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) ………………….
4,000
Plantwide overhead rate per DLH (b) ……..
$57.00
Manufacturing overhead assigned (a) × (b)
$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)
Pickup
and
Delivery
Customer
Service
Other
Totals
Driver and guard wages ……………………
$252,000
$ 72,000
$ 36,000
$ 720,000
Vehicle operating expense …………………
14,000
0
70,000
280,000
Vehicle depreciation …………………………
18,000
0
30,000
120,000
Customer representative salaries and
expenses …………………………………….
0
144,000
16,000
160,000
Office expenses ………………………………
6,000
9,000
15,000
30,000
Administrative expenses ……………………
16,000
192,000
112,000
320,000
Total cost …………………………..………….
$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