Acct 2 - Chapter 7

What is the third step in computing Acme Auto Parts' Customer margin?

- to compute Acme Auto Parts' customer margin by deducting all its direct and indirect costs from its sales

The fifth step for implementing activity-based costing is to Prepare Management Reports. The first step in computing Acme Auto Parts' customer margin is to gather its sales and direct cost data. The second step is to incorporate Acme Auto Parts' previously computed activity-based cost assignments. Acme Auto Parts 1. Sales: $29,200 2. Direct costs - Direct material: $7,500 - Direct labor: $6,700 - Shipping: $1,700 - Customer orders: $5,424 - Product design: $3,040 - Order size: $2,912 - Customer relations: $1,540 3. Total: $28,816 Compute Acme Auto Parts' customer margin.

$29,200 - 28,816 = $384

- activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run

Product-level activities

- the process by which activity rates are used to apply costs to products and customers in activity-based costing

Second-stage allocation

In ABC, nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis. Explain nonmanufacturing costs and activity-based costing.

- Many nonmanufacturing costs relate to selling, distributing, and servicing specific products - ABC includes manufacturing and nonmanufacturing costs when calculating the entire cost of a product Two types of nonmanufacturing costs that ABC systems assign to products - ABC systems trace all direct nonmanufacturing costs to products (Ex: Commissions paid to salespersons, shipping costs, and warranty repair costs) - ABC systems allocate indirect nonmanufacturing costs to products whenever the products have presumably caused the costs to be incurred - expand the definition of overhead to include all indirect costs - manufacturing and nonmanufacturing

How do you calculate the individual activity rates for each activity cost pool?

- By dividing the total cost for each activity by the total activity levels

What is the second step in computing product margins using the traditional cost system?

- to compute the plantwide overhead rate Plantwide overhead rate = total estimated manufacturing overhead / total estimated machine-hours Total manufacturing overhead = $14,000,000 Total machine-hours = 800,000 Plantwide overhead rate = $17.50 per machine-hour

What is the third step in computing product margins?

- to deduct each product's direct and indirect costs from sales

What is the first step in computing product margins?

- to gather each product's sales and direct cost data

What is the first step in computing Acme Auto Parts' customer margin?

- to gather its sales and direct cost data

- an event that causes the consumption of overhead resources in an organization

Activity

What are the three characteristics of a successful activity-based costing implementation?

1. Strong top management support: Top managers must strongly support the ABC implementation because their leadership is instrumental in properly motivating all employees to embrace the need to change 2. Linked to how people are evaluated and rewarded: If employees continue to be evaluated and rewarded using traditional (non-ABC) cost data, they will quickly get the message that ABC is not important and will abandon it 3. Cross-functional teams should be created: cross-functional employees possess intimate knowledge of operations that is necessary for designing an effective ABC system

What are the five limitations of ABC?

1. Substantial resources required to implement and maintain 2. Desire to fully allocate all costs to products 3. Resistance to unfamiliar numbers and reports 4. Potential misinterpretation of unfamiliar numbers 5. Does not conform to GAAP. Two costing systems may be needed

The first step for implementing activity-based costing is to define activities, activity cost pools, and activity measures. At Baxter Battery, the ABC team selected the following activity cost pools and activity measures:

Activity Cost Pool - Activity measure 1. Customer orders - Number of customer orders 2. Design changes - Number of design changes 3. Order size - machine-hours 4. Customer relations - number of active customers 5. Other - not applicable

- activities that are carried out to support customers, but that are not related to any specific product

Customer-level activities

Activity-based costing defines five levels of activity. Define the level of activity. Ex: sales calls, catalog mailings, and general technical support that are not tied to any specific product

Customer-level activities

- a measure of the amount of time required to perform an activity (such as the time spent preparing individual bills for customers)

Duration drivers

- activities that are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made

Organization-sustaining activities

Activity-based costing defines five levels of activity. Define the level of activity. Ex: Heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders, and so on

Organization-sustaining activities

The product margins can be reconciled with the company's net operating income. Sales: $31,300,000 (Sure Starts); $18,700,000 (Long Lifes); $50,000,000 (Total) Total costs: $22,928,000 (Sure Starts); 19,832,000 (Long Lifes); $42,760,000 (Total) Product margins: $8,372,000 (Sure Starts); $(1,132,000) (Long Lifes); $7,240,000 (Total) Less costs not assigned to products: - Customer relations = 3,080,000 - Other = 6,160,000 How can the product margins can be reconciled with the company's net operating loss?

Total = 9,240,000 Net operating loss = $(2,000,000) 3,080,000 + 6,160,000 = 9,240,000 7,240,000 - 9,240,000 = $(2,000,000)

- a simple count of the number of times an activity occurs (the number of bills sent out to customers)

Transaction drivers

- activities that are performed each time a unit is produced

Unit-level activities

Q: Foster Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity-based costing system: Overhead costs: Wages and salaries: $70,000 Other expenses: $50,000 Total: $120,000 Distribution of resource consumption: Making Bouquets - Delivery - Other - Total Wages and salaries: 70%; 20%; 10%; 100% Other expenses: 45%; 25%; 30%; 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 - Activity 1. Making bouquets: 40,000 bouquets 2. Delivery: 1,000 deliveries What would be the total overhead cost per bouquet according to the activity-based costing system? In other words, what would be the overall activity rate for the making bouquets activity cost pool? (Round to the nearest whole cent.)

