Activity-Based Costing
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BE 165. (Cont.)
Instructions
Compute the activity-based overhead rates.
BE 166
Tunes & More, Inc. manufactures speakers and receivers and uses activity-based costing. The
following information is available:
Expected Use of
Activity Cost Pool Estimated Overhead Cost Driver per Activity
Ordering $216,000 24,000 orders
Soldering 192,000 64,000 machine hours
Inspecting 960,000 120,000 labor hours
Packing 840,000 56,000 boxes
Instructions
Compute the activity-based overhead rates.
BE 167
Dolan Tires manufactures tires for dune buggies and has two different products, nubby tires and
smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and
incurs $167,000 of overhead costs. The following information is available:
Activity Total Cost Cost Driver
Materials handling $60,000 Number of requisitions
Machine setups 50,000 Number of setups
Quality inspections 57,000 Number of inspections
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BE 167 (Cont.)
For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The
smooth tires require 600 requisitions, 300 setups, and 400 inspections.
Instructions
Determine the overhead rate for each activity.
BE 168
The legal firm of West, Green, and Ink uses ABC to allocate its overhead costs. The firm has
identified the following activity cost pools:
A. Direct labor fringe benefits.
B. Printing and photocopying.
C. Secretarial support.
D. Client support.
E. Recruiting and training.
F. Computer support.
G. Liability insurance
Instructions
Match these cost pools with the appropriate cost driver listed below.
______ 1. Revenue billed.
______ 2. CPU minutes.
______ 3. Number of pages.
______ 4. Direct labor cost.
______ 5. Number of clients.
______ 6. Number of recruits.
______ 7. Direct professional hours.
Activity-Based Costing
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BE 169
Rhode Company provides architectural services for mall development companies. The following
data are available for 2013
Expected Use of
Activity Cost Pool Estimated Overhead Cost Driver per Activity
Secretarial support $ 220,000 27,500 professional hours
Direct labor fringe benefits 200,000 $500,000 direct labor cost
Printing and copying 30,000 20,000 pages
Computer support 250,000 62,500 minutes
Liability insurance 140,000 $2,800,000 billed revenue
Instructions
Compute the activity-based overhead rates.
BE 170
Hops, Inc. manufactures several types of microbrew beers. Hops has identified the following
activities:
a. Inventory control e. Machine setups
b. Purchasing f. Brewing
c. Receiving g. Packing and shipping
d. Employee training
Instructions
Classify each activity as value-added or non-value-added.
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BE 171
Laredo Services is considering the installation of activity-based costing. The following activities
are performed daily by staff consultants: (1) consulting with clients, (2) staff meetings, (3) on-site
supervision, (4) meals, (5) entertaining prospective clients, and (6) training client personnel.
Instructions
Classify these activities as value-added or non-value-added.
EXERCISES
Ex. 172
Hayward Industries manufactures dining chairs and tables. The following information is available:
Dining Chairs Tables Total Cost
Machine setups 200 600 $48,000
Inspections 250 470 $72,000
Labor hours 2,600 2,400
Hayward is considering switching from one overhead rate based on labor hours to activity-based
costing.
Instructions
Perform the following analyses for these two components of overhead:
a. Compute total machine setups and inspection costs assigned to each product, using a single
overhead rate.
b. Compute total machine setups and inspection costs assigned to each product, using activity–
based costing.
c. Comment on your findings.
Activity-Based Costing
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Solution 172 (cont.)
Ex. 173
Sonoma Manufacturing has five activity cost pools and two products (a budget tape vacuum and
a deluxe tape vacuum). Information is presented below:
Cost Drivers by Product
Activity Cost Pool Cost Driver Est. Overhead Budget Deluxe
Ordering and Receiving Orders $ 120,000 600 400
Machine Setup Setups 297,000 500 400
Machining Machine hours 1,000,000 150,000 100,000
Assembly Parts 1,400,000 1,200,000 800,000
Inspection Inspections 300,000 550 450
Instructions
Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and
200,000 units of Deluxe. Round your answer to the nearest cent.
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Ex. 174
Morgan, Player, and Associates, a law firm, employs ABC. The following budgeted data for each
of the activity cost pools is provided for the year 2013.
