Chapter 08

True/False Questions

1. If a manufacturing company is using activity-based costing for internal purposes only, then organization-sustaining overhead costs should not be allocated to any of the products.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

2. Batch-level activities are performed each time a batch of goods is handled or processed.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

3. Organization-sustaining activities are carried out regardless of how many units are made, how many batches are run, or how many different products are made.


4. Direct labor-hours or direct labor cost should not be used as a measure of activity in an activity-based costing system.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

5. Activity-based costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs.


6. Activity-based costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect only variable costs.


Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-5

7. A duration driver provides a measure of the amount of time required to perform an activity.


8. In general, transaction drivers are more accurate measures of the consumption of resources than duration drivers.


9. The costs of idle capacity should not be assigned to products in activity-based costing.


10. In traditional costing systems, all manufacturing costs are assigned to products--even manufacturing costs that are not caused by the products.


11. Activity-based costing involves a two-stage allocation in which overhead costs are first assigned to departments and then to jobs on the basis of direct labor hours.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,4 Level: Medium

12. In activity-based costing, some costs may be broken down and assigned to two activity cost pools. For example, part of a supervisor's salary may be classified as a product-level activity and part of it may be classified as a batch-level activity.


13. Activity rates in activity-based costing are computed by dividing costs from the first-stage allocations by the activity measure for each activity cost pool.


14. In the second-stage allocation in activity-based costing, activity rates are used to apply costs to products, customers, and other cost objects.


15. When a company shifts from a traditional cost system in which manufacturing overhead is applied based on direct labor-hours to an activity-based costing system in which there are batch-level and product-level costs, the unit product costs of high volume products typically decrease whereas the unit product costs of low volume products typically increase.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium

Multiple Choice Questions

16. Which terms would make the following sentence true? Manufacturing companies that benefit the most from activity-based costing are those where overhead costs are a _________ percentage of total product cost and where there is ___________ diversity among the various products that they produce.A) low, littleB) low, considerableC) high, littleD) high, considerable

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

17. Would factory security and assembly activities be best classified at an appliance manufacturing plant as unit-level, batch-level, product-level, or organization-sustaining?

Security AssemblyA) Product UnitB) Batch BatchC) Organization UnitD) Organization Product

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium


18. Which of the following would be an acceptable measure of activity for a material handling activity cost pool?

Number of Weight ofmaterial moves material moved

A) Yes YesB) No YesC) Yes NoD) No No

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

19. An activity-based costing system that is designed for internal decision-making generally will not conform to generally accepted accounting principles. Which of the following is NOT a reason for this happening?A) Some manufacturing costs (i.e., the costs of idle capacity and organization-

sustaining costs) will not be assigned to products.B) Some nonmanufacturing costs are assigned to products.C) Allocation bases other than direct labor-hours, direct labor cost, and machine-

hours are used.D) First-stage allocations may be based on subjective interview data.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

20. Providing the power required to run production equipment is an example of a:A) Unit-level activity.B) Batch-level activity.C) Product-level activity.D) Organization-sustaining activity.


21. Parts administration is an example of a:A) Unit-level activity.B) Batch-level activity.C) Product-level activity.D) Organization-sustaining.

Ans: C LO: 1 Level: Medium

22. If a cost object such as a product or customer has a negative green margin, then:A) its red margin will be positive.B) its red margin may be either positive or negative.C) its red margin will be negative.D) its red margin will be zero.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 8A LO: 6 Level: Medium

23. Tatman Corporation uses an activity-based costing system with the following three activity cost pools:

Activity Cost Pool Total ActivityFabrication......................... 10,000 machine-hoursOrder processing................ 800 ordersOther.................................. Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs.The company has provided the following data concerning its costs:

Wages and salaries............. $320,000Depreciation....................... 220,000Occupancy.......................... 120,000 Total................................... $660,000

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools

FabricationOrder

Processing Other TotalWages and salaries....... 20% 65% 15% 100%Depreciation................. 15% 35% 50% 100%Occupancy.................... 5% 70% 25% 100%

The activity rate for the Fabrication activity cost pool is closest to:A) $3.30 per machine-hourB) $13.20 per machine-hourC) $10.30 per machine-hourD) $8.80 per machine-hour

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Medium


Solution:

Total Fabrication Cost:Wages and salaries: 20% × $320,000....... $ 64,000Depreciation: 15% × $220,000................. 33,000Occupancy: 5% × $120,000..................... 6,000 Total.......................................................... $103,000

(a) (b)(a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity RateFabrication $103,000 10,000 machine-hours $10.30 per machine-hour

24. Leaper Corporation uses an activity-based costing system with the following three activity cost pools:

Activity Cost Pool Total ActivityFabrication......................... 40,000 machine-hoursOrder processing................ 200 ordersOther.................................. Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-sustaining costs.The company has provided the following data concerning its costs:

Wages and salaries....... $360,000Depreciation................. 140,000Occupancy.................... 160,000 Total............................. $660,000

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools

FabricationOrder

Processing Other TotalWages and salaries....... 35% 40% 25% 100%Depreciation................. 5% 55% 40% 100%Occupancy.................... 30% 45% 25% 100%

The activity rate for the Order Processing activity cost pool is closest to:A) $1,485 per orderB) $1,540 per orderC) $1,465 per orderD) $1,320 per order


Solution:

Total Order Processing Cost:Wages and salaries: 40% × $360,000....... $144,000Depreciation: 55% × $140,000................. 77,000Occupancy: 45% × $160,000................... 72,000 Total.......................................................... $293,000

(a) (b)(a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity RateOrder Processing $293,000 200 orders $1,465 per order


25. Huelskamp Corporation has provided the following data concerning its overhead costs for the coming year:

Wages and salaries....... $360,000Depreciation................. 120,000Rent.............................. 180,000 Total............................. $660,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year:

Activity Cost Pool Total ActivityAssembly...................... 60,000 labor-hoursOrder processing.......... 400 ordersOther............................ Not applicable

The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs.The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools

AssemblyOrder

Processing Other TotalWages and salaries....... 25% 65% 10% 100%Depreciation................. 15% 45% 40% 100%Rent.............................. 35% 40% 25% 100%

The activity rate for the Assembly activity cost pool is closest to:A) $2.65 per labor-hourB) $3.85 per labor-hourC) $2.85 per labor-hourD) $2.75 per labor-hour


Solution:

Total Assembly Cost:Wages and salaries: 25% × $360,000....... $ 90,000Depreciation: 15% × $120,000................. 18,000Rent: 35% × $180,000.............................. 63,000 Total.......................................................... $171,000

(a) (b)(a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity RateAssembly $171,000 60,000 labor-hours $2.85 per labor-hour


26. Bennette Corporation has provided the following data concerning its overhead costs for the coming year:

Wages and salaries....... $340,000Depreciation................. 120,000Rent.............................. 140,000 Total............................. $600,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year:

Activity Cost Pool Total ActivityAssembly................... 30,000 labor-hoursOrder processing....... 500 ordersOther......................... Not applicable

The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs.The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools

AssemblyOrder

Processing Other TotalWages and salaries....... 40% 35% 25% 100%Depreciation................. 15% 45% 40% 100%Rent.............................. 35% 30% 35% 100%

The activity rate for the Order Processing activity cost pool is closest to:A) $430 per orderB) $420 per orderC) $360 per orderD) $440 per order

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Medium

Solution:

Total Order Processing Cost:Wages and salaries: 35% × $340,000....... $119,000Depreciation: 45% × $120,000................. 54,000Rent: 30% × $140,000.............................. 42,000 Total.......................................................... $215,000

(a) (b)

(a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity RateOrder Processing $215,000 500 orders $430 per order

27. Eccles Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:Wages and salaries............. $340,000Depreciation....................... 180,000Utilities............................... 200,000 Total................................... $720,000

Distribution of resource consumption:Activity Cost Pools

Assembly Setting Up Other TotalWages and salaries....... 20% 60% 20% 100%Depreciation................. 15% 35% 50% 100%Utilities......................... 5% 55% 40% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Assembly activity cost pool?A) $144,000B) $96,000C) $36,000

PD) $105,000



Solution:

Total Assembly Cost:Wages and salaries: 20% × $340,000....... $ 68,000Depreciation: 15% × $180,000................. 27,000Utilities: 5% × $200,000.......................... 10,000 Total.......................................................... $105,000

28. Mayeux Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:



Assembly Setting Up Other TotalWages and salaries....... 50% 40% 10% 100%Depreciation................. 10% 55% 35% 100%Utilities......................... 15% 50% 35% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Setting Up activity cost pool?A) $360,000B) $336,000C) $288,000D) $348,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Total Setting Up Cost:Wages and salaries: 40% × $320,000....... $128,000Depreciation: 55% × $160,000................. 88,000Utilities: 50% × $240,000........................ 120,000 Total.......................................................... $336,000

29. Gutknecht Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:



Assembly Setting Up Other TotalWages and salaries........ 35% 40% 25% 100%Depreciation.................. 5% 60% 35% 100%Utilities.......................... 10% 60% 30% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other activity cost pool?A) $138,000B) $210,000C) $180,000D) $216,000


Solution:

Total Other Cost:Wages and salaries: 25% × $300,000....... $ 75,000Depreciation: 35% × $180,000................. 63,000Utilities: 30% × $240,000........................ 72,000 Total.......................................................... $210,000


30. Lakatos Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs:

Costs:Wages and salaries............. $420,000Depreciation....................... 240,000Occupancy.......................... 220,000 Total................................... $880,000

The distribution of resource consumption across the three activity cost pools is given below:

Activity Cost Pools

FabricatingOrder

Processing Other TotalWages and salaries........ 10% 75% 15% 100%Depreciation.................. 5% 50% 45% 100%Occupancy..................... 30% 35% 35% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Fabricating activity cost pool?A) $88,000B) $132,000C) $264,000D) $120,000


Solution:

Total Fabricating Cost:Wages and salaries: 10% × $420,000....... $ 42,000Depreciation: 5% × $240,000................... 12,000Occupancy: 30% × $220,000................... 66,000 Total.......................................................... $120,000

31. Perl Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs:

Costs:Wages and salaries............. $360,000Depreciation....................... 200,000Occupancy.......................... 100,000 Total................................... $660,000


Activity Cost Pools

FabricatingOrder


How much cost, in total, would be allocated in the first-stage allocation to the Order Processing activity cost pool?A) $336,000B) $319,000C) $330,000D) $396,000


Solution:

Total Order Processing Cost:Wages and salaries: 60% × $360,000....... $216,000Depreciation: 35% × $200,000................. 70,000Occupancy: 50% × $100,000................... 50,000 Total.......................................................... $336,000


32. Hosley Corporation uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs:

Costs:Wages and salaries....... $360,000Depreciation................. 100,000Occupancy.................... 120,000 Total............................. $580,000


Activity Cost Pools

FabricatingOrder


How much cost, in total, would be allocated in the first-stage allocation to the Other activity cost pool?A) $123,000B) $174,000C) $58,000D) $203,000


Solution:

Total Other Cost:Wages and salaries: 10% × $360,000....... $ 36,000Depreciation: 45% × $100,000................. 45,000Occupancy: 35% × $120,000................... 42,000 Total.......................................................... $123,000

33. Feldpausch Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Total Cost Total ActivityAssembly...................... $1,137,360 84,000 machine-hoursProcessing orders......... $28,479 1,100 ordersInspection..................... $97,155 1,270 inspection-hours

The company makes 470 units of product W26B a year, requiring a total of 660 machine-hours, 50 orders, and 40 inspection-hours per year. The product's direct materials cost is $40.30 per unit and its direct labor cost is $42.22 per unit. The product sells for $118.00 per unit. According to the activity-based costing system, the product margin for product W26B is:A) $6,444.70 per unitB) $4,679.20 per unitC) $3,384.70 per unitD) $16,675.60 per unit

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4,5 Level: Medium

Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateAssembly $1,137,360 84,000 machine-

hours$13.54 per

machine-hourProcessing Orders 28,479 1,100 orders $25.89 per orderInspection 97,155 1,270 inspection-

hours$76.50 per

inspection-hour

Calculation of Overhead Costs:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC CostAssembly $13.54 per MH 660 MHs $8,936.40Processing Orders $25.89 per order 50 orders $1,294.50Inspection $76.50 per IH 40 IHs $3,060.00


Sales.............................................................................$55,460.00Costs:

Direct materials (470 × $40.30)...............................$18,941.00Direct labor (470 × $42.22)......................................19,843.40Assembly..................................................................8,936.40Processing.................................................................1,294.50Inspection................................................................. 3,060.00 52,075.30

Product margin.............................................................$ 3,384.70

34. Houseal Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Total Cost Total ActivityAssembly...................... $613,250 55,000 machine-hoursProcessing orders......... $46,170 1,500 ordersInspection..................... $146,110 1,900 inspection-hours

Data concerning one of the company’s products, Product W58B, appear below:

Selling price per unit............................ $113.70Direct materials cost per unit............... $48.14Direct labor cost per unit...................... $11.62Annual unit production and sales......... 360Annual machine-hours......................... 1,040Annual orders....................................... 60Annual inspection-hours...................... 30

According to the activity-based costing system, the product margin for product W58B is:A) $3,668.60B) $5,975.60C) $5,515.40D) $19,418.40

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4,5 Level: Medium

Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateAssembly $613,250 55,000 machine-

hours$11.15 per


hours$76.90 per

inspection-hour

Calculation of Overhead Costs:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC CostAssembly $11.15 per MH 1,040 MHs $11,596.00Processing Orders $30.78 per order 60 orders $1,846.80Inspection $76.90 per IH 30 IHs $2,307.00

Sales (360 × $113.70)..................................................$40,932.00Costs:

Direct materials (360 × $48.14)...............................$17,330.40Direct labor (360 × $11.62)......................................4,183.20Assembly..................................................................11,596.00Processing.................................................................1,846.80Inspection................................................................. 2,307.00 37,263.40

Product margin.............................................................$ 3,668.60


35. Dobles Corporation has provided the following data from its activity-based costing system:


The company makes 420 units of product D28K a year, requiring a total of 460 machine-hours, 80 orders, and 10 inspection-hours per year. The product's direct materials cost is $48.96 per unit and its direct labor cost is $25.36 per unit. According to the activity-based costing system, the average cost of product D28K is closest to:A) $95.34 per unitB) $93.60 per unitC) $74.32 per unitD) $89.93 per unit


Solution:


hours$12.67 per


hours$73.00 per

inspection-hour

Average Cost of Product D28K:Direct materials.......................................... $48.96Direct labor................................................ 25.36Assembly [($12.67 × 460) ÷ 420].............. 13.88Processing orders [($28.39 × 80) ÷ 420]. . . 5.40Inspection [($73.00 × 10) ÷ 420]............... 1.74

$95.34

36. Paparo Corporation has provided the following data from its activity-based costing system:


Data concerning the company’s product Q79Y appear below:

Annual unit production and sales......... 450Annual machine-hours......................... 1,080Annual number of orders..................... 70Annual inspection hours...................... 20Direct materials cost............................ $44.00 per unitDirect labor cost................................... $41.03 per unit

According to the activity-based costing system, the average cost of product Q79Y is closest to:A) $133.29 per unitB) $85.03 per unitC) $127.43 per unitD) $129.94 per unit



Solution:


hours$16.27 per


hours$75.30 per

inspection-hour

Average Cost of Product Q79Y:Direct materials.......................................... $ 44.00Direct labor................................................ 41.03Assembly [($16.27 × 1,080) ÷ 450]........... 39.05Processing orders [($37.68 × 70) ÷ 450]. . . 5.86Inspection [($75.30 × 20) ÷ 450]............... 3.35

$133.29

37. Millner Corporation has provided the following data from its activity-based costing accounting system:

Activity Cost Pools Total Cost Total ActivityDesigning products............ $1,372,448 7,798 product design hoursSetting up batches.............. $33,300 740 batch set-upsAssembling products.......... $126,160 6,640 assembly hours

The activity rate for the “designing products” activity cost pool is closest to:A) $101 per product design hourB) $1,372,448 per product design hourC) $176 per product design hourD) $57 per product design hour

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy

Solution:(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity RateDesigning Products $1,372,448 7,798 PDHs $176 per PDH

38. Data concerning three of the activity cost pools of Salcido LLC, a legal firm, have been provided below:

Activity Cost Pools Total Cost Total ActivityResearching legal issues.. . . $20,480 640 research hoursMeeting with clients........... $1,182,239 7,253 meeting hoursPreparing documents.......... $91,840 5,740 documents

The activity rate for the “meeting with clients” activity cost pool is closest to:A) $95 per meeting hourB) $61 per meeting hourC) $163 per meeting hourD) $1,182,239 per meeting hour



Activity Cost Pool Total Cost Total Activity Activity RateMeeting with clients $1,182,239 7,253 meeting

hours$163 per meeting hour


39. Gould Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products:

Activity Cost Pools Activity RateSetting up batches.......................... $59.06 per batchProcessing customer orders............ $72.66 per customer orderAssembling products...................... $3.75 per assembly hour

Data concerning two products appear below:

Product K91B Product F65ONumber of batches......................... 84 50Number of customer orders........... 32 43Number of assembly hours............ 483 890

How much overhead cost would be assigned to Product K91B using the activity-based costing system?A) $9,097.41B) $81,146.53C) $4,961.04D) $135.47

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy

Solution:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost

Setting up batches$59.06 per

batch84 batches $4,961.04

Processing customer orders

$72.66 per order

32 orders 2,325.12

Assembling products $3.75 per AH 483 AHs 1,811.25 $9,097.41

40. Hane Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products:

Activity Cost Pools Activity RateAssembling products...................... $8.90 per assembly hourProcessing customer orders............ $31.23 per customer orderSetting up batches.......................... $43.72 per batch

Data for one of the company’s products follow:

Product U94WNumber of assembly hours............ 389Number of customer orders........... 53Number of batches......................... 61

How much overhead cost would be assigned to Product U94W using the activity-based costing system?A) $42,176.55B) $83.85C) $7,784.21D) $2,666.92



Activity Cost Pool Activity Rate Total Activity ABC CostAssembling products $8.90 per AH 389 AHs $3,462.10Processing customer

orders$31.23 per

order53 orders 1,655.19


batch61 batches 2,666.92

$7,784.21


41. Activity rates from Lippard Corporation's activity-based costing system are listed below. The company uses the activity rates to assign overhead costs to products:

Activity Cost Pools Activity RateProcessing customer orders............ $31.62 per customer orderAssembling products...................... $2.86 per assembly hourSetting up batches.......................... $46.61 per batch

Last year, Product H50E involved 9 customer orders, 666 assembly hours, and 77 batches. How much overhead cost would be assigned to Product H50E using the activity-based costing system?A) $60,979.68B) $3,588.97C) $5,778.31D) $81.09



Activity Cost Pool Activity Rate Total Activity ABC CostProcessing customer

orders$31.62 per

order9 orders $ 284.58

Assembling products $2.86 per AH 666 AHs 1,904.76


batch77 batches 3,588.97

$5,778.31

Use the following to answer questions 42-43:

Weldon Corporation has provided the following data from its activity-based costing accounting system:

Indirect factory wages............................. $340,000Factory equipment depreciation.............. $240,000

Distribution of Resource Consumption across Activity Cost Pools:

Activity Cost PoolsCustomer

OrdersProduct

Processing Other TotalIndirect factory wages.................... 25% 65% 10% 100%Factory equipment depreciation..... 40% 40% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs that are not assigned to products.

