ABC Costing Exercise

CHAPTER 6 SAMPLE EXERCISE
QUESTION 1 OUT OF 20
Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of
Product Z. The company uses a plantwide overhead rate based on direct labor-hours. It is
considering implementing an activity-based costing (ABC) system that allocates all $684,000 of
its manufacturing overhead to four cost pools. The following additional information is available
for the company as a whole and for Products Y and Z:
Activity Cost Pool Activity Measure Estimated Overhead CostExpected Activity
Machining Machine-hours $ 200,000 10,000 MHs
Machine setups Number of setups $ 100,000 200 setups
Product design Number of products $ 84,000 2 products
General factory Direct labor-hours $ 300,000 12,000 DLHs
Activity Measure Product YProduct Z

Machine-hours 7,000 3,000
Number of setups 50 150
Number of products 1 1
Direct labor-hours 8,000 4,000
Required:
1. What is the company’s plantwide overhead rate?
Explanation
1.The plantwide overhead rate is computed as follows:
Total estimated overhead cost (a) $684,000

Total expected direct labor-hours (b) 12,000 DLHs
Plantwide overhead rate (a) ÷ (b) $ 57 per DLH

2. Using the plantwide overhead rate, how much manufacturing overhead cost is allocated to
Product Y and Product Z?
Explanation

The overhead cost assignments to Products Y and Z are as follows:

Product Y Product Z
Total direct labor hours (a) 8,000 4,000
Plantwide overhead rate per DLH (b) $ 57 $ 57
Manufacturing overhead assigned (a) × (b)$456,000 $228,000

3. What is the activity rate for the Machining activity cost pool?
Explanation
3.
(a)
Estimated (b) (a) ÷ (b)
Overhead Expected Activity
Cost Activity Rate
Machining activity cost pool $200,000 10,000 MH$20 per MH

4. What is the activity rate for the Machine Setups activity cost pool?
Explanation
4.
(a)
Cost Activity Rate
Machine setups activity cost pool $100,000 200 setups$500 per setup

5. What is the activity rate for the Product Design activity cost pool?
Explanation
5.
(a)
Cost Activity Rate
Product design activity cost pool $84,000 2 products$42,000 per product

6. What is the activity rate for the General Factory activity cost pool?
Explanation
6.
(a)
Cost Activity Rate
General factory activity cost pool $300,000 12,000 DLHs$25 per DLH

7. Which of the four activities is a batch-level activity?
• Product design activity

• General factory activity
• Machining activity
• Machine setups activity
Explanation
7.Machine setups is a batch-level activity. A setup is performed to run a batch of units. The cost
of the setup is determined by the resources consumed performing the setup and it is not
influenced by the number of units processed once the setup is complete.

8. Which of the four activities is a product-level activity?
• Machine setups activity

• Product design activity
• Machining activity
• General factory activity
Explanation
8.The product design activity is a product-level activity. The product design cost is determined
by the number of products supported and it is not influenced by the number of batches or units
processed.

9. Using the ABC system, how much total manufacturing overhead cost would be assigned to
Product Y?
Explanation
9.The activity rates are computed as follows:
(a)
Estimated (b)
Overhead Expected (a) ÷ (b)
Activity Cost Pool Cost Activity Activity Rate
Machining $200,000 10,000 MH $ 20 per MH
Machine setups $100,000 200 setups $ 500 per setup
Product design $ 84,000 2 products $42,000 per product
General factory $300,000 12,000 DLHs $ 25 per DLH
Using the ABC system, the total overhead assigned to Products Y is computed as follows:
Product Y
Expected
Activity Amount
Machining, at $20 per machine-hour 7,000 $140,000
Machine setups, at $500 per setup 50 25,000
Product design, at $42,000 per product 1 42,000
General factory, at $25 per direct
8,000 200,000
labor-hour
Total overhead costs assigned $407,000

10. Using the ABC system, how much total manufacturing overhead cost would be assigned to
Product Z?
Explanation
10.The activity rates are computed as follows:
(a)
Estimated (b)
Activity Cost Pool Cost Activity Activity Rate
Machining $200,000 10,000 MH $ 20 per MH
Machine setups $100,000 200 setups $ 500 per setup
Product design $ 84,000 2 products $42,000 per product
General factory $300,000 12,000 DLHs $ 25 per DLH
Using the ABC system, the total overhead assigned to Products Z is computed as follows:
Product Z
Expected Activity Amount
Machining, at $20 per machine-hour 3,000 $ 60,000
Machine setups, at $500 per setup 150 75,000
Product design, at $42,000 per product 1 42,000
General factory, at $25 per direct labor-hour 4,000 100,000
Total overhead costs assigned $277,000