Estimated Expected Use of
Activity Cost Pools Overhead Cost Drivers per Activity
Researching legal issues $ 31,500 900 research hours
Meeting with clients 1,760,000 8,800 professional hours
Preparing legal documents 480,000 30,000 pages
During 2013 the firm experienced 660 research hours, prepared 25,000 document pages, and
10,000 professional hours.
Instructions
Compute the total overhead applied during 2013.
Ex. 175
Betsy Rose owns a small department store in a metropolitan area. For twenty years, the
accountant has applied overhead to the various departments—Women’s Apparel, Men’s Apparel,
Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee hours
worked. Betsy Rose’s daughter, who is an accounting student at a local university, has suggested
her mother should consider using activity-based costing (ABC). In an attempt to implement ABC,
Betsy Rose and her daughter have identified the following activities.
Instructions
Determine a cost driver for each of the activities listed below.
Cost Pool Cost Driver
a. Placing orders ______________________________
b. Stocking merchandise ______________________________
c. Waiting on customers ______________________________
d. Janitorial and Maintenance ______________________________
Activity-Based Costing
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Ex 175 (Cont.)
e. Training employees ______________________________
f. Administrative ______________________________
g. Advertising and Marketing ______________________________
h. Accounting and Legal Services ______________________________
i. Wrapping packages ______________________________
Ex. 176
A list of possible cost drivers is presented below:
Code Code
A Engineering hours D Number of subassemblies
B Setups E Boxes
C Machine hours F Orders
Instructions
For each of the following activity cost pools, select the most appropriate cost driver:
Code Cost Pool
_____ 1. Machine setup
_____ 2. Ordering and receiving
_____ 3. Packaging and shipping
_____ 4. Engineering design
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Ex 176 (Cont.)
_____ 5. Machining
_____ 6. Assembly
Ex. 177
Identify appropriate cost drivers for the following activity cost pools:
1. Human resources
2. Security
3. Receiving
4. Data processing
Ex. 178
Two of the activity cost pools for Kinney Company are (a) machining ($325,000) and (b)
inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours
(12,500), square footage (2,000), and number of inspections (200).
Instructions
Compute the overhead rate for each activity.
Activity-Based Costing
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Ex. 179
Holmes Industries produces two models of televisions, Standard and Luxury. It sells 100,000
Standard televisions and 15,000 Luxury televisions annually. Holmes switched from traditional
costing to activity-based costing and discovered that the cost allocated to Luxury televisions
increased so dramatically that the Luxury was now only marginally profitable.
Instructions
Give a probable explanation for this shift.
Ex. 180
Compute activity-based costing rates from the following budgeted data for Hart Golf Co.:
Activity Cost Pool Budgeted Cost Budgeted Cost Driver
Designing $2,550,000 75,000 designer hours
Machining 525,000 21,000 machine hours
Packing 620,000 31,000 labor hours
EX. 181
We Store It Company rents storage units of various sizes to individuals and companies. The
following activities have been identified as cost pools for accumulating overhead and assigning it
to rental services provided. (a) repairs, (b) customer setups, (c) employee training, (d) supplies
ordering, (e) temperature/humidity control, (f) security, and (g) cleaning. Identify a cost driver
appropriate for each cost pool.
Instructions
For each activity, name a cost driver that might be used to assign overhead costs.
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Ex. 182
Seasonal Delights manufactures a wide variety of holiday and seasonal decorative items.
Seasonal’s activity–based costing overhead rates are:
Purchasing $380 per order
Storing $2 per square foot/days
Machining $100 per machine hour
Supervision $5 per direct labor hour
The Snow Man project involved three purchase orders, 4,000 square feet/days, 60 machine
hours, and 40 direct labor hours. The cost of direct materials on the job was $19,000 and the
direct labor rate is $30 per hour.
Instructions
Determine the total cost of the Snow Man project.
