CHAPTER 4 EXERCISES

1. Storrer Co. identifies the following activities that pertain to manufacturing overhead:materials handling,
machine setups, factory machine maintenance, factory supervision,and quality control. For each activity, identify
an appropriate cost driver.

An appropriate cost driver for each activity is:

Activity Cost Driver

Materials handling Number of requisitions
Machine setups Number of setups
Factory machine maintenance Machine hours used
Factory supervision Number of employees
Quality control Number of inspections
2. Mason Company manufactures four products in a single production facility. The company uses activity-based
costing. The following activities have been identified through the company’s activity analysis: (a) inventory
control, (b) machine setups, (c) employee training, (d) quality inspections, (e) material orderings, (f) drilling
operations, and (g) building maintenance. For each activity, name a cost driver that might be used to assign
overhead costs to products.

(a) Number of parts or assemblies

(b) Number of setups
(c) Number of employees
(d) Number of inspections
(e) Number of purchase orders
(f) Machine hours
(g) Square meters occupied
3. Mordica Company identifies three activities in its manufacturing process: machine setups, machining, and
inspections. Estimated annual overhead cost for each activity is $1,500,000, $3,750,000, and $875,000,
respectively. The cost driver for each activity and the expected annual usage are: number of setups 2,500,
machine hours 25,000, and number of inspections 1,750. Compute the overhead rate for each activity.

Machine setups HK$1,500,000 ÷ 2,500 = HK$600 per setup

Machining HK$3,750,000 ÷ 25,000 = HK$150 per machine hour
Inspections HK$ 875,000 ÷ 1,750 = HK$500 per inspection
4. Weisman, Inc. uses activity-based costing as the basis for information to set pricesfor its six lines of seasonal
coats. Compute the activity-based overhead rates using the following budgeted data for each of the activity cost
pools.
Estimated Estimated Use of
Activity Cost Pools Overhead Cost Drivers per Activity
Designing € 450,000 10,000 designer hours
Sizing and cutting 4,000,000 160,000 machine hours
Stitching and trimming 1,440,000 80,000 labor hours
Wrapping and packing 336,000 32,000 finished units

Estimated Estimated Use of Activity-Based

Activity Cost Pool Overhead ÷ Cost Drivers per Activity = Overhead Rates
Designing € 450,000 10,000 designer hours €45.00 per designer hour
Sizing and cutting 4,000,000 160,000 machine hours €25.00 per machine hour
Stitching and trimming 1,440,000 80,000 labor hours €18.00 per labor hour
Wrapping and packing 336,000 32,000 finished units €10.50 per finished unit
5.Hollins, Inc., a manufacturer of gourmet potato chips, employs activity-based costing.The budgeted data for
each of the activity cost pools is provided below for the year2020.
Estimated Estimated Use of
Activity Cost Pools Overhead Cost Drivers per Activity
Ordering and receiving $ 84,000 12,000 orders
Food processing 480,000 60,000 machine hours
Packaging 1,760,000 440,000 labor hours
For 2020, the company had 11,000 orders and used 50,000 machine hours, and laborhours totaled 500,000. What
is the total overhead applied?
Estimated Estimated Use of Activity-Based
Activity Cost Pool Overhead ÷ Cost Drivers per Activity = Overhead Rates
Ordering and receiving $ 84,000 12,000 orders $7.00 per order
Food processing 480,000 60,000 machine hours $8.00 per machine hour
Packaging 1,760,000 440,000 labor hours $4.00 per labor hour

Overhead Total Overhead

Cost Drivers X Rates = Applied
11,000 orders $7.00 $ 77,000
50,000 machine hours $8.00 400,000
500,000 labor hours $4.00 2,000,000
$2,477,000
6.Rich Novelty Company identified the following activities in its production andsupport operations. Classify each
of these activities as either value-added or non–valueadded.
(a) Machine setup. (d) Moving work in process.
(b) Design engineering. (e) Inspecting and testing.
(c) Storing inventory. (f) Painting and packing.

(a) Non-value-added
(b) Value-added
(c) Non-value-added
(d) Non-value-added
(e) Non-value-added
(f) Value-added
7.Trammell, Inc. operates 20 injection molding machines in the production of toolboxes of four different sizes,
named the Apprentice, the Handyman, the Journeyman, andthe Professional. Classify each of the following costs
as unit-level, batch-level, product-level,or facility-level.
(a) First-shift supervisor’s salary.
(b) Powdered raw plastic.
(c) Dies for casting plastic components.
(d) Depreciation on injection molding machines.
(e) Changing dies on machines.
(f) Moving components to assembly department.
(g) Engineering design.
(h) Employee health and medical insurance coverage.

(a) Facility-level
(b) Unit-level
(c) Product-level
(d) Unit-level
(e) Batch-level
(f) Batch-level
(g) Product-level
(h) Facility-level
8. Adamson Company manufactures four lines of garden tools. As a result of an activity analysis, the accounting
department has identified eight activity cost pools. Each of the product lines is produced in large batches, with
the whole plant devoted to one product at a time. Classify each of the following activities or costs as either unit-
level, batch level, product-level, or facility-level.
(a) Machining parts. (e) Assembling parts.
(b) Product design. (f) Purchasing raw materials.
(c) Plant maintenance. (g) Property taxes.
(d) Machine setup. (h) Painting.

(a) unit-level
(b) product-level
(c) facility-level
(d) batch-level
(e) unit-level
(f) batch-level
(g) facility-level
(h) unit-level