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Exam 9: Activity-Based Costing

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Question 71

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Excel Manufacturing has an activity-based costing system with three activity cost pools-Machining, Batch Setup, and Other. The company's overhead costs have already been allocated to the cost pools and total $28,000 for the Machining cost pool, $13,800 for the Batch Setup cost pool, and $27,200 for the Other cost pool. Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Batch Setup cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the company's two products and the company's costs appear below: $\begin{array} { l c r } & \text { MHs } & \text { Batches } \\\text { Product A } & 5,200 & 500 \\\text { Product B } & 14,800 & 500 \\\text { Total } & 20,000 & 1,000 \\\end{array}$ $\begin{array} { l c c } & \text { Product A } & \text { Product B } \\\text { Sales } & \$ 124,300 & \$ 166,000 \\\text { Direct materials } & \$ 53,100 & \$ 71,500 \\\text { Direct labor } & \$ 54,000 & \$ 56,600\end{array}$ Required: a. Calculate activity rates for each activity cost pool using activity-based costing. b. Determine the amount of overhead cost that would be assigned to each product using activity-based costing. c. Determine the product margins for each product using activity-based costing.

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Question 72

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Vanguard Corporation has provided the following data from its activity-based costing system: $\begin{array} { l c l } \text { Activity Cost Pool } & \text { Total Cost } & \text { Total Activity } \\\text { Assembly } & \$ 942,480 & 66,000 \text { machine-hours } \\\text { Processing orders } & \$ 85,050 & 1,800 \text { orders } \\\text { Inspection } & \$ 126,854 & 1,820 \text { inspection-hours }\end{array}$ The company makes 430 units of product O37W a year, requiring a total of 690 machine-hours, 40 orders, and 10 inspection-hours per year. The product's direct materials cost is $35.72 per unit and its direct labor cost is $29.46 per unit. According to the activity-based costing system, the average cost of product O37W is closest to:

A) $94.11 per unit.
B) $89.72 per unit.
C) $65.18 per unit.
D) $92.49 per unit.

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Question 73

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Upton Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs) . The company has two products, Long and Short, about which it has provided the following data: $\begin{array}{lrrr}&\text { Long }&\text {Short }\\\text { Direct materials per unit } & \$ 14.20& \$ 48.30 \\\text { Direct labor per unit } & \$ 16.80& \$ 50.40 \\\text { Direct labor-hours per unit } & 0.80 & 2.40 \\\text { Annual production } & 45,000 & 10,000\end{array}$ The company's estimated total manufacturing overhead for the year is $3,170,400 and the company's estimated total direct labor-hours for the year is 60,000. The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below: $\begin{array}{lc}&\text { Estimated Overhead }\\\text { Activities and Activity Measures } & \text { Cost } \\\text { Direct labor support (DLHs) } & \$ 1,740,000 \\\text { Setting up machines (setups) } & 422,400 \\\text { Part administration (part types) } & 1,008,000 \\\text { Total }&\$3,170,400\end{array}$ $\begin{array} { l r r r } & { \text { Expected Activity } } \\& \text { Long } & \text { Short } & \text { Total } \\\text { DLHs } & 36,000 & 24,000 & 60,000 \\\text { Setups } & 1,140 & 1,500 & 2,640 \\\text { Part types } & 900 & 2,460 & 3,360\end{array}$ - Unit overhead cost of Product Short under the activity-based costing system is closest to:

Smithville Industries has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Manual and Power, about which it has provided the following data: $\begin{array}{lrrr}&\text { Manual}&\text { Power}\\\text { Direct materials per unit } & \$ 27.50 & \$ 64.90 \\\text { Direct labor per unit } & \$ 7.80& \$23.40 \\\text { Direct labor-hours per unit } & 0.60 & 1.80 \\\text { Annual production } & 40,000 & 15,000\end{array}$ The company's estimated total manufacturing overhead for the year is $2,675,460 and the company's estimated total direct labor-hours for the year is 51,000. The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below: $\begin{array}{lr}\text { Activities and Activity Measures }&\text { Estimated Overhead Cost}\\\text { Supporting direct labor (DLHs) } & \$ 1,326,000 \\\text { Setting up machines (setups) } & 456,960 \\\text { Parts administration (part types) } & 892,500 \\\text { Total } & \$ 2,675,460\end{array}$ $\begin{array} { | l | r | r | r | } \hline & \text { Manual } & \text { Power } & \text { Total } \\\hline \text { Supporting direct labor } & 24,000 & 27,000 & 51,000 \\\hline \text { Setting up machines } & 2,346 & 510 & 2,856 \\\hline \text { Parts administration } & 1,122 & 663 & 1,785 \\\hline\end{array}$ Required: a. Determine the manufacturing overhead cost per unit of each of the company's two products under the traditional costing system. b. Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.