42. How much indirect factory wages and factory equipment depreciation cost would be assigned to the Customer Orders activity cost pool?A) $188,500B) $181,000C) $290,000D) $580,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Easy

Solution:

Customer Orders Cost:Indirect factory wages: 25% × $340,000............................................$ 85,000Factory equipment depreciation: 40% × $240,000............................. 96,000 Total....................................................................................................$181,000


43. How much indirect factory wages and factory equipment depreciation cost would NOT be assigned to products using the activity-based costing system?A) $340,000B) $82,000C) $0D) $240,000


Solution:

Other Cost:Indirect factory wages: 10% × $340,000............................................$34,000Factory equipment depreciation: 20% × $240,000............................. 48,000 Total....................................................................................................$82,000


Tomasini Corporation has provided the following data from its activity-based costing accounting system:

Supervisory wages............. $660,000Factory supplies................. $280,000


Activity Cost PoolsBatch

ProcessingUnit

Processing Other TotalSupervisory wages.... 20% 70% 10% 100%Factory supplies........ 45% 35% 20% 100%


44. How much supervisory wages and factory supplies cost would be assigned to the Batch Processing activity cost pool?A) $940,000B) $470,000C) $305,500D) $258,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Easy

Solution:

Batch Processing Cost:Supervisory wages: 20% × $660,000.................................................$132,000Factory supplies: 45% × $280,000..................................................... 126,000 Total....................................................................................................$258,000

45. How much supervisory wages and factory supplies cost would NOT be assigned to products using the activity-based costing system?A) $122,000B) $660,000C) $280,000D) $0

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Easy

Solution:

Other Cost:Supervisory wages: 10% × $660,000.................................................$ 66,000Factory supplies: 20% × $280,000..................................................... 56,000 Total....................................................................................................$122,000



The following data have been provided by Letze Corporation from its activity-based costing accounting system:

Factory supervision............ $460,000Indirect factory labor.......... $220,000

Distribution of Resource Consumption across Activity Cost Pools:Activity Cost Pools

Batch Set-Up Expediting Other TotalFactory supervision............ 55% 35% 10% 100%Indirect factory labor.......... 60% 20% 20% 100%


46. How much factory supervision and indirect factory labor cost would be assigned to the Batch Set-Up activity cost pool?A) $680,000B) $385,000C) $391,000D) $340,000


Solution:

Batch Set-Up Cost:Factory supervision: 55% × $460,000................................................$253,000Indirect factory labor: 60% × $220,000............................................. 132,000 Total....................................................................................................$385,000

47. How much factory supervision and indirect factory labor cost would NOT be assigned to products using the activity-based costing system?A) $220,000B) $90,000C) $0D) $460,000


Solution:

Other Cost:Factory supervision: 10% × $460,000................................................$46,000Indirect factory labor: 20% × $220,000............................................. 44,000 Total....................................................................................................$90,000


Forliche Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:Wages and salaries............. $ 80,000Other expenses................... 40,000 Total................................... $120,000


Making Bouquets Delivery Other Total

Wages and salaries.... 60% 30% 10% 100%Other expenses.......... 45% 25% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool ActivityMaking bouquets....... 40,000 bouquetsDelivery..................... 5,000 deliveries


48. What would be the total overhead cost per bouquet according to the activity based costing system? In other words, what would be the overall activity rate for the making bouquets activity cost pool? (Round to the nearest whole cent.)A) $1.65B) $1.35C) $1.58D) $1.80


Solution:

Making Bouquets Cost:Wages and salaries: 60% × $80,000...................................................$48,000Other expenses: 45% × $40,000......................................................... 18,000 Total....................................................................................................$66,000

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateMaking Bouquets $66,000 40,000 bouquets $1.65 per bouquet

49. What would be the total overhead cost per delivery according to the activity based costing system? In other words, what would be the overall activity rate for the deliveries activity cost pool? (Round to the nearest whole cent.)A) $7.20B) $6.60C) $6.00D) $6.80

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Medium

Solution:

Delivery Cost:Wages and salaries: 30% × $80,000...................................................$24,000Other expenses: 25% × $40,000......................................................... 10,000 Total....................................................................................................$34,000

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateDelivery $34,000 5,000 deliveries $6.80 per delivery


Dietz Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:Manufacturing overhead............................ $440,000Selling and administrative expenses.......... 240,000 Total........................................................... $680,000


Order Size

Customer Support Other Total

Manufacturing overhead...................... 55% 35% 10% 100%Selling and administrative expenses.... 30% 50% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs. You have been asked to complete the first-stage allocation of costs to the activity cost pools.

50. How much cost, in total, would be allocated in the first-stage allocation to the Order Size activity cost pool?A) $314,000B) $289,000C) $204,000D) $374,000


Solution:

Order Size Cost:Manufacturing overhead: 55% × $440,000........................................$242,000Selling and administrative expenses: 30% × $240,000...................... 72,000 Total....................................................................................................$314,000


51. How much cost, in total, would be allocated in the first-stage allocation to the Customer Support activity cost pool?A) $274,000B) $238,000C) $289,000D) $340,000


Solution:

Customer Support Cost:Manufacturing overhead: 35% × $440,000........................................$154,000Selling and administrative expenses: 50% × $240,000...................... 120,000 Total....................................................................................................$274,000

52. How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activity-based costing system is used for internal decision-making?A) $68,000B) $0C) $92,000D) $136,000


Solution:

Other Cost:Manufacturing overhead: 10% × $440,000........................................$44,000Selling and administrative expenses: 20% × $240,000...................... 48,000 Total....................................................................................................$92,000


The controller of Hendershot Company estimates the amount of materials handling overhead cost that should be allocated to the company's two products using the data that are given below:

Wall Mirrors Specialty WindowsTotal expected units produced................... 6,000 3,000Total expected material moves.................. 500 100Expected direct labor-hours per unit.......... 6 9

The total materials handling cost for the year is expected to be $6,123.60.

53. If the materials handling cost is allocated on the basis of direct labor-hours, how much of the total materials handling cost would be allocated to the wall mirrors? (Round off your answer to the nearest whole dollar.)A) $2,449B) $4,144C) $3,499D) $3,062

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Easy Source: CMA, adapted

Solution:

Total Direct Labor-HoursWall Mirrors: 6,000 units × 6 DLHs per unit.....................................36,000 DLHsSpecialty Mirrors: 3,000 units × 9 DLHs per unit..............................27,000 DLHsTotal....................................................................................................63,000 DLHs

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateDirect labor-hours $6,123.60 63,000 DLHs $.0972 per DLH

Materials Handling Cost for Wall Mirrors:

(a) (b) (a) × (b)Activity Cost Pool Activity Rate Total Activity ABC CostDirect labor-hours $.0972 per DLH 36,000 DLHs $3,499


54. If the materials handling cost is allocated on the basis of material moves, how much of the total materials handling cost would be allocated to the specialty windows? (Round off your answer to the nearest whole dollar.)A) $1,021B) $3,674C) $3,062D) $1,980

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Easy Source: CMA, adapted

Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateMaterial moves $6,123.60 600 moves* $10.206 per move

*500 + 100 = 600 moves

Materials Handling Cost for Specialty Mirrors:

(a) (b) (a) × (b)Activity Cost Pool Activity Rate Total Activity ABC CostMaterial moves $10.206 per move 100 moves $1,021


Swimm Company allocates materials handling cost to the company's two products using the below data:

Modular Homes Prefab BarnsTotal expected units produced............. 3,000 4,000Total expected material moves............ 400 100Expected direct labor-hours per unit.... 700 200

The total materials handling cost for the year is expected to be $72,065.

55. If the materials handling cost is allocated on the basis of direct labor-hours, how much of the total materials handling cost would be allocated to the prefab barns? (Round off your answer to the nearest whole dollar.)A) $16,014B) $19,880C) $36,890D) $36,033

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Easy Source: CMA, adapted

Solution:

Total Direct Labor-HoursModular Homes: 3,000 units × 700 DLHs per unit............................2,100,000 DLHsPrefab Barns: 4,000 units × 200 DLHs per unit................................. 800,000 DLHs Total....................................................................................................2,900,000 DLHs

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateDirect labor-hours $72,065 2,900,000 DLHs $.02485 per DLH

Materials Handling Cost for Prefab Barns:

(a) (b) (a) × (b)Activity Cost Pool Activity Rate Total Activity ABC CostDirect labor-hours $.02485 per DLH 800,000 DLHs $19,880


56. If the materials handling cost is allocated on the basis of material moves, how much of the total materials handling cost would be allocated to the modular homes? (Round off your answer to the nearest whole dollar.)A) $36,033B) $57,652C) $56,051D) $35,175

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Easy Source: CMA, adapted

Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateMaterial moves $72,065 500 moves* $144.13 per move

*400 + 100 = 500 moves

Materials Handling Cost for Modular Homes:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC CostMaterial moves $144.13 per move 400 moves $57,652


Abel Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 200 units and of Product B is 400 units. There are three activity cost pools, with estimated costs and expected activity as follows:

Expected Activity

Activity Cost PoolEstimated

Cost Product A Product B TotalActivity 1............... $16,660 600 100 700Activity 2............... $18,450 1,100 700 1,800Activity 3............... $9,731 60 160 220

57. The activity rate for Activity 2 is closest to:A) $24.91B) $26.36C) $16.77D) $10.25


Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateActivity 2 $18,450 1,800 $10.25

58. The cost per unit of Product B is closest to:A) $41.58B) $81.53C) $74.73D) $17.69

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard

Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateActivity 1 $16,660 700 $23.80Activity 2 $18,450 1,800 $10.25Activity 3 $9,731 220 $44.23

Total Cost of Product B:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC CostActivity 1 $23.80 100 $ 2,380.00Activity 2 $10.25 700 7,175.00Activity 3 $44.23 160 7,076.80

$16,631.80

Cost per unit of Product B = $16,631.80 ÷ 400 units = $41.58 per unit



Andris Corporation uses activity-based costing to determine product costs for external financial reports. The company has provided the following data concerning its activity-based costing system:

