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PTS: 1 REF: 11.5
2. Discuss how volume-based unit-level analysis underestimates and/or overestimates the cost of
products.
3. The most critical step in activity-based costing is identifying cost drivers. Explain this statement.
4. Compare and contrast traditional organization-based costing with activity-based costing.
PROBLEM
1. Hunter Company manufactures two products (XX and YY). The overhead costs have been divided into
four cost pools that use the following activity drivers:
Number of
Number of
Number of labour
Labour
Product
Orders
Setups
Transactions
Hours
XX
60
20
50
2,000
YY
20
80
70
500
Cost per pool
£16,000
£13,000
£2,400
£20,000
Required:
a.
Compute the allocation rates for each of the activity drivers listed.
b.
Allocate the overhead costs to Products XX and YY using activity-based costing.
c.
Compute the overhead rate using labour hours under the traditional functional-based costing
system.
d.
Allocate the overhead costs to Products XX and YY using the traditional functional-based
costing system overhead rate calculated in part (c).
2. Lyons, SA., has identified the following overhead costs and activity drivers for next year:
Overhead Item
Expected Cost
Activity Driver
Expected Qty.
Setup costs
£150,000
Number of setups
1,200
Ordering costs
40,000
Number of orders
10,000
Maintenance
200,000
Machine hours
16,000
Power
20,000
Kilowatt hours
100,000
The following are two of the jobs completed during the year:
Job XX
Job YY
Direct materials
£2,250
£2,500
Direct labour
3,000
1,875
Units completed
375
300
Direct labour hours
90
110
Number of setups
6
8
Number of orders
8
15
Machine hours
180
150
Kilowatt hours
90
120
The company's normal activity is 20,000 direct labour hours.
Required:
a.
Determine the unit cost for each job using direct labour hours to apply overhead.
b.
Determine the unit cost for each job using the four activity drivers. (Round amounts to 2
decimal places.)
c.
Which method produces the more accurate cost assignment? Why?
3. Hill Manufacturing uses an activity-based costing system. The company produces Model A and Model
B. Information concerning the two products is as follows:
Model A
Model B
Units produced
30,000
50,000
Direct labour hours
24,000
26,000
Engineering labour (hours)
4,000
6,000
Setups
20
30
Kilowatt hours
5,000
7,000
The following costs are reported:
Power
£12,000
labour-related overhead
70,000
Setups
60,000
Required:
a.
Classify the following overhead activities as unit-level activities, batch-level activities, or
product-level activities:
Power
Engineering
Setups
b.
Calculate the following:
A cost pool rate for power
A cost pool rate for setups
A cost pool rate for engineering
c.
Calculate the following:
Power costs assigned to Model B
Setups costs assigned to Model A
Engineering costs assigned to Model A
4. Funk Manufacturing Company produces specially machined parts. The parts are produced in batches
in one continuous manufacturing process. Each part is custom produced and requires special
engineering design activity (based on customer specifications). Once the design is completed, the
equipment can be set up for batch production. Once the batch is completed, a sample is taken and
inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has
four activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining
process with two activities: providing utilities (plantwide) and providing space. Costs have been
assigned to each activity using direct tracing and resource drivers:
Engineering
£125,000
Setups
112,500
Machining
250,000
Inspection
100,000
Providing space
31,250
Providing utilities
22,500
Activity drivers for each activity have been identified and their practical capacities listed:
Machine hours
50,000
Setups
400
Engineering hours
10,000
Inspection hours
5,000
The costs of facility-level activities are assigned using machine hours.
Required:
a.
Identify the activities within each process as unit-level, batch-level, product-level, or
facility-level.
b.
Create homogeneous cost pools. Identify the activities that belong to each pool and the activity
driver that will be used for computing pool rates.
c.
Build an activity relational (i.e. cost) table.
d.
Compute the cost pool rates.
5. Godwin Ltd. produces specially machined parts. The parts are produced in batches in one continuous
manufacturing process. Each part is custom produced and requires special engineering design activity
(based on customer specifications). Once the design is completed, the equipment can be set up for
batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are
within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups,
machining, and inspecting. In addition, there is a sustaining process with two activities: providing
utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing
and resource drivers:
Engineering
£250,000
Setups
225,000
Machining
500,000
Inspection
200,000
Providing space
62,500
Providing utilities
45,000
Activity drivers for each activity have been identified and their practical capacities listed:
Machine hours
25,000
Setups
200
Engineering hours
5,000
Inspection hours
2,500
The costs of facility-level activities are assigned using machine hours.
