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1. Management desires accurate product costs so that its decisions regarding products are correct.
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. The multiple production department factory overhead rate method would provide more accurate
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
7. If the costs listed in Discussion Question 6 were included as product costs, then they would be
8. Calculating product costs using activity rates may result in greater accuracy than using
9. Activity-based costing would be preferred over the relative sales value method when the
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: 20,000 units × 0.10 direct labor hour = 2,000 direct labor hours
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: (20,000 jeans × 0.04 dlh) + (20,000 khakis × 0.06 dlh)
= 2,000 direct labor hours
Sewing: (20,000 jeans × 0.06 dlh) + (20,000 khakis × 0.04 dlh)
= 2,000 direct labor hours
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)
b. Fabrication Department rate: $420,000 ÷ 3,000 dlh = $140 per dlh
Assembly Department rate: $180,000 ÷ 3,000 dlh = $60 per dlh
CHAPTER 26 Cost Allocation and Activity-Based Costing
PE 26–3A (FIN MAN); PE 11–3A (MAN)
a. Cutting: $18,000 ÷ 2,000 direct labor hours = $9.00 per dlh
Sewing: $36,000 ÷ 2,000 direct labor hours = $18.00 per dlh
b.
Activity Activity
Activity Cost Cost
Cutting 800 dlh /dlh 1,200 dlh /dlh
Sewing 1,200 dlh /dlh 800 dlh /dlh
Setup 1,400 setups /setup 1,000 setups /setup
Activity
Rate
$9.00
$18.00
Activity Base
$40.00
$ 7,200
21,600
56,000
40,000
$9.00 $10,800
$18.00 14,400
$40.00
Activity-
Jeans
Activity-
Base
Usage
Khakis
×= ×=Rate 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
Assembly 1,000 dlh /dlh 2,000 dlh /dlh
Setup 300 setups /setup 100 setups /setup
Speed Boat
Activity-
Base
Usage
Activity Base
Usage
Bass Boat
×= ×=Rate
Activity
Rate
Activity-
$68
$35
$390
$136,000
35,000
117,000
$68 $ 68,000
$35 70,000
$390 39,000
CHAPTER 26 Cost Allocation and Activity-Based Costing
PE 26–4A (FIN MAN); PE 11–4A (MAN)
a. Sales order processing activity: 5,000 orders × $12 per order = $60,000
PE 26–4B (FIN MAN); PE 11–4B (MAN)
PE 26–5A (FIN MAN); PE 11–5A (MAN)
Teller transaction processing………………………
…
$42.00 (12 transactions × $3.50)
12.00 (100 checks × $0.12)
PE 26–5B (FIN MAN); PE 11–5B (MAN)
Guest check-in…………………………………………
…
$ 8.00 (1 check-in × $8.00)
Room cleaning…………………………………………
…
75.00 (3 nights × $25.00)
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–1 (FIN MAN); Ex. 11–1 (MAN)
($560,000 ÷ 8,000) × 5,150 = $360,500
Ex. 26–2 (FIN MAN); Ex. 11–2 (MAN)
$40 per direct labor hour
*Total direct labor hours:
b.
Direct
Labor
Hours ×=
Trumpets…
…
1,680 ×= $67,200 ÷ 2,100 units = $32
Single Plant-
wide Rate
per Direct
Labor Hour
$40
Overhead
Budgeted
Production
Volume
$ 67,200
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. $188,000
4,700 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…
…
800 ×= $48,000 ÷ 4,000 cases = $12.00
Production
(Cases)
4,000
Volume
head Rate per
Single Plantwide
Factory Over-
Factory Overhead per Case
0.20 800
a. $153,000*
2,550 processing hours**
Budgeted
Single Plantwide Factory Overhead Rate =
Budgeted Production Volume)
(Factory Overhead ÷
Hours per Case
Processing
Hours
Processing
$ 48,000
Processing
Hour
$60
Factory
Overhead
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
b. Factory Overhead
Direct Labor Cost per Unit
Hours per ($30.00 × Direct
c.
Revenues (price × unit volume)
Direct materials (direct materials
cost per unit × unit volume)
Direct labor [direct labor cost per
unit (b) × unit volume]
Factory overhead [factory overhead
1,200 × $70.00
7,200 × $4.00
28,800 × $4.50
4
7,200 × $25.00
8
28,800 × $3.00
12
1,200 × $9.60
d. Valves have the lowest (and negative) gross profit as a percent of sales. Valves may
require a higher price or lower cost to manufacture in order to achieve the same
$84,000
$34,800
7,680
$288,000
$115,200
86,400
$180,000
28,800
Pistons Cams
$360,000
For the Year Ended December 31, 2016
Volume
7,200
6,144 direct labor hours
$184,320
Valves
ORANGE COUNTY ENGINE PARTS INC.
