Exercises of ABC - ejercicios para practicar ABC PDF

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ABC$$ Exercise 1: “Open Doors” produces 2 types of doors: interior and exterior. The company’s simple costing system has 2 direct cost categories (materials and labor), one indirect cost pool and uses machine hours as an allocation base. The company is experiencing a decline in the market for interior doors that was usually their best seller. INTERIOR

EXTERIOR

Units&Sold

3,200

1,800

Selling&Price

$125

$200

Direct&Material/unit

$30

$45

Direct&Manuf Labour&cost/hr

$16

$16

Direct Manfuf Labour&hrs/unit

1.5

2.25

Production&runs

40

85

Material&Moves

72

168

Machine&Set Ups

45

155

5,500

4,500

250

150

Machine&Hrs

Number&of&Inspections

The owners are thinking of applying ABC and have identified 6 activities generating indirect costs:

ACTIVITY

ACTIVITY'COST

ACTIVITY'COST' DRIVER

Production scheduling Material Handling

95,000

Production3runs

45,000

Material3Moves

Machine3Setup Assembly

25,000 60,000

Machine3setups Machine3Hours

Inspection

8,000

Number3of3Inspections

Marketing Costs are 3% of the revenue for each type of door. Required:

1. Calculate the costs of interior and exterior doors under the simple costing system. 2. Calculate the costs of interior and exterior doors under the ABC costing system. 3. Compare the results 4. How can they use this information to deal with the declining market share for interior doors?

Exercise 2: Siegel Company manufactures a product that is available in a deluxe model and a regular model. Since the introduction of the deluxe model, the company’s profits have steadily declined while sales of the deluxe model have been increasing rapidly. Managers are concerned about the accuracy of its costing system. Manufacturing overhead is currently assigned to products on the basis of direct laborhours (SIMPLE ALLOCATION method). For the current year, the company has estimated that it will incur €900,000 in indirect costs and produce 5,000 units of the deluxe model and 40,000 units of the regular model. The deluxe model requires two hours of direct labor per unit, and the regular model requires one hour per unit. Material and labor costs are as follows: Direct materials/unit Direct labor/hour

Deluxe €40 €7

Regular €25 €7

Managers are considering using the activity-based costing (ABC) method in order to assign overhead costs to products. The ABC system consists of the following four activities and uses direct labor hours as allocation base: The costs of each activity are allocated to the two products as follows: Activities Purchasing Processing Scrap/rework Shipping

Activity allocation bases Purchase orders issued Machine-hours Rework orders issued Number of shipments

Estimated direct labor hours 11,000 hours 10,500 hours 15,800 hours 12,700 hours

Activity allocation bases Purchase orders issued Machine-hours Rework orders issued Number of shipments

Deluxe 200 20,000 1,000 250

Regular 400 15,000 1,000 650

Suppose that the selling price of each product is calculated as the total direct cost plus a margin of 100% and that the company can sell all products produced. Calculate the operating income using absorption costing based on both SIMPLE ALLOCATION and ABC methods and answer questions 1 to 5. 1. Using the SIMPLE ALLOCATION method, the amount of manufacturing overheads for the Deluxe product is: A. 90,000 B. 180,000 C. 280,000 D. 560,000 2. Using the ABC method, the amount of manufacturing overheads allocated to the Purchasing activity is: A. 189,000 B. 228,600 C. 284,400 D. 198,000 3. Using the ABC, the amount allocated from the Shipping activity to the Deluxe product is: A. 63,500 B. 66,000 C. 108,000 D. 142,200 4. Using the ABC, the operating income/loss of the Deluxe product is: A. -46,200 B. -109,700 C. 759,700 D. 924,800 5. Which of the following statements is TRUE? A. Sales of the Deluxe product increase rapidly because its selling price is much lower than what it should be. B. The Deluxe product has operating loss using ABC method, because it subsidizes the Regular product. C. Siegel Company should use the SIMPLE ALLOCATION method, because it allows both products to have (positive) operating income. D. None of the above statements is correct.

