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Exam 9: Activity-Based Costing

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Question 51

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Excel Manufacturing has an activity-based costing system with three activity cost pools-Machining,Batch Setup,and Other.The company's overhead costs have already been allocated to the cost pools and total $28,000 for the Machining cost pool,$13,800 for the Batch Setup cost pool,and $27,200 for the Other cost pool.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.Data concerning the two products and the company's costs appear below: $\begin{array} { | l | r | r | } \hline & \text { MHs } & \text { Batches } \\\hline \text { Product A. } & 5,200 & 500 \\\hline \text { Product B } &\underline{ 14,800 }& \underline{500 }\\\hline \text { Total } & 20,000 & 1,000 \\\hline\end{array}$ $\begin{array} { | l | r | r | } \hline & \text { Product } A & \text { Product B } \\\hline \text { Sales (total) } & \$ 124,300 & \$ 166,000 \\\hline \text { Direct materials } & \$ 53,100 & \$ 71,500 \\\text { (total) } \\\hline \text { Direct labor (total) } & \$ 54,000 & \$ 56,600 \\\hline\end{array}$ Required: a.Calculate activity rates for each activity cost pool using activity-based costing.b.Determine the amount of overhead cost that would be assigned to each product using activity-based costing.c.Determine the product margins for each product using activity-based costing.

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a.Computation of activity rates:
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Question 52

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The classification of cost drivers into general levels of activity,volume,batch,product,and so on is known as:

A) cost allocation.
B) value-added costing.
C) a cost hierarchy.
D) cost driver management.

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Question 53

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

A basic assumption of activity based costing (ABC) is that:

It is possible to apply activity-based costing (ABC)to segments of an organization without applying it to the entire organization.

The flow of activity-based costs through the ledger is the same as their flow using traditional methods except that the accounts are based on activities,not departments.

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. $\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Wall } \\\text { Miirors }\end{array} & \begin{array} { l } \text { Specialty } \\\text { Windows }\end{array} \\\hline \text { Units Produced } & 40 & 20 \\\hline \begin{array} { l } \text { Material moves per product } \\\text { line }\end{array} & 5 & 15 \\\begin{array} { l } \text { Direct labor hours per } \\\text { product line }\end{array} & 200 & 300 \\\hline { \text { Budgeted material handling costs: } \$ 50,000 } \\\hline\end{array}$ (CMA based) Under an activity-based costing (ABC) system,the materials handling costs allocated to one unit of wall mirrors would be:

Individual ABC systems do not vary because there is one ABC method.

Sarno Corporation has an activity-based costing system with three activity cost pools-Processing,Batch Setup,and Other.Costs in the Processing 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.Data concerning the two products and the company's costs and activity-based costing system appear below: $\begin{array} { | l | r | } \hline \text { Acturity Cost Pools } & \\\hline \text { Processing } & \$ 3,000 \\\hline \text { Batch Setup } & \$ 9,800 \\\hline \text { Other } & \$ 9,200 \\\hline\end{array}$ $\begin{array} { | l | c r | } \hline & \text { MHs } & \text { Batches } \\\hline \text { Product \#1 } & 5,800 & 700 \\\hline \text { Product \#2 } & \underline { 4,200 } & \underline { 300} \\\hline \text { Total } & 10,000 & 1,000 \\\hline\end{array}$ $\begin{array} { | l | r | r | } \hline & \text { Product \#1 } & \text { Product \#2 } \\\hline \text { Sales (total) } & \$ 45,300 & \$ 48,400 \\\hline \text { Direct materials (total) } & \$ 19,600 & \$ 16,900 \\\hline \text { Direct labor (total) } & \$ 15,900 & \$ 24,200 \\\hline\end{array}$ Required: a.Calculate activity rates for each activity cost pool using activity-based costing.b.Determine the amount of overhead cost that would be assigned to each product using activity-based costing.c.Determine the product margins for each product using activity-based costing.

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: $\begin{array}{|l|l|r|r|r|}\hline \text { Acturity } & \text { Cost Driser } & \text { Amount } & \text { M } & \times Y \\\text { Production } & \text { Number of } & \$ 82,000 & 8 & 12 \\\text { setups } & \text { setups } & & & \\\hline \text { Material } & \text { Number of } & 48,000 & 56 & 24 \\\text { handling } & \text { parts } & & & \\\text { Packaging } & \text { Number of } & 130,000 & 80,000 & 50,000 \\\text { costs } & \text { units } & & & \\\hline&&\underline{\$260,000}&&\\\hline\end{array}$ What is the total overhead per unit allocated to Product XY using activity-based costing (ABC) ?

What is the typical effect on the numbers of cost pools and cost assignment bases when an activity-based costing (ABC) system replaces a traditional costing system? (CPA adapted) $\begin{array} { | l | c | c | } \hline & \text { Cost Pook } & \text { Cost Assignment Bases } \\\hline \text { A. } & \text { No effect } & \text { No effect } \\\hline \text { B. } & \text { Increase } & \text { No effect } \\\hline \text { C. } & \text { No effect } & \text { Increase } \\\hline \text { D. } & \text { Increase } & \text { Increase } \\\hline\end{array}$

The Mega Construction Company recently switched to activity-based costing (ABC) from the department allocation method.The department method allocated overhead costs at a rate of $60 per machine hour.The cost accountant for the Finishing Department has gathered the following data: $\begin{array} { | l | l | r | } \hline \text { Activity } & \text { Cost Drivers } & \text { Rate } \\\hline \text { Material handling } & \text { Tons of material handled } & \$ 80 \\\hline \text { Machine setups } & \text { Number of production runs } & 3,750 \\\hline \text { Utilities } & \text { Machine hours } & 25 \\\hline \text { Quality control } & \text { Number of inspections } & 500 \\\hline\end{array}$ During April,Mega purchased and used $100,000 of direct materials at $20 per ton.There were eight (8) production runs using a total of 12,000 machine hours in April.The manager of the Finishing Department needed 12 inspections.Actual overhead costs totaled $820,000 for the month.How much overhead costs were applied to the Work-in-Process Inventory during April using traditional costing?

Chang Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs) .The company has two products,Plain and Fancy,about which it has provided the following data: $\begin{array} { | l | r | r | } \hline & \text { Plain } & \text { Fancy } \\\hline \text { Direct materials per unit } & \$ 24.50 & \$ 59.30 \\\hline \text { Direct labor per unit } & \$ 5.00 & \$ 25.00 \\\hline \text { Direct labor-hours per unit } & 0.20 & 1.00 \\\hline \text { Annual production } & 45,000 & 15,000 \\\hline\end{array}$ The company's estimated total manufacturing overhead for the year is $985,440 and the company's estimated total direct labor-hours for the year is 24,000.The company is considering using a variation of activity-based costing to determine its unit product costs for external reports.Data for this proposed activity-based costing system appear below: $\begin{array}{|l|r|}\hline \begin{array}{l}\text { Activities and Actirity } \\\text { Measures }\end{array} & \text { Estimeted Overhead } \\& \text { cost}\\\text { Supporting direct labor (DLHs) } & \$ 384,000 \\\hline \text { Setting up machines (setups) } & 255,840 \\\hline \text { Parts administration (part } & 345,600 \\\text { ypes) } & \\\hline \text { Total } & \$ 985,440 \\\hline\end{array}$ The manufacturing overhead that would be applied to a unit of product Fancy under the activity-based costing system is closest to:

Within a purchasing department,the activity of placing orders could best be costed by a cost driver of the potential number of vendors.

Flawless Cosmetic Company manufactures and distributes several different products.The company currently uses a plantwide allocation method for allocating overhead at a rate of $7 per direct labor hour.Loren is the department manager of the Makeup Department which produces Products - Concealer (C) and Glow Cream (GC) .Jennifer is the department manager of the Hair Care Department which manufactures Product - Shampoo (S) .The product costs (per case of 24 bottles) and other information are as follows: If Flawless changes its allocation basis to machine hours,what is the total product cost per case for Product C?

Farris Corporation's activity-based costing system has three activity cost pools-Machining,Batch Setup,and Other.The company's overhead costs have already been allocated to these cost pools as follows: $\begin{array} { | l | r | } \hline \text { Machining } & \$ 15,200 \\\hline \text { Batch Setup } & \$ 44,800 \\\hline \text { Other } & \$ 16,000 \\\hline\end{array}$ 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.The following table shows the machine-hours and number of batches associated with each of the company's two products: $\begin{array} { | l | r | r | } \hline & \text { MHs } & \text { Batches } \\\hline \text { Product Sea } & 2,000 & 800 \\\hline \text { Product Air } & \underline { 8,000 } & \underline { 200 }\\\hline \text { Total } & 10,000 & 1,000 \\\hline\end{array}$ Additional data concerning the company's products appears below: $\begin{array} { | l | r | r | } \hline & \text { Product Sea } & \text { Procuct Ari } \\\hline \text { Sales (total) } & \$ 220,700 & \$ 165,500 \\\hline \text { Direct materials (total) } & \$ 78,600 & \$ 83,100 \\\hline \text { Direct labor (total) } & \$ 89,600 & \$ 58,000 \\\hline\end{array}$ Required: a.Calculate activity rates for each activity cost pool using activity-based costing.b.Determine the amount of overhead cost that would be assigned to each product using activity-based costing.c.Determine the product margins for each product using activity-based costing.

Cost pools are used with: $\begin{array} { | c | c | c | } \hline & \text { Plantwide Rates } & \text { Department Rates } \\\hline \text { A. } & \text { Yes } & \text { No } \\\hline \text { B. } & \text { No } & \text { Yes } \\\hline \text { C. } & \text { No } & \text { No } \\\hline \text { D. } & \text { Yes } & \text { Yes } \\\hline\end{array}$

Conform Foam Products produces different kinds of industrial packing materials,all in one manufacturing facility.They have identified four activities for their costing system: Materials management-allocated by number of purchase orders Chemical processing-allocated on metric tons Molding-allocated on direct labor hours Packaging-allocated by number of units produced The activity rates are as follows: $\begin{array} { | l | r | l | } \hline \text { Materials management } & \$ 10.00 & \text { Per purchase order } \\\hline \text { Chemical processing } & \$ 6.50 & \text { Per metric ton } \\\hline \text { Molding } & \$ 23.50 & \text { Per direct labor hour } \\\hline \text { Packaging } & \$ 0.25 & \text { Per unit } \\\hline\end{array}$ Engineering design shows that the order will require direct material worth $775,direct labor cost being $125,require 5 purchase orders to be placed,use 6 metric tons of chemical base,need 12 direct labor hours.The size of the order is to produce 5,000 units of product.Required: (1)Calculate the overhead cost of the order.(2)Calculate total cost of production of the order.

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: The overhead cost per unit of Deluxe Product under the traditional costing system is closest to:

The death spiral can occur even in firms with increasing demand.