- $1.79 Allocations to the Making Bouquet's activity cost pool: Wages and salaries (70% x $70,000) = $49,000 Other expenses (45% x $50,000) = $22,500 Total cost = $71,500 Overhead cost per bouquet = Total cost ÷ Number of bouquets = $71,500 ÷ 40,000 bouquets = $1.79 per bouquet

Q: Nick Company has two products: A and B. The company uses activity-based costing. The total cost and activity for each of the company's three activity cost pools are as follows: Total Activity Activity Cost Pool - Total Cost - Product A - Product B - Total 1. Activity 1 - $32,600 - 700 - 300 - 1,000 2. Activity 2 - $17,600 - 600 - 200 - 800 3. Activity 3 - $52,500 - 400 - 100 - 500 The activity rate under the activity-based costing system for Activity 3 is closest to:

- $105.00 Activity 3 activity rate: $52,500 ÷ 500 = $105

Q: An activity-based costing system that is designed for internal decision-making will not conform to generally accepted accounting principles because:

- under activity-based costing some manufacturing costs (i.e., the costs of idle capacity and organization-sustaining costs) will not be assigned to products

Activity-based costing defines five levels of activity that largely do not relate to the volume of units produced. What are they?

- unit-level - batch-level - product-level - customer-level - organization-sustaining

Activity-based costing defines five levels of activity. Define the level of activity. Ex: Providing power to run processing equipment.

- unit-level activity because power tends to be consumed in proportion to the number of units produced

What is the general structure of the ABC model?

1. Cost Objects (cost objects such as products generate activities) 2. Activities (Activity consumes resources) 3. Consumption of resources (Causes costs) 4. Costs

The first step for implementing activity-based costing is to define activities, activity cost pools, and activity measures. The Activity Cost Pool - Customer orders - Design changes - Order Size - Customer relations - Other Define the activity cost pool.

1. Customer Orders - assigned all costs of resources that are consumed by taking and processing customer orders 2. Design Changes - assigned all costs of resources consumed by customer-requested design changes 3. Order Size - assigned all costs of resources consumed as a consequence of the number of units produced 3. Customer Relations - assigned all costs associated with maintaining relations with customers 4. Other - assigned all organization-sustaining costs and unused capacity costs (costs that are not associated with customer orders, product design, the size of the orders, or customer relations)

What are the steps for implementing activity-based costing?

1. Define activities, activity cost pools, and activity measures 2. Assign overhead costs to activity cost pools 3. Calculate activity rates 4. Assign overhead costs to cost objects 5. Prepare management reports

Describe the Activity-Based Costing Model at Baxter Battery.

1. Direct Materials + Direct Labor + Shipping Costs = Traced to Cost Objects (Products, Customer Orders, Customers) 2. Overhead Costs (Manufacturing and Nonmanufacturing) $22,000,000 First-Stage Allocations - Customer Orders: $4,520,000 - Design Changes: $3,040,000 - Order Size: $5,200,000 - Customer Relations: $3,080,000 - Other: $6,160,000 Second-Stage Allocations - $452 per order - $760 per change - $6.50 per MH - $1,540 per customer - Not applicable All goes to cot objects: Products, Customer Orders, Customers

Most companies do not use ABC for external reporting because...

1. External reports are less detailed than internal reports 2. It may be difficult to make changes to the company's accounting system 3. ABC does not conform to GAAP 4. Auditors may be suspect the subjective allocation process based on interviews with employees

Activity-based costing differs from traditional absorption costing in three ways. What are they?

1. Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis 2. Some manufacturing costs may be excluded from product costs 3. Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity

The second step for implementing activity-based costing is to assign overhead costs to activity cost pools. Overhead Costs at Baxter Battery Production Department - Indirect factory wages: $6,000,000 - Factory equipment depreciation: 3,500,000 - Factory utilities: 2,500,000 - Factory building lease: 2,000,000 General Administrative Department - Administrative wages and salaries: 4,000,000 - Office equipment depreciation: $900,000 ......etc. Assign Overhead Costs to Activity Cost Pools Production Department - Indirect factory wages: 30% (Customer Orders) + 30% (Design Changes) - Factory equipment depreciation: 20% (Customer Orders) + 10% (Design Changes) - Factory utilities: 0% (Customer Orders) + 10% (Design Changes) .... etc. Assign overhead costs for indirect factory wages and factory equipment depreciation for the customer orders.

