2. A single plantwide overhead rate will provide accurate product costing if products use
p
roduction department activity-base quantities in nearly the same ratio across departments.
For example, if Product X used 2 hours of Department A and 4 hours of Department B
3. Under the multiple production department rate method, factory overhead rates are determined
for each production department. Factory overhead is allocated to products depending on the
4. When there are significant differences in the factory overhead rates across different production
5. Under activity-based costing, factory overhead costs are assigned to activity cost pools rather
6. These activities are part of selling and administrative expenses, which must be treated as
p
b
7. If the costs listed in Discussion Question 6 were included as product costs, then they would be
p
8. Calculating product costs using activity rates may result in greater accuracy than using
p
9. Activity-based costing would be preferred over the relative sales value method when the
p
10. Service companies can use activity-based costing to determine the cost of service offerings.
CHAPTER 26 (FIN MAN); CHAPTER 11 (MAN)
COST ALLOCATION AND ACTIVITY-BASED COSTING
DISCUSSION QUESTIONS
CHAPTER 26 Cost Allocation and Activity-Based Costing
PE 26–1A (FIN MAN); PE 11–1A (MAN)
a. Jeans: 15,000 units × 0.15 direct labor hour = 2,250 direct labor hours
b. Single plantwide factory overhead rate:
PE 26–1B (FIN MAN); PE 11–1B (MAN)
a. Speedboat: 250 units × 12 direct labor hours = 3,000 direct labor hours
PE 26–2A (FIN MAN); PE 11–2A (MAN)
a. Cutting: (15,000 jeans × 0.05 dlh) + (15,000 khakis × 0.10 dlh)
b. Cutting Department rate: $72,000 ÷ 2,250 dlh = $32 per dlh
PRACTICE EXERCISES
CHAPTER 26 Cost Allocation and Activity-Based Costing
PE 26–2B (FIN MAN); PE 11–2B (MAN)
a. Fabrication: (250 speedboats × 8 dlh) + (250 bass boats × 4 dlh)
CHAPTER 26 Cost Allocation and Activity-Based Costing
PE 26–3A (FIN MAN); PE 11–3A (MAN)
a. Cutting: $22,500 ÷ 2,250 direct labor hours = $10 per dlh
b.
Activity Activity
Activity Cost Cost
Cutting 750 dlh /dlh 1,500 dlh /dlh
$10 $15,000
$10
$ 7,500
Khakis
×= ×=Rate
Activity
Rate
Activity-
Jeans
Activity-
Base
Usage
Activity Base
Usage
CHAPTER 26 Cost Allocation and Activity-Based Costing
PE 26–3B (FIN MAN); PE 11–3B (MAN)
a. Fabrication: $204,000 ÷ 3,000 direct labor hours = $68 per dlh
b.
Activity Activity
Activity Cost Cost
Fabrication 2,000 dlh /dlh 1,000 dlh /dlh
Speed Boat
Activity-
Base
Usage
Activity Base
Usage
Bass Boat
×= ×=Rate
Activity
Rate
Activity-
$68
$136,000
$68 $ 68,000
PE 26–4A (FIN MAN); PE 11–4A (MAN)
PE 26–4B (FIN MAN); PE 11–4B (MAN)
a. Sales order processing activity: 750 orders × $20 per order = $15,000
PE 26–5A (FIN MAN); PE 11–5A (MAN)
PE 26–5B (FIN MAN); PE 11–5B (MAN)
Guest check-in…………………………………………… $ 8.00 (1 check-in × $8.00)
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–1 (FIN MAN); Ex. 11–1 (MAN)
Ex. 26–2 (FIN MAN); Ex. 11–2 (MAN)
*Total direct labor hours:
×=
b.
Direct
Labor
Hours ×=
Trumpets…
…
960 ×= $48,000 ÷ 1,600 units = $30
Single Plant-
wide Rate
per Direct
Labor Hour
$50
Overhead
$ 48,000
Budgeted
Production
Volume
Factory
Budgeted Production Volume)
(Factory Overhead ÷
Factory Overhead per Unit
Direct Labor
Hours
Direct Labor
Hours per Unit
EXERCISES
Single Plantwide Factory Overhead Rate = a. $145,500
2,910 direct labor hours*
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–3 (FIN MAN); Ex. 11–3 (MAN)
** Total processing hours:
×=
Tortilla chips………………
…
×=
b.
Processing
Hours ×=
Tortilla chips…
…
480 ×= $33,600 ÷ 3,000 cases = $11.20
head Rate per
Single Plantwide
Factory Over-
Production
(Cases)
3,000
Budgeted
Single Plantwide Factory Overhead Rate =
0.16
Hours per Case
Volume Processing
480
a. $98,000*
1,400 processing hours**
Hours
Processing
Budgeted Production Volume)
(Factory Overhead ÷
Factory Overhead per Case
$33,600
Processing
Hour
$70
Overhead
Factory
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–4 (FIN MAN); Ex. 11–4 (MAN)
a. First, determine the total estimated labor hours consumed by the three products:
Direct Labor Total
Hours per Labor
×Unit =Hours
Pistons…………………………………
…
× 0.20 = 1,440
Next, determine the plantwide overhead rate:
b. Factory Overhead
Direct Labor Cost per Unit
Hours per ($30.00 × Direct
Unit Labor Hours per Unit
)
Pistons………………
…
0.20 $6.00
c.