Activity Cost Pools(and Activity Measures) Estimated Overhead CostMachine related (machine-hours)................. $46,400Batch setup (setups)...................................... $434,000General factory (direct labor-hours)............. $226,500

Expected ActivityActivity Cost Pools Total Product X Product Y

Machine related............ 4,000 3,000 1,000Batch setup................... 7,000 3,000 4,000General factory............. 15,000 7,000 8,000

59. The activity rate for the batch setup activity cost pool is closest to:A) $62.00B) $101.00C) $144.70D) $108.50


Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateBatch setup $434,000 7,000 $62.00

60. Assuming that actual activity turns out to be the same as expected activity, the total amount of overhead cost allocated to Product X would be closest to:A) $353,450B) $303,000C) $326,500D) $434,000


Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateMachine related $46,400 4,000 $11.60Batch setup $434,000 7,000 $62.00General factory $226,500 15,000 $15.10

Total Overhead Cost Allocated to Product X:

(a) (b) (a) × (b)Activity Cost Pool Activity Rate Total Activity ABC CostMachine related $11.60 3,000 $ 34,800Batch setup $62.00 3,000 186,000General factory $15.10 7,000 105,700

$326,500



Nissley Wedding Fantasy Company makes very elaborate wedding cakes to order. The owner of the company has provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools Activity RateSize-related..................... $1.13 per guestComplexity-related......... $28.22 per tierOrder-related................... $74.72 per order

The measure of activity for the size-related activity cost pool is the number of planned guests at the wedding reception. The greater the number of guests, the larger the cake. The measure of complexity is the number of tiers in the cake. The activity measure for the order-related cost pool is the number of orders. (Each wedding involves one order.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.Data concerning two recent orders appear below:

Tijerina Wedding

Twersky Wedding

Number of reception guests....................... 49 126Number of tiers on the cake....................... 2 4Cost of purchased decorations for cake..... $28.60 $54.64

61. Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what amount would the company have to charge for the Tijerina wedding cake to just break even?A) $74.72B) $215.13C) $28.60D) $260.31

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4,5 Level: Medium

Solution:

Total Cost for Tijerina Wedding Cake Order:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC CostSize-related $1.13 per guest 49 guests $ 55.37Complexity-related $28.22 per tier 2 tiers 56.44

Order-related$74.72 per

order1 order 74.72

Cost of purchased decorations for cake.........................................................................................................................

28.60

Total cost............................................................................ $215.13


62. Assuming that the company charges $465.39 for the Twersky wedding cake, what would be the overall margin on the order?A) $135.41B) $80.77C) $384.62D) $155.49


Solution:

(a) (b) (a) × (b)Activity Cost Pool Activity Rate Total Activity ABC CostSize-related $1.13 per guest 126 guests $142.38Complexity-related $28.22 per tier 4 tiers 112.88


order1 order 74.72


54.64

Total cost............................................................................ $384.62

Sales................................ $465.39Total cost......................... 384.62 Margin on order.............. $ 80.77

63. Suppose that the company decides that the present activity-based costing system is too complex and that all costs (except for the costs of purchased decorations) should be allocated on the basis of the number of guests. In that event, what would you expect to happen to the costs of cakes?A) The costs of all cakes would go up.B) The cost of cakes for receptions with fewer than the average number of guests

would go down.C) The cost of cakes for receptions with more than the average number of guests

would go down.D) The costs of all cakes would go down.



Meade Nuptial Bakery makes very elaborate wedding cakes to order. The company has an activity-based costing system with three activity cost pools. The activity rate for the Size-Related activity cost pool is $1.13 per guest. (The greater the number of guests, the larger the cake.) The activity rate for the Complexity-Related cost pool is $43.52 per tier. (Cakes with more tiers are more complex.) Finally, the activity rate for the Order-Related activity cost pool is $61.44 per order. (Each wedding involves one order for a cake.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.

Data concerning two recent orders appear below:Ericson Wedding Haupt Wedding

Number of reception guests...................... 60 162Number of tiers on the cake...................... 4 3Cost of purchased decorations for cake.... $16.89 $38.61

64. Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what amount would the company have to charge for the Ericson wedding cake to just break even?A) $61.44B) $387.45C) $16.89D) $320.21

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4,5 Level: Medium

Solution:

Total Cost for Ericson Wedding Cake Order:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC CostSize-related $1.13 per guest 60 guests $ 67.80Complexity-related $43.52 per tier 4 tiers 174.08


order1 order 61.44


16.89

Total cost............................................................................ $320.21


65. Assuming that the company charges $500.54 for the Haupt wedding cake, what would be the overall margin on the order?A) $86.87B) $413.67C) $148.31D) $125.48


Solution:

(a) (b) (a) × (b)Activity Cost Pool Activity Rate Total Activity ABC CostSize-related $1.13 per guest 162 guests $183.06Complexity-related $43.52 per tier 3 tiers 130.56


order1 order 61.44


38.61

Total cost............................................................................ $413.67

Sales................................ $500.54Total cost......................... 413.67 Margin on order.............. $ 86.87


(Appendix 8A) Espinoza Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:

Wages and salaries.... $220,000Other expenses.......... 160,000 Total.......................... $380,000

Distribution of resource consumption:

Activity Cost PoolsFilling Orders

Customer Support Other Total

Wages and salaries....... 35% 55% 10% 100%Other expenses............. 15% 65% 20% 100%



Activity Cost Pool ActivityFilling orders................ 4,000 ordersCustomer support......... 20 customers


66. What would be the total overhead cost per order according to the activity based costing system? In other words, what would be the overall activity rate for the filling orders activity cost pool? (Round to the nearest whole cent.)A) $25.25B) $23.75C) $33.25D) $14.25


Solution:

Filling Orders Cost:Wages and salaries: 35% × $220,000....... $ 77,000Other expenses: 15% × $160,000............. 24,000 Total.......................................................... $101,000

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateFilling orders $101,000 4,000 order $25.25 per order

67. What would be the total overhead cost per customer according to the activity based costing system? In other words, what would be the overall activity rate for the customer support activity cost pool? (Round to the nearest whole dollar.)A) $10,450B) $11,250C) $12,350D) $11,400


Solution:

Customer Support Cost:Wages and salaries: 55% × $220,000....... $121,000Other expenses: 65% × $160,000............. 104,000 Total.......................................................... $225,000

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateCustomer support $225,000 20 customers $11,250 per customer

68. To the nearest whole dollar, how much wages and salaries cost would be allocated to a customer who made 6 orders in a year?A) $5,745B) $10,650C) $6,166D) $5,325

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Hard

Solution:

Wages and Salaries Cost:Allocated to Filling Orders: 35% × $220,000....................................$77,000Allocated to Customer Support: 55% × $220,000.............................$121,000

(a) (b) (a) ÷ (b)Activity Cost Pool Total Cost Total Activity Activity RateFilling orders $77,000 4,000 orders $19.25 per order

Customer support $121,00020 customers $6,050 per

customer

(a) (b) (a) × (b)Activity Cost Pool Activity Rate Total Activity ABC CostFilling orders $19.25 per order 6 orders $ 116Customer support $6,050 per customer 1 customer 6,050

$6,166



(Appendix 8A) Groats Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools Preparing Meals Arranging FunctionsWages........................ $1.15 $180.00Supplies..................... $0.40 $320.00Other expenses.......... $0.15 $130.00

The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool.

Management would like to know whether the company made any money on a recent function at which 150 meals were served. The company catered the function for a fixed price of $18.00 per meal. The cost of the raw ingredients for the meals was $12.40 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above.

For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost.

69. According to the activity-based costing system, what was the total cost (including the costs of raw ingredients) of the function mentioned above? (Round to the nearest whole dollar.)A) $2,945B) $2,745C) $2,095D) $2,245


Solution:

Cost of preparing meals [($1.15 + $0.40 + $0.15) × 150]..............................................................................................$ 255

Cost of arranging functions ($180 + $320 + $130)............................630Cost of raw ingredients ($12.40 × 150).............................................. 1,860 Total....................................................................................................$2,745

70. Suppose an action analysis report is prepared for the function mentioned above. What would be the “red margin” in the action analysis report? (Round to the nearest whole dollar.)A) $(45)B) $(195)C) $(145)D) $105

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Hard

Solution:

Sales ($18.00 × 150).................................................... $2,700.00Green costs:

Supplies−Preparing meals ($0.40 × 150)................. $ 60.00Supplies−Arranging functions.................................. 320.00Raw ingredients ($12.40 × 150)............................... 1,860.00 2,240.00

Green margin............................................................... 460.00Yellow costs:

Wages−Preparing meals ($1.15 × 150).................... 172.50Wages−Arranging functions..................................... 180.00 352.50

Yellow margin............................................................. 107.50Red costs:

Other expenses−Preparing meals ($0.15 × 150)...... 22.50Other expenses−Arranging functions....................... 130.00 152.50

Red margin................................................................... $(45.00)


71. Suppose an action analysis report is prepared for the function mentioned above. What would be the “yellow margin” in the action analysis report? (Round to the nearest whole dollar.)A) $183B) $288C) $233D) $108

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Hard

Solution:

Sales ($18.00 × 150).................................................... $2,700Green costs:

Supplies−Preparing meals ($0.40 × 150)................. $ 60Supplies−Arranging functions.................................. 320Raw ingredients ($12.40 × 150)............................... 1,860 2,240

Green margin............................................................... 460Yellow costs:

Wages−Preparing meals ($1.15 × 150).................... 173Wages−Arranging functions..................................... 180 353

Yellow margin............................................................. $ 108


(Appendix 8B) Addison Company has two products: A and B. Annual production and sales are 800 units of Product A and 700 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.2 direct labor hours per unit and Product B requires 0.6 direct labor hours per unit. The total estimated overhead for next period is $71,286.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:

Expected Activity


Overhead Costs Product A Product B TotalActivity 1............... $20,272 300 500 800Activity 2............... 29,380 800 500 1,300General Factory...... 21,634 160 420 580Total....................... $71,286

(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.)

