ch009.LAM2e TB.doc

Chapter 9Activity-Based Costing

True/False Questions

T F 1. Traditional product costing systems (e.g., job and process costing) are designed primarily to accumulate cost information for financial reporting.

Answer: True Difficulty: Simple Learning Objective: 1 AACSB: Analytic

T F 2. Applied manufacturing overhead for product costing purposes may lead to inappropriate managerial decisions because a single cost driver is used as the allocation base.


T F 3. The death spiral concept refers to the process of continually decreasing selling prices to meet foreign competition.

Answer: False Difficulty: Simple Learning Objective: 1 AACSB: Analytic

T F 4. The usual cost objects used in a first-stage product cost allocation are the manufacturing overhead accounts themselves.

Answer: True Difficulty: Moderate Learning Objective: 2 AACSB: Analytic

T F 5. The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations.

Answer: False Difficulty: Moderate Learning Objective: 2 AACSB: Analytic

T F 6. Predetermined overhead rates are used in first-stage cost allocations but not in second-stage cost allocations.


Test Bank, Chapter 9 210

T F 7. In general, variable costs are allocated using a first-stage cost allocation system and fixed costs are allocated using a second-stage cost allocation system.


T F 8. A company that uses a second-stage cost allocation system will have one unique allocation base for each cost pool.


T F 9. The single-stage cost allocation system uses a plant wide rate because the cost pool is the entire plant.


T F 10. The department cost allocation method provides more accurate product cost information for managerial decision-making that the plant wide cost allocation method.


T F 11. The plant wide cost allocation method can be used by either a manufacturer or a merchandiser.


T F 12. The plant wide cost allocation method should be used by companies that manufacture products that are similar and use the same resources.


T F 13. Activity-based costing (ABC) is a second-stage cost allocation system that (1) allocates costs to activities and (2) then to products based on their use of the activities.


Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e211

T F 14. The basic difference between the department cost allocation method and activity-based costing (ABC) is the number of stages involved in allocating costs to products.


T F 15. In general, the cost drivers used in activity-based costing (ABC) cause an activity's costs to change.


T F 16. The best cost drivers are activities that are causally related to the costs being allocated.


T F 17. The first-stage allocation in activity-based costing (ABC) allocates costs to departments using appropriate cost drivers.


T F 18. Direct labor cost (DLC) and direct labor hours (DLH) are examples of volume-related cost drivers in the cost hierarchy.


T F 19. The number of products produced is an example of a facility-related cost driver in the cost hierarchy.


T F 20. Activity-based costing (ABC) provides more detailed measures of costs than do plant wide or department allocation methods.



T F 21. Before using activity-based costing (ABC), managers must apply the cost-benefit principle to the additional recordkeeping costs associated with ABC.


T F 22. In general, traditional product costing methods allocate less cost to low-volume products and more costs to high-volume products than activity-based costing (ABC).

Answer: True Difficulty: Complex Learning Objective: 6 AACSB: Analytic

T F 23. Activity-based costing (ABC) uses more overhead accounts than traditional product costing systems.


T F 24. Using direct labor costs to allocate overhead costs in an activity-based costing (ABC) system will encourage management to reduce labor costs.


T F 25. In general, low-volume products (and services) have a lower degree of complexity associated with them.


T F 26. In general, traditional product costing methods have resulted in lower gross margins for high-volume products and higher gross margins for low-volume products than activity-based costing (ABC).

Answer: False Difficulty: Complex Learning Objective: 6 AACSB: Analytic

T F 27. When overhead is applied based on the volume of output, high-volume products tend to "subsidize" low-volume products.



T F 28. Activity-based costing (ABC) can be applied to administrative activities (e.g., purchasing) but not to marketing activities.


T F 29. It is possible to apply activity-based costing (ABC) to segments of an organizationwithout applying it to the entire organization.


T F 30. In general, activity-based costing methods result in higher product costs per unit than plant wide cost allocation methods.


Multiple Choice Questions

Part A : Conceptual Questions

31. Which of the following statements is (are) true regarding the potential effects of using reported product costs for decision making?

