Ch. 4- Activity-based costing

Healthy Legs Manufacturing designs and manufactures treadmills and elliptical machines. Management has the following information about costs and activities: product assembly (cost pool)- $700,000 (expected cost) --activity driver= # of DL hrs- $0.80/DL hour

$700,000 ÷ Number of direct labor hours = $0.80/direct labor hours. Number of direct labor hours = $700,000 ÷ $0.80/direct labor hours = 875,000.

Hoskins, Inc. has activity costs of $93,000, predetermined total overhead of $120,000, actual overhead of $98,000, and the company has three product lines. The activity rate is ________ per product line.

$93,000 activity cost ÷ 3 product lines = $31,000 per product line.

A switch to activity-based costing would be most appropriate when a company's

A common symptom of costs being incorrectly allocated is when low volume jobs show healthy profits and high volume show low profits. This likely means that the cost driver does not properly correlate to the activity. Similarly, this is a common downfall of traditional costing systems. The subject company should explore ABC

Clipper Inc. makes three models of hedge trimmer. Each model's design has remained unchanged for the past five years. All three models are made on their own dedicated production line using equipment that is fully automated and requires minimal maintenance and monitoring. Based on this information, which type of overhead costing system would be the best fit for Clipper?

A firm using traditional costing with machine hours as the basis of allocation needs to produce products with machines. Further, for machine hours to be the most accurate allocation method, the firm should have minimal costs in the form of labor, maintenance, or engineering because machine hours don't drive these costs. If Clipper had changes in product design, significant maintenance costs, or significant engineering costs, then ABC might be appropriate. However, traditional costing using machine hours as the basis for allocation is the best solution for Clipper given the small size of their product line and the simplicity of their production process.

Cool Covers makes protective cases for smartphones. Currently, the firm produces eight models, each of which is redesigned once per year. All eight models are produced on the same equipment, but this equipment needs extensive recalibration and re-engineering each time the firm starts a new production run. Based on this information, which type of overhead costing system is the best fit for Cool Covers?

ABC is typically ideal for manufacturing environments with a high concentration of overhead costs. Product redesigns, equipment recalibration, and equipment reengineering all contribute to the cost of overhead. Specifically, if a company needs to recalibrate and reengineering frequently (i.e. each production run), then they're a good candidate for ABC

Mandy Appliances manufactures toaster ovens. Each oven contains 15 parts totaling $35 in direct materials. Each oven requires three hours of machine time at $15 per machine hour. The company has the following information regarding activities, activity drivers, and activity rates:

Allocated cost = Activity rate x Activity driver consumption = $3.00 per machine hour x 3 hours per oven = $9.00

Home Linens manufactures bed sets that include a flat sheet, fitted sheet, pillowcase, and comforter. In the sheet division, it has overhead costs of $92,000, which are allocated equally to flat sheets and fitted sheets. However, fitted sheets take twice as long to produce. Due to high demand, the company plans to double its production of blue bed sets. If the company produces 25 fitted sheets per batch, batch-level costs associated with blue fitted sheets wil

Batch-level overhead costs will not change since the question states costs are allocated equally and doesn't indicate that the amount of sheets in each batch will increase.

Morrow Co. produces three products: Beta, Delta, and Gamma. Beta requires 400 purchase orders, Delta requires 600 purchase orders, and Gamma requires 1,000 purchase orders. Morrow has identified an ordering and receiving activity cost pool with allocated overhead of $180,000. The cost driver for the pool is purchase orders. Direct labor hours used on each product are 50,000 for Beta, 40,000 for Delta, and 110,000 for Gamma. How much ordering and receiving overhead is assigned to each product?

Beta = $180,000 x [400 ÷ (400 + 600 + 1,000 purchase orders)] = $36,000Delta = $180,000 x [600 ÷ (400 + 600 + 1,000 purchase orders)] = $54,000Gamma = $180,000 x [1,000 ÷ (400 + 600 + 1,000 purchase orders)] = $90,000

Murphy Company produces two products, Regular and Enhanced. Murphy produces 8,000 units of Regular and 2,000 units of Enhanced. The company uses two activity cost pools, with estimated cost and activity as follows:

Costs for Regular: Pool #1: $12,000 x [500 ÷ (500 + 250)] = $8,000. Pool #2: $24,000 x [400 ÷ (400 + 1,200)] = $6,000. Total = $8,000 + $6,000 = $14,000. Per unit = $14,000 ÷ 8,000 units = $1.75.

