Chapter 09 – Activity-Based Costing
9-21
9-35. (20 min.) Activity-Based Costing for an Administrative Service: LastCall
Enterprises.
a.
Rate
LaidBack
StressedOut
Total
Allocated costsa …………………………..
$1,100
$220,000
b
$55,000
c
$275,000
a $1,100 per employee = $275,000 Personnel cost ÷ 250 average employees.
b $220,000 = $1,100 x 200 employees for LaidBack.
c $55,000 = $1,100 per employee x 50 employees for StressedOut
b.
Rate
LaidBack
StressOut
Total
Employee maintenancea …………………………..
$6,000
$60,000
b
$180,000
c
$240,000
Payrolld ………………………..…
$140
28,000
e
7,000
f
35,000
Total allocated costs …………………………..
$88,000
$187,000
$275,000
a $6,000 = $240,000 Employee maintenance costs ÷ 40 employees hired/leaving.
b 60,000 = $6,000 10 employees hired/leaving.
c 180,000 = $6,000 30 employees hired/leaving.
d $140 = $35,000 Payroll costs ÷ 250 employees (average).
Chapter 09 – Activity-Based Costing
9-22
9-36. (20 min.) Activity-Based Costing for an Administrative Service: John’s
Custom Computer Shop.
a.
Rate
Personal
Business
Total
Allocated costsa …………………………..
$84
$50,400
b
$33,600
c
$84,000
a $84 per bill = $84,000 Accounts receivable cost ÷ 1,000 bills prepared.
b $50,400 = $84 x 600 bills prepared for Personal.
c $33,600 = $84 x 400 bills prepared for Business.
b.
Rate
Personal
Business
Total
Billinga …………………………..
$48
$28,800
b
$19,200
c
$48,000
Dispute resolutiond …………………………..
$500
30,000
e
6,000
f
36,000
Total allocated costs …………………………..
$58,800
$25,200
$84,000
a $48 = $48,000 Billing costs ÷ 1,000 bills prepared.
b 28,800 = $48 600 bills prepared.
c 19,200 = $48 400 bills prepared.
d $500 = $36,000 Dispute resolution costs ÷ 72 disputes.
Chapter 09 – Activity-Based Costing
9-23
Solutions to Problems
9-37. (40 min.) Comparative Income Statements and Management Analysis: EZ–
Seat, Inc.
a. EZ-Seat, Inc. Income Statement
Account
Rate
Ergo
Standard
Total
Sales revenue …………………………..
$2,925,000
$2,760,000
$5,685,000
Direct materials ……………….………….
$ 550,000
$ 500,000
$1,050,000
Direct labor …………………….…….
400,000
200,000
600,000
Overhead costs:
Administration ……………..……………
78%
a
312,000
e
156,000
468,000
Production setup ………….……………….
$7,200
b
360,000
f
720,000
1,080,000
Quality control ……………..……………
$1,800
c
360,000
g
360,000
720,000
Distribution ………………….……….
$192
d
288,000
h
1,152,000
1,440,000
Total overhead costs ……….………………….
1,320,000
2,388,000
3,708,000
Operating profit ……………….………….
$ 655,000
$ (328,000)
$ 327,000
a78% = $468,000 of Administrative costs ÷ $600,000 of direct labor costs
b$7,200 = $1,080,000 of Production setup costs ÷ 150 production runs
c$1,800 = $720,000 of Quality control costs ÷ 400 inspections
d$192 = $1,440,000 of Distribution costs ÷ 7,500 units shipped
Chapter 09 – Activity-Based Costing
9-24
9-37. (continued)
c. EZ-Seat, Inc. Income Statement
Account
Rate
Ergo
Standard
Total
Sales revenue …………………………..
$2,925,000
$2,760,000
$5,685,000
Direct Materials ………………….……….
550,000
500,000
1,050,000
Direct Labor …………………………..
400,000
200,000
600,000
Overhead Costs …………………………..
