Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

True/False Questions

1. If a manufacturing company is using activity-based costing for internal purposes only,

then organization-sustaining overhead costs should not be allocated to any of the
products.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

2. Batch-level activities are performed each time a batch of goods is handled or

processed.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Easy

3. Organization-sustaining activities are carried out regardless of how many units are
made, how many batches are run, or how many different products are made.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Easy

4. Direct labor-hours or direct labor cost should not be used as a measure of activity in an
activity-based costing system.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

5. Activity-based costing is a costing method that is designed to provide managers with

cost information for strategic and other decisions that potentially affect capacity and
therefore “fixed” costs.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Easy

6. Activity-based costing is a costing method that is designed to provide managers with

cost information for strategic and other decisions that potentially affect only variable
costs.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

7. A duration driver provides a measure of the amount of time required to perform an

activity.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

8. In general, transaction drivers are more accurate measures of the consumption of

resources than duration drivers.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

9. The costs of idle capacity should not be assigned to products in activity-based costing.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Easy

10. In traditional costing systems, all manufacturing costs are assigned to products--even
manufacturing costs that are not caused by the products.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

11. Activity-based costing involves a two-stage allocation in which overhead costs are
first assigned to departments and then to jobs on the basis of direct labor hours.

Ans:  False AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2,4 Level:  Medium

12. In activity-based costing, some costs may be broken down and assigned to two activity
cost pools. For example, part of a supervisor's salary may be classified as a product-
level activity and part of it may be classified as a batch-level activity.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Medium

13. Activity rates in activity-based costing are computed by dividing costs from the first-
stage allocations by the activity measure for each activity cost pool.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

14. In the second-stage allocation in activity-based costing, activity rates are used to apply
costs to products, customers, and other cost objects.

Ans:  True AACSB:  Reflective Thinking AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4 Level:  Medium

15. 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 in
which there are 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.

Ans:  True AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  8 Level:  Medium

Multiple Choice Questions

16. Which terms would make the following sentence true? Manufacturing companies that
benefit the most from activity-based costing are those where overhead costs are a
_________ percentage of total product cost and where there is ___________ diversity
among the various products that they produce.
A) low, little
B) low, considerable
C) high, little
D) high, considerable

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

17. Would factory security and assembly activities be best classified at an appliance
manufacturing plant as unit-level, batch-level, product-level, or organization-
sustaining?

Security Assembly
A) Product Unit
B) Batch Batch
C) Organization Unit
D) Organization Product

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

18. Which of the following would be an acceptable measure of activity for a material
handling activity cost pool?

Number of Weight of
material moves material moved
A) Yes Yes
B) No Yes
C) Yes No
D) No No

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

19. An activity-based costing system that is designed for internal decision-making

generally will not conform to generally accepted accounting principles. Which of the
following is NOT a reason for this happening?
A) Some manufacturing costs (i.e., the costs of idle capacity and organization-
sustaining costs) will not be assigned to products.
B) Some nonmanufacturing costs are assigned to products.
C) Allocation bases other than direct labor-hours, direct labor cost, and machine-
hours are used.
D) First-stage allocations may be based on subjective interview data.

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Hard

20. Providing the power required to run production equipment is an example of a:

A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1 Level:  Medium

21. Parts administration is an example of a:

A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining.

Ans:  C LO:  1 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

22. If a cost object such as a product or customer has a negative green margin, then:
A) its red margin will be positive.
B) its red margin may be either positive or negative.
C) its red margin will be negative.
D) its red margin will be zero.

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting Appendix:  8A LO:  6 Level:  Medium

23. Tatman Corporation uses an activity-based costing system with the following three
activity cost pools:

Activity Cost Pool Total Activity

Fabrication......................... 10,000 machine-hours
Order processing................ 800 orders
Other.................................. Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and
organization-sustaining costs.
The company has provided the following data concerning its costs:

Wages and salaries............. $320,000

Depreciation....................... 220,000
Occupancy..........................  120,000
Total................................... $660,000

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools

Order
Fabrication Processing Other Total
Wages and salaries....... 20% 65% 15% 100%
Depreciation................. 15% 35% 50% 100%
Occupancy.................... 5% 70% 25% 100%

The activity rate for the Fabrication activity cost pool is closest to:
A) $3.30 per machine-hour
B) $13.20 per machine-hour
C) $10.30 per machine-hour
D) $8.80 per machine-hour

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2,3 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Solution:

Total Fabrication Cost:

Wages and salaries: 20% × $320,000....... $ 64,000
Depreciation: 15% × $220,000................. 33,000
Occupancy: 5% × $120,000..................... 6,000
Total.......................................................... $103,000

(a) ÷ (b)
(a) (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Fabrication $103,000 10,000 machine-hours $10.30 per machine-hour

24. Leaper Corporation uses an activity-based costing system with the following three
activity cost pools:

Activity Cost Pool Total Activity

Fabrication......................... 40,000 machine-hours
Order processing................ 200 orders
Other.................................. Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and
organization-sustaining costs.
The company has provided the following data concerning its costs:

Wages and salaries....... $360,000

Depreciation................. 140,000
Occupancy....................  160,000
Total............................. $660,000

The distribution of resource consumption across activity cost pools is given below:

Activity Cost Pools

Order
Fabrication Processing Other Total
Wages and salaries....... 35% 40% 25% 100%
Depreciation................. 5% 55% 40% 100%
Occupancy.................... 30% 45% 25% 100%

The activity rate for the Order Processing activity cost pool is closest to:
A) $1,485 per order
B) $1,540 per order
C) $1,465 per order
D) $1,320 per order

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2,3 Level:  Medium

Solution:

Total Order Processing Cost:

Wages and salaries: 40% × $360,000....... $144,000
Depreciation: 55% × $140,000................. 77,000
Occupancy: 45% × $160,000................... 72,000
Total.......................................................... $293,000

(a) ÷ (b)
(a) (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Order Processing $293,000 200 orders $1,465 per order

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

25. 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

Assembly...................... 60,000 labor-hours
Order processing.......... 400 orders
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:

Activity Cost Pools

Order
Assembly Processing Other Total
Wages and salaries....... 25% 65% 10% 100%
Depreciation................. 15% 45% 40% 100%
Rent.............................. 35% 40% 25% 100%

The activity rate for the Assembly activity cost pool is closest to:
A) $2.65 per labor-hour
B) $3.85 per labor-hour
C) $2.85 per labor-hour
D) $2.75 per labor-hour

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2,3 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Solution:

Total Assembly Cost:

Wages and salaries: 25% × $360,000....... $ 90,000
Depreciation: 15% × $120,000................. 18,000
Rent: 35% × $180,000.............................. 63,000
Total.......................................................... $171,000

(a) ÷ (b)
(a) (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly $171,000 60,000 labor-hours $2.85 per labor-hour

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

26. Bennette Corporation has provided the following data concerning its overhead costs
for the coming year:

Wages and salaries....... $340,000

Depreciation................. 120,000
Rent..............................  140,000
Total............................. $600,000

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

Assembly................... 30,000 labor-hours
Order processing....... 500 orders
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:

Activity Cost Pools

Order
Assembly Processing Other Total
Wages and salaries....... 40% 35% 25% 100%
Depreciation................. 15% 45% 40% 100%
Rent.............................. 35% 30% 35% 100%

The activity rate for the Order Processing activity cost pool is closest to:
A) $430 per order
B) $420 per order
C) $360 per order
D) $440 per order

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2,3 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Solution:

Total Order Processing Cost:

Wages and salaries: 35% × $340,000....... $119,000
Depreciation: 45% × $120,000................. 54,000
Rent: 30% × $140,000.............................. 42,000
Total.......................................................... $215,000

(a) ÷
(b)
(a) (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Order Processing $215,000 500 orders $430 per order

27. Eccles 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:
Wages and salaries............. $340,000
Depreciation....................... 180,000
Utilities...............................  200,000
Total................................... $720,000

Distribution of resource consumption:

Activity Cost Pools
Assembly Setting Up Other Total
Wages and salaries....... 20% 60% 20% 100%
Depreciation................. 15% 35% 50% 100%
Utilities......................... 5% 55% 40% 100%

How much cost, in total, would be allocated in the first-stage allocation to the
Assembly activity cost pool?
A) $144,000
B) $96,000
C) $36,000
PD) $105,000

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Solution:

Total Assembly Cost:

Wages and salaries: 20% × $340,000....... $ 68,000
Depreciation: 15% × $180,000................. 27,000
Utilities: 5% × $200,000.......................... 10,000
Total.......................................................... $105,000

28. Mayeux 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:
Wages and salaries............. $320,000
Depreciation....................... 160,000
Utilities...............................  240,000
Total................................... $720,000

Distribution of resource consumption:

Activity Cost Pools
Assembly Setting Up Other Total
Wages and salaries....... 50% 40% 10% 100%
Depreciation................. 10% 55% 35% 100%
Utilities......................... 15% 50% 35% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Setting
Up activity cost pool?
A) $360,000
B) $336,000
C) $288,000
D) $348,000

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Medium

Solution:

Total Setting Up Cost:

Wages and salaries: 40% × $320,000....... $128,000
Depreciation: 55% × $160,000................. 88,000
Utilities: 50% × $240,000........................ 120,000
Total.......................................................... $336,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

29. Gutknecht 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:
Wages and salaries............. $300,000
Depreciation....................... 180,000
Utilities...............................  240,000
Total................................... $720,000

Distribution of resource consumption:

Activity Cost Pools
Assembly Setting Up Other Total
Wages and salaries........ 35% 40% 25% 100%
Depreciation.................. 5% 60% 35% 100%
Utilities.......................... 10% 60% 30% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other
activity cost pool?
A) $138,000
B) $210,000
C) $180,000
D) $216,000

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Medium

Solution:

Total Other Cost:

Wages and salaries: 25% × $300,000....... $ 75,000
Depreciation: 35% × $180,000................. 63,000
Utilities: 30% × $240,000........................ 72,000
Total.......................................................... $210,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

30. Lakatos Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs:

Costs:
Wages and salaries............. $420,000
Depreciation....................... 240,000
Occupancy..........................  220,000
Total................................... $880,000

The distribution of resource consumption across the three activity cost pools is given
below:

Activity Cost Pools

Order
Fabricating Processing Other Total
Wages and salaries........ 10% 75% 15% 100%
Depreciation.................. 5% 50% 45% 100%
Occupancy..................... 30% 35% 35% 100%

How much cost, in total, would be allocated in the first-stage allocation to the
Fabricating activity cost pool?
A) $88,000
B) $132,000
C) $264,000
D) $120,000

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Medium

Solution:

Total Fabricating Cost:

Wages and salaries: 10% × $420,000....... $ 42,000
Depreciation: 5% × $240,000................... 12,000
Occupancy: 30% × $220,000................... 66,000
Total.......................................................... $120,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

31. Perl Corporation uses an activity-based costing system with three activity cost pools.
The company has provided the following data concerning its costs:

Costs:
Wages and salaries............. $360,000
Depreciation....................... 200,000
Occupancy..........................  100,000
Total................................... $660,000