(A) Traditional product costing systems (e.g., job and process costing) are designed primarily to accumulate cost information for financial reporting.(B) Applied manufacturing overhead for product costing purposes may lead to inappropriate managerial decisions because a single cost driver is used as the allocation base.

A) Only A is true B) Only B is true. C) Both A and B are true. D) Neither A nor B is true.

Answer: C Difficulty: Simple Learning Objective: 1 AACSB: Analytic

32. Which of the following statements is (are) false regarding first-stage and second-stage cost allocation methods?

(A) The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations.


(B) Predetermined overhead rates are used in first-stage cost allocations but not in second-stage cost allocations.

A) Only A is false B) Only B is false. C) Neither A and B nor false. D) Both A and B are false.

Answer: D Difficulty: Simple Learning Objective: 2 AACSB: Analytic

33. Activity-based costing (ABC) is a costing technique that uses a two stage allocation process. Which of the following statements best describes these two stages? A) The costs are assigned to activities, and then to the products based upon their use of the

activities. B) The costs are assigned to departments, and then to the products based upon their use of

activity resources. C) Service department costs are allocated to the production departments, and then to the

products based upon their use of the activities. D) Indirect costs are assigned to activities, and then to the products based upon the direct cost

resources used by the activities.

Answer: A Difficulty: Simple Learning Objective: 2 AACSB: Analytic

34. Which of the following statements is true? A) One of the lessons learned from activity-based costing (ABC) is that all costs are really a

function of volume. B) The primary purpose of the plant wide and department allocation methods is allocating direct

costs to specific products. C) A problem with activity-based costing (ABC) is that it requires more recordkeeping than

other methods. D) Service department allocations are required for the plant wide and department allocation

methods.

Answer: C Difficulty: Simple Learning Objective: 3 AACSB: Analytic

35. Cost pools are used with

Plant wide Rates Department RatesA) Yes NoB) No YesC) No NoD) Yes Yes



36. A company is considering the use of a single plant wide rate. Under what conditions would this choice be justified? A) The company has many service departments but only one production department. B) The company produces a few products with similar characteristics in a few departments. C) The company has no service departments but many production departments. D) The company produces a wide selection of products in a single production department.

Answer: B Difficulty: Moderate Learning Objective: 3 AACSB: Analytic

37. Which of the following should not be used as the allocation base in a company that appropriately uses a single plant wide rate? A) sales volume B) machine hours C) material costs D) direct labor cost E) direct labor hours


38. The electricity used for computerized machinery would be classified as a(n) A) volume-related activity. B) batch-related activity. C) product-related activity. D) facility-related activity.


39. The number of services provided by an accounting firm would be classified as a(n) A) volume-related activity. B) batch-related activity. C) product-related activity. D) facility-related activity.

Answer: C Difficulty: Moderate Learning Objective: 4 AACSB: Analytic

40. Activity analysis is one of the first stages in implementing an activity-based costing system. Which of the following steps in "activity analysis" is usually performed first?


A) Classify all activities as value added or nonvalue added. B) Record, from start to finish, the activities used to complete the product or service. C) Identify the process objectives that are defined by what the customer wants from the process. D) Improve the efficiency of all activities and develop plans to eliminate any nonvalued-added

activities.


41. Which of the following costs is not related to a batch-related activity? A) Material handling B) Machine setups C) Shipping costs D) Compliance costs

Answer: D Difficulty: Moderate Learning Objective: 4 AACSB: Analytic

42. Which of the following measures is used by traditional costing systems as an allocation base for allocating overhead costs to the units produced? A) volume-related activities B) batch-related activities C) product-related activities D) facility-related activities


43. Which of the following measures is used by activity-based costing (ABC) systems as an allocation base for allocating overhead costs to the units produced A) volume-related activities B) batch-related activities C) product-related activities D) facility-related activities E) all of the above are used by ABC systems

Answer: E Difficulty: Simple Learning Objective: 4 AACSB: Analytic

44. Which of the following statements is (are) true?

(1) Activity-based costs per unit are greater than volume-based costs per unit.(2) Volume-based costing has typically resulted in lower gross margins for high volume products and higher gross margins for low volume products.


