Exam 5: Activity-Based Costing and Activity-Based Management

Answer the following questions using the information below: Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2015, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages. For 2015 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Activity level Design changes \ 120,000 300 design changes Setups 640,000 5,000 setups Inspections 8,000 inspections Total manufacturing overhead costs \ 840,000 During 2015, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Money Managers Hospital Systems Pages 60,000 76,000 Design changes 10 0 Setups 20 10 Inspections 30 38 -Using the three cost pools to allocate overhead costs,what is the total manufacturing overhead cost estimate for Money Managers during 2015?

Teecorp Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor \ 320,000 8,000 hours Gas \ 36,000 6,000 gallons Invoices \ 40,000 2,500 invoices Total costs \ 396,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 2,500 hours 1,200 hours 4,300 hours Gas 1,700 gallons 800 gallons 3,500 gallons Invoices 1,600 invoices 400 invoices 500 invoices -If labor hours are used to allocate the non-labor,overhead costs,what is the overhead allocation rate?

Extracts from cost information of Hebar Corp.: Simple L3 Pack Complex L7 Pack Total Setup cost allocated using direct labor-hours \ 18,750 \ 6,250 \ 25,000 Setup cost allocated using setup-hours \ 13,200 \ 11,800 \ 25,000 Which of the following statement is true of Hebar's setup costs under traditional costing?

Rachel's Pet Supply Corporation manufactures two models of grooming stations,a standard and a deluxe model.The following activity and cost information has been compiled: Number of Number of Number of Product Setups Components Direct Labor Hours Standard 3 30 650 Del wixe 7 50 150 Overhead costs \ 40,000 \ 120,000 Assume a traditional costing system applies the $160,000 of overhead costs based on direct labor hours. a.What is the total amount of overhead costs assigned to the standard model? b.What is the total amount of overhead costs assigned to the deluxe model? Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead. c.What is the total amount of overhead costs assigned to the standard model? d.What is the total amount of overhead costs assigned to the deluxe model? e.Explain the difference between the costs obtained from the traditional costing system and the ABC system.Which system provides a better estimate of costs? Why?

Facility-sustaining costs are the costs of activities ________.

Answer the following questions using the information below: Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: Activities Cost driver Allocation Rate Material handling Number of parts \ 2 per part Assembly Labor hours \ 20 per hour Inspection Time at inspectionstation \ 3 per minute The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $200 per labor hour. -What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 50 remote controls are produced? The batch requires 100 parts,6 direct manufacturing labor hours,and 2.5 minutes of inspection time.

Teecorp Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Labor \ 320,000 8,000 hours Gas \ 36,000 6,000 gallons Invoices \ 40,000 2,500 invoices Total costs \ 396,000 The above activities used by their three departments are: Lawn Department Bush Department Plowing Department Labor 2,500 hours 1,200 hours 4,300 hours Gas 1,700 gallons 800 gallons 3,500 gallons Invoices 1,600 invoices 400 invoices 500 invoices -How much of the labor cost will be assigned to the Bush Department?

Which of the following statements is true of activity-based costing?

________ are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced.

When refining a costing system,a company should classify as many costs as possible as indirect costs,thereby minimizing the extent to which costs have to be traced rather than allocated.

Which of the following statements is true of implementing an ABC system?

Top management compensation cost is an example of ________ in the cost hierarchy.

Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called ________.

Premium Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry \ 200,000 10,000 hours Account billing \ 140,000 4,000,000 lines Account verificationaccounts \ 75,000 40,000 accounts Correspondence letters \ 25,000 4,000 letters Total costs \ 440,000 The above activities are used by Departments A and B as follows: Department Department Account inquiry hours 2,500 hours 4,000 hours Account billing lines 400,000 lines 250,000 lines Account verification accounts 10,000 accounts 8,000 accounts Correspondence letters 1,200 letters 1,600 letters -How much of correspondence costs will be assigned to Department A?

Activity-based costing attempts to identify the most relevant cause-and-effect relationship for each activity pool without restricting the cost driver to only units of output or variables related to units of output.

At Deutschland Electronics,product lines are charged for call center support costs based on sales revenue.Last year's summary of call center operations revealed the following: Surveillance Products Specialty Products Number of calls for information 1,000 4,000 Average call length for information 3 minutes 8 minutes Number of calls for warranties 300 1,200 Average call length for warranties 7 minutes 15 minutes Sales revenue \ 8,000,000 \ 5,000,000 Deutschland Electronics currently allocates call center support costs using a rate of 0.5% of sales revenue. Required: a.Compute the amount of call center support costs allocated to each product line under the current system. b.Assume Deutschland decides to use the average call length for information to assign last year's support costs.Does this allocation method seem more appropriate than percentage of sales? Why or why not? c.Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last year's support costs of $65,000.Compute the amount of call center support costs assigned to each product line under this revised ABC system. d.Deutschland Electronics assigns bonuses based on departmental profits.How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information? e.Discuss the barriers for implementing ABC for this call center.

Answer the following questions using the information below: Gregory Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Costdriver Activity level Supervision of direct labor \ 326,000 Direct labor-hours 900,000 Machine maintenance \ 132,000 Machine-hours 960,000 Facility rent \ 217,000 Square feet of area 100,000 Total overhead costs \ 675,000 The accounting records show the Mossman Job consumed the following resources: Cost driver Actual level Direct labor-hours 200 Machine-hours 1,500 Square feet of area 70 -Under activity-based costing,what is the amount of machine maintenance costs allocated to the Mossman Job?

Answer the following questions using the information below: Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows: T-SHIRTS SWEATSHIRTS Production and sales volume 60,000 units 35,000 units Selling price \ 16.00 \ 29.00 Direct material \ 2.00 \ 5.00 Direct labor \ 4.50 \ 7.20 Manufacturing overhead \ 2.00 \ 3.00 Gross profit \ 7.50 \ 13.80 Selling and administrative \ 4.00 \ 7.00 Operating profit \ 3.50 \ 6.80 What is projected operating income if direct materials costs of T-Shirts increase to $4.00 per unit and direct labor costs of Sweatshirts increase to $8.20 per unit? -Under the revised ABC system,the activity-cost driver rate for the supervision activity is ________.

A cost-allocation base is a necessary element when using a strategy that will refine a costing system.

How are cost drivers selected in activity-based costing systems?