Revenues (price × unit volume)
Direct materials (direct materials
d. Valves have the lowest (and negative) gross profit as a percent of sales. Valves may
$84,000
$288,000
Pistons Valves Cams
$360,000
For the Year Ended December 31, 2014
Volume
7,200
ORANGE COUNTY ENGINE PARTS INC.
Product Line Budgeted Gross Profit Reports
Cost per Unit
Labor Hours per Unit)
Direct Labor
$4.00
($20.00 × Direct
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–5 (FIN MAN); Ex. 11–5 (MAN)
a. Production department factory overhead rates:
Total factory overhead………………………
…
$204,000 $303,600
b. Product cost allocation:
Small Glove
Pattern Department………………………
…
0.08 dir. labor hr. × $85/dlh = $ 6.80
…
…
Pattern Cut and Sew
DepartmentDepartment
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–6 (FIN MAN); Ex. 11–6 (MAN)
a. Plantwide overhead rate:
Product costs:
b. Department factory overhead rates:
Production department overhead………………
…
$187,500 $600,000
Product cost allocation:
Desktop
Assembly Department………
…
$75
…
c. The factory overhead determined under the single plantwide factory overhead
Assembly Testing
Department Department
1.0 dir. mach. hr. × $75/dmh =
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–7 (FIN MAN); Ex. 11–7 (MAN)
a. Plantwide factory overhead rate:
Product costs:
b. Department factory overhead rates:
Total production department
Product cost allocation:
Gasoline engine
Fabrication Department……… $150
c. Management should select the multiple department factory overhead rate method
of allocating overhead costs. The single plantwide factory overhead rate method
Fabrication Assembly
Department Department
8,400 direct labor hours
$882,000 $105 per dlh
Budgeted Factory Overhead
Plantwide Allocation Base =
1.0 dir. labor hr. × $150/dlh =
=
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–8 (FIN MAN); Ex. 11–8 (MAN)
Accounting reports Number of accounting reports
Customer return processing Number of customer returns
Ex. 26–9 (FIN MAN); Ex. 11–9 (MAN)
a. Sales order processing activity rate:
Activity Activity Base
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–10 (FIN MAN); Ex. 11–10 (MAN)
Activity Activity
Activity Cost Cost
Fabrication 1,600 mh /mh 1,000 mh /mh
Assembly 420 dlh /dlh 134 dlh /dlh
$32,000
$12
$12 1,608
5,040
$32$32
Usage×Rate
$51,200
Treadmill
=×=
Activity
Stationary Bicycle
Rate
Activity-
Base
Activity-
Base
Usage
Activity
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–11 (FIN MAN); Ex. 11–11 (MAN)
a.
Activity
Casting mh /mh
Assembly dlh /dlh
b.
Activity
Activity Cost
Casting 3,120 mh /mh 1,440 mh /mh
4,560
3,950
Base
Activity
=
$30
$18
Rate
Budgeted
Activity
Cost
Total
Activity
÷
$30 $ 43,200
Base Activity
Usage ×Rate =
Entry Lighting Fixtures Dining Room Lighting Fixtures
Activity- Activity-
$30 $ 93,600
Usage ×Rate =
71,100
$136,800
Cost
ActivityBase Activity
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–12 (FIN MAN); Ex. 11–12 (MAN)
a.
Factory overhead $21,900
*Engineering Change Order
b.
Activity Activity
Activity Cost Cost
Procurement 800 purch. ords. $116 /purch. ord. 500 purch. ords. /purch. ord.
Procurement
Base Activity
Activity-
Base
Activity-
Materials Handling
$29,050
Usage
Refrigerators
Activity
Ovens
Usage ×
Product
=× Rate
DevelopmentScheduling
$116 $58,000$ 92,800
$150,800
$10,750
Rate =
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–13 (FIN MAN); Ex. 11–13 (MAN)
a. Single plantwide rate:
b. Activit
y
-based rates:
3,750 direct labor hours
$375,000
Setup
Production
Support
Plantwide Allocation Base
Indirect Labor =
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–13 (FIN MAN); Ex. 11–13 (MAN) (Concluded)
c.
Activity Activity
Activity Cost Cost
Setup 600 setups /setup 1,400 setups /setup
d. The per-unit indirect labor costs in (a) are distorted because setup activity is consumed by the products in a different ratio from the direct
labor. Cell phones required 600 setups over a volume of 93,750 units (or 156 units per production run), while tablets required 1,400 setups
$105,000
$75.00
$ 45,000
Base
Usage
$75.00
Activity
RateUsage
Activity
Tablets
×= ×=
Cell Phones
Activity-Activity-
Base
Rate
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–14 (FIN MAN); Ex. 11–14 (MAN)
a. Production department factory overhead rates:
Factory overhead………………………………………
…
$120,000
b.
Activity Activity
Activity Cost Cost
Assembly
Department
Blender
Allocation-
Base
Usage
Activity Base
=
=Rate
×
$186,000
Activity
Toaster Oven
×
RateUsage
Test and Pack
Department
Allocation-
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–15 (FIN MAN); Ex. 11–15 (MAN)
a. Activity rates:
Budgeted activity cost…………………………………
…
$105,000 $39,000
b.
Activity Activity
Cost Cost
Assembly activity 750 dlh /dlh $ 26,250 dlh /dlh $ 78,750
Activity
Assembly Test and Pack
Activity
$35
2,250
Activity-
$35
Toaster Oven
×= ×=Rate
Activity
Rate
Setup
Activity
Blender
Activity-
Base
Usage
Activity Base
Activity Usage
$162,000
12
…