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27. Activity rates from Quattrone Corporation's activity-based costing system are listed
below. The company uses the activity rates to assign overhead costs to products:
Last year, Product F76D involved 2 customer orders, 434 assembly hours, and 20 batches.
How much overhead cost would be assigned to Product F76D using the activity-based costing
system?
A. $1,041.80
B. $2,000.04
C. $66,908.88
D. $146.73
E. $772.52
28. Lehner Corporation has provided the following data from its activity-based costing
accounting system:
Distribution of Resource Consumption across Activity Cost Pools:
The "Other" activity cost pool consists of the costs of idle capacity and organization-
sustaining costs that are not assigned to products. How much indirect factory wages and
factory equipment depreciation cost would be assigned to the Customer Orders activity cost
pool?
A. $247,000
B. $390,000
C. $214,500
D. $780,000
E. $208,000
29. Briefly describe the process of activity-based costing.
30. Why would a firm use activity-based costing (ABC) rather than traditional two-stage
methods of cost allocation for overhead?
Problems
31. Precision Brackets, Co. is considering switching from traditional allocation of overhead
based on direct labor hours to an activity-based costing system. The manager has accumulated
the following information on engineering changes for two of the company's major products:
Automotive
Brackets
Computer
Brackets
Total units produced ....................................
5,000
2,500
Cost per engineering change .......................
$400
$ 400
Number of engineering changes..................
5
25
Direct labor hours per unit ..........................
4
4
Compute the cost per unit using:
(1) The traditional two-stage allocation of the costs of engineering changes based on direct
labor hours.
(2) The activity-based cost allocation of the costs of engineering changes.
32. Outdoor Sports, Inc., produces two types of skis, downhill skis and cross country skis.
Product and production information about the two items is shown below:
Downhill skis
Cross country skis
Number of sets sold.............
75,000
125,000
Number of setups................
200
50
Total direct labor hours.......
150,000 hours
250,000 hours
Direct labor hours per unit..
2 hours
2 hours
Total machine hours............
25,000 hours
100,000 hours
Machine hours per unit........
0.333 hours
0.08 hours
Indirect costs consist of the following:
Depreciation of factory equipment..............
$2,000,000
Setup costs...................................................
1,500,000
Miscellaneous indirect costs........................
1,000,000
Total............................................................
$4,500,000
Required:
1. If Outdoor Sports uses the traditional two-stage method of allocating overhead costs based
on direct labor hours, what is the amount of indirect costs per set of skis for each of the two
types of skis?
2. If Outdoor Sports uses activity based costing, what is the total amount of indirect costs per
set of skis for each of the two types of skis? Assume that depreciation is allocated based on
machine hours, setup costs based on the number of setups, and miscellaneous costs based on
the number of direct labor hours.
33. Larabee Company produces two types of product, flat and round, on the same production
line. For the current period, the company reports the following data.
Flat
Round
Total
Direct materials
$12,000
$24,000
$36,000
Direct labor
6,000
18,000
24,000
Overhead (250 % of direct labor cost)
15,000
45,000
60,000
Total cost
$33,000
$87,000
$120,000
Units produced
10,000
15,000
Average cost per unit
$3.30
$5.80
Larabee’s controller wishes to apply activity-based costing (ABC) to allocate the $60,000 of
overhead costs incurred by the two product lines to see whether cost per unit would change
markedly from that reported above. She has collected the following information.
Overhead Cost Category (Activity Cost Pool)
Cost
Supervision
$
12,600
Depreciation of machinery
30,600
Assembly line preparation
16,800
Total overhead
$
60,000
She has also collected the following information about the cost drivers for each category (cost
pool) and the amount of each driver used by the two product lines.
Usage
Overhead Cost Category (Activity
Cost Pool)
Driver
Flat
Round
Total
Supervision
Direct labor cost ($)
$6,000
$18,000
$24,000
Depreciation of machinery
Machine hours
400 hours
500 hours
900 hours
Assembly line preparation
Setups (number)
40 times
80 times
120 times
Assign these three overhead cost pools to each of the two products using ABC. Show each
overhead cost allocation by product and the total overhead allocated to each product.
Determine average cost per unit for each of the two products using ABC. (Round your answer
to 2 decimal places.) Which overhead cost allocation method would you recommend to the
controller?
34. Tresselt Corporation has provided the following data from its activity-based costing
accounting system:
Distribution of Resource Consumption across Activity Cost Pools:
The "Other" activity cost pool consists of the costs of idle capacity and organization-
sustaining costs that are not assigned to products.
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!
35. Cosgrove Company manufactures two products, Product K-7 and Product L-15. Product
L-15 is of fairly recent origin, having been developed as an attempt to enter a market closely
related to that of Product K-7. Product L-15 is the more complex of the two products,
requiring 2.0 hours of direct labor time per unit to manufacture compared to 1.0 hour of direct
labor time for Product K-7. Product L-15 is produced on an automated production line.
Overhead currently is applied to the products on the basis of direct labor-hours. The company
estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units
of Product L-15 and 40,000 units of Product K- 7 during the current year.
Unit costs for materials and labor are:
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 the use of activity-based costing as an alternative to its
traditional costing method for manufacturing overhead. Data relating to the company's
activity cost pools for the current year are given below:
Using the data above, determine the unit product cost of each product for the current year.
c. What items of overhead cost make Product L-15 so costly to produce according to the
activity-based costing system? What influence might the activity-based costing data have on
management's opinions regarding the profitability of Product L-15?
36. Daba Company manufactures two products, Product F and Product G. The company
expects to produce and sell 1,400 units of Product F and 1,800 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:
Required: Using the activity-based costing approach, determine the overhead cost per unit for
each product.
Fill-in-the-Blank Questions
37. Billabong Resources provides the following data to enable you to calculate overhead
rates: Machining Department Overhead is $16,000, which is to be allocated on estimated
machine hours of 25,000. The rate per Machine Hour would be ___________________. If
Machining cost is to be allocated to three jobs which consumed A = 3,000 hours, B = 6,000
hours, and C = 1,000 hours respectively; then Job A should be charged $ _______________;
Job B should be charged $_______________; and Job C $_______________.
38. A _________________ is a factor that causes the cost of an activity to go up and down.
39. An activity __________________ is a temporary account accumulating the costs a
company incurs to support an identified set of activities.
40. Under traditional cost allocation methods, low-volume complex products are often
________________ and high-volume simpler products are likely to be ________________.