Exercise 3: INFOGESTION Co. is owned and operated by two friends: one IT engineer and one economist. The company sells two different management software packages: Financial Analysis software and Accounting Analysis software. There are two costs: • •

Labor costs (annual salary) o IT engineer: 35,000 €/year o Economist: 65,000 €/year Other indirect manufacturing costs (depreciation costs of computers, electricity costs, rental fees, etc.): 45,000 €/year

For simplicity, the company uses one allocation base (computer hours) to allocate all indirect costs between the two products (SIMPLE ALLOCATION method). The allocation details are as follows: Costs/Products Indirect costs

Financial Analysis 550 computer hours

Accounting Analysis 450 computer hours

However, the economist of the firm finds that it is problematic to allocate different types of indirect costs based on one single cost allocation base. Therefore, the two friends decide to allocate indirect costs based on different activities (ABC). They have identified two activities: design done by the economist and that made by the IT engineer. Indirect costs allocated to the two activities are described in the following table (notice that the allocation of other indirect manufacturing costs to the two activities is based on computer hours): Indirect Costs/Activities Design by the Economist Design by the IT Engineer IT Engineer’s salary 35,000 €/year Economist’s salary 65,000 €/year Other indirect manufacturing costs 450 computer hours 550 computer hours The costs of each activity are allocated to the two products based on the labor hours of each friend: Activities/Products Design by the Economist Design by the IT Engineer

Financial Analysis 700 hours from the Economist 1,600 hours from the IT Engineer

Accounting Analysis 1,800 hours from the Economist 900 hours from the IT Engineer

Suppose that the selling price of each product is the full cost, calculated using the SIMPLE ALLOCATION method, plus a margin of 20%. Assume that this selling price applies to both SIMPLE ALLOCATION method and ABC method. The sales volumes of the two products are: 100 packages for Financial Analysis and 50 packages for Accounting Analysis. 1. Using the SIMPLE ALLOCATION method, what is the operating income from selling Accounting Analysis software packages?

a. b. c. d.

21,583 12,833 13,050 11,278

2. Using ABC method, what is the amount of indirect costs allocated to the activity: “Design by the IT Engineer”? a. 80,714 b. 81,750 c. 77,900 d. 59,750 3. Using ABC method, what is the amount of costs allocated from the activity: “Design by the Economist” to Financial Analysis software? a. 23,870 b. 23,600 c. 28,910 d. 32,228 4. Using the ABC method, what is the operating income from selling Financial Analysis software packages? a. 65,742 b. 33,590 c. 59,449 d. 45,743 Exercise 4: LetsTravel Co. manufactures and sells two types of suitcases: ItsHeavy and ItsLight. The company’s simple costing system has 2 direct cost categories (materials and labor), one indirect cost pool and uses machine hours as an allocation base. The indirect costs of the current year amount to $812,000. The company uses weighted-average method for its finished goods inventory account.

Sales Volume in units Selling price Production Volume in units Beginning Bal. of Finished Goods in units Beginning Bal. of Finished Goods in costs Direct materials per unit Direct Labor costs per hour Direct Labor Hours per unit Sewing Hours per unit Machine Hours per unit

ItsHeavy 5,000 $130 6,500 1,000 $98,000 $30 $10 2 1 6

ItsLight 6,000 $170 5,500 2,000 $240,000 $45 $20 3 1.5 6

The owners are thinking of applying ABC and have identified 5 activities (Assembly, Decoration, Packing, Marketing, and Distribution). Indirect costs are allocated to activities based on direct labor hours. Activity Assembly Decoration Packing Marketing Distribution

Consumption of Direct Labor Hours 5,500 10,000 4,000 8,000 2,000

Cost ? ? ? ? ?

Activity Cost Drivers Machine Hours Sewing Hours Production Volume Sales Revenue Sales Volume

Given the information given above, prepare for the income statement using absorption costing and answer the following QUESTIONS:

1. Under simple allocation the Operating Income for “ItsHeavy” is: a. 74,778 b. 49,500 c. 85,611 d. 13,389 2. Under ABC, the total indirect cost allocated to the Assembly activity is: a. 164,441 b. 183,085 c. 145,797 d. 151,390 3. The amount of indirect cost allocated from the Decoration activity to “ItsHeavy” under ABC is: a. 146,693 b. 121,298 c. 131,755 d. 116,817 4. The cost of goods manufactured per unit of “ItsLight” under ABC is: a. 185 b. 123 c. 155 d. 119

