Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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APPENDIX C
ACTIVITY-BASED COSTING
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Explain cost flows for activity
1,3,4
A1. Identify and assess advantages
and disadvantages of activity-
based costing.
7,10,11
C-1, C-7
C-2, C-3
Procedural objectives:
SP
P2. Assign overhead costs using
activity-based costing.
5,6,8,9
C-3, C-4,
C-5, C-6
C-1, C-2,
SP
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
Analytical objectives:
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and
Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows
instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing.
Connect Insight is available through Connect titles.
The Serial Problem for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Chapter Revision
New 3-step method for activity-based costing.
Revised discussion of applying activity-based costing.
Revised example and new exhibits of activity-based costing.
Added discussion of value-added activities.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
I. Plantwide Overhead Rate Method
A. Cost Flows under Plantwide Overhead Rate Method
1. Uses one overhead rate to allocate overhead costs to products.
3. The rate is determined using volume related measure, such as
direct labor hours, machine hours, or direct labor cost dollars.
B. Applying the Plantwide Overhead Rate Method
1. Total budgeted overhead costs are combined into one cost pool
2. The cost pool is divided by the selected allocation base (direct
3. The rate is then applied to assign costs to all products based on
the allocation base such as direct labor hours or machine hours
required to manufacture each product.
II. Activity-Based Costing
A. Cost Flows under Activity-Based Costing
1. Attempts to better allocate overhead costs to proper users of
overhead activities by focusing on activities.
2. Activity-based costing flows three steps:
3. a. Identify activities and assign costs to activity cost pools.
5. First Step:
a. Identify activities involved in processing the product or
service and then form activity cost pools by combining
6. Second Step:
a. Activity rates are computed as follows:
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
B. Advantages and Disadvantages of Activity-Based Costing
1. ABC uses more allocation bases than a traditional cost system
2. ABC is very effective when the same department produces
many different types of products. More complex products
3. ABC encourages managers to focus on activities and the use of
those activities.
4. ABC helps managers identify the activities which cause costs
5. ABC requires managers to look at each item and encourages
them to manage each cost to increase the benefit from each
6. ABC requires more effort to implement and maintain than a
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Appendix C Alternate Demonstration Problem
Plata Company manufacturers 2 printer models: Deluxe and Cheapie. A single
plantwide cost driver (150% of direct labor cost) is used to apply the $24,000 of
overhead costs to the products. The following information is available:
Deluxe
Cheapie
Quantity to be produced
100
1,000
1. Using the plantwide overhead rate method, compute the cost per unit, the
gross profit per unit and gross profit rate per unit.
The company decided to apply the activity based costing (ABC) method to see if they
can get a better allocation of overhead costs. The following data was collected:
Activity Name
Activity Cost
Driver
Deluxe
Cheapie
Total
Machining
20,000
Machine hours
3,000
Total overhead costs
$ 24,000
2. Using the Activity Based Costing (ABC) method:
a. Compute the activity rate for each of the identified activities
Selling price per unit
Direct Materials cost per unit
Direct Labor cost per unit
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1. Using the plantwide overhead rate method, compute the cost per unit, the gross
profit per unit and gross profit rate per unit.
Deluxe
Cheapie
Sales per unit
$ 300
$ 100
direct materials per unit
$ 100
$ 40
direct labor per unit
cost per unit
gross profit ($) per unit
Gross profit rate (%) (Gross Profit/Sales)
2. Using the Activity Based Costing (ABC) method:
a. Compute the activity rate for each of the identified activities
Activities Activity Costs Driver Quantity Rate__________
b. Compute the amount of overhead assigned to the Deluxe and Cheapie
printers
Activities
Deluxe
Rate
x
Act. Activity
Cost
Setups
x
600 setup hrs.
Machining
$4 per machine hr.
x
Activities
Setups
x
200 setup hrs.
$ 1,000
Machining
$4 per machine hr.
x
Total costs allocated
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
c. Compute the Unit cost, the gross profit per unit and gross profit %
per unit
Deluxe
Cheapie
Sales per unit
$ 300
$ 100
overhead per unit (150% X DL cost)
cost per unit
gross profit ($) per unit
$
$