Professional Documents
Culture Documents
Chapter 5 Solutions Comm 305
Chapter 5 Solutions Comm 305
Identify BE51
difference
sbetween
InfotracInc.sellsahighspeedretrievalsystemforinformation.Itprovidesthefollowing
costing
informationfortheyear.
systems.
Budgeted
Actual
Overheadcost
$500,000
$450,000
Machinehours
50,000
40,000
100,000
90,000
Directlabourhours
Overheadisappliedonthebasisofmachinehours.
(a)Calculatethepredeterminedoverheadrate.
(b)Determinetheamountofoverheadappliedfortheyear.
(c)Explainhowanactivitybasedcostingsystemmightdifferintermsofcalculatinga
predeterminedoverheadrate.
Identify BE52SassafrasInc.hasconductedananalysisofoverheadcostsrelatedtooneofitsproductlines
difference
usingatraditionalcostingsystem(volumebased)andanactivitybasedcostingsystem.
sbetween
Followingareitsresults:
costing
TraditionalCosting
ABC
systems.
Salesrevenues
$1,000,000
$1,000,000
Overheadcosts:
Identify
cost
drivers.
Identify
cost
drivers.
ProductRX3
$68,000
$100,000
ProductY12
72,000
40,000
$140,000
$140,000
Explainhowadifferenceintheoverheadcostsbetweenthetwosystemsmayhave
occurred.
BE53AltexCo.identifiesthefollowingactivitiesthatpertaintomanufacturingoverhead:
materialshandling,machinesetups,factorymachinemaintenance,factorysupervision,and
qualitycontrol.Foreachactivity,identifyanappropriatecostdriver.
BE54AyalaCompanymanufacturesfourproductsinasingleproductionfacility.Thecompany
usesactivitybasedcosting.Thecompanyhasidentifiedthefollowingactivitiesthroughits
activityanalysis:(a)inventorycontrol,(b)machinesetups,(c)employeetraining,(d)quality
inspections,(e)materialordering,(f)drillingoperations,and(g)buildingmaintenance.
Foreachactivity,nameacostdriverthatmightbeusedtoassignoverheadcoststoproducts.
Calculat BE55XOXCo.producesthreeproducts,ProductsRed,Black,andYellow.ProductRedrequires
e
180machinesetups,ProductBlackrequires240setups,andProductYellowrequires540
activity
setups.XOXhasidentifiedanactivitycostpoolwithallocatedmanufacturingoverheadof
based
$960,000forwhichthecostdriverismachinesetups.Howmuchmanufacturingoverheadis
overhead
assignedtoeachproduct?
rates.
Calculat BE56CoatsGalore,Inc.usesactivitybasedcostingasthebasisforinformationtosetpricesforits
e
sixlinesofseasonalcoats.Calculatetheactivitybasedoverheadratesusingthefollowing
activity
budgeteddataforeachoftheactivitycostpools.
based
overhead
rates.
ActivityCostPools
EstimatedOverhead
Designing
ExpectedUseofCostDriversperActivity
$450,000
12,000designerhours
Sizingandcutting
4,000,000
160,000machinehours
Stitchingandtrimming
1,440,000
80,000labourhours
Wrappingandpacking
336,000
32,000finishedunits
Calculat BE57ComputerParts,Inc.,amanufacturerofcomputerchips,employsactivitybasedcosting.The
e
followingbudgeteddataforeachoftheactivitycostpoolsareprovidedbelowfortheyear
activity
2012.
based
ActivityCostPools
EstimatedOverhead ExpectedUseofCostDriversperActivity
overhead
Orderingandreceiving
$90,000 15,000orders
rates.
Etching
Soldering
480,000 60,000machinehours
1,760,000 440,000labourhours
For2012,thecompanyhad11,000ordersandused50,000machinehours,andlabourhours
totalled500,000.Whatisthetotaloverheadapplied?
Classify BE58HiraniNoveltyCompanyidentifiedthefollowingactivitiesinitsproductionandsupport
activities
operations.Classifyeachoftheseactivitiesaseithervalueaddedornonvalueadded.
asvalue
(a)Purchasing
addedor
(b)Receiving
non
(c)Designengineering
value
(d)Storinginventory
added.
(e)Costaccounting
(f)Movingworkinprocess
(g)Inspectingandtesting
(h)Paintingandpacking
Classify BE59WuandMartinisanarchitecturalfirmthatiscontemplatingtheinstallationofactivitybased
service
costing.Thefollowingactivitiesareperformeddailybystaffarchitects.Classifythese
compan
activitiesasvalueaddedornonvalueadded:(a)designinganddrafting,3hours;(b)staff
y
meetings,1hour;(c)onsitesupervision,2hours;(d)lunch,1hour;(e)consultationwith
activities
clientonspecifications,1.5hours;(f)entertainingaprospectiveclientfordinner,2hours.
asvalue
addedor
non
value
added.
Classify BE510
activities
accordin
QuickPixisalargedigitalprocessingcentrethatserves130outletsingrocerystores,
gto
servicestations,cameraandphotoshops,anddrugstoresin16nearbytowns.QuickPix
level.
operates24hoursaday,sixdaysaweek.Classifyeachofthefollowingactivitycostsof
QuickPixaseitherunitlevel,batchlevel,productlevel,orfacilitylevel.
(a)Colourprintingmaterials
(b)Photocopypaper
(c)Depreciationofmachinery
(d)Setupsforenlargements
(e)Supervisor'ssalary
(f)Orderingmaterials
(g)Pickupanddelivery
(h)Commissiontodealers
(i)Insuranceonthebuilding
(j)Loadingdevelopingmachines
Classify BE511
activities
accordin
ToolTime,Inc.operates20injectionmouldingmachinesintheproductionoftoolboxesof
gto
fourdifferentsizes,namedtheApprentice,theHandyman,theJourneyman,andthe
level.
Professional.Classifyeachofthefollowingcostsasunitlevel,batchlevel,productlevel,
orfacilitylevel.
(a)Firstshiftsupervisor'ssalary
(b)Powderedrawplastic
(c)Diesforcastingplasticcomponents
(d)Depreciationoninjectionmouldingmachines
(e)Changingdiesonmachines
(f)Movingcomponentstotheassemblydepartment
(g)Engineeringdesign
(h)Employeehealthandmedicalinsurancecoverage
Calculat BE512MontrealInc.'schieffinancialofficerisnotsatisfiedwiththetraditionalmethodof
erates
allocatingmanufacturingoverhead.Hebelievesthatmostofthemanufacturingoverhead
and
costsrelatetotheV120productlinebecauseofitscomplexity.Hethereforedevelopsthe
activity
followingthreeactivitycostpoolsandrelatedcostdriverstobetterunderstandthesecosts:
levels.
ExpectedUseofCostDrivers
EstimatedOverhead
ActivityCostPools
Costs
Settingupmachines
Assembling
Inspection
1,500
50,000
setups
$300,000
labourhours
1,500,000
60 inspections
300,000
(a) Calculatethepredeterminedoverheadrate
foreachactivity.
(b)Classifyeachoftheseactivitiesasunitlevel,batchlevel,productlevel,orfacility
level.
DoIt!Review
Identify
D513Instructions
characteristic
Indicatewhetherthefollowingstatementsaretrueorfalse.
sof
(a)ThereasoningbehindABCcostallocationisthatproductsconsumeactivitiesand
traditional
activitiesconsumeresources.
andABC
(b)Activitybasedcostingisanapproachforallocatingdirectlabourtoproducts.
costing
(c)Intoday'sincreasinglyautomatedenvironment,directlabourisneveranappropriate
systems.
basisforallocatingcoststoproducts.
(d)Acostdriverisanyfactororactivitythathasadirectcauseeffectrelationshipwith
resourcesconsumed.
(e)Activitybasedcostingsegregatesoverheadintovariouscostpoolsinaneffortto
providemoreaccuratecostinformation.
CalculateD514WeberIndustrieshasthreeactivitycostpoolsandtwoproducts.Itexpectstoproduce3,000
activity
unitsofProductBC113and1,400ofProductAD908.Havingidentifieditsactivitycostpools
based
andthecostdriversforeachpool,Weberaccumulatedthefollowingdatarelativetothose
overhead
activitycostpoolsandcostdrivers.
ratesand
ExpectedUseofCost
assign
overhead
AnnualOverheadData
DriversperProduct
using
ExpectedUseof
ABC.
Activity
Cost
Estimated
CostDriversper
Product
Product
CostPool
Drivers
Overhead
Activity
BC113
AD908
Machineset
up
Setups
$20,000
40
25
15
Machining
Machine
hours
110,000
5,000
1,000
4,000
Packing
Orders
30,000
500
150
350
Instructions
(a)Prepareascheduleshowingthecalculationsoftheactivitybasedoverheadratespercost
driver.
