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ACG2071 Managerial Accounting

Sample Problems - Chapters 35 and 36 - Cost Allocation and ABC


Answers appear in red.
DRAFT
Problem 1 - Dunn Company produces two products, Fred and Barney. Overhead has traditionally
been allocated on the basis of direct labor hours. Dunn recently sat up 3 activity centers to implement
ABC costing. Information concerning this follows:
Estimated Activity
Estimated
Activity Centers
Cost
Fred
Barney
Machine setups
12 setups
36 setups
$ 96,000
Assembly
2,000 square feet 3,000 square feet
180,000
Packaging
600 crates
400 crates
34,000
Direct labor hours
2 hours per unit
3.3 hours per unit
Estimated volume
700 units
2,000 units
A. How much overhead is budgeted to be allocated to each Fred under the traditional approach?
The traditional approach lumps all the overhead costs into one pool and allocates it based on one
activity.
Allocation Rate:($96,000 + $180,000 + $34,000)/[(700 x 2) x (2,000 x 3.3) = $38.75
Amount allocated to each 'Fred': $38.75 x 2 hours per unit = $77.50
B. Determine the overhead to be allocated per unit to each Barney under ABC.
Setups: $96,000 x 36/48 =
Assembly: $180,000 x 3,000/5,000 =
Packaging: $34,000 x 400/1,000 =
Overhead allocated to all Barneys
Units of Barney to be produced
Cost per unit of barney

$ 72,000
108,000
13,600
$193,600
2,000
$96.80

C. List which of the items provided above are cost drivers.


Number of machine setups, number of square feet of assembly space, number of packaging crates,
number of direct labor hours incurred.
Problem 2 - Coleman Company produces two products, Berts and Ernies. Overhead has traditionally
been allocated on the basis of direct labor hours. Estimated data follow:
Berts
Estimated units
Direct labor hours per unit

Ernies

Totals

500
2

800
5

1,300

1,400
20
10

2,100
10
6

3,500
30
16

Estimated activity:
Maintenance (square footage)
Inspections
Machine setups
Estimated overhead costs
Machine setups
Maintenance
Inspections
A.

$48,000
175,000
27,000
$250,000

Calculate the overhead rate under the traditional approach.


$250,000/5,000 = $50 per DLH

B. Calculate how much budgeted overhead is to be allocated for each Bert under the traditional
approach.
$50 per DLH x 2 DLH per Bert = $100
C. Circle the names of the cost drivers under ABC costing. Highlighted in Yellow
D. Calculate how much overhead is budgeted to be allocated to each Bert produced under ABC.
Maintenance
$175,000 x 1,400/3,500 = $70,000
Inspections
$27,000 x 20/30 = $18,000
Machine setups
$48,000 x 10/16 = $30,000
Total for all Berts = $118,000
Cost per Bert = $118,000/500 units = $236 each
Problem 3 - Wislow Company manufactures three product costs. It presently uses a single factory
overhead rate for allocating factory overhead to products, based on direct labor hours. The total
factory overhead cost is budgeted as follows:
Department
Manufacturing Overhead
Production
$1,225,000
Supervision and janitorial
175,000
The company determined that it performed four major activities in the production department as
follows:
Activities
Budgeted Cost
Setup
$428,750
Storeroom support
367,500
Quality control
183,750
Production monitoring
245,000
Wislow Company estimated the following activity-base usage quantities and units produced for each
of its three products:
Direct Labor
Production
Material
Products Units
Setups
Inspections
Hours
Orders
Requisitions
A
10,000
25,000
80
80
35
320
B
2,000
10,000
40
40
40
400
C
50,000
140,000
5
5
0
30
Total
62,000
175,000
125
125
75
750
A. Determine the budgeted factory overhead cost per unit for Products A, B, and C using the
traditional cost allocation system.
Overhead rate = [$1,225,000 + $175,000]/175,000 = $8 per direct labor hour
Overhead cost per unit:
Product A
Product B
Product C
Direct labor hours
25,000
10,000
140,000
Overhead rate
x $8
x $8
x $8
Total factory overhead
$200,000
$80,000
$1,120,000
Number of units
10,000
2,000
50,000
Cost per unit
$20.00
$40.00
$22.40
B. Use ABC costing to determine the budgeted factory overhead cost per unit for Products A, B, C.
Setup
$428,750/125 = $3,430
Storeroom support
$367,500/750 = $490
Quality control
$183,750/75 = $2,450
Production monitoring
$245,000/125 = $19,60
Supervision and janitors
$175,000/175,000 = $1
Product A
Product B
Product C
Setup
80 x $3,430 = $274,400 40 x $3,430 = $137,200
5 x $3,430 = $17,150

