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Exam 9: Activity-Based Costing

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Question 1

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The number of services provided by an accounting firm would be classified as an:

A) Volume-related activity.
B) Batch-related activity.
C) Product-related activity.
D) Facility-related activity.

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Question 2

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The basic approach in product costing is to allocate costs in the cost pools to the individual cost objects, which are the products or services of interest.

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Sebastian Corporation's activity-based costing system has three activity cost pools-Machining, Batch Setup, and Other. The company's overhead costs, which consist of equipment depreciation and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. $\begin{array}{lrr} \text { Equipment depreciation } &\$27,000\\ \text { Indirect labor } &\$7,000\\\end{array}$ $\begin{array}{l}\text { Distributim of Resaurce Cmsumption Acrass Activity Cast Ponls }\\\begin{array} { | l | c | c | c | } \hline & \text { Machining } & \text { Batch Setup } & \text { Other } \\\hline \text { Equipment depreciation } & 0.40 & 0.30 & 0.30 \\\hline \text { Indirect labor } & 0.20 & 0.30 & 0.50 \\\hline\end{array}\end{array}$ Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Batch Setup cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. $\begin{array} { l c r } & \text { MHs } & \text { Batches } \\\text { Product Snorkel } & 8,100 & 400 \\\text { Product Fin } & \underline{1,900 }& \underline{ 1,600} \\\text { Total } & \underline{10,000 }& \underline{2,000 }\\\end{array}$ Additional data concerning the company's products appears below: $\begin{array} { l c c } & \text { Product Snorkel } & \text { Product Fin } \\\text { Sales } & \$ 71,400 & \$ 57,600 \\\text { Direct materials } & \$ 21,900 & \$ 19,900 \\\text { Direct labor } & \$ 33,700 & \$ 25,100\end{array}$ Required: a. Assign overhead costs to activity cost pools using activity-based costing. b. Calculate activity rates for each activity cost pool using activity-based costing. c. Determine the amount of overhead cost that would be assigned to each product using activity-based costing. d. Determine the product margins for each product using activity-based costing.

Describe the four steps involved in activity-based costing.

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period: $\begin{array} { l c c r } \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\text { Consumer } & 14,000 & 700 & \$ 280,000 \\\text { Commercial } & 8,000 & 300 & \$ 180,000\end{array}$ - If Banc Corp. Trust uses a bankwide rate based on direct labor hours, what would be the indirect costs allocated to the Commercial Department?

If a company manufactures diverse products using different sets of resources in a plant, it is best to use a plantwide allocation rate.

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period: $\begin{array} { l c c r } \text { Department } & \text { DLH } & \text { Loans Processed } & \text { Direct Costs } \\\text { Consumer } & 14,000 & 700 & \$ 280,000 \\\text { Commercial } & 8,000 & 300 & \$ 180,000\end{array}$ - If Banc Corp. Trust uses a bankwide rate based on the number of loans processed, what would be the total costs for the Consumer Department?

Donnati Corporation has provided the following data from its activity-based costing system: $\begin{array} { l c l} \text { Activity Cost Pool } & \text { Total Cost } & \text { Total Activity } \\\text { Assembly } & \$ 383,180 & 23,000 \text { machine-hours } \\\text { Processing orders } & \$ 50,798 & 1,100 \text { orders } \\\text { Inspection } & \$ 106,110 & 1,620 \text { inspection-hours }\end{array}$ Data concerning one of the company's products, Product A43V, appear below: $\begin{array}{llr} \text {Selling price per unit } &\$124.60\\ \text { Direct materials cost per unit } &\$22.08\\ \text { Direct labor cost per unit} &\$45.77\\ \text {Annual unit production and sales } &210\\ \text { Annual machine-hours } &320\\ \text {Annual orders } &80\\ \text { Annual inspection-hours } &10\end{array}$ According to the activity-based costing system, the product margin for Product A43V is:

"Activity-based costing is just a more precise form of product costing and is only usable in a production setting." Do you agree or disagree? Explain why.

Activity-based costing (ABC) is a costing technique that uses a two-stage allocation process. Which of the following statements best describes these two stages?

Mission Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information provided below. (CMA based) $\begin{array} { | l | r | r | } \hline & \text { Wall Mirrors } & \text { Specialty Windows } \\\hline \text { Units Produced } & 40 & 20 \\\hline \text { Material moves per product line } & 5 & 15 \\\hline \text { Direct labor hours per product line } & 200 & 300 \\\hline \text { Budgeted material handling costs: } \$ 50,000 & \\\hline\end{array}$ - Under a traditional costing system that allocates overhead on the basis of direct labor hours, the materials handling costs allocated to one unit of Wall Mirrors would be:

The number of products produced is an example of a facility-related cost driver in the cost hierarchy.

Markham Company makes two products: Basic Product and Deluxe Product. Annual production and sales are 1,700 units of Basic Product and 1,100 units of Deluxe Product. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Basic Product requires 0.3 direct labor hours per unit and Deluxe Product requires 0.6 direct labor hours per unit. The total estimated overhead for next period is $98,785. 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: $\begin{array} { l c c c c } & \text { Estimated } & { \text { Expected Activity } } \\ & & \text { Basic } & & \\\text { Activity Cost Pool } & \text { Overhead Costs } & \text { Product } & \text { Deluxe Product } & \text { Total } \\\text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \\\text { Activity 2 } & 17,385 & 1,700 & 200 & 1,900 \\\text { General Factory } & 50,872 & 510 & 660 & 1,170 \\\text { Total } & \$ 98,785 & & &\end{array}$ - (Note: The General Factory costs are allocated on the basis of direct labor hours.) The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system is closest to:

Work Horse Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products. $\begin{array} { l c c } \text { Activity Cost Pools } & \text { Activity Rate } \\\text { Batch Setup } & \$ 83.75 \text { per batch } \\\text { Assembling products } & \$ 2.88 \text { per assembly hour } \\\text { Processing customer orders } & \$ 50.41 \text { per customer order }\end{array}$ Data concerning two products appear below: $\begin{array} { | l | r | r | } \hline & \text { Praduct J } & { \text { Praduct S } } \\\hline \text { Number of batches } & 34 & 41 \\\hline \text { Number of assembly hours } & 105 & 824 \\\hline \text { Number of customer orders } & 17 & 38 \\\hline\end{array}$ Required: a. How much overhead cost would be assigned to Product J using the company's activity-based costing system? Show your work. b. How much overhead cost would be assigned to Product S using the company's activity-based costing system? Show your work!

Plant administration is an example of a:

Activity-based costing (ABC) can be applied to administrative activities (e.g., purchasing) but not to marketing activities.

Time-driven activity-based costing (TDABC) is more costly to implement than an unmodified activity-based costing system.

When product costs are used for decision-making, what assumption is most likely to distort the decisions?

Allure Company manufactures and distributes two products, M and XY. Overhead costs are currently allocated using the number of units produced as the allocation base. The controller has recommended changing to an activity-based costing (ABC) system. She has collected the following information: $\begin{array} { l l r r r } \text { Activity } & \text { Cost Driver } & \text { Amount } & { \text { M } } & { \text { XY } } \\\text { Production setups } & \text { Number of setups } &8 2 , 0 0 0 &8 & 12 \\\text { Material hardling } & \text { Number of parts } & 48,000 & 56 & 24 \\\text { Packaging costs } & \text { Number of urits } & 130,000 & 80,000 & 50,000 \\& &\$ 2 6 0 , 0 0 0 & &\end{array}$ - What is the total overhead allocated to Product M using the current system?

Which of the following activities would be classified as a batch-level activity?