(b)Prepareascheduleassigningeachactivity'soverheadcosttothetwoproducts.
(c)Calculatetheoverheadcostperunitforeachproduct.(Roundtonearestcent.)
(d)Commentonthecomparativeoverheadcostperproduct.
Classify D515
activities
asvalue
Instructions
addedor
non
Classifyeachofthefollowingactivitieswithinataxpreparationbusinessasvalueadded
value
(VA)ornonvalueadded(NVA).
added.
(a)Advertising
(b)Completingtaxreturns
(c)Cleaningtheoffice
(d)Billingclients
(e)Answeringclientquestions
(f)Accompanyingclientstoauditproceedings
Classify D516GoodHarvestCompanymanufacturesfourlinesofgardentools.Asaresultofanactivity
activities
analysis,theaccountingdepartmenthasidentifiedeightactivitycostpools.Eachofthe
accordin
productlinesisproducedinlargebatches,withthewholeplantdevotedtooneproductata
gto
time.
level.
Instructions
Classifyeachofthefollowingactivitiesorcostsasunitlevel,batchlevel,productlevel,or
facilitylevel.
(a)Machiningparts
(b)Productdesign
(c)Plantmaintenance
(d)Machinesetup
(e)Assemblingparts
(f)Purchasingrawmaterials
(g)Propertytaxes
(h)Painting
Exercises
Assign E517ElleInc.hastwotypesofhandbags:standardandcustom.Thecontrollerhasdecidedtouse
overhead
aplantwideoverheadratebasedondirectlabourcosts.Thepresidenthasheardofactivity
using
basedcostingandwantstoseehowtheresultswoulddifferifthissystemwereused.Two
traditiona
activitycostpoolsweredeveloped:machiningandmachinesetup.Presentedbelowis
lcosting
informationrelatedtothecompany'soperations.
and
Standard
Custom
ABC.
Directlabourcosts
$50,000
$100,000
Machinehours
500
1,000
Setuphours
100
400
Totalestimatedoverheadcostsare$277,500.Theoverheadcostallocatedtothemachining
activitycostpoolis$177,000,and$100,500isallocatedtothemachinesetupactivitycost
pool.
Instructions
(a)Calculatetheoverheadrateusingthetraditional(plantwide)approach.
(b)Calculatetheoverheadrateusingtheactivitybasedcostingapproach.
(c)
Determinethedifferenceinallocationbetweenthetwoapproaches.
Explai E518PerdonInc.hasconductedthefollowinganalysisrelatedtoitsproductlinesusingatraditional
nthe
costingsystem(volumebased)andanactivitybasedcostingsystem.Boththetraditionaland
differe
theactivitybasedcostingsystemsincludedirectmaterialsanddirectlabourcosts.
nce
TotalCosts
betwee
n
Products
SalesRevenue
Traditional
ABC
traditio
Product440X
$200,000
$50,000
$40,000
naland
activit
Product137Y
160,000
60,000
45,000
y
Product249S
80,000
20,000
45,000
based
costing
Instructions
.
(a)Foreachproductline,calculateoperatingincomeusingthetraditionalcostingsystem.
(b)Foreachproductline,calculateoperatingincomeusingtheactivitybasedcostingsystem.
(c)Usingthefollowingformula,calculatethepercentagedifferenceinoperatingincomefor
eachofPerdon'sproduct
lines:
.(Roundthepercentagetotwodecimals.)
(d)ProvidearationaleforwhythecostsforProduct440Xareapproximatelythesameusing
eitherthetraditionaloractivitybasedcostingsystem.
Assign E519InternationalFabricshasbudgetedoverheadcostsof$955,000.Ithasallocatedoverheadon
overhead
aplantwidebasistoitstwoproducts(woolandcotton)usingdirectlabourhours,whichare
using
estimatedtobe477,500forthecurrentyear.Thecompanyhasdecidedtoexperimentwith
traditiona
activitybasedcostingandhascreatedtwoactivitycostpoolsandrelatedactivitycost
lcosting
drivers.Thesetwocostpoolsarecutting(thecostdriverismachinehours)anddesign(the
andABC.
costdriveristhenumberofsetups).Overheadallocatedtothecuttingcostpoolis$400,000
and$555,000isallocatedtothedesigncostpool.Additionalinformationrelatedtothese
poolsisasfollows:
Wool
Machinehours
Numberofsetups
Cotton
Total
100,000
100,000
200,000
1,000
500
1,500
(a)Determinetheamountofoverheadallocatedtothewoolproductlineandthecotton
productlineusingactivitybasedcosting.
(b)Whatisthedifferencebetweentheallocationofoverheadtothewoolandcottonproduct
linesusingactivitybasedcostingversusthetraditionalapproach,assumingdirectlabour
hourswereincurredevenlybetweenthewoolandcotton?
Assign E520
overhead
using
traditional
costing
andABC.
AlonzoInc.manufacturestwoproducts:carwheelsandtruckwheels.
Todeterminetheamountofoverheadtoassigntoeachproductline,the
controller,YuYuOrtega,hasdevelopedthefollowinginformation:
Estimatedwheelsproduced
Directlabourhoursperwheel
Car
Truck
40,000
10,000
Totalestimatedoverheadcostsforthetwoproductlinesare$840,000.
(a)Calculatetheoverheadcostassignedtothecarwheelsandtruckwheels,assumingthat
directlabourhoursisusedtoallocateoverheadcosts.
(b)YuYuisnotsatisfiedwiththetraditionalmethodofallocatingoverheadbecausehe
believesthatmostoftheoverheadcostsrelatetothetruckwheelproductlinebecauseof
itscomplexity.Hethereforedevelopsthefollowingthreeactivitycostpoolsandrelated
costdriverstobetterunderstandthesecosts:
ActivityCostPools
Settingupmachines
Assembling
Inspection
ExpectedUseofCostDrivers
500 setups
EstimatedOverheadCosts
$260,000
35,000 labourhours
280,000
600 inspections
300,000
Calculatetheactivitybasedoverheadratesforthesethreecostpools.
(c)Calculatethecostthatisassignedtothecarandtruckproductlinesusinganactivity
basedcostingsystem,giventhefollowinginformation:
Numberofsetups
ExpectedUseofCostDriversperProduct
Car
Truck
100
400
ExpectedUseofCostDriversperProduct
Car
Truck
Directlabourhours
20,000
15,000
50
550
Numberofinspections
(d)WhatdoyoubelieveYuYushoulddo?
Assign E521
overhead
using
ShadyLadysellswindowcoveringstobothcommercialandresidentialcustomers.The
traditional
followinginformationrelatestoitsbudgetedoperationsforthecurrentyear:
costing
andABC.
Commercial
Residential
Revenues
$300,000
$480,000
Directmaterialcosts
$30,000
$70,000
Directlabourcosts
100,000
300,000
55,000
185,000
162,000
532,000
$115,000
$(52,000)
Overheadcosts
Operatingincome(loss)
Thecontroller,SusanChan,isconcernedabouttheresidentialproductline.Shecannot
understandwhythislineisnotmoreprofitablegiventhatwindowcoveringsarelesscomplex
toinstallforresidentialcustomers.Inaddition,theresidentialclientbaseresidesinclose
proximitytothecompanyoffice,sotravelcostsarenotasexpensiveonaperclientvisitfor
residentialcustomers.Asaresult,shehasdecidedtotakeacloserlookattheoverheadcosts
assignedtothetwoproductlinestodeterminewhetheramoreaccurateproductcosting
modelcanbedeveloped.Followingarethethreeactivitycostpoolsandrelatedinformation
shedeveloped:
ActivityCostPools
EstimatedOverhead
CostDrivers
Schedulingandtravel
$84,000
Hoursoftravel
Setuptime
77,000
Numberofsetups
Supervision
56,000
Directlabourcost
ExpectedUseofCostDriversperProduct
Commercial
Residential
Schedulingandtravel
1,000
680
Setuptime
450
250
Instructions
(a)Calculatetheactivitybasedoverheadratesforeachofthethreecostpools,and
determinetheoverheadcostassignedtoeachproductline.
(b)Calculatetheoperatingincomeforeachproductline,usingtheactivitybasedoverhead
rates.
(c)WhatdoyoubelieveSusanChanshoulddo?
Assign E522MYCompanymanufacturestwoproducts,StandardandDeluxe.MY'smanufacturing
overhead
overheadcostsconsistofsettingupmachines,$400,000;machining,$1,500,000;inspecting,
using
$450,000;materialhandling$750,000;andpurchasingorders$150,000.Informationonthe
traditional
twoproductsis:
costing
Standard
Deluxe
andABC.
