CHAPTER 4
Activity-Based Costing
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
A
Problems
*1. Recognize the difference
between traditional costing
and activity-based costing.
1, 2, 3,
4, 5
1, 2
1
1A, 3A,
4A, 5A
*2. Identify the steps in the
development of an activity-
based costing system.
7
1
*3. Know how companies
identify the activity
cost pools used in
activity-based costing.
9
*4. Know how companies
identify and use cost
drivers in activity-based
costing.
6, 10,
11, 12
3, 4, 5, 6,
7, 12
2
1A, 2A, 3A,
4A, 5A
*5. Understand the bene–
fits and limitations of
activity-based costing.
13, 14, 15
*6. Differentiate between
value-added and non-
value-added activities.
8, 16, 17
8, 9
3
1A, 5A
*7. Understand the value of
using activity levels in
activity-based costing.
19
10, 11, 12
4
*8. Apply activity-based
costing to service
industries.
18
9, 10
3
5A
*9. Explain just-in-time
(JIT) processing.
20
chapter.
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Assign overhead using traditional costing and ABC;
compute unit costs; classify activities as value- or
non-value-added.
Moderate
35–45
2A
Assign overhead to products using ABC and evaluate
decision.
Moderate
25–35
3A
Assign overhead costs using traditional costing and ABC;
compare results.
Moderate
35–45
4A
Assign overhead costs using traditional costing and ABC;
compare results.
Moderate
40–50
5A
Assign overhead costs to services using traditional
costing and ABC; compute overhead rates and unit costs;
compare results.
Moderate
35–45
1B
Assign overhead using traditional costing and ABC;
compute unit costs; classify activities as value- or
non-value-added.
Moderate
35–45
2B
Assign overhead to products using ABC and evaluate
decision.
Moderate
25–35
3B
Assign overhead costs using traditional costing and ABC;
compare results.
Moderate
35–45
4B
Assign overhead costs using traditional costing and ABC;
compare results.
Moderate
40–50
5B
Assign overhead costs to services using traditional
costing and ABC; compute overhead rates and unit costs;
compare results.
Moderate
35–45
BLOOM’S TAXONOMY TABLE
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 4-3
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
*1. Recognize the difference
between traditional costing and
activity-based costing.
Q4-1
Q4-2
Q4-3
Q4-4
Q4-5
DI4-1
BE4-1
BE4-2
E4-1
E4-2
E4–12
E4–13
P4–1A
P4–4A
P4–5A
P4–1B
P4–4B
P4–5B
E4-1
E4-2
E4-3
E4-4
E4-5
E4-6
P4–3A
P4–4A
P4–5A
P4–3B
P4–4B
P4–5B
*2. Identify the steps in the
development of an activity-
based costing system.
Q4-7
DI4-1
*3. Know how companies identify
the activity cost pools used in
activity-based costing.
Q4-9
E4-7
E4-8
*4. Know how companies identify
and use cost drivers in
activity-based costing.
Q4-6
Q4–10
Q4–11
Q4–12
BE4-3
BE4-4
BE4-5
BE4-6
BE4-7
BE4-12
DI4-2
E4-1
E4-4
E4-5
E4–11
E4–12
E4–13
P4–1A
P4–2A
P4–4A
P4–5A
P4–1B
P4–2B
P4–3B
P4–4B
P4–5B
DI4-2
E4-1
E4-3
E4-4
E4-5
E4-6
E4-8
E4-9
E4–10
P4–3A
P4–4A
P4–5A
P4–3B
P4–4B
P4–5B
P4–4B
*5. Understand the benefits and
limitations of activity-based
costing.
Q4–13
Q4–14
Q4–15
E4–11
*6. Differentiate between value-
added and non-value-added
activities.
Q4-8
Q4–16
Q4–17
BE4-8
BE4-9
DI4-3
E4–12
E4–13
P4–1A
P4–1B
BE4-8
BE4-9
E4–14
E4–15
E4–16
P4–5A
P4–5B
*7. Understand the value of
using activity levels in
activity-based costing.