11. Using the plantwide overhead rate, what percentage of the total overhead cost is allocated to
Product Y and Product Z? (Round your "Percentage" answers to 1 decimal place.)
Explanation

The overhead cost assignments to Products Y and Z are as follows:

Product Y Product Z
Total direct labor hours (a) 8,000 4,000
Plantwide overhead rate per DLH (b) $ 57 $ 57
Manufacturing overhead assigned (a) × (b)$456,000 $228,000
Product Y Product Z
(a) (a) ÷ (c) (b) (b) ÷ (c) Total
Plantwide Approach Amount % Amount % (c) Amount
Manufacturing overhead$456,000 66.7% $228,000 33.3% $ 684,000

12. Using the ABC system, what percentage of the Machining costs is assigned to Product Y and
Product Z?
Explanation
12.
(a)
Estimated (b)
Cost Activity Activity Rate
Machining activity cost pool$200,000 10,000 MH $ 20 per MH
Product Y Product Z
Expected Activity Amount Expected ActivityAmount
Machining, at $20 per machine-hour 7,000 $140,000 3,000 $60,000
Product Y Product Z Total

(a) (a) ÷ (c) (b) (b) ÷ (c) (c)
Activity-Based Costing System Amount % Amount % Amount
Machining $140,000 70% $60,000 30% $200,000

13. Using the ABC system, what percentage of Machine Setups cost is assigned to Product Y and
Product Z?
Explanation
13.
(a)
Estimated (b)
Machine setups activity cost pool$100,000 200 setups $500 per setup
Product Y Product Z
Expected ActivityAmountExpected ActivityAmount
Machine setups, at $500 per setup 50 $25,000 150 $75,000
Product Y Product Z Total

(a) (a) ÷ (c) (b) (b) ÷ (c) (c)
Activity-Based Costing System Amount % Amount % Amount
Machine setups $25,000 25% $75,000 75% $100,000

14. Using the ABC system, what percentage of the Product Design cost is assigned to Product Y
and Product Z?
Explanation
14.
(a)
Estimated (b)
Product design activity cost pool $ 84,000 2 products $42,000 per product
Product Y Product Z
Expected ActivityAmountExpected ActivityAmount
Product design, at $42,000 per product 1 $42,000 1 $42,000
Product Y Product Z
(a) (a) ÷ (c) (b) (b) ÷ (c) Total
Activity-Based Costing System Amount % Amount % (c) Amount
Product design $42,000 50% $42,000 50% $84,000

