Problem 1 Consumption Ratios

Zapato Company produces two types of boots: vaquero and vaquera. There are four activities
associated with these two products. Drivers for the four activities are as follows:

Vaquer Vaquer
o a
Cutting hours 4,000 5,400
Assembly hours 2,850 4,650
Inspection
hours 945 2,430
Rework hours 150 450

Required:
1. Compute the consumption ratios for the four drivers (round to two decimal places).
2. Is there evidence of product diversity? Explain.
3. The following data have been collected:
Cutting P225,600
Assembling P300,000
Inspecting P 67,500
Reworking P 45,000
Compute the activity rates that would be used to assign costs to each product.

Answers:
1. Activity Driver Vaquero Vaquera
Cutting hours 0.43a 0.57a
Assembly hours 0.38b 0.62b
Inspection hours 0.28c 0.72c
Rework hours 0.25d 0.75d
a
4,000/9,400; 5,400/9,400
b
2,850/7,500; 4,650/7,500
c
945/3,375; 2,430/3,375
d
150/600; 450/600

2. There is evidence of product diversity, but it is not strong. The consumption ratios vary
from 0.25 to 0.43, revealing that the vaquero boots vary in their consumption of the activities.
However, the range is narrow and so the diversity is not great.

3.
Cutting: P225,600/9,400 = P24 per Cutting hour
Assembling: P300,000/7,500 = P40 per Assembling hour
Inspecting: P67,500/3,375 = P20 per Inspecting hour
Reworking: P45,000/600 = P75 per Reworking hour

Problem 2 Calculating ABC Unit Costs

Banco de Filipino has collected the following information for four activities and two types of
credit cards.
Activity Driver Classic Gold Activity Rate
Processing transactions Transactions processed 12,000 7,200 10.00
Preparing statements No. of statements 12,000 7,200 47.50
Answering questions No. of calls 24,000 36,000 200.00
Providing ATMs ATM transactions 48,000 14,400 75.00

There are 7,500 holders of Classic cards and 30,000 holders of Gold cards.
Compute for the unit cost (rounded to the nearest centavo) for Classic and Gold credit cards.

Answer:
Activity Classic Gold
Processing transactions:
P0.20 × 12,000 P 2,400
P0.20 × 7,200 P 1,440
Preparing statements:
P0.95 × 12,000 11,400
P0.95 × 7,200 6,840
Answering questions:
P4.00 × 24,000 96,000
P4.00 × 36,000 144,000
Providing ATMs:
P1.50 × 48,000 72,000
P1.50 × 14,400 21,600
Total cost P181,800 P173,880
÷ 7,500 ÷ 30,000
Unit cost P 24.24 P 5.80

Problem 3 Assigining Costs to Activities

McCourt Company produces small engines for lawnmower producers. The accounts payable
department at McCourt has 10 clerks who process and pay supplier invoices. The total costs of
their salaries is P500,000. The work distribution for the activities that they perform is as follows:

Activity % of Time in each Activity

Comparing source documents 25%
Resolving discrepancies 60%
Processing payments 15%

Assign the cost of labor of each of the three activities in the accounts payable department.

Answer:
Activity Cost Assignment
Comparing source documents 0.25 × P500,000 = P125,000
Resolving discrepancies 0.60 × P500,000 = P300,000
 Processing payment 0.15 × P500,000 = P75,000

Problem 4 Activity Based Customer Costing

Duratex Company produces mattresses for 20 retails outlets. Of the 20 retails outlets, 19 are
small, separately owned furniture stores and one is a retail chain. The retail chain buys 60% of
the mattresses produced. The 19 smaller customers purchase mattresses in approximately
equal quantities, where the orders are about the same size. Data concerning Duratex customer
activity are as follows:

Large Retailer Smaller Retailers

Units produced 108,000 72,000
Orders placed 36 3,600
No. of sales calls 18 882
Manufacturing costs P43,200,000 P28,800,000
Order filling costs allocated P1,455,127 P970,085
Sales force costs allocated P719,820 P479,880

Currently, customer-driven costs are assigned to customers based on units sold, a unit-level
driver.