Directlabourhours
150,000
250,000
Machinesetups
300
200
Machinehours
48,000
52,000
800
700
Materialhandling
5,000
10,000
Purchasingorders
300
200
Inspections
Instructions
(a)Assignthetotalmanufacturingoverheadcoststothetwoproductsusingtraditional
costing.
(b)Assignthetotalmanufacturingoverheadcoststothetwoproductsusingactivitybased
costing(ABC).
Identify E523QuikPrintsCompanyisasmallprintingandcopyingfirmwiththreehighspeedoffset
activity
printingpresses,fivecopiers(twocolourandthreeblackandwhite),onecollator,onecutting
cost
andfoldingmachine,andonefaxmachine.Toimproveitspricingpractices,ownermanager
pools.
DamonWhiteboneisinstallingactivitybasedaccounting.Damonemploysfiveemployees:
twoprinters/designers,onereceptionist/bookkeeper,onesalesperson/copymachineoperator,
andonejanitor/deliveryclerk.Damoncanoperateanyofthemachinesand,inadditionto
managingtheentireoperation,performsthetraining,designing,selling,andmarketing
functions.
Instructions
AsQuikPrints'independentaccountantwhopreparestaxformsandquarterlyfinancial
statements,youhavebeenaskedtoidentifytheactivitiesthatwouldbeusedtoaccumulate
overheadcostsforassignmenttojobsandcustomers.Usingyourknowledgeofasmall
printingandcopyingfirm(andsomeimagination),identifyatleast12activitycostpoolsas
thestartofanactivitybasedcostingsystemforQuikPrintsCompany.
Identif E524GalavicCorporationmanufacturessnowmobilesinitsBlueMountainplant.Ithasbudgetedthe
y
followingcostsforthefirstquarter'soperations.
activity
Machinesetup,indirect
$4,000 Propertytaxes
$29,000
cost
materials
pools
and
Inspections
16,000 Oil,heating
19,000
cost
Tests
4,000 Electricity,plantlighting
21,000
drivers.
Insurance,plant
110,000
Engineeringprototypes
Engineeringdesign
140,000
Depreciation,plant
Depreciation,machinery
520,000
Electricity,machinery
36,000
Custodial(machinemaintenance)
wages
19,000
Machinesetup,indirectlabour
20,000
60,000
210,000
ClassifytheabovecostsofGalavicCorporationintoactivitycostpoolsusingthefollowing:
engineering,machinery,machinesetup,qualitycontrol,factoryutilities,andmaintenance.
Thenidentifyacostdriverthatmaybeusedtoassigneachcostpooltoeachlineof
snowmobiles.
Identif E525PeterCatalano'sVerdeVineyards,intheNiagaraPeninsula,producesthreevarietiesofwine:
y
merlot,viognier,andpinotnoir.Hiswinemaster,KylePohle,hasidentifiedthefollowing
activity
activitiesascostpoolsforaccumulatingoverheadandassigningittoproducts.
cost
1. Cullingandreplanting.Deadorovercrowdedvinesareculled,andnewvinesare
drivers.
plantedorrelocated.(Eachvarietyhasaseparatevineyard.)
2. Tying.Thepostsandwiresarereset,andvinesaretiedtothewiresforthedormant
season.
3. Trimming.Attheendoftheharvest,thevinesarecutandtrimmedbackinpreparation
forthenextseason.
4. Spraying.Thevinesaresprayedwithchemicalsforprotectionagainstinsectsand
fungi.
5. Harvesting.Thegrapesarehandpicked,placedincarts,andtransportedtothe
crushers.
6. Stemmingandcrushing.Cartfulsofbunchesofgrapesofeachvarietyareseparately
loadedintomachines,whichremovestemsandgentlycrushthegrapes.
7. Pressingandfiltering.Thecrushedgrapesaretransferredtopresses,which
mechanicallyremovethejuicesandfilteroutbulkandimpurities.
8. Fermentation.Thegrapejuice,byvariety,isfermentedineitherstainlesssteeltanksor
oakbarrels.
9. Aging.Thewinesareagedineitherstainlesssteeltanksoroakbarrelsforonetothree
years,dependingonthevariety.
10. Bottlingandcorking.Bottlesaremachinefilledandcorked.
11.
12.
13.
14.
15.
Labellingandboxing.Eachbottleislabelled,asiseachninebottlecase,withthename
ofthevintner,vintage,andvariety.
Storing.Packagedandboxedbottlesarestoredawaitingshipment.
Shipping.Thewineisshippedtodistributorsandprivateretailers.
Heatingandairconditioningofplantandoffices.
Maintenanceofbuildingsandequipment.Printing,repairs,replacements,andgeneral
maintenanceareperformedintheoffseason.
ForeachofVerde's15activitycostpools,identifyaprobablecostdriverthatmightbeusedto
assignoverheadcoststoitsthreewinevarieties.
Calculate E526FontillasInstrument,Inc.manufacturestwoproducts:missilerangeinstrumentsandspace
overhead
pressuregauges.DuringApril,itproduced50rangeinstrumentsand300pressuregauges
rates,
andincurredestimatedoverheadcostsof$85,500.Ananalysisofestimatedoverheadcosts
assign
revealsthefollowingactivities:
overhead
Activities
CostDrivers
TotalCost
using
ABC,and
1.Materialshandling
Numberofrequisitions
$33,000
discussthe
2.Machinesetups
Numberofsetups
27,900
advantage
sofABC.
3.Qualityinspections
Numberofinspections
24,600
Thecostdrivervolumeforeachproductwasasfollows:
CostDrivers
Instruments
Gauges
Total
Numberofrequisitions
400
600
1,000
Numberofsetups
150
300
450
Numberofinspections
200
400
600
Instructions
(a)Determinetheoverheadrateforeachactivity.
(b)AssignthemanufacturingoverheadcostsforApriltothetwoproductsusingactivity
basedcosting.
(c)WriteamemorandumtothepresidentofFontillasInstrumentexplainingthebenefitsof
activitybasedcosting.
Calculate E527H&YCompanyusesfouractivitypoolstoapplyoverheadtoitsproducts.Eachactivityhas
overhead
acostdriverusedtoallocatetheoverheadcoststotheproduct.Theactivitiesandrelated
ratesand
overheadcostsareasfollows:
assign
Activity
TotalCosts VolumeofCostDriver
overhead
using
Materialhandling
$200,000 100,000parts
ABC.
Purchaseorders
210,000 35orders
Setuphours
300,000
150hours
Machining
480,000
3,000machinehours
Activity
TotalCosts
VolumeofCostDriver
Totalcosts
$1,190,000
Theaboveactivitiesareusedbythetwodifferentproductsasfollows:
PC21
WX34
Materialhandling
75,000parts
25,000parts
Purchaseordersperproduct
15
20
Setuphours
100hours
50hours
Numberofmachinehours
2,000machinehours
1,000machinehours
(a)
Calculatehowmuchofthematerialhandlingcostwillbe
allocatedtoPC21.
(b)
DeterminetheABCallocationrateforPurchaseorders.
(c)CalculatehowmuchoftheSetupcostswillbeallocatedtoWX34.
(d)CalculatehowmuchofthetotalactivitycostswillbeallocatedtoPC21.
Assign E528LimClothingCompanymanufacturesitsowndesignedandlabelledsportsattireandsellsits
overhead
productsthroughcataloguesalesandretailoutlets.WhileLimhasusedactivitybased
using
costinginitsmanufacturingactivitiesforyears,ithasalwaysusedtraditionalcostingin
traditional
assigningitssellingcoststoitsproductlines.Sellingcostshavetraditionallybeenassigned
costing
toLim'sproductlinesatarateof80%ofdirectmaterialcosts.Itsdirectmaterialcostsforthe
andABC;
monthofMarchforLim'shighintensitylineofattireare$400,000.Thecompanyhas
classify
decidedtoextendactivitybasedcostingtoitssellingcosts.Datarelatingtothehighintensity
activities
lineofproductsforthemonthofMarchareasfollows:
asvalue
NumberofCostDrivers
addedor
ActivityCostPools
CostDrivers
OverheadRate
UsedperActivity
non
value
Salescommissions Dollarsales
$0.06 perdollar
$950,000
added.
sales
Advertising
TV/Radio
Minutes
Advertising
Newspaper
Column
inches
Catalogues
Catalogues
mailed
Costofcatalogue
sales
Catalogue
orders
Creditand
collection
Dollarsales
$300 perminute
250
$10 percolumn
inch
2,000
$2.50 percatalogue
6,000
$1 percatalogue
order
9,000
$0.04 perdollar
sales
$950,000
Instructions
(a)Calculatethesellingcoststobeassignedtothehighintensitylineofattireforthemonth
ofMarchusing
1. thetraditionalproductcostingsystem(directmaterialcostisthecostdriver),and
2. activitybasedcosting.