Storeroom support
Quality control
Production monitoring
Supervision and
janitors
TOTAL
Units produced
Overhead per unit

320 x $490 = $156,800


35 x $2,450 = $85,750
80 x $1,960 = $156,800
25,000 x $1 = $25,000

400 x $490 = $196,000


40 x $2,450 = $98,000
40 x $1,960 = $78,400

30 x $490 = $14,700
0 x $2,450 = $0
5 x $1,960 = $9,800

10,000 x $1 = $10,000 140,000 x $1 = $140,000

$698,750
10,000
$69.88

$519,600
2,000
$259.80

$181,650
50,000
$3.63

Problem 4 - A company produces two products, A and B, and estimates that its overhead costs will be
$261,780. Overhead has traditionally been allocated on the basis of direct labor hours. Estimated data
follow:
Product A
Product B
Estimated volume
500 units
1,250 units
Direct labor hours per unit
1
2
Estimated Activity
Estimated
Cost
Product A
Product B
Machine setups
$27,140
20
26
Maintenance (sq. ft.)
183,040
1,620
2,540
Inspections
51,600
56
288
$ 261,780
A. Determine the budgeted overhead to be allocated per unit to each product under the traditional
approach.
Overhead rate = $261,780/3,000DLH = $ 87.26/DLH
Allocated overhead:
Product A: $87.26 1DLH= $87.26
Product B: $87.26 2DLH= $174.52
Activity Centers

B. Determine the overhead allocated per unit to each product under


ABC.
Activity center rates:
Setups
$27,140/46 = $590 / setup
Maintenance
$183,040/4,160 = $44/sq. ft.
Inspections
$51,600/344 = $150/inspection
Allocated overhead:
Setups
Maintenance
Inspections

Product A
(20 $590)
(1,620 $44)
(56 $150)

Units
Overhead per unit

Product B
$11,800
71,280
8,400
91,480
500
$ 182.96

(26 $590)
(2,540 $44)
(288 $150)

$15,340
111,760
43,200
170,300
1,250
$ 136.24

Problem 5 - The total cost of the machining activity cost pool is $600. The cost driver of machining is
machine hours, and a total of 400 machine hours are consumed. If one unit of product X requires 1.5
machine hours, then how much is the cost per unit of product X for machining?
$600/400 x 1.5 hours = $2.25
Problem 6 Estimated data:

Machine setups
Inspections
Actual data on job 22:

$100,000
$24,000

No. of setups
No. of inspections

500
1,200

No. of inspections
10
No. of setups
2
A. Using ABC, determine the amount of setup cost to be allocated to job 22.
[$100,000/500 x 2] = $400
B. Using ABC, determine the amount of inspection cost to be allocated to job 22:
[$24,000/1,200] x 10 = $200
Problem 7- Dark Corp. budgeted $1,000,000 of overhead cost for 2000. Actual overhead costs for the
year were $960,000. Light's allocation base, machine hours, was budgeted at 500,000 hours. Actual
machine hours were 450,000. Budgeted units to be produced are 400,000 units. How much is Light's
factory overhead rate for 2000 using traditional cost allocation?
[$1,000,000/500,000] = $2.00 per machine hour
Problem 9 - The Jaguars Football team relies on information from its activity-based costing system
when setting prices for special events. Three ABC rates are used: Security service, $5,000 per event,
General overhead, $500 per scheduled hour of event, and Facility setup, $4,000 per setup. The JagsRedskins game incurred the following costs: Cost of materials, programs, giveaways, $30,000. Total
direct labor hours worked, 3,000. Average direct labor rate, $5.00 per hour. The football game was
scheduled from 1:00 to 4:00 pm and required two setups. How much is the total cost of JagsRedskins game using ABC?
Direct material
$30,000
Direct labor (3,000 x $15)
15,000
Overhead setups (4,000 x 2)
8,000
Security
5,000
General overhead ($500 x 3 hrs.)
1,500
Total
$59,500
Problem 10 - Carver Company produces 4 different models of calculators. Direct labor costs are
estimated at a total of $143,050 for all products. The accounting staff has provided the following
estimates of its overhead and activity for all products for June:
Overhead
Monthly Cost
Allocation Base
Ordering
$22,500
Number of purchase orders
Depreciation
$29,120
Number of machine hours
Quality Control
$5,600
Number of inspections
The company determined that production of one batch of 200 graphing calculators used 12 purchase
orders, $4,400 of direct labor, 2 inspections, and 32 machine hours during June. The company uses
direct labor cost to allocate when using a single pool.
A. Using ABC, how much overhead cost will be allocated to one batch of calculators?
Ordering: $22,500/450 = $50 per PO
Depreciation: $29,120/1,040 = $28 per machine hour
Quality control: $5,600/28 = $200 per inspection
Total
B. How much overhead should be allocated to one batch If traditional costing is used?
Total overhead cost: $22,500 + $29,120 + $5,600 =
Allocation rate: $57,220/$143,050 = $0.40 per DL$
Overhead allocation to one batch: $0.40 x $4,400 =

OH for one Batch


$50 x 12 = $600
$28 x 32 = 928
$200 x 2 = 400
$1,928
$47,220
$1,760

C. Which items are considered cost drivers?


Number of purchase orders, number of machine hours, number of inspections
Note that cost drivers are the activities that 'drive' the dollar amount of the cost pools higher. e.g., the
more purchase order completed, the higher the cost of the ordering department.
D. Which items are considered cost objects?
Models of calculators
Note that cost objects are the items for which the company wants to accumulate costs for---such as
departments, services, products, divisions.
Problem 11 - Peigler Manufacturing Co. has a new product with both a mixing and a baking
department. The company is deciding whether to allocate overhead using a single rate of $2.80 per
direct labor dollar, or using two pools in order to allocate the overhead costs of each department
separately. Under the latter, mixing would be allocated at a rate of $4.00 per direct labor dollar and
baking would be allocated at a rate of $2 per direct labor dollar. Product A is produced using a 3 hours
of baking labor and relatively little mixing labor (1 hour), what effect will this have on Product A. If the
company uses a single pool instead of two pools, what will be the effect on Product A?
It will be over-costed.
Single rate allocation:
Two pool allocation:
Mixing: 1 hour x $2.80 = $2.80
Mixing: 1 hour x $4 = $4.00
Baking: 3 hours x $2.80 = $7.40
Baking: 3 hours x $2 = $6.00
Total cost allocated = $10.20
Total cost allocated = $10.00
Results: overcosted under traditional (too much allocated to product A using traditional
allocation.

