MBA 649 Tutorials Questions prepared by Mazri Hafiz

TUTORIAL QUESTIONS: ACTIVITY BASED COSTING

The following cases/questions are fictitious. All references are not, in any form,
reflective of the person(s) or entities named in the text. These cases are for the
sole purpose of MBA 649 (Strategic Managerial Accounting & Control) tutorials.
Reproduction and distribution of this document, in any form, is prohibited.
Solutions to these questions are only available by attending tutorials.

QUESTION 1: IDENTIFYING ACTIVITY LEVELS

Soni-Ready-Set-Go Inc. is considering using an activity based costing (ABC)

system. Before implementing the system, the senior managerial accountant has
asked that the company’s activities be classified appropriately in order to use
proper cost drivers.

______ Factory Depreciation

______ Factory Landscaping

______ Machine Set-Ups

______ Product Design

______ Painting Desks

______ Equipment Installation

______ Quality Control Test

______ Product Assembly

______ Purchase Order

______ Sewing Clothing

Required 1: Identify whether the listed activity is unit level, batch level,
product level or facility level.
MBA 649 Tutorials Questions prepared by Mazri Hafiz

QUESTION 2: ACTIVITY BASED COSTING AND DECISION MAKING

Breton Corp. currently uses a single-rate method of allocating overhead costs

based on direct labour dollars. The company recently introduced a new policy
that wants all products with a gross margin of 50% or less to be discontinued.
The estimated overhead costs for the year were $1,240,000 with an expected
direct labour cost of $310,000.

The chief managerial accountant, Tinsley, was put in charge of compiling the
data in order to make the final decision. Tinsley found the following information:

The Cordoba The Gibson

Selling Price $8,000.00 $10,000.00
Direct Material Cost $400.00 $500.00
Direct Labour Cost $800.00 $600.00

Moreover, before finalizing his decision, Tinsley heard about the potential
benefits of using Activity Based Costing (ABC) to gather more accurate cost
data. Therefore, Tinsley compiled the following data as per ABC:
Expected
Use of Cost
Activity Cost Pools Cost Driver Estimated Overhead Drivers
Receiving Kilograms $200,000.00 80,000
Forming Machine Hours $120,000.00 300,000
Assembling Number of parts $100,000.00 400,000
Testing Number of tests $80,000.00 40,000
Painting Litres $140,000.00 200,000
Packaging/Shipping Direct Labour Cost $600,000.00 310,000

Tinsley then compiled the following usage data:

The Cordoba The Gibson

Receiving 100kg 300kg
Forming 80 hours 280 hours
Assembling 100 parts 200 parts
Testing 180 tests 900 tests
Painting 100L 300L
Packaging/Shipping $800.00 $600.00

Required 1: Under the single-rate method, compute the product cost per
unit. Which product should be discontinued and why?

Required 2: Under the ABC method, compute the product cost per unit.
Which product should be discontinued and why?

Required 3: Explain some of the advantages and disadvantages of ABC.