(b)Bywhatamountdoesthetraditionalproductcostingsystemundercostorovercostthe
highintensityproductline?
(c)Classifyeachoftheactivitiesasvalueaddedornonvalueadded.
Assign E529HealthyProducts,Inc.usesatraditionalproductcostingsystemtoassignoverheadcosts
overhead
uniformlytoallproducts.TomeetCanadianFoodInspectionAgency(CFIA)requirements
using
andtoassureitscustomersofsafe,sanitary,andnutritiousfood,HealthyProductsengagesin
traditional
ahighlevelofqualitycontrol.Itassignsitsqualitycontroloverheadcoststoallproductsata
costing
rateof17%ofdirectlabourcosts.ItsdirectlabourcostforthemonthofJuneforitslow
andABC;
caloriedessertlineis$55,000.Inresponsetorepeatedrequestsfromitsvicepresident,
classify
finance,Healthy'smanagementagreestoadoptactivitybasedcosting.Datarelatingtothe
activities
lowcaloriedessertlineforthemonthofJuneareasfollows:
asvalue
NumberofCostDrivers
addedor
ActivityCostPools
CostDrivers
Rate
UsedperActivity
non
value
Inspectionsof
Numberof
$0.60 per
6,000 kilograms
added.
materialreceived
kilograms
kilogram
Inprocess
inspections
Numberof
servings
$0.33
CFIAcertification
Customer
orders
$12.00
per
serving
perorder
10,000
servings
420 orders
Instructions
(a)Calculatethequalitycontroloverheadcosttobeassignedtothelowcaloriedessert
productlineforthemonthofJuneusing
1. thetraditionalproductcostingsystem(directlabourcostisthecostdriver),and
2. activitybasedcosting.
(b)Bywhatamountdoesthetraditionalproductcostingsystemundercostorovercostthe
lowcaloriedessertline?
(c)Classifyeachoftheactivitiesasvalueaddedornonvalueadded.
Classify E530Inanefforttoexpandtheusefulnessofitsactivitybasedcostingsystem,PeterCatalano's
activities
VerdeVineyardsdecidestoadoptactivitybasedmanagementtechniques(AMB).Oneof
ad
theseABMtechniquesisclassifyingitsactivitiesaseithervalueaddedornonvalueadded.
value
Instructions
addedor
UsingVerde'slistof15activitycostpoolsinE525,classifyeachoftheactivitiesaseither
non
valueaddedornonvalueadded.
value
added.
Classify E531AnnaBellatorre,Inc.isinterestedinusingitsactivitybasedcostingsystemtoimproveits
activities
operatingefficiencyanditsprofitmarginsbyapplyingactivitybasedmanagementtechniques.
asvalue
Aspartofthisundertaking,youhavebeenaskedtoclassifyitsplantactivitiesasvalueadded
addedor
ornonvalueadded.
non
Instructions
value
Usingthelistofactivitiesbelow,classifyeachactivityaseithervalueaddedornonvalue
added.
added.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Designingnewmodels
Purchasingrawmaterialsandparts
Storingandmanaginginventory
Receivingandinspectingrawmaterialsandparts
Interviewingandhiringnewpersonnel
Machineformingsheetsteelintoapplianceparts
Manuallyassemblingpartsintoappliances
Trainingallemployeesofthecompany
Insuringalltangiblefixedassets
Supervisingproduction
Maintainingandrepairingmachineryandequipment
Paintingandpackagingfinishedappliances
Classify E532
service
compan
DuplessisandNajaraliisalawfirmthatisinitiatinganactivitybasedcostingsystem.Rjean
y
Duplessis,theseniorpartnerandastrongsupporterofABC,haspreparedthefollowinglistof
activities
activitiesperformedbyatypicallawyerinadayatthefirm:
asvalue
addedor
Activities
Hours
non
Writingcontractsandletters
1.0
value
added.
Attendingstaffmeetings
0.5
Takingdepositions
1.0
Doingresearch
1.0
Travellingto/fromcourt
1.0
Contemplatinglegalstrategy
1.0
Eatinglunch
1.0
Litigatingacaseincourt
2.5
Entertainingaprospectiveclient
2.0
Instructions
ClassifyeachoftheactivitieslistedbyRjeanDuplessisasvalueaddedornonvalueadded
anddefendyourclassification.Howmuchtimewasvalueaddedandhowmuchwasnon
valueadded?
Classify E533Havingitemizeditscostsforthefirstquarterofnextyear'sbudget,GalavicCorporationwants
activities
toinstallanactivitybasedcostingsystem.First,itidentifiedtheactivitycostpoolsinwhichto
bylevel.
accumulatefactoryoverhead;second,itidentifiedtherelevantcostdrivers.(Thiswasdonein
E524.)
Instructions
UsingtheactivitycostpoolsidentifiedinE524,classifyeachofthosecostpoolsaseither
unitlevel,batchlevel,productlevel,orfacilitylevel.
Classify E534OttoDieffenbach&Sons,Inc.isasmallmanufacturingcompanythatusesactivitybased
activities
costing.Dieffenbach&Sonsaccumulatesoverheadinthefollowingactivitycostpools.
bylevel.
1.
2.
3.
4.
5.
6.
7.
8.
Hiringpersonnel
Managingpartsinventory
Purchasing
Testingprototypes
Designingproducts
Settingupequipment
Trainingemployees
Inspectingmachineparts
9. Machining
10. Assembling
Instructions
Foreachactivitycostpool,indicatewhethertheactivitycostpoolwouldbeunitlevel,batch
level,productlevel,orfacilitylevel.
Problems:SetA
Assign P535AFireOut,Inc.manufacturessteelcylindersandnozzlesfortwomodelsoffireextinguishers:
overhead
(1)ahomefireextinguisherand(2)acommercialfireextinguisher.Thehomemodelisa
using
highvolume(54,000units),halflitrecylinderthatholds2.5kilogramsofmultipurpose
traditiona
drychemicalat480PSI(poundspersquareinch).Thecommercialmodelisalowvolume
lcosting
(10,200units),twolitrecylinderthatholds10kilogramsofmultipurposedrychemicalat
and
390PSI.Bothproductsrequire1.5hoursofdirectlabourforcompletion.Therefore,total
ABC;
annualdirectlabourhoursare96,300or
.Expected
calculate
annualmanufacturingoverheadis$1,502,280.Thus,thepredeterminedoverheadrateis
unit
$15.60or
perdirectlabourhour.Thedirectmaterialscostper
costs;
unitis$18.50forthehomemodeland$26.50forthecommercialmodel.Thedirectlabour
classify
costis$19perunitforboththehomeandthecommercialmodels.
activities
asvalue
Thecompany'smanagersidentifiedsixactivitycostpoolsandrelatedcostdrivers,and
addedor
accumulatedoverheadbycostpoolasfollows:
non
value
added.
Estimated
Overhead
ExpectedUse
ofCost
Drivers
$70,350
335,000
215,000
120,000
Machine
hours
150,500
35,000
27,000
8,000
Assembling
Numberof
parts
390,600
217,000
165,000
52,000
Testing
Numberof
tests
51,000
25,500
15,500
10,000
Painting
Litres
52,580
5,258
3,680
1,578
Packingand
shipping
Kilograms
787,250
335,000
215,000
120,000
$1,502,280
ActivityCost
Pools
Cost
Drivers
Receiving
Kilograms
Forming
ExpectedUseofDrivers
byProduct
Home
Commercial
Instructions
(a)Undertraditionalproductcosting,calculatethetotalunitcostofeachproduct.Prepare
asimplecomparativescheduleoftheindividualcostsbyproduct(similarto
Illustration54).
(b)UnderABC,prepareascheduleshowingthecalculationsoftheactivitybased
overheadrates(percostdriver).
(c)Prepareascheduleassigningeachactivity'soverheadcostpooltoeachproductbased
ontheuseofcostdrivers.(Includeacalculationofoverheadcostperunit,roundingto
thenearestcent.)
(d)CalculatethetotalcostperunitforeachproductunderABC.
(e)Classifyeachoftheactivitiesasavalueaddedactivityoranonvalueaddedactivity.
(f)Commenton
1. thecomparativeoverheadcostperunitforthetwoproductsunderABC,and
2. thecomparativetotalcostsperunitundertraditionalcostingandABC.