Budgeted Factory Overhead
Product Line Budgeted Gross Profit Reports
Cost per Unit
= $30.00 per dlh
Direct Labor
($20.00 × Direct
Plantwide Allocation Base =
123
456
789
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………………………
…
$288,000 $412,500
b. Product cost allocation:
Small Glove
Pattern Department………………………
…
0.10 dir. labor hr. × $100/dlh = $10.00
Cut and Sew Department………………… 0.12 dir. labor hr. × $125/dlh = 15.00
Total factory overhead per small glove……………………………………………
…
$25.00
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:
b. Department factory overhead rates:
Production department overhead………………
…
$240,000 $750,000
÷ Direct machine hours…………………………
…
3,000 6,000
Production department overhead rate………… $ 80.00 $ 125.00
Product cost allocation:
Commercial Motor
Total factory overhead per residential motor…………………………
…
c. The factory overhead determined under the single plantwide factory overhead
rate and multiple production department factory overhead rate methods are
the same. This is because the ratio of direct machine hours used by each
product from the two departments is the same. The commercial motor uses
1.5 direct machine hour in the Assembly Department and 3.0 hours in the
Testing Department, or a ratio of 1:2. The residential motor uses 1.0 direct
$990,000 = $110.00 per dmh
/dmh
dmh
Assembly Testing
Department Department
Budgeted Factory Overhead
Plantwide Allocation Base =9,000 direct machine hours
dmh
/dmh
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–7 (FIN MAN); Ex. 11–7 (MAN)
a. Plantwide factory overhead rate:
b. Department factory overhead rates:
Total production department
factory overhead…………………………………
…
$550,000 $250,000
÷ Direct labor hours………………………………… 5,000 5,000
Production department overhead rate…………
…
$ 110 $50
Product cost allocation:
c. Management should select the multiple department factory overhead rate method
of allocating overhead costs. The single plantwide factory overhead rate method
indicates that both products have the same factory overhead of $400 per unit.
This is because each product uses a total of 5.0 direct labor hours per unit.
However, each product uses these 5.0 direct labor hours much differently. The
gasoline engine consumes 3.0 hours in the expensive Fabrication Department and
Budgeted Factory Overhead
Plantwide Allocation Base =
dlh
/dlh
dlh
/dlh
Fabrication Assembly
Department Department
10,000 direct labor hours =
$800,000 $80 per 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
Electric power Kilowatt hours used
Human resources Number of employees
Inventory control Number of inventory transactions
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 800 mh /mh 500 mh /mh
Assembly 210 dlh /dlh 90 dlh /dlh
Setup 24 setups /setup 10 setups /setup
Inspecting 140 insp. /insp. 160 insp. /insp.
$15,000
Treadmills
=×=
Activity
Elliptical Machines
Rate
Activity-
Base
Activity-
Base
Usage
Activity
$30$30
Usage
×
Rate
$24,000
3,150
1,200
$15
$50
4,000
$253,500
1,350
500
$15
$50
$25
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 2,500 mh /mh 1,150 mh /mh
Assembly 960 dlh /dlh 2,200 dlh /dlh
Inspecting 860 insp. /insp. 325 insp. /insp.
Setup 170 setups /setup 60 setups /setup
3,650
3,160
Base
Activity
Rate
=
$35
$20
Budgeted
Activity
Cost
Total
Activity
÷
$18 5,850
Usage
×
Rate
=
$35 $ 87,500
Usage
×
Rate
=
$125 21,250
$20 19,200
$18 15,480
$127,750
Cost
Activity-
ActivityBase Activity
Entry Lighting Fixtures
63,200
$20 44,000
$125 7,500
Dining Room Lighting Fixtures
Activity-
$35 $ 40,250
Base Activity
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–12 (FIN MAN); Ex. 11–12 (MAN)
a.
Factory overhead $8,100
*Engineering Change Order
b.
Activity Activity
Activity Cost Cost
Procurement 400 purch. ords. $100 /purch. ord. 260 purch. ords. /purch. ord.
Scheduling 136 prod. ords. $20 /prod. ord. 70 prod. ords. /prod. ord.
Procurement
Base Activity
Activity-
Base
Activity-
Materials Handling
$13,280
$66,000
$4,120
Usage
Refrigerators
Activity
Ovens
Usage
×
Rate
=
Product
=×
Rate
DevelopmentScheduling
$20 1,4002,720
$100 $26,000$ 40,000
CHAPTER 26 Cost Allocation and Activity-Based Costing
Ex. 26–13 (FIN MAN); Ex. 11–13 (MAN)
a. Single plantwide rate:
= $100 per direct labor hour
Direct
Labor
Hours
×=÷
Units
=
Cell phones
…
1,875
×
$100
=÷
93,750
=
3,750 direct labor hours
$375,000
Plantwide
Rate
/dlh
Plantwide Allocation Base
Indirect Labor =
$187,500
Labor Cost
Indirect
Indirect
Labor Cost
per Unit
$2.00
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
Production support 1,875 dlh /dlh 1,875 dlh /dlh
Usage
$105,000
$60.00
$75.00
112,500
$ 45,000
112,500
Rate
$75.00
$60.00
Activity
Tablets
×= ×=
Cell Phones
Activity-
Base
Usage
Activity-
Activity
Rate
Base
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 750 dlh /dlh $ 46,500 dlh /dlh $139,500
Test and Pack Department 2,250 dlh /dlh 90,000 dlh /dlh 30,000
Total $136,500 $169,500
Blender
Allocation-
Base
Usage
Activity Base
=
$40 750
$62
$40
×
Assembly
Department
Activity
$62
Toaster Oven
×
2,250
RateUsage
=
Rate
Test and Pack
Department
Allocation-
$186,000
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
Test and pack activity 2,250 dlh /dlh 29,250 dlh /dlh 9,750
Setup activity 135 setups /setup 121,500 setups /setup 40,500
Assembly Test and Pack
Activity
$35
$13
2,250
750
$900
$13
$900 45
Activity
Blender
Activity-
Base
Usage
Toaster Oven
×= ×=
Rate
Activity
Rate
Setup
Activity
Activity-
$35
Activity Usage
Activity Base
$162,000
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