Chapter 5
1. When combining activities in an activity-based costing system, activities should be
grouped together at the same level. For example, batch-level activities should not be
combined with unit-level activities.
Ans: True Difficulty: Easy
2. Unit-level activities arise as a result of the total volume of production and are performed
each time a unit is produced.
Ans: True Difficulty: Easy
3. Unit-level production activities are performed each time a unit is made.
Ans: True Difficulty: Easy
4. 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 Difficulty: Easy
5. Activity-based costing uses a number of activity cost pools, each of which is allocated to
products on the basis of direct labour hours.
Ans: False Difficulty: Easy
6. The first-stage allocation in activity-based costing is the process by which overhead costs
are assigned to products before they are assigned to customers.
Ans: False Difficulty: Medium
7. Activity rates in activity-based costing are computed by dividing costs from the firststage allocations by the activity measure for each activity cost pool.
Ans: True Difficulty: Medium
8. 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 Difficulty: Medium
9. In traditional costing systems, all manufacturing costs are assigned to products—even
manufacturing costs that are not caused by the products.
Ans: True Difficulty: Medium
10. When there are batch-level or product-level costs, in comparison to a traditional cost
system, an activity-based costing system ordinarily will shift costs from high-volume to
low-volume products.
Ans: True Difficulty: Hard
Page 1
11. An activity-based costing system is generally easier to set up and run than a traditional
cost system.
Ans: False Difficulty: Medium
12. 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 Difficulty: Medium
13. In activity-based costing, as in traditional costing systems, non-manufacturing costs are
not assigned to products.
Ans: False Difficulty: Medium
14. In activity-based costing, a plant-wide overhead rate is used to apply overhead to
products.
Ans: False Difficulty: Medium
15. Changing a cost accounting system is likely to meet with little resistance in an
organization since it is a technical matter of little interest to individuals outside of the
accounting department.
Ans: False Difficulty: Medium
16. Managing and sustaining product diversity requires many more overhead resources, such
as production schedulers and product design engineers, than managing and sustaining a
single product. The costs of these resources can be accurately allocated to products on the
basis of direct labour hours.
Ans: False Difficulty: Medium
17. Transaction drivers usually take more effort to record than duration drivers.
Ans: False Difficulty: Medium
18. In general, duration drivers are more accurate measures of the consumption of resources
than transaction drivers.
Ans: True Difficulty: Medium
19. (Appendix 5A) An action analysis report reconciles activity-based costing product costs
with traditional product costs based on direct labour.
Ans: False Difficulty: Medium
20. Costs incurred at which of the following activity levels should NOT be allocated to
products for decision-making purposes?
A) Unit-level activities.
C) Product-level activities.
B) Batch-level activities.
D) Organization-sustaining activities.
Ans: D Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
21. Testing a prototype of a new product is an example of an activity at which of the
following levels?
A) Unit-level activity.
C) Product-level activity.
B) Batch-level activity.
D) Organization-sustaining activity.
Ans: C Difficulty: Easy
22. Setting up equipment is an example of an activity at which of the following levels?
A) Unit-level activity.
C) Product-level activity.
B) Batch-level activity.
D) Organization-sustaining activity.
Ans: B Difficulty: Medium
23. Which of the following activity levels is an example of the clerical activity associated
with processing purchase orders to produce an order for a standard product?
A) Unit-level activity.
C) Product-level activity.
B) Batch-level activity.
D) Organization-sustaining activity.
Ans: B Difficulty: Hard
24. Worker recreational facilities are examples of costs that would ordinarily be considered
to be incurred at which of the following activity levels?
A) Unit-level activity.
C) Product-level activity.
B) Batch-level activity.
D) Organization-sustaining activity.
Ans: D Difficulty: Medium
25. Arranging for a shipment of a number of different products to a customer is an example
of an activity at which of the following levels?
A) Unit-level activity.
C) Customer-level activity.
B) Batch-level activity.
D) Organization-sustaining activity.
Ans: B Difficulty: Medium
26. Human resource management is an example of an activity at