Q4–19
DI4-4
BE4-10
BE4-11
BE4-12
BE4-10
E4–17
E4–18
*8. Apply activity-based costing to
service industries.
Q4–18
BE4-9
BE4-10
DI4-3
P4–5A
P4–5B
P4–5A
P4–5B
*9. Explain just-in-time (JIT)
processing.
Q4–20
Broadening Your Perspective
BYP4-1
BYP4-3
BYP4-4
BYP4-7
BYP4-2
BYP4-5
BYP4-8
BYP4-3
BYP4-6
ANSWERS TO QUESTIONS
1. Direct labor is a valid basis for allocating overhead when: (a) direct labor constitutes a significant
the amount of overhead costs.
2. The amount of direct labor in many industries has greatly decreased, due to advances in
machine hours as the basis on which to allocate overhead in an automated manufacturing
environment.
3. In many automated manufacturing environments, machine hours is a more relevant basis on
which to allocate overhead.
4. Under a traditional volume-based costing system where overhead cost is allocated on the basis
volume product.
5. The principal differences are:
Activity-Based Costing
Traditional Costing
(1)
(2)
Primary focus
Bases of allocation
Activities performed in making
products
Multiple cost drivers
Units of production
Single unit-level base
6. Activity-based overhead rates are computed using the following formula:
Estimated Overhead per Activity
Expected Use of Cost Drivers per Activity
7. The four steps involved in developing an ABC system are:
2. Identify the cost driver that has a strong correlation to the costs accumulated in the cost pool.
3. Compute the overhead rate for each cost driver.
4. Assign manufacturing overhead costs for each cost pool to products, using the overhead
rates (cost per driver).
8. A value-added/non-value-added activity flowchart is based on a systematic analysis of all the
process.
9. An activity cost pool is the overhead cost attributed to a distinct type of activity.
consumed.
Questions Chapter 4 (Continued)
11. A cost driver is accurate and appropriate if it measures the actual consumption of the activity in
and easily obtained.
12. The formula for assigning activity cost pools to products is:
13. The primary benefit of ABC is more accurate product costing. This results from using more cost
14. The limitations of ABC are: (a) increased costs that accompany multiple-activity cost pools and
15. ABC is the superior costing system when: (1) product lines differ greatly in volume and
the existing system is being ignored.
17. Identifying non-value-added activities highlights for managers the activities that should be
18. The overall objective of ABC in service firms is no different than for manufacturing companies;
services.
19. Greater accuracy in cost allocation is achieved by recognizing the four levels of activity. Some
activities are affected (driven) by changes in the number of units produced, while other activities
needed.
(b) There are three important elements in JIT processing:
(1) A company must have dependable suppliers who are willing to deliver on short notice
exact quantities of raw materials according to precise quality specifications.
(2) A multiskilled workforce must be developed.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1
(a)
Estimated annual overhead costs
= Predetermined overhead rate
Expected annual operating activity
$1,000,000
= $10 per direct labor hour
100,000
(b)
92,000 direct labor hours X $10 = $920,000 overhead applied
(c)
If the manufacturing process is complex, then multiple allocation
bases can result in more accurate product-cost computations. In
such situations, managers need to consider an overhead cost
allocation method that uses multiple bases. That method is activity–
based costing.
BRIEF EXERCISE 4-2
two reasons:
1. Low-volume products often require more special handling, such
2. Assigning overhead using ABC will usually increase the cost per
unit for low-volume products. Therefore, a traditional overhead
allocation such as direct labor hours is usually a poor cost driver
for assigning overhead costs to low-volume products.
As a result, for Finney, one of the products (Product RX3) may have been low
volume and therefore may have more overhead costs assigned to it under
an ABC system.