Activity Cost Pools Production Department - Indirect factory wages: $1,800,000 (Customer Orders) - Factory equipment depreciation: $700,000 (Customer Orders) 1. Indirect factory wages = $6,000,000 x Percent consumed by customer orders = 30% = $1,800,000 2. Factory equipment depreciation = $3,500,000 x Percent consumed by customer orders = 20% = $700,000 (Note: DM, DL, and shipping expenses are excluded bc. we can directly trace these costs to products or customer orders)

The fourth step for implementing activity-based costing is to assign overhead costs to cost objects. (Known as second-stage allocation) Let's take a look at how Baxter Battery's system works for just one of the 2,000 customers - Acme Auto Parts who placed a total of 12 orders. Note that the four orders for LongLifes required a design change. Orders 1. Eight orders for 60 SureStarts per order 2. Four orders for 50 LongLifes per order Machine-hours 1. The 480 SureStarts required 288 machine-hours 2. The 200 LongLifes required 160 machine-hours Activity Cost Pools - Activity Rate 1. Customer orders: $452.00 2. Design changes: $760.00 3. Order size: $6.50 4. Customer relations: $1,540.00 Calculate the overhead cost for Acme Auto Parts.

Activity Cost Pools - Activity Rate - Activity - ABC Cost 1. Customer orders - $452.00 x 12 = $5,424 2. Design changes - $760.00 x 4 = $3,040 3. Order size - 6.50 x 448 = $2,912 4. Customer relations - 1,540.00 x 1 = $1,540

The third step for implementing activity-based costing is to calculate activity rates. Computation of Activity Rates for Baxter Battery Activity Cost Pools - Total Cost - Total Activity 1. Customer Orders: $4,520,000 - 10,000 orders 2. Design Changes: $3,040,000 - 4,000 changes 3. Order Size: $5,200,000 - 800,000 MHS 4. Customer relations: $3,080,000 - 2,000 customers 5. Other: $6,160,000 - Not applicable Total: $22,000,000 Calculate the activity rate for each activity cost pool.

Activity Rate (a) / (b) 1. Customer orders = $452 per order 2. Design changes = $760 per change 3. $6.50 per MH 4. $1,540 per customer 5. Not applicable

- a "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system

Activity cost pool

- an allocation base in an activity-based costing system; ideally, a measure of the amount of activity that drives the costs in an activity cost pool (also referred to as cost driver)

Activity measure

- a costing method based on activities that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs

Activity-based costing (ABC)

In ABC, numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.

Activity-based costing defines cost pools and selects allocation bases. The activity-based approach uses more cost pools and unique measures of activity to better understand the costs of managing and sustaining product diversity.

The fifth step for implementing activity-based costing is to Prepare Management Reports. The first step in computing product margins is to gather each product's sales and direct cost data. The second step in computing product margins is to incorporate the previously computed activity-based cost assignments pertaining to each product. Sure Starts 1. Sales: $31,300,000 2. Costs: - Direct material = $9,000,000 - Direct labor = $7,000,000 - Shipping = $2,000,000 - Customer orders = $1,808,000 - Design Changes = 0 - Order Size = $3,120,000 3. Total Cost: $22,928,000 Long Lifes 1. Sales: $18,700,000 2. Costs: - Direct material = $6,000,000 - Direct labor = $5,000,000 - Shipping = $1,000,000 - Customer orders = $2,712,000 - Design Changes = $3,040,000 - Order Size = $2,800,000 3. Total Cost: $19,832,000 What is the product margin for both activities?

Sure Starts = 8,372,000 Long Lifes = (1,132,000) - 31,300,000 - 22,928,000 = 8,372,000 - 18,700,000 - 19,832,000 = (1,132,000)

The fourth step for implementing activity-based costing is to assign overhead costs to cost objects. (Known as second-stage allocation) Baxter Battery Information 1. SureStart - Requires no new design resources - 800,000 batteries ordered with 4,000 separate orders - Each SureStart requires 36 minutes of machine time for a total of 480,000 machine-hours 2. LongLife - Requires new design resources - 400,000 batteries ordered with 6,000 separate orders - 4,000 custom designs prepared - Each LongLife requires 48 minutes of machine time for a total of 320,000 machine-hours Activity Cost Pools - Activity Rate 1. Customer orders: $452.00 2. Design changes: $760.00 3. Order size: $6.50 Calculate the Overhead cost for the SureStart and the LongLife.

SureStart 1. Customer orders - $452.00 x 4,000 = $1,808,000 2. Design changes - nothing. 3. Order size - $6.50 x 480,000 = $3,120,000 Total: $4,928,000 LongLife 1. Customer orders - $452.00 x 6,000 = $2,712,000 2. Design changes - $760.00 x 4,000 = $3,040,000 3. Order size - $6.50 x $320,000 = 2,080,000 Total: $7,832,000

Q: Goertz Corporation has an activity-based costing system with three activity cost pools--Machining, Order Filling, and Other. In the first stage allocations, costs in the two overhead accounts, equipment depreciation and supervisory expense, are allocated to the three activity cost pools based on resource consumption. Data used in the first stage allocations follow: Overhead costs: 1. Equipment depreciation: $51,000 2. Supervisory expense: $3,000 Distribution of Resource Consumption Across Activity Cost Pools: Activity Cost Pools Machining - Order Filling - Other 1. Equipment depreciation: 0.40; 0.10; 0.50 2. Supervisory expense: 0.20; 0.30; 0.50 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 for the company's two products follow: Activity: Activity: 1. Product J3: 9,100 MHs (Machining) + 100 (Order Filling) 2. Product F7: 900 MHs (Machining) + 900 (Order Filling) Total: 10,000 MHs (Machining) + 1,000 (Order Filling) Finally, the costs of Machining and Order Filling are combined with the following sales and direct cost data to determine product margins. Sales and Direct Cost Data: Sales (total): $145,200 (Product J3) + $90,700 (Product F7) Direct materials (total): $81,400 (Product J3) + $38,600 (Product F7) Direct labor (total): $37,700 (Product J3) + $42,400 (Product F7) What is the product margin for Product F7 under activity-based costing?

