ACTIVITY BASED COSTING

I. TriCo would like to institute an activity-based costing system to price products. The companys
Purchasing Department incurs costs of 550,000 per year and has six employees. Purchasing has
determined the three major activities that occur during the year.

Allocation # of Total
Activity Measure People Cost
Issuing purchase orders # of purchase 1 150,000
orders
Reviewing receiving # of receiving 2 175,000
reports reports
Making phone calls # of phone calls 3 225,000

During the year 50,000 phone calls were made in the department; 15,000 purchase orders
were issued; and 10,000 shipments were received. Product A required 200 phone calls, 150
receiving reports, and 50 purchase orders. Product B required 350 phone calls, 400 receiving
reports, and 100 purchase orders.

1. Determine the amount of purchasing department cost that should be assigned to

each of these products.
2. Determine purchasing department cost per unit if 1,500 units of Product A and
3,000 units of Product B were manufactured during the year.

II. Germie, Inc., has identified the following overhead costs and activity drivers for next year:
Overhead Item Expected Activity Expected
Cost Driver Quantity
Setup costs P100,000 Number of 500
setups
Ordering costs 40,000 Number of 3,200
orders
Maintenance 200,000 Machine 4,000
hours
Power 20,000 Kilowatt 80,000
hours
The following are two of the jobs completed during the year:
Job 500 Job 501
Direct materials P1,500 P2,000
Direct labor P1,400 P2,400
Units completed 100 160
Direct labor hours 100 160
Number of setups 2 8
Number of orders 8 10
Machine hours 40 50
Kilowatt hours 60 100
The companys normal activity is 4,000 direct labor hours.
3. If the four activity drivers are used to allocate overhead costs, total overhead
allocated to Job 500 would be:
4. If the four activity drivers are used to allocate overhead costs, total overhead
allocated to Job 500 would be:
III. Seneca Company has two products with the following information:

Engine Race
Rebuilds Cars Total__
Annual revenue 1,200,000 1,400,000 2,600,000
Material costs 400,000 600,000 1,000,000
Labor costs 250,000 150,000 400,000
Number of receipts 8,000 2,000
Number of batches 425 75

The business also has overhead costs as follows:

Cost pool Cost in pool Cost driver

Receiving 300,000 number of receipts
Material moves 275,000 number of batches
Administrative 225,000 labor cost

5. Allocate the overhead costs to the segments based on material costs.

6. Determine the income of each segment.
7. Allocate the overhead costs to the segments using ABC.
8. Determine the income of each segment under ABC.

IV. Special Products recently installed an activity-based relational data base. Using the
information contained in the activity relational table, the following pool rates were computed:

P200 per purchase order

P12 per machine hour, process A
P15 per machine hours, process B
P40 per engineering hour

Two products are produced by Special Products: A and B. Each product has an area in the plant
that is dedicated to its production. The plant has two manufacturing processes, process A and
process B. Other processes include engineering, product handling, and procurement. The
product relational table for Special is as follows:
Activity Usage
Activity Driver # and Product A: Product B:
Name
1 Units 200,000 25,000
2 Purchase orders 250 125
3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500

9. How much overhead cost will be assigned to product B using process B?

10. What is the unit cost of Product A?
ANSWER:

a. $150,000/15,000 = $10 per purchase order

$175,000/10,000 = $17.50 per receiving report
$225,000/50,000 = $4.50 per phone call

Product A Product B
50 purchase orders $10 $ 500
100 purchase orders $10 $1,000
150 receiving reports $17.50 2,625
400 receiving reports $17.50 7,000
200 phone calls $4.50 900
350 phone calls $4.50 1,575
Total cost $4,025 $9,575

b. Product A= $4,025/1,500 = $2.68 per unit

Product B= $9,575/3,000 = $3.19 per unit

Activity Rates:
Setup (P100,000 500) P200.00
Ordering (P40,000 3,200) 12.50
Maintenance (P200,000 4,000) 50.00
Power (P20,000 80,000) 0.25
Overhead costs assigned to Job 500:
Setup (2 x P200) P 400
Ordering (8 x P12.50) 100
Maintenance (40 x P50) 2,000
Power (60 x P0.25) 15
Total P2,515

III.
a. Engines:$320,000[$800,000x($400,000/$1,000,000)]
RaceCars:$480,000[$800,000x($600,000/$1,000,000)]

b. Engines:$230,000[$1,200,000$400,000$250.000$320,000]
RaceCars:$170,000[$1,400,000$600,000$150,000$480,000]

Engine Race
Rebuilds Cars Total__
Annual revenue $1,200,000 $1,400,000 2,600,000
Material costs 400,000 600,000 1,000,000
Labor costs 250,000 150,000 400,000
Receiving 240,000 60,000 300,000
Material moves 233,750 41,250 275,000
Administrative 140,625 84,375 225,000
------- ------- --------
Income $(64,375) $464,375 $ 400,000
Answer: D
OH assigned to Product B: 6,000 MH x P15 per MH = P150,000

Answer: D
Purchasing cost (250 x P200) P 50,000
Processing costs (80,000 x P12) 960,000
Engineering cost (1,250 x P40) 50,000
Total costs assigned to Product A P1,060,000
Unit cost: (P1,060,000 200,000) P 5.30