ABC Practice Problems

1. Music 2 Go (M2G) makes portable digital audio players. Two models are available:
Compact and Deluxe. M2G uses activity-based costing to allocate indirect
manufacturing costs. In the past all costs were allocated based on Direct Material cost.
After switching to the ABC system, they have identified three activities and the related
cost drivers in making their products. Information for a recent month is provided below.

Activity Cost Driver

Materials Handling Direct Materials Cost
Engineering Engineering Change Notices
Power Kilowatt hours
Cost Driver Compact Deluxe
Direct Materials Cost $113,750 $211,250
Engineering Change Notices 9 3
Kilowatt Hours 84,000 126,000

Indirect Manufacturing
Costs:
Materials Handling $65,000
Engineering 48,000
Power 94,500
$207,500
Total

How much of the indirect manufacturing costs should be allocated to the Compact digital
audio players using the old system and the new ABC system?

2. In the past, XYZ Hospital allocated all of its overhead costs to patients based on nursing
time. XYZ has decided to switch to an activity-based costing system using three activity
pools. Information related to the new system is as follows:

Activity Cost Driver Estimated Cost Estimated Activity

Registration Number of patients $ 75,000 1,000 patients
Patient Care Nursing time $900,000 150,000 hours
Billing Number of bills $120,000 2,500 bills

Data concerning two patients follows:

Patient Nursing time Number of bills

A 100 hours 2
B 60 hours 3

Compute the overhead allocated to the two patients under the old system and the new
activity-based costing system.
3. Diamond Cleats Co. manufactures cleats for baseball shoes. It has outlined the following
overhead cost drivers:

Diamond Cleats Co. has an order for cleats that has the following production requirements:

   

Using activity-based costing, applied total overhead for the baseball cleat order based is:

____________________________
4. Sealing Company manufactures a product that is available in both a Deluxe model and a
Regular model. Indirect production costs are assigned to the products using direct labor hours.
For the current year, the company estimates $2,000,000 of indirect production costs and 40,000
direct labor hours. They expect to produce 5,000 units of the Deluxe model and 40,000 units of
the Regular model. The Deluxe model requires 1.6 hours of direct labor time per unit and the
Regular model requires 0.8 hours. Other costs are as follows:

Costs Deluxe Model Regular Model

Direct materials $150 $112
Direct labor $16 $8

Assume the company's indirect production costs can be traced to four activities with the
following cost drivers:

Activity (Cost Driver) Costs

Purchase orders (number of purchase orders) $84,000
Rework orders (number of rework orders) $216,000
Product testing (number of tests) $450,000
Machining (number of machine hours) $1,250,000

Deluxe Regular
Cost Drivers Model Model
Number of purchase orders 400 600
Number of rework orders 200 600
Number of tests 4,000 6,000
Number of machine hours 20,000 30,000

Required:
A) Assume direct labor hours are the only cost-allocation base (Traditional Method). What is the
cost to manufacture one unit of each model?
B) Assume the activity-based costing method is used. What is the cost to manufacture one unit of
each model?
5. Hails Corporation manufactures two products: Product Q21F and Product H44W. The
company uses a plantwide overhead rate based on direct labor-hours. It is considering
implementing an activity-based costing (ABC) system that allocates its manufacturing overhead
to four cost pools. The following additional information is available for the company as a whole
and for Products Q21F and H44W.

Activity Cost Pool Activity Measure Total Cost Total Activity

Machining Machine-hours $ 195,000 13,000 MHs
Machine setups Number of setups $ 90,000 150 setups
Product design Number of products $ 64,000 2 products
General factory Direct labor-hours $ 280,000 10,000 DLHs

Activity Measure Product Q21F Product H44W

Machine-hours 9,000 4,000
Number of setups 80 70
Number of products 1 1
Direct labor-hours 6,000 4,000

a. Calculate activity rates for each activity cost pool using activity-based costing.
b. Determine the amount of overhead cost that would be assigned to each product using activity-
based costing.

6. Dane Housecleaning provides housecleaning services to its clients. The company uses an
activity-based costing system for its overhead costs. The company has provided the following
data from its activity-based costing system.

Activity Cost Pool Total Cost Total Activity

Cleaning $263,784 34,800 hours
Job support 145,180 7,000 jobs
Client support 4,774 220 clients

One particular client, the Hoium family, requested 45 jobs during the year that required a total of
90 hours of housecleaning. For this service, the client was charged $2,000.

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round off
all calculations to the nearest whole cent.

b. Using the activity-based costing system, compute the customer margin for the Hoium family.
Round off all calculations to the nearest whole cent.
7. Dobles Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Total Cost Total Activity

Assembly $ 228,060 18,000 machine-hours
Processing orders $ 34,068 1,200 orders
Inspection $ 125,560 1,720 inspection-hours

The company makes 420 units of product D28K a year, requiring a total of 460 machine-hours,
80 orders, and 10 inspection-hours per year. The product's direct materials cost is $48.96 per unit
and its direct labor cost is $25.36 per unit. Calculate total Mfg. Overhead cost of D28K and total
Mfg. Cost of D28K.