Assign P536AAllenInc.isamanufacturerofqualityshoes.Thecompanyhasalwaysusedaplantwide
overhead
allocationrateforallocatingmanufacturingoverheadtoitsproducts.Theplantmanager
costs
believesitistimetochangetoabettermethodofcostallocation.Theaccounting
using
departmenthasestablishedthefollowingrelationshipsbetweenproductionactivitiesand
traditional
manufacturingoverheadcosts:
costing
Activities
CostDrivers
AllocationRate
andABC;
compare
Materialhandling
Numberofparts
$8perpart
results.
Assembly
Labourhours
80perhour
Inspection
Timespentbyitematinspectionstation
12perminute
Thepreviousplantwideallocationratemethodwasbasedondirectmanufacturinglabour
hours,andifthatmethodisused,theallocationrateis$800perlabourhour.
Instructions
(a)Assumethatabatchof1,000pairsofshoesrequires4,000parts,50direct
manufacturinglabourhours,and60minutesofinspectiontime.Whataretheindirect
manufacturingcostsperpairofshoestoproduceabatchof1,000pairsofshoes,
assumingthepreviousplantwideallocationratemethodisused?
(b)Whataretheindirectmanufacturingcostsperpairofshoestoproduceabatchof1,000
pairsofshoes,assumingtheactivitybasedmethodofallocationisused?
(c)Commentontheresults.
(adaptedfromCMACanada)
Assign P537AJacobsonElectronicsmanufacturestwoHDtelevisionmodels:theRoyale,whichsellsfor
overhead
$1,400,andanewmodel,theMajestic,whichsellsfor$1,100.Theproductioncosts
to
calculatedperunitundertraditionalcostingforeachmodelin2012wereasfollows:
products
TraditionalCosting
Royale
Majestic
using
ABCand
Directmaterials
$600
$320
evaluate
Directlabour($20perhour)
100
80
the
decision.
Manufacturingoverhead($35perdirectlabourhour)
175
140
Totalperunitcost
$875
$540
In2012,Jacobsonmanufactured20,000unitsoftheRoyaleand10,000unitsofthe
Majestic.Theoverheadrateof$35perdirectlabourhourwasdeterminedbydividingtotal
expectedmanufacturingoverheadof$4.9millionbythetotaldirectlabourhours(140,000)
forthetwomodels.
Undertraditionalcosting,thegrossprofitonthemodelswas$525fortheRoyale
or
,and$560fortheMajesticor
.Becauseof
thisdifference,managementisconsideringphasingouttheRoyalemodelandincreasing
theproductionoftheMajesticmodel.
Beforefinalizingitsdecision,managementasksJacobson'scontrollertoprepareananalysis
usingactivitybasedcosting(ABC).Thecontrolleraccumulatesthefollowinginformation
aboutoverheadfortheyearendedDecember31,2012:
ActivityCost
Pools
CostDrivers
Estimated
Overhead
ExpectedUse
ofCostDrivers
$750,000
25,000
ActivityBased
OverheadRate
Purchasing
Numberof
orders
Machineset
ups
Numberofset
ups
600,000
20,000
30 persetup
Machining
Machinehours
3,100,000
100,000
31 perhour
Quality
control
Numberof
inspections
450,000
5,000
90 perinspection
Thecostdriversusedforeachproductwereasfollows:
$30 perorder
CostDrivers
Royale
Majestic
Purchaseorders
11,250
13,750
25,000
Machinesetups
10,000
10,000
20,000
Machinehours
40,000
60,000
100,000
2,250
2,750
5,000
Inspections
Total
Instructions
(a)Assignthetotal2012manufacturingoverheadcoststothetwoproductsusingactivity
basedcosting(ABC).
(b)WhatwasthecostperunitandgrossprofitofeachmodelusingABCcosting?
(c)
Aremanagement'sfutureplansforthetwomodelssound?Explain.
Assign P538AKiddyCompanymanufacturesbicycles.Itrecentlyreceivedarequesttomanufacture10
overhead
unitsofamountainbikeatapricelowerthanitnormallyaccepts.Bruce,thesalesmanager,
costs
indicatedthatiftheorderwereacceptedatthatprice,thecompanycouldexpectadditional
using
ordersfromthesameclient.BrucebelievesthatifKiddycouldofferthispriceinthe
traditional
marketgenerally,salesofthisbikewouldincreaseby30%.Melany,presidentofKiddy,is
costing
skepticalaboutacceptingtheorder.Thecompanyhasapolicyofnotacceptinganyorder
andABC;
thatdoesnotprovideamarkupof20%onfullmanufacturingcosts.Thepriceofferedis
compare
$575perbike.
results.
Thecontroller,Sanjay,hasrecentlyresearchedthepossibilityofusingactivitybased
multipleoverheadratesinsteadofthesingleratecurrentlyinuse.Hehaspromisedmore
accurateestimatedoverheadproductcosting,andMelanyiscuriousabouthowthis
approachwouldaffectproductcostingandpricingofthemountainbike.
Theplantwideoverheadrateisbasedonanexpectedvolumeof10,000directlabourhours
andthefollowingbudgetedoverhead:
Machineoperatingcosts
$75,000
Reworklabour
45,000
Inspection
25,000
Scrapcosts
35,000
Generalfactoryoverhead
Total
120,000
$300,000
Expectedactivitiesforselectedcostdriversfor2012:
Machinehours
25,000
Unitsreworked
600
Inspectionhours
500
Unitsscrapped
140
Directlabourhours
12,000
Estimateddatafortheproductionofonemountainbike:
Directmaterials
$160
Directlabour(7.5hours/unit)
$180
Numberofmachinehours
Numberofunitsreworked
0.25
Numberofinspectionhours
0.10
Numberofunitsscrapped
0.05
Instructions
(a)Usingthesingleratemethodtoassignoverheadonaplantwidebasis,determine
whetherornotKiddyshouldaccepttheorderforthe10mountainbikes.Explainyour
decision.
(b)Usingactivitybasedcostingtoassignoverhead,determinewhetherornotKiddy
shouldaccepttheorderforthe10mountainbikes.Explainyourdecision.
(adaptedfromCGACanada)
Assign P539AStellarStairsCo.designsandbuildsfactorymadepremiumwoodenstairsforhomes.The
overhead
manufacturedstaircomponents(spindles,risers,hangers,handrails)permitinstallationof
costs
stairsofvaryinglengthsandwidths.Allaremadeofwhiteoakwood.Thecompany's
using
budgetedmanufacturingoverheadcostsfor2012areasfollows:
traditional
OverheadCostPools
Amount
costing
andABC;
Purchasing
$57,000
compare
Handlingmaterials
82,000
results.
Production(cutting,milling,finishing)
210,000
Settingupmachines
85,000
Inspecting
90,000
Inventorycontrol(rawmaterialsandfinishedgoods)
126,000
Utilities
180,000
Totalbudgetoverheadcosts
$830,000
Forthelastfouryears,StellarStairsCo.hasbeenchargingoverheadtoproductsonthe
basisofmachinehours.For2012,ithasbudgeted100,000machinehours.
HeatherFujar,ownermanagerofStellarStairsCo.,recentlydirectedheraccountant,Kiko
Nishikawa,toimplementtheactivitybasedcostingsystemthatshehasrepeatedly
proposed.AtHeatherFujar'srequest,Kikoandtheproductionforepersonidentifythe
followingcostdriversandtheirusageforthepreviouslybudgetedoverheadcostpools.
ExpectedUseofCost
Drivers
ActivityCostPools
CostDrivers
Purchasing
Numberoforders
600
Handlingmaterials
Numberofmoves
8,000
Production(cutting,milling,finishing)
Directlabourhours
Settingupmachines
Numberofsetups
1,250
Inspecting
Numberof
inspections
6,000
Inventorycontrol(rawmaterialsand
finishedgoods)
Numberof
components
168,000
Utilities
Squaremetres
occupied
100,000
9,000
JasonDion,salesmanager,hasreceivedanorderfor280stairsfromCommunityBuilders,
Inc.,alargehousingdevelopmentcontractor.AtJason'srequest,Kikopreparescost
estimatesforproducingcomponentsfor280stairwayssoJasoncansubmitacontractprice
perstairtoCommunityBuilders.Sheaccumulatesthefollowingdatafortheproductionof
280stairways:
Directmaterials
Directlabour
Machinehours
Directlabourhours
$103,600
112,000
14,500
5,000
Numberofpurchaseorders
60
Numberofmaterialmoves
800
Numberofmachinesetups
100
Numberofinspections
450
Numberofcomponents
Numberofsquaremetresoccupied
16,000
800
Instructions
(a)Calculatethepredeterminedoverheadrateusingtraditionalcostingwithmachinehours
asthebasis.
(b)Whatisthemanufacturingcostperstairwayundertraditionalcosting?(Roundtothe
nearestcent.)