- $2,410 Sales: $90,700 Direct materials: $38,600 Direct labor: 42,400 Machining: 1,890 Order filling: 5,400 Product margin: $2,410

Q: Huelskamp Corporation has provided the following data concerning its overhead costs for the coming year: Wages and salaries: $360,000 Depreciation: 120,000 Rent: 180,000 Total: $660,000 The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year: Activity Cost Pool - Total Activity 1. Assembly: 60,000 labor hours 2. Order processing: 400 orders 3. Other: Not applicable The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs. The distribution of resource consumption across activity cost pools is given below: Assembly - Order Processing - Other - Total 1. Wages and salaries: 25%; 65%; 10%; 100% 2. Depreciation: 15%; 45%; 40%; 100% 3. Rent: 35%; 40%; 25%; 100% The activity rate for the Assembly activity cost pool is closest to:

- $2.85 per labor-hour Allocations to the Assembly activity cost pool: Wages and salaries (25% x $360,000) = $90,000 Depreciation (15% x $120,000) = 18,000 Rent (35% x $180,000) = 63,000 Total: $171,000 Assembly: $171,000 / 60,000 labor hours = $2.85 per labor hour

Q: Bippus Corporation manufactures two products: Product X08R and Product P56L. 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 X08R and P56L. Activity Cost Pool - Activity Measure - Total Cost - Total Activity 1. Machining - Machine hours - $247,000 - 13,000 MHs 2. Machine setups - Number of setups - $60,000 - 150 setups 3. Product design - Number of products - $56,000 - 2 products 4. Order size - Direct labor hours - $260,000 - 10,000 DLHs Activity Measure 1. Machine hours: 10,000 (Product X08R) + 3,000 (Product P56L) 2. Number of setups: 110 (Product X08R) + 40 (Product P56L) 3. Number of products: 1 (Product X08R) + 1 (Product P56L) 4. Direct labor hours: 6,000 (Product X08R) + 4,000 (Product P56L) Using the plantwide overhead rate, how much manufacturing overhead cost would be allocated to Product P56L?

- $249,200 The company's plantwide overhead rate is computed as follows: Machining: $247,000 Machine setups: $60,000 Product design: $56,000 Order size: $260,000 Total estimated overhead cost (a): $623,000 Total expected direct labor hours (b): 10,000 DLHs Predetermined overhead rate (a) / (b): $62.30 per DLH Using the plantwide overhead rate, the manufacturing overhead cost that would be allocated to Product P56L is computed as follows: Total direct labor hours (a): 4,000 Plantwide overhead rate per DLH (b): $62.30 Manufacturing overhead assigned (a) x (b): $249,200

Q: Tomasini Corporation has provided the following data from its activity-based costing accounting system: Supervisory wages: $660,000 Factory supplies: $280,000 Distribution of Resource Consumption across Activity Cost Pools: Activity Cost Pools - Batch Processing - Unit Processing - Other - Total 1. Supervisory wages: 20%; 70%; 10%; 100% 2. Factory supplies: 45%; 35%; 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 supervisory wages and factory supplies cost would be assigned to the Batch Processing activity cost pool?

- $258,000 Allocations to the Batch Processing activity cost pool: Supervisory wages (20% x $660,000) = $132,000 Factory supplies (45% x $280,000) = 126,000 Total = $258,000

Q: Torello Corporation manufactures two products: Product H95V and Product V93N. The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information is available for the company as a whole and for Products H95V and V93N. Activity Cost Pool - Activity Measure - Total Cost - Total Activity 1. Machining - Machine hours - $242,000 - 11,000 MHs 2. Machine setups - Number of setups - $140,000 - 350 setups 3. Product design - Number of products - $70,000 - 2 products 4. Order size - Direct labor hours - $270,000 - 10,000 DLHs Activity Measure 1. Machine hours: 6,000 (Product H95V) + 5,000 (Product V93N) 2. Number of setups: 250 (Product H95V) + 100 (Product V93N) 3. Number of products: 1 (Product H95V) + 1 (Product V93N) 4. Direct labor hours: 6,000 (Product H95V) + 4,000 (Product V93N) Using the plantwide overhead rate, how much manufacturing overhead cost would be allocated to Product V93N?