Required: Assign costs to customers by using ABC approach. Round activity rates and activity
costs to the nearest peso.

Answer:
Order Filling Rate = (P1,455,127 + P970,085)/3,636 orders = P667 per order
Selling Call Rate = (P719,820 + P479,880)/900 orders = P1,333 per sales call
Large Retailer Smaller
Cost assignment: Retailers
Ordering
P667 × 36 P24,012
P667 × 3,600 P2,401,200
Sales calls
P1,333 × 18 23,994
P1,333 × 882 1,175,706
Total P48,006 P3,576,906
Problem 5 Activity-Based Supplier Costing
Claersound uses Alpha Electronics and La Paz Company to buy two electronic components used
in the manufacture of its cell phones, Component 125X and Component 30Y. Consider two
activities, testing components and reordering components. After the two components are
inserted, testing is done to ensure that the two components in the phones are working properly.
Reordering occurs because one or both of the components have failed the test and it is
necessary to replenish component inventories. Activity cost information and other data needed
for supplier are as follows:
1. Activity Costs Caused by Suppliers (testing failures and reordering as a result).
Activity Costs
Testing components P1,200,000
Reordering components 300,000

2. Supplier Data
Alpha Electronics La Paz Company
125X 30Y 125X 30Y
Units purchase price P10 P26 P12 P28
Units purchased 120,000 60,000 15,000 15,000
Failed tests 1,200 780 10 10
No. of reorders 60 40 0 0

Required: Determine the cost of each supplier by using ABC. Round unit costs to two decimal
places.

Answer:
Test Rate = P1,200,000/2,000* failed tests
= P600 per failed test
Reorder Rate = P300,000/100** reorders
= P3,000 per reorder
* (1,200 + 780 + 10 + 10)
** (60 + 40)
Using these rates and the activity data, the total purchasing cost per unit of each component is
computed as follows:
Alpha Electronics La Paz Company
125X 30Y 125X 30Y
Purchase cost:
P10 × 120,000 P1,200,000
P26 × 60,000 P1,560,000
P12 × 15,000 P180,000
P28 × 15,000 P420,000
Testing components:
P600 × 1,200 720,000
P600 × 780 468,000
P600 × 10 6,000
P600 × 10 6,000
Reordering components:
 P3,000 × 60 180,000
P3,000 × 40 120,000
P3,000 × 0 0
P3,000 × 0 0
Total P2,100,000 P2,148,000 P186,000 P426,000
÷ Units 120,000 60,000 15,000 15,000
Unit cost P 17.50 P 35.80 P 12.40 P 28.40

Problem 6 Nonvalue-Added Costs

Lemmons Incorporated has the following two activities: (1) Retesting reworked products, cost:
P720,000. The retesting cost of the most efficient competitor is P225,000. (2) Welding sub-
assemblies, cost: P1,350,000 (67,500 welding hours). A benchmarking study reveals that the
most efficient level for Lemmons would use 54,000 welding hours and entail a cost of
P1,080,000.
Required: Determine the nonvalue-added cost of each activity.

Answer:
Retesting: Nonvalue-Added Cost = P720,000. Retesting is a nonvalue-added activity, and its
value-added standard is therefore 0. All cost is waste.
Welding: P1,350,000/67,500 welding hours = P20 per welding hour
Nonvalue-Added Cost = (AQ – SQ)P20 = (67,500 – 54,000) × P20 = P270,000

Problem 7 Velocity and Cycle Time

Kolby Company takes 36,000 hours to produce 144,000 units of a product.
What is the velocity? Cycle time?
Answer:
Velocity = 144,000 units/36,000 hours = 4 units per hour
Cycle Time = 36,000 hours/144,000 units = 0.25 hour (15 minutes)
Notice that cycle time is the inverse of velocity.