72. The predetermined overhead rate under the traditional costing system is closest to:A) $25.34B) $22.60C) $37.30D) $122.91


Solution:

Total Direct Labor-HoursProduct A: 800 units × .2 DLHs per unit...........................................160 DLHsProduct B: 700 units × .6 DLHs per unit............................................420 DLHsTotal....................................................................................................580 DLHs

Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.91


73. The overhead cost per unit of Product B under the traditional costing system is closest to:A) $22.38B) $13.56C) $73.74D) $15.20


Solution:

Total Direct Labor-HoursProduct A: 800 units × .2 DLHs per unit...........................................160 DLHsProduct B: 700 units × .6 DLHs per unit............................................420 DLHsTotal....................................................................................................580 DLHs

Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.9069

Total overhead cost applied to Product B using traditional costing: $122.9069 × 420 DLHs = $51,621 (rounded)Overhead cost per unit = $51,621 ÷ 700 units = $73.74

74. The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system is closest to:A) $22.60B) $54.84C) $58.76D) $36.73


Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Estimated Cost Estimated Activity Activity RateActivity 2 $29,380 1,300 $22.60

75. The overhead cost per unit of Product B under the activity-based costing system is closest to:A) $73.74B) $56.62C) $22.38D) $47.52

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Hard

Solution:

(a) (b) (a) ÷ (b)Activity Cost Pool Estimated Cost Estimated Activity Activity RateActivity 1 $20,272 800 $25.34Activity 2 $29,380 1,300 $22.60General Factory $21,634 580 $37.30

Total Cost of Product B:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Activity ABC CostActivity 1 $25.34 500 $12,670Activity 2 $22.60 500 11,300General Factory $37.30 420 15,666

$39,636

Overhead cost per unit = $39,636 ÷ 700 units = $56.62 per unit (rounded)



(Appendix 8B) Koszyk Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, P85G and C43S, about which it has provided the following data:

P85G C43SDirect materials per unit........... $36.50 $63.10Direct labor per unit................. $20.80 $31.20Direct labor-hours per unit....... 0.80 1.20Annual production................... 35,000 10,000

The company’s estimated total manufacturing overhead for the year is $2,264,000 and the company’s estimated total direct labor-hours for the year is 40,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

Activities and Activity MeasuresEstimated

Overhead CostSupporting direct labor (DLHs)..... $1,160,000Setting up machines (setups)......... 288,000Parts administration (part types).... 816,000 Total............................................... $2,264,000

Expected ActivityP85G C43S Total

DLHs............. 28,000 12,000 40,000Setups............ 1,480 920 2,400Part types....... 1,880 840 2,720

76. The manufacturing overhead that would be applied to a unit of product P85G under the company's traditional costing system is closest to:A) $89.67B) $45.28C) $44.39D) $23.20


Solution:

Predetermined overhead rate = $2,264,000 ÷ 40,000 DLHs = $56.60 per DLH

Applied overhead per unit = $56.60 per DLH × 0.80 DLHs per unit = $45.28 per unit

77. The manufacturing overhead that would be applied to a unit of product C43S under the activity-based costing system is closest to:A) $71.04B) $138.96C) $67.92D) $11.04



Solution:

(a) (b) (a) ÷ (b)


CostEstimated Activity Activity Rate

Supporting direct labor $1,160,000 40,000 DLHs $29 per DLHSetting up machines $288,000 2,400 setups $120 per setupParts administration $816,000 2,720 part types $300 per part type

Total Overhead applied to Product C43S:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Expected Activity ABC CostSupporting direct labor $29 per DLH 12,000 DLHs $348,000Setting up machines $120 per setup 920 setups 110,400Parts administration $300 per part type 840 part types 252,000

$710,400

Applied overhead per unit = $710,400 ÷ 10,000 units = $71.04 per unit


(Appendix 8B) Binegar Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R58G and R09O, about which it has provided the following data:

R58G R09ODirect materials per unit........... $15.90 $52.40Direct labor per unit................. $1.30 $27.30Direct labor-hours per unit....... 0.10 2.10Annual production................... 30,000 10,000




Overhead CostAssembling products (DLHs)................ $ 696,000Preparing batches (batches)................... 252,000Product support (product variations)..... 669,600 Total....................................................... $1,617,600

Expected ActivityR58G R09O Total

DLHs............................ 3,000 21,000 24,000Batches......................... 528 1,152 1,680Product variations........ 1,056 1,176 2,232


78. The manufacturing overhead that would be applied to a unit of product R58G under the company's traditional costing system is closest to:A) $6.74B) $16.10C) $22.84D) $2.90


Solution:


Total applied overhead = 3,000 DLHs × $67.40 per DLH = $202,200

Applied overhead per unit = $202,200 ÷ 30,000 units = $6.74 per unit

79. The manufacturing overhead that would be applied to a unit of product R09O under the activity-based costing system is closest to:A) $113.46B) $255.00C) $141.54D) $17.28


Solution:

(a) (b) (a) ÷ (b)


CostEstimated Activity

Activity RateAssembling products $696,000 24,000 DLHs $29 per DLHPreparing batches $252,000 1,680 batches $150 per batchProduct support $669,600 2,232 product

variations$300 per product

variation

Total Overhead applied to Product R09O:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Expected Activity ABC CostAssembling products $29 per DLH 21,000 DLHs $ 609,000Preparing batches $150 per batch 1,152 batches 172,800

Product support$300 per product

variation1,176 product

variations 352,800 $1,134,600

Applied overhead per unit = $1,134,600 ÷ 10,000 units = $113.46 per unit



(Appendix 8B) Kebort Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, U86Y and M91F, about which it has provided the following data:

U86Y M91FDirect materials per unit........... $19.80 $45.80Direct labor per unit................. $18.20 $49.40Direct labor-hours per unit....... 0.70 1.90Annual production................... 40,000 10,000




Overhead CostDirect labor support (DLHs)............. $1,175,000Setting up machines (setups)............ 407,960Part administration (part types)......... 958,800 Total.................................................. $2,541,760

Expected ActivityU86Y M91F Total

DLHs................ 28,000 19,000 47,000Setups............... 2,256 658 2,914Part types.......... 1,034 2,162 3,196

80. The unit product cost of product U86Y under the company's traditional costing system is closest to:A) $71.15B) $55.50C) $75.86D) $38.00


Solution:


Applied overhead = [(40,000 units × 0.70 DLHs per unit) × $54.08 per DLH] ÷ 40,000 units = $37.86 per unit

Unit Product Cost:Direct materials............................... $19.80Direct labor...................................... 18.20Applied manufacturing overhead.... 37.86 Total................................................. $75.86


81. The unit product cost of product M91F under the activity-based costing system is closest to:A) $95.20B) $121.57C) $216.77D) $197.95


Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Estimated CostExpected Activity Activity Rate

Direct labor support $1,175,000 47,000 DLHs $25 per DLHSetting up machines $407,960 2,914 setups $140 per setupPart administration $958,800 3,196 part types $300 per part

type

Total Overhead applied to Product M91F:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Expected Activity ABC CostDirect labor support $25 per DLH 19,000 DLHs $ 475,000Setting up machines $140 per setup 658 setups 92,120

Part administration$300 per part

type2,162 part types

648,600 $1,215,720

Overhead Cost per unit = $1,215,720 ÷ 10,000 units = $121.57 per unit

Unit Product Cost:Direct materials............................... $ 45.80Direct labor...................................... 49.40Applied manufacturing overhead.... 121.57 Total................................................. $216.77


(Appendix 8B) Pacchiana Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R21V and D00B, about which it has provided the following data:

R21V D00BDirect materials per unit................. $19.60 $61.70Direct labor per unit....................... $3.90 $19.50Direct labor-hours per unit............. 0.30 1.50Annual production......................... 45,000 15,000




Overhead CostAssembling products (DLHs).................... $ 108,000Preparing batches (batches)....................... 362,880Product support (product variations)......... 792,000 Total........................................................... $1,262,880

Expected ActivityR21V D00B Total

DLHs......................... 13,500 22,500 36,000Batches...................... 1,440 1,152 2,592Product variations..... 1,404 576 1,980


82. The unit product cost of product R21V under the company's traditional costing system is closest to:A) $34.02B) $24.40C) $41.36D) $23.50


Solution:


Applied overhead = [(45,000 units × 0.30 DLHs per unit) × $35.08 per DLH] ÷ 45,000 units = $10.52 per unit

Unit Product Cost:Direct materials............................... $19.60Direct labor...................................... 3.90Applied manufacturing overhead.... 10.52 Total................................................. $34.02

83. The unit product cost of product D00B under the activity-based costing system is closest to:A) $111.81B) $133.82C) $81.20D) $30.61



Activity Cost Pool Estimated CostExpected Activity Activity Rate

Assembling products

$108,000 36,000 DLHs $3 per DLH

Preparing batches $362,880 2,592 batches $140 per batchesProduct support $792,000 1,980 product

variations$400 per product

variation

Total Overhead applied to Product D00B:(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Expected Activity ABC CostAssembling products $3 per DLH 22,500 DLHs $ 67,500Preparing batches $140 per batch 1,152 batches 161,280

Product support$400 per product

variation576 product

variations 230,400 $459,180

Overhead Cost per unit = $459,180 ÷ 15,000 units = $30.61 per unit

Unit Product Cost:Direct materials............................... $ 61.70Direct labor...................................... 19.50Applied manufacturing overhead.... 30.61 Total................................................. $111.81


Essay Questions

84. Beckley Corporation has provided the following data from its activity-based costing accounting system:

Indirect factory wages.................... $16,000Factory equipment depreciation..... $193,000


Activity Cost PoolsCustomer

OrdersProduct

Processing Other TotalIndirect factory wages.................... 48% 47% 5% 100%Factory equipment depreciation..... 61% 25% 14% 100%


