AC351 Chapter 7
Activity rates from Lippard Corporation's activity-based costing system are listed below. The company uses the activity rates to assign overhead costs to products: Activity Cost Pool Activity Rate Processing customer orders $ 31.62 per customer order Assembling products $ 2.86 per assembly hour Setting up batches $ 46.61 per batch Last year, Product H50E involved 9 customer orders, 666 assembly hours, and 77 batches. How much overhead cost would be assigned to Product H50E using the activity-based costing system? Multiple Choice A) $81.09 B) $3,588.97 C) $5,778.31 D) $60,979.68
C) $5,778.31 Explanation The overhead cost charged to Product H50E is: Activity Rate Activity ABC Cost Processing customer orders $ 31.62per customer order 9 orders $ 284.58 Assembling products $ 2.86 per assembly hour 666 hours 1,904.76 Setting up batches $ 46.61 per batch 77 batches 3,588.97 Total overhead cost $ 5,778.31
Weldon Corporation has provided the following data from its activity-based costing accounting system: Indirect factory wages $ 340,000 Factory equipment depreciation $ 240,000 Distribution of Resource Consumption across Activity Cost Pools: Activity Cost Pools Customer Orders Product Processing Other Total Indirect factory wages 25% 65% 10% 100% Factory equipment depreciation 40% 40% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs that are not assigned to products. How much indirect factory wages and factory equipment depreciation cost would be assigned to the Customer Orders activity cost pool? Multiple Choice A) $181,000 B) $290,000 C) $580,000 D) $188,500
A) $181,000 Explanation Allocations to the Customer Orders activity cost pool: Indirect factory wages (25% × $340,000) $ 85,000 Factory equipment depreciation (40% × $240,000) 96,000 Total $ 181,000
Dercole Corporation uses activity-based costing to assign overhead costs to products. Overhead costs have already been allocated to the company's three activity cost pools as follows: Machining, $43,200; Order Filling, $13,900; and Other, $14,900. Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Activity data appear below: MHs (Machining) Orders (Order Filling) Product N8 7,300 600 Product Y4 2,700 1,400 What is the overhead cost assigned to Product N8 under activity-based costing? Multiple Choice A) $36,000 B) $4,170 C) $31,536 D) $35,706
D) $35,706 Explanation Total MHs = 7,300 MHs + 2,700 MHs = 10,000 MHs Total orders = 600 orders + 1,400 orders = 2,000 orders Machining: $43,200 ÷ 10,000 MHs = $4.32 per MH Order Filling: $13,900 ÷ 2,000 orders = $6.95 per order Overhead cost for Product N8: Machining $4.32 per MH × 7,300 MHs $ 31,536 Order Filling $6.95 per order × 600 orders 4,170 Total $ 35,706
First-stage allocations in an ABC system should not be based on the opinions of employees about how costs should be distributed among activity cost pools. (T/F)
False
An activity rate of $512 per product design means that on average a product design consumes resources that cost $512. (T/F)
True
To compute a product's profit or product margin, the product's sales and direct costs are needed in addition to the overhead costs computed in an activity-based costing system. (T/F)
True
Diehl 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: Manufacturing overhead $ 480,000 Selling and administrative expenses 100,000 Total $ 580,000 Distribution of resource consumption: Activity Cost Pools Order Size Customer Support Other Total Manufacturing overhead 5% 85% 10% 100% Selling and administrative expenses 60% 20% 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, would be allocated in the first-stage allocation to the Customer Support activity cost pool? Multiple Choice A) $493,000 B) $304,500 C) $116,000 D) $428,000
D) $428,000 Explanation Allocations to the Customer Support activity cost pool: Manufacturing overhead (85% × $480,000) $ 408,000 Selling and administrative expenses (20% × $100,000) 20,000 Total $ 428,000
Immen Corporation manufactures two products: Product B82O and Product P99Y. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products B82O and P99Y. Activity Cost Pool Activity Measure Total Cost Total Activity Machining Machine-hours $ 330,000 15,000 MHs Machine setups Number of setups $ 300,000 500 setups Product design Number of products $ 46,000 2 products Order size Direct labor-hours $ 330,000 10,000 DLHs Activity Measure Product B82O Product P99Y Machine-hours 7,000 8,000 Number of setups 200 300 Number of products 1 1 Direct labor-hours 3,000 7,000 Using the plantwide overhead rate, how much manufacturing overhead cost would be allocated to Product P99Y? Multiple Choice A) $301,800 B) $396,000 C) $503,000 D) $704,200
D) $704,200 Explanation The company's plantwide overhead rate is computed as follows: Machining $ 330,000 Machine setups 300,000 Product design 46,000 Order size 330,000 Total estimated overhead cost (a) $ 1,006,000 Total expected direct labor-hours (b) 10,000 DLHs Predetermined overhead rate (a) ÷ (b) $ 100.60 per DLH Using the plantwide overhead rate, the manufacturing overhead cost that would be allocated to Product P99Y is computed as follows: Product P99Y Total direct labor hours (a) 7,000 Plantwide overhead rate per DLH (b) $ 100.60 Manufacturing overhead assigned (a) × (b) $ 704,200
Direct materials costs are usually excluded from the costs that are allocated to activity cost pools in an activity-based costing system. (T/F)
True
When a company shifts from a traditional cost system in which manufacturing overhead is applied based on direct labor-hours to an activity-based costing system with batch-level and product-level costs, the unit product costs of high volume products typically decrease whereas the unit product costs of low volume products typically increase. (T/F)
True