5. The Gross Margin of “ItsHeavy” under ABC is: a. 192,707 b. 177,595 c. 156,008 d. 199,183 6. The Operating Income/Loss of “ItsLight” under ABC is: a. -41,467 b. -17,568 c. -50,634 d. -3,397 7. When costs are assigned using the simple allocation method: a. “ItsHeavy” is more profitable than when using ABC b. “ItsHeavy” is less profitable than “ItsLight” c. “ItsLight” has undercosting d. Both types of products seem to be more profitable than when using ABC Exercise 5 CopyThat Co. sells and services 2 types of photocopying machines (Amateur and Professional). The company has 2 departments: a Sales Department that sells the machines and a Service Department that provides after sales maintenance and repair services. The Service department customers are charged an amount per copy that differs depending on the type of the machine. There is no beginning or ending inventories of any kind. The company´s existing simple costing system uses a single allocation rate based on the number of purchase orders, to allocate the costs of the Service Department between the two types of photocopiers. Amateur Professional Charge per copy $ 0.3 $ 0.4 Machine Selling Price $ 300 $ 620 Number of Copies per Year 60,000 150,000 Maintenance Visits per year 4 10 Repairs Visits per year 1 2 Number of Machines sold 300 500 Number of Purchase Orders 500 1000 Cost per Machine Sold $180 $450 Cost of parts of Repair $100 $450 and/or Maintenance per Visit Labor Cost per Maintenance $60 $100 or Repair Visit

The owners are thinking of applying ABC and have identified the following activities and overhead costs relevant to the Service Department: Activity Customer account handling Maintenance Scheduling Repairs Scheduling Parts Purchases Administration Overheads

Cost $1,260 $4,800 $14,700 $24,300 $3,000

Driver Number of visits for maintenance and repair Number of maintenance visits Number of repairs visits Number of purchase orders Number of machines sold

Given the information given above, answer the following QUESTIONS: 1. Under the Simple Allocation method the Operating Income from “Amateur” registered by the Service Department is: a. $1,180 b. $2,467 c. $66,800 d. $30,360 2. Using the ABC method the cost of Repairs Scheduling assigned to the “Professional” photocopier in the Service Department is: a. $1,371 b. $9,800 c. $8,100 d. $16,200 3. Using the ABC method the Operating Income/Loss from the “Amateur” photocopier in the Service Department is: a. -$2,722 b. $1,333 c. $65,050 d. $30,270 4. The total cost of the Service Department under ABC is: a. $55,350 b. $61,840 c. $56,885 d. $55,460

5. If Sales Salaries of the Sales Department amount to € 53,000, the Operating Income of CopyThat Co. under ABC is: a. $90,540 b. $155,650 c. $98,260 d. $136,615 6. When costs are allocated using the simple allocation method in the Service Department: a. “Amateur” machines are less profitable than when using ABC b. “Professional” machines are less profitable than “Amateur” machines c. “Professional” machines are less profitable than when using ABC d. Both types of products seem to be more profitable than when using ABC Exercise 6: Classic Windows is a company that builds specialty wooden windows for local builders. For years the company relies on a traditional costing system, which allocates all indirect costs on the basis of direct labor-hours. Now the president of the company is interested in activity-based costing. He worked with an activity-based costing design team and they designed a simple system consisting of three activities: Activities Making windows Processing orders Customer relations

Cost Drivers Direct labor-hours Number of orders Number of customers

Activity for the year 100,000 DLHs 2,000 orders 100 customers

For the current fiscal year, management of the company is particularly interested in measuring the profitability of two customers. One of the customers, Kuszik Builders, is a low-volume purchaser. The other, Western Homes, is a relatively high-volume purchaser. Details of these two customers’ orders for the year appear below: Kuszik Builders

Western Home

Number of orders during the year

2 orders

3 orders

Total direct labor hours

300 DLHs

2,000 DLHs

Total sales

$12,500

$68,000

Total wooden window ordered

840 units

3,700 units

The total costs incurred for the year are: § § §

The direct materials (wood, crystal, etc.) cost $5 per window. The workers (direct labor) of the company have a wage of $18/hour. Indirect factory wages: $400,000

§ § § § §

Acquisition cost of production equipment: $2,600,000. Straight-line depreciation method is used. The residual value is $200,000 and the useful life time is 8 years. Factory maintenance: $80,000 Administrative salaries: $300,000 Office supplies costs: $40,000 Marketing costs: $250,000

The distribution of resource consumption across the activities is as follows: § § § § § §

Indirect factory wages are allocated on the basis of the direct labor hours (DLHs). 30,000 DLHs were incurred in making windows, 50,000 DLHs in processing orders and 20,000 DLHs in customer relations. The production equipment is used exclusively for making windows. Factory maintenance costs cover the whole factory (2000 square meters). The window production area occupies 800 m2, order processing 200 m2, and the rest is used by customer relations activity. The company has five administrative employees and they earn the same annual salary. Two of the employees process orders and the three other are involved in customer relations. Office supplies are used for processing orders and dealing with customer relations. The costs are shared equally by the two activities. Marketing costs incurred are related to customer relations activities.

