ASIAN ACADEMY FOR EXCELLENCE FOUNDATION, INC.

2044 C.M. Recto , Bgy. 390, Zone 40, Quiapo, Manila

3rd Floor, San Agustin mall Builders, San Agustin, San Fernando, Pampanga

PRACTICAL ACCOUNTING 2- COST CPA Review

ACTIVITY-BASED COSTING M. Cerda,CPA, MBA.RCA
O2017

PROBLEM 1

SJ Company produces two products – Product KK & GG, and uses a costing
system in which all overhead is accumulated in a single cost pool and allocated
based on machine hours. The company’s management has decided to
implement activity-based costing because a cost study has revealed significant
amounts of overhead costs related to set-up activity and design activity. The
number of setups and the number of design hours will be the activity drivers for
the two new cost pools, and machine hours will continue to be the base for
allocating the remaining overhead. Selected information follows the SJ
Company’s most recent year of operations:
Product KK Product GG
Units produced 500 15,500
Direct material cost per unit P200 P20
Machine hours 3,000 47,000
Direct labor cost P50,000 P350,000
Setups 120 80
Design hours 6,000 4,000
Overhead costs:
Setup cost P250,000
Design related 350,000
Others 900,000

Required: 1. Determine the total and per unit costs for the two products by the
existing system.
2. Determine the total and per unit costs for the two products by the
ABC system.
PROBLEM 2

CAT Manufacturing Company identified the following overhead costs and cost
drivers for the coming year.
Budgeted
Activity Center Cost Driver Budgeted Cost Activity Level
Machine setup No. of setups P 20,000 200
Inspection No. of inspections 130,000 6,500
Materials handling No. of material moves 80,000 8,000
Engineering Engineering hours 50,000 1,000
The following information was gathered in 3 jobs that were expected to be
completed in the coming year.
Job 1001 Job 2002 Job 3003
Direct materials P 5,000 P12,000 P 8,000
Direct labor P 2,000 P 2,000 P 4,000
Units completed 100 50 200
Number of setups 8 10 14
Number of inspection 22 15 30
Number of material moves 30 40 50
Engineering hours 25 50 15
For the past several years, the company assigned overhead costs to products
based on direct labor costs. For the coming year, the budgeted direct labor cost
was P100,000 and budgeted material cost was P280,000. The company
operates in a competitive market and sets product selling prices at cost plus 50%
markup.

Required: 1. Using the current allocation system, determine

a. The total overhead costs of Job 1001.
b. Total unit cost of Job 2002.
c. Sales price per unit of Job 3003.

2. If the appropriate cost drivers are used in assigning overhead

costs to the three products, determine
a. The total overhead costs of Job 1001.
b. Total unit cost of Job 2002.
c. Sales price per unit of Job 3003.

MULTIPLE CHOICE

For questions 1 & 2

Thunder Company incurs about P860,000 in manufacturing overhead costs each

month, which had been allocated to individual product lines based on their
relative shares of direct labor hours. The company work about 100,000 direct
labor hours per month. The company is concerned that using direct labor hours is
inappropriate because some costs are driven by other activities. The following
information regarding cost pools and drivers has been developed.

Cost Driver Amount in Pool Amount of Activity

Direct labor hours P520,000 100,000
Number of batches 280,000 500
Design changes 60,000 120

The following data regarding two product lines of the company are presented:
 Product A Product B
Direct labor hours 1,600 200
Number of batches 4 12
Design changes 2 24

Product A is produced in large batches, while Product B is a specialty line that

only few customers buy.

1. What is the overhead to be allocated to each product using direct labor

hours as the only cost driver?
Product A Product B Product A Product B
A. 13,760 1,270 C. 14,000 7,120
B. 13,760 1,720 D. 14,760 2,170

2. What is the overhead to be allocated to each product using activity based

costing?
Product A Product B Product A Product B
A. 10,760 14,670 C. 11,560 14,760
B. 10,760 14,760 D. 11,560 19,760

3. Barkley Company accumulated the following cost information for its two
products X & Y:
Product X Product Y
Production volume 2,000 1,000
Total direct labor hours 5,000 20,000
Set-up cost per batch P1,000 P2,000
Batch size 100 50
Total set-up costs incurred P20,000 P40,000
Direct labor hour cost per unit 2 1

A traditional costing system would allocate set-up costs on the basis of

direct labor hours. An ABC system would trace costs by spreading the
cost per batch over the units in a batch.

What is the set-up cost per unit of Product X under each costing system?
Traditional ABC Traditional ABC

A. P 2.40 P10.00 C. P 4.80 P40.00

B. 4.80 20.00 D. 10.00 10.00

For questions 4 to 6

Helen Corporation has identified the following overhead costs and cost drivers
for the coming year:
Budgeted Budgeted
 Overhead Item Cost Driver Cost Activity Level
Machine set-up No. of set-ups P 20,000 200
Inspection No. of inspections 130,000 6,500
Materials handling No. of material moves 80,000 8,000
Engineering Engineering hrs. 50,000 1,000
P280,000
========
The following information was collected on three jobs that were completed
during the year:
Job 101 Job 102 Job 103
Direct materials P 5,000 P12,000 P 8,000
Direct labor P 2,000 P 2,000 P 4,000
Units completed 100 50 200
No. of set-ups 1 2 4
No. of inspections 20 10 30
No. of material moves 30 10 50
Engineering hours 10 50 10
Budgeted direct labor cost was P100,000 and budgeted direct material cost
was P280,000.

4. If the company uses activity-based costing, how much overhead cost

should be assigned to Job 101?
A. 1,300 B. 2,000 C. 5,000 D. 5,600

5. If the company uses activity-based costing, compute the cost of each unit
of Job 102?
A. 340 B. 392 C. 440 D. 520

6. The company prices its products at 140% of cost. If the company uses
activity-based costing, the price of each unit of Job 103 would be
A. 98 B. 100 C. 116 D. 140

For questions 7 & 8

Pamela Company manufactures vacuum cleaners and floor polishers. The

company sells 10,000 vacuum cleaners and 1,000 floor polishers annually.
Revenues and costs incurred for each product lines are as follows:
Vacuum Cleaners Floor Polishers
Revenue P6,500,000 P5,950,000
Direct materials 1,000,000 900,000
Direct labor ( P20 per hour ) 600,000 2,000,000
Oveerhead ? ?
Direct labor hours 30,000 100,000
===== ======
Total manufacturing overhead total P1,105,000.
 7. What is the profit/(loss) per unit for each product if overhead is allocated
using direct labor hour basis?
V. Cleaners F.Polishers V. Cleaners F. Polishers
A. 389.50 2,949.50 C. 464.50 2,200.00
B. ( 450.50 ) ( 2,950.50 ) D. ( 464.50 ) ( 2,200.00 )

8. Assume that manufacturing overhead is divided into two activity centers

as follows: P650,000, which has a cost driver of direct labor hours totaling
130,000; and P455,500, which has a cost driver of machine hours totaling
50,000 hours. Vacuum cleaners production uses 30,000 direct labor hours
and 15,000 machine hours; floor polisher production uses 100,000 direct
labor hours and 35,000 machine hours. What is the profit/(loss) per unit for
each product if overhead is allocated to products using ABC method?
V. Cleaners F.Polishers V. Cleaners F. Polishers
A. 461.34 2,231.15 C. ( 461.30 ) ( 2,231.20 )
B. 461.34 ( 2,231.15 ) D. 475.00 2,731.15

For questions 9 & 10

Aleck Corporation is considering a shift to ABC costing system from the

traditional costing system. At present, the company is using full cost system,
which applied overhead on the basis of machine hours.

The company plans on using 50,000 direct labor hours and 30,000 machine
hours in the coming year. The following data is about the company’s budgeted
manufacturing overhead:
Activity Cost Driver Budgeted Activity Amount
Materials handling No. of parts handled 6,000,000 P1,440,000
Set-up costs No. of set-ups 750 630,000
Machining costs Machine hours 30,000 1,080,000
Quality control No. of batches 500 450,000

Costs, sales, and production data for one of the company’s product for the
coming year are as follows:
Prime Costs:
Direct materials cost per unit = P8.80
Direct labor cost per unit – 0.05 labor hr. @P30/hr.=1.50
Sales and production data:
Expected sales 20,000 units
Batch size 5,000 units
Set-ups 2 per batch
Total parts per finished unit 5 parts
Machine hours required per batch 80 m/c hrs.
9. Using traditional costing system, the cost per unit of product is
A. 10.78 B. 10.88 C. 12.22 D. 13.90
 10. Using ABC costing, the cost per unit of product is
A. 12.00 B. 12.16 C. 12.59 D. 13.00

For questions 11 & 12

Beverly Company produces two products – AA & BB. The company president
decided to change from unit-based, traditional costing system to ABC cost
system.
To assess the effect of the change, the following data have been gathered:

Machine Material
Quantity Prime Cost Hours Moves Set-ups
AA 400,000 P1,600,000 100,000 200,000 100
BB 100,000 300,000 25,000 100,000 50
Peso Value - 1,900,000 P1,000,000* P1,700,000 P1,300,000

 The cost of operating the production equipment.

Under the current system, the cost of operating equipment, materials handling,
and set-ups are assigned to products on the basis of machine hours. Products
are produced and moved in batches.

11. Under the current unit-based approach, what is the unit cost of AA & BB,
respectively, are
A. 12.00 & 11.00 C. 13.00 & 10.00
B. 12.00 & 13.00 D. 13.00 & 11.00

12. Using ABC system, the unit cost of AA & BB, respectively, are
A. 9.38 & 21.50 C. 12.00 & 11.00
B. 11.00 & 15.00 D. 15.00 & 11.00