(c)Whatisthemanufacturingcostperstairwayundertheproposedactivitybasedcosting?
(Roundtothenearestcent.Prepareallofthenecessaryschedules.)
(d)
Whichofthetwocostingsystemsispreferableinpricingdecisionsandwhy?
Assign P540AInternationalSteelCompanyhasbudgetedmanufacturingoverheadcostsof$1,930,000.It
overhead
hasallocatedoverheadonaplantwidebasistoitstwoproducts(softsteelandhardsteel)
costs
usingmachinehours,whichareestimatedtobe90,000forthecurrentyear.Thecompany
using
hasdecidedtoexperimentwithactivitybasedcostingandhascreatedfiveactivitycost
traditional
poolsandrelatedactivitycostdriversasfollows:
costing
ActivityCentre
Costdriver
EstimatedOverhead ExpectedActivity
andABC;
compare
Materialhandling Numberofmoves
$280,000
40,000moves
results.
Purchaseorders
Numberoforders
$100,000
1,200orders
Producttesting
Numberoftests
$420,000
3,500tests
Machinesetup
Numberofsetups
$320,000
5000setups
Machining
Machinehours
$810,000
90,000machinehours
Eachunitoftheproductsrequiresthefollowing:
SoftSteel
HardSteel
Directmaterialscosts
$300
$200
Directlabourcosts
$120
$60
Purchaseorders
Machinesetup
10
Producttesting
Machining
50
50
Materialhandling
Instructions
(a)Undertraditionalproductcostingusingmachinehours,calculatethetotal
manufacturingcostperunitofbothproducts.
(b)UnderABC,prepareascheduleshowingthecalculationoftheactivitybasedoverhead
rates(percostdriver).
(c)CalculatethetotalmanufacturingcostperunitforbothproductsunderABC.
(d)Writeamemotothepresidentofthecompanydiscussingtheimplicationsofyour
analysisforthecompany'splans.Inthismemo,provideabriefdescriptionofABC,as
wellasanexplanationofhowthetraditionalapproachcanresultindistortions.
Assign P541A
overhead
costsof
HyandvanLamsweerdeisapublicaccountingfirmthatofferstwoprimaryservices,
services
auditingandtaxreturnpreparation.Acontroversyhasdevelopedbetweenthepartnersof
using
thetwoservicelinesregardingwhoiscontributingthegreateramounttothebottomline.
traditional
Theareaofcontentionistheassignmentofoverhead.Thetaxpartnersargueforassigning
costing
overheadonthebasisof40%ofdirectlabourdollars,whiletheauditpartnersarguefor
anad
implementingactivitybasedcosting.Thepartnersagreetousenextyear'sbudgeteddata
ABC;
foranalysisandcomparison.Thefollowingoverheaddataarecollected:
calculate
overhead
ExpectedUseofCost
ratesand
DriversperService
unitcosts;
ExpectedUse
compare
Activity
Estimated
ofCost
results.
CostPools
CostDrivers
Overhead
Drivers
Audit
Tax
Employee
training
Directlabour
dollars
$216,000
$1,800,000
$1,000,000
$800,000
Typingand
secretarial
Numberof
reportsand
forms
76,200
2,500
600
1,900
Computing
Numberof
minutes
204,000
60,000
25,000
35,000
Facility
rental
Numberof
employees
142,500
40
22
18
Travel
Perexpense
reports
81,300
Direct
56,000
25,300
$720,000
Instructions
(a)Usingtraditionalproductcostingasproposedbythetaxpartners,calculatethetotal
overheadcostassignedtobothservices(auditandtax)ofHyandvanLamsweerde.
(b)
1. Usingactivitybasedcosting,prepareascheduleshowingthecalculationsofthe
activitybasedoverheadrates(percostdriver).
2. Prepareascheduleassigningeachactivity'soverheadcostpooltoeachservice
basedontheuseofthecostdrivers.
(c)Classifyeachoftheactivitiesasavalueaddedactivityoranonvalueaddedactivity.
(d)Commentonthecomparativeoverheadcostforthetwoservicesunderbothtraditional
costingandABC.
Assign P542AGoGoLtd.manufacturesthreemodelsofchildren'sswingsets:Standard,Deluxe,and
overhead
Super.TheStandardsetismadeofsteel,theDeluxesetismadeofaluminum,andthe
costs
Supersetismadeofatitaniumaluminumalloy.Becauseofthedifferentmaterialsused,
using
productionrequirementsdiffersignificantlyacrossmodelsintermsofmachinetypesand
traditional
timerequirements.However,oncethepartsareproduced,assemblytimepersetissimilar
costing
forthethreemodels.Forthisreason,GoGohasadoptedthepracticeofallocatingoverhead
andABC;
costsonthebasisofmachinehours.Lastyear,thecompanyproduced5,000Standardsets,
compare
500Deluxesets,and2,000Supersets.Thecompanyhadthefollowingrevenuesand
results.
expensesfortheyear:
GOGOLTD.
IncomeStatement
YearEndedDecember31,2012
Standard
Deluxe
Super
Total
Sales
$475,000
$380,000
$560,000
$1,415,000
200,000
150,000
240,000
590,000
54,000
14,000
24,000
92,000
Machinesetups
25,000
Orderprocessing
60,000
Warehouse
90,000
Shipping
35,000
523,000
Plantadministration
88,000
Other
182,000
Grossprofit
$253,000
Directcosts:
Directmaterials
Directlabour
Variableoverheadcosts:
Contributionmargin
Fixedoverheadcosts:
ThechieffinancialofficerofGoGohashiredaconsultanttorecommendcostallocation
bases.Theconsultanthasrecommendedthefollowing:
Activities
CostDrivers
Machinesetups
No.ofproductionruns
Salesorder
processing
ActivityLevel
Standard
Deluxe
Super
Total
22
11
17
50
No.ofsalesordersreceived
300
200
300
800
Warehousecosts
No.ofunitsheldin
inventory
200
100
100
400
Shipping
No.ofunitsshipped
5,000
500
2,000
7,500
Theconsultantfoundnobasisforallocatingtheplantadministrationandotherfixed
overheadcosts,andrecommendedthattheynotbeappliedtoproducts.
Instructions
(a)Completetheincomestatementusingthebasesrecommendedbytheconsultant.Do
notallocateanyfixedoverheadcosts.
(b)ExplainhowactivitybasedcostingmightresultinbetterdecisionsbyGoGo's
management.
Problems:SetB
Assign P543BVidPlayers,Inc.manufacturestwotypesofDVDplayers,adeluxemodelandastandard
overhead
model.ThedeluxemodelisamultiformatprogressivescanDVDplayerwithnetworking
using
capability,Dolbydigital,andDTSdecoder.Thestandardmodel'sprimaryfeatureis
traditiona
progressivescan.Annualproductionis20,000unitsforthedeluxeand50,000unitsforthe
lcosting
standard.
and
Bothproductsrequiretwohoursofdirectlabourforcompletion.Therefore,totalannual
ABC;
directlabourhoursare140,000or
.Expectedannual
calculate
manufacturingoverheadis$980,000.Thus,thepredeterminedoverheadrateis$7
unit
costs;
or
perdirectlabourhour.Thedirectmaterialscostperunitis
classify
$11forthedeluxemodeland$42forthestandardmodel.Thedirectlabourcostis$18per
activities
unitforboththedeluxeandthestandardmodels.
asvalue
Thecompany'smanagersidentifiedsixactivitycostpoolsandrelatedcostdriversand
addedor
accumulatedoverheadbycostpoolasfollows.
non
value
ExpectedUseof
added.
DriversbyProduct
CostDriver
Estimated
Overhead
ExpectedUse
ofCost
Drivers
Purchasing
Orders
$130,000
Receiving
Kilograms
Assembling
ActivityCost
Pool
Deluxe
Standard
500
150
350
30,000
20,000
4,000
16,000
Numberof
parts
370,000
74,000
20,000
54,000
Testing
Numberof
tests
115,000
23,000
10,000
13,000
Finishing
Units
140,000
70,000
20,000
50,000
Packingand
shipping
Kilograms
195,000
78,000
17,000
61,000
$980,000
(a) Undertraditionalproductcosting,calculatethetotalunitcostofbothproducts.
Prepareasimplecomparativescheduleoftheindividualcostsbyproduct.
(b) UnderABC,prepareascheduleshowingthecalculationsoftheactivitybased
overheadrates(percostdriver).
(c)Prepareascheduleassigningeachactivity'soverheadcostpooltoeachproductbased
ontheuseofcostdrivers.(Includeacalculationofoverheadcostperunit,roundingto
thenearestcent.)
(d)CalculatethetotalcostperunitforeachproductunderABC.