Answer the following questions (1-6) assuming that the company uses Absorption Costing to prepare for the income statement. Keep as many decimals as you can in the calculations. 1. What is Classic Windows’ operating income of the year from Kuszik Builders, based on the traditional costing system (peanut butter costing method)? a. 560 b. -1,210 c. -1,657 d. 845 2. What is the amount of total indirect costs allocated to the Processing Orders activity for the year? a. 412,000 b. 400,800 c. 400,000 d. 348,000 3. What is the total manufacturing cost related to Kuszik Builders using activitybased costing system? a. 11,201 b. 11,320 c. 10,742 d. 11,304

4. What is the amount of indirect costs allocated from the Customer Relations activity to Western Home? a. 5,700 b. 7,182 c. 5,220 d. 11,400 5. What is Classic Windows’ operating income of the year from Western Homes using activity-based costing system? a. -2,283 b. -1,058 c. -1,762 d. -3,116 6. What is Return on Sales, which is equal to Operating Income/Sales Revenue, of the year from Kuszik Builders using activity-based costing system? a. -0.36 b. -0.32 c. -0.47 d. -0.77 Exercise 7: TT-Tables, S.A. is a company that manufactures two types of tables (pine and oak). This year they produced 4,000 Pine tables and 2,000 Oak tables. The company has three departments: purchases, manufacturing and distribution. The activities realized in each department are the following:

DEPARTMENT Purchases Purchases Purchases Manufacturing Manufacturing Manufacturing Distribution Distribution

ACTIVITY Suppliers communication Preparation and posting of orders Invoicing Wood cutting Wood Gluing Varnishing Marketing Order receipt and followup

DRIVER Nº of suppliers Nº of orders Nº of invoices Nº meters cut Liters of glue Nº of meters varnished Nº of campaigns Nº of orders

Management and administration is located in the company’s headquarters in London. The costs of TT-tables for year 2017 were registered as follows: Costs Raw Material Labour/Salaries Depreciation

Direct Costs

Indirect Costs 2,000 1,500 950

Total 2,650 500

2,000 4,150 1,450

Rents Auxiliary Material Repairs Insurance TOTAL

325 450 1,250 400 5,575

4,450

325 450 1,250 400 10,025

Raw material captures the consumption of 20,000 kg of wood at 0.1 €/ kg. Each pine table needs 4 kg of wood and each oak table requires 2 kg of wood. The direct labor required is: 30 min for each pine table and 15 min for each oak table. Direct depreciations correspond to the machinery the workers use when producing the tables, and the costs are traced to each product based on direct labor hours. The allocation of indirect costs is realized based on the following criteria: v The indirect labor fulfills the following activities and the allocation base of the indirect labor costs is indirect labor hours in the following table: ACTIVITY Indirect Labor Hrs Suppliers communication 50 Preparation and posting of orders 15 Invoicing 80 Wood cutting 120 Wood Gluing 200 Varnishing 50 Marketing 10 Order receipt and follow-up 50 v Indirect depreciations refer to the computers used in order to prepare and post orders and plan marketing activities. The two activities share the cost evenly. v The rent relates to a machine used to measure and cut wood. v Auxiliary material refers to office supplies used by the Purchases and Distribution departments. The cost is shared evenly by activities of the two departments. v Repairs are a maintenance cost for the whole building (1,500 square meters). 700 meters are used for manufacturing, 200 for purchases and the rest for distribution. Within each department, the cost of Repairs is shared evenly by the activities. v Insurance refers to a policy that covers the whole building (1,500 square meters). The allocation rule of Insurance costs is the same as that of Repairs. Cost Drivers are allocated as follows: Pine Table

Oak Table

TOTAL

Nº of suppliers

40

10

50

Nº of orders

100

220

320

Nº of invoices

70

90

160

Nº of meters cut

800

200

1,000

Liters of glue

300

100

400

Nº of meters varnished

750

180...