Problem 12 - Clinton Company produces two products, Bill and Hillary. Overhead has traditionally
been allocated on the basis of direct labor hours. Direct labor has a budgeted cost of $15 per labor
hour. Clinton recently sat up 3 activity centers to implement ABC costing. Information concerning this
follows:
Actual Activity
Estimated Activity
Estimated Cost
Bill
Hillary
Machine setups
60 setups
$120,000
15 setups
45 setups
Assembly
20,000 sq. feet
$210,000
14,000 square feet
6,000 square fe
Packaging
1,000 crates
$94,000
300 crates
700 crates
Direct labor
4,240 hours
$63,600
2.6 hours per unit
1.4 hours per u
Estimated volume
2,000 units
1,200 units
800 units
A. How much overhead is allocated to each Bill under the traditional approach?
Estimated MOH
$120,000 + $210,000 + $94,000
=
Estimated DLH
4,240 DLH
$100/DLH x 2.6 DLH = $260 for each 'Bill'
B. Determine the overhead allocated per unit to each Hillary under ABC.
Machine setups
$120,000/60 =
$2,000/setup
Assembly
$210,000/20,000 =
$10.50/sf
Packaging
$94,000/1,000 =
$94/crate
Cost for al Hillarys:
$2,000/setup x 45 setups =

$10.50/sf x 6,000 sf =

$90,000

63,000

$100/DLH

$94/crate x 700 crates =

65,800

Total MOH cost for all HIllarys:

$218,800

Cost per Hillary:

$218,800/800 =

$273.50

C. List the names of which of the items provided for Clinton Company are cost pools under ABC.
Machine setups, assembly, packaging
Problem 13 Nader Company manufactures 15 models of widgets and has used a traditional
overhead allocation based on direct labor cost. The following costs and activities are expected for
June:
Activity
Cost
Direct labor
3,625 direct labor hours
$58,000
Indirect costs
Materials ordering
Materials handling
Quality control

600 purchase orders


21,000 crates of
materials
900 inspections
Total indirect costs

$12,600
42,000
32,400
$87,000

Nader will produce 1,000 blue widgets in June with following production costs:
Direct labor
Purchase orders issued
Crates of materials used
Inspections made

140 hours @ $16 per hour


18
1,500
14

A. Calculate the overhead cost allocated to each blue widget under the current traditional approach.
Estimated overhead costs/ DL cost = $1.50 per DL$
Blue widgets = $1.50 x [140 DLH x $16/hr.] =
$3,360
Overhead cost of each blue widget = $3,360/1,000 =
$3.36
B. Calculate the overhead cost allocated to each blue widget using the ABC approach.
Materials ordering cost/number of POs = $12,600/600 = $21/PO
Blue widget allocation: $21/PO x 18 purchase orders =
$ 378
Materials handling/number of crates = $42,000/21,000 = $2/crate
Blue widget allocation: $2/crate x 1,500 crates =
Quality control/number of inspections = $32,400/900 = $36/inspection
Blue widget allocation: $36/inspection x 14 inspections =
Total overhead applied to blue widgets
Overhead cost of each blue widget = $3,882/1,000 =

3,000
504
$3,882
$3.88

Problem 14 -Nassau Company has six departments, A, B, C, D, E and F, and has allocated
manufacturing overhead using one cost pool based on direct labor hours. The accounting staff has
provided the following estimates applicable to traditional and ABC allocation of manufacturing costs
for 2004:
Cost
Allocation Base
Activity
Setups
$16,500
Number of setups
250 setups
Quality Control
$24,000
Number of inspections 400 inspections
Fabrication
$36,000
Production runs
3,600 runs
Direct labor
$90,000
Direct labor hours 4,500 labor hours
Management is assessing if ABC should be used, and has determined that Department B used the
following: 24 setups, 60 inspections, 900 production runs, and 900 direct labor hours during 2004.
Using traditional allocation, how much overhead cost is allocated to Dept. B?
($16,500 + $24,000 + $36,000)/4,500 DLH = $17 per DLH
$17 x 900 DLH = $15,300
Using ABC, how much overhead cost is allocated to Dept. B?
Setups: $16,500/250 = $66/ setup
Quality control: $24,000/400 = $60/ inspection
Fabrication: $36000/3,600 = $10/ run

$66 x 24 setups = $1,584


$60 x 60 inspections = $3,600
$10 x 900 runs = $9,000
Total = $14,184

Which items are cost drivers?


