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1.

Tatman Corporation uses an activity-based costing system with the following three
activity cost pools:

Activity Cost Pool Total Activity


Fabrication ......................... 10,000 machine-hours
Order processing................ 800 orders
Other .................................. Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-
sustaining costs.
The company has provided the following data concerning its costs:

Wages and salaries ............ $320,000


Depreciation ...................... 220,000
Occupancy ......................... 120,000
Total................................... $660,000

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools


Order
Fabrication Processing Other Total
Wages and salaries ...... 20% 65% 15% 100%
Depreciation ................ 15% 35% 50% 100%
Occupancy ................... 5% 70% 25% 100%

The activity rate for the Fabrication activity cost pool is closest to:
A) $3.30 per machine-hour
B) $13.20 per machine-hour
C) $10.30 per machine-hour
D) $8.80 per machine-hour

Solution:

Total Fabrication Cost:


Wages and salaries: 20% × $320,000 ..... $ 64,000
Depreciation: 15% × $220,000 ............... 33,000
Occupancy: 5% × $120,000 ................... 6,000
Total........................................................ $103,000

(a) ÷ (b)
(a) (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Fabrication $103,000 10,000 machine-hours $10.30 per machine-hour

2. Gutknecht Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs and its activity
based costing system:

Costs:
Wages and salaries ............ $300,000
Depreciation ...................... 180,000
Utilities .............................. 240,000
Total................................... $720,000

Distribution of resource consumption:


Activity Cost Pools
Assembly Setting Up Other Total
Wages and salaries ....... 35% 40% 25% 100%
Depreciation ................. 5% 60% 35% 100%
Utilities ......................... 10% 60% 30% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other
activity cost pool?
A) $138,000
B) $210,000
C) $180,000
D) $216,000

Solution:

Total Other Cost:


Wages and salaries: 25% × $300,000 ..... $ 75,000
Depreciation: 35% × $180,000 ............... 63,000
Utilities: 30% × $240,000 ...................... 72,000
Total........................................................ $210,000

3. Feldpausch Corporation has provided the following data from its activity-based costing
system:

Activity Cost Pool Total Cost Total Activity


$1,137,36
Assembly ..................... 0 84,000 machine-hours
Processing orders ......... $28,479 1,100 orders
inspection-
Inspection .................... $97,155 1,270 hours

The company makes 470 units of product W26B a year, requiring a total of 660 machine-
hours, 50 orders, and 40 inspection-hours per year. The product's direct materials cost is
$40.30 per unit and its direct labor cost is $42.22 per unit. The product sells for $118.00
per unit. According to the activity-based costing system, the product margin for product
W26B is:
A) $6,444.70 per unit
B) $4,679.20 per unit
C) $3,384.70 per unit
D) $16,675.60 per unit

Solution:

(a) (b) (a) ÷ (b)


Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly $1,137,360 84,000 machine- $13.54 per
hours machine-hour
Processing Orders 28,479 1,100 orders $25.89 per order
Inspection 97,155 1,270 inspection- $76.50 per
hours inspection-hour

Calculation of Overhead Costs:


(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Assembly $13.54 per MH 660 MHs $8,936.40
Processing Orders $25.89 per order 50 orders $1,294.50
Inspection $76.50 per IH 40 IHs $3,060.00

Sales................................................ $55,460.00
Costs:
Direct materials (470 × $40.30) .. $18,941.00
Direct labor (470 × $42.22) ........ 19,843.40
Assembly .................................... 8,936.40
Processing ................................... 1,294.50
Inspection .................................... 3,060.00 52,075.30
Product margin ............................... $ 3,384.70

4. Houseal Corporation has provided the following data from its activity-based costing
system:

Total
Activity Cost Pool Cost Total Activity
Assembly ..................... $613,250 55,000 machine-hours
Processing orders ......... $46,170 1,500 orders
inspection-
Inspection .................... $146,110 1,900 hours

Data concerning one of the company’s products, Product W58B, appear below:

Selling price per unit ........................... $113.70


Direct materials cost per unit............... $48.14
Direct labor cost per unit ..................... $11.62
Annual unit production and sales ........ 360
Annual machine-hours ........................ 1,040
Annual orders ...................................... 60
Annual inspection-hours...................... 30

According to the activity-based costing system, the product margin for product W58B is:
A) $3,668.60
B) $5,975.60
C) $5,515.40
D) $19,418.40

Solution:

(a) (b) (a) ÷ (b)


Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly $613,250 55,000 machine- $11.15 per
hours machine-hour
Processing Orders 46,170 1,500 orders $30.78 per order
Inspection 146,110 1,900 inspection- $76.90 per
hours inspection-hour

Calculation of Overhead Costs:


(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Assembly $11.15 per MH 1,040 MHs $11,596.00
Processing Orders $30.78 per order 60 orders $1,846.80
Inspection $76.90 per IH 30 IHs $2,307.00

Sales (360 × $113.70)..................... $40,932.00


Costs:
Direct materials (360 × $48.14) .. $17,330.40
Direct labor (360 × $11.62) ........ 4,183.20
Assembly .................................... 11,596.00
Processing ................................... 1,846.80
Inspection .................................... 2,307.00 37,263.40
Product margin ............................... $ 3,668.60

5. Dietz Company uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity based
costing system:

Costs:
Manufacturing overhead ........................... $440,000
Selling and administrative expenses ......... 240,000
Total .......................................................... $680,000
Distribution of resource consumption:
Activity Cost Pools
Order Customer
Size Support Other Total
Manufacturing overhead ..................... 55% 35% 10% 100%
Selling and administrative expenses ... 30% 50% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs. You have been asked to complete the first-stage allocation of costs to the
activity cost pools.

