N12405 MAD II

Seminar 3
Activity-Based Costing

Indicative Answers:
1
2
3
4
5

D
A
C
C
D

6
7
8
9
10

B
B
B
D
B

11
12
13
14
15

D
C
D
B
D

16
17

A
A

18(a)
i. The more traditional, Plant-Wide Application Rate for Conversion Costs using Direct
Labor Hours as the Cost Driver would be calculated as follows:
Estimated Overhead $5,324,400
Estimated DLHs = 54,600
Application rate = $97.52 (rounded)
ii. The predetermined allocation rates for each activities are calculated as follows:
Activity
Material Handling

Calculation
$258,400 /
[(30 x10,000)+(50 x 5,000)+(120 x 800)]

Application Rate
40 / part

Prod. Scheduling

$114,000 / [300 + 70 + 200]

$200 / prod order

Setups

$160,000 / [100 + 50 + 50]

$800 / prod setup

Machinery

$3,510,000 /
[(7 x 10,000) + (7 x 5,000) + 15(800)]

$30 / mach hour

Finishing

$1,092,000 /
[(2 x 10,000)+(5 x 5,000) + (12 x 800)]

$20 / DLH

Packing & Shipping

$190,000 / [1,000+2,000+800]

$50 /order shipped

(b)
Allocation of conversion costs
i. Traditional plant-wide allocation rate:
Quality
Superior
Plant-Wide
(2 x $97.52) $195.04
(5 x $97.52) $487.60

Superb
(12 x $97.52) $1,170.24

ii. The ABC rate

(Note: since activities can represent batch costs (costs incurred in the production of products in
groups) and product costs (cost incurred at the product line level) as opposed to unit-level costs,
it may be best to calculate the total Conversion Cost for the entire product line and then divide
that total by the budgeted production level in order to get a Conversion Cost per unit).
Activity
Mat Hand
Prod Sch
Setups
Machinery
Finishing
Pck & Shp
Ttl Conv.
Conv./Unit

Quality

Superior

Superb

((30x10,000)x.40) $120,000
(300x$200) 60,000
(100x$800) 80,000
((7x10,000)x$30) 2,100,000
((2x10,000)x$20) 400,000
(1,000x$50) 50,000
$2,810,000
($2,810,000/10,000) $281.00

(50x5,000)x$.40) $100,000
(70x$200) 14,000
(50x$800) 40,000
((7x5,000)x$30) 1,050,000
((5x5,000)x$20) 500,000
(2,000x$50) 100,000
$1,804,000
($1,804,000/5,000) $360.80

((120x800)x$.40) $38,400
(200x$200) 40,000
(50x$800) 40,000
((15x800)x$30) 360,000
((12x800)x$20) 192,000
(800x$50) 40,000
$710,400
($710,400/800) $888.00

N12405 MAD II

Seminar 3
Activity-Based Costing

Comparisons of Conversion Cost applied to each unit using ABC versus the Plant-Wide rate:

Plant-Wide
ABC
Difference

Quality
$195.04
$281.00
-$85.96

Superior
$487.60
$360.80
$126.80

Superb
$1,170.24
$ 888.00
$ 282.24

(c) Assuming that ABC presents a more accurate Conversion Cost for each product, under the
traditional, Plant-Wide Application Rate, the Quality units are under-costed and the Superior and
Superb units are over-costed.
(d) Production decisions criteria: minimum c/s ratio of 40%.

Selling price
Conversion cost (PW)
Contribution (PW)
Decision

Quality
$350
195.04
44%
/

Superior
$610
487.60
20%
X

Superb
$2,340
1,170.24
50%
/

Conversion cost (ABC)

Contribution (ABC)
Decision

281.00
20%
X

360.80
41%
/

888.00
62%
/