Q.

1 XYZ Company has identified the following overhead activities, costs, and activity drivers for the
coming year:
Activity Expected Cost Activity Driver Activity Capacity
Material-handling costs.............. $45,000 Number of moves.................... 450
Machine costs............................ 80,000 Machine hours......................... 20,000
Order costs................................. 15,000 Number of orders..................... 750
Receiving costs.......................... 30,000 Number of parts....................... 50,000
Setup costs................................. 50,000 Number of setups..................... 250
Assume that each activity corresponds to a process. XYZ’s normal activity is 5,000 direct labor hours.
The following two jobs were completed during March:
Job X-1 Job Y-4
Direct materials........................................... $1,500 $2,000
Direct labor ($15 per hour).......................... $750 $750
Units completed.......................................... 200 200
Number of moves........................................ 3 6
Machine hours............................................. 125 75
Number of orders........................................ 3 12
Number of parts.......................................... 200 800
Number of setups........................................ 1 4

Required:
1. Determine the unit cost for each job using direct labor hours to apply overhead.
2. Determine the unit cost for each job using the activity drivers to apply overhead.
3. Which method produces the more accurate cost assignment? Why?

a) Unit cost for each job using direct labor hours = Total cost / No. of labour hours.
= 45000+80000+15000+30000+50000/50*
= $4400 for each job
* 750/15 = 50 hours
b). Unit cost for each job using ABC method
Statement of cost pool :-
Activity Expected Cost Activity Driver Activity Capacity Rate
Material-handling costs $45,000 Number of moves 450 $100 per move
Machine costs 80,000 Machine hours 20,000 $4 per hour
Order costs 15,000 Number of orders 750 $20 per order
Receiving costs 30,000 Number of parts 50,000 $0.60per part
Setup costs 50,000 Number of setups 250 $200 per setup
Statement of cost Job X-1 Job Y4
Direct materials $1,500 $2,000
Direct labor ($15 per hour) $750 $750
Material-handling costs $300(3*100)     $600(6*100)
Machine costs $500(125*4) $500(75*$)
Order costs $60(3*20) $240(12*20)
Receiving costs $120(200*0.6) $480(800*0.6)
Setup costs $200(1*200) $800(4*200)
   $3430 $5370
c) ABC method is more accurate as it gives answer as per the activity for which it is incurred.
Q.2
Required:
Classify the following activities as unit-level, batch-level, product-level, or facility-level.

1. Marketing a product
2. Paying rent
3. Drilling a hole
4. Lighting the factory
5. Running the machines
6. Moving a batch
7. Engineering a product
8. Inspecting a machined part when it is completed
9. Ordering a purchased part
10. Setting up a machine
11. Using janitorial services
12. Paying insurance

Four general activity categories include:

Unit-level activities are those that are performed each time a unit is produced.
Batch-level activities are those that are performed each time a batch is produced.
Examples: Setup, inspections (if done by sampling units from a batch), purchasing, material handling
Product-level activities are those performed that enable the various products of a company to be
produced.
Examples: Engineering changes to products, developing product-testing procedures, introducing new
products, expediting goods
Facility-level activities are those that sustain a factory’s general manufacturing processes.
Examples: Providing facilities, maintaining grounds, providing plant security

Q.3
Acme Enterprises is a custom manufacturer of specialty circuit boards. The boards are produced in
batches in a single manufacturing facility. Each board requires an engineer to prepare the speci fications
and schematic drawings. Once this design is complete, the equipment is set up for the batch production.
As each batch is completed, a sample of the units is inspected for quality and tolerances. Costs have
been assigned as follows:
Engineering.................................... $75,000
Setups............................................. 60,000
 Labor.............................................. 50,000
Inspection....................................... 75,000
Factory lease.................................. 30,000
Factory utilities.............................. 12,000
The following activity drivers have been identified and their capacities determined:
Activity Driver Practical Capacity
Labor hours.................................... 5,000
Setup hours..................................... 2,000
Engineering hours.......................... 2,500
Inspection hours............................. 6,000
Machine hours................................ 10,000
The costs of the facility-level activities are assigned using machine hours.
Required:
1. Identify each activity as unit-level, batch-level, product-level, or facility-level.
2. Create homogeneous cost pools. Identify the activities that belong to each pool and the activity
driver that will be used for computing pool rates. (Use machine hours as the activity driver for the
factory lease and factory utilities cost pools.)
3. Compute the pool rate for each pool you have identified in Requirement 2.
4. 1)
5. Engineering.................................   Product Level
6. Setups.........................................   Batch Level
7. Labor..........................................    Unit Level
8. Inspection...................................    Unit Level
9. Factory lease...............................   Facility Level
10. Factory utilities...........................     Facility Level
11.
12. 2) Cost Pool Cost Driver Driver
13. Cost Pool 1
14. Engineering.................................  Engineering Hours
15. Cost Pool 2
16. Setups.........................................   Set-up Hours
17. Cost Pool 3
18. Labor..........................................    Labor Hours
19. Cost Pool 4
20. Inspection...................................    Inspection Hours
21. Cost Pool 5
22. Factory lease...............................   Machine Hours
23. Factory utilities...........................     Machine Hours
24.
25. 3)
26. Cost Pool 1 $30/engineering hour
27. Cost Pool 2 $30/set-up hours
28. Cost Pool 3 $10/labor hours
29. Cost Pool 4 $12.50/inspection hours
30. Cost Pool 5 $4.20/machine hours
31.
32. See computation below.
33.
Explanation:
34. 3) Cost Pool Over Head Cost Activity Level of Cost Driver Pool Rate (Cost / Act.
Level)
35. Cost Pool 1 $75,000 2,500 hrs $30/engineering hour
36. Cost Pool 2 $60,000 2,000 hrs $30/set-up hours
37. Cost Pool 3 $50,000 5,000 hrs $10/labor hours
38. Cost Pool 4 $75,000 6,000 hrs $12.50/inspection hours
39. Cost Pool 5 $42,000 10,000 hrs $4.20/machine hours
Q.4
Alcatraz Company makes two models of an antitheft device. The portable model is relatively small and is
primarily for use in automobiles. The standard model is much larger and is designed for houses and
buildings. The Fabricating Department cuts, bends, and welds sheet metal to produce the external box of
the device. The box is also painted in this department. The Assembly Department uses purchased parts to
produce the internal workings and fit them into the prepared metal boxes.
Alcatraz has conducted a special study to determine if an activity-based costing system would be
beneficial in determining the costs of the two products. The Fabricating Department is a more complex
department than the Assembly Department and has been chosen for a pilot test of an ABC system. The
following activities have been identified, along with their associated costs:
Depreciation................................................ $250,000
Factory lease............................................... 125,000
Inspection.................................................... 75,000
Factory maintenance................................... 150,000
Materials handling....................................... 100,000
Power.......................................................... 50,000
Product engineering changes....................... 25,000
Setups.......................................................... 125,000
Department manager salaries...................... 60,000
The analysts have identified the following potential activity drivers and the capacity of each:
Portable Standard
Direct labor  ($10 per hour)........................ $75,000 $90,000
Machine hours............................................. 4,000 6,000
Materials..................................................... $450,000 $650,000
Number of moves........................................ 1,500 1,500
Number of products.................................... 1 1
Number of setups........................................ 150 350
Units produced............................................ 15,000 17,500