Number of setups, number of inspections, production runs, direct labor hours
Cost drivers are activity bases which cause the cost of cost pools to increase, i.e., drive the cost of
expenses up.
Which items are cost objects?
Departments A, B, C, D, E and F
Objects are the items for which the cost is desired, ie. jobs, departments, products, services, etc.
Problem 15 Brew Company produces two products, Bud and Wiser. Overhead has traditionally been
allocated on the basis of direct labor hours. Direct labor has a budgeted cost of $13 per labor hour.
Brew recently sat up 3 activity centers to implement ABC costing. Information concerning this follows:
Actual Activity
Estimated
Bud
Wiser
Estimated Cost
Activity
Materials handling
500 requisitions
$28,000
350 requisitions
150 requisitions
Assembly
12,000 sq. feet
$120,000 8,400 square feet
3,600 square feet
200 service
Tech support
calls
$72,000
20 service calls
180 service calls
Direct labor
8,800 hours
$114,400 2.4 hours per unit
1.6 hours per unit
Estimated units
5,000 units
1,000 units
4,000 units
A. List all the cost drivers:
Cost drivers are the activities that cause the costs to change:
Number of requisitions, number of square feet, number of service calls
B.
C.

List the cost objects:


Cost objects are the items for which we want to accumulate costs, such as products or services:
Bud and Wiser
Determine the overhead allocated per unit to each Wiser under ABC:
$ 28,000
= $56 per requisition
500
.
$ 120,000
= $10 per sq. foot
12,000
.

72,000
200

= $360 per service call

Problem 16 - Under ABC, Waco, Inc. provided the following information for June of 2005:
Estimated Overhead
Expected Activity
Setups
$18,000
50 setups
Purchase orders
$1,050
525 purchase orders
Product testing
$3,500
350 tests
Template etching
$1,120
28 etchings
Facilities
$20,000
8,000 sq. feet
Totals
$43,670

Actual Overhea
$1
$
$
$
$2
$4

What amount of overhead was applied to products during June using ABC?
Setups
Purchase orders
Product testing
Template etching
Facilities

45
525
340
32
8,000

x $360 per setup


x $2 per order
x $10 per test
x $40 per etching
x $2.50 per sf
TOTAL

Problem 17 Mattel, Inc. produces 2 products, Barbie and Ken. Overhead has been assigned using
direct labor hours in the past. Mattel just set up 3 activity centers, machines setups, maintenance, and
packaging to implement ABC costing. Product information follows:
Estimated Activity
Estimated
Activity Centers
Cost
Barbie
Ken
Total
Estimated production
1,600 units
2,400 units
4,000 units
Machine setup
144 setups
48 setups
192 setups
$72,000
3,360 square
1,440 square
4,800 square
Maintenance
feet
feet
feet
$160,000
Packaging
2,000 crates
3,000 crates
5,000 crates
$80,000
Direct labor hours ($20 per
2 hours per unit
3 hours per unit
10,400 hours
hour)
$208,000
Direct material ($5 per
1 pound
2 pounds
6,400 pounds
pound)
$32,000
A. If the traditional approach is used, how much is the overhead rate?
[$72,000 + $160,000 + $80,000]/10,400 DLH = $30.00 per DLH
B. How much overhead will be allocated to each Ken under the traditional approach?
$30.00 per DLH x 3 hours = $90
C. Determine the budgeted overhead to be allocated per unit to each Barbie under ABC.
Machine setups
$72,000/192 setups = $375 per setup
Maintenance
$160,000/4,800 sf = $33.33 per sf
Packaging
$80,000/5,000 crates = $16.000 per crate
Total for all Barbie's
Per each Barbie:
D. List the items provided above that are cost drivers.
Number of setups (for ABC)
Number of square feet (for ABC)
Number of crates (for ABC)
Number of DLH (for traditional method)