15. Using the ABC system, what percentage of the General Factory cost is assigned to Product Y
and Product Z? (Round your "Percentage" answers to 1 decimal place.)
Explanation
15.
(a)
Estimated (b)
General factory activity cost pool$300,000 12,000 DLHs $25 per DLH
Product Y Product Z
Expected Expected
Activity Amount Activity Amount
General factory, at $25 per direct labor-
8,000 $200,000 4,000 $100,000
hour
Product Y Product Z
(a) (a) ÷ (c) (b) (b) ÷ (c) Total
Activity-Based Costing System Amount % Amount % (c) Amount
General factory $200,000 66.7% $100,000 33.3% $ 300,000
Green Thumb Gardening is a small gardening service that uses activity-based costing to estimate
costs for pricing and other purposes. The proprietor of the company believes that costs are driven
primarily by the size of customer lawns, the size of customer garden beds, the distance to travel
to customers, and the number of customers. In addition, the costs of maintaining garden beds
depends on whether the beds are low maintenance beds (mainly ordinary trees and shrubs) or
high maintenance beds (mainly flowers and exotic plants). Accordingly, the company uses the
five activity cost pools listed below:
Activity Cost Pool Activity Measure
Caring for lawn Square feet of lawn
Caring for garden beds–low maintenance Square feet of low maintenance beds
Caring for garden beds–high maintenance Square feet of high maintenance beds
Travel to jobs Miles
Customer billing and service Number of customers
The company already has completed its first stage allocations of costs and has summarized its
annual costs and activity as follows:
Estimated
Overhead
Activity Cost Pool Cost Expected Activity
Caring for lawn $ 72,000 150,000 square feet of lawn
Caring for garden beds–low maintenance $ 26,400 20,000 square feet of low maintenance beds
Caring for garden beds–high maintenance $ 41,400 15,000 square feet of high maintenance beds
Travel to jobs $ 3,250 12,500 miles
Customer billing and service $ 8,750 25 customers
Required:
Compute the activity rate for each of the activity cost pools. (Round your answers to 2 decimal
places except customer billing and service.)
Explanation
Estimated
Activity Cost Overhead
Pool Cost Expected Activity Activity Rate
Caring for per square ft.
lawn $ 72,000 150,000 square ft. of lawn $0.48 of lawn
Caring for $ 26,400 20,000 $1.32 per square ft.
garden beds- of low
low square ft. of low maintenance
maintenance maintenance beds beds
Caring for $ 41,400 15,000 $2.76 per square ft.
garden beds- of high
high square ft. of high maintenance
maintenance maintenance beds beds
Travel to jobs $ 3,250 12,500 miles $0.26 per mile
Customer
billing and $
service 8,750 25 customers $ 350 per customer
The activity rate for each activity cost pool is computed by dividing its estimated overhead cost
by its expected activity.
Klumper Corporation is a diversified manufacturer of industrial goods. The company’s activity-
based costing system contains the following six activity cost pools and activity rates:
Activity Cost Pool Activity Rates
Supporting direct labor$ 6 per direct labor-hour
Machine processing $ 4 per machine-hour
Machine setups $ 50 per setup
Production orders $ 90 per order
Shipments $ 14 per shipment
Product sustaining $840 per product
Activity data have been supplied for the following two products:
Total Expected Activity
K425 M67
Number of units produced per year 200 2,000
Direct labor-hours 80 500
Machine-hours 100 1,500
Machine setups 1 4
Production orders 1 4
Shipments 1 10
Product sustaining 1 1
Required:
How much total overhead cost would be assigned to K425 and M67 using the activity-based
costing system?
Explanation
Activity Cost Pool Activity Rate Activity ABC Cost
K425
per direct
Supporting direct labor $ 6 80 direct labor-hours $ 480
labor-hour
per
Machine processing $ 4 machine- 100 machine-hours 400
hour
Machine setups $ 50 per setup 1 setup 50
Production orders $ 90 per order 1 order 90
per
Shipments $ 14 1 shipment 14
shipment
Product sustaining $ 840 per product 1 product 840
Total overhead cost $ 1,874
M67
per direct
Supporting direct labor $ 6 500 direct labor-hours $ 3,000
labor-hour
per
Machine processing $ 4 machine- 1,500 machine-hours 6,000
hour
Machine setups $ 50 per setup 4 setups 200
Production orders $ 90 per order 4 orders 360
per
Shipments $ 14 10 shipments 140
shipment
Product sustaining $ 840 per product 1 product 840
Total overhead cost $ 10,540
Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The
company has a standard paraglider model, but also makes custom-designed paragliders.
Management has designed an activity-based costing system with the following activity cost pools
and activity rates:
Activity Cost Pool Activity Rate
Supporting direct labor $ 26 per direct labor-hour
Order processing $284 per order
Custom design processing$186 per custom design
Customer service $379 per customer
Management would like an analysis of the profitability of a particular customer, Big Sky
Outfitters, which has ordered the following products over the last 12 months:
Standard Custom
Model Design
Number of gliders 20 3
Number of orders 1 3
Number of custom designs 0 3
Direct labor-hours per glider 26.35 28.00
Selling price per glider $ 1,850 $2,400
Direct materials cost per glider$ 564 $ 634
The company’s direct labor rate is $19.50 per hour.

Required:
Using the company’s activity-based costing system, compute the customer margin of Big Sky
Outfitters. (Round your intermediate calculations and final answer to the nearest whole
dollar amount.)
Explanation
Big Sky Outfitters
Customer Margin—Activity-Based Costing
Sales ($1,850 per standard model glider × 20
standard model gliders + $2,400 per
custom designed glider × 3 custom
designed gliders) $ 44,200
Costs:
Direct materials ($564 per standard
model glider × 20 standard model
gliders + $634 per custom designed
glider × 3 custom designed gliders) $ 13,182
Direct labor ($19.50 per direct labor-hour ×
26.35 direct labor-hours per standard
model glider × 20 standard model gliders
+ $19.50 per direct labor-hour × 28 direct
labor-hours per custom designed glider × 3
custom designed gliders) 11,915
Supporting direct labor ($26 per direct labor-
hour × 26.35 direct labor-hours per
standard model glider × 20 standard model
gliders + $26 per direct labor-hour ×
28 direct labor-hours per custom designed
glider × 3 custom designed gliders) 15,886
Order processing ($284 per order × 4 orders) 1,136
Custom design processing ($186 per custom
558
design × 3 custom designs)
Customer service ($379 per customer × 1
379
customer) 43,056
Customer margin $ 1,144
Hiram’s Lakeside is a popular restaurant located on Lake Washington in Seattle. The owner of
the restaurant has been trying to better understand costs at the restaurant and has hired a student
intern to conduct an activity-based costing study. The intern, in consultation with the owner,
identified three major activities and then completed the first-stage allocations of costs to the
activity cost pools. The results appear below.
Activity Cost Pool Activity Measure Total Cost Total Activity

