AB-Costing- Problems - Lecture notes 1 PDF

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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 organizationsustaining costs. The company has provided the following data concerning its costs: Wages and salaries ............ Depreciation ...................... Occupancy ......................... Total...................................

$320,000 220,000 120,000 $660,000

The distribution of resource consumption across activity cost pools is given below: Activity Cost Pools Order Fabrication Processing Other Wages and salaries ...... 20% 65% 15% Depreciation ................ 15% 35% 50% Occupancy ................... 5% 70% 25%

Total 100% 100% 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 ..... Depreciation: 15% × $220,000............... Occupancy: 5% × $120,000 ................... Total........................................................

$ 64,000 33,000 6,000 $103,000 (a) ÷ (b)

(a) Activity Cost Pool Total Cost Fabrication $103,000

(b) Total Activity 10,000 machine-hours

Activity Rate $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 ............ Depreciation ...................... Utilities .............................. Total...................................

$300,000 180,000 240,000 $720,000

Distribution of resource consumption: Wages and salaries ....... Depreciation ................. Utilities .........................

Activity Cost Pools Assembly Setting Up Other 35% 40% 25% 5% 60% 35% 10% 60% 30%

Total 100% 100% 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 ..... Depreciation: 35% × $180,000............... Utilities: 30% × $240,000 ...................... Total........................................................

$ 75,000 63,000 72,000 $210,000

3. Feldpausch Corporation has provided the following data from its activity-based costing system: Activity Cost Pool Assembly ..................... Processing orders.........

Total Cost $1,137,36 0 $28,479

Inspection ....................

$97,155

Total Activity 84,000 machine-hours 1,100 orders inspection1,270 hours

The company makes 470 units of product W26B a year, requiring a total of 660 machinehours, 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) B) C) D)

$6,444.70 per unit $4,679.20 per unit $3,384.70 per unit $16,675.60 per unit

Solution:

Activity Cost Pool Assembly

(a) Total Cost $1,137,360

Processing Orders Inspection

28,479 97,155

(b) Total Activity 84,000 machinehours 1,100 orders 1,270 inspectionhours

(a) ÷ (b) Activity Rate $13.54 per machine-hour $25.89 per order $76.50 per inspection-hour

Calculation of Overhead Costs: Activity Cost Pool Assembly Processing Orders Inspection

(a) Activity Rate $13.54 per MH $25.89 per order $76.50 per IH

Sales................................................ Costs: Direct materials (470 × $40.30) .. Direct labor (470 × $42.22) ........ Assembly .................................... Processing ................................... Inspection .................................... Product margin ...............................

(b) Total Activity 660 MHs 50 orders 40 IHs

(a) × (b) ABC Cost $8,936.40 $1,294.50 $3,060.00

$55,460.00 $18,941.00 19,843.40 8,936.40 1,294.50 3,060.00

52,075.30 $ 3,384.70

4. Houseal Corporation has provided the following data from its activity-based costing system: Activity Cost Pool Assembly ..................... Processing orders.........

Total Cost $613,250 $46,170

Inspection ....................

$146,110

Total Activity 55,000 machine-hours 1,500 orders inspection1,900 hours

Data concerning one of the company’s products, Product W58B, appear below: Selling price per unit ........................... Direct materials cost per unit............... Direct labor cost per unit .....................

$113.70 $48.14 $11.62

Annual unit production and sales ........ Annual machine-hours ........................ Annual orders ...................................... Annual inspection-hours......................

360 1,040 60 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:

Activity Cost Pool Assembly

(a) Total Cost $613,250

Processing Orders Inspection

46,170 146,110

(b) Total Activity 55,000 machinehours 1,500 orders 1,900 inspectionhours

(a) ÷ (b) Activity Rate $11.15 per machine-hour $30.78 per order $76.90 per inspection-hour

Calculation of Overhead Costs: Activity Cost Pool Assembly Processing Orders Inspection

(a) Activity Rate $11.15 per MH $30.78 per order $76.90 per IH

Sales (360 × $113.70)..................... Costs: Direct materials (360 × $48.14) .. Direct labor (360 × $11.62) ........ Assembly .................................... Processing ................................... Inspection .................................... Product margin ............................... 5.

(b) Total Activity 1,040 MHs 60 orders 30 IHs

(a) × (b) ABC Cost $11,596.00 $1,846.80 $2,307.00

$40,932.00 $17,330.40 4,183.20 11,596.00 1,846.80 2,307.00

37,263.40 $ 3,668.60

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 ........................... Selling and administrative expenses ......... Total ..........................................................

$440,000 240,000 $680,000

Distribution of resource consumption:

Manufacturing overhead ..................... Selling and administrative expenses ...

Order Size 55% 30%

Activity Cost Pools Customer Support Other Total 35% 10% 100% 50% 20% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining 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 decisionmaking? A) $68,000 B) $0 C) $92,000 D) $136,000 Solution: Other Cost: Manufacturing overhead: 10% × $440,000 ........................... Selling and administrative expenses: 20% × $240,000 ......... Total.......................................................................................

$44,000 48,000 $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 ... Other expenses ......... Total .........................

$220,000 160,000 $380,000

Distribution of resource consumption:

Activity Cost Pools Wages and salaries ...... Other expenses ............

Filling Orders 35% 15%

Customer Support 55% 65%

Other Total 10% 100% 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 Filling orders ............... Customer support ........

Activity 4,000 orders 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 ..... Other expenses: 15% × $160,000 ........... Total........................................................ (a) Activity Cost Pool Total Cost Filling orders $101,000

$ 77,000 24,000 $101,000

(b) Total Activity 4,000 order

(a) ÷ (b) Activity Rate $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 ..... Other expenses: 65% × $160,000 ........... Total........................................................ Activity Cost Pool

$121,000 104,000 $225,000

(a) (b) Total Cost Total Activity

(a) ÷ (b) 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 ........... Allocated to Customer Support: 55% × $220,000 .... Activity Cost Pool Filling orders

(a) Total Cost $77,000

Customer support

$121,000

Activity Cost Pool Filling orders Customer support

(b) Total Activity 4,000 orders 20 customers

(a) Activity Rate $19.25 per order $6,050 per customer

$77,000 $121,000 (a) ÷ (b) Activity Rate $19.25 per order $6,050 per customer

(b) Total Activity 6 orders 1 customer

(a) × (b) ABC Cost $ 116 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 Activity Cost Pool Activity 1 ............... Activity 2 ............... General Factory .....

Estimated Overhead Costs $20,272 29,380 21,634

Product A 300 800 160

Product B 500 500 420

Total 800 1,300 580

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 .................. Product B: 700 units × .6 DLHs per unit................... Total...........................................................................

160 DLHs 420 DLHs 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) Activity Cost Pool Estimated Cost Activity 1 $20,272 Activity 2 $29,380 General Factory $21,634

(b) Estimated Activity 800 1,300 580

(a) ÷ (b) Activity Rate $25.34 $22.60 $37.30

Total Cost of Product B: Activity Cost Pool Activity 1 Activity 2 General Factory

(a) Activity Rate $25.34 $22.60 $37.30

(b) Activity 500 500 420

(a) × (b) ABC Cost $12,670 11,300 15,666 $39,636

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