Flawless Cosmetic Company manufactures and distributes several different products. The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour. Loren is the department manager of the Makeup Department that produces Products - Concealer (C) and Glow Cream (GC) . Jennifer is the department manager of the Hair Care Department that manufactures Product - Shampoo (S) . The product costs (per case of 24 bottles) and other information are as follows: $\begin{array}{lccc}&&\text { Products }\\ &\text { C } & \text { GC } & \text { S }\\ \text { Direct materials } & \$ 100.00 & \$ 72.00 & \$ 48.00 \\ \text { Direct labor } & 42.00 & 31.50& 12.00\\ \text { Overhead } & 28.00 & 21.00 & 14.00\\&\$170.00&\$124.50&\$74.00\\\text { Machine hours } & 4 & 2 & 3 \\\text { Number of cases (per year) } & 300 & 500 & 600 \end{array}$ - If Flawless changes its allocation basis to machine hours, what is the total product cost per case for Product C?

Product costs are computed by:

The department cost allocation method provides more accurate product cost information for managerial decision-making than the plantwide cost allocation method.

Which of the following measures is used by traditional costing systems as an allocation base for allocating overhead costs to the units produced?

Conform Foam Products produces different kinds of industrial packing materials, all in one manufacturing facility. They have identified four activities for their costing system: Materials management-allocated by number of purchase orders Chemical processing-allocated on metric tons Molding-allocated on direct labor hours Packaging-allocated by number of units produced The activity rates are as follows: $\begin{array}{ll}\text { Materials management } & \$ 10.00 \mathrm{Per} \text { purchase or der } \\\text { Chemical processing } & 6.50 \mathrm{Per} \text { metric ton } \\\text { Molding } & 23.50 \mathrm{Per} \text { direct labor hour } \\\text { Packaging } & 0.25 \mathrm{Per} \text { unit }\end{array}$ Engineering design shows that the order will require direct materials of $775, direct labor cost of $125, 5 purchase orders, 6 metric tons of chemical base, and 12 direct labor hours. The size of the order to produce is 5,000 units of product. Required: (1) Calculate the overhead cost of the order. (2) Calculate total cost of the order.

Which of the following measures is not used by activity-based costing (ABC) systems as an allocation base for allocating overhead costs to the units produced?

Installing activity-based costing requires teamwork among employees and departments within an organization.

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period: $\begin{array} { l c c r } \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\text { Consumer } & 14,000 & 700 & \$ 280,000 \\\text { Commercial } & 8,000 & 300 & \$ 180,000\end{array}$ - If Banc Corp. Trust uses a bankwide rate based on direct labor hours, what would be the indirect costs allocated to the Consumer Department?

Within a purchasing department, a cost driver of the potential number of vendors could best cost the activity of placing orders.

Allure Company manufactures and distributes two products, M and XY. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information: $\begin{array} { l l r r r } \text { Activity } & \text { Cost Driver } & \text { Amount } & { \text { M } } & { \text { XY } } \\\text { Production setups } & \text { Number of setups } &8 2 , 0 0 0 &8 & 12 \\\text { Material hardling } & \text { Number of parts } & 48,000 & 56 & 24 \\\text { Packaging costs } & \text { Number of urits } & 130,000 & 80,000 & 50,000 \\& &\$ 2 6 0 , 0 0 0 & &\end{array}$ - What is the total overhead per unit allocated to Product XY using activity-based costing (ABC) ?

Falcon Company manufactures and sells two models of a computer tablets. The Basic Model has limited networking capability while the Explorer Model has significantly more features. The tablets are produced to order and the company has no inventories at the end of the year. The cost accounting system at Falcon allocates overhead to products based on direct-labor cost. Overhead in year 1, which just ended, was $3,412,500. Other data for year 1 for the two products follow: $\begin{array}{lrr}& \text { Basic Model } & \text { Explorer Model } \\& ( 20,000 \text { units } ) & ( 3,000 \text { units }) \\\text { Sales revenue } & \$ 6,600,000 & \$ 3,645,000 \\\text { Direct materials } & 3,200,000 & 450,000 \\\text { Direct labor } & 1,600,000 & 675,000\end{array}$ Required: a. Compute product line profits for the Basic Model and the Explorer Model for year 1. b. A study of overhead shows that without the Basic Model, overhead would fall to $2,750,000. Assume all other revenues and costs would remain the same for the Explorer Model in year 2. Compute product line profits for the Explorer Model in year 2 assuming the Basic Model was not produced or sold.

A cost hierarchy classifies cost drivers by general dimensions or levels of activity.

Companies using activity-based costing (ABC) have learned that costs are a function of:

Activity-based costing is so beneficial because it provides more information about product costs but requires less recordkeeping.

Which of the following statements is true?

Barnard Corporation has provided the following data from its activity-based costing accounting system: $\begin{array} { l c c } \text { Activity Cost Pools } & \text { Total Cost } & \text { Total Activity } \\\text { Designing products } & \$ 806,715 & \text { 6,895product design hours } \\\text { Batch Setup } & \$ 23,660 & \text { 910batch set-ups } \\\text { Assembling products } & \$ 42,240 & 3,520 \text { assembly hours }\end{array}$ Required: Compute the activity rates for each of the three cost pools. Show your work.