PROBLEM SOLVING EXERCISES IN ACTIVITY-BASED COSTING

Problem #1: Smithson Company

Smithson Company produces two products (A and B). Direct material and labor costs for Product A total
$35 (which reflects 4 direct labor hours); direct material and labor costs for Product B total $22 (which
reflects 1.5 direct labor hours). Three overhead functions are needed for each product. Product A uses 2
hours of Function 1 at $10 per hour, 1 hour of Function 2 at $7 per hour, and 6 hours of Function 3 at $18
per hour. Product B uses 1, 8, and 1 hours of Functions 1, 2, and 3, respectively. Smithson produces 800
units of A and 8,000 units of B each period.

1. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units produced,
Product A will have an overhead cost per unit of _____?
2. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units produced,
Product B will have an overhead cost per unit of ______?
3. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor
hours, Product A will have an overhead cost per unit of _____?
4. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor
hours, Product B will have an overhead cost per unit of _____?
5. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity
hours used, the total product cost per unit assigned to Product A will be _____?
6. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity
hours used, the total product cost per unit assigned to Product B will be _____?

Problem #2: Phelps Company

Phelps Company produces 50,000 units of Product Q and 6,000 units of Product Z during a period. In
that period, four set-ups were required for color changes. All units of Product Q are black, which is the
color in the process at the beginning of the period. A set-up was made for 1,000 blue units of Product Z;
a set-up was made for 4,500 red units of Product Z; a set-up was made for 500 green units of Product Z.
A set-up was then made to return the process to its standard black coloration and the units of Product Q
were run. Each set-up costs $500.

1. Refer to Phelps Company. If set-up cost is assigned on a volume basis for the department, what is
the approximate per-unit set-up cost for Product Z?
2. Refer to Phelps Company. If set-up cost is assigned on a volume basis for the department, what is
the approximate per-unit set-up cost for the red units of Product Z?
3. Refer to Phelps Company. Assume that Phelps Company has decided to allocate overhead costs
using levels of cost drivers. What would be the approximate per-unit set-up cost for the blue
units of Product Z?
 4. Refer to Phelps Company. Assume that Phelps Company has decided to allocate overhead costs
using levels of cost drivers. What would be the approximate per-unit set-up cost for the green
units of Product Z?

Problem #3: Hazel Company

Hazel Company uses activity-based costing. The company produces two products: coats and hats. The
annual production and sales volume of coats is 8,000 units and of hats is 6,000 units. There are three
activity cost pools with the following expected activities and estimated total costs:

Activity Estimated Expected Expected

Activity Activity
Cost Pool Cost
Coats Hats
Total

Activity 1 $20,000 100 400 500

Activity 2 $37,000 800 200 1,000

Activity 3 $91,200 800 3,000 3,800

1. Refer to Hazel Company. Using ABC, the cost per unit of coats is approximately:
2. Refer to Hazel Company. Using ABC, the cost per unit of hats is approximately:
 PROBLEM SOLVING EXERCISES IN JOB ORDER COSTING

Problem 1:

Cajun Company. uses a job order costing system. During April 20X6, the following costs appeared in the
Work in Process Inventory account:

Beginning balance $ 24,000

Direct material used 70,000
Direct labor incurred 60,000
Applied overhead 48,000
Cost of goods manufactured 185,000

Cajun Company applies overhead on the basis of direct labor cost. There was only one job left in Work in
Process at the end of April which contained $5,600 of overhead. What amount of direct material was
included in this job?

Problem #2:

Quest Co. is a print shop that produces jobs to customer specifications. During January 20X6, Job #3051
was worked on and the following information is available:

Direct material used $2,500

Direct labor hours worked 15
Machine time used 6
Direct labor rate per hour $7
Overhead application rate per hour of machine
$18
time

What was the total cost of Job #3051 for January?

Problem #3:

Alpha Company

Alpha Co. uses a job order costing system. At the beginning of January, the company had two jobs in
process with the following costs:

Direct Direct Labor Overhead

Material
Job #456 $3,400 $510 $255
Job #461 1,100 289 ?

Alpha pays its workers $8.50 per hour and applies overhead on a direct labor hour basis.

1. Refer to Alpha Company. What is the overhead application rate per direct labor hour?

2. Refer to Alpha Company. How much overhead was included in the cost of Job #461 at the
beginning of January?
3. Refer to Alpha Company. During January, Alpha’s employees worked on Job #649. At the end of
the month, $714 of overhead had been applied to this job. Total Work in Process at the end of
the month was $6,800 and all other jobs had a total cost of $3,981. What amount of direct
material is included in Job #649?

Problem #4:

Brown Corporation manufactures products on a job order basis. The job cost sheet for Job #656 shows
the following for March:

Direct material $5,000

Direct labor (100 hours @ $7.25) $725
Machine hours incurred 40
Predetermined overhead rate per machine
$26
hour

At the end of March, what total cost appears on the job cost sheet for Job #656?
Problem #5:
Products at Redd Manufacturing are sent through two production departments: Fabricating and
Finishing. Overhead is applied to products in the Fabricating Department based on 150 percent of direct
labor cost and $18 per machine hour in Finishing. The following information is available about Job #297:

Fabricating Finishin
g
Direct material $1,590 $580
Direct labor cost ? 48
Direct labor
22 6
hours
Machine hours 5 15
Overhead applied 429 ?

What is the total cost of Job #297?

Problem #6:

Virginia Company applies overhead to jobs at the rate of 40 percent of direct labor cost. Direct material
of $1,250 and direct labor of $1,400 were expended on Job #145 during June. On May 31, the balance of
Job #145 was $2,800. The balance on June 30 is:

Problem #7:

Jackson Company.

Jackson Company uses a job order costing system and the following information is available from its
records. The company has three jobs in process: #6, #9, and #13.
 Raw material used $120,000
Direct labor per hour $8.50
Overhead applied based on direct labor
120%
cost

Direct material was requisitioned as follows for each job respectively: 30 percent, 25 percent, and 25
percent; the balance of the requisitions was considered indirect. Direct labor hours per job are 2,500;
3,100; and 4,200; respectively. Indirect labor is $33,000. Other actual overhead costs totaled $36,000.

1. Refer to Jackson Company. What is the prime cost of Job #6?

2. Refer to Jackson Company. What is the total amount of overhead applied to Job #9?

3. Refer to Jackson Company. What is the total amount of actual overhead?

4. Refer to Jackson Company. How much overhead is applied to Work in Process?

5. Refer to Jackson Company. If Job #13 is completed and transferred, what is the balance in Work
in Process Inventory at the end of the period if overhead is applied at the end of the period?

6. Refer to Jackson Company. Assume the balance in Work in Process Inventory was $18,500 on
June 1 and $25,297 on June 30. The balance on June 30 represents one job that contains direct
material of $11,250. How many direct labor hours have been worked on this job (rounded to the
nearest hour)?