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1. For plantwide rates, overhead is first collected in a plantwide pool, using direct tracing. Next, an
overhead rate is computed and used to assign overhead to products.
2. First stage: Overhead is assigned to production department pools using direct tracing, driver
tracing, and allocation. Second stage: Individual departmental rates are used to assign overhead
to products as they pass through the departments.
6. Activity-based product costing is an overhead costing approach that first assigns costs to
activities and then to cost objects. The assignment is made possible through the identification of
activities, their costs, and the use of cost drivers.
7. An activity dictionary is a list of activities accompanied by information that describes each
activity (called attributes).
10. Activity-based supplier costing traces all supplier-caused activity costs to suppliers. Often, many
costs are overlooked by traditional costing. By assigning all costs that are caused by suppliers,
a company may find that its low-cost supplier does not correspond to the one that has the
lowest purchase price.
ACTIVITY-BASED COSTING
AND MANAGEMENT
7
DISCUSSION QUESTIONS
7-1
CHAPTER 7 Activity Based Costing and Management
13. Nonvalue-added activities are unnecessary activities or activities that are necessary but inefficient
and improvable. An example is moving goods. Nonvalue-added costs are those costs caused by
nonvalue-added activities. An example is the cost of materials handling.
14. (1) Activity elimination—the identification and elimination of activities that fail to add value.
7-1. a 7-15. e
7-2. d 7-16. e $60,000 + $40,000
7-9. d $80,000/40,000 7-23. c
7-10. a 7-24. d
MULTIPLE-CHOICE QUESTIONS
7-2
CHAPTER 7 Activity Based Costing and Management
CE 7-29
1. Activity Driver
Cutting hours 0.40 a0.60 a
Assembly hours 0.38
b
0.62
b
2. There is evidence of product diversity, but it is not strong. The consumption ratios
CE 7-30
Cutting: $150,000/6,000 = $25 per Cutting hour
CE 7-31
Processing transactions:
$0.15 × 8,000……………..………………
…
$0.15 × 4,800……………..………………
…
CORNERSTONE EXERCISES
Vaquero Vaquera
Classic Gold
Activity
$ 1,200
$ 720
7-3
CHAPTER 7 Activity Based Costing and Management
CE 7-32
CE 7-33
Order Filling Rate = ($484,800 + $323,200)/1,212 orders = $667 per order
Large Smaller
Cost assignment: Retaile
r
Retailers
Ordering
Cost AssignmentActivity
7-4
CE 7-34
Test Rate = $1,500,000/2,500* failed tests
= $600 per failed test
Using these rates and the activity data, the total purchasing cost per unit of each
component is computed as follows:
125X 30Y 125X 30Y
Purchase cost:
$10 × 150,000………………
…
$1,500,000
CE 7-35
Retesting: Nonvalue-Added Cost = $480,000. Retesting is a nonvalue-added activity,
CE 7-36
Velocity = 28,800 units/7,200 hours = 4 units per hour
Cycle Time = 7,200 hours/28,800 units = 0.25 hour (15 minutes)
Notice that cycle time is the inverse of velocity.
A
lpha Electronics La Paz Company
7-5
CHAPTER 7 Activity Based Costing and Management
E 7-37
1.
Inspection hours…………………… 0.60 a0.40 a
Setup hours…………………………
…
0.70
b
0.30
b
2. The consumption ratios vary significantly from driver to driver, ranging from 0.25 to
0.80 for Scented and 0.20 to 0.75 for the Regular cards. Thus, there seems to be
significant product diversity. If machine hours are used as the only driver, Scented
3. Rates:
Inspecting products:
$7,500/300 inspection hours = $25 per inspection hour
4. Rate = Cost
Hours
Inspection Hours = Cost = $7,500/$20 = 375 inspection hours
Rate
Scented Cards Regular Cards
EXERCISES
7-6
CHAPTER 7 Activity Based Costing and Management
E 7-38
1. Molding Activity Overhead Cost = $675,000 × 0.80 = $540,000
Activity Rate (molding) =
E 7-39
1. a. Activity Rate =
2. Total overhead costs assigned to Fudge (ABC rates):
= (Setup Rate × Fudge Setup Hours) + (Oven Hour Rate × Fudge Oven Hours)
= ($54 × 4,000) + ($150 × 1,000) = $366,000
3. Unit overhead assigned to Fudge:
Total Setup Hours
Molding Activity Costs
Pounds of Plastic Molded
Setup Costs
CHAPTER 7 Activity Based Costing and Management
E 7-39 (Continued)
6. The difference in overhead assignment to Fudge between the two systems is due to
their different treatment of setup costs (i.e., both systems use oven hours to assign
“other overhead” costs). The total overhead assigned to Fudge under the ABC
*Rounded
E 7-40
1. Treating patients: Normal Intensive
$4.00 × 6,400………………………..……………….……
…
$ 25,600
$4.00 × 8,000………………………..……………….……
…
$ 32,000
Providing hygienic care:
$5.00 × 4,800………………………..……………….……
…
24,000
2. Nursing cost per patient day: Normal Intensive
$131,600/8,000 patient days……………………………
…
$16.45
$496,000/6,400 patient days……………………………
…
$77.50
3. From Requirement 1, Total Nursing Cost = $131,600 + $496,000
= $627,600
Thus, using patient days (8,000 + 6,400):
CHAPTER 7 Activity Based Costing and Management
E 7-41
1. Resource Unloading Counting Inspecting
Equipment………
…
$15,000 —$ 1,200
2. Direct tracing and driver tracing are used. When the resource is used only
E 7-42
1. JIT NonJIT
Sales (in units)a…………………………
…
525,000 525,000
2. Activity rates:
Ordering Rate = $3,080,000/770 sales orders = $4,000 per sales order
Selling Rate = $1,120,000/140 sales calls = $8,000 per sales call
Service Rate = $1,050,000/525 sales calls = $2,000 per sales call
JIT NonJIT
Ordering costs:
CHAPTER 7 Activity Based Costing and Management
E 7-42 (Continued)
For the nonJIT distributors, the customer costs amount to $2,625,000/70 =
3. It sounds like the JIT buyers are switching their inventory carrying costs to
Stillwater Designs without any significant benefit to Stillwater Designs. Stillwater
Designs needs to increase prices to reflect the additional demands on customer-
E 7-43
1. Supplier cost:
First, calculate the activity rates for assigning costs to suppliers:
Inspecting components:
$480,000/4,000 sampling hours = $120 per sampling hour
Buckner
Manzer Inc. Company
Purchase cost:
$89 × 800,000……………………… $71,200,000
E 7-43 (Continued)
Buckner
Company
Reworking products:
$1,014 × 360…..….………….….…………………
2. Using warranty hours, the rate is $4,000,000/16,000 = $250 per warranty hour.
The cost assigned to each component would be:
Bucker
Lost sales: Company
$250 × 800…..….………….….…………………...
3. As with product costing, accurate assignment of costs to the cost object is essential
for well-grounded decision making. Suppliers can cause a firm to perform costly
activities such as inspection, rework, and warranty work. The total cost of a
Manzer Inc.
$200,000
Manzer Inc.
$ 365,040
7-11
CHAPTER 7 Activity Based Costing and Management
E 7-44
Nonvalue-Added Cost
$9 per unit1
E 7-45
E 7-46
Activity selection
E 7-47
1. Velocity = 80,000/20,000 = 4 units per hour
2. Cycle Time = 20,000/80,000 = 1/4 hour per unit = 15 minutes per unit
Case
a
Root CauseCase
a
b
Process design
Product design
Cost Reduction
Case
a
7-12
E 7-48
2. The consumption ratios for each activity (using machine hours and setup
hours as the activity drivers) are as follows:
3. Elegant: $1.75* × $9,000/3,000 = $5.25 per briefcase
Fina: $1.75* × $3,000/3,000 = $1.75 per briefcase
*Overhead Rate = $21,000/$12,000 = $1.75 per direct labor dollar (or 175% of direct
labor cost)
4. Products tend to make different demands on overhead activities, and this
should be reflected in overhead cost assignments. Usually, this means
the use of both unit- and nonunit-level activity drivers. In this example,
there is a unit-level activity (machining) and a nonunit-level activity (setting
up equipment).
CHAPTER 7 Activity Based Costing and Management
E 7-49
1. Total overhead: $152,000 ($80,000 + $24,000 + $18,000 + $30,000)
2. Consumption ratios:
Machine Receiving Packing
Hours Setups Orders Orders
3. Activity rates:
Machining: $80,000/40,000 machine hours = $2.00 per machine hour
4. Overhead assignment: Infantry Forces
Machining:
$2.00 × 20,000…………...………...…….…………...…
…
$40,000
5. Using only machine hours undercosts the infantry product and overcosts the
special forces product. The consumption ratios reveal this before the actual
calculations are made.
Product
CHAPTER 7 Activity Based Costing and Management
E 7-50
Activity Dictionary:
Providing nursing care
E 7-51
1. Activity rates:
Setups = $2,000,000/500 setups = $4,000 per setup
2. Calculation of unit product costs: Deluxe Regula
r
Setups:
$4,000 × 300…………...………...…….…… $ 1,200,000
$4,000 × 200…………...………...…….…… $ 800,000
Machining:
Activity Name Activity Description Activity Driver
Satisfying patient needs Nursing hours
7-15
CHAPTER 7 Activity Based Costing and Management
E 7-52
1. First, receiving is viewed as a value-added activity because the efficient level
of the activity is nonzero. Second, receiving enables other activities to be
performed. Third, there is a change of state—from a state of no materials
2. Activity Rate = $630,000/72,000 orders = $8.75 per order
Value-Added Costs = $8.75 × 36,000 = $315,000
7-16
CHAPTER 7 Activity Based Costing and Management
P 7-53
1. Cost before addition of duffel bags:
2. Activity-based cost assignment:
Stage 1:
Activity Rate = $120,000/80,000 transactions = $1.50 per transaction
3. Product cost assignment:
Overhead rates:
Patterns: $30,000/15,000 direct labor hours = $2.00 per direct labor hour
Finishing: $90,000/30,000 direct labor hours = $3.00 per direct labor hour
Unit cost computation: Backpacks Duffel Bags
Patterns:
$2.00 × 0.10………………………………… $0.20
PROBLEMS
CHAPTER 7 Activity Based Costing and Management
P 7-53 (Continued)
4. This problem allows us to see what the accounting cost per unit should
be by providing the ability to calculate the cost with and without the duffel
bags. With this perspective, it becomes easy to see the benefits of the
activity-based approach over those of the functional-based approach. The