618%
a
2,472,000
b
1,236,000
3,708,000
Operating Profit ………………….……….
$ (497,000
)
$ 824,000
$ 327,000
a 618% = $3,708,000 Overhead Costs ÷ $600,000 Direct Labor Costs.
b $2,472,000 = 6.18 Overhead Rate x $400,000 Direct Labor Costs.
d. Dear Members of the Management Board:
The purpose of this report is to explain the differences between the profits of our
to continue to use labor-based overhead allocations. Under our traditional method,
the Ergo product line is not profitable (losses of $497,000), and management might
wish to eliminate the Ergo model. Under the more accurate method of activity-based
Chapter 09 – Activity-Based Costing
9-25
9-38. (40 min.) Comparative Income Statements and Management Analysis:
Bob’s Baskets, Inc.
a. Bob’s Baskets, Inc.: Income Statement
Account
Rate
Deluxe
Standard
Total
Sales revenue ……………………….….
$216,000
$240,000
$456,000
Direct materials ……………………..……
20,000
20,000
40,000
Direct labor …………………………..……………………
48,000
72,000
120,000
Overhead costs:
Administration …………………………..
25%
a
12,000
e
18,000
30,000
Setting up …………………………..
$2,000
b
40,000
f
20,000
60,000
Performing quality control…….……………………
$375
c
22,500
g
7,500
30,000
Distribution ………………………..…
$0.12
d
9,600
h
14,400
24,000
Total overhead costs ……………..……………
84,100
59,900
144,000
Operating profit (loss) …………….…………….
$ 63,900
$ 88,100
$ 152,000
a 25% = $30,000 administrative costs ÷ $120,000 direct labor costs.
b $2,000 = $60,000 production setup costs ÷ 30 production runs.
c $375 = $30,000 quality control costs ÷ 80 inspections.
d $0.12 = $24,000 distribution costs ÷ 200,000 units shipped.
Chapter 09 – Activity-Based Costing
9-26
9-38. (continued)
c.
Bob’s Baskets, Inc.
Income Statement
Account
Rate
Deluxe
Standard
Total
Sales revenue ……………………….….
$216,000
$240,000
$456,000
Direct Materials ……………………..……
20,000
20,000
40,000
Direct Labor …………………………..
48,000
72,000
120,000
Overhead Costs …………………….…….
120%
a
57,600
b
86,400
144,000
Operating Profit (loss) …………….…………….
$90,400
$61,600
$ 152,000
a 120% = $144,000 of Overhead Costs ÷ $120,000 Direct Labor Costs.
b $57,600 = 120% Overhead rate x $48,000 Direct Labor Costs.
d. Dear Members of the Management Board:
The purpose of this report is to explain the differences between the profits in our
to continue to use labor-based overhead allocations. Under our traditional method,
Chapter 09 – Activity-Based Costing
9-27
9-39. (15 min.) Ethics and Choice of Accounting Methods: Bob’s Baskets, Inc.
Yes, you should show the results to management. You have an ethical responsibility
9-40. (50 min.) Activity-Based Costing and Predetermined Overhead Allocation
Rates: Kitchen Supply, Inc.
a. Computing overhead allocation rates
Activity
Cost
Driver
Est.
Costs
Driver
Units
Rate
Processing orders ………
No. of orders
$ 54,000
÷
200
=
$ 270
Setting up production ….
No. of runs
216,000
÷
100
=
2,160
Handling materials ……..
Pounds
360,000
÷
120,000
=
3.00
Using machines …………
Machine-hrs.
288,000
÷
12,000
=
24
Performing quality control
No. of insp.
72,000
÷
45
=
1,600
Packing …………………….
No. of units
144,000
÷
480,000
=
0.30
Total est. overhead …….
