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Appendix C - Activity-Based Costing
Exercise C-5 (continued)
Part 3
Allocation of costs to the general surgery department using ABC
GENERAL SURGERY
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries............. 2,500 hours $160 per hr. $400,000
Patient services & supplies.......400 patients $45 per patient 18,000
Exercise C-6 (30 minutes)
Calculation of predetermined overhead rates to apply ABC
Overhead Cost
Category (Activity
Cost Pool) Total
Cost
Total Amount
of Cost Driver Predetermined Overhead Rate
1. Assignment of overhead costs to the two products using ABC
Rounded edge
Cost
Driver
Cost per
Driver Unit Assigned Cost
Supervision............................. $12,200 15% $ 1,830
Machinery depreciation......... 500 hours $ 28.30 14,150
Squared edge
Cost
Driver
Cost per
Driver Unit Assigned Cost
Supervision............................. $23,800 15% $ 3,570
Machinery depreciation.........
1,500 hours $ 28.30 42,450
Line preparation.....................210 setups $184.00 38,640
Total overhead assigned....... $84,660
AppC-1999
2. Average cost per foot of the two products
Rounded edge Squared edge
Direct materials ........................... $19,000 $ 43,200
Direct labor .................................. 12,200 23,800
Overhead (using ABC) ................ 23,340 84,660
*Rounded
3. Using ABC, the average cost of rounded edge shelves declines and the
average cost of squared edge shelves increases. Under the current
allocation method, the rounded edge shelving was allocated 34% of all of
PROBLEM SET A
Problem C-1A (40 minutes)
1. Grinding & Polishing ($320,000+$135,000)/13,000 MH $35/MH
Product modification $600,000/1,500 Eng. Hrs. $400/Eng. Hr.
2.
Job 3175 Job 4286
Grinding & polishing 550 MH x $35.................... $19,250 5,500 MH x $35................... $192,500
Product modification 26 Eng.Hr x $400.............. 10,400 32 Eng. Hr. x $400............... 12,800
AppC-1999
3. Job 3175 Job 4286
Total overhead cost of job $74,650 $383,425
4. Plantwide rate
Grinding............................................................................... $ 320,000
Polishing.............................................................................. 135,000
Product modification.......................................................... 600,000
AppC-1999
Appendix C - Activity-Based Costing
Problem C-1A (concluded)
Job 3175 Job 4286
Overhead
500 DLH x $106.47 $ 53,235
4,375 DLH x $106.47 $ 465,806
*Rounded
5. Average overhead cost
Job 3175 Job 4286
Using ABC $ 373.25 $ 153.37
Using plantwide rate $ 266.18 $ 186.32
The plantwide rate, which is closely associated with the volume of
production, overstates the cost of the high-volume product (in this case
Problem C-2A (50 minutes)
*Rounded
Pup Tent Pop-Up Tent
Overhead cost by product line
Pup: 2,600 DLH @ $269.22/DLH $699,972*
Pop-Up: 1,600 DLH @ $269.22/DLH $430,752*
÷ Number of units produced 15,200 units 7,600 units
Overhead cost per unit $46.05 $56.68
*($699,972 + 430,752 = $1,130,724; $14 rounding error)
2. Total manufacturing cost per unit:
Direct materials and direct labor $25.00 $32.00
Appendix C - Activity-Based Costing
AppC-1999
Appendix C - Activity-Based Costing
Problem C-2A (continued)
3. Gross profit per unit
Selling price per unit $65.00 $200.00
Gross profit (loss) per unit $ (6.05) $111.32
4. Pattern alignment $64,400/560 batches $115/batch
Cutting $50,430/12,300 machine hours $4.10/MH
Moving product $100,800/2,400 moves $42/move
Pup Tent Pop-Up Tent
Pattern alignment 140 batches x $115..........$ 16,100 420 batches x $115...........$ 48,300
Cutting 7,000 MH x $4.10..............28,700 5,300 MH x $4.10...............21,730
Moving product 800 moves x $42..............33,600 1,600 moves x $42............67,200
Sewing 2,600 DLH x $78...............202,800 1,600 DLH x $78................124,800
Inspecting 240 insp. x $40................. 9,600 360 insp. x $40..................14,400
÷ units ÷ 15,200 ÷ 7,600
Overhead per unit (rounded) $ 33.46 $ 81.87
DM and DL per unit 25.00 32.00
Mfg. cost per unit $ 58.46 $ 113.87
AppC-1999
Appendix C - Activity-Based Costing
Problem C-2A (concluded)
5.
Pup Tent Pop-Up Tent
Selling price $65.00 $200.00
Both product lines are profitable without any cost cutting. The ABC cost
assignment method more accurately reflects the costs associated with
overhead rate bases cost assignment on volume-related factors.
6. Departmental overhead rates based on direct labor hours and machine
hours are still volume-based measures and would not improve the
AppC-1999
Appendix C - Activity-Based Costing
Problem C-3A (25 minutes)
1. When companies experience strong price pressure on their high-
volume, commodity-type products, they should be concerned. Many
managers will blame competitive price cutting on attempts by
2. The company may be charging less for its low-volume, custom-order
products than the competitors because the company is using a volume-
based costing system, which understates the true cost of producing
3. While prices are really set in the marketplace based on customer
demand and supply of the product, companies still look at costs to
determine the price they would like to get if they could affect market
4. Custom-order furniture requires handling special fabrics, buying in
smaller quantities (which may be more expensive than buying “in bulk”),
5. In addition to obtaining a more accurate picture of the costs of making
various products, activity based costing also gives information about
the cost of the activities that are performed. Managers may be surprised
AppC-1999
Appendix C - Activity-Based Costing
Problem C-4A (45 minutes)
1. Plantwide overhead rate:
Engineering support $ 24,500
Electricity 34,000
÷ 6,200* direct labor hours = $17.90/DLH
* Product A 10,000 units x 0.3 DLH/unit = 3,000 DLH
Product B 2,000 units x 1.6 DLH/unit = 3,200 DLH
6,200 DLH
Product A Product B
Direct materials per unit $15.00 $24.00
Direct labor per unit
A: 0.3 DLH/unit @ $20/DLH 6.00
B: 1.6 DLH/unit @ $20/DLH 32.00
Product A Product B
Selling price per unit...................... $30.00 $120.00
Manufacturing cost per unit.......... 26.37 84.64
Gross profit per unit....................... $ 3.63 $ 35.36
AppC-1999
