FACULTY OF BUSINESS

MANAGEMENT ACCOUNTING
TUTORIAL 4 – ACTIVITY COSTING
QUESTION PAPER
Question 1
Classify the following activities as unit-level, product level, or facility-level.
1. Marketing a product product level
2. Paying rent facility-level
3. Drilling a hole unit-level
4. Lighting the factory facility-level
5. Running the machines unit-level
6. Moving a batch product level
7. Engineering a product product level
8. Inspecting a machined part when it is completed Batch level activities /
facility-level
9. Ordering a purchased part product level
10. Setting up a machine Batch level activities
11. Using janitorial services facility-level
12. Paying insurance facility-level
Question 2
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:
a. Determine the unit cost for each job using direct labor hours to apply overhead
b. Determine the unit cost for each job using the activity drivers to apply overhead
Question 3
Babu Incs., manufactures two products, Super and Duper, and applies overhead on the basis of direct labor
hours.
Anticipated overhead and direct labor time for the upcoming accounting period are $2,600,000 ans 23,000
hours respectively.
Information about the company’s product follows:
SUPER:
Estimated production volume: 2,000 units
Direct materials cost: $24 per unit
Direct labor per unit: 3 hours at $15 per hour
DUPER:
Estimated production volume: 3,000 units
Direct materials cost: $42 per unit
Direct labor per unit: 4 hours at $15 per hour
Babu overhead of $2,600,000 can be identified with three major activities:
Processing - $200,000
Machine processing - $2,000,000
Product inspection - $400,000
These activities are driven by number of orders processed, machine hours worked and inspection hours
respectively.
Data relevant to these activities follow:

PROCESSED MACHINE HOURS WORKED INSPECTION HOURS

SUPER 300 14,000 4,000
DUPER 180 11,000 6,000
TOTAL 500 25,000 10,000

REQUIRED:
a. Compute the overhead rates that would be used for order processing, machine processing and product
inspection in an activity-based costing system.
b. Based on the overhead rate above, compute the production cost per unit for Super and Duper
c. How much overhead would be applied to a unit Super and Duper if the company used traditional
costing and applied overhead solely on the basis of direct labor hours? Which of the products would be
under costed by this procedure?
Question 4
Didwell Limited produces a single product, Product B. One unit of Product B has a prime cost of $10.20, which

includes one hour of direct labour @ $6.20, and each unit uses 0.5 hours of machine time. Estimated

production of B in 2018 is 60,000 units and total production overheads estimated at $218,000.

Calculate the traditional absorption overhead recovery rate (to the nearest penny) for 2018, based on:

I. Direct labour hours

II. Machine hours

III. Units of production