Exam 3: How Does an Organization Use Activity-Based Costing to Allocate Overhead Costs

Which of the following items is a facility-level activity?

Exhibit 3-1 Hydrate Inc.makes two types of sports drinks and is implementing an activity-based costing system.Previously,all overhead had been applied on the basis of machine hours.The company produces 22,500 units of Sports Light and 42,284 units of Thirst Quench.Additional data is as follows: -Refer to Exhibit 3-1.What is the overhead cost per unit for Thirst Quench using ABC?

Exhibit 3-1 Hydrate Inc.makes two types of sports drinks and is implementing an activity-based costing system.Previously,all overhead had been applied on the basis of machine hours.The company produces 22,500 units of Sports Light and 42,284 units of Thirst Quench.Additional data is as follows: -Refer to Exhibit 3-1.What is the total overhead cost applied to Thirst Quench using activity-based costing?

Organizations that use activity-based costing to allocate overhead typically have many different products and complex operations.

Exhibit 3-3 Metro Inc.has two production departments (Lamination and Molding)and three service departments (Human Resources,Technology Support,and Purchasing).Service department costs are allocated to production departments using the direct method.The $200,000 costs of Human Resources are allocated based on the number of employees in each production department.The $400,000 costs of Technology Support are allocated based on hours of technology support used by each production department.The $120,000 of Purchasing is allocated on the pounds of raw materials purchased for each production department.Information for each production department is as follows: Number of Technology Pounds of Employees Support Hours Raw Materials Lamination 40 600 30,000 Molding Total -Refer to Exhibit 3-3.Using the direct method of allocating service department costs to production departments,how much of the Purchasing service department costs should be allocated to the Lamination Department?

Valor company is planning to implement an activity-based costing"ABC"system to apply overhead costs to products.Three activities were identified and rates were calculated for each activity. Purchase requisitions: \ 5 per requisition processed Production setup: \ 20 per setup Quality control: \ 30 per inspection Assume 600 purchase requisitions were processed,1,200 production setups were performed,and 300 products were inspected for the year.Which of the following journal entries would be made by Valor to record the application of overhead? a. Work in Process Inventory 36,000 Manufacturing Overhead 36,000 b. Manufacturing Overhead 36,000 Work in Process Inventory 36,000 c. Manufacturing Overhead 36,000 Finished Goods Inventory 36,000 d. Finished Goods Inventory 36,000 Work in Process Inventory 36,000 e. $\text {None of the answer choices is correct.}$

Roseville Engineering provides watershed and design services for its customers.Total overhead costs this coming year are expected to be $8,000,000 ($2,000,000 in the Watershed Department,and $6,000,000 in the Design Department).If the company chooses to use the plantwide approach,overhead will be allocated using direct labor costs.Direct labor costs are expected to total $4,000,000.The Watershed Department expects to incur direct labor costs of $500,000,and the Design Department expects to work 120,000 direct labor hours. a. Assume Roseville Engineering uses the plantwide approach to allocating overhead costs, and uses direct labor costs as the allocation base. Calculate the predetermined overhead rate and explain how this rate will be used to allocate overhead costs. b. Assume Roseville Engineering uses the department approach for allocating overhead costs rather than the plantwide method. The Watershed Department allocates overhead based on direct labor costs and the Design Department allocates overhead based on direct labor hours. Calculate the predetermined overhead rate for each department and explain how these rates will be used to allocate overhead costs

Overhead activities that are required to sustain facility operations are called unit-level activities.

Exhibit 3-2 Dublin Pie Company sells cherry pies and apple pies in bulk online.Estimated overhead costs for 2016 total $600,000.The accountant for Dublin identified the following information for its activity-based costing system. Activity Allocation Base Proportion of Total Overhead Cost Purchasing Number of purchase orders 25\% Processing Number of units 60\% Sales Number of sales orders 15\% The estimated activity level for each type of pie and in total is as follows: Cherry Pies Apple Pies Total Number of purchase orders 10,000 15,000 25,000 Number of units 30,000 70,000 100,000 Number of sales orders 1,000 4,000 5,000 -Refer to Exhibit 3-2.What is the total overhead allocated to the purchasing activity associated with Apple Pies?

As costing systems become more complex,they become more expensive to implement.

Kathy Edwards owns a landscape maintenance service that has two major segments,residential and commercial.Kathy is trying to decide whether she should use traditional costing or activity-based costing,so she develops the following estimates for her analysis and asks you to help. Residential Commercial Totals Annual revenues \ 200,000 \ 600,000 \ 800,000 Annual labor costs 120,000 180,000 300,000 Hours of operation 10,000 40,000 50,000 Travel time in hours 2,000 8,000 10,000 The business also has overhead costs for equipment maintenance,transportation,and general activities of $360,000. Cost Pool Cost Pool Amount Cost Driver Equipment Maintenance \ 150,000 Hours of equipment operation Transportation 120,000 Travel time General activities 90,000 Labor cost (1) Using the traditional allocation method, calculate the predetermined overhead rate and allocate the overhead costs to the segments based on labor cost. (2) What is the income for each segment assuming the company uses traditional costing? (3) Using activity-based costing, determine the overhead rates for each activity and allocate the overhead costs to each segment. (4) What is the income for each segment assuming the company uses traditional costing? (5) What are your recommendations to Kathy?

Activity-based costing breaks total estimated overhead costs out into different departments to establish an overhead rate for each department.

Which of the following would be the best allocation base for a product designed for a specific customer?

Both manufacturing and service organizations use activity-based costing.

Value-added activities are typically ignored when using activity-based management.

Prevention costs are costs for activities that prevent product defects.

Exhibit 3-3 Metro Inc.has two production departments (Lamination and Molding)and three service departments (Human Resources,Technology Support,and Purchasing).Service department costs are allocated to production departments using the direct method.The $200,000 costs of Human Resources are allocated based on the number of employees in each production department.The $400,000 costs of Technology Support are allocated based on hours of technology support used by each production department.The $120,000 of Purchasing is allocated on the pounds of raw materials purchased for each production department.Information for each production department is as follows: Number of Technology Pounds of Employees Support Hours Raw Materials Lamination 40 600 30,000 Molding Total -Refer to Exhibit 3-3.Using the direct method of allocating service department costs to production departments,how much of the Purchasing service department costs should be allocated to the Molding Department?

Exhibit 3-2 Dublin Pie Company sells cherry pies and apple pies in bulk online.Estimated overhead costs for 2016 total $600,000.The accountant for Dublin identified the following information for its activity-based costing system. Activity Allocation Base Proportion of Total Overhead Cost Purchasing Number of purchase orders 25\% Processing Number of units 60\% Sales Number of sales orders 15\% The estimated activity level for each type of pie and in total is as follows: Cherry Pies Apple Pies Total Number of purchase orders 10,000 15,000 25,000 Number of units 30,000 70,000 100,000 Number of sales orders 1,000 4,000 5,000 -Refer to Exhibit 3-2.What is the overhead rate for the purchasing activity?

Theron Industries has the following financial data related to its quality control program. Initial raw materials inspection \1 50,000 Product inspection 300,000 Product warranty 1,575,000 Scrap 960,000 Rework 720,000 Quality training Total Identify which costs and amounts are prevention,appraisal,internal failure or external failure.

Appraisal costs are the same as detection costs.