Required:
1.Classify each activity according to activity level and identify an appropriate driver for each.
2.Create homogeneous cost pools and calculate pool rates. (Use the number of setups as the activity
driver for both inspection and setups costs. Machine hours serve as the activity driver for
depreciation, factory lease, factory maintenance, and department manager salaries.)
3. Use the pool rates to compute per unit overhead costs for the two products.
Q.5
Laraib Distributions have been accused of discriminating against its small-order customers
(25 to 50 cases) in southern territory when compared with same class of customers in other
territory. The company has classified its marketing costs by territories. It now plans to
allocate the territorial costs to different categories of customers within each territory.
Tabulation of the average distribution costs per year in southern territory shows:

Advertising;
Direct to customers Rs.36,000
Radio and newspapers 90,000
Sales salaries 360,000
Sales commission 480,000
Delivery 288,000
Sales travel cost 108,000
Collection cost 84,000
Rs.1446,000
The sales department has furnished the following data to assist prorating costs in southern
territory between small, medium and large order customers.

Small order Medium order Large order customers

customers customers
Net sales (Rs.) 1500,000 2,220,000 3,500,000
Number of sales order taken 2,500 2,000 1,500
Number of cases of product sold 1,000,000 1,500,000 2,500,000
Relative shipping cost (per order) 10 20 30
(Rs.) 1,500 1,500 2,000
Number of customers
Relative number of kilometers 4 10 16
Travelled (per day per 13 6 5
salespersons)
Number of salespersons

In the collection department, the bookkeeping cost per order handled is about one rupee. Each
customer is mailed a statement at month end. The customers make single month remittances
on account.

All salespersons are paid the same salary and each salesperson works with a single class of
customer.

Required:
 Prepare a statement showing allocation of the distribution costs of southern territory to the
three classes of customers. Indicate the base or bases on which each allocation is made.
(Round off all computations suitably).

Q.6
Having the attention in ICMA course on activity based costing (ABC) you decide to
experiment by applying the principle of ABC to the four products currently made and sold by
your company. Details of the four products and relevant information are given below for one
period;

Product A B C D
Output in units 120 100 80 120
Cost per unit: Rs. Rs. Rs. Rs.
Direct material 40 50 30 60
Direct labor 28 21 14 21
Machine hour per unit 4 3 2 3

The four products are similar and are usually produced in production runs of 20 units and
sold in batches of 10 units.
The production overheads are currently absorbed by using a machine hour rate the total of
production overheads for the period are analyzed as follows:

Rs.
Machine department costs
(rent, business rates, depreciation, and supervision) 10,430
Setup costs 5,250
Stores receiving 3,600
Inspection / Quality control 2,100
Material handling and dispatch 4,620

You have ascertained that the ‘Cost Drivers’ to be used are listed below for the overhead
costs shown:

Costs Cost Driver

Set up costs Number of production runs
Stores receiving Requisitions raised
Inspection / Quality control Number of production runs
Material handling and dispatch Orders executed

The number of requisitions raised on the store was 20 for each period product and the number
of orders executed was 42, each order being for a batch of a product.
You are required:
a) To calculate the total costs of each product if all overhead costs are absorbed on
machine hour basis.
b) To calculate the total costs for each product using activity based costing.
c) To calculate and list the unit product costs from your figures in (a) and (b) above to
show the difference and to comment briefly on any conclusions which may be drawn
and which could have profit and pricing implications.