- $288,800 The company's plantwide overhead rate is computed as follows: Machining = $242,000 Machine setup = $140,000 Product design = 70,000 Order size = 270,000 Total estimated overhead cost (a) = $722,000 Total expected direct labor hours (b) = 10,000 DLHs Predetermined overhead rate (a) / (b) = $72.20 per DLH Using the plantwide overhead rate, the manufacturing overhead cost that would be allocated to Product V93N is computed as follows: Total direct labor hours (a) = 4,000 (Product V93N) Plantwide overhead rate per DLH (b) = $72.20 Manufacturing overhead assigned (a) x (b) = $288,800

What is the first step in computing product margins using the traditional cost system?

- gather each product's sales and direct cost data Ex: Sure Starts 1. Sales: $31,300,000 2. Direct costs: - Direct material: $9,000,000 - Direct labor: $7,000,000 Long Lifes 1. Sales: $18,700,000 2. Direct costs: - Direct material: 6,000,000 - Direct labor: $5,000,000

Q: The controller of Hendershot Corporation estimates the number of materials handling overhead cost that should be allocated to the company's two products using the data that are given below: Total expected units produced: 6,000 (Wall Mirrors) + 3,000 (Specialty Windows) Total expected material moves: 500 (Wall Mirrors) + 100 (Specialty Windows) Expected direct labor hours per unit: 6 (Wall Mirrors) + 9 (Specialty Windows) The total materials handling cost for the year is expected to be $6,123.60. If the materials handling cost is allocated on the basis of direct labor-hours, the total materials handling cost allocated to the wall mirrors is closest to: (Do not round your intermediate calculations.)

- $3,499 Total expected units produced (a): 6,000 (Wall Mirrors) + 3,000 (Specialty Windows) Expected direct labor hours per unit (b): 6 (Wall Mirrors) + 9 (Specialty Windows) Total direct labor hours (a) x (b): 36,000 (Wall Mirrors) + 27,000 (Specialty Windows) + 63,000 (Total) Cost per direct labor hour = Total materials handling cost / Total direct labor hours = $6,123.60 / 63,000 direct labor hours = $0.0972 per direct labor hour Cost allocated to wall mirrors = $0.0972 per direct labor hour x 36,000 direct labor hours = $3,499.20

Q: Kulka Corporation manufactures two products: Product F82D and Product T05P. 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 F82D and T05P. Activity Cost Pool - Activity Measure - Total Cost - Total Activity 1. Machining - Machine hours - $180,000 - 9,000 MHs 2. Machine setups - Number of setups - $125,000 - 250 setups 3. Product design - Number of products - $44,000 - 2 products 4. Order size - Direct labor hours - $260,000 - 10,000 DLHs Activity Measure 1. Machine hours: 5,000 (Product F82D) + 4,000 (Product T05P) 2. Number of setups: 160 (Product F82D) + 90 (Product T05P) 3. Number of products: 1 (Product F82D) + 1 (Product T05P) 4. Direct labor hours: 4,000 (Product F82D) + 6,000 (Product T05P) Using the ABC system, how much total manufacturing overhead cost would be assigned to Product T05P?

- $303,000 Activity Cost Pool - Estimated Overhead Cost (a) - Expected Activity (b) - Activity Rate (a) / (b) 1. Machining - $180,000 - 9,000 MHs - $20 per MH 2. Machine setups - $125,000 - 250 setups - $500 per setup 3. Product design - $44,000 - 2 products - $22,000 per product 4. Order size - $260,000 - 10,000 DLHs - $26 per DLH The overhead cost charged to Product T05P under the ABC system is: Activity Cost Pools - Activity rate x Activity = ABC Cost Machining: 20 x 4,000 = $80,000 Machine setups: 500 x 90 = $45,000 Product design: 22,000 x 1 = 22,000 Order size: 26 x 6,000 = $156,000 Total: $303,000

Q: The following data have been provided by Letze Corporation from its activity-based costing accounting system: Factory supervision: $460,000 Indirect factory labor: $220,000 Distribution of Resource Consumption across Activity Cost Pools: Batch Set - Activity Cost Pools - Up - Expediting - Other - Total Factory supervision: 55%; 35%; 10%; 100% Indirect factory labor: 60%; 20%; 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 factory supervision and indirect factory labor cost would be assigned to the Batch Set-Up activity cost pool?

- $385,000 Allocations to the Batch Set-Up activity cost pool: Factory supervision (55% x $460,000) = $253,000 Indirect factory labor (60% x $220,000) = 132,000 Total: $385,000

Q: Abel Corporation uses activity-based costing. The company makes two products: Product A and Product B. The annual production and sales of Product A is 200 units and of Product B is 400 units. There are three activity cost pools, with total cost and activity as follows: Total Activity Activity Cost Pools - Total Cost - Product A - Product B - Total Activity 1: $16,660; 600; 100; 700 Activity 2: $18,450; 1,100; 700; 1,800 Activity 3: $9,731; 60; 160; 220 The cost per unit of Product B is closest to:

- $41.58 The activity rates for each activity cost pool are computed as follows: Total Cost - Total Activity - Activity Rate Activity 1: $16,660; 700; $23.80 Activity 2: $18,450; $1,800; $10.25 Activity 3: $9,731; 220; $44.23 The overhead cost charged to Product B is: Activity Rate - Activity - Activity-Based Costing Activity 1: $23.80; 100; $2,380 Activity 2: $10.25; 700; $7,175 Activity 3: $44.23; 160; $7,077 Total overhead cost = $16,632 Cost per unit of Product B = Total overhead cost ÷ Number of units = $16,632 ÷ 400 units = $41.58 per unit

Q: Deemer Corporation has an activity-based costing system with three activity cost pools--Processing, Supervising, and Other. In the first stage allocations, costs in the two overhead accounts, equipment expense and indirect labor, are allocated to the three activity cost pools based on resource consumption. Data used in the first stage allocations follow: Overhead costs: 1. Equipment = $73,000 2. Indirect labor = $6,000 Distribution of Resource Consumption Across Activity Cost Pools: Activity Cost Pool 1. Equipment expense: 0.60 (Processing) + 0.20 (Supervising) + 0.20 (Other) 2. Indirect labor: 0.40 (Processing) + 0.20 (Supervising) + 0.40 (Other) Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow: Product F6 - 1,000 MHs (Processing) - 600 Batches (Supervising) Product X0 - 9,000 MHs (Processing) - 400 Batches (Supervising) Total - 10,000 MHs (Processing) - 1,000 Batches (Supervising) What is the overhead cost assigned to Product X0 under activity-based costing?

- $47,900 Processing: $46,200 / 10,000 MHs = $4.62 per MH Supervising: $15,800 / 1,000 batches = $15.80 per batch Overhead cost for Product XO: Processing $4.62 per MH x 9,000 MHs = $41,580 Supervising $15.80 per batch x 400 batches = 6,320 Total = $47,900

What is the second step in computing Acme Auto Parts' Customer margin?

- incorporate Acme Auto Parts' previously computed activity-based cost assignments

The fifth step for implementing activity-based costing is to Prepare Management Reports. What are the most common management reports prepared with ABC data?

- product and customer profitability reports

Activity-based costing defines five levels of activity. Define the level of activity. Ex: Designing a product, advertising a product, and maintaining a product manager and staff.

- product-level activities

Q: Delauder Enterprises makes a variety of products that it sells to other businesses. The company's activity-based costing system has four activity cost pools for assigning costs to products and customers. Details concerning that activity-based costing system are listed below: Activity Cost Pool - Activity Measure - Activity Rate 1. Supporting assembly - Direct labor hours (DLHs) - $3.45 per DLH 2. Processing batches - Number of batches - $193.30 per batch 3. Processing orders - Number of orders - $83.05 per order 4. Serving customers - Number of customers - $1,608.00 per customer The cost of serving customers, $1,608.00 per customer, is the cost of serving a customer for one year. Grennon Corporation buys only one of the company's products. The details of last year's purchases of this product are listed below: Number of units: 1,500 units Number of batches: 5 batches Number of orders: 2 orders Direct labor hour requirement: 0.25 DLHs per unit Selling price: $18.55 per unit Direct materials cost: $8.35 per unit Direct labor cost: $3.95 per unit According to the activity-based costing system, the customer margin for this customer this past year was closest to:

- $5,340.65 Customer Margin-Activity-Based Costing Analysis Sales (1,500 units x $18.55 per unit) = $27,825.00 Costs: - Direct materials ($8.35 per unit x 1,500 units) = $12,525 - Direct labor ($3.95 per unit x 1,500 units) = $5,925.00 - Supporting assembly ($3.45 per DLH x 0.25 DLHs per unit x 1,500 units) = $1,293.75 - Processing batches ($193.30 per batch x 5 batches) = $966.50 - Processing orders ($83.05 per order x 2 orders) = $166.10 - Servicing customers ($1,608.00 per customer x 1 customer) = $1,608 Customer margin = $5,340.65

Q: Doede Corporation uses activity-based costing to compute product margins. In the first stage, the activity-based costing system allocates two overhead accounts--equipment depreciation and supervisory expense--to three activity cost pools--Machining, Order Filling, and Other--based on resource consumption. Data to perform these allocations appear below: Overhead costs: 1. Equipment depreciation: $92,000 2. Supervisory expense: $4,000 Distribution of Resource Consumption Across Activity Cost Pools: Activity Cost Pools Machining - Order Filling - Other 1. Equipment depreciation: 0.60; 0.20; 0.20 2. Supervisory expense: 0.30; 0.20; 0.50 In the second stage, 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: Activity: 1. Product W1: 4,200 MHs (Machining) + 800 (Order Filling) 2. Product M0: 15,800 MHs (Machining) + 200 (Order Filling) Total: 20,000 MHs (Machining) + 1,000 (Order Filling) Finally, sales and direct cost data are combined with Machining and Order Filling costs to determine product margins. Sales and Direct Cost Data: Sales (total): $236,500 (Product W1) + $262,000 (Product M0) Direct materials (total): $90,900 (Product W1) + $123,900 (Product M0) Direct labor (total): $110,400 (Product W1) + $76,100 (Product M0) What is the product margin for Product W1 under activity-based costing?