Required:

a. Determine the total amount of indirect factory wages and factory equipment depreciation costs that would be allocated to the Product Processing activity cost pool. Show your work!

b. Determine the total amount of indirect factory wages and factory equipment depreciation costs that would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Product Processing activity cost pool:Indirect factory wages (47% × $16,000)......................... $ 7,520Factory equipment depreciation (25% × $193,000)....... 48,250 Total................................................................................ $55,770

b. As stated in the problem, the costs allocated to the “Other” cost pool are not assigned to products.Indirect factory wages (5% × $16,000)........................... $ 800Factory equipment depreciation (14% × $193,000)....... 27,020 Total................................................................................ $27,820

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Easy

85. Desilets Corporation has provided the following data from its activity-based costing accounting system:

Supervisory wages............. $94,000Factory utilities.................. $128,000


Activity Cost PoolsBatch

Set-UpsUnit

Processing Other TotalSupervisory wages....... 34% 64% 2% 100%Factory utilities............ 49% 35% 16% 100%


Required:

a. Determine the total amount of supervisory wages and factory utilities costs that would be allocated to the Unit Processing activity cost pool. Show your work!

b. Determine the total amount of supervisory wages and factory utilities costs that would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Unit Processing activity cost pool:Supervisory wages (64% × $94,000)......... $ 60,160Factory utilities (35% × $128,000)............ 44,800 Total........................................................... $104,960

b. As stated in the problem, the costs allocated to the “Other” cost pool are not assigned to products.Supervisory wages (2% × $94,000)........... $ 1,880Factory utilities (16% × $128,000)............ 20,480 Total........................................................... $22,360



86. The following data have been provided by Hooey Corporation from its activity-based costing accounting system:

Supervisory wages............. $46,000Factory utilities.................. $199,000


Activity Cost Pools Product

Change-Overs Machining Other TotalSupervisory wages....... 59% 33% 8% 100%Factory utilities............ 18% 69% 13% 100%


Required:

a. Determine the total amount of supervisory wages and factory utilities costs that would be allocated to the Machining activity cost pool. Show your work!

b. Determine the total amount of supervisory wages and factory utilities costs that would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Machining activity cost pool:Supervisory wages (33% × $46,000)......... $ 15,180Factory utilities (69% × $199,000)............ 137,310 Total........................................................... $152,490

b. As stated in the problem, the costs allocated to the “Other” cost pool are not assigned to products.Supervisory wages (8% × $46,000)........... $ 3,680Factory utilities (13% × $199,000)............ 25,870 Total........................................................... $29,550


87. Fidler & Jenkins PLC, a consulting firm, uses an activity-based costing in which there are three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs:Wages and salaries............. $620,000Travel expenses.................. 140,000Other expenses................... 120,000 Total................................... $880,000


Activity Cost PoolsWorking On Engagements

Business Development Other Total

Wages and salaries....... 60% 10% 30% 100%Travel expenses............ 50% 40% 10% 100%Other expenses............. 35% 25% 40% 100%

Required:

a. How much cost, in total, would be allocated to the Working On Engagements activity cost pool?

b. How much cost, in total, would be allocated to the Business Development activity cost pool?

c. How much cost, in total, would be allocated to the Other activity cost pool?

Ans:

All three parts can be answered using a first-stage allocation of costs.

Working On Engagements

Business Development Other Total

Wages and salaries..... $372,000 $ 62,000 $186,000 $620,000Travel expenses.......... 70,000 56,000 14,000 140,000Other expenses........... 42,000 30,000 48,000 120,000 Total........................... $484,000 $148,000 $248,000 $880,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy


88. Dane Housecleaning provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system.

Activity Cost Pool Total Cost Total ActivityCleaning.................... $263,784 34,800 hoursJob support................ 145,180 7,000 jobsClient support............ 4,774 220 clientsOther......................... 170,000 Not applicableTotal.......................... $583,738


One particular client, the Hoium family, requested 45 jobs during the year that required a total of 90 hours of housecleaning. For this service, the client was charged $2,000.

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off all calculations to the nearest whole cent.

b. Using the activity-based costing system, compute the customer margin for the Hoium family. Round off all calculations to the nearest whole cent.

c. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Hoium family. Round off all calculations to the nearest whole cent.

Ans:

a. The computation of the activity rates follow:Total Cost Total Activity Activity Rates

Cleaning........... $263,784 34,800 hours $7.58 per hourJob support....... $145,180 7,000 jobs $20.74 per jobClient support... $4,774 220 clients $21.70 per client

b. The customer margin for the family is computed as follows:Client charges............... $2,000.00Costs:

Cleaning.................... $682.20Job support................ 933.30Client support............ 21.70 1,637.20

Customer margin.......... $ 362.80

Computations for costs:Cleaning: 90 hours × $7.58 per hour = $682.20Job support: 45 jobs × $20.74 per job = $933.30Client support: 1 client × $21.70 per client = $21.70

c. The margin if all costs are allocated on the basis of cleaning hours:

Predetermined overhead rate = $583,738 ÷ 34,800 hours = $16.77 per hour

Client charges..................... $2,000.00Allocated costs*................. 1,509.30 Customer margin................ $ 490.70

* 90 hours × $16.77 per hour = $1,509.30

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4,5 Level: Medium


89. The Kamienski Cleaning Brigade Company provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system.

Activity Cost Pool Total Cost Total ActivityCleaning................. $185,752 21,700 hoursJob support............. 171,532 6,100 jobsClient support......... 15,124 760 clientsOther...................... 240,000 Not applicableTotal....................... $612,408

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.One particular client, the Whiddon family, requested 15 jobs during the year that required a total of 60 hours of housecleaning. For this service, the client was charged $1,170.

Required:

a. Using the activity-based costing system, compute the customer margin for the Whiddon family. Round off all calculations to the nearest whole cent.

b. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Whiddon family. Round off all calculations to the nearest whole cent.

Ans:

a. The first step is to compute activity rates:Total Cost Total Activity Activity Rates

Cleaning................. $185,752 21,700 hours $8.56 per hourJob support............. $171,532 6,100 jobs $28.12 per jobClient support......... $15,124 760 clients $19.90 per client

The customer margin for the family is computed as follows:Client charges............... $1,170.00Costs:

Cleaning.................... $513.60Job support................ 421.80Client support............ 19.90 955.30

Customer margin.......... $ 214.70

Computations for costs:Cleaning: 60 hours × $8.56 per hour = $513.60Job support: 15 jobs × $28.12 per job = $421.80Client support: 1 client × $19.90 per client = $19.90

b. The margin if all costs are allocated on the basis of cleaning hours:

Predetermined overhead rate = $612,408 ÷ 21,700 hours = $28.22 per hour

Client charges............... $1,170.00Allocated costs*........... 1,693.20 Customer margin.......... ($523.20)

* 60 hours × $28.22 per hour = $1,693.20

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4,5 Level: Medium


90. Cabio Company manufactures two products, Product C and Product D. The company estimated it would incur $119,100 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period's operations appear below:

Product C Product DEstimated volume........................... 400 units 3,000 unitsDirect labor hours per unit............. 1.20 hours 1.30 hourDirect materials cost per unit......... $4.00 $22.80Direct labor cost per unit................ $12.00 $13.00

Required:

a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.

b. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

Expected Activity

Activity Cost Pool

Estimated Overhead

Costs Product C Product D TotalMachine setups....... $ 10,440 60 120 180Purchase orders...... 78,000 820 1,180 2,000General factory....... 30,660 480 3,900 4,380Total....................... $119,100

Determine the unit product cost of each product for the current period using the activity-based costing approach.

Ans:

a. The expected total direct labor hours during the period are computed as follows:

Product C: 400 units × 1.2 hours per unit........... 480 hoursProduct D: 3,000 units × 1.3 hours per unit........ 3,900 hoursTotal direct labor hours....................................... 4,380 hours

Using these hours as a base, the predetermined overhead using direct labor hours would be:

Estimated overhead cost ÷ Estimated direct labor-hours = $119,100 ÷ 4,380 DLHs = $27.19 per DLH

Using this overhead rate, the unit product costs are:

Product C Product DDirect materials........................ $ 4.00 $22.80Direct labor.............................. 12.00 13.00Manufacturing overhead.......... 32.63 35.35 Total unit product cost............. $48.63 $71.15

b. The activity rates for each activity cost pool are as follows:

Estimated Overhead

CostsExpected Activity

Activity Rate

Machine setups....... $10,440 180 $58.00Purchase orders...... $78,000 2,000 $39.00General factory....... $30,660 4,380 $7.00

The overhead cost charged to each product is:

Product C Product DActivity Amount Activity Amount

Machine setups.......... 60 $ 3,480 120 $ 6,960Purchase orders......... 820 31,980 1,180 46,020General factory.......... 480 3,360 3,900 27,300 Total overhead cost... $38,820 $80,280


Overhead cost per unit:Product C: $38,820 ÷ 400 units = $97.05 per unitProduct D: $80,280 ÷ 3,000 units = $26.76 per unit

Using activity based costing, the unit product cost of each product would be:

Product C Product DDirect materials.............................. $ 4.00 $22.80Direct labor.................................... 12.00 13.00Manufacturing overhead................ 97.05 26.76 Total unit product cost................... $113.05 $62.56

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Hard

91. Danton Company manufactures two products, Product F and Product G. The company expects to produce and sell 600 units of Product F and 3,000 units of Product G during the current year. The company uses activity-based costing to compute unit product costs for external reports. Data relating to the company's three activity cost pools are given below for the current year:

Expected Activity

Activity Cost Pool

Estimated Overhead

Costs Product F Product G TotalMachine setups....... $13,720 140 140 280Purchase orders...... $74,730 630 960 1,590General factory....... $15,000 600 2,400 3,000

Required:

Using the activity-based costing approach, determine the overhead cost per unit for each product.

