Appendix C
Activity-Based Costing
QUESTIONS
1. Manufacturing overhead costs cannot be directly traced to units of product like
2. In the first stage, service department costs are assigned to operating departments.
3. Operating departments are directly involved in manufacturing or selling the products
4. Activity-based costing (ABC) is a method for allocating shared costs among
departments or products. It is especially common for overhead allocation. The goal
5. Anything to which costs would be assigned is considered a “cost object.” Common
6. An activity cost driver is the measure of the activity that causes costs to be incurred.
7. Activity-based costing is typically used when a company produces many different
8. Typical activity cost pools include: purchasing, order processing, accounting,
engineering, factory maintenance, and legal services (other answers are possible).
9. In activity-based costing, costs in a cost pool are allocated to output (or jobs or
products) using predetermined overhead rates.
10. While ABC may provide more accurate cost assignments, the additional cost to
implement activity-based costing may not be justified. That is, the value of the
11. Activity-based costing may be used in any type of organization. The premise of ABC
is that activities cause costs. Since all organizations engage in activities, these
QUICK STUDIES
Quick Study C-1 (10 minutes)
Quick Study C-2 (10 minutes)
2. Assign overhead costs to Fast and Standard models
Fast
Overhead cost 25,000 DLH x $24.80/DLH $ 620,000
Standard
Overhead cost 60,000 DLH x $24.80/DLH $ 1,488,000
Quick Study C-3 (15 minutes)
Expected Activity Activity
Activity Cost Driver Rate
Handling material $ 625,000 100,000 parts $6.25/part
Inspecting product 900,000 1,500 batches $600/batch
Processing orders 105,000 700 orders $150/order
Quick Study C-4 (15 minutes)
Note: Activity rates are from Quick Study C-3.
Assign overhead to Fast and Standard models using ABC:
Fast
Handling material $6.25/part 20,000 parts $ 125,000
Inspecting product $600/batch 250 batches 150,000
Processing orders $150/order 50 orders 7,500
Paying suppliers $350/invoice 50 invoices 17,500
Quick Study C-4 (concluded)
Standard
Handling material $6.25/part 30,000 parts $ 187,500
Inspecting product $600/batch 100 batches 60,000
Processing orders $150/order 20 orders 3,000
Paying suppliers $350/invoice 10 invoices 3,500
Quick Study C-5 (10 minutes)
1. Cost of technical support per service call =
10,000
$250,000
= $25
2. Assign technical support costs to each model
Quick Study C-6 (5 minutes)
Quick Study C-7 (15 minutes)
Overhead cost allocation of indirect labor and supplies to Department 1:
Overhead cost allocation of rent and utilities, general office, and
depreciation to Department 1
Total overhead allocated to Department 1
Quick Study C-8 (10 minutes)
Expected Activity Activity
Activity Cost Driver* Rate
1 $70,000 35,000 $ 2.00
*Computed as the sum of the budgeted cost driver activity of all three products.
Fundamental Accounting Principles, 21st Edition
1534
Quick Study C-9 (15 minutes)
1.
Expected Activity Activity
Activity Cost Driver Rate
1 $ 87,000 5,800 $ 15.00
2.
Standard Deluxe
Activity 1
3,000 x $15 $ 45,000
Activity 2
4,500 x $6.20 27,900
5,500 x $6.20 34,100
Activity 3
Quick Study C-10 (15 minutes)
Overhead cost allocation of indirect labor and supplies to Department 1:
Overhead cost allocation of rent and utilities, general office, and
depreciation to Department 1
Total overhead allocated to Department 1
EXERCISES
Exercise C-1 (25 minutes)
1. $1,004,000 + $465,300 + $232,000 = $283.55 per machine hour
6,000 machine hours
Model 145
1,800 machine hours x $283.55/machine hour $ 510,390
Model 212
4,200 machine hours x $283.55/machine hour $ 1,190,910
2. Model 145
Materials and labor $250.00
Total cost per unit $590.26
Model 212
Materials and Labor $180.00
3. Model 145 Model 212
Price per unit $800.00 $470.00
Using a single plantwide overhead rate, Model 212 appears to be
unprofitable. Management may be inclined to stop producing this
product, increase its selling price, or look for ways to cut the cost of
Exercise C-2 (35 minutes)
1.