The distribution of resource consumption across the three activity cost pools is given
below:

Activity Cost Pools

Order
Fabricating Processing Other Total
Wages and salaries........ 15% 60% 25% 100%
Depreciation.................. 20% 35% 45% 100%
Occupancy..................... 25% 50% 25% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Order
Processing activity cost pool?
A) $336,000
B) $319,000
C) $330,000
D) $396,000

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Medium

Solution:

Total Order Processing Cost:

Wages and salaries: 60% × $360,000....... $216,000
Depreciation: 35% × $200,000................. 70,000
Occupancy: 50% × $100,000................... 50,000
Total.......................................................... $336,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

32. Hosley Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs:

Costs:
Wages and salaries....... $360,000
Depreciation................. 100,000
Occupancy....................  120,000
Total............................. $580,000

The distribution of resource consumption across the three activity cost pools is given
below:
Activity Cost Pools
Order
Fabricating Processing Other Total
Wages and salaries........ 50% 40% 10% 100%
Depreciation.................. 10% 45% 45% 100%
Occupancy..................... 5% 60% 35% 100%

How much cost, in total, would be allocated in the first-stage allocation to the Other
activity cost pool?
A) $123,000
B) $174,000
C) $58,000
D) $203,000

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Medium

Solution:

Total Other Cost:

Wages and salaries: 10% × $360,000....... $ 36,000
Depreciation: 45% × $100,000................. 45,000
Occupancy: 35% × $120,000................... 42,000
Total.......................................................... $123,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

33. Feldpausch Corporation has provided the following data from its activity-based
costing system:

Activity Cost Pool Total Cost Total Activity

Assembly...................... $1,137,360 84,000 machine-hours
Processing orders......... $28,479 1,100 orders
Inspection..................... $97,155 1,270 inspection-hours

The company makes 470 units of product W26B a year, requiring a total of 660
machine-hours, 50 orders, and 40 inspection-hours per year. The product's direct
materials cost is $40.30 per unit and its direct labor cost is $42.22 per unit. The
product sells for $118.00 per unit. According to the activity-based costing system, the
product margin for product W26B is:
A) $6,444.70 per unit
B) $4,679.20 per unit
C) $3,384.70 per unit
D) $16,675.60 per unit

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3,4,5 Level:  Medium

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly $1,137,360 84,000 machine- $13.54 per
hours machine-hour
Processing Orders 28,479 1,100 orders $25.89 per order
Inspection 97,155 1,270 inspection- $76.50 per
hours inspection-hour

Calculation of Overhead Costs:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Assembly $13.54 per MH 660 MHs $8,936.40
Processing Orders $25.89 per order 50 orders $1,294.50
Inspection $76.50 per IH 40 IHs $3,060.00

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Sales.............................................................................$55,460.00
Costs:
Direct materials (470 × $40.30)...............................
$18,941.00
Direct labor (470 × $42.22)......................................
19,843.40
Assembly..................................................................
8,936.40
Processing.................................................................
1,294.50
Inspection.................................................................
3,060.00 52,075.30
Product margin.............................................................$ 3,384.70

34. Houseal Corporation has provided the following data from its activity-based costing
system:

Activity Cost Pool Total Cost Total Activity

Assembly...................... $613,250 55,000 machine-hours
Processing orders......... $46,170 1,500 orders
Inspection..................... $146,110 1,900 inspection-hours

Data concerning one of the company’s products, Product W58B, appear below:

Selling price per unit............................ $113.70

Direct materials cost per unit............... $48.14
Direct labor cost per unit...................... $11.62
Annual unit production and sales......... 360
Annual machine-hours......................... 1,040
Annual orders....................................... 60
Annual inspection-hours...................... 30

According to the activity-based costing system, the product margin for product W58B
is:
A) $3,668.60
B) $5,975.60
C) $5,515.40
D) $19,418.40

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3,4,5 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly $613,250 55,000 machine- $11.15 per
hours machine-hour
Processing Orders 46,170 1,500 orders $30.78 per order
Inspection 146,110 1,900 inspection- $76.90 per
hours inspection-hour

Calculation of Overhead Costs:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Assembly $11.15 per MH 1,040 MHs $11,596.00
Processing Orders $30.78 per order 60 orders $1,846.80
Inspection $76.90 per IH 30 IHs $2,307.00

Sales (360 × $113.70)..................................................$40,932.00

Costs:
Direct materials (360 × $48.14)...............................
$17,330.40
Direct labor (360 × $11.62)......................................
4,183.20
Assembly..................................................................
11,596.00
Processing.................................................................
1,846.80
Inspection.................................................................
2,307.00 37,263.40
Product margin.............................................................$ 3,668.60

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

35. Dobles Corporation has provided the following data from its activity-based costing
system:

Activity Cost Pool Total Cost Total Activity

Assembly...................... $228,060 18,000 machine-hours
Processing orders......... $34,068 1,200 orders
Inspection..................... $125,560 1,720 inspection-hours

The company makes 420 units of product D28K a year, requiring a total of 460
machine-hours, 80 orders, and 10 inspection-hours per year. The product's direct
materials cost is $48.96 per unit and its direct labor cost is $25.36 per unit. According
to the activity-based costing system, the average cost of product D28K is closest to:
A) $95.34 per unit
B) $93.60 per unit
C) $74.32 per unit
D) $89.93 per unit

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3,4 Level:  Medium

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly $228,060 18,000 machine- $12.67 per
hours machine-hour
Processing Orders 34,068 1,200 orders $28.39 per order
Inspection 125,560 1,720 inspection- $73.00 per
hours inspection-hour

Average Cost of Product D28K:

Direct materials.......................................... $48.96
Direct labor................................................ 25.36
Assembly [($12.67 × 460) ÷ 420].............. 13.88
Processing orders [($28.39 × 80) ÷ 420]. . . 5.40
Inspection [($73.00 × 10) ÷ 420]............... 1.74
$95.34

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

36. Paparo Corporation has provided the following data from its activity-based costing
system:

Activity Cost Pool Total Cost Total Activity

Assembly...................... $846,040 52,000 machine-hours
Processing orders......... $64,056 1,700 orders
Inspection..................... $102,408 1,360 inspection-hours

Data concerning the company’s product Q79Y appear below:

Annual unit production and sales......... 450

Annual machine-hours......................... 1,080
Annual number of orders..................... 70
Annual inspection hours...................... 20
Direct materials cost............................ $44.00 per unit
Direct labor cost................................... $41.03 per unit

According to the activity-based costing system, the average cost of product Q79Y is
closest to:
A) $133.29 per unit
B) $85.03 per unit
C) $127.43 per unit
D) $129.94 per unit

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3,4 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly $846,040 52,000 machine- $16.27 per
hours machine-hour
Processing Orders 64,056 1,700 orders $37.68 per order
Inspection 102,408 1,360 inspection- $75.30 per
hours inspection-hour

Average Cost of Product Q79Y:

Direct materials.......................................... $ 44.00
Direct labor................................................ 41.03
Assembly [($16.27 × 1,080) ÷ 450]........... 39.05
Processing orders [($37.68 × 70) ÷ 450]. . . 5.86
Inspection [($75.30 × 20) ÷ 450]............... 3.35
$133.29

37. Millner Corporation has provided the following data from its activity-based costing
accounting system:

Activity Cost Pools Total Cost Total Activity

Designing products............ $1,372,448 7,798 product design hours
Setting up batches.............. $33,300 740 batch set-ups
Assembling products.......... $126,160 6,640 assembly hours

The activity rate for the “designing products” activity cost pool is closest to:
A) $101 per product design hour
B) $1,372,448 per product design hour
C) $176 per product design hour
D) $57 per product design hour

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3 Level:  Easy

Solution:
(a) (b) (a) ÷ (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Designing Products $1,372,448 7,798 PDHs $176 per PDH

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

38. Data concerning three of the activity cost pools of Salcido LLC, a legal firm, have
been provided below:

Activity Cost Pools Total Cost Total Activity

Researching legal issues.... $20,480 640 research hours
Meeting with clients........... $1,182,239 7,253 meeting hours
Preparing documents.......... $91,840 5,740 documents

The activity rate for the “meeting with clients” activity cost pool is closest to:
A) $95 per meeting hour
B) $61 per meeting hour
C) $163 per meeting hour
D) $1,182,239 per meeting hour

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3 Level:  Easy

Solution:
(a) (b) (a) ÷ (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Meeting with clients $1,182,239 7,253 meeting $163 per
hours meeting hour

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

39. Gould Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products:

Activity Cost Pools Activity Rate

Setting up batches.......................... $59.06 per batch
Processing customer orders............ $72.66 per customer order
Assembling products...................... $3.75 per assembly hour

Data concerning two products appear below:

Product K91B Product F65O

Number of batches......................... 84 50
Number of customer orders........... 32 43
Number of assembly hours............ 483 890

How much overhead cost would be assigned to Product K91B using the activity-based
costing system?
A) $9,097.41
B) $81,146.53
C) $4,961.04
D) $135.47

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4 Level:  Easy

Solution:
(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
$59.06 per 84 batches $4,961.04
Setting up batches batch
Processing customer $72.66 per 32 orders 2,325.12
orders order
Assembling products $3.75 per AH 483 AHs 1,811.25
$9,097.41

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

40. Hane Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products:

Activity Cost Pools Activity Rate

Assembling products...................... $8.90 per assembly hour
Processing customer orders............ $31.23 per customer order
Setting up batches.......................... $43.72 per batch

Data for one of the company’s products follow:

Product U94W
Number of assembly hours............ 389
Number of customer orders........... 53
Number of batches......................... 61

How much overhead cost would be assigned to Product U94W using the activity-
based costing system?
A) $42,176.55
B) $83.85
C) $7,784.21
D) $2,666.92

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4 Level:  Easy

Solution:
(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Assembling products $8.90 per AH 389 AHs $3,462.10
Processing customer $31.23 per 53 orders 1,655.19
orders order
$43.72 per 61 batches 2,666.92
Setting up batches batch
$7,784.21

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

41. 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 Pools 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?
A) $60,979.68
B) $3,588.97
C) $5,778.31
D) $81.09

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4 Level:  Easy

Solution:
(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Processing customer $31.62 per 9 orders $ 284.58
orders order
Assembling products $2.86 per AH 666 AHs 1,904.76
$46.61 per 77 batches 3,588.97
Setting up batches batch
$5,778.31

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 42-43:

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 Product
Orders 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.

42. How much indirect factory wages and factory equipment depreciation cost would be
assigned to the Customer Orders activity cost pool?
A) $188,500
B) $181,000
C) $290,000
D) $580,000

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1,2 Level:  Easy

Solution:

Customer Orders Cost:

Indirect factory wages: 25% × $340,000............................................ $ 85,000
Factory equipment depreciation: 40% × $240,000............................. 96,000
Total....................................................................................................
$181,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

43. How much indirect factory wages and factory equipment depreciation cost would
NOT be assigned to products using the activity-based costing system?
A) $340,000
B) $82,000
C) $0
D) $240,000

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1,2 Level:  Easy

Solution:

Other Cost:
Indirect factory wages: 10% × $340,000............................................ $34,000
Factory equipment depreciation: 20% × $240,000............................. 48,000
Total....................................................................................................
$82,000

Use the following to answer questions 44-45:

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 Unit
Processing Processing Other Total
Supervisory wages.... 20% 70% 10% 100%
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.