Ans:

The activity rates for each activity cost pool are as follows:

Activity Cost Pool

Overhead Estimated

CostsExpected Activity

Activity Rate

Machine setups............. $13,720 280 $49.00Purchase orders............ $74,730 1,590 $47.00General factory............. $15,000 3,000 $5.00

The overhead cost charged to each product is:

Product F Product GActivity Amount Activity Amount

Machine setups............. 140 $ 6,860 140 $ 6,860Purchase orders............ 630 29,610 960 45,120General factory............. 600 3,000 2,400 12,000 Total overhead cost...... $39,470 $63,980

Overhead cost per unit:Product F: $39,470 ÷ 600 units = $65.78 per unitProduct G: $63,980 ÷ 3,000 units = $21.33 per unit

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Medium


92. Kretlow Corporation has provided the following data from its activity-based costing accounting system:

Activity Cost Pools Total Cost Total ActivityDesigning products...... $700,502 3,746 product design hoursSetting up batches........ $12,400 620 batch set-upsAssembling products.... $125,440 8,960 assembly hours

Required:

Compute the activity rates for each of the three cost pools. Show your work!

Ans:

Activity Cost Pools Total Cost Total Activity Activity RateDesigning products............ $700,502 3,746 $187Setting up batches.............. $12,400 620 $20Assembling products.......... $125,440 8,960 $14


93. Data concerning three of Kilmon Corporation's activity cost pools appear below:

Activity Cost Pools Total Cost Total ActivityAssembling products.......... $150,300 8,350 assembly hoursDesigning products............ $1,177,535 7,597 product design hoursSetting up batches.............. $14,400 600 batch set-ups

Required:

Compute the activity rates for each of the three cost pools. Show your work!

Ans:

Activity Cost Pools Total Cost Total Activity Activity RateAssembling products.......... $150,300 8,350 $18Designing products............ $1,177,535 7,597 $155Setting up batches.............. $14,400 600 $24


94. Doles Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products.

Activity Cost Pools Activity RateSetting up batches.................... $98.54 per batchProcessing customer orders...... $42.00 per customer orderAssembling products................ $3.53 per assembly hour


Product K52W Product X94TNumber of batches......................... 55 73Number of customer orders........... 9 17Number of assembly hours............ 697 402

Required:

How much overhead cost would be assigned to each of the two products using the company's activity-based costing system?

Ans:

Product K52W Product X94TSetting up batches....................... $5,419.70 $7,193.42Processing customer orders......... 378.00 714.00Assembling products................... 2,460.41 1,419.06 Total overhead cost..................... $8,258.11 $9,326.48



95. Desjarlais Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products.

Activity Cost Pools Activity RateSetting up batches.......................... $32.22 per batchAssembling products...................... $6.13 per assembly hourProcessing customer orders............ $72.75 per customer order


Product S96U Product Q06FNumber of batches......................... 78 24Number of assembly hours............ 412 178Number of customer orders........... 53 18

Required:

a. How much overhead cost would be assigned to Product S96U using the company's activity-based costing system? Show your work!

b. How much overhead cost would be assigned to Product Q06F using the company's activity-based costing system? Show your work!

Ans:

a. Product S96USetting up batches (78 batches × $32.22 per batch)........ $2,513.16Assembling products (412 assembly hours × $6.13 per

assembly hour)............................................................ 2,525.56Processing customer orders (53 customer orders ×

$72.75 per customer order)......................................... 3,855.75 Total overhead cost......................................................... $8,894.47

b. Product Q06FSetting up batches (24 batches × $32.22 per batch)........ $ 773.28Assembling products (178 assembly hours × $6.13 per

assembly hour)............................................................ 1,091.14Processing customer orders (18 customer orders ×

$72.75 per customer order)......................................... 1,309.50 Total overhead cost......................................................... $3,173.92


96. Archie Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products.

Activity Cost Pools Activity RateSetting up batches.................... $16.68 per batchProcessing customer orders...... $98.60 per customer orderAssembling products................ $7.89 per assembly hour

Last year, Product X26X involved 18 batches, 4 customer orders, and 103 assembly hours.

Required:

How much overhead cost would be assigned to Product X26X using the company's activity-based costing system? Show your work!

Ans:

Setting up batches (18 batches × $16.68 per batch)........ $ 300.24Processing customer orders (4 customer orders ×

$98.60 per customer order)......................................... 394.40Assembling products (103 assembly hours × $7.89 per

assembly hour)............................................................ 812.67 Total overhead cost......................................................... $1,507.31



97. IGL Draperies makes custom draperies for homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity cost pools.

Overhead costs:Production overhead.... $140,000Office expense............. 140,000 Total............................. $280,000

Distribution of resource consumption:Activity Cost Pools Making Drapes Job Support Other Total

Production overhead.... 60% 20% 20% 100%Office expense............. 15% 55% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.The amount of activity for the year is as follows:

Activity Cost Pool Annual ActivityMaking drapes........ 3,000 yardsJob support............. 140 jobsOther...................... Not applicable

Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Making Drapes

Job Support Other Total

Production overhead....Office expense.............Total.............................

b. Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes and Job Support activity cost pools by filling in the table below:

Making Drapes Job SupportProduction overhead....Office expense.............Total.............................

c. Prepare an action analysis report in good form of a job that involves making 85 yards of drapes and has direct materials and direct labor cost of $2,990. The sales revenue from this job is $6,000. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost.

Ans:

a. First-stage allocationMaking Drapes Job Support Other Total

Production overhead.... $84,000 $28,000 $28,000 $140,000Office expense............. 21,000 77,000 42,000 140,000Total............................. $105,000 $105,000 $70,000 $280,000Activity........................ 3,000 yards 140 jobs

b. Activity rates (costs divided by activity)Making JobDrapes Support

Activity........................ 3,000 yards 140 jobs

Production overhead.... $28.00 $200.00Office expense............. 7.00 550.00 Total............................. $35.00 $750.00

c. Overhead cost of the job.

Making Drapes Job Support TotalActivity.............................. 85 1Production overhead.......... $2,380 $200 $2,580Office expense................... 595 550 1,145 Total................................... $2,975 $750 $3,725


Sales............................................... $6,000Green costs:

Direct materials and labor........... 2,990 Green margin................................. 3,010Yellow costs:

Office expense............................ 1,145 Yellow margin............................... 1,865Red costs:

Production overhead................... 2,580Red margin..................................... ($ 715 )

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 8A LO: 6 Level: Hard

98. Haskell Hardwood Floors installs oak and other hardwood floors in homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:Production overhead.......... $120,000Office expense................... 140,000 Total................................... $260,000


Installing JobActivity Cost Pools Floors Support Other Total

Production overhead.......... 55% 25% 20% 100%Office expense................... 20% 50% 30% 100%



Activity Cost Pool Annual ActivityInstalling floors...... 800 squaresJob support............. 100 jobsOther...................... Not applicable

A “square” is a measure of area that is roughly equivalent to 1,000 square feet.

Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Installing JobFloors Support Other Total

Production overhead..........Office expense...................Total...................................


b. Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors and Job Support activity cost pools by filling in the table below:

Installing JobFloors Support

Production overhead..........Office expense...................Total...................................

c. Compute the overhead cost, according to the activity-based costing system, of a job that involves installing 3.2 squares.

Ans:

a. First-stage allocationInstalling Job

Floors Support Other TotalProduction overhead.... $66,000 $ 30,000 $24,000 $120,000Office expense............. 28,000 70,000 42,000 140,000 Total............................. $94,000 $100,000 $66,000 $260,000

b. Activity rates (costs divided by activity)

Installing JobFloors Support

Activity.............................. 800 squares 100 jobs

Production overhead.......... $ 82.50 $ 300.00Office expense................... 35.00 700.00 Total................................... $117.50 $1,000.00

c. Overhead cost of the job.Installing Job

Floors Support TotalActivity........................ 3.2 1

Production overhead.... $264.00 $ 300.00 $ 564.00Office expense............. 112.00 700.00 812.00 Total............................. $376.00 $1,000.00 $1,376.00

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 8A LO: 6 Level: Medium

99. Golden Company, a wholesale distributor, uses activity-based costing for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:Wages and salaries....... $680,000Nonwage expenses....... 120,000 Total............................. $800,000


Filling ProductActivity Cost Pools Orders Support Other Total

Wages and salaries............. 15% 75% 10% 100%Nonwage expenses............. 25% 55% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.The amount of activity for the year is as follows:

Activity Cost Pool Annual ActivityFilling orders............. 4,000 ordersProduct support......... 40 productsOther......................... Not applicable

Required:

Compute the activity rates (i.e., cost per unit of activity) for the Filling Orders and Product Support activity cost pools by filling in the table below:

Filling ProductOrders Support Other Total

Wages and salaries.............Nonwage expenses.............


Ans:

First-stage allocationFilling ProductOrders Support Other Total

Wages and salaries....... $102,000 $510,000 $68,000 $680,000Nonwage expenses....... 30,000 66,000 24,000 120,000 Total............................. $132,000 $576,000 $92,000 $800,000

Filling ProductOrders Support

Activity....................................... 4,000 orders 40 products

Wages and salaries...................... $25.50 $12,750Nonwage expenses...................... 7.50 1,650 Total............................................ $33.00 $14,400


100. Jared Painting paints the interiors and exteriors of homes and commercial buildings. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its activity-based costing system.

Activity Cost Pool Activity Measure Annual ActivityPainting overhead............... Square meters 10,000 square metersJob support......................... Jobs 200 jobsOther.................................. None Not applicable


The company has already finished the first stage of the allocation process in which costs were allocated to the activity cost centers. The results are listed below:

JobPainting Support Other Total

Painting overhead...... $ 99,000 $ 45,000 $36,000 $180,000Office expense.......... 6,000 78,000 36,000 120,000 Total.......................... $105,000 $123,000 $72,000 $300,000

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job Support activity cost pools by filling in the table below. Round off all calculations to the nearest whole cent.