A) Only (1) is true. B) Only (2) is true. C) Both (1) and (2) are true. D) Neither (1) nor (2) are true.


45. Volume-based costing allocates indirect product costs based on the volume of output, using such allocation bases as direct labor hours, machine hours, and the amount of direct material used in the production process. Activity-based costing (ABC) has consistently shown that Volume-based costing A) overstates high volume products. B) overstates low volume products. C) understates high volume products. D) understates low volume products. E) More than one of the above is true_____________.

Answer: E Difficulty: Moderate Learning Objective: 6 AACSB: Analytic

46. Which of the following statements regarding traditional costing and activity-based costing is false? A) There are more overhead cost pools in ABC systems. B) There are more cost allocation bases in ABC systems. C) ABC cost pools are more homogeneous than the cost pools in traditional costing. D) ABC systems use more first-stage cost allocations than traditional costing.


47. Which one of the following accounts is not used in an activity-based costing (ABC) system? A) Materials Inventory B) Work-in-Process Inventory C) Finished Goods Inventory D) Overhead Applied E) Allocations Incurred

Answer: E Difficulty: Simple Learning Objective: 7 AACSB: Analytic

48. Companies using activity-based costing (ABC) have learned that costs are a function of A) volume and activities. B) time and complexity.


C) volume and time. D) resources and time. E) volume and resources.


Part B: Computational Questions

Use the following to answer questions 49-50:

Smelly Perfume Company manufactures and distributes several different products. They currently use a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour. Cindy is the department manager of Department C which produces Products J and P. Diane is the department manager of Department D which manufactures Product X. The product costs (per case of 24 bottles) and other information are as follows:

ProductsJ P X

Direct materials $100.00 $ 72.00 $48.00Direct labor 42.00 31.50 12.00Overhead 28.00 21.00 14.00

$170.00 $124.50 $74.00

Machine hours 4 2 3Number of cases (per year) 300 500 600

49. If Smelly changes its allocation basis to machine hours, what is the total product cost per case for Product P? A) $163.50 B) $144.00 C) $138.15 D) $117.15 E) Some other answer _______________.

Answer: D Difficulty: Moderate Learning Objective: 5

Response: Total overhead = $28(300) + $21(500) + $14(600) = $27,300Total machine hours = 4(300) + 2(500) + 3(600) = 4,000Overhead rate = $27,300/4,000 = $6.825/MHProduct cost for P $72.00 + $31.50 + $6.825(2) = $117.15AACSB: Analytic

50. Department D has recently purchased and installed new computerized equipment for Product X. This equipment will increase the overhead costs by $2,700 and decrease labor costs in


Department D by $3.00 per case. Cindy believes that her department will be allocated some of Department D's overhead if Smelly uses machine hours to allocate overhead. If Smelly uses departmental rates, what are the product costs per case for Product X assuming Departments C and D use direct labor hours and machine hours as their respective allocation bases? A) $81.98 B) $79.50 C) $77.48 D) $75.00 E) Some other answer ________________.

Answer: A Difficulty: Simple Learning Objective: 5

Response: $48.00 (materials) + $9.00 (labor) +[(3 x $6.825) + ($2,700/600)] = $81.98AACSB: Analytic


RS Company manufactures and distributes two products, R and S. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information:

Activity Cost Driver Amount R S

Production setups Number of setups $ 82,000 8 12Material handling Number of parts 48,000 56 24Packaging costs Number of units 130,000 80,000 50,000

$260,000AACSB: Analytic

51. What is the total overhead allocated to Product R using the current system? A) $113,600 B) $130,000 C) $146,400 D) $160,000 E) Some other answer _______________.

Answer: D Difficulty: Simple Learning Objective: 5

Response: $260,000/130,000 = $2.00 per unit $2(80,000) = $160,000AACSB: Analytic

52. What is the total overhead per unit allocated to Product R using activity-based costing (ABC)? A) $2.60 B) $2.27


C) $2.00 D) $1.83 E) Some other answer _______________.