$1,134,000
Predetermined rate
for direct labor-hour
=
Estimated activity ÷ Estimated allocation base
=
$1,134,000 ÷ 7,500 hours
=
$151.20 per hour
b. Production Costs using Direct Labor-Hours
Account
Institutional
Standard
Silver
Total
Direct materials ………….……………….
$ 39,000
$24,000
$15,000
$ 78,000
Direct labora …………………………..
6,750
6,750
9,000
22,500
Indirect costsb …………………………..
68,040
68,040
90,720
226,800
Total cost ………………….……….
$113,790
$98,790
$114,720
$327,300
a Number of labor-hours x $15 per hour.
b Number of labor-hours x $151.20 per hour.
Chapter 09 – Activity-Based Costing
9-28
9-40. (continued)
c. Production Costs using ABC
Account
Institutional
Standard
Silver
Total
Direct materials ………………….……….
$39,000
$ 24,000
$15,000
$78,000
Direct labor ……………………….….
6,750
6,750
9,000
22,500
Indirect costs
Processing orders …………….…………….
3,240
2,430
1,620
7,290
Setting up production ………..…………………
6,480
6,480
12,960
25,920
Handling materials …………………………..
45,000
18,000
9,000
72,000
Using machines ……………….………….
13,920
3,360
1,920
19,200
Performing quality control ….……………………….
4,800
4,800
4,800
14,400
Packing …………………………..……………………….
18,000
7,200
2,700
27,900
Total cost …………………………..
$137,190
$73,020
$57,000
$267,210
With the more accurate product costs, we should begin to concentrate our efforts
upon reducing the costs of our more expensive overhead operations. As seen in the
activity-based costing report, a large share of our total overhead is comprised of
materials handling and maintenance costs—costs, which were not visible under the
Chapter 09 – Activity-Based Costing
9-41. (50 min.) Activity-Based Costing and Predetermined Overhead Rates:
College Supply Company.
a.
Activity
Recommended Base
Allocation Rate
Setting up production …
No. of runs
$360 per run ($36,000 ÷ 100 runs)
Processing orders ……..
No. of orders
$300 per order ($60,000 ÷ 200 orders)
Handling materials …….
Lbs. of material
$3.00 per lb. ($24,000 ÷ 8,000 lbs.)
Using machines …………
Machine-hours
$7.20 per hour ($72,000 ÷ 10,000 hrs.)
Performing quality
management …………….
No. of inspections
$1,500 per insp. ($60,000 ÷ 40 insp.)
Packing & shipping …….
Units shipped
$2.40 per unit ($48,000 ÷ 20,000 units)
Direct labor hour rate …
$150 per hour ($300,000 ÷ 2,000 hrs.)
Direct materials ………………………………….……….
Chapter 09 – Activity-Based Costing
9-30
9-41 (continued)
c.
Short
Medium
Tall
Direct materials ……………………………….………….
$ 6,000
$ 3,750
$ 3,000
Direct labor …………………………………….………….
3,000
3,600
3,300
Setting up production ……………………….….
720
a
1,440
2,880
Processing orders ……………………………………….
2,400
b
2,400
1,200
Handling materials …………………………..………….
1,200
c
2,400
600
Using machines ………………………………………….
3,600
d
2,160
2,160
Performing quality management ………..………….
3,000
e
3,000
3,000
Shipping …………………………………………………….
2,400
f
1,200
720
Total cost ……………………………………….………….
$22,320
$19,950
$16,860
a $720 = $360 per run x 2 runs.
b $2,400 = $300 per order x 8 orders.
c $1,200 = $3.00 per lb. x 400 lbs.
d $3,600 = $7.20 per hour x 500 hours.
allocation base versus activity-based costing is found in the way overhead costs are
allocated. Our existing direct-labor cost method distorts our product costs because
there is little correlation between our direct-labor costs per product and overhead.
Activity-based overhead is more accurate. It allocates the individual components of
our overhead to our products based upon the product’s use of that overhead
costs—costs that were not visible under the direct-labor approach. Reducing these