Serving a party of dinersNumber of parties served $ 33,000 6,000 parties
Serving a diner Number of diners served $138,000 15,000 diners
Serving drinks Number of drinks ordered$ 24,000 10,000 drinks
The above costs include all of the costs of the restaurant except for organization-sustaining costs
such as rent, property taxes, and top-management salaries.
Some costs, such as the cost of cleaning the linens that cover the restaurant's tables, vary with the
number of parties served. Other costs, such as washing plates and glasses, depend on the number
of diners served or the number of drinks served.
Prior to the activity-based costing study, the owner knew very little about the costs of the
restaurant. She knew that the total cost for the month (including organization-sustaining costs)
was $240,000 and that 15,000 diners had been served. Therefore, the average cost per diner was
$16.
Required:
1&2. According to the activity-based costing system, what is the total cost and average cost per
diner for serving each of the following parties of diners? (Round your intermediate
calculations to 2 decimal places. Round your Total Cost final answers to 2 decimal places
and your Average Cost final answers to 3 decimal places.)
Explanation
1&2.The first step is to determine the activity rates:
(a) (b) (a) ÷ (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Serving parties $ 33,000 6,000 parties$5.50 per party
Serving diners $138,000 15,000 diners $9.20 per diner
Serving drinks $ 24,000 10,000 drinks $2.40 per drink
According to the activity-based costing system, the cost of serving each of the parties can be
computed as follows:
a.Party of 4 persons who order a total of 3 drinks:
(a) (b) (a) × (b)
Activity Cost Pool Activity Rate ActivityABC Cost
Serving parties $5.50 per party 1 party $ 5.50
Serving diners $9.20 per diner 4 diners 36.80
Serving drinks $2.40 per drink3 drinks 7.20
Total $ 49.50
b. Party of 2 persons who order no drinks:

(a) (b) (a) × (b)
Serving diners $9.20 per diner 2 diners 18.40
Serving drinks $2.40 per drink0 drinks 0
Total $ 23.90
c.Party of 1 person who orders 2 drinks:

(a) (b) (a) × (b)
Serving diners $9.20 per diner 1 diner 9.20
Serving drinks $2.40 per drink2 drinks 4.80
Total $ 19.50
The average cost per diner for each party can be computed by dividing the total cost of the party
by the number of diners in the party as follows:
a. $49.50 ÷ 4 diners = $12.375 per diner
b. $23.90 ÷ 2 diners = $11.95 per diner
c. $19.50 ÷ 1 diner = $19.50 per diner
This is the last question in the assignment. To submit, use Alt + S. To access other questions,
proceed to the question map button.

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CHAPTER 6 SAMPLE EXERCISE

Activity Measure Product YProduct Z

Total estimated overhead cost (a) $684,000

Activity Measure Product YProduct Z

Total estimated overhead cost (a) $684,000

The overhead cost assignments to Products Y and Z are as follows:

Activity Measure Product YProduct Z

Activity Measure Product YProduct Z

Activity Measure Product YProduct Z

Activity Measure Product YProduct Z

Activity Measure Product YProduct Z

7. Which of the four activities is a batch-level activity?

• Product design activity

Activity Measure Product YProduct Z

8. Which of the four activities is a product-level activity?

• Machine setups activity

Activity Measure Product YProduct Z

Activity Measure Product YProduct Z

Activity Measure Product YProduct Z

Total estimated overhead cost (a) $684,000

The overhead cost assignments to Products Y and Z are as follows:

Activity Measure Product YProduct Z

Product Y Product Z Total

Activity Measure Product YProduct Z

Product Y Product Z Total

Activity Measure Product YProduct Z

Activity Measure Product YProduct Z

The company’s direct labor rate is $19.50 per hour.

Activity Cost Pool Activity Measure Total Cost Total Activity

b. Party of 2 persons who order no drinks:

c.Party of 1 person who orders 2 drinks:

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