Wind Inc. and Vortex Inc. both manufacture 10 different models of ceiling fans. Wind's production line is entirely mechanized, and the firm has no plans to alter its product line or its manufacturing processes any time in the next five years. Vortex also uses a fully mechanized production line. However, the company redesigns all of its products on a yearly basis, and it is continually making machinery adjustments in an attempt to increase production efficiency. Based on this description, you can conclude that

Fully mechanized environments generally should not allocate costs on the basis of direct labor hours because they rely more on machines for production than labor. Furthermore, fully mechanized environments tend to be good candidates for ABC.

acqueline owns a nanny service. Which of the following would be a value-added activity for Jacqueline?

Jacqueline's main clients are parents. Parents being able to remotely check on their children via a nanny cam will be valuable to them. Thus, installing nanny cams in the living room, playroom, and nursery is the value-added activity.

??

Non-value-added activities are those activities that, if eliminated, would not reduce the perceived value of a company's product or service.

Total factory overhead of $250,000 for the quarter is split between the two cost pools in the following proportion: 70% gluing and 30% pressing. Hardwood produces two types of flooring: oak and maple. Last quarter, it produced 13,200 sheets of oak and 25,000 sheets of maple. Oak is produced in batch sizes of 60, and maple is produced in batch sizes of 50. A sheet of oak requires 1.5 hours of direct labor, and a sheet of maple requires 1.25 hours. What was the overhead allocation to oak for gluing last quarter?

Number of batches processed for oak = 13,200 sheets ÷ 60 sheets per batch = 220 batches. Number of batches processed for maple = 25,000 sheets ÷ 50 sheets per batch = 500 batches. Total number of batches processed = 220 + 500 = 720. Factory overhead allocated to gluing process = 0.70 x $250,000 = $175,000. Overhead rate per batch for gluing = $175,000 ÷ 720 = $243.06. Overhead allocation to oak for gluing = 220 x $243.06 = $53,473.20.

Total factory overhead of $250,000 is split between the two cost pools in the following proportion: 70% gluing and 30% pressing. Hardwood produces two types of flooring: oak and maple. Last quarter, it produced 13,200 sheets of oak and 25,000 sheets of maple. Oak is produced in batch sizes of 60, and maple is produced in batch sizes of 50. A sheet of oak requires 1.5 hours of direct labor, and a sheet of maple requires 1.25 hours. What is the overhead allocation to maple for gluing?

Number of batches processed for oak = 13,200 sheets ÷ 60 sheets per batch = 220. Number of batches processed for maple = 25,000 sheets ÷ 50 sheets per batch = 500. Total number of batches processed = 220 + 500 = 720. Factory overhead allocated to gluing process = 0.70 x $250,000 = $175,000. Overhead rate per batch for gluing = $175,000 ÷ 720 = $243.06. Overhead allocation to maple for gluing = 500 x $243.06 = $121,530.00.

Tri-state Progressive Bank wants to reduce its branch-level expenses by automating some of the drive-through activities. In analyzing branch activities, it may employ which of the following activity cost pools?

Number of customers walking in through the door, number of tellers employed, and number of hours a branch remains open are all more likely to be cost drivers and not cost pools.

The Sandy Beach Inn is located on the Oregon coast and caters to an upscale clientele by offering such services as in-room massage, wedding packages, and catered beach picnics. The Sandy Beach Inn is one of 10 hotels owned by Beach Inns, Inc. Beach Inns, Inc.'s corporate overhead ________ be allocated to its various service offerings because it is a(n) ________ activity.

Organization-level overhead is not allocated to products or services. Only unit-level, batch-level, product-level, and facility-level overhead is allocated to products or services.

What is the activity rate for shipping?

shipping cost pool is $14,025/expects to ship 165 completed comforters to its distributors= $85.00/shipment

A furniture manufacturer has three product lines: dining tables, dining chairs, and coffee tables. It has factory overhead of $1,550,000 to be allocated among these products. The activity pools identified are cutting, planing, and assembly. The cost driver for cutting is number of cuts performed, the cost driver for planing is direct labor hours, and the cost driver for assembly is number of joints. The details of activities are shown:

tables chairs coffee tbl number of joints 21 28 24 production 30,000 145,000 20,000 activity cost pool factory overhead assembly 500,000 Activity rate = Total activity cost pool resources ÷ Total activity driver volume = $500,000 ÷ [(21 x 30,000) + (28 x 145,000) + (24 x 20,000)] = $500,000 ÷ 5,170,000 = $0.097 per joint

For the past four years, Horton Helmets has allocated overhead using an ABC system that has featured the same six cost pools and the same six cost drivers. Horton expects to significantly simplify the manufacturing operation associated with its Pro model bike helmet. This suggests that

the Pro model will be associated with fewer cost pools next year than it was this year. (Simplifying the production process will create a reduction in cost pools.)