BRIEF EXERCISE 4-3
An appropriate cost driver for each activity is:
Activity
Cost Driver
Materials handling
Machine setups
Factory machine maintenance
Factory supervision
Quality control
Number of requisitions
Number of setups
Machine hours used
Number of employees
Number of inspections
BRIEF EXERCISE 4-4
(a) Number of parts or assemblies
(b) Number of setups
(c) Number of employees
BRIEF EXERCISE 4-5
Machine setups
Machining
Inspections
$150,000 ÷ 2,500 = $60 per setup
$325,000 ÷ 25,000 = $13 per machine hour
$ 87,500 ÷ 1,750 = $50 per inspection
BRIEF EXERCISE 4-6
Activity Cost Pool
Estimated
Overhead
÷
Expected Use of
Cost Drivers per Activity
=
Activity-Based
Overhead Rates
Designing
Sizing and cutting
Stitching and trimming
Wrapping and packing
$ 450,000
4,000,000
1,440,000
336,000
10,000 designer hours
160,000 machine hours
80,000 labor hours
32,000 finished units
$45.00 per designer hour
$25.00 per machine hour
$18.00 per labor hour
$10.50 per finished unit
BRIEF EXERCISE 4-7
Activity Cost Pool
Estimated
Overhead
÷
Expected Use of
Cost Drivers per Activity
=
Activity-Based
Overhead Rates
Ordering and receiving
Etching
Soldering
$ 90,000
480,000
1,760,000
12,000 orders
60,000 machine hours
440,000 labor hours
$7.50 per order
$8.00 per machine hour
$4.00 per labor hour
Cost Drivers
X
Overhead
Rates
=
Total Overhead
Applied
11,000 orders
50,000 machine hours
500,000 labor hours
$7.50
$8.00
$4.00
$ 82,500
400,000
2,000,000
$2,482,500
BRIEF EXERCISE 4-8
(a)
(b)
(c)
(d)
(e)
(f)
Non-value-added
Value-added
Non-value-added
Non-value-added
Non-value-added
Value-added
BRIEF EXERCISE 4-9
Value-added Activities
Hours
(1)
(3)
(5)
Designing and drafting
On-site supervision
Consultation with client
2.5
2.0
1.5
6.0
Non-value-added Activities
Hours
(2)
(4)
(6)
Staff meetings
Lunch
Entertaining a prospective client
1
1
2
4
BRIEF EXERCISE 4-10
(a) Batch– or unit-level
(b) Unit-level
(c) Unit-level
BRIEF EXERCISE 4-11
(a) Facility-level
(b) Unit-level
(c) Product-level
BRIEF EXERCISE 4-12
(a)
Product design
$40,000
= $4,000 per product change
10
Machining
$300,000
= $2 per machine hour
150,000
Material handling
$100,000
= $1,000 per set up
100
(b)
Product design—product-level
Machining—unit-level
Material handling—batch-level
SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 4-1
1. True
2. False
DO IT! 4-2
Activity Cost
Pools
Estimated
Overhead
Expected Use of Cost
Drivers per Activity
Activity-Based
Overhead Rates
Machine setup
$ 16,000
40 setups
$400 per setup
Machining
110,000
5,000 machine hours
$ 22 per machine hr.
Packing
30,000
500 orders
$ 60 per order
$156,000
BC113
AD908
Activity Cost
Pools
Expected
Use of Cost
Drivers per
Product
Activity-Based
Overhead Rates
Cost
Assigned
Expected Use of
Cost Drivers per
Product
Activity-Based
Overhead
Rates
Cost
Assigned
Machine setup
25
$400
$10,000
15
$400
$ 6,000
Machining
1,000
$ 22
22,000
4,000
$ 22
88,000
Packing
150
$ 60
9,000
350
$ 60
21,000
Total assigned costs
$41,000
$115,000
(c) Computation of overhead cost per unit:
BC113
AD908
Total costs assigned
(a)
$41,000
$115,000
Total units produced
(b)
3,000
1,500
Overhead cost per unit
(a) ÷ (b)
$13.67
$76.67