Required:
a.
Identify the activities within each process as unit-level, batch-level, product-level, or
facility-level.
b.
Create homogeneous cost pools. Identify the activities that belong to each pool and the activity
driver that will be used for computing pool rates.
c.
Build an activity relational (i.e. cost) table.
d.
Compute the cost pool rates.
6. Holbrook, SA., has identified the following overhead costs and cost drivers for next year:
Overhead Item
Expected Cost
Cost Driver
Expected Quantity
Setup costs
£960,000
Number of setups
4,800
Ordering costs
160,000
Number of orders
20,000
Maintenance
640,000
Machine hours
64,000
Power
80,000
Kilowatt hours
200,000
The following are two of the jobs completed during the year:
Job 701
Job 702
Prime costs
£25,00
£18,000
Units completed
650
500
Direct labour hours
180
220
Number of setups
12
15
Number of orders
16
30
Machine hours
360
300
Kilowatt hours
180
650
The company's normal activity is 40,000 direct labour hours.
Required:
a.
Determine the unit cost for each job using direct labour hours to apply overhead.
b.
Determine the unit cost for each job using the four cost drivers. (Round amounts to two
decimal places.)
c.
Which method produces the more accurate cost assignment? Why?
7. Flanigan Manufacturing uses an activity-based cost system. The company produces Product R and
Product X. Information concerning the two products is as follows:
Product R
Product X
Units produced
30,000
50,000
Direct labour hours
24,000
26,000
Engineering labour (hours)
4,000
6,000
Setups
20
30
Kilowatt hours
5,000
7,000
The following costs are reported:
Power
£ 24,000
Engineering
140,000
Setups
120,000
Required:
a.
Classify the overhead activities as:
Unit-level activities
Batch-level activities
Product-sustaining activities
b.
Calculate the following:
The pool rate for power
The pool rate for setups
The pool rate for engineering
c.
Calculate the following:
Power costs assigned to Product X
Setup costs assigned to Product R
Engineering costs assigned to Product R
8. Ernest, SA., has identified the following overhead costs and cost drivers for next year:
Overhead Item
Expected Cost
Cost Driver
Expected Quantity
Setup costs
£320,000
Number of setups
4,000
Ordering costs
120,000
Number of orders
20,000
Maintenance
480,000
Machine hours
24,000
Power
40,000
Kilowatt hours
160,000
The following are two of the jobs completed during the year:
Job 320
Job 321
Direct materials
£8,000
£19,000
Direct labour
£6,400
£12,000
Units completed
800
1,600
Direct labour hours
240
500
Number of setups
12
20
Number of orders
20
40
Machine hours
400
600
Kilowatt hours
280
400
The company's normal activity is 32,000 direct labour hours. (Round amounts to two decimal places.)
Required:
a.
Determine the unit cost for each job using direct labour hours to apply overhead.
b.
Determine the unit cost for each job using the four cost drivers.
c.
Which method produces the more accurate cost assignment? Why?
9. Books Company manufactures and sells two products: Soft Cover (S) and Hard Cover (H). The firm's
activities have been analyzed and placed into a hierarchy of activity costs. Presented is information on
activity cost drivers and costs per unit of cost driver at each activity level.
Activity Level
Activity
Cost
Unit level
X11, S acquire direct materials
b11, £6
X12, H acquire direct materials
b12, £10
X13, S other manufacturing costs
b13, £2
X14, H other manufacturing costs
b14, £4
Batch level
X21, S setup
b21, £200
X22, H setup
b22, £300
Product level
X31, S advertising
b31, £20,000
X32, H advertising
b32, £30,000
Facility level
X41, Rent
b41, £10,000
During January 2012, Books Company produced 10,000 units of Soft Covers and 5,000 units of Hard
Covers. Each batch of products includes 1,000 units of Soft Covers or 1,000 units of Hard Covers.
Required:
Determine the total costs for each activity level and the total predicted costs for January.
ESSAY
1. Describe the unit level approach to cost behaviour analysis. Discuss the appropriateness of this
approach.
2. Identify Cooper and Kaplan's four categories of activities and provide a brief description of each
category.
3. Explain how the activity resource usage model is used in assessing relevancy.