Ex. 183
Label the following costs as value-adding (VA) or non-value-adding (NVA):
____ 1. Engineering design
____ 2. Machine repair
____ 3. Inventory storage
____ 4. Machining
____ 5. Assembly
____ 6. Painting
____ 7. Inspections
____ 8. Packaging
Activity-Based Costing
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Ex. 184
Parton and Sons is a law firm that uses activity-based costing. Classify these activities as value–
added or non-value-added:
______________ 1. Taking appointments
______________ 2. Reception
______________ 3. Meeting with clients
______________ 4. Bookkeeping
______________ 5. Court time
______________ 6. Meeting with opposing attorneys
______________ 7. Billing
______________ 8. Advertising
Ex. 185
Novotna Manufacturing Company manufactures small tools. Classify each of the following
activity costs of the tool company as either unit-level, batch-level, product-level, or facility-level:
______________ 1. Plant management
______________ 2. Drilling
______________ 3. Painting
______________ 4. Machine setups
______________ 5. Product design
______________ 6. Cutting
______________ 7. Inspection
______________ 8. Inventory management
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Ex. 186
Castleman, Inc. designs, prints, and delivers advertising copy for companies throughout the tri–
state area. Sometimes this entails designing and printing a single copy and other times multiple
copies of the same advertisement. Listed below are typical activity costs:
(a) Printer ink.
(b) Paper
(c) Depreciation on equipment
(d) Machine setup costs
(e) Designing
(f) Supervisory salaries
(g) Ordering materials
(h) Delivery
(i) Building insurance
(j) Printing
Instructions
Classify each of these activities as either unit-level, batch-level, product-level, or facility-level.
Ex. 187
Norton Brooks, PSC is an architectural firm that uses activity-based costing. The three activity
cost pools used by Norton Brooks are: Salaries and Wages, Travel Expense, and Plan
Reproduction Expense. The firm has provided the following information concerning activity and
costs:
Salaries and wages $390,000
Travel expense 100,000
Plan reproduction expense 120,000
Total $610,000
Activity Cost Pools
Project Business
Assignment Development Other
Salaries and wages 60% 30% 10%
Travel expense 40% 40% 20%
Plan reproduction expense 35% 40% 25%
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Ex 187 (Cont.)
Instructions
Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business Development,
and (c) Other activity cost pools.
COMPLETION STATEMENTS
188. In traditional costing systems, direct labor cost is often used for the assignment of all
____________________.
189. A __________________ is any activity that has a direct cause-effect relationship with the
resources consumed.
190. In activity-based costing, overhead costs are allocated to ____________________, then
assigned to products.
191. The number of ___________________ is an appropriate cost driver for the ordering and
receiving activity cost pool.
192. The primary benefit of activity-based costing is ___________________ product costing.
193. When product lines differ greatly in volume and manufacturing complexity, a switch from
traditional costing to ___________________ is indicated.
194. Some ______________________ increase the perceived worth of a product or service to
customers.
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195. In the hierarchy of activity levels, the four levels are __________, ___________,
____________, and _____________.
196. Equipment setups are a ______________-level activity.
a197. A primary objective of __________________ processing is to eliminate all manufacturing
inventories.
a198. Dependable suppliers, a multi-skilled workforce, and a __________________________
are necessary elements of just–in-time processing.
Answers to Completion Statements
MATCHING
199. Match the items in the two columns below by entering the appropriate code letter in the
space provided.
A. Pull approach F. Just-in-time processing
B. Cost driver G. Batch-level activity
C. Facility-level activity H. Product-level activity
D. Unit-level activity I. Non-value-added activity
E. Activity-based costing J. Value-added activity
_____ 1. Allocates overhead to multiple activity cost pools, then assigns the activity cost pools
to products.
_____ 2. An activity that has a direct cause-effect relationship with the resources consumed.
_____ 3. Increases the worth of a product or service to customers.
_____ 4. Should be eliminated or reduced.
_____ 5. Plant management.
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_____ 6. Engineering changes.
_____ 7. Equipment setups.
_____ 8. Assembling.
_____ 9. Primary objective is to eliminate all manufacturing inventories.
_____ 10. Used to initiate manufacturing under JIT processing.
SHORT-ANSWER ESSAY QUESTIONS
S-A E 200
Delany Company uses a traditional costing system. Management is considering switching to an
activity-based costing system. What steps must Delany take in initiating an activity-based costing
system?
S-A E 201
Feather, Inc. produces phasers (sales of 200,000 units per year) and force field enhancers (sales
of 25,000 units per year). If Feather switches from traditional costing to activity-based costing,
what is the likely effect on overhead assigned to the two products?
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S-A E 202
What are the conditions that would indicate to the management of a firm that they should switch
from traditional costing to activity-based costing?
S-A E 203
Describe how the application of ABC to service companies is the same as its application to
manufacturing companies.