Answer: D Difficulty: Moderate Learning Objective: 5

Response: ($82,000/20)8 + ($48,000/80)56 + ($130,000/130,000)80,000 = $146,400 $146,400/80,000 = $1.83AACSB: Analytic


Terri Martin Nerdmeister, CPA provides bookkeeping and tax services to her clients. She charges a fee of $60 per hour for bookkeeping and $90 per hour for tax services. Martin estimates the following costs for the upcoming year:

Office supplies $16,000Computer fees 24,000Secretary's salary 30,000Rent 18,000

$88,000

Operating profits declined last year and Ms. Martin has decided to use activity-based costing (ABC) procedures to evaluate her hourly fees. She gathered the following information from last year's records:

Activity LevelsActivity Cost Driver Bookkeeping Tax services

Office supplies Hours billed 1,200 800Computer fees Computer hours used 400 600Secretary's salary Number of clients 16 84Rent Types of services offered 1 1

53. What is the total cost allocated to the bookkeeping services using activity-based costing? A) $24,000 B) $33,000 C) $35,000 D) $44,000 E) Some other answer _______________.

Answer: B Difficulty: Moderate Learning Objective: 5

Response: (16,000/2,000)1,200 + (24,000/1,000)400 + (30,000/100)16 + (18,000/2)1 = $33,000AACSB: Analytic

54. Martin wants her hourly fees for the tax services to be 160% of their activity-based costs. What is the fee per hour for tax services in the upcoming year? A) $ 70.40


B) $ 88.00 C) $110.00 D) $118.40 E) Some other answer _______________.

Answer: C Difficulty: Moderate Learning Objective: 5

Response: ($88,000 - $33,000)/800 = $68.75(1.60)($68.75) = $110.00AACSB: Analytic

55. Martin cannot change the hourly fee for the bookkeeping services because of the number of competing firms in the area. If Martin wants to earn $60,000 in the upcoming year, how much will she charge per hour for tax services? A) $ 74 B) $ 90 C) $ 95 D) $106 E) Some other answer _______________.

Answer: C Difficulty: Complex Learning Objective: 5

Response: [($60)(1,200) + x(800)] - $88,000 = $60,000; x = $95.00AACSB: Analytic

56. A major client has requested bookkeeping service. However, Martin is already billing 100% of her capacity (i.e., 2,000 hours per year) and is reluctant to shift 100 hours from her tax services to meet this client's request. What is the minimum fee per hour that Martin could charge this client for bookkeeping services and be no worse off than last year? Assume that activity-based costing (ABC) is used. A) $48.75 B) $60.00 C) $81.25 D) $90.00 E) Some other answer _______________.

Answer: D Difficulty: Complex Learning Objective: 5

Response: [($60)(1,200) + $90(800) - $88,000 = $56,000[($60)(1,200) + x(100) + $90(700) - $88,000 = $56,000; x = $90.00AACSB: Analytic


Zela Company is preparing its annual profit plan. As part of its analysis of the profitability of individual


products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information provided below. (CMA based)

Wall Mirrors Specialty WindowsUnits produced 40 20Material moves per product line 5 15Direct labor hours per unit 200 300

Budgeted material handling costs $50,000

57. Under a traditional costing system that allocates overhead on the basis of direct labor hours, the materials handling costs allocated to one unit of wall mirrors would be A) $1,000 B) $ 500 C) $2,000 D) $5,000 E) some other answer _______________.


Response: $50,000/(200 + 300) = $100[($100(200)]/40 = $500AACSB: Analytic

58. Under an activity-based costing (ABC) system, the materials handling costs allocated to one unit of wall mirrors would be A) $ 625.00 B) $ 312.50 C) $ 833.33 D) $1,000.00 E) some other answer _______________.