(e)Classifyeachoftheactivitiesasavalueaddedactivityoranonvalueaddedactivity.
(f)Commenton
1. thecomparativeoverheadcostperunitforthetwoproductsunderABC,and
2. thecomparativetotalcostsperunitundertraditionalcostingandABC.
Assign P544BToughThermos,Inc.manufacturestwoplasticthermoscontainersatitsplasticmoulding
overhead
facilityinLethbridge,Alberta.Itslargecontainer,calledtheIceHouse,hasavolumeoffive
to
litres,sidecarryinghandles,asnapdownlid,andasidedrainandplug.Itssmaller
products
container,calledtheCoolChest,hasavolumeoftwolitres,anoverthetopcarryinghandle,
using
whichispartofatiltinglid,andaremovableshelf.Bothcontainersandtheirpartsaremade
ABCand
entirelyofhardmouldedplastic.TheIceHousesellsfor$35andtheCoolChestsellsfor
evaluate
$24.Theproductioncostscalculatedperunitundertraditionalcostingforeachmodelin
decision.
2012wereasfollows:
TraditionalCosting
IceHouse
CoolChest
Directmaterials
$9.50
$6.00
Directlabour($10perhour)
8.00
5.00
Manufacturingoverhead($17.08perdirectlabour
hour)
13.66
8.54
Totalperunitcost
$31.16
$19.54
In2012,ToughThermosmanufactured50,000unitsoftheIceHouseand20,000unitsof
theCoolChest.Theoverheadrateof$17.08perdirectlabourhourwasdeterminedby
dividingtotalexpectedmanufacturingoverheadof$854,000bythetotaldirectlabourhours
(50,000)forthetwomodels.
Undertraditionalcosting,thegrossprofitonthetwocontainerswas$3.84fortheIceHouse
or
,and$4.46fortheCoolChestor
.Thegrossmargin
ratesoncostare12%fortheIceHouseor
,and23%fortheCoolChest
or
.BecauseToughThermoscanearnagrossmarginrateontheCool
ChestthatisnearlytwiceasgreatasthatearnedontheIceHouse,withlessinvestmentin
inventoryandlabourcosts,itsmanagementisurgingitssalesstafftoputitseffortsinto
sellingtheCoolChestovertheIceHouse.
Beforefinalizingitsdecision,managementasksthecontrollerSvenMezatopreparea
productcostinganalysisusingactivitybasedcosting(ABC).Mezaaccumulatesthe
followinginformationaboutoverheadfortheyearendedDecember31,2012:
Activities
CostDrivers
Estimated
Overhead
ExpectedUseof
CostDrivers
ActivityBased
OverheadRate
ExpectedUseof
CostDrivers
ActivityBased
OverheadRate
195,000
780
$250persetup
Machinehours
320,000
80,000
$4permachine
hour
Testsand
inspections
160,000
8,000
$20pertest
Activities
CostDrivers
Machineset
ups
Numberofset
ups
Extruding
Quality
control
Estimated
Overhead
Thecostdriversusedforeachproductwerethefollowing:
CostDrivers
IceHouse
CoolChest
Total
Purchaseorders
2,500
1,975
4,475
Machinesetups
480
300
780
60,000
20,000
80,000
5,000
3,000
8,000
Machinehours
Testsandinspections
Instructions
(Assignthetotal2012manufacturingoverheadcoststothetwoproductsusingactivitybased
acosting(ABC).
)
(WhatwasthecostperunitandgrossprofitofeachmodelusingABCcosting?
b
)
cAremanagement'sfutureplansforthetwomodelssound?
)
Assign P545BMarsCompanyhasfourcategoriesofoverhead:purchasingandreceivingmaterials,
overhead
machineoperatingcosts,materialshandling,andshipping.Thecostsexpectedforthese
costs
categoriesforthecomingyearareasfollows:
using
Purchasingandreceiving
$300,000
traditional
materials
costing
andABC;
Machineoperatingcosts
900,000
compare
Materialshandling
160,000
results.
Shipping
Total
140,000
$1,500,000
Theplantcurrentlyappliesoverheadusingmachinehoursandexpectedannualcapacity.
Expectedcapacityis300,000machinehours.Pragya,thefinancialcontroller,hasbeen
askedtosubmitabidonjob#287,onwhichshehasassembledthefollowingdata:
Directmaterialsperunit
$1.35
Directlabourperunit
$1.85
Appliedoverhead
Numberofunitsproduced
Numberofpurchasesandreceipts
$?
6,000
3
Numberofmachinehours
3,000
Numberofmaterialmoves
300
Numberofkilometrestoshiptothecustomer
2,300
PragyahasbeentoldthatArrowCompany,amajorcompetitor,isusingactivitybased
costingandwillbidonjob#287withapriceof$6.75perunit.Beforesubmittingherbid,
Pragyawantstoassesstheeffectsofthisalternativecostingapproach.Sheestimatesthat
850,000unitswillbeproducednextyear,3,000purchasesandreceiptswillbemade,
400,000moveswillbeperformedplantwide,andthedeliveryoffinishedgoodswillrequire
280,000kilometres.Thebidpricepolicyisfullmanufacturingcostplus25%.
Instructions
(Calculatethebidpriceperunitofjob#287usingmachinehourstoassignoverhead.
a
)
(Usinganactivitybasedapproach,determinewhetherMarsorArrowwillproducethemost
bcompetitivebidandobtainthecontract.Showallyourcalculations.
)
(adaptedfromCGACanada)
Assign P546BPrimeFurnituredesignsandbuildsfactorymade,premium,woodarmoiresforhomes.All
overhead
aremadeofwhiteoak.Itsbudgetedmanufacturingoverheadcostsfortheyear2012areas
costs
follows.
using
OverheadCostPools
Amount
traditional
costing
Purchasing
$40,000
andABC;
Handlingmaterials
45,000
compare
results.
Production(cutting,milling,finishing)
130,000
Settingupmachines
50,000
Inspecting
60,000
Inventorycontrol(rawmaterialsandfinishedgoods)
80,000
Utilities
105,000
Totalbudgetoverheadcosts
$510,000
Forthelastfouryears,PrimeFurniturehasbeenchargingoverheadtoproductsonthebasis
ofmaterialscost.Fortheyear2012,materialscostof$500,000werebudgeted.
WeiHuang,ownermanagerofPrimeFurniture,recentlydirectedheraccountant,Tom
Turkel,toimplementtheactivitybasedcostingsystemthathehasrepeatedlyproposed.
AtWeiHuang'srequest,Tomandtheproductionmanageridentifythefollowingcost
driversandtheirusageforthepreviouslybudgetedoverheadcostpools.
OverheadCostPools
ActivityCost
Drivers
ExpectedUseofCost
Drivers
Purchasing
Numberoforders
500
Handlingmaterials
Numberofmoves
5,000
Production(cutting,milling,finishing)
Directlabourhours
65,000
OverheadCostPools
ActivityCost
Drivers
ExpectedUseofCost
Drivers
Settingupmachines
Numberofsetups
1,000
Inspecting
Numberof
inspections
4,000
Inventorycontrol(rawmaterialsand
finishedgoods)
Numberof
components
40,000
Utilities
Squaremetres
occupied
5,000
MariaCarvalho,salesmanager,hasreceivedanorderfor10luxuryarmoiresfromCohn's
InteriorDesign.AtMaria'srequest,Tompreparescostestimatesforproducingcomponents
for10armoiressoMariacansubmitacontractpriceperarmoiretoCohn's.Heaccumulates
thefollowingdatafortheproductionof10armoires.
Directmaterials
$5,200
Directlabour
$3,500
Directlabourhours
200
Numberofpurchaseorders
Numberofmaterialmoves
32
Numberofmachinesetups
Numberofinspections
20
Numberofcomponents
640
Numberofsquaremetresoccupied
32
Instructions
(a)Calculatethepredeterminedoverheadrateusingtraditionalcostingwithmaterialscost
asthebasis.
(b)Whatisthemanufacturingcostperarmoireundertraditionalcosting?
(c)Whatisthemanufacturingcostperarmoireundertheproposedactivitybasedcosting?
(Prepareallofthenecessaryschedules.)
(d)Determinewhichofthetwocostingsystemsispreferableinpricingdecisionsandwhy.
Assign P547BQualityPaintsInc.usesatraditionalcostaccountingsystemtoapplyqualitycontrolcosts
overhead
uniformlytoallitsproductsatarateof30%ofthedirectlabourcost.Themonthlydirect
costs
labourcostforthevarnishpaintlineis$100,000.Thecompanyisconsideringactivity
using
basedcostingtoapplyqualitycontrolcosts.Themonthlydataforthevarnishpaintline
traditional
havebeengatheredasfollows:
costing
UseofDriversforVarnish
andABC;
ActivityCostPools
CostDrivers
UnitRates
Paint
compare
results.