JobPainting Support

Painting overhead......Office expense..........Total..........................

b. Prepare an action analysis report in good form of a job that involves painting 71 square meters and has direct materials and direct labor cost of $2,410. The sales revenue from this job is $3,800.

For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; painting overhead as a Red cost; and office expense as a Yellow cost.


Ans:

a. Activity rates (costs divided by activity)Job

Painting SupportPainting overhead...... $ 9.90 $225.00Office expense.......... 0.60 390.00 Total.......................... $10.50 $615.00

b. Overhead cost of the job.Job

Painting Support TotalActivity........................ 71 1

Painting overhead......... $702.90 $225.00 $ 927.90Office expense............. 42.60 390.00 432.60 Total............................. $745.50 $615.00 $1,360.50

Sales............................................... $3,800.00Green costs:

Direct materials and labor........... 2,410.00 Green margin................................. 1,390.00Yellow costs:

Office expense............................ 432.60 Yellow margin............................... 957.40Red costs:

Painting overhead....................... 927.90 Red margin..................................... $ 29.50


101. Werger Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, W82R and L48S, about which it has provided the following data:

W82R L48SDirect materials per unit................. $11.50 $62.90Direct labor per unit....................... $2.00 $13.00Direct labor-hours per unit............. 0.20 1.30Annual production......................... 45,000 10,000



Activities and Activity Measures Estimated Overhead CostSupporting direct labor (DLHs)........... $ 352,000Setting up machines (setups)............... 201,960Parts administration (part types).......... 968,000 Total..................................................... $1,521,960

Activities W82R L48S TotalSupporting direct labor...... 9,000 13,000 22,000Setting up machines........... 814 374 1,188Parts administration........... 924 1,012 1,936

Required:

a. Determine the unit product cost of each of the company's two products under the traditional costing system.

b. Determine the unit product cost of each of the company's two products under activity-based costing system.


Ans:

a. Traditional Unit Product CostsPredetermined overhead rate = $1,521,960 ÷ 22,000 DLHs = $69.18 per DLH

W82R L48SDirect materials............................................................... $11.50 $ 62.90Direct labor..................................................................... 2.00 13.00Manufacturing overhead (0.2 DLHs × $69.18 per DLH;

1.3 DLHs × $69.18 per DLH)..................................... 13.84 89.93 Unit product cost............................................................. $27.34 $165.83

b. ABC Unit Product CostsEstimated Overhead

CostTotal Expected

Activity Activity RateSupporting direct labor. . . $352,000 22,000 DLHs $16 per DLHSetting up machines........ $201,960 1,188 setups $170 per setupParts administration........ $968,000 1,936 part types $500 per part type

Overhead cost for W82R

Activity Rate ActivityABC Cost

Supporting direct labor. . . $16 per DLH 9,000 DLHs $144,000Setting up machines........ $170 per setup 814 setups 138,380Parts administration........ $500 per part type 924 part types 462,000 Total................................ $744,380

Overhead cost for L48S


Supporting direct labor. . . $16 per DLH 13,000 DLHs $208,000Setting up machines........ $170 per setup 374 setups 63,580Parts administration........ $500 per part type 1,012 part types 506,000 Total................................ $777,580

W82R L48SDirect materials............................................................... $11.50 $62.90Direct labor..................................................................... 2.00 13.00Manufacturing overhead ($744,400 ÷ 45,000 units;

$777,600 ÷ 10,000 units)............................................. 16.54 77.76 Unit product cost............................................................. $30.04 $153.66

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 8B LO: 7 Level: Medium


102. Torri Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, B40W and C63J, about which it has provided the following data:

B40W C63JDirect materials per unit........... $34.90 $63.70Direct labor per unit................. $20.80 $62.40Direct labor-hours per unit....... 0.80 2.40Annual production................... 35,000 15,000



Activities and Activity Measures Estimated Overhead CostAssembling products (DLHs).............. $1,216,000Preparing batches (batches)................. 480,000Milling (MHs)...................................... 960,000 Total..................................................... $2,656,000

Activities B40W C63J TotalAssembling products.......... 28,000 36,000 64,000Preparing batches............... 2,304 2,496 4,800Milling................................ 1,088 2,112 3,200

Required:

a. Determine the unit product cost of each of the company's two products under the traditional costing system.

b. Determine the unit product cost of each of the company's two products under activity-based costing system.

Ans:

a. Traditional Unit Product CostsPredetermined overhead rate = $2,656,000 ÷ 64,000 DLHs = $41.50 per DLH

B40W C63JDirect materials............................................................... $34.90 $ 63.70Direct labor..................................................................... 20.80 62.40Manufacturing overhead (0.8 DLHs × $41.50 per DLH;

2.4 DLHs × $41.50 per DLH)..................................... 33.20 99.60 Unit product cost............................................................. $88.90 $225.70

b. ABC Unit Product CostsEstimated Overhead

CostTotal Expected

Activity Activity RateAssembling products.... $1,216,000 64,000 DLHs $19 per DLHPreparing batches......... $480,000 4,800 batches $100 per setupMilling.......................... $960,000 3,200 MHs $300 per MH

Overhead cost for B40WActivity Rate Activity ABC Cost

Assembling products.... $19 per DLH 28,000 DLHs $ 532,000Preparing batches......... $100 per setup 2,304 batches 230,400Milling.......................... $300 per MH 1,088 MHs 326,400 Total............................. $1,088,800

Overhead cost for C63JActivity Rate Activity ABC Cost

Assembling products.... $19 per DLH 36,000 DLHs $ 684,000Preparing batches......... $100 per setup 2,496 batches 249,600Milling.......................... $300 per MH 2,112 MHs 633,600 Total............................. $1,567,200

B40W C63JDirect materials............................................................... $34.90 $ 63.70Direct labor..................................................................... 20.80 62.40Manufacturing overhead ($1,088,800 ÷ 35,000 units;

$1,567,200 ÷ 15,000 units).......................................... 31.11 104.48 Unit product cost............................................................. $86.81 $230.58



103. Welk Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, H16Z and P25P, about which it has provided the following data:

H16Z P25PDirect materials per unit................. $10.20 $50.50Direct labor per unit....................... $8.40 $25.20Direct labor-hours per unit............. 0.40 1.20Annual production......................... 30,000 10,000



Activities and Activity Measures Estimated Overhead CostSupporting direct labor (DLHs)................. $ 552,000Setting up machines (setups)..................... 132,480Parts administration (part types)................ 780,000 Total........................................................... $1,464,480

H16Z P25P TotalSupporting direct labor...... 12,000 12,000 24,000Setting up machines........... 864 240 1,104Parts administration........... 600 960 1,560

Required:

a. Determine the manufacturing overhead cost per unit of each of the company's two products under the traditional costing system.

b. Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.

Ans:

a. Traditional Manufacturing Overhead CostsPredetermined overhead rate = $1,464,480 ÷ 24,000 DLHs = $61.02 per DLH

H16Z P25PDirect labor-hours...................................... 0.40 1.20Predetermined overhead rate per DLH...... $61.02 $61.02Manufacturing overhead cost per unit....... $24.41 $73.22

b. ABC Manufacturing Overhead Costs

Estimated Overhead

CostTotal Expected

Activity Activity RateSupporting direct labor. . . $552,000 24,000 DLHs $23 per DLHSetting up machines........ $132,480 1,104 setups $120 per setupParts administration........ $780,000 1,560 part types $500 per part type

Overhead cost for H16Z


Supporting direct labor. . . $23 per DLH 12,000 DLHs $276,000Setting up machines........ $120 per setup 864 setups 103,680Parts administration........ $500 per part type 600 part types 300,000 Total................................ $679,680Annual production.......... 30,000Manufacturing overhead

cost per unit................. $22.66

Overhead cost for P25P


Supporting direct labor. . . $23 per DLH 12,000 DLHs $276,000Setting up machines........ $120 per setup 240 setups 28,800Parts administration........ $500 per part type 960 part types 480,000 Total................................ $784,800Annual production.......... 10,000Manufacturing overhead

cost per unit................. $78.48



104. Bullie Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, D31X and U75X, about which it has provided the following data:

D31X U75XDirect materials per unit........... $29.20 $47.40Direct labor per unit................. $1.10 $23.10Direct labor-hours per unit....... 0.10 2.10Annual production................... 35,000 15,000



Activities and Activity Measures Estimated Overhead CostAssembling products (DLHs)........ $ 140,000Preparing batches (batches)........... 241,150Axial milling (MHs)...................... 766,500 Total............................................... $1,147,650

D31X U75X TotalAssembling products.......... 3,500 31,500 35,000Preparing batches............... 560 1,295 1,855Axial milling...................... 1,540 1,015 2,555

Required:

a. Determine the manufacturing overhead cost per unit of each of the company's two products under the traditional costing system.

b. Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.

Ans:

a. Traditional Manufacturing Overhead CostsPredetermined overhead rate = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH

D31X U75XDirect labor-hours...................................... 0.10 2.10Predetermined overhead rate per DLH...... $32.79 $32.79Manufacturing overhead cost per unit....... $3.28 $68.86

b. ABC Manufacturing Overhead Costs

Estimated Overhead

CostTotal Expected

Activity Activity RateAssembling products.... $140,000 35,000 DLHs $4 per DLHPreparing batches......... $241,150 1,855 batches $130 per batchAxial milling................ $766,500 2,555 MHs $300 per MH

Overhead cost for D31X


Assembling products........ $4 per DLH 3,500 DLHs $ 14,000Preparing batches.............. $130 per batch 560 batches 72,800Axial milling..................... $300 per MH 1,540 MHs 462,000 Total.................................. $548,800Annual production............ 35,000Manufacturing overhead

cost per unit................... $15.68

Overhead cost for U75X


Assembling products........ $4 per DLH 31,500 DLHs $126,000Preparing batches.............. $130 per batch 1,295 batches 168,350Axial milling..................... $300 per MH 1,015 MHs 304,500 Total.................................. $598,850Annual production............ 15,000Manufacturing overhead

cost per unit................... $39.92



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Chapter 08