E. List the items above that are cost objects.


Ken and Barbie
Problem 19 Sonic Company has eight departments. The accounting staff has provided the following
information about manufacturing overhead and one of its departments for 2003:
Cost Pools
Overhead Cost
Allocation Base
Dept. 4 Activity
Setups
$50,000
Number of setups
4
Inspections
$80,000
Number of inspections
50
Packaging
$28,000
Units packaged
300
The company estimates that it will perform 40 setups, 400 inspections, and $800,000 of direct labor
each year, and will package 1,500 units. Direct labor costs in department 4 for 2003 total $160,000.
Using ABC, how much overhead cost will be allocated to Dept. 4?
Setup: $50,000 x 4/40 =
Inspection: $80,000 x 50/400 =
Packaging: $28,000 x 300/1500 =
Total

$5,000
10,000
5,600
$20,600

Problem 20 - Under ABC, Waco, Inc. provided the following information for June of 2005:
Estimated Overhead
Expected Activity
Setups
$18,000
50 setups
Purchase orders
$1,050
525 purchase orders
Product testing
$3,500
350 tests
Template etching
$1,120
28 etchings
Facilities
$20,000
8,000 sq. feet
Totals
$43,670

Actual Overhead
$19,000
$1,200
$3,100
$1,000
$21,000
$45,300

A. What amount of overhead was applied to products during June using ABC?
Setups
45 x $360 per setup
Purchase orders
525 x $2 per order
Product testing
340 x $10 per test
Template etching
32 x $40 per etching
Facilities
8,000 x $2.50 per sf
TOTAL
B. Label the following t-accounts with the account names used when applying overhead using ABC.
Post the overhead applied by ABC and any other transactions you know from the information provided
that affect these accounts. Circle label any under or overapplied overhead (i.e. Label as either over or
underapplied.)
Work In Process
Manufacturing Overhead
Applied 41,930
Actual 45,300 41,930 Applied
Balance 3,370
Underapplied

Problem 21 Mattel, Inc. produces 2 products, Barbie and Ken. Overhead has been assigned using
direct labor hours in the past. Mattel just set up 3 activity centers, machines setups, maintenance, and
packaging to implement ABC costing. Product information follows:
Estimated Activity
Estimated
Cost
Activity Centers
Barbie
Ken
Total
Estimated production
1,600 units
2,400 units
4,000 units
Machine setup
144 setups
48 setups
192 setups
$72,000
3,360 square
1,440 square
4,800 square feet
Maintenance
feet
feet
$160,000

Packaging
Direct labor hours ($20 per
hour)
Direct material ($5 per
pound)

2,000 crates

3,000 crates

5,000 crates

2 hours per unit

3 hours per unit

10,400 hours

1 pound

2 pounds

6,400 pounds

A. If the traditional approach is used, how much is the overhead rate?


[$72,000 + $160,000 + $80,000]/10,400 DLH = $30.00 per DLH
B. How much overhead is allocated to each Ken under the traditional approach?
$30.00 per DLH x 3 hours = $90
C. Determine the overhead allocated per unit to each Barbie under ABC.
Machine setups
$72,000/192 setups = $375 per setup
Maintenance
$160,000/4,800 sf = $33.33 per sf
Packaging
$80,000/5,000 crates = $16.000 per crate
Total for all Barbie's
Per each Barbie:
D. List the items provided above that are cost drivers.
Number of setups (for ABC)
Number of square feet (for ABC)
Number of crates (for ABC)
Number of DLH (for traditional method)
E. List the items above that are cost objects.
Ken and Barbie
Problem 29 - Vyas Company produces two products. Overhead is allocated based on activities.
Estimated data follow:
Department Allocation Base
Product A
Product B
Overhead Costs
1
Machine Hours
1,000
1,500
$400,000
2
Purchase Orders
100
300
100,000
3
Labor Dollars
200
300
500,000
Using ABC, how much would be allocated to Product B?
From Dept. 1:
1,500/(1,000 + 1,500) x $400,000 =