- $7,996 Sales: $236,500 Direct materials: $90,900 Direct labor: $110,400 Machining: $11,844 Order filling: $15,360 Product margin: $7,996

Q: Addleman Corporation has an activity-based costing system with three activity cost pools--Processing, Supervising, and Other. In the first stage allocations, costs in the two overhead accounts, equipment expense and indirect labor, are allocated to the three activity cost pools based on resource consumption. Data used in the first stage allocations follow: Overhead costs: 1. Equipment expense: $73,000 2. Indirect labor: $1,000 Distribution of Resource Consumption Across Activity Cost Pools: Activity Cost Pools Processing - Supervising - Other 1. Equipment: 0.20; 0.10; 0.70 2. Indirect labor: 0.20; 0.20; 0.60 Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow: Activity: 1. Product W3: 7,600 MHs (Processing) + 100 (Supervising) 2. Product H3: 2,400 MHs (Processing) + 900 (Supervising) Total: 10,000 MHs (Processing) + 1,000 (Supervising) Finally, the costs of Processing and Supervising are combined with the following sales and direct cost data to determine product margins. Sales and Direct Cost Data: Sales (total): $159,500 (Product W3) + 154,100 (Product H3) Direct materials (total): $66,300 (Product W3) + $55,300 (Product H3) Direct labor (total): $77,800 (Product W3) + $84,100 (Product H3) The activity rate for the Supervising activity cost pool under activity-based costing is closest to:

- $7.50 per batch Supervising: $7,500 / 1,000 batches = $7.50 per batch

Q: Scheuer Corporation uses activity-based costing to compute product margins. In the first stage, the activity-based costing system allocates two overhead accounts--equipment expense and indirect labor--to three activity cost pools--Processing, Supervising, and Other--based on resource consumption. Data to perform these allocations appear below: Overhead costs: 1. Equipment expense: $55,000 2. Indirect labor: $7,000 Distribution of Resource Consumption Across Activity Cost Pools: Activity Cost Pools Processing - Supervising - Other 1. Equipment: 0.10; 0.70; 0.20 2. Indirect labor: 0.50; 0.10; 0.40 In the second stage, Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow: Activity: 1. Product Q1: 1,000 MHs (Processing) + 700 (Supervising) 2. Product S6: 19,000 MHs (Processing) + 1,300 (Supervising) Total: 20,000 MHs (Processing) + 2,000 (Supervising) Finally, sales and direct cost data are combined with Processing and Supervising costs to determine product margins. Sales and Direct Cost Data: Sales (total): $134,600 (Product Q1) + $186,300 (Product S6) Direct materials (total): $76,000 (Product Q1) + $64,800 (Product S6) Direct labor (total): $40,800 (Product Q1) + $78,400 (Product S6) How much overhead cost is allocated to the Processing activity cost pool under activity-based costing in the first stage of allocation?

- $9,000 Assign overhead costs to activity cost pools by applying the percentages in the Distribution of Resource Consumption Across Activity Cost Pools table to the respective costs. For example, the first entry in the table is computed as follows: $55,000 × 0.10 = $5,500. Equipment expense: $5,500 (Processing) + $38,500 (Supervising) Indirect labor: 3,500 (Processing) + 700 (Supervising) Total: $9,000 (Processing) + $39,200 (Supervising)

What is the second step in computing product margins?

- to incorporate the previously computed activity-based cost assignments pertaining to each product

What are the two most common types of activity measures?

- transaction drivers and duration drivers

Q: Bartow Corporation uses an activity based costing system to assign overhead costs to products. In the first stage, two overhead costs--equipment expense and indirect labor--are allocated to the three activity cost pools--Processing, Supervising, and Other--based on resource consumption. Data to perform these allocations appear below: Overhead costs: 1. Equipment expense: $29,000 2. Indirect labor: $8,000 Distribution of Resource Consumption Across Activity Cost Pools: Activity Cost Pools Processing - Supervising - Other 1. Equipment: 0.20; 0.60; 0.20 2. Indirect labor: 0.50; 0.30; 0.20 In the second stage, Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow: Activity: Activity: 1. Product H3: 6,700 MHs (Processing) + 700 (Supervising) 2. Product S6: 3,300 MHs (Processing) + 1,300 (Supervising) Total: 10,000 MHs (Processing) + 2,000 (Supervising) How much overhead cost is allocated to the Processing activity cost pool under activity-based costing in the first stage of allocation?

- $9,800 Assign overhead costs to activity cost pools by applying the percentages in the Distribution of Resource Consumption Across Activity Cost Pools table to the respective costs. For example, the first entry in the table is computed as follows: $29,000 × 0.20 = $5,800. Equipment expense: $5,800 (Processing) + $17,400 (Supervising) Indirect labor: $4,000 (Processing) + $2,400 (Supervising) Total: $9,800 (Processing) + $19,800 (Supervising)

Q: Mustafa Enterprises makes a variety of products that it sells to other businesses. The company's activity-based costing system has four activity cost pools for assigning costs to products and customers. Details concerning the ABC system are listed below: Activity Cost Pool - Activity Measure - Activity Rate 1. Supporting assembly - Direct labor hours (DLHs) - $7.50 per DLH 2. Processing batches - Number of batches - $111.65 per batch 3. Processing orders - Number of orders - $86.00 per order 4. Serving customers - Number of customers - $2,737.00 per customer The cost of serving customers, $2,737.00 per customer, is the cost of serving a customer for one year. Dahle Corporation buys only one of the company's products. The details of last year's purchases of this product are listed below: Number of units: 800 units Number of batches: 16 batches Number of orders: 4 orders Direct labor hour requirement: 0.40 DLHs per unit Selling price: $24.25 per unit Direct materials cost: $7.45 per unit Direct labor cost: $7.85 per unit According to the ABC system, the total cost of the activity "Supporting assembly" for this customer this past year was closest to:

- 2,400.00 Supporting assembly = $7.50 per DLH x 0.40 DLHs per unit x 800 units = $2,400.00

Q: Hails Corporation manufactures two products: Product Q21F and Product H44W. 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 Q21F and H44W. Activity Cost Pool - Activity Measure - Total Cost - Total Activity 1. Machining - Machine hours - $195,000 - 13,000 MHs 2. Machine setups - Number of setups - $90,000 - 150 setups 3. Product design - Number of products - $64,000 - 2 products 4. Order size - Direct labor hours - $280,000 - 10,000 DLHs Activity Measure 1. Machine hours: 9,000 (Product Q21F) + 4,000 (Product H44W) 2. Number of setups: 80 (Product Q21F) + 70 (Product H44W) 3. Number of products: 1 (Product Q21F) + 1 (Product H44W) 4. Direct labor hours: 6,000 (Product Q21F) + 4,000 (Product H44W) Using the plantwide overhead rate, the percentage of the total overhead cost that is allocated to Product H44W is closest to:

- 40.00% The company's plantwide overhead rate is computed as follows: Machining = $195,000 Machine setups = $90,000 Product design = 64,000 Order size = 280,000 Total estimated overhead cost (a) = $629,000 Total expected direct labor hours (b) = 10,000 DLHs Predetermined overhead rate (a) / (b) = $62.90 per DLH Using the plantwide overhead rate, the manufacturing overhead cost that would be allocated to Product H44W is computed as follows: Total direct labor hours (a) = 4,000 (Product H44W) Plantwide overhead rate per DLH (b) = $62.90 Manufacturing overhead assigned (a) x (b) = $251,600 Using the plantwide overhead rate, the percentage of the total overhead cost allocated to Product H44W is computed as follows: Manufacturing overhead cost assigned to Product H44W (a) = $251,600 Total manufacturing overhead cost (b) = $629,000 Percentage of total manufacturing overhead cost assigned to Product H44W (a) / (b) = 40.00%

In ABC, Some manufacturing costs may be excluded from product costs. What does that mean?

- ABC excludes organization-sustaining costs and idle capacity costs from product cost - In activity-based costing, products are charged only for the cost of the capacity they use - not for the cost of the capacity they don't use (Provides more stable unit product costs)

The two most common types of activity measures are transaction drivers and duration drivers. Which one is used more?

- Duration drivers = accurate measures of resource consumption than transaction drivers, but they take more effort to record - Transaction drivers are often used in practice

The first step in any improvement program is to decide what to improve. What helps to decide?

- The activity rates computed in activity-based costing can provide valuable clues concerning where there is waste and opportunity for improvement

What is the third step in computing product margins using the traditional cost system?

- allocate manufacturing overhead to each product Sure Starts - 480,000 MH's x $17.50 Overhead = $8,400,000 Overhead Allocated Long Lifes - 320,000 MH's x $17.50 Overhead = $5,600,000 Overhead Allocated Total overhead allocated to products = $14,000,000

Activity-based costing defines five levels of activity. Define the level of activity. Ex: Tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers.

- batch-level activities (incurred once for each batch)

What is the fourth step in computing product margins using the traditional cost system?

- compute the product margins Sales - Cost of goods sold (DM, Dl, and MOH)

Differences Between ABC and Traditional Product Costs. Product Margins - Traditional 1. Sure Starts = $6,900,000 2. Long Lifes = $2,100,000 Product Margins - ABC 1. Sure Starts = $8,372,000 2. Long Lifes = $(1,132,000) Change in reported margins 1. Sure Starts = $1,472,000 2. Long Lifes = $(3,232,000) Explain the differences.

1. The traditional cost system over costs the Sure Starts and reports a lower product margin for this product 2. The traditional cost system under costs the Long Lifes and reports a higher product margin for this product

There are three reasons why the reported product margins for the two costing systems differ from one another. What are they?

1. Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products 2. Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume-related allocation bases 3. Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in the activity cost pools that are assigned to products

- a management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects

Activity-based management (ABM)

- activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch

Batch-level activities

- a systematic approach to identifying the activities with the greatest potential for improvement (can be used to compare activity cost information with standards of performance achieved by other organizations)

Benchmarking

What is another way to leverage the information in activity rates?

Benchmarking

- the process by which overhead costs are assigned to activity cost pools in an activity-based costing system

First-stage allocation