Components
Changeover $500,000 / 800 batches $625/batch
Machining $279,000 / 6,000 machine hours $46.50/MH
Setups $225,000 / 120 setups $1,875/setup
Finishing
Rework $75,000 / 300 rework orders $250/rework order
Support
Purchasing $135,000 / 450 purchase orders $300/PO
Providing space
Model 145 Model 212
Changeover
400 batches x $625/batch $ 250,000 $ 250,000
Machining
1,800 MH x $46.50/MH 83,700
4,200 MH x $46.50/MH 195,300
Setups
Purchasing
300 purchase orders x $300/PO 90,000
150 purchase orders x $300/PO 45,000
Space & Utilities
1,500 units x $19.40/unit 29,100
3,500 units x $19.40/unit _________ 67,900
Total overhead cost $ 773,380 $ 927,920
Exercise C-2 (concluded)
2. Model 145 Model 212
Materials & labor cost per unit $250.00 $180.00
3. Model 145 Model 212
Price per unit $800.00 $470.00
Both product lines appear profitable. Using ABC we see that Model
145 is not generating nearly as much profit as it appeared to generate
using the volume-based systems in Exercise C-1. Furthermore,
Exercise C-3 (20 minutes)
1.
Client consultation $270,000/1,500 contact hours $180/con.hr.
Drawings $115,000/2,000 design hours $57.50/design hr.
Billing/Collection $22,000/8 jobs $2,750/job
2.
Client consultation 450 contact hours x $180/con. hr. $ 81,000
Drawings 340 design hrs. x $57.50/design hr. 19,550
Exercise C-4 (35 minutes)
1. Total direct labor hours:
Product A: 10,000 units x 0.20 DLH/unit = 2,000 DLH
Plant-wide overhead rate:
Product A Product B
Direct materials
A: 10,000 units x $2/unit $ 20,000
B: 2,000 units x $3/unit $ 6,000
Direct labor
A: 2,000 DLH x $24/DLH 48,000
B: 500 DLH x $24/DLH 12,000
2. Product A Product B
Price per unit $20.00 $60.00
It appears that Product A is not profitable. The company may decide
Exercise C-4 (concluded)
3. Overhead rates
Machine setup $121,000/(10 + 12) setups $5,500/setup
Material handling $48,000/16,000 parts* $3/part
Product A Product B
Direct Materials (from part 1) $ 20,000 $ 6,000
Direct labor (from part 1) 48,000 12,000
Overhead
Machine setup
A: 10 setups x $5,500/setup 55,000
B: 12 setups x $5,500/setup 66,000
Material handling
4. Product A Product B
Price per unit $20.00 $ 60.00
Using this approach (activity based costing) the company sees that
Product B is not profitable, and Product A is profitable. The company
should evaluate the activities used to produce Product B and
Exercise C-5 (30 minutes)
Calculation of predetermined overhead rates to apply ABC
Overhead Cost
Category (Activity
Cost Pool)
Total
Cost
Total Amount
of Cost Driver
Supervision …………………………
$ 5,400
$36,000
15%
of direct labor cost
Depreciation …………………..……
56,600
2,000 MH
$28.30
per machine hour
Line preparation …………….……
46,000
250 setups
$184.00
per setup
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
Line preparation ………………..
40 setups
$184.00
7,360
Total overhead assigned …...
$23,340
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
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
Total cost …………………………….…
$54,540
$151,660
Quantity produced ……………….…
10,500 ft.
14,100 ft.
Average cost per foot (ABC)* ..…
$5.19
$10.76
*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
Exercise C-6 (25 minutes)
Part 1
Part 2
Determination of cost per driver unit
Cost Center
Cost
Driver
Cost per Driver
Professional salaries …………..………
$1,600,000
10,000 hours
$160 per hour
Patient services & supplies …………
$ 27,000
600 patients
$45 per patient
Building cost …………………………..
$ 150,000
1,500 sq. ft.
$100 per sq. ft.
Total costs …………………………..
$1,777,000
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
Building cost …………………..…
600 sq. ft.
$100 per sq. ft.
60,000
Total ……………………………………………………………………………….…..
$478,000
Average cost per patient using ABC ………………………………………..
$ 1,195
PROBLEM SET A
Problem C-1A (25 minutes)
1. Liquid materials $2,304/(1,400 + 37,000) gallons $0.06/gallon
Dry materials $6,941/(620 + 12,000) pounds $0.55/pound
Utilities $1,422/(200 + 3,750) machine hrs $0.36/MH
PowerPunch
SlimLife
Liquid material
1,400 gal x $0.06………………
$ 84
37,000 gal x $0.06 ……….
$ 2,220
Dry material
620 pounds x $0.55 …………
341
12,000 pounds x $0.55 ..
6,600
Utilities
200 MH x $0.36 ……………….
72
3,750 MH x $0.36 ………...
1,350
Bottling
12,500 btls x $0.40 …………
5,000
180,000 btls x $0.40 …….
72,000
Labeling
37,500 labels x$0.03 ……….
1,125
180,000 labels x $0.03 ...
5,400
Machine setup
500 setups x $25 …………….
12,500
300 setups x $25 ………...
7,500
Product Cost
$19,122
$95,070
2. PowerPunch SlimLife
Total cost of line $19,122 $95,070
3. For PowerPunch:
Price $3.75
4. The price of SlimLife must cover the costs associated with the product,