$240,000

From Dept. 2:

300/(300 + 100) x $100,000 =

75,000

From Dept. 3:

300/(200 + 300) x $500,000 =


TOTAL

300,000
$615,000

Problem 31 - Terrapin Company manufactures widgets and estimated it would produce 5,000 widgets
in May. The company estimated $10,000 for manufacturing overhead costs which the accountant
labeled $4,000 as inspection costs and $6,000 as packaging costs. The company estimated there
would be 50 inspections and 60 hours of packaging. The actual direct material cost per unit amounted
to $35, and the actual direct labor cost per unit amounted to $24.
A. Identify the cost pools, cost objectives, and cost drivers.
Cost pools = inspection and packaging costs
Cost objectives = widgets
Cost drivers = # of inspections and # of packages
Cost pools are expenses that are allocated to widgets (cost objectives) using an allocation base (# of
inspections and # of packages.) Objects, or objectives are products or services for which you plan to
accumulate costs.

$80,000
$208,000
$32,000

B. When using traditional costing, which is the most likely allocation base to use?
Direct labor cost
Traditional costing uses a volume based allocation base. Direct labor costs and direct labor dollars
and number of units produced or sold are the most common allocation base used.
Problem 32 - The Jaguars Football team relies on information from its activity-based costing system
when setting prices for special events. Three ABC rates are used: Security service, $5,000 per event,
General overhead, $500 per scheduled hour of event, and Facility setup, $4,000 per setup. The JagsRedskins game incurred the following costs: Cost of materials, programs, giveaways, $30,000. Total
direct labor hours worked, 3,000. Average direct labor rate, $5.00 per hour. The football game was
scheduled from 1:00 to 4:00 pm and required two setups. How much is the total cost of JagsRedskins game?
Direct material
$30,000
Direct labor (3,000 x $15)
15,000
Overhead setups (4,000 x 2)
8,000
Security
5,000
General overhead ($500 x 3 hrs.)
1,500
Total
$59,500
Problem 33 - Four departments (Carpet, Tile, Wood, Marble) in a flooring company occupy floor
space of 10,000, 55,000, 20,000, and 15,000 square feet, respectively. How much of the rent of
$104,500 on the building would be allocated to the Wood Department?
$104,500 x 20,000/100,000 = $20,900
Problem 34 -Q15 Company estimated the following costs and activities for its two products, stools
and buckets, for 2008:
Cost
Activity
Direct materials
$135,000
9,000 yards at $15 per yard
Direct labor
$102,000
5,100 hours @ $20 per hour
Machine Setup
$60,800
320 setup hours
Materials Handling
$88,200
4,200 loads of materials moved
Electric Power
$40,000
20,000 kilowatt-hours
Q15 applies overhead based on direct labor cost. The following information pertains to the actual
production of stools and buckets:
Stools
Buckets
Units produced
5,000
20,000
Direct materials
$75,000
$61,200
Direct labor
$40,000
$60,000
Setup hours
160
140
Loads of materials moved
1,000
3,000
Kilowatt-hours consumed
17,000
2,000
A. What cost driver will Q15 use to determine the pre-determined rate using a traditional cost system?
(Be specific.) Briefly explain your choice.
Direct labor cost because the company has chosen this driver as the basis on which it will apply
overhead.
B. How much is the unit cost for buckets using the ABC approach?
Machine Setup
$60,800/320 x 140 = $26,600
Materials Handling
$88,200/4,200 x 3,000 = $63,000
Electric Power
$40,000/20,000 x 2,000 = $4,000
Total allocated to all buckets = $93,600
Per unit cost = $93,600/20,000 buckets = $4.68

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