Exam 7: Activity Based Costing

Companies that use departmental overhead rates trace direct materials and direct labour to cost objects just as in a traditional costing systems.

Use the information below to answer the following question(s): Pittinger Company manufactures cuckoo clocks and uses an activity-based costing system. Each cuckoo clock consists of 10 separate parts totaling $120 in direct materials, and requires 2.0 hours of machine time to produce. Additional information follows: -What is the cost of materials handling per cuckoo clock?

Use the information below to answer the following question(s): Traditions Home Accessories Company manufactures pillows using an activity-based costing system to allocate all manufacturing conversion costs. The following information is provided for the month of June: Each pillow consists of 3 parts; the total direct materials cost per pillow is $8.00. -What is the total cost of materials handling and assembling for each pillow?

Use the information below to answer the following question(s): Green Bags Company manufactures cloth grocery bags to be sold to grocery stores and other retailers. Green Bags Company sells the bags in cases of 1,000 bags. The bags come in three sizes: Large, Medium, and Small. Currently, Green Bags Company uses a single plantwide overhead rate to allocate its $7,141,100 of annual manufacturing overhead. Of this amount, $1,875,000 is associated with the Large Bag line, $2,992,500 is associated with the Medium Bag line, and $2,273,600 is associated with the Small Bag line. Green Bags Company is currently running a total of 37,000 machine hours; 12,500 in the Large Bag line, 13,300 in the Medium Bag line, and 11,200 in the Small Bag line. Green Bags Company uses machine hours as the cost driver for manufacturing overhead costs. -The departmental manufacturing overhead rate for the Small Bag line would be closest to

The benefits of adopting ABC/ABM are higher for companies in more competitive markets.

Use the information below to answer the following question(s): Vittoria Corporation manufactures two products-Carts and Wheelbarrows. The annual production and sales of Carts is 2,000 units, while 1,800 units of Wheelbarrows are produced and sold. The company has traditionally used direct labour hours to allocate its overhead to products. Carts require 1.0 direct labour hours per unit, while Wheelbarrows require 0.5 direct labour hours per unit. The total estimated overhead for the period is $117,500. The company is looking at the possibility of changing to an activity-based costing system for its products. If the company used an activity-based costing system, it would have the following three activity cost pools: Expected Activity -The overhead cost per Wheelbarrow using the traditional costing system would be closest to

Use the information below to answer the following question(s): Hinckley & Granger Company had the following activities, estimated indirect activity costs, and allocation bases: Hinckley & Granger uses activity-based costing. The above activities are used by Departments P and Q as follows: -How much of the account inquiry cost will be assigned to Department Q?

Use the information below to answer the following question(s): Menno Corporation manufactures two products-Tables and Chairs. The annual production and sales of Tables is 2,000 units, while 8,000 units of Chairs are produced and sold. The company has traditionally used direct labour hours to allocate its overhead to products. Tables require 1.0 direct labour hours per unit, while Chairs require 0.5 direct labour hours per unit. The total estimated overhead for the period is $235,000. The company is looking at the possibility of changing to an activity-based costing system for its products. If the company used an activity-based costing system, it would have the following three activity cost pools: Expected Activity -The cost pool activity rate for machining costs would be closest to

Use the information below to answer the following question(s): Louis Corporation, which uses an activity-based costing system, produces travel trailers and boat trailers. The company allocates batch setup costs to the two products using the following basic data: Total budgeted setup costs for the year are $140,000. -If the setup costs are allocated using direct labour hours, how much of the total setup costs would be allocated to boat trailers?

The estimated total manufacturing overhead costs that will be incurred in each department in the coming year are often referred to as activity cost pools.