Incomingmaterial
Typeof
$25.00per
50types
inspection
material
type
Inprocessinspection
Numberof
units
0.30per
unit
30,000units
Productcertification
Perorder
150.00per
order
80orders
Instructions
(a)Calculatethemonthlyqualitycontrolcosttobeassignedtothevarnishpaintlineusing
atraditionalcostingsystemthatallocatesoverheadbasedonthedirectlabourcost.
(b)Calculatethemonthlyqualitycontrolcosttobeassignedtothevarnishpaintlineusing
anactivitybasedcostingsystem.
(c)Commentontheresults.
(adaptedfromCMACanada)
Assign P548B
overhead
costs
InternationalSteelCompanyhasbudgetedmanufacturingoverheadcostsof$2,500,000.It
using
hasallocatedoverheadonaplantwidebasistoitstwoproducts(StandardSteelandDeluxe
traditional
Steel)usingmachinehours,whichareestimatedtobe100,000forthecurrentyear.The
costing
companyhasdecidedtoexperimentwithactivitybasedcostingandhascreatedfive
andABC;
activitycostpoolsandrelatedactivitycostdriversasfollows:
compare
results.
ActivityCentre
Costdriver
EstimatedOverhead ExpectedActivity
Materialhandling
Numberofmoves
$250,000
50,000moves
Purchaseorders
Numberoforders
$200,000
4,000orders
Producttesting
Numberoftests
$450,000
9,000tests
Machinesetup
Numberofsetups
$600,000
6,000setups
Machining
Machinehours
$1,000,000
100,000machinehours
Eachunitoftheproductsrequiresthefollowing
StandardSteel
DeluxeSteel
Directmaterialscosts
$200
$250
Directlabourcosts
$100
$120
Purchaseorders
StandardSteel
DeluxeSteel
Machinesetup
10
Producttesting
Machining
50
50
Materialshandling
10
Instructions
(a)Undertraditionalproductcostingusingmachinehours,calculatethetotal
manufacturingcostperunitofbothproducts.
(b)UnderABC,prepareascheduleshowingthecalculationoftheactivitybasedoverhead
rates(percostdriver).
(c)CalculatethetotalmanufacturingcostperunitforbothproductsunderABC.
(d)Writeamemotothepresidentofthecompanydiscussingtheimplicationsofyour
analysisforthecompany'splans.Inthismemo,provideabriefdescriptionofABC,as
wellasanexplanationofhowthetraditionalapproachcanresultindistortions.
Assign P549B
overhead
costs
ScalarManufacturingproducesautomobilepartsinbatchesinonecontinuous
using
manufacturingprocess.Thecompanyusesdirectlabourhourstoassignoverheadtoeach
traditional
part.Magda,thefinancialcontroller,iswonderingwhatthereasonsareforthelowprofits
costing
in2012andwhythegearproductlinedidnotattainScalar's20%netprofitmargintarget
andABC;
(netprofitperunitonsaleprice).Shehascalculatedthe2012netprofitperunitasfollows:
compare
results.
BrakeDisk
Gear
Salespriceperunit
Manufacturingcostsperunit:
Directmaterials
Directlabour
Overhead
$35.00
$43.00
10.00
7.50
1.20
6.00
5.00
BrakeDisk
Gear
25.00
Totalmanufacturingcostperunit
$16.20
$38.50
Netprofitperunit
$18.80
$4.50
Netprofitmarginpercentage
53.7%
10.5%
MagdaintendstoimplementactivitybasedcostingatScalar.Eachpartrequires
engineeringdesignactivity.Oncethedesigniscompleted,theequipmentcanbesetupfor
batchproduction.Oncethebatchiscompleted,asampleistakenandinspectedtoseeifthe
partsarewithinthetolerancesallowed.Themanufacturingprocesshasfiveactivities:
engineering,setups,machining,inspection,andprocessing.Overheadhasbeenassignedto
eachactivityusingdirectattributionandresourcedrivers:
Engineering
$80,000
Setups
45,000
Machining
120,000
Inspection
60,000
Processing
35,000
Totaloverhead
$340,000
Magdahasidentifiedactivitydriversforeachactivityandlistedtheirpracticalcapacities:
Engineering
Hours
Numberof
Setups
Machine
Hours
Numberof
Inspections
DirectLabour
Hours
4,000
250
20,000
1,500
7,000
Followingaretheproductiondatain2012forbrakedisksandgears:
BrakeDisk
Gear
Numberofunitsproduced
5,000
3,000
Engineeringhoursperunit
0.05
0.15
Numberofsetups
25
Machinehoursperunit
2.5
Numberofinspections
250
125
Instructions
(a)Usingtheactivitybasedapproach,calculatetheactivityrates,thenetprofitperunit,
andthenetprofitmarginpercentageforboththebrakediskandthegear.
(b)Explainwhythenewprofitmarginpercentagesforthebrakediskandthegearare
differentfromwhattheywereoriginally.
(adaptedfromCGACanada)
Assign P550B
overhead
coststo
McDonaldandO'Tooleisalawfirmthatservesbothindividualsandcorporations.A
service
controversyhasdevelopedbetweenthepartnersofthetwoservicelinesastowhois
using
contributingthegreateramounttothebottomline.Theareaofcontentionistheassignment
traditional
ofoverhead.Theindividualpartnersargueforassigningoverheadonthebasisof28.125%
costing
ofdirectlabourdollars,whilethecorporatepartnersargueforimplementingactivitybased
andABC;
costing.Thepartnersagreetousenextyear'sbudgeteddataforpurposesofanalysisand
calculate
comparison.Thefollowingoverheaddataarecollectedtodevelopthecomparison.
overhead
rates;
ExpectedUseofCost
compare
DiversperService
results.
ExpectedUse
Activity
Estimated
ofCost
CostPool
CostDriver
Overhead
Drivers
Corporate
Individual
Employee
training
Directlabour
dollars
$120,000
$1,600,000
$900,000
$700,000
Activity
CostPool
CostDriver
ExpectedUseofCost
DiversperService
Estimated
Overhead
ExpectedUse
ofCost
Drivers
Corporate
Individual
Typingand
secretarial
Numberof
reportsand
forms
60,000
2,000
500
1,500
Computing
Numberof
minutes
100,000
40,000
17,000
23,000
Facility
rental
Numberof
employees
100,000
25
14
11
Travel
Perexpense
reports
70,000
Direct
48,000
22,000
$450,000
Instructions
(a)Usingtraditionalproductcostingasproposedbythetaxpartners,calculatethetotal
overheadcostassignedtobothservices(individualandcorporate)ofMcDonaldand
O'Toole.
(b)
1. Usingactivitybasedcosting,prepareascheduleshowingthecalculationsofthe
activitybasedoverheadrates(percostdriver).
2. Prepareascheduleassigningeachactivity'soverheadcostpooltoeachservice
basedontheuseofthecostdrivers.
(c)Classifyeachoftheactivitiesasavalueaddedactivityoranonvalueaddedactivity.
(d)Commentonthecomparativeoverheadcostservicelineunderbothtraditionalcosting
andABC.
Assign P551BProDriverInc.(PDI)recentlystartedoperationstoobtainashareofthegrowingmarketfor
overhead
golfequipment.PDImanufacturestwomodelsofspecialtydrivers:theThunderboltmodel
costs
andtheEarthquakemodel.Twoprofessionalengineersandaprofessionalgolfer,noneof
using
whomhadanyaccountingbackground,formedthecompanyasapartnership.Thebusiness
ABC.
hasbeenverysuccessful,andtocopewiththeincreasedlevelofactivity,thepartnershave
hiredaCGAastheircontroller.Oneofthefirstimprovementsthatthecontrollerwantsto
makeistoupdatethecostingsystembychangingfromasingleoverheadapplicationrate
usingdirectlabourhourstoactivitybasedcosting.Thecontrollerhasidentifiedthe
followingthreeactivitiesascostdrivers,alongwiththerelatedcostpools:
NumberofMaterial
Requisitions
NumberofProduct
Inspections
NumberofOrders
Shipped
Thunderbolt
46
23
167
Earthquake
62
31
129
Costsper
pool
$54,000
$8,200
$103,000
Model
Instructions
(a)Usingactivitybasedcosting,prepareaschedulethatshowstheallocationofthecosts
ofeachcostpooltoeachmodel.Showyourcalculations.
(b)IdentifythreeconditionsthatshouldbepresentinPDIinorderfortheimplementation
ofactivitybasedcostingtobesuccessful.
(adaptedfromCGACanada)