Answer: B Difficulty: Moderate Learning Objective: 6 Response: $50,000/(5 + 15) = $2,500[$2,500(5)]/40 = $312.50AACSB: Analytic

59. Under an activity-based costing (ABC) system, the materials handling costs allocated to one unit of specialty windows would be A) $1875.00 B) $ 937.50 C) $ 312.50 D) $1,500.00 E) some other answer _______________.



Response: $50,000/(5 + 15) = $2,500[$2,500(15)]/20 = $1,875.00AACSB: Analytic


The LMN Company recently switched to activity-based costing (ABC) from the department allocation method. The department method allocated overhead costs at a rate of $60 per machine hour. The cost accountant for Department XZ has gathered the following data:

Activity Cost Drivers RateMaterial handling Tons of material handled $ 80Machine setups Number of production runs $3,750Utilities Machine hours $ 25Quality control Number of inspections $ 500

During April, LMN purchased and used $100,000 of direct materials at $20 per ton. There were eight (8) production runs using a total of 12,000 machine hours in April. The manager of Department XZ needed 12 inspections. Actual overhead costs totaled $820,000 for the month.

60. How much overhead costs were applied to the Work-in-Process Inventory during April? A) $536,000 B) $720,000 C) $736,000 D) $820,000 E) some other answer _______________.


Response: ($100,000/$20)80 + 8($3,750) + $25(12,000) + $500(12) = $736,000AACSB: Analytic

61. What account would be credited for $400,000 during April? A) Material Inventory B) Work-in-Process Inventory C) Overhead Incurred D) Overhead Applied




The Muskego National Bank is considering either a bankwide overhead rate or department overhead rates to allocate $250,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period:

Department DLH Loans Processed Direct CostsConsumer 9,000 400 $200,000Commercial 6,000 100 $150,000

62. If Muskego uses a bankwide rate based on direct labor hours, what would be the indirect costs allocated to the Consumer Department? A) $100,000 B) $150,000 C) $250,000 D) $350,000 E) some other answer _______________.


Response: $250,000/(9,000 + 6,000) = $16.6667/DLH9,000(16.6667) = $150,000AACSB: Analytic

63. If Muskego uses a bankwide rate based on the number of loans processed, what would be the total costs for the Commercial Department? A) $ 50,000 B) $150,000 C) $200,000 D) $250,000 E) some other answer _______________.


Response: $250,000 (400 + 100) = $500 per loan100($500) = $50,000$50,000 + $150,000 = $200,000AACSB: Analytic

64. Management estimates that it costs $500 to analyze and close a commercial loan. This amount has been included in the $250,000 of indirect costs. How much of the indirect costs should be allocated to the Commercial Department? A) $ 40,000 B) $ 50,000 C) $ 90,000


D) $120,000 E) some other answer _______________.

Answer: C Difficulty: Moderate Learning Objective: 3 Response: $250,000 - $500(100) = $200,000$200,000/(400 + 100) = $400 per loan$400(100) + $500(100) = $90,000AACSB: Analytic

65. Management estimates that it costs $400 to analyze and close a commercial loan. What is the overhead rate for the Commercial Loan Department, if Muskego allocates the remaining indirect costs using direct labor hours? A) $14.00 per hour plus $400 per loan B) $16.67 per hour plus $400 per loan C) $1,000 per loan D) $ 500 per loan E) some other answer _______________.

Answer: A Difficulty: Complex Learning Objective: 3

Response: $250,000 - $400(100) = $210,000$210,000/(9,000 + 6,000) = $14.00 per hourAACSB: Analytic

Part C: Professional Examination Questions

66. Multiple (departmental) manufacturing overhead rates are considered preferable to a single (plant wide) overhead rate when (CMA adapted) A) manufacturing is limited to a single product flowing through identical departments in a fixed

sequence. B) various products are manufactured that do not pass through the same departments or use the

same manufacturing techniques. C) individual cost drivers cannot accurately be determined with respect to cause-and-effect

relationships. D) the single or plant wide rate is related to several identified cost drivers.