Credit Valley Products manufactures its products in two separate departments: milling and assembly. Total manufacturing overhead costs for the year are budgeted at $1,600,000. Of this amount Milling Department incurs $960,000 (primarily for machine operation and depreciation) while the Assembly Department incurs $640,000. Credit Valley Products estimates that it will incur 8,000 machines hours (all in the Milling Department) and 25,000 direct labour hours (5,000 in the Milling Department and 20,000 in the Assembly Department) during the year. Credit Valley Products currently uses a plantwide overhead rate based on direct labour hours to allocate overhead. However, the company is considering refining its overhead allocation system by using departmental overhead rates. The Milling Department would allocate its overhead using machine hours (MH), but the Assembly Department would allocate its overhead using direct labour (DL) hours. The following chart shows the machine hours (MH) and direct labour (DL) hours incurred by Jobs 400 and 401 in each production department: Both Jobs 400 and 401 used $4,000 of direct materials. Wages and benefits total $35 per direct labour hour. Credit Valley Products prices its products at 120% of total manufacturing costs. Required: 1. Compute Credit Valley Products' current plantwide overhead rate. 2. Compute refined departmental overhead rates. 3. Compute the total amount of overhead allocated to each job if Credit Valley Products uses its current plantwide overhead rate. 4. Compute the total amount of overhead allocated to each job if Credit Valley Products uses departmental overhead rates. 5. Do both allocation systems accurately reflect the resources that each job used? Explain. 6. Compute the total manufacturing cost and sales price of each job using Credit Valley Products' current plantwide overhead rate. 7. Compute the total manufacturing cost and sales price of each job using Credit Valley Products' refined departmental overhead rates 8. Based on the current (plantwide) allocation system, how much profit did Credit Valley Products think it earned on each job? 9. Based on the departmental overhead rates and the sales price determined in Requirement 7, how much profit did it really earn on each job?

Step-Up Corporation manufactures two small step ladders, Regular and Deluxe. Deluxe ladders were added as a product line three years ago. Deluxe ladders are the more complex of the two products as they are extendable, requiring one hour of direct labour time per unit to manufacture, compared to one-half hours of direct labour time for Regular ladder. Indirect costs are currently allocated to the products on the basis of direct labour hours. The company estimated it would incur $332,500 in manufacturing overhead costs and produce 6,000 units of Deluxe ladders and 20,000 units of Regular ladders during the current year. Unit costs for materials and direct labour are: Required: a. Determine the unit cost of the two products using traditional costing with units as the allocation base. b. Determine the unit cost of the two products using activity-based costing.

Companies that use ABC trace direct materials and direct labour to cost objects just as in traditional costing systems.

Use the information below to answer the following question(s): Bond Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs. The company has two departments, Assembly and Sanding. The Assembly Department uses a departmental overhead rate of $20 per machine hour, while the Sanding Department uses a departmental overhead rate of $15 per direct labour hour. Job 542 used the following direct labour hours and machine hours in the two departments: The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 542 is $1,200. -What was the total cost of Job 542 if Bond Industries used the departmental overhead rates to allocate manufacturing overhead?

Rach & Johnson is an advertising agency. The firm uses an activity-based costing system to allocate overhead costs to its services. Information about the firm's activity cost pool rates follows: Smythe Company is a client of Rach & Johnson. Recently, 8 administrative assistant hours, 2 new ad campaigns, and 6 meeting hours were incurred for the Smythe Company account. Using the activity-based costing system, how much overhead cost would be allocated to the Smythe Company account?

The departmental overhead cost allocation rate is computed by dividing the estimated total manufacturing overhead costs of the department by the estimated total quantity of the department's cost allocation base.

Direct labour hours would be the most appropriate cost allocation base for a Machining Department that uses machine robotics extensively.

ABC costing is generally more accurate than traditional cost systems.

The use of which of the following costing systems is most likely to reduce cost distortion to a minimum?

Moylan & Bolognese, Attorneys at Law, provide a variety of legal services. The law firm uses an activity-based costing system and has developed the following activity pool cost rates: Cost and activity data related to two clients is as follows: Required: A. Calculate the amount of overhead that would be allocated to Client 352 using the activity-based costing system. B. Calculate the amount of overhead that would be allocated to Client 487 using the activity-based costing system.