How much cost, in total, should NOT be allocated to orders and products in the second stage
of the allocation process if the activity-based costing system is used for internal decision-
making?
A) $68,000
B) $0
C) $92,000
D) $136,000

Solution:

Other Cost:
Manufacturing overhead: 10% × $440,000 ........................... $44,000
Selling and administrative expenses: 20% × $240,000 ......... 48,000
Total....................................................................................... $92,000

For items 6-8

Espinoza Company is a wholesale distributor that uses activity-based costing for all of its
overhead costs. The company has provided the following data concerning its annual overhead
costs and its activity based costing system:

Overhead costs:

Wages and salaries ... $220,000


Other expenses ......... 160,000
Total ......................... $380,000

Distribution of resource consumption:

Filling Customer
Activity Cost Pools Orders Support Other Total
Wages and salaries ...... 35% 55% 10% 100%
Other expenses ............ 15% 65% 20% 100%
The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining
costs.

The amount of activity for the year is as follows:

Activity Cost Pool Activity


Filling orders ............... 4,000 orders
Customer support ........ 20 customers

6. What would be the total overhead cost per order according to the activity-based costing
system? In other words, what would be the overall activity rate for the filling orders
activity cost pool? (Round to the nearest whole cent.)
A) $25.25
B) $23.75
C) $33.25
D) $14.25

Solution:

Filling Orders Cost:


Wages and salaries: 35% × $220,000 ..... $ 77,000
Other expenses: 15% × $160,000 ........... 24,000
Total........................................................ $101,000

(a) (b) (a) ÷ (b)


Activity Cost Pool Total Cost Total Activity Activity Rate
Filling orders $101,000 4,000 order $25.25 per order

7. What would be the total overhead cost per customer according to the activity based costing
system? In other words, what would be the overall activity rate for the customer support
activity cost pool? (Round to the nearest whole dollar.)
A) $10,450
B) $11,250
C) $12,350
D) $11,400

Solution:

Customer Support Cost:


Wages and salaries: 55% × $220,000 ..... $121,000
Other expenses: 65% × $160,000 ........... 104,000
Total........................................................ $225,000

(a) (b) (a) ÷ (b)


Activity Cost Pool Total Cost Total Activity Activity Rate
Customer support $225,000 20 customers $11,250 per customer

8.To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who made 6 orders in a year?
A) $5,745
B) $10,650
C) $6,166
D) $5,325

Solution:

Wages and Salaries Cost:


Allocated to Filling Orders: 35% × $220,000 ........... $77,000
Allocated to Customer Support: 55% × $220,000 .... $121,000

(a) (b) (a) ÷ (b)


Activity Cost Pool Total Cost Total Activity Activity Rate
Filling orders $77,000 4,000 orders $19.25 per order
20 customers $6,050 per
Customer support $121,000 customer

(a) (b) (a) × (b)


Activity Cost Pool Activity Rate Total Activity ABC Cost
Filling orders $19.25 per order 6 orders $ 116
Customer support $6,050 per customer 1 customer 6,050
$6,166

For problems 9-10

Addison Company has two products: A and B. Annual production and sales are 800 units of
Product A and 700 units of Product B. The company has traditionally used direct labor-hours as
the basis for applying all manufacturing overhead to products. Product A requires 0.2 direct labor
hours per unit and Product B requires 0.6 direct labor hours per unit. The total estimated
overhead for next period is $71,286.

The company is considering switching to an activity-based costing system for the purpose of
computing unit product costs for external reports. The new activity-based costing system would
have three overhead activity cost pools—Activity 1, Activity 2, and General Factory--with
estimated overhead costs and expected activity as follows:

Expected Activity
Estimated
Activity Cost Pool Overhead Costs Product A Product B Total
Activity 1 ............... $20,272 300 500 800
Activity 2 ............... 29,380 800 500 1,300
General Factory ..... 21,634 160 420 580
Total ...................... $71,286

(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor
hours.)

9. The predetermined overhead rate under the traditional costing system is closest to:
A) $25.34
B) $22.60
C) $37.30
D) $122.91

Solution:

Total Direct Labor-Hours


Product A: 800 units × .2 DLHs per unit .................. 160 DLHs
Product B: 700 units × .6 DLHs per unit ................... 420 DLHs
Total........................................................................... 580 DLHs

Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.91

10. The overhead cost per unit of Product B under the activity-based costing system is closest to:
A) $73.74
B) $56.62
C) $22.38
D) $47.52

Solution:

(a) (b) (a) ÷ (b)


Activity Cost Pool Estimated Cost Estimated Activity Activity Rate
Activity 1 $20,272 800 $25.34
Activity 2 $29,380 1,300 $22.60
General Factory $21,634 580 $37.30

Total Cost of Product B:


(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Activity ABC Cost
Activity 1 $25.34 500 $12,670
Activity 2 $22.60 500 11,300
General Factory $37.30 420 15,666
$39,636

Overhead cost per unit = $39,636 ÷ 700 units = $56.62 per unit (rounded)

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