Activity Based Costing Practice Problems

1. In a two-stage cost allocation system,

a. The first stage involves assigning overhead costs to cost pools.
b. The cost pools may be departments.
c. Each cost pool requires an allocation rate.
d. All of the above.
2. One of the cost pools at Toylands Store is Personnel department that provides recruiting and training for Sales and
Administrative departments and has an estimated overhead of $45,000. Sales department has 12 employees and
Administrative department has 3. How much of the overhead cost of the Personnel department should be allocated
to the Sales department? A:$36000

The following information applies to the next 4 problems.

The accountant of Toylands Manufacturing collected the following information:

Activity Overhead costs Cost driver Product X1 Product X2

Machining Dept.

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Setup $200,000 Number of setups 200 50

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Machining 700,000 Machine hours 20,000 15,000

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Packaging Dept.

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Assembly 300,000 Direct labor hours 40,000 60,000
Inspection 180,000 Number of inspections 120 60

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3d If Toylands Manufacturing uses a plantwide rate based on direct labor hours to allocate overhead costs, how much is
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product X1’s share of overhead? A:$552000

4. If a two-stage department allocation method is used, what is the overhead rate for the Machining department with
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machine hours as the allocation base?A:$25.71 per MH

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5. When activity-based costing is used, what is product X2’s share of the Packaging department overhead costs?
A:$240000
6. When activity-based costing is used, how much of the overhead cost is allocated to product X1?
A:$800000
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7. Which of the following is true of activity-based costing relative to traditional costing?

a. Less detailed cost measures.
b. Accounting department can handle all the work.
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c. More cost pools.

d. Less costly to implement.
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A:More cost pools

8. Activity-based costing can be beneficial to

a. Banks.
b. Nonprofit organizations.
c. Law firms
d. All of the above.
A: D

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 The following information applies to the next 4 problems.
Brannon Company manufactures ceiling fans and uses an activity-based costing system. Each ceiling fan
consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to
produce. Additional information follows:
Activity Allocation Base Cost Allocation Rate
Materials handling Number of parts $ .08
Machining Machine hours $7.20
Assembling Number of parts $.35
Packaging Number of finished units $2.70

9. What is the cost of materials handling per ceiling fan?

A:$1.60
10. What is the cost of machining per ceiling fan?
A:$18.00
11. What is the cost of assembling per ceiling fan?
A:$7.00
12. What is the total manufacturing cost per ceiling fan?
A:$124.30

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The following information applies to the next 3 problems.

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Kenney Company uses activity-based costing to account for its manufacturing process. Kenney Company

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produces tires and each tire has $.50 of direct materials, includes 20 parts and requires 2 hours of machine time.

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Additional information follows:

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Activity Allocation Base Cost Allocation Rate
Materials handling Number of parts $ .16
Machining Machine hours $14.40
Assembling Number of parts $.70
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Packaging Number of finished units $5.40

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13. What is the cost of materials handling per tire?

A:$3.20
14. What is the cost of machining per tire?
A:$28.80
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15. What is the cost of assembling per tire?

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A:$14.00

The following information applies to the next 2 problems.

Alpha Company manufactures breadboxes and uses an activity-based costing system. The following
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information is provided for the month of May:

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Activity Estimated Indirect Allocation Base Estimated Quantity

Activity Costs of Allocation Base
Materials handling $ 3,500 Number of parts 5,000 parts
Assembling $12,000 Number of parts 5,000 parts
Packaging $5,750 Number of bread 1,250 bread boxes
boxes

Each breadbox consists of 4 parts, and the direct materials cost per breadbox is $7.00.
16. What is the cost of materials handling and assembling per breadbox?
A:$12.40

17. What is the total manufacturing cost per breadbox?

A:$24.00
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 The following information applies to the next 4 problems.
Sleep Tight Company manufactures pillows using an activity-based costing system. The following
information is provided for the month of June:

Activity Estimated Indirect Allocation Base Estimated Quantity

Activity Costs of Allocation Base
Materials handling $ 3,150 Number of parts 4,200 parts
Assembling $13,860 Number of parts 4,200 parts
Packaging $2,730 Number of pillows 1,050 pillows
Each pillow consists of 4 parts, and the total direct materials cost per pillow is $3.50.
18. What is the total cost of materials handling and assembling for each pillow?
A:$16.20
19. What is the total cost of packaging per pillow?
A:$2.60
20. What is the total manufacturing cost per pillow?
A:$22.30
21. If the cost to purchase the same pillow from a supplier is $21.00, what should Sleep Tight do to maximize

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profits?

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a. Continue to manufacture the pillow.

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b. Since the cost to manufacture the pillow is also $21.00, the company would make the same

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profit whether it bought the pillow or manufactured it.
c. Purchase the pillow from the supplier.

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A: C
d. Close down the business
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The following information applies to the next 5 problems.
Pitt Jones Company had the following activities, overhead costs, and allocation bases:
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Activities Overhead Costs Allocation Base

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Account inquiry (hours) $60,000 2,000 hours

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Account billing (lines) $30,000 20,000 lines

Account verification (accounts) $15,000 20,000 accounts
Correspondence (letters) $10,000 1,000 letters
The above activities are used by departments P and Q:
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Department P Department Q
Account inquiry (hours) 100 hours 200 hours
Account billing (lines) 10,000 lines 7,000 lines
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Account verification (accounts) 1,000 accounts 600 accounts

Correspondence (letters) 50 letters 100 letters
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22. What is the cost per driver unit for the account inquiry activity?
A:$30.00
23. What is the cost per driver unit for the account billing activity?
A:$1.50
24. What is the cost per driver unit for the account verification activity?
A:$0.75
25. What is the cost per driver unit for the correspondence activity?
A:$10.00
26. How much of the account inquiry cost will be assigned to Department Q?
A:$6000

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 27. Quality Stereo Company has provided the following information regarding its activity-based costing
system:
 Purchasing department costs are allocated based on purchase orders and the cost allocation
rate is $75 per purchase order.
 Assembly department costs are allocated based on the number of parts used and the cost
allocation rate is $1.00 per part.
 Packaging department costs are allocated based on the number of units produced and the
allocation rate is $2.00 per unit produced.

Each stereo produced has 50 parts, and the direct materials cost per unit is $70. Quality Stereo has an
order for 1,000 stereos which will require 50 purchase orders. What is the total cost of the 1,000 stereos?

A:$125750

28. Classic Manufacturing has provided the following information:

Expected production of product KB11 is estimated to be 12,000 units for the upcoming period.
Each unit of KB11 takes three direct labor hours to produce and 1,000 material moves are expected.

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 Expected production of product JL22 is estimated to be 6,000 units for the upcoming period.

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Each unit of JL22 takes nine direct labor hours to produce and 300 material moves are expected.

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 Material handling costs are estimated to be $10,800 for the upcoming period and are allocated

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based on direct labor hours.
What is the material handling cost per unit of JL22?

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A:$1.08
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29. RJ Company manufactures many products which each use a variety of direct laborers of different skill
levels. Which of the following cost drivers would be the most applicable for assigning direct labor
scheduling costs to the finished products?
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a. Number of products produced

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b. Number of direct labor hours incurred

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c. Total cost of the direct labor incurred

d. Number of direct laborers assigned to each product
A: C
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The following information pertains to the next 2 questions.

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Singleton Company manufactures two models of pens, a standard and a deluxe model. The company has traditionally applied all
overhead to its two products based on the number of Direct-labor hours [DLHrs]. They are considering using Activity-Based
Costing. They identified three activities that account for all of their overhead, and identified the most likely cost drivers (in
parentheses): Setups (number of setups), Material handling (number of parts), and Maintenance (number of direct-labor
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hours). Their analysis of total overhead costs found that those costs could be traced to the three activities as follows: Setups,
$24,000; Material handling, $57,600; and Maintenance, $14,400. The use of cost drivers for each of Singleton Company’s two
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products are as follows:

Number of Number of Number of
Product Setups Parts DLHrs_
Standard 110 400 75,000
Deluxe 140 600 45,000
30. What is the total amount of overhead costs assigned to the standard model assuming an activity-based costing system?
A:$42600
31. What is the total amount of overhead costs assigned to the deluxe model assuming a traditional costing system?
A:$36000

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 32. Sagging Prod Corporation manufactures only two types of wireless video streaming converters, the G4 and the D11. The
activities, the estimated overhead cost for each activity, along with cost drivers and estimated amount of cost driver activity used
by each product, are detailed below:
Expected Expected
Activity Overhead Cost Driver Activity Activity
Cost G4 D11
Designing & forming $240,000 # design hours 96 Dhrs 128 Dhrs
(Dhrs)
Purchasing costs $608,000 # purchase orders 16 po’s 28 po’s
(po’s)
Material handling $112,000 # pounds (lbs) 880 lbs 1,500 lbs
Each G4 unit requires $30 of Direct Material, and $18 of Direct Labor. Each D11 unit requires $42 of Direct Material and $26 of
Direct Labor.
If activity-based costing is used, and the company produced 10,000 units of the D11 model during the year, then what is the
total cost of each D11 unit (may be rounded to nearest penny)?
A:$127.46

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Use the information below to answer the following two (2) questions.

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Remote, Inc. is a manufacturer of remote controls. The company has always used a single, plant-wide rate for allocating

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manufacturing overhead to its products. The plant manager believes it is time to change to a better method of cost allocation.

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The accounting department has been able to establish some relationships between production activities and manufacturing

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overhead. They are as follows:
Activity
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Material handling Number of parts $2 per part
Assembly Direct Labor hours $20 per hour
Inspection Time at inspection station $3 per minute
The traditional allocation method is based on direct labor hours only, and if that method is used the overhead rate is $200
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per direct labor hour.

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33. To produce a particular model of remote control, a batch of 500 units requires 1,000 parts, 10 direct labor hours, and 15
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minutes of inspection time. If the traditional method for applying overhead is used, what is the overhead cost per unit?
A:$4.00
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34. To produce another model, a batch of 50 units requires 100 parts, 6 direct labor hours, and 2.5 minutes of inspection time.
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If activity based costing is used, what are the overhead costs per unit?
A:$6.55

The following information refers to the next two (5) questions:

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X Company had the following activities, estimated overhead costs, and estimated annual amounts of
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cost drivers:

Cost Overhead Amount of

Activities Driver Costs Cost Driver
Account inquiry hours $96,000 1,500 hours
Account billing pages 560,000 200,000 pages
Account verification contracts 123,000 2,000 contracts
Correspondence letters 18,000 4,500 letters
The above activities are used by products J and K as follows (Note: there are other products that make up
the total amount of cost driver activity, but they are not important to this problem):

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 J K
Account inquiry 70 hours 160 hours
Account billing 45,000pages 20,000 pages
Account verification 200 contracts 700 contracts
Correspondence 120 letters 60 letters
35. Using Activity based costing, what is the rate for applying each overhead activity?
A: (here is just one rate. If you get it correct, you probably have the other rates correct.)
Correspondence: $4 per letter.
36. Using Activity based costing, how much total overhead cost will be assigned to Product K?
A: $109530
37. Information about Direct costs and units produced, associated with making products J and K are as follows:
Product J K
Direct Material $160,000 $151,000
Direct Labor $211,000 $225,000

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Number of Units produced 25,000 30,000

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Using ABC, what is the cost per unit for J? Using ABC, what is the cost per unit for K?
A: J:$20.57 per unit; K: $16.18 per unit

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38. Traditionally, X Company applied ALL overhead, in a single overhead cost pool, based on Direct Labor costs.
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Total estimated Direct Labor costs for X Company for the period are $1,350,000. Determine the amount of
overhead allocated to products J and K using the traditional method.
A: J:$124568; K: $132833
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39. Calculate the cost per unit of products J and K when the traditional method of allocating overhead is used.
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A: J:$19.82 per unit; K: $16.96 per unit

The following information refers to the next two (2) questions:
40. Z Company identifies three activities in its manufacturing process: machine setups, machining, and
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inspections. Estimated annual overhead cost for each activity is $960,000, $975,000, and $280,000
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respectively. The cost driver for each activity and the budgeted annual usage are: number of setups
6,000, machine hours 125,000, and number of inspections 17,500. What is the overhead rate for each
activity?
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A: (here is just one rate. If you get it correct, you probably have the other rates correct.)
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Machine Setup Overhead: $160 per setup.

41. Z Company has traditionally allocated overhead to its jobs using a single overhead cost pool, based on
Direct Labor hours. If Z budgets that it will use 175,000 DLHours next year, what would the traditional
overhead rate have been?
A: $12.66 per DLHr

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 42. W, Inc. is a manufacturer of digital cameras. Traditionally, the company has used a single overhead rate
based on direct labor hours for allocating overhead to its products. The plant manager believes it is
time to change to Activity Based Costing as a better method of allocating overhead. The accounting
department has been able to establish some new relationships between production activities and
manufacturing overhead. They are as follows:
Activity Cost Driver Overhead Allocation Rate
Material handling Number of parts $22 per part
Assembly Direct Labor hours $46 per hour
Inspection Time at inspection station $13.50 per minute
What are the total overhead costs allocated to a batch of 5000 cameras, assuming activity-based costing
method is used? The batch requires 1000 parts, 256 direct labor hours, and 425 minutes of inspection time.
A: $39513.50
The following information pertains to the next 2 questions.
G Corporation manufactures portable toilets for the space shuttle. Their product line consists of a
complete mobile toilet system for transporting, and a larger, complete toilet system for use in the shuttle. G

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Corp. is analyzing the profitability of their two products. Part of the analysis involves estimating the

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amount of overhead to be allocated to each product line. The following information relates to overhead:

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Mobile Shuttle

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Toilet system Toilet system

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Systems planned for production...................................... 4 2
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Components (parts) per product line.............................. 6,000 14,000
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Quality inspections per product line.............................. 3,900 5,700
Direct labor hours per product line................................. 6,400 12,400
The total estimated manufacturing overhead was $5,860,000. In the past, G Corp used a traditional
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system to allocate overhead based on direct-labor hours. Now, the company is considering using an
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Activity-Based Costing system. Their analysis shows that the $5,860,000 of overhead was comprised of
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$2,300,000 for material handling costs and $1,650,000 for quality control costs, and $1,910,000 for
assembly costs.
43. Using traditional costing, what amount of overhead costs are assigned to each Mobile toilet unit? And
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each Shuttle toilet unit?

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A: M:$498,723.50 per unit; S: $1,932,553 per unit

44. Using Activity-based costing and the most appropriate cost driver for each activity, what amount of
overhead costs are assigned to each Shuttle toilet unit? And each Mobile toilet unit?
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A: M:$502,631 per unit; S: $1,924,737.50 per unit

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