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

44. How much supervisory wages and factory supplies cost would be assigned to the
Batch Processing activity cost pool?
A) $940,000
B) $470,000
C) $305,500
D) $258,000

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1,2 Level:  Easy

Solution:

Batch Processing Cost:

Supervisory wages: 20% × $660,000................................................. $132,000
Factory supplies: 45% × $280,000..................................................... 126,000
Total....................................................................................................
$258,000

45. How much supervisory wages and factory supplies cost would NOT be assigned to
products using the activity-based costing system?
A) $122,000
B) $660,000
C) $280,000
D) $0

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1,2 Level:  Easy

Solution:

Other Cost:
Supervisory wages: 10% × $660,000................................................. $ 66,000
Factory supplies: 20% × $280,000..................................................... 56,000
Total....................................................................................................
$122,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-33

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 46-47:

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:

Activity Cost Pools
Batch Set-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.

46. How much factory supervision and indirect factory labor cost would be assigned to the
Batch Set-Up activity cost pool?
A) $680,000
B) $385,000
C) $391,000
D) $340,000

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1,2 Level:  Easy

Solution:

Batch Set-Up Cost:

Factory supervision: 55% × $460,000................................................ $253,000
Indirect factory labor: 60% × $220,000............................................. 132,000
Total....................................................................................................
$385,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

47. How much factory supervision and indirect factory labor cost would NOT be assigned
to products using the activity-based costing system?
A) $220,000
B) $90,000
C) $0
D) $460,000

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  1,2 Level:  Easy

Solution:

Other Cost:
Factory supervision: 10% × $460,000................................................ $46,000
Indirect factory labor: 20% × $220,000............................................. 44,000
Total....................................................................................................
$90,000

Use the following to answer questions 48-49:

Forliche 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............. $  80,000
Other expenses...................    40,000
Total................................... $120,000

Distribution of resource consumption:

Activity Cost Pools
Making
Bouquets Delivery Other Total
Wages and salaries.... 60% 30% 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

Making bouquets....... 40,000 bouquets
Delivery..................... 5,000 deliveries

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

48. 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.)
A) $1.65
B) $1.35
C) $1.58
D) $1.80

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2,3 Level:  Medium

Solution:

Making Bouquets Cost:

Wages and salaries: 60% × $80,000................................................... $48,000
Other expenses: 45% × $40,000......................................................... 18,000
Total....................................................................................................
$66,000

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Making Bouquets $66,000 40,000 bouquets $1.65 per bouquet

49. What would be the total overhead cost per delivery according to the activity based
costing system? In other words, what would be the overall activity rate for the
deliveries activity cost pool? (Round to the nearest whole cent.)
A) $7.20
B) $6.60
C) $6.00
D) $6.80

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2,3 Level:  Medium

Solution:

Delivery Cost:
Wages and salaries: 30% × $80,000................................................... $24,000
Other expenses: 25% × $40,000......................................................... 10,000
Total....................................................................................................
$34,000

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Delivery $34,000 5,000 deliveries $6.80 per delivery

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 50-52:

Dietz Company 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............................ $440,000
Selling and administrative expenses..........  240,000
Total........................................................... $680,000

Distribution of resource consumption:

Activity Cost Pools
Order Customer
Size Support Other Total
Manufacturing overhead...................... 55% 35% 10% 100%
Selling and administrative expenses.... 30% 50% 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.

50. How much cost, in total, would be allocated in the first-stage allocation to the Order
Size activity cost pool?
A) $314,000
B) $289,000
C) $204,000
D) $374,000

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Order Size Cost:

Manufacturing overhead: 55% × $440,000........................................ $242,000
Selling and administrative expenses: 30% × $240,000...................... 72,000
Total....................................................................................................
$314,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

51. How much cost, in total, would be allocated in the first-stage allocation to the
Customer Support activity cost pool?
A) $274,000
B) $238,000
C) $289,000
D) $340,000

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Customer Support Cost:

Manufacturing overhead: 35% × $440,000........................................ $154,000
Selling and administrative expenses: 50% × $240,000...................... 120,000
Total....................................................................................................
$274,000

52. How much cost, in total, should NOT be allocated to orders and products in the second
stage of the allocation process if the activity-based costing system is used for internal
decision-making?
A) $68,000
B) $0
C) $92,000
D) $136,000

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  2 Level:  Medium

Solution:

Other Cost:
Manufacturing overhead: 10% × $440,000........................................ $44,000
Selling and administrative expenses: 20% × $240,000...................... 48,000
Total....................................................................................................
$92,000

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 53-54:

The controller of Hendershot Company estimates the amount of materials handling overhead
cost that should be allocated to the company's two products using the data that are given
below:

Wall Mirrors Specialty Windows

Total expected units produced................... 6,000 3,000
Total expected material moves.................. 500 100
Expected direct labor-hours per unit.......... 6 9

The total materials handling cost for the year is expected to be $6,123.60.

53. If the materials handling cost is allocated on the basis of direct labor-hours, how much
of the total materials handling cost would be allocated to the wall mirrors? (Round off
your answer to the nearest whole dollar.)
A) $2,449
B) $4,144
C) $3,499
D) $3,062

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3,4 Level:  Easy Source:  CMA, adapted

Solution:

Total Direct Labor-Hours

Wall Mirrors: 6,000 units × 6 DLHs per unit..................................... 36,000 DLHs
Specialty Mirrors: 3,000 units × 9 DLHs per unit.............................. 27,000 DLHs
Total....................................................................................................
63,000 DLHs

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Direct labor-hours $6,123.60 63,000 DLHs $.0972 per DLH

Materials Handling Cost for Wall Mirrors:

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Direct labor-hours $.0972 per DLH 36,000 DLHs $3,499

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

54. If the materials handling cost is allocated on the basis of material moves, how much of
the total materials handling cost would be allocated to the specialty windows? (Round
off your answer to the nearest whole dollar.)
A) $1,021
B) $3,674
C) $3,062
D) $1,980

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3,4 Level:  Easy Source:  CMA, adapted

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Material moves $6,123.60 600 moves* $10.206 per move
*500 + 100 = 600 moves

Materials Handling Cost for Specialty Mirrors:

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Material moves $10.206 per move 100 moves $1,021

Use the following to answer questions 55-56:

Swimm Company allocates materials handling cost to the company's two products using the
below data:

Modular Homes Prefab Barns

Total expected units produced............. 3,000 4,000
Total expected material moves............ 400 100
Expected direct labor-hours per unit.... 700 200

The total materials handling cost for the year is expected to be $72,065.

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

55. If the materials handling cost is allocated on the basis of direct labor-hours, how much
of the total materials handling cost would be allocated to the prefab barns? (Round off
your answer to the nearest whole dollar.)
A) $16,014
B) $19,880
C) $36,890
D) $36,033

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3,4 Level:  Easy Source:  CMA, adapted

Solution:

Total Direct Labor-Hours

Modular Homes: 3,000 units × 700 DLHs per unit............................ 2,100,000 DLHs
Prefab Barns: 4,000 units × 200 DLHs per unit................................. 800,000 DLHs
Total....................................................................................................
2,900,000 DLHs

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Direct labor-hours $72,065 2,900,000 DLHs $.02485 per DLH

Materials Handling Cost for Prefab Barns:

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Direct labor-hours $.02485 per DLH 800,000 DLHs $19,880

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

56. If the materials handling cost is allocated on the basis of material moves, how much of
the total materials handling cost would be allocated to the modular homes? (Round off
your answer to the nearest whole dollar.)
A) $36,033
B) $57,652
C) $56,051
D) $35,175

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3,4 Level:  Easy Source:  CMA, adapted

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Material moves $72,065 500 moves* $144.13 per move
*400 + 100 = 500 moves

Materials Handling Cost for Modular Homes:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Material moves $144.13 per move 400 moves $57,652

Use the following to answer questions 57-58:

Abel Company uses activity-based costing. The company has two products: A and 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 estimated costs and expected activity as follows:

Expected Activity
Estimated
Activity Cost Pool 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

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

57. The activity rate for Activity 2 is closest to:

A) $24.91
B) $26.36
C) $16.77
D) $10.25

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Activity 2 $18,450 1,800 $10.25

58. The cost per unit of Product B is closest to:

A) $41.58
B) $81.53
C) $74.73
D) $17.69

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4 Level:  Hard

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool 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

Total Cost of Product B:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Activity 1 $23.80 100 $ 2,380.00
Activity 2 $10.25 700 7,175.00
Activity 3 $44.23 160 7,076.80
$16,631.80

Cost per unit of Product B = $16,631.80 ÷ 400 units = $41.58 per unit

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-43

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 59-60:

Andris Corporation uses activity-based costing to determine product costs for external
financial reports. The company has provided the following data concerning its activity-based
costing system:
Activity Cost Pools(and Activity Measures) Estimated Overhead Cost
Machine related (machine-hours)................. $46,400
Batch setup (setups)...................................... $434,000
General factory (direct labor-hours)............. $226,500

Expected Activity
Activity Cost Pools Total Product X Product Y
Machine related............ 4,000 3,000 1,000
Batch setup................... 7,000 3,000 4,000
General factory............. 15,000 7,000 8,000

59. The activity rate for the batch setup activity cost pool is closest to:
A) $62.00
B) $101.00
C) $144.70
D) $108.50

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Batch setup $434,000 7,000 $62.00

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

60. Assuming that actual activity turns out to be the same as expected activity, the total
amount of overhead cost allocated to Product X would be closest to:
A) $353,450
B) $303,000
C) $326,500
D) $434,000

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4 Level:  Medium

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Machine related $46,400 4,000 $11.60
Batch setup $434,000 7,000 $62.00
General factory $226,500 15,000 $15.10

Total Overhead Cost Allocated to Product X:

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Machine related $11.60 3,000 $ 34,800
Batch setup $62.00 3,000 186,000
General factory $15.10 7,000 105,700
$326,500

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 61-63:

Nissley Wedding Fantasy Company makes very elaborate wedding cakes to order. The owner
of the company has provided the following data concerning the activity rates in its activity-
based costing system:

Activity Cost Pools Activity Rate

Size-related..................... $1.13 per guest
Complexity-related......... $28.22 per tier
Order-related................... $74.72 per order

The measure of activity for the size-related activity cost pool is the number of planned guests
at the wedding reception. The greater the number of guests, the larger the cake. The measure
of complexity is the number of tiers in the cake. The activity measure for the order-related
cost pool is the number of orders. (Each wedding involves one order.) The activity rates
include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity
rates do not include the costs of purchased decorations such as miniature statues and wedding
bells, which are accounted for separately.
Data concerning two recent orders appear below:

Tijerina Twersky
Wedding Wedding
Number of reception guests....................... 49 126
Number of tiers on the cake....................... 2 4
Cost of purchased decorations for cake..... $28.60 $54.64

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

61. Assuming that all of the costs listed above are avoidable costs in the event that an
order is turned down, what amount would the company have to charge for the Tijerina
wedding cake to just break even?
A) $74.72
B) $215.13
C) $28.60
D) $260.31

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4,5 Level:  Medium

Solution:

Total Cost for Tijerina Wedding Cake Order:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Size-related $1.13 per guest 49 guests $ 55.37
Complexity-related $28.22 per tier 2 tiers 56.44
$74.72 per 1 order 74.72
Order-related order
Cost of purchased decorations for cake............................. 28.60
............................................................................................
Total cost............................................................................ $215.13

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

62. Assuming that the company charges $465.39 for the Twersky wedding cake, what
would be the overall margin on the order?
A) $135.41
B) $80.77
C) $384.62
D) $155.49

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4,5 Level:  Medium

Solution:

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Size-related $1.13 per guest 126 guests $142.38
Complexity-related $28.22 per tier 4 tiers 112.88
$74.72 per 1 order 74.72
Order-related order
Cost of purchased decorations for cake............................. 54.64
............................................................................................
Total cost............................................................................ $384.62

Sales................................ $465.39
Total cost......................... 384.62
Margin on order.............. $ 80.77

63. Suppose that the company decides that the present activity-based costing system is too
complex and that all costs (except for the costs of purchased decorations) should be
allocated on the basis of the number of guests. In that event, what would you expect to
happen to the costs of cakes?
A) The costs of all cakes would go up.
B) The cost of cakes for receptions with fewer than the average number of guests
would go down.
C) The cost of cakes for receptions with more than the average number of guests
would go down.
D) The costs of all cakes would go down.

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4,5 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 64-65:

Meade Nuptial Bakery makes very elaborate wedding cakes to order. The company has an
activity-based costing system with three activity cost pools. The activity rate for the Size-
Related activity cost pool is $1.13 per guest. (The greater the number of guests, the larger the
cake.) The activity rate for the Complexity-Related cost pool is $43.52 per tier. (Cakes with
more tiers are more complex.) Finally, the activity rate for the Order-Related activity cost
pool is $61.44 per order. (Each wedding involves one order for a cake.) The activity rates
include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity
rates do not include the costs of purchased decorations such as miniature statues and wedding
bells, which are accounted for separately.

Data concerning two recent orders appear below:

Ericson Wedding Haupt Wedding
Number of reception guests...................... 60 162
Number of tiers on the cake...................... 4 3
Cost of purchased decorations for cake.... $16.89 $38.61

64. Assuming that all of the costs listed above are avoidable costs in the event that an
order is turned down, what amount would the company have to charge for the Ericson
wedding cake to just break even?
A) $61.44
B) $387.45
C) $16.89
D) $320.21

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4,5 Level:  Medium

Solution:

Total Cost for Ericson Wedding Cake Order:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Size-related $1.13 per guest 60 guests $ 67.80
Complexity-related $43.52 per tier 4 tiers 174.08
$61.44 per 1 order 61.44
Order-related order
Cost of purchased decorations for cake............................. 16.89
............................................................................................
Total cost............................................................................ $320.21

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

65. Assuming that the company charges $500.54 for the Haupt wedding cake, what would
be the overall margin on the order?
A) $86.87
B) $413.67
C) $148.31
D) $125.48

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  4,5 Level:  Medium

Solution:

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Size-related $1.13 per guest 162 guests $183.06
Complexity-related $43.52 per tier 3 tiers 130.56
$61.44 per 1 order 61.44
Order-related order
Cost of purchased decorations for cake............................. 38.61
............................................................................................
Total cost............................................................................ $413.67

Sales................................ $500.54
Total cost......................... 413.67
Margin on order.............. $ 86.87

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 66-68:

(Appendix 8A) Espinoza Company is a wholesale distributor that uses activity-based costing
for all of its overhead costs. The company has provided the following data concerning its
annual overhead costs and its activity based costing system:

Overhead costs:

Wages and salaries.... $220,000

Other expenses..........  160,000
Total.......................... $380,000

Distribution of resource consumption:

Filling Customer
Activity Cost Pools Orders Support Other Total
Wages and salaries....... 35% 55% 10% 100%
Other expenses............. 15% 65% 20% 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

Filling orders................ 4,000 orders
Customer support......... 20 customers

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

66. What would be the total overhead cost per order according to the activity based
costing system? In other words, what would be the overall activity rate for the filling
orders activity cost pool? (Round to the nearest whole cent.)
A) $25.25
B) $23.75
C) $33.25
D) $14.25

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  6 Level:  Medium

Solution:

Filling Orders Cost:

Wages and salaries: 35% × $220,000....... $ 77,000
Other expenses: 15% × $160,000............. 24,000
Total.......................................................... $101,000

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Filling orders $101,000 4,000 order $25.25 per order

67. What would be the total overhead cost per customer according to the activity based
costing system? In other words, what would be the overall activity rate for the
customer support activity cost pool? (Round to the nearest whole dollar.)
A) $10,450
B) $11,250
C) $12,350
D) $11,400

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  6 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Solution:

Customer Support Cost:

Wages and salaries: 55% × $220,000....... $121,000
Other expenses: 65% × $160,000............. 104,000
Total.......................................................... $225,000

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Customer support $225,000 20 customers $11,250 per customer

68. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who made 6 orders in a year?
A) $5,745
B) $10,650
C) $6,166
D) $5,325

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  6 Level:  Hard

Solution:

Wages and Salaries Cost:

Allocated to Filling Orders: 35% × $220,000....................................
$77,000
Allocated to Customer Support: 55% × $220,000.............................
$121,000

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Filling orders $77,000 4,000 orders $19.25 per order
20 customers $6,050 per
Customer support $121,000 customer

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Filling orders $19.25 per order 6 orders $ 116
Customer support $6,050 per customer 1 customer 6,050
$6,166

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-53

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 69-71:

(Appendix 8A) Groats Catering uses activity-based costing for its overhead costs. The
company has provided the following data concerning the activity rates in its activity-based
costing system:

Activity Cost Pools Preparing Meals Arranging Functions

Wages........................ $1.15 $180.00
Supplies..................... $0.40 $320.00
Other expenses.......... $0.15 $130.00

The number of meals served is the measure of activity for the Preparing Meals activity cost
pool. The number of functions catered is used as the activity measure for the Arranging
Functions activity cost pool.

Management would like to know whether the company made any money on a recent function
at which 150 meals were served. The company catered the function for a fixed price of $18.00
per meal. The cost of the raw ingredients for the meals was $12.40 per meal. This cost is in
addition to the costs of wages, supplies, and other expenses detailed above.

For the purposes of preparing action analyses, management has assigned ease of adjustment
codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw
ingredients as a Green cost; and other expenses as a Red cost.

69. According to the activity-based costing system, what was the total cost (including the
costs of raw ingredients) of the function mentioned above? (Round to the nearest
whole dollar.)
A) $2,945
B) $2,745
C) $2,095
D) $2,245

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  6 Level:  Medium

Solution:

Cost of preparing meals [($1.15 + $0.40 + $0.15)

× 150]..............................................................................................
$ 255
Cost of arranging functions ($180 + $320 + $130)............................ 630
Cost of raw ingredients ($12.40 × 150).............................................. 1,860
Total....................................................................................................
$2,745

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

70. Suppose an action analysis report is prepared for the function mentioned above. What
would be the “red margin” in the action analysis report? (Round to the nearest whole
dollar.)
A) $(45)
B) $(195)
C) $(145)
D) $105

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  6 Level:  Hard

Solution:

Sales ($18.00 × 150).................................................... $2,700.00

Green costs:
Supplies−Preparing meals ($0.40 × 150)................. $ 60.00
Supplies−Arranging functions.................................. 320.00
Raw ingredients ($12.40 × 150)............................... 1,860.00 2,240.00
Green margin............................................................... 460.00
Yellow costs:
Wages−Preparing meals ($1.15 × 150).................... 172.50
Wages−Arranging functions..................................... 180.00 352.50
Yellow margin............................................................. 107.50
Red costs:
Other expenses−Preparing meals ($0.15 × 150)...... 22.50
Other expenses−Arranging functions....................... 130.00 152.50
Red margin................................................................... $(45.00)

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

71. Suppose an action analysis report is prepared for the function mentioned above. What
would be the “yellow margin” in the action analysis report? (Round to the nearest
whole dollar.)
A) $183
B) $288
C) $233
D) $108

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  6 Level:  Hard

Solution:

Sales ($18.00 × 150).................................................... $2,700

Green costs:
Supplies−Preparing meals ($0.40 × 150)................. $ 60
Supplies−Arranging functions.................................. 320
Raw ingredients ($12.40 × 150)............................... 1,860 2,240
Green margin............................................................... 460
Yellow costs:
Wages−Preparing meals ($1.15 × 150).................... 173
Wages−Arranging functions..................................... 180 353
Yellow margin............................................................. $ 108

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 72-75:

(Appendix 8B) Addison Company has two products: A and B. Annual production and sales
are 800 units of Product A and 700 units of Product B. The company has traditionally used
direct labor-hours as the basis for applying all manufacturing overhead to products. Product A
requires 0.2 direct labor hours per unit and Product B requires 0.6 direct labor hours per unit.
The total estimated overhead for next period is $71,286.

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:

Expected Activity
Estimated
Activity Cost Pool Overhead Costs Product A Product B Total
Activity 1............... $20,272 300 500 800
Activity 2............... 29,380 800 500 1,300
General Factory......  21,634 160 420 580
Total....................... $71,286

(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor
hours.)

72. The predetermined overhead rate under the traditional costing system is closest to:
A) $25.34
B) $22.60
C) $37.30
D) $122.91

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

Total Direct Labor-Hours

Product A: 800 units × .2 DLHs per unit........................................... 160 DLHs
Product B: 700 units × .6 DLHs per unit............................................ 420 DLHs
Total....................................................................................................
580 DLHs

Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.91

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

73. The overhead cost per unit of Product B under the traditional costing system is closest
to:
A) $22.38
B) $13.56
C) $73.74
D) $15.20

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

Total Direct Labor-Hours

Product A: 800 units × .2 DLHs per unit........................................... 160 DLHs
Product B: 700 units × .6 DLHs per unit............................................ 420 DLHs
Total....................................................................................................
580 DLHs

Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.9069

Total overhead cost applied to Product B using traditional costing: $122.9069 × 420
DLHs = $51,621 (rounded)
Overhead cost per unit = $51,621 ÷ 700 units = $73.74

74. The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-
based costing system is closest to:
A) $22.60
B) $54.84
C) $58.76
D) $36.73

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Estimated Cost Estimated Activity Activity Rate
Activity 2 $29,380 1,300 $22.60

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

75. The overhead cost per unit of Product B under the activity-based costing system is
closest to:
A) $73.74
B) $56.62
C) $22.38
D) $47.52

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Hard

Solution:

(a) (b) (a) ÷ (b)

Activity Cost Pool Estimated Cost Estimated Activity Activity Rate
Activity 1 $20,272 800 $25.34
Activity 2 $29,380 1,300 $22.60
General Factory $21,634 580 $37.30

Total Cost of Product B:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Activity ABC Cost
Activity 1 $25.34 500 $12,670
Activity 2 $22.60 500 11,300
General Factory $37.30 420 15,666
$39,636

Overhead cost per unit = $39,636 ÷ 700 units = $56.62 per unit (rounded)

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-59

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 76-77:

(Appendix 8B) Koszyk 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, P85G and C43S, about which
it has provided the following data:

P85G C43S
Direct materials per unit........... $36.50 $63.10
Direct labor per unit................. $20.80 $31.20
Direct labor-hours per unit....... 0.80 1.20
Annual production................... 35,000 10,000

The company’s estimated total manufacturing overhead for the year is $2,264,000 and the
company’s estimated total direct labor-hours for the year is 40,000.

