PRACTICAL ACCOUNTING PROBLEMS II

Activity-Based Costing
The budgeted manufacturing overhead costs of Zomboss Company for 2010 are as follows:
Type of Cost Cost Amount
Electric Power P 1,000,000
Work Cells 6,000,000
Materials Handling 2,000,000
Quality Control Inspections 2,000,000
Product Runs (machine setups) 500,000
Total Budgeted Overhead Costs P 11,500,000

For the last five years, the cost accounting department has been charging overhead
production costs based on machine hours. The estimated budgeted capacity for 2006 is
2,000,000 machine hours.

The president of Zomboss Company recently attended a seminar on activity-based costing.

He now believes that ABC results in more reliable cost data cost data that, in turn, will give
the company an edge in pricing over its competitors. At the president’s request, the
production manager provided the following data regarding expected 2006 activity for the cost
drivers of the preceding budgeted overhead costs.

Type of Cost Activity Drivers

Electric Power 200,000 kilowatt hours
Work Cells 1,200,000 square feet
Materials Handling 500,000 material moves
Quality Control Inspections 400,000 inspections
Product Runs (machine setups) 50,000 product runs

The Vice President of Marketing received an offer to sell 5,000 doors to a local construction
company. The VP asked the head of the cost accounting to prepare cost estimates for
producing the 5,000 doors. The head of cost accounting accumulated the following data
concerning production of 5,000 doors:

Direct material cost P 200,000

Direct labor cost P 400,000
Machine hours 10,000
Direct labor hours 20,000
Electric power-kilowatt hours 2,000
Work cells-square feet 12,000
Number of material handling moves 120
Number of quality control inspections 60
Number of product runs (setups) 30

Requirements:
1. What is the predetermined overhead rate if the traditional measure of machine hours
is used?
2. What is the manufacturing cost per door as presently accounted for?
3. What is the manufacturing cost per door under the proposed ABC method?

Prepared by: Marc Oliver B. Castañeda, CPA, MSBA Page 1

 PRACTICAL ACCOUNTING PROBLEMS II

Standard Costing

Zombross Co. manufactures screen doors with the following standard quantity and cost
information per door:

Aluminum 4 sheets at P2 P 8
Copper 3 sheets at P5 15
Direct labor 7 hours at P7 49
Variable overhead 6 machine hours at P3 18
Fixed overhead 5 machine hours at P2 10

Overhead rates were based on normal monthly capacity 5,000 machine hours.

During November, the company produced only 800 doors and the following costs were
incurred in October:

Materials
Aluminum 3,400 sheets purchased and used at P2.20
Copper 2,500 sheets purchased and used at P4.20

Labor
Direct labor 5,250 hours at P8.00

Overhead
Variable overhead P11,800 (based on 4,250 machine hours)
Fixed overhead P9,500 (based on 4,250 machine hours)

Requirements:
1. Material Price Variance for each material
2. Material Quantity Variance for each material
3. Total Material Variance for each material
4. Labor Rate variance
5. Labor Efficiency variance
6. Total Labor Variance
7. Overhead Spending Variance
8. Overhead Efficiency Variance
9. Total Overhead Variance
10. Fixed Overhead Spending Variance
11. Prepare Journal entries

Prepared by: Marc Oliver B. Castañeda, CPA, MSBA Page 2