Exercise 7-13 (30 minutes)
1. Activity rates are computed as follows:
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected
Activity
(a) ÷ (b)
Activity
Rate
Machine setups ……
$72,000
400
setups
$180
per setup
Special processing ..
$200,000
5,000
MHs
$40
per MH
There is no activity rate for the General Factory activity because it is an organization-sustaining
activity. Organization-sustaining costs should not be allocated to products.
2. Overhead is assigned to the two products as follows:
Hubs:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Machine setups …………………
$180
per setup
100
setups
$ 18,000
Special processing ……………..
$40
per MH
5,000
MHs
200,000
Total ……………………………….
$218,000
Sprockets:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Machine setups …………………
$180
per setup
300
setups
$54,000
Special processing ……………..
$40
per MH
0
MHs
0
Total ……………………………….
$54,000
Exercise 7-13 (continued)
Hubs
Sprockets
Direct materials ……………………………..
$32.00
$18.00
Direct labor:
$15 per DLH × 0.80 DLHs per unit…..
12.00
$15 per DLH × 0.40 DLHs per unit…..
6.00
Overhead:
$218,000 ÷ 10,000 units ……………….
21.80
$54,000 ÷ 40,000 units ………………..
1.35
Unit cost ………………………………………
$65.80
$25.35
Exercise 7-14 (continued)
2. The average cost per diner for each party can be computed by dividing
the total cost of the party by the number of diners in the party as
follows:
3. The average cost per diner differs from party to party under the activity-
based costing system for two reasons. First, the cost of serving a party
($5.50) does not depend on the number of diners in the party.
Therefore, the average cost per diner of this activity decreases as the
We should note that the activity-based costing system itself does not
recognize all of the differences in diners’ demands on resources. For
example, there are undoubtedly differences in the costs of preparing the
Exercise 7-15 (continued)
3. Computation of the overhead costs for the Shenzhen Enterprises order:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supporting direct
labor ……………..
$7.50
per DLH
20
DLHs*
$150
Order processing ..
$250
per order
1
order
250
Customer support
$400
per customer
1
customer
400
Total ………………..
$800
*2 DLHs per unit × 10 units = 20 DLHs.
4. The customer margin for Shenzhen Enterprises is computed as follows:
Customer Margin—ABC Analysis
Sales (10 units × $300 per unit) …………………
$3,000
Costs:
Direct materials ($180 per unit × 10 units) …
$1,800
Direct labor ($50 per unit × 10 units) ………..
500
Support direct labor overhead (see part 3
above) ……………………………………………..
150
Order processing overhead (see part 3
above) ……………………………………………..
250
Customer support overhead (see part 3
above) ……………………………………………..
400
3,100
Customer margin …………………………………….
$ (100)
Problem 7-16 (continued)
2. The first step is to determine the activity rates:
Activity Cost Pools
(a)
Total
Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Machining …………..
$213,500
152,500
MHR
$1.40
per MHR
Setups ……………….
$157,500
375
setup hrs.
$420
per setup hr.
Product sustaining ..
$120,000
2
products
$60,000
per product
*The Other activity cost pool is not shown above because it includes
organization-sustaining and idle capacity costs that should not be
assigned to products.
Under the activity-based costing system, the product margins would be
computed as follows:
B300
T500
Total
Sales ……………………………..
$1,400,000
$700,000
$2,100,000
Direct materials ………………..
436,300
251,700
688,000
Direct labor ……………………..
200,000
104,000
304,000
Advertising expense ………….
50,000
100,000
150,000
Machining ……………………….
126,000
87,500
213,500
Setups …………………………...
31,500
126,000
157,500
Product sustaining …………….
60,000
60,000
120,000
Total cost ……………………….
903,800
729,200
1,633,000
Product margin ………………..
$ 496,200
$(29,200)
$ 467,000
Problem 7-16 (continued)
The traditional and activity-based cost assignments differ for three
65.8% of all overhead to the B300 product line and 34.2% of all
overhead to the T500 product line. The ABC system assigns 59.0% of
Machining costs to the B300 product line and 41.0% to the T500