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:
Estimated
Activities and Activity Measures Overhead Cost
Supporting direct labor (DLHs)..... $1,160,000
Setting up machines (setups)......... 288,000
Parts administration (part types)....     816,000
Total............................................... $2,264,000

Expected Activity
P85G C43S Total
DLHs............. 28,000 12,000 40,000
Setups............ 1,480 920 2,400
Part types....... 1,880 840 2,720

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

76. The manufacturing overhead that would be applied to a unit of product P85G under
the company's traditional costing system is closest to:
A) $89.67
B) $45.28
C) $44.39
D) $23.20

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

Predetermined overhead rate = $2,264,000 ÷ 40,000 DLHs = $56.60 per DLH

Applied overhead per unit =

$56.60 per DLH × 0.80 DLHs per unit = $45.28 per unit

77. The manufacturing overhead that would be applied to a unit of product C43S under
the activity-based costing system is closest to:
A) $71.04
B) $138.96
C) $67.92
D) $11.04

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Solution:

(a) (b) (a) ÷ (b)

Estimated Estimated
Activity Cost Pool Cost Activity Activity Rate
Supporting direct labor $1,160,000 40,000 DLHs $29 per DLH
Setting up machines $288,000 2,400 setups $120 per setup
Parts administration $816,000 2,720 part types $300 per part type

Total Overhead applied to Product C43S:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Expected Activity ABC Cost
Supporting direct labor $29 per DLH 12,000 DLHs $348,000
Setting up machines $120 per setup 920 setups 110,400
Parts administration $300 per part type 840 part types 252,000
$710,400

Applied overhead per unit = $710,400 ÷ 10,000 units = $71.04 per unit

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 78-79:

(Appendix 8B) Binegar 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, R58G and R09O, about which
it has provided the following data:

R58G R09O
Direct materials per unit........... $15.90 $52.40
Direct labor per unit................. $1.30 $27.30
Direct labor-hours per unit....... 0.10 2.10
Annual production................... 30,000 10,000

The company’s estimated total manufacturing overhead for the year is $1,617,600 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:
Estimated
Activities and Activity Measures Overhead Cost
Assembling products (DLHs)................ $   696,000
Preparing batches (batches)................... 252,000
Product support (product variations).....     669,600
Total....................................................... $1,617,600

Expected Activity
R58G R09O Total
DLHs............................ 3,000 21,000 24,000
Batches......................... 528 1,152 1,680
Product variations........ 1,056 1,176 2,232

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

78. The manufacturing overhead that would be applied to a unit of product R58G under
the company's traditional costing system is closest to:
A) $6.74
B) $16.10
C) $22.84
D) $2.90

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

Predetermined overhead rate = $1,617,600 ÷ 24,000 DLHs = $67.40 per DLH

Total applied overhead = 3,000 DLHs × $67.40 per DLH = $202,200

Applied overhead per unit = $202,200 ÷ 30,000 units = $6.74 per unit

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

79. The manufacturing overhead that would be applied to a unit of product R09O under
the activity-based costing system is closest to:
A) $113.46
B) $255.00
C) $141.54
D) $17.28

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

(a) (b) (a) ÷ (b)

Estimated Estimated Activity
Activity Cost Pool Cost Activity Rate
Assembling products $696,000 24,000 DLHs $29 per DLH
Preparing batches $252,000 1,680 batches $150 per batch
Product support $669,600 2,232 product $300 per product
variations variation

Total Overhead applied to Product R09O:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Expected Activity ABC Cost
Assembling products $29 per DLH 21,000 DLHs $ 609,000
Preparing batches $150 per batch 1,152 batches 172,800
$300 per product 1,176 product
Product support variation variations 352,800
$1,134,600

Applied overhead per unit = $1,134,600 ÷ 10,000 units = $113.46 per unit

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 80-81:

(Appendix 8B) Kebort 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, U86Y and M91F, about which it
has provided the following data:

U86Y M91F
Direct materials per unit........... $19.80 $45.80
Direct labor per unit................. $18.20 $49.40
Direct labor-hours per unit....... 0.70 1.90
Annual production................... 40,000 10,000

The company’s estimated total manufacturing overhead for the year is $2,541,760 and the
company’s estimated total direct labor-hours for the year is 47,000.

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:

Estimated
Activities and Activity Measures Overhead Cost
Direct labor support (DLHs)............. $1,175,000
Setting up machines (setups)............ 407,960
Part administration (part types).........     958,800
Total.................................................. $2,541,760

Expected Activity
U86Y M91F Total
DLHs................ 28,000 19,000 47,000
Setups............... 2,256 658 2,914
Part types.......... 1,034 2,162 3,196

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

80. The unit product cost of product U86Y under the company's traditional costing system
is closest to:
A) $71.15
B) $55.50
C) $75.86
D) $38.00

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

Predetermined overhead rate = $2,541,760 ÷ 47,000 DLHs = $54.08 per DLH

Applied overhead = [(40,000 units × 0.70 DLHs per unit) × $54.08 per DLH] ÷ 40,000
units = $37.86 per unit

Unit Product Cost:

Direct materials............................... $19.80
Direct labor...................................... 18.20
Applied manufacturing overhead.... 37.86
Total................................................. $75.86

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-67

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

81. The unit product cost of product M91F under the activity-based costing system is
closest to:
A) $95.20
B) $121.57
C) $216.77
D) $197.95

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

(a) (b) (a) ÷ (b)

Expected
Activity Cost Pool Estimated Cost Activity Activity Rate
Direct labor support $1,175,000 47,000 DLHs $25 per DLH
Setting up machines $407,960 2,914 setups $140 per setup
Part administration $958,800 3,196 part types $300 per part
type

Total Overhead applied to Product M91F:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Expected Activity ABC Cost
Direct labor support $25 per DLH 19,000 DLHs $ 475,000
Setting up machines $140 per setup 658 setups 92,120
$300 per part 2,162 part types
Part administration type 648,600
$1,215,720

Overhead Cost per unit = $1,215,720 ÷ 10,000 units = $121.57 per unit

Unit Product Cost:

Direct materials............................... $ 45.80
Direct labor...................................... 49.40
Applied manufacturing overhead.... 121.57
Total................................................. $216.77

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Use the following to answer questions 82-83:

(Appendix 8B) Pacchiana 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, R21V and D00B, about
which it has provided the following data:

R21V D00B
Direct materials per unit................. $19.60 $61.70
Direct labor per unit....................... $3.90 $19.50
Direct labor-hours per unit............. 0.30 1.50
Annual production......................... 45,000 15,000

The company’s estimated total manufacturing overhead for the year is $1,262,880 and the
company’s estimated total direct labor-hours for the year is 36,000.

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:
Estimated
Activities and Activity Measures Overhead Cost
Assembling products (DLHs).................... $   108,000
Preparing batches (batches)....................... 362,880
Product support (product variations).........     792,000
Total........................................................... $1,262,880

Expected Activity
R21V D00B Total
DLHs......................... 13,500 22,500 36,000
Batches...................... 1,440 1,152 2,592
Product variations..... 1,404 576 1,980

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-69

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

82. The unit product cost of product R21V under the company's traditional costing system
is closest to:
A) $34.02
B) $24.40
C) $41.36
D) $23.50

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:

Predetermined overhead rate = $1,262,880 ÷ 36,000 DLHs = $35.08 per DLH

Applied overhead = [(45,000 units × 0.30 DLHs per unit) × $35.08 per DLH] ÷ 45,000
units = $10.52 per unit

Unit Product Cost:

Direct materials............................... $19.60
Direct labor...................................... 3.90
Applied manufacturing overhead.... 10.52
Total................................................. $34.02

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

83. The unit product cost of product D00B under the activity-based costing system is
closest to:
A) $111.81
B) $133.82
C) $81.20
D) $30.61

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking

AICPA FN:  Reporting LO:  7 Level:  Medium

Solution:
(a) (b) (a) ÷ (b)
Expected
Activity Cost Pool Estimated Cost Activity Activity Rate
Assembling $108,000 36,000 DLHs $3 per DLH
products
Preparing batches $362,880 2,592 batches $140 per batches
Product support $792,000 1,980 product $400 per product
variations variation

Total Overhead applied to Product D00B:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Expected Activity ABC Cost
Assembling products $3 per DLH 22,500 DLHs $ 67,500
Preparing batches $140 per batch 1,152 batches 161,280
$400 per product 576 product
Product support variation variations 230,400
$459,180

Overhead Cost per unit = $459,180 ÷ 15,000 units = $30.61 per unit

Unit Product Cost:

Direct materials............................... $ 61.70
Direct labor...................................... 19.50
Applied manufacturing overhead.... 30.61
Total................................................. $111.81

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-71

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Essay Questions

84. Beckley Corporation has provided the following data from its activity-based costing
accounting system:

Indirect factory wages.................... $16,000

Factory equipment depreciation..... $193,000

Distribution of Resource Consumption across Activity Cost Pools:

Customer Product
Activity Cost Pools Orders Processing Other Total
Indirect factory wages.................... 48% 47% 5% 100%
Factory equipment depreciation..... 61% 25% 14% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs that are not assigned to products.

Required:

a. Determine the total amount of indirect factory wages and factory equipment
depreciation costs that would be allocated to the Product Processing activity cost
pool. Show your work!
b. Determine the total amount of indirect factory wages and factory equipment
depreciation costs that would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Product Processing activity cost pool:

Indirect factory wages (47% × $16,000)......................... $  7,520
Factory equipment depreciation (25% × $193,000).......  48,250
Total................................................................................ $55,770

b. As stated in the problem, the costs allocated to the “Other” cost pool are not
assigned to products.
Indirect factory wages (5% × $16,000)........................... $    800
Factory equipment depreciation (14% × $193,000).......  27,020
Total................................................................................ $27,820

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  1,2 Level:  Easy

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

85. Desilets Corporation has provided the following data from its activity-based costing
accounting system:

Supervisory wages............. $94,000

Factory utilities.................. $128,000

Distribution of Resource Consumption across Activity Cost Pools:

Batch Unit
Activity Cost Pools Set-Ups Processing Other Total
Supervisory wages....... 34% 64% 2% 100%
Factory utilities............ 49% 35% 16% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs that are not assigned to products.

Required:

a. Determine the total amount of supervisory wages and factory utilities costs that
would be allocated to the Unit Processing activity cost pool. Show your work!
b. Determine the total amount of supervisory wages and factory utilities costs that
would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Unit Processing activity cost pool:

Supervisory wages (64% × $94,000)......... $  60,160
Factory utilities (35% × $128,000)............    44,800
Total........................................................... $104,960

b. As stated in the problem, the costs allocated to the “Other” cost pool are not
assigned to products.
Supervisory wages (2% × $94,000)........... $  1,880
Factory utilities (16% × $128,000)............  20,480
Total........................................................... $22,360

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  1,2 Level:  Easy

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

86. The following data have been provided by Hooey Corporation from its activity-based
costing accounting system:

Supervisory wages............. $46,000

Factory utilities.................. $199,000

Distribution of Resource Consumption across Activity Cost Pools:

Product
Activity Cost Pools Change-Overs Machining Other Total
Supervisory wages....... 59% 33% 8% 100%
Factory utilities............ 18% 69% 13% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs that are not assigned to products.

Required:

a. Determine the total amount of supervisory wages and factory utilities costs that
would be allocated to the Machining activity cost pool. Show your work!
b. Determine the total amount of supervisory wages and factory utilities costs that
would NOT be assigned to products. Show your work!

Ans:

a. Allocations to the Machining activity cost pool:

Supervisory wages (33% × $46,000)......... $  15,180
Factory utilities (69% × $199,000)............  137,310
Total........................................................... $152,490

b. As stated in the problem, the costs allocated to the “Other” cost pool are not
assigned to products.
Supervisory wages (8% × $46,000)........... $ 3,680
Factory utilities (13% × $199,000)............  25,870
Total........................................................... $29,550

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  1,2 Level:  Easy

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

87. Fidler & Jenkins PLC, a consulting firm, uses an activity-based costing in which there
are three activity cost pools. The company has provided the following data concerning
its costs and its activity based costing system:

Costs:
Wages and salaries............. $620,000
Travel expenses.................. 140,000
Other expenses...................  120,000
Total................................... $880,000

Distribution of resource consumption:

Working On Business
Activity Cost Pools Engagements Development Other Total
Wages and salaries....... 60% 10% 30% 100%
Travel expenses............ 50% 40% 10% 100%
Other expenses............. 35% 25% 40% 100%

Required:

a. How much cost, in total, would be allocated to the Working On Engagements

activity cost pool?
b. How much cost, in total, would be allocated to the Business Development activity
cost pool?
c. How much cost, in total, would be allocated to the Other activity cost pool?

Ans:

All three parts can be answered using a first-stage allocation of costs.

Working On Business
Engagements Development Other Total
Wages and salaries..... $372,000 $ 62,000 $186,000 $620,000
Travel expenses.......... 70,000 56,000 14,000 140,000
Other expenses...........    42,000    30,000    48,000   120,000
Total........................... $484,000 $148,000 $248,000 $880,000

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  2 Level:  Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-75

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

88. Dane Housecleaning provides housecleaning services to its clients. The company uses
an activity-based costing system for its overhead costs. The company has provided the
following data from its activity-based costing system.

Activity Cost Pool Total Cost Total Activity

Cleaning.................... $263,784 34,800 hours
Job support................ 145,180 7,000 jobs
Client support............ 4,774 220 clients
Other.........................  170,000 Not applicable
Total.......................... $583,738

The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs.

One particular client, the Hoium family, requested 45 jobs during the year that
required a total of 90 hours of housecleaning. For this service, the client was charged
$2,000.

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools.
Round off all calculations to the nearest whole cent.
b. Using the activity-based costing system, compute the customer margin for the
Hoium family. Round off all calculations to the nearest whole cent.
c. Assume the company decides instead to use a traditional costing system in which
ALL costs are allocated to customers on the basis of cleaning hours. Compute the
margin for the Hoium family. Round off all calculations to the nearest whole cent.

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

a. The computation of the activity rates follow:

Total Cost Total Activity Activity Rates
Cleaning........... $263,784 34,800 hours $7.58 per hour
Job support....... $145,180 7,000 jobs $20.74 per job
Client support... $4,774 220 clients $21.70 per client

b. The customer margin for the family is computed as follows:

Client charges............... $2,000.00
Costs:
Cleaning.................... $682.20
Job support................ 933.30
Client support............    21.70  1,637.20
Customer margin.......... $  362.80

Computations for costs:

Cleaning: 90 hours × $7.58 per hour = $682.20
Job support: 45 jobs × $20.74 per job = $933.30
Client support: 1 client × $21.70 per client = $21.70

c. The margin if all costs are allocated on the basis of cleaning hours:

Predetermined overhead rate = $583,738 ÷ 34,800 hours = $16.77 per hour

Client charges..................... $2,000.00

Allocated costs*.................  1,509.30
Customer margin................ $  490.70

* 90 hours × $16.77 per hour = $1,509.30

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  3,4,5 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

89. The Kamienski Cleaning Brigade Company provides housecleaning services to its
clients. The company uses an activity-based costing system for its overhead costs. The
company has provided the following data from its activity-based costing system.

Activity Cost Pool Total Cost Total Activity

Cleaning................. $185,752 21,700 hours
Job support............. 171,532 6,100 jobs
Client support......... 15,124 760 clients
Other......................  240,000 Not applicable
Total....................... $612,408

The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs.
One particular client, the Whiddon family, requested 15 jobs during the year that
required a total of 60 hours of housecleaning. For this service, the client was charged
$1,170.

Required:

a. Using the activity-based costing system, compute the customer margin for the
Whiddon family. Round off all calculations to the nearest whole cent.
b. Assume the company decides instead to use a traditional costing system in which
ALL costs are allocated to customers on the basis of cleaning hours. Compute the
margin for the Whiddon family. Round off all calculations to the nearest whole
cent.

8-78 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

a. The first step is to compute activity rates:

Total Cost Total Activity Activity Rates
Cleaning................. $185,752 21,700 hours $8.56 per hour
Job support............. $171,532 6,100 jobs $28.12 per job
Client support......... $15,124 760 clients $19.90 per client

The customer margin for the family is computed as follows:

Client charges............... $1,170.00
Costs:
Cleaning.................... $513.60
Job support................ 421.80
Client support............     19.90     955.30
Customer margin.......... $  214.70

Computations for costs:

Cleaning: 60 hours × $8.56 per hour = $513.60
Job support: 15 jobs × $28.12 per job = $421.80
Client support: 1 client × $19.90 per client = $19.90

b. The margin if all costs are allocated on the basis of cleaning hours:

Predetermined overhead rate = $612,408 ÷ 21,700 hours = $28.22 per hour

Client charges............... $1,170.00

Allocated costs*...........  1,693.20
Customer margin.......... ($523.20)

* 60 hours × $28.22 per hour = $1,693.20

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  3,4,5 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

90. Cabio Company manufactures two products, Product C and Product D. The company
estimated it would incur $119,100 in manufacturing overhead costs during the current
period. Overhead currently is applied to the products on the basis of direct labor hours.
Data concerning the current period's operations appear below:

Product C Product D
Estimated volume........................... 400 units 3,000 units
Direct labor hours per unit............. 1.20 hours 1.30 hour
Direct materials cost per unit......... $4.00 $22.80
Direct labor cost per unit................ $12.00 $13.00

Required:

a. Compute the predetermined overhead rate under the current method, and
determine the unit product cost of each product for the current year.
b. The company is considering using an activity-based costing system to compute
unit product costs for external financial reports instead of its traditional system
based on direct labor hours. The activity-based costing system would use three
activity cost pools. Data relating to these activities for the current period are given
below:
Expected Activity
Estimated
Overhead
Activity Cost Pool Costs Product C Product D Total
Machine setups....... $ 10,440 60 120 180
Purchase orders...... 78,000 820 1,180 2,000
General factory.......    30,660 480 3,900 4,380
Total....................... $119,100

Determine the unit product cost of each product for the current period using the
activity-based costing approach.

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

a. The expected total direct labor hours during the period are computed as follows:

Product C: 400 units × 1.2 hours per unit........... 480 hours

Product D: 3,000 units × 1.3 hours per unit........ 3,900 hours
Total direct labor hours....................................... 4,380 hours

Using these hours as a base, the predetermined overhead using direct labor hours
would be:

Estimated overhead cost ÷ Estimated direct labor-hours =

$119,100 ÷ 4,380 DLHs = $27.19 per DLH

Using this overhead rate, the unit product costs are:

Product C Product D
Direct materials........................ $ 4.00 $22.80
Direct labor.............................. 12.00 13.00
Manufacturing overhead..........  32.63  35.35
Total unit product cost............. $48.63 $71.15

b. The activity rates for each activity cost pool are as follows:

Estimated
Overhead Expected Activity
Costs Activity Rate
Machine setups....... $10,440 180 $58.00
Purchase orders...... $78,000 2,000 $39.00
General factory....... $30,660 4,380 $7.00

The overhead cost charged to each product is:

Product C Product D
Activity Amount Activity Amount
Machine setups.......... 60 $ 3,480 120 $ 6,960
Purchase orders......... 820 31,980 1,180 46,020
General factory.......... 480    3,360 3,900  27,300
Total overhead cost... $38,820 $80,280

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-81

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Overhead cost per unit:

Product C: $38,820 ÷ 400 units = $97.05 per unit
Product D: $80,280 ÷ 3,000 units = $26.76 per unit

Using activity based costing, the unit product cost of each product would be:

Product C Product D
Direct materials.............................. $   4.00 $22.80
Direct labor.................................... 12.00 13.00
Manufacturing overhead................    97.05  26.76
Total unit product cost................... $113.05 $62.56

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  7 Level:  Hard

91. Danton Company manufactures two products, Product F and Product G. The company
expects to produce and sell 600 units of Product F and 3,000 units of Product G during
the current year. The company uses activity-based costing to compute unit product
costs for external reports. Data relating to the company's three activity cost pools are
given below for the current year:
Expected Activity
Estimated
Overhead
Activity Cost Pool Costs Product F Product G Total
Machine setups....... $13,720 140 140 280
Purchase orders...... $74,730 630 960 1,590
General factory....... $15,000 600 2,400 3,000

Required:

Using the activity-based costing approach, determine the overhead cost per unit for
each product.

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

The activity rates for each activity cost pool are as follows:

Overhead
Estimated Expected Activity
Activity Cost Pool Costs Activity Rate
Machine setups............. $13,720 280 $49.00
Purchase orders............ $74,730 1,590 $47.00
General factory............. $15,000 3,000 $5.00

The overhead cost charged to each product is:

Product F Product G
Activity Amount Activity Amount
Machine setups............. 140 $ 6,860 140 $  6,860
Purchase orders............ 630 29,610 960 45,120
General factory............. 600    3,000 2,400  12,000
Total overhead cost...... $39,470 $63,980

Overhead cost per unit:

Product F: $39,470 ÷ 600 units = $65.78 per unit
Product G: $63,980 ÷ 3,000 units = $21.33 per unit

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  3,4 Level:  Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-83

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

92. Kretlow Corporation has provided the following data from its activity-based costing
accounting system:

Activity Cost Pools Total Cost Total Activity

Designing products...... $700,502 3,746 product design hours
Setting up batches........ $12,400 620 batch set-ups
Assembling products.... $125,440 8,960 assembly hours

Required:

Compute the activity rates for each of the three cost pools. Show your work!

Ans:

Activity Cost Pools Total Cost Total Activity Activity Rate

Designing products............ $700,502 3,746 $187
Setting up batches.............. $12,400 620 $20
Assembling products.......... $125,440 8,960 $14

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  3 Level:  Easy

93. Data concerning three of Kilmon Corporation's activity cost pools appear below:

Activity Cost Pools Total Cost Total Activity

Assembling products.......... $150,300 8,350 assembly hours
Designing products............ $1,177,535 7,597 product design hours
Setting up batches.............. $14,400 600 batch set-ups

Required:

Compute the activity rates for each of the three cost pools. Show your work!

Ans:

Activity Cost Pools Total Cost Total Activity Activity Rate

Assembling products.......... $150,300 8,350 $18
Designing products............ $1,177,535 7,597 $155
Setting up batches.............. $14,400 600 $24

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  3 Level:  Easy

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

94. Doles Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products.

Activity Cost Pools Activity Rate

Setting up batches.................... $98.54 per batch
Processing customer orders...... $42.00 per customer order
Assembling products................ $3.53 per assembly hour

Data concerning two products appear below:

Product K52W Product X94T

Number of batches......................... 55 73
Number of customer orders........... 9 17
Number of assembly hours............ 697 402

Required:

How much overhead cost would be assigned to each of the two products using the
company's activity-based costing system?

Ans:

Product K52W Product X94T

Setting up batches....................... $5,419.70 $7,193.42
Processing customer orders......... 378.00 714.00
Assembling products...................  2,460.41  1,419.06
Total overhead cost..................... $8,258.11 $9,326.48

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  4 Level:  Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-85

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

95. Desjarlais Corporation uses the following activity rates from its activity-based costing
to assign overhead costs to products.

Activity Cost Pools Activity Rate

Setting up batches.......................... $32.22 per batch
Assembling products...................... $6.13 per assembly hour
Processing customer orders............ $72.75 per customer order

Data concerning two products appear below:

Product S96U Product Q06F

Number of batches......................... 78 24
Number of assembly hours............ 412 178
Number of customer orders........... 53 18

Required:

a. How much overhead cost would be assigned to Product S96U using the company's
activity-based costing system? Show your work!
b. How much overhead cost would be assigned to Product Q06F using the company's
activity-based costing system? Show your work!

Ans:

a. Product S96U
Setting up batches (78 batches × $32.22 per batch)........ $2,513.16
Assembling products (412 assembly hours × $6.13 per
assembly hour)............................................................ 2,525.56
Processing customer orders (53 customer orders ×
$72.75 per customer order).........................................  3,855.75
Total overhead cost......................................................... $8,894.47

b. Product Q06F
Setting up batches (24 batches × $32.22 per batch)........ $  773.28
Assembling products (178 assembly hours × $6.13 per
assembly hour)............................................................ 1,091.14
Processing customer orders (18 customer orders ×
$72.75 per customer order).........................................  1,309.50
Total overhead cost......................................................... $3,173.92

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  4 Level:  Easy

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

96. Archie Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products.

Activity Cost Pools Activity Rate

Setting up batches.................... $16.68 per batch
Processing customer orders...... $98.60 per customer order
Assembling products................ $7.89 per assembly hour

Last year, Product X26X involved 18 batches, 4 customer orders, and 103 assembly
hours.

Required:

How much overhead cost would be assigned to Product X26X using the company's
activity-based costing system? Show your work!

Ans:

Setting up batches (18 batches × $16.68 per batch)........ $  300.24

Processing customer orders (4 customer orders ×
$98.60 per customer order)......................................... 394.40
Assembling products (103 assembly hours × $7.89 per
assembly hour)............................................................     812.67
Total overhead cost......................................................... $1,507.31

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

LO:  4 Level:  Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-87

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

97. IGL Draperies makes custom draperies for homes and businesses. The company uses
an activity-based costing system for its overhead costs. The company has provided the
following data concerning its annual overhead costs and its activity cost pools.

Overhead costs:
Production overhead.... $140,000
Office expense.............  140,000
Total............................. $280,000

Distribution of resource consumption:

Activity Cost Pools Making Drapes Job Support Other Total
Production overhead.... 60% 20% 20% 100%
Office expense............. 15% 55% 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 Annual Activity

Making drapes........ 3,000 yards
Job support............. 140 jobs
Other...................... Not applicable

Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by
filling in the table below:

Making Job
Drapes Support Other Total
Production overhead....
Office expense.............
Total.............................

b. Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes
and Job Support activity cost pools by filling in the table below:

Making Drapes Job Support

Production overhead....
Office expense.............
Total.............................

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

c. Prepare an action analysis report in good form of a job that involves making 85
yards of drapes and has direct materials and direct labor cost of $2,990. The sales
revenue from this job is $6,000. For purposes of this action analysis report, direct
materials and direct labor should be classified as a Green cost; production
overhead as a Red cost; and office expense as a Yellow cost.

Ans:

a. First-stage allocation
Making Drapes Job Support Other Total
Production overhead.... $84,000 $28,000 $28,000 $140,000
Office expense............. 21,000 77,000 42,000 140,000
Total............................. $105,000 $105,000 $70,000 $280,000
Activity........................ 3,000 yards 140 jobs

b. Activity rates (costs divided by activity)

Making Job
Drapes Support
Activity........................ 3,000 yards 140 jobs

Production overhead.... $28.00 $200.00

Office expense.............    7.00  550.00
Total............................. $35.00 $750.00

c. Overhead cost of the job.

Making Drapes Job Support Total

Activity.............................. 85 1
Production overhead.......... $2,380 $200 $2,580
Office expense...................     595  550  1,145
Total................................... $2,975 $750 $3,725

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-89

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Sales............................................... $6,000
Green costs:
Direct materials and labor...........  2,990
Green margin................................. 3,010
Yellow costs:
Office expense............................  1,145
Yellow margin............................... 1,865
Red costs:
Production overhead...................  2,580
Red margin..................................... ($  715)

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

Appendix:  8A LO:  6 Level:  Hard

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

98. Haskell Hardwood Floors installs oak and other hardwood floors in homes and
businesses. The company uses an activity-based costing system for its overhead costs.
The company has provided the following data concerning its annual overhead costs
and its activity based costing system:

Overhead costs:
Production overhead.......... $120,000
Office expense...................  140,000
Total................................... $260,000

Distribution of resource consumption:

Installing Job
Activity Cost Pools Floors Support Other Total
Production overhead.......... 55% 25% 20% 100%
Office expense................... 20% 50% 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 Annual Activity

Installing floors...... 800 squares
Job support............. 100 jobs
Other...................... Not applicable

A “square” is a measure of area that is roughly equivalent to 1,000 square feet.

Required:

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by
filling in the table below:

Installing Job
Floors Support Other Total
Production overhead..........
Office expense...................
Total...................................

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

b. Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors
and Job Support activity cost pools by filling in the table below:

Installing Job
Floors Support
Production overhead..........
Office expense...................
Total...................................

c. Compute the overhead cost, according to the activity-based costing system, of a

job that involves installing 3.2 squares.

Ans:

a. First-stage allocation
Installing Job
Floors Support Other Total
Production overhead.... $66,000 $ 30,000 $24,000 $120,000
Office expense.............  28,000    70,000  42,000  140,000
Total............................. $94,000 $100,000 $66,000 $260,000

b. Activity rates (costs divided by activity)

Installing Job
Floors Support
Activity.............................. 800 squares 100 jobs

Production overhead.......... $ 82.50 $  300.00

Office expense...................    35.00     700.00
Total................................... $117.50 $1,000.00

c. Overhead cost of the job.

Installing Job
Floors Support Total
Activity........................ 3.2 1

Production overhead.... $264.00 $  300.00 $  564.00

Office expense.............  112.00     700.00     812.00
Total............................. $376.00 $1,000.00 $1,376.00

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

Appendix:  8A LO:  6 Level:  Medium

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

99. Golden Company, a wholesale distributor, uses activity-based costing for its overhead
costs. The company has provided the following data concerning its annual overhead
costs and its activity based costing system:

Overhead costs:
Wages and salaries....... $680,000
Nonwage expenses.......  120,000
Total............................. $800,000

Distribution of resource consumption:

Filling Product
Activity Cost Pools Orders Support Other Total
Wages and salaries............. 15% 75% 10% 100%
Nonwage expenses............. 25% 55% 20% 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 Annual Activity

Filling orders............. 4,000 orders
Product support......... 40 products
Other......................... Not applicable

Required:

Compute the activity rates (i.e., cost per unit of activity) for the Filling Orders and
Product Support activity cost pools by filling in the table below:

Filling Product
Orders Support Other Total
Wages and salaries.............
Nonwage expenses.............

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-93

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

First-stage allocation
Filling Product
Orders Support Other Total
Wages and salaries....... $102,000 $510,000 $68,000 $680,000
Nonwage expenses.......     30,000    66,000  24,000  120,000
Total............................. $132,000 $576,000 $92,000 $800,000

Filling Product
Orders Support
Activity....................................... 4,000 orders 40 products

Wages and salaries...................... $25.50 $12,750

Nonwage expenses......................    7.50    1,650
Total............................................ $33.00 $14,400

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

Appendix:  8A LO:  6 Level:  Medium

8-94 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

100. Jared Painting paints the interiors and exteriors of homes and commercial buildings.
The company uses an activity-based costing system for its overhead costs. The
company has provided the following data concerning its activity-based costing system.

Activity Cost Pool Activity Measure Annual Activity

Painting overhead............... Square meters 10,000 square meters
Job support......................... Jobs 200 jobs
Other.................................. None Not applicable

The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs.

The company has already finished the first stage of the allocation process in which
costs were allocated to the activity cost centers. The results are listed below:

Job
Painting Support Other Total
Painting overhead...... $  99,000 $  45,000 $36,000 $180,000
Office expense..........      6,000    78,000  36,000  120,000
Total.......................... $105,000 $123,000 $72,000 $300,000

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job
Support activity cost pools by filling in the table below. Round off all calculations
to the nearest whole cent.

Job
Painting Support
Painting overhead......
Office expense..........
Total..........................

b. Prepare an action analysis report in good form of a job that involves painting 71
square meters and has direct materials and direct labor cost of $2,410. The sales
revenue from this job is $3,800.

For purposes of this action analysis report, direct materials and direct labor should
be classified as a Green cost; painting overhead as a Red cost; and office expense
as a Yellow cost.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-95

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

a. Activity rates (costs divided by activity)

Job
Painting Support
Painting overhead...... $ 9.90 $225.00
Office expense..........    0.60  390.00
Total.......................... $10.50 $615.00

b. Overhead cost of the job.

Job
Painting Support Total
Activity........................ 71 1

Painting overhead......... $702.90 $225.00 $  927.90

Office expense.............    42.60  390.00     432.60
Total............................. $745.50 $615.00 $1,360.50

Sales............................................... $3,800.00
Green costs:
Direct materials and labor...........  2,410.00
Green margin................................. 1,390.00
Yellow costs:
Office expense............................     432.60
Yellow margin............................... 957.40
Red costs:
Painting overhead.......................     927.90
Red margin..................................... $    29.50

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

Appendix:  8A LO:  6 Level:  Medium

8-96 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

101. Werger 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, W82R and L48S, about
which it has provided the following data:

W82R L48S
Direct materials per unit................. $11.50 $62.90
Direct labor per unit....................... $2.00 $13.00
Direct labor-hours per unit............. 0.20 1.30
Annual production......................... 45,000 10,000

The company’s estimated total manufacturing overhead for the year is $1,521,960 and
the company’s estimated total direct labor-hours for the year is 22,000.

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:

Activities and Activity Measures Estimated Overhead Cost

Supporting direct labor (DLHs)........... $   352,000
Setting up machines (setups)............... 201,960
Parts administration (part types)..........      968,000
Total..................................................... $1,521,960

Activities W82R L48S Total

Supporting direct labor...... 9,000 13,000 22,000
Setting up machines........... 814 374 1,188
Parts administration........... 924 1,012 1,936

Required:

a. Determine the unit product cost of each of the company's two products under the
traditional costing system.
b. Determine the unit product cost of each of the company's two products under
activity-based costing system.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-97

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

a. Traditional Unit Product Costs

Predetermined overhead rate = $1,521,960 ÷ 22,000 DLHs = $69.18 per DLH

W82R L48S
Direct materials............................................................... $11.50 $ 62.90
Direct labor..................................................................... 2.00 13.00
Manufacturing overhead (0.2 DLHs × $69.18 per DLH;
1.3 DLHs × $69.18 per DLH).....................................  13.84    89.93
Unit product cost............................................................. $27.34 $165.83

b. ABC Unit Product Costs

Estimated
Overhead Total Expected
Cost Activity Activity Rate
Supporting direct labor. . . $352,000 22,000 DLHs $16 per DLH
Setting up machines........ $201,960 1,188 setups $170 per setup
Parts administration........ $968,000 1,936 part types $500 per part type

Overhead cost for W82R

ABC
Activity Rate Activity Cost
Supporting direct labor. . . $16 per DLH 9,000 DLHs $144,000
Setting up machines........ $170 per setup 814 setups 138,380
Parts administration........ $500 per part type 924 part types  462,000
Total................................ $744,380

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Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Overhead cost for L48S

ABC
Activity Rate Activity Cost
Supporting direct labor. . . $16 per DLH 13,000 DLHs $208,000
Setting up machines........ $170 per setup 374 setups 63,580
Parts administration........ $500 per part type 1,012 part types  506,000
Total................................ $777,580

W82R L48S
Direct materials............................................................... $11.50 $62.90
Direct labor..................................................................... 2.00 13.00
Manufacturing overhead ($744,400 ÷ 45,000 units;
$777,600 ÷ 10,000 units).............................................  16.54  77.76
Unit product cost............................................................. $30.04 $153.66

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

Appendix:  8B LO:  7 Level:  Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-99

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

102. Torri 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, B40W and C63J, about
which it has provided the following data:

B40W C63J
Direct materials per unit........... $34.90 $63.70
Direct labor per unit................. $20.80 $62.40
Direct labor-hours per unit....... 0.80 2.40
Annual production................... 35,000 15,000

The company’s estimated total manufacturing overhead for the year is $2,656,000 and
the company’s estimated total direct labor-hours for the year is 64,000.

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:

Activities and Activity Measures Estimated Overhead Cost

Assembling products (DLHs).............. $1,216,000
Preparing batches (batches)................. 480,000
Milling (MHs)......................................     960,000
Total..................................................... $2,656,000

Activities B40W C63J Total

Assembling products.......... 28,000 36,000 64,000
Preparing batches............... 2,304 2,496 4,800
Milling................................ 1,088 2,112 3,200

Required:

a. Determine the unit product cost of each of the company's two products under the
traditional costing system.
b. Determine the unit product cost of each of the company's two products under
activity-based costing system.

8-100 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

a. Traditional Unit Product Costs

Predetermined overhead rate = $2,656,000 ÷ 64,000 DLHs = $41.50 per DLH

B40W C63J
Direct materials............................................................... $34.90 $ 63.70
Direct labor..................................................................... 20.80 62.40
Manufacturing overhead (0.8 DLHs × $41.50 per DLH;
2.4 DLHs × $41.50 per DLH).....................................  33.20    99.60
Unit product cost............................................................. $88.90 $225.70

b. ABC Unit Product Costs

Estimated
Overhead Total Expected
Cost Activity Activity Rate
Assembling products.... $1,216,000 64,000 DLHs $19 per DLH
Preparing batches......... $480,000 4,800 batches $100 per setup
Milling.......................... $960,000 3,200 MHs $300 per MH

Overhead cost for B40W

Activity Rate Activity ABC Cost
Assembling products.... $19 per DLH 28,000 DLHs $   532,000
Preparing batches......... $100 per setup 2,304 batches 230,400
Milling.......................... $300 per MH 1,088 MHs     326,400
Total............................. $1,088,800

Overhead cost for C63J

Activity Rate Activity ABC Cost
Assembling products.... $19 per DLH 36,000 DLHs $   684,000
Preparing batches......... $100 per setup 2,496 batches 249,600
Milling.......................... $300 per MH 2,112 MHs     633,600
Total............................. $1,567,200

B40W C63J
Direct materials............................................................... $34.90 $ 63.70
Direct labor..................................................................... 20.80 62.40
Manufacturing overhead ($1,088,800 ÷ 35,000 units;
$1,567,200 ÷ 15,000 units)..........................................  31.11  104.48
Unit product cost............................................................. $86.81 $230.58

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

Appendix:  8B LO:  7 Level:  Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-101

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

103. Welk 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, H16Z and P25P, about
which it has provided the following data:

H16Z P25P
Direct materials per unit................. $10.20 $50.50
Direct labor per unit....................... $8.40 $25.20
Direct labor-hours per unit............. 0.40 1.20
Annual production......................... 30,000 10,000

The company’s estimated total manufacturing overhead for the year is $1,464,480 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:

Activities and Activity Measures Estimated Overhead Cost

Supporting direct labor (DLHs)................. $  552,000
Setting up machines (setups)..................... 132,480
Parts administration (part types)................     780,000
Total........................................................... $1,464,480

H16Z P25P Total

Supporting direct labor...... 12,000 12,000 24,000
Setting up machines........... 864 240 1,104
Parts administration........... 600 960 1,560

Required:

a. Determine the manufacturing overhead cost per unit of each of the company's two
products under the traditional costing system.
b. Determine the manufacturing overhead cost per unit of each of the company's two
products under activity-based costing system.

8-102 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

a. Traditional Manufacturing Overhead Costs

Predetermined overhead rate = $1,464,480 ÷ 24,000 DLHs = $61.02 per DLH

H16Z P25P
Direct labor-hours...................................... 0.40 1.20
Predetermined overhead rate per DLH...... $61.02 $61.02
Manufacturing overhead cost per unit....... $24.41 $73.22

b. ABC Manufacturing Overhead Costs

Estimated
Overhead Total Expected
Cost Activity Activity Rate
Supporting direct labor. . . $552,000 24,000 DLHs $23 per DLH
Setting up machines........ $132,480 1,104 setups $120 per setup
Parts administration........ $780,000 1,560 part types $500 per part type

Overhead cost for H16Z

ABC
Activity Rate Activity Cost
Supporting direct labor. . . $23 per DLH 12,000 DLHs $276,000
Setting up machines........ $120 per setup 864 setups 103,680
Parts administration........ $500 per part type 600 part types  300,000
Total................................ $679,680
Annual production.......... 30,000
Manufacturing overhead
cost per unit................. $22.66

Overhead cost for P25P

ABC
Activity Rate Activity Cost
Supporting direct labor. . . $23 per DLH 12,000 DLHs $276,000
Setting up machines........ $120 per setup 240 setups 28,800
Parts administration........ $500 per part type 960 part types  480,000
Total................................ $784,800
Annual production.......... 10,000
Manufacturing overhead
cost per unit................. $78.48

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

Appendix:  8B LO:  7 Level:  Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-103

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

104. Bullie 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, D31X and U75X, about
which it has provided the following data:

D31X U75X
Direct materials per unit........... $29.20 $47.40
Direct labor per unit................. $1.10 $23.10
Direct labor-hours per unit....... 0.10 2.10
Annual production................... 35,000 15,000

The company’s estimated total manufacturing overhead for the year is $1,147,650 and
the company’s estimated total direct labor-hours for the year is 35,000.

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:

Activities and Activity Measures Estimated Overhead Cost

Assembling products (DLHs)........ $   140,000
Preparing batches (batches)........... 241,150
Axial milling (MHs)......................     766,500
Total............................................... $1,147,650

D31X U75X Total

Assembling products.......... 3,500 31,500 35,000
Preparing batches............... 560 1,295 1,855
Axial milling...................... 1,540 1,015 2,555

Required:

a. Determine the manufacturing overhead cost per unit of each of the company's two
products under the traditional costing system.
b. Determine the manufacturing overhead cost per unit of each of the company's two
products under activity-based costing system.

8-104 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

Ans:

a. Traditional Manufacturing Overhead Costs

Predetermined overhead rate = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH

D31X U75X
Direct labor-hours...................................... 0.10 2.10
Predetermined overhead rate per DLH...... $32.79 $32.79
Manufacturing overhead cost per unit....... $3.28 $68.86

b. ABC Manufacturing Overhead Costs

Estimated
Overhead Total Expected
Cost Activity Activity Rate
Assembling products.... $140,000 35,000 DLHs $4 per DLH
Preparing batches......... $241,150 1,855 batches $130 per batch
Axial milling................ $766,500 2,555 MHs $300 per MH

Overhead cost for D31X

ABC
Activity Rate Activity Cost
Assembling products........ $4 per DLH 3,500 DLHs $  14,000
Preparing batches.............. $130 per batch 560 batches 72,800
Axial milling..................... $300 per MH 1,540 MHs  462,000
Total.................................. $548,800
Annual production............ 35,000
Manufacturing overhead
cost per unit................... $15.68

Overhead cost for U75X

ABC
Activity Rate Activity Cost
Assembling products........ $4 per DLH 31,500 DLHs $126,000
Preparing batches.............. $130 per batch 1,295 batches 168,350
Axial milling..................... $300 per MH 1,015 MHs  304,500
Total.................................. $598,850
Annual production............ 15,000
Manufacturing overhead
cost per unit................... $39.92

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting

Appendix:  8B LO:  7 Level:  Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 8-105

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making

8-106 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition