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Chapter 7
Activity-Based Costing: A Tool to Aid
Decision Making
Solutions to Questions
7-1 Activity-based costing differs from
excluded from product costs. An activity-based
costing system typically includes a number of
have been reasonably accurate. However, direct
is replaced by machines; a decrease in direct
product diversity and complexity as well as by
needed to properly motivate all employees to
ABC system. Tapping the knowledge of cross-
each unit that is produced.
Batch-level
activities
are performed for each batch regardless of how
7-5 Organization-sustaining costs, customer-
7-6 In activity-based costing, costs must first
7-7 Because people are often involved in
also possible to ask people to keep records of
7-8 In traditional cost systems, product-level
costs are indiscriminately spread across all
products using direct labor-hours or some other
allocation base related to volume. As a
7-9 Activity rates tell managers the average
cost of resources consumed to carry out a
particular activity such as processing purchase
orders. An activity whose average cost is high
The Foundational 15
1. The plantwide overhead rate is computed as follows:
Total estimated overhead cost (a) ............
$684,000
Total expected direct labor-hours (b) ........
12,000
DLHs
Predetermined overhead rate (a) ÷ (b) ....
$57.00
per DLH
2. The overhead cost assignments to Products Y and Z are as follows:
Product Y
Product Z
Total direct labor hours (a) ......................
8,000
4,000
Plantwide overhead rate per DLH (b) ........
$57.00
$57.00
Manufacturing overhead assigned (a) × (b)
$456,000
$228,000
3-6.
The activity rates are computed as follows:
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected
Activity
(a) ÷ (b)
Activity
Rate
Machining ...............
$200,000
10,000
MH
$20
per MH
Machine setups .......
$100,000
200
setups
$500
per setup
Product design ........
$84,000
2
products
$42,000
per product
General factory .......
$300,000
12,000
DLHs
$25
Per DLH
7. Machine setups is a batch-level activity. A setup is performed to run a
8. The product design activity is a product-level activity. The product
The Foundational 15 (continued)
9-10. Using the ABC system, the total overhead assigned to Products Y and Z is computed as follows:
Product Y
Product Z
Expected
Activity
Amount
Expected
Activity
Amount
Machining, at $20.00 per machine-hour ...............
7,000
$140,000
3,000
$ 60,000
Machine setups, at $500.00 per setup ..................
50
25,000
150
75,000
Product design, at $42,000 per product ...............
1
42,000
1
42,000
General factory, at $25.00 per direct labor-hour ...
8,000
200,000
4,000
100,000
Total overhead cost assigned ..............................
$407,000
$277,000
The Foundational 15 (continued)
11-15. The percentages of overhead assigned using the plantwide and ABC approaches are computed
as follows:
Product Y
Product Z
Total
Plantwide Approach
(a)
Amount
(a) ÷ (c)
%
(b)
Amount
(b) ÷ (c)
%
(c)
Amount
Manufacturing overhead ........
$456,000
66.7%
$228,000
33.3%
$684,000
Activity-Based Costing System
Machining .............................
$140,000
70.0%
$ 60,000
30.0%
$200,000
Machine setups .....................
25,000
25.0%
75,000
75.0%
100,000
Product design ......................
42,000
50.0%
42,000
50.0%
84,000
General factory ......................
200,000
66.7%
100,000
33.3%
300,000
Total cost assigned to products
$407,000
$277,000
$684,000
The Machining allocation percentages used in the ABC system are similar to the plantwide allocation
percentages because the Machining cost pool uses a unit-level activity measure (machine-hours).
cost pool. Although Product Y is the high-volume product (14,000 units) and Product Z is the low-
volume product (6,000 units), Product Y only consumes 25% of the total machine setups and Product
Z consumes 75% of the total machine setups. The conventional system is allocating too much of the
machine setup costs to Product Y and too little of these costs to Product Z.
The Foundational 15 (continued)
low-volume product (6,000 units), both products consume 50% of the
product design resources. The conventional system is allocating too much
of the product design costs to Product Y and too little of these costs to
Product Z.
Under the ABC system, the General Factory allocation percentages are the
Exercise 7-1 (10 minutes)
a.
Receive raw materials from suppliers.
Batch-level
b.
Manage parts inventories.
Product-level
c.
Do rough milling work on products.
Unit-level
d.
Interview and process new employees in the
personnel department.
Organization-
sustaining
e.
Design new products.
Product-level
f.
Perform periodic preventive maintenance on general-
use equipment.
Organization-
sustaining
g.
Use the general factory building.
Organization-
sustaining
h.
Issue purchase orders for a job.
Batch-level
Exercise 7-2 (15 minutes)
Travel
Pickup
and
Delivery
Customer
Service
Other
Totals
Driver and guard wages ........................
$360,000
$252,000
$ 72,000
$ 36,000
$ 720,000
Vehicle operating expense .....................
196,000
14,000
0
70,000
280,000
Vehicle depreciation ..............................
72,000
18,000
0
30,000
120,000
Customer representative salaries and
expenses ...........................................
0
0
144,000
16,000
160,000
Office expenses ....................................
0
6,000
9,000
15,000
30,000
Administrative expenses ........................
0
16,000
192,000
112,000
320,000
Total cost .............................................
$628,000
$306,000
$417,000
$279,000
$1,630,000
Travel
Pickup
and
Delivery
Customer
Service
Other
Totals
Driver and guard wages ........................
50%
35%
10%
5%
100%
Vehicle operating expense .....................
70%
5%
0%
25%
100%
Vehicle depreciation ..............................
60%
15%
0%
25%
100%
Customer representative salaries and
expenses ...........................................
0%
0%
90%
10%
100%
Office expenses ....................................
0%
20%
30%
50%
100%
Administrative expenses ........................
0%
5%
60%
35%
100%
Exercise 7-4 (10 minutes)
K425
Activity Cost Pool
Activity Rate
Activity
ABC Cost
Supporting direct labor .........
$6
per direct labor-hour
80
direct labor-hours
$ 480
Machine processing ..............
$4
per machine-hour
100
machine-hours
400
Machine setups ....................
$50
per setup
1
setups
50
Production orders .................
$90
per order
1
order
90
Shipments ............................
$14
per shipment
1
shipment
14
Product sustaining ................
$840
per product
1
product
840
Total ....................................
$1,874
M67
Activity Cost Pool
Activity Rate
Activity
ABC Cost
Supporting direct labor .........
$6
per direct labor-hour
500
direct labor-hours
$ 3,000
Machine processing ..............
$4
per machine-hour
1,500
machine-hours
6,000
Machine setups ....................
$50
per setup
4
setups
200
Production orders .................
$90
per order
4
orders
360
Shipments ............................
$14
per shipment
10
shipments
140
Product sustaining ................
$840
per product
1
product
840
Total ....................................
$10,540