Answer: B Difficulty: Simple Learning Objective: 3 AACSB: Analytic

67. What is the normal effect on the numbers of cost pools and cost assignment bases when an activity-based costing (ABC) system replaces a traditional costing system? (CPA adapted)

Cost Pools Cost Assignment BasesA) No effect No effect


B) Increase No effectC) No effect IncreaseD) Increase Increase


68. Which of the following would be a reasonable basis for assigning the materials handling costs to the units produced in an activity-based costing (ABC) system? A) number of production runs per year B) number of components per completed unit C) amount of time required to produce one unit D) amount of overhead applied to each completed unit



A company has identified the following overhead costs and cost drivers for the coming year: (CIA adapted)

Overhead Item Cost Driver Budgeted Cost Bud. Activity LevelMachine setup Number of setups $ 20,000 200Inspection Number of inspections $130,000 6,500Material handling Number of material moves $ 80,000 8,000Engineering Engineering hours $ 50,000 1,000

Budgeted direct labor cost was $100,000 and budgeted direct material cost was $280,000. The following information was collected on three jobs that were completed during the year:

Job 101 Job 102 Job 103Direct materials $5,000 $12,000 $8,000Direct labor $2,000 $2,000 $4,000Units completed 100 50 200Number of setups 1 2 4Number of inspections 20 10 30Number of mat’l moves 30 10 50Engineering hours 10 50 10

69. If the company uses activity-based costing (ABC), how much overhead cost should be assigned to Job 101? A) $1,300 B) $2,000 C) $5,000 D) $5,600 E) some other answer _______________.


Answer: A Difficulty: Moderate Learning Objective: 5 Response: [($20,000/200) x 1] + [($130,000/6,500) x 20] + [($80,000/8,000) x 30] +[($50,000/1,000) x 10] = $1,300AACSB: Analytic

70. If the company uses activity-based costing (ABC), what is the cost of each unit of Job 102? A) $340 B) $392 C) $440 D) $520 E) some other answer ______________.


Response: [($20,000/200) x 2] + [($130,000/6,500) x 10] + [($80,000/8,000) x 10] +[($50,000/1,000) x 50] = $3,000$12,000 + 2,000 + 3,000 = $17,000$17,000/50 = $340AACSB: Analytic

71. The company prices its products at 140% of cost. If the company uses activity-based costing (ABC), the price of each unit of Job 103 would be A) $ 98 B) $100 C) $116 D) $140 E) some other answer _______________.


Response: [($20,000/200) x 4] + [($130,000/6,500) x 30] + [($80,000/8,000) x 50] +[($50,000/1,000) x 10] = $2,000$8,000 + 4,000 + 2,000 = $14,000[$14,000(1.40)]/20= $98AACSB: Analytic

Essay Questions

72. Wayne Shen established Windy City Placement Service (WCPS) to provide executive counseling and job placement services to its clients. Wayne charges a fee of $450.00 per hour for each service. The revenues and costs for the year are shown in the following income statement:


Executive Counseling

Placement Service

Total

Revenue $99,000 $202,500 $301,500Expenses: Administrative Support 60,000 Transportation, etc. 54,000 Equipment 30,000Profit $157,500

Wendy has kept good records of the following data for cost allocation purposes:

Activity LevelActivity Cost Driver Executive Counseling Placement Service

Administrative support Number of clients 9 6Transportation, etc. Number of visits 150 225Equipment Computer hours 1,350 1,050

Required:(a) Complete the income statement using activity-based costing and WCPSs three cost drivers.(b) Recompute the income statement using direct labor-hours as the only allocation base (220 hours for teen counseling; 450 hours for executive coaching).(c) How might Wayne's decisions be altered if he were to allocate all overhead costs using direct labor-hours?(d) Under what circumstances would the labor-based allocation and activity-based costing (using Wayne's three cost drivers) result in similar profit results?

Answer:

Executive Placementa. Account Rate Counseling Service Total

Revenue $99,000 $202,500 $301,500Expenses: Administrative support $4,000 a 36,000 d 24,000 60,000 Transportation 144 b 21,600 e 32,400 54,000 Equipment. 12.50 c 16,875 f 13,125 30,000Profit $ 24,525 $132,975 $157,500

a$4,000 per client = $60,000/15 clients b$144 per visit = $54,000/375 visits c$12.50 per computer hour = $30,000/2,400 hours d$36,000 = $4,000 per client x 9 clients e$21,600 = $144 per hour x 150 visits f$16,875 = $12.50 per computer hour x 1,350 hours

Executive Placementb. Account Rate Counseling Service Total

Revenue $ 99,000 $202,500 $301,500Expenses $214.925a 47,282 b 96,718 144,000Profit $ 51,718 $105,782 $157,500


a$301,500 revenue/$450 per hour = 670 hours of labor $214.925 per labor hour = $144,000 of expenses/670 hours b$47,284 = $214.925 per labor hour x 220 hours of labor

C) Under labor-based costing, teen counseling and executive coaching appear equally profitable (relative to revenues), so Wayne will not emphasize one or the other. However, using ABC, Windy City Placement Service appears to be much more profitable.D) ABC and traditional costing systems generally yield comparable product-line profits when overhead is a small portion of costs, or when cost drivers are highly correlated with the volume-related allocation base. In this case, labor hours were distributed 32.8% to Executive Counseling and 67.2% to Placement Service. If Wayne's three cost drivers were each also distributed 32.8% to Executive Counseling and 67.5% to Placement Service, the labor-hour allocation and ABC would have been identical. AACSB: Analytic

73. Delta Parts, Inc., recently switched to activity-based costing from the department allocation method. The Fabrication Department manager has estimated the following cost drivers and rates:

Activity Centers Cost Drivers Rate per Cost Driver UnitMaterials handling Pounds of material handled $25.20 per poundQuality inspections Number of inspections $315 per inspectionMachine setups Number of machine setups $3,780 per setupRunning machines Number of machine-hours $31.50 per hour

Direct materials costs were $420,000, and direct labor costs were $210,000 during July, when the Fabrication Department handled 5,250 pounds of materials, made 1,050 inspections, had 56 setups, and ran the machines for 21,000 hours.RequiredUse T-accounts to show the flow of materials, labor, and overhead costs from the four overhead activity centers through work-in-process inventory and out to finished goods inventory. Use the accounts materials inventory, wages payable, work-in-process inventory, finished goods inventory, and four overhead applied accounts.

Answer:

Materials Inventory$420,000

Wages Payable$210,000

Overhead Applied:Materials Handling

5,250 pounds x $25.20 per pound = $132,300 to WIP

Overhead Applied:


Quality Inspections1,050 inspections x $315 per inspection = $330,750 to WIP

Overhead Applied:

Machine Setups56 setups x $3,780 per setup = $211,680 to WIP

Overhead Applied:Running Machines

21,000 hours x $31.50 per hour = $661,500 to WIP

AACSB: Analytic

74. Platt Sports Products manufactures and distributes three types of golf clubs: beginners, intermediate, and advanced. The materials used in these clubs increases in each level and allows for more precise balancing and longer wear. Production is highly automated for the beginners' clubs, whereas the intermediate and advanced clubs require a varying degree of labor, depending on the intricacy of the balancing process. Platt applies all indirect costs according to a predetermined rate based on direct labor hours. A consultant recently suggested that Platt switch to an activity-based costing (ABC) system, and identified the following cost breakdown for the upcoming year:

EstimatedActivity Recommended Cost Drivers Costs Cost DriverOrder processing Number of orders $ 52,500 125 ordersProduction setup Number of production runs $210,000 75 runsMaterials handling Pounds of materials used $375,000 125,000 lbs.Machine depr. and maintenance Machine hours $322,000 20,000 hoursQuality control Number of inspections $ 80,000 40 inspectionsPacking Number of units $ 14,000 280,000 units

In addition, management estimates 50,000 direct labor hours will be used in the upcoming year at a rate of $14 per hour.

Assume that the following activity took place in the first month of the upcoming year:

Beginners Intermediate Advanced

Number of units produced 20,000 8,000 3,000Direct material costs $20,800 $13,000 $8,000Direct labor hours 500 1,000 2,000Number of orders 6 4 3Number of production runs 2 2 3Pounds of material 8,000 3,200 1,500


Machine hours 1,200 300 200Number of inspections 3 3 2Number of units shipped 18,000 7,500 2,500

Required:A) Compute the production costs for each product in the first month of the upcoming year using direct labor hours as the allocation base.B) Compute the production costs for each product in the first month of the upcoming year using machine hours as the allocation base.C) Compute the production costs for each product in the first month of the upcoming year using activity-based costing.

Answer: (A) Total estimated costs = $1,053,500 $1,053,500/50,000 = $21.07/DLH

Beginning Intermediate AdvancedDirect materials $20,800 $13,000 $8,000Direct labor 7,000 14,000 28,000Overhead 10,535 21,070 42,140Total $38,335 $48,070 $78,14078,140

(B) $1,053,500/20,000 - $52.675/MH

Beginning Intermediate AdvancedDirect materials $20,800 $13,000 $8,000Direct labor 7,000 14,000 28,000Overhead 63,210 15,802.50 10,535Total $91,010 $42,802.50 $46,53546,535

Activity-based rate:

Activity RateOrder processing $420/orderProduction setup $2,800/runMaterials handling $3.00/poundMachine depr. and maintenance $16.10/hourQuality control $2,000/inspectionPacking $.05/unit

Beginning Intermediate AdvancedDirect materials $20,800 $13,000 $8,000Direct labor 7,000 14,000 28,000Overhead 58,340 28,085 21,505Total $86,140 $55,085 $57,50557,505

AACSB: Analytic



75. ABC Enterprises manufactures and distributes three products; A, B, and C. Over the past few years, ABC has gradually automated its operations. As a result, total direct labor hours have substantially declined, while total manufacturing overhead costs have significantly increased. Because of these changes, ABC wants to evaluate its product costs using activity-based costing procedures. The following information has been gathered from the company's internal records and budgetary system:

Exhibit #1A B C

Units produced and sold 5,000 2,000 1,000Total direct material cost $90,000 $50,000 $ 40,000Total direct labor hours 3,600 2,000 800Direct labor rate per hour $ 9.00Total manufacturing overhead $360,000Total operating expenses $225,000

Exhibit #2Overhead: Number of Events Activity Cost Driver Total Cost A B CProduction No. of parts per unit $150,000 20 32 68Set-up No. of production runs 90,000 8 5 3Quality control No. of inspection pts. 50,000 3 6 11

Expenses: Number of EventsActivity Cost Driver Total Cost A B CMarketing No. of sales calls $125,000 100 75 25Customer Service No. of units shipped 60,000 5,000 2,000 1,000

ABC Enterprises determines its selling price per unit using a 40% markup on traditional product cost.

Required:(A) Use traditional costing procedures and complete the segmented income statement provided below, using direct labor hours to assign overhead costs to products.

ProductA B C Total

SalesCost of salesGross marginOperating expensesOperating income

(B) Use activity-based costing procedures and complete the segmented income statement provided below.


ProductA B C Total

Sales

Cost of sales

Gross margin

Unassignable costs

Operating income

Answer: (A) Use traditional costing procedures and complete the segmented income statement provided below.

Overhead rate = $360,000/6,400 = $56.25/DLH

ProductA B C Total

Sales $454,860 $252,700 $129,080 $836,640

Cost of sales 324,900 180,500 92,200 597,600

Gross margin 129,960 72,200 36,880 239,040

Operating expenses 225,000

Operating income 14,040

(B) Use activity-based costing procedures complete the segmented income statement provided below. Use the sales figures from part A.Activity-based rates = $1,250/part; $5,625/run; $2,500/inspection; $625/sales call; $7.50/unit

ProductA B C Total

Sales $454,860 $252,700 $129,080 $836,640

Cost of sales 299,900 213,000 199,700 712,600

Gross margin 154,960 39,700 ( 70,620) 124,040

Unassignable costs 110,000

Operating income $ 14,040


AACSB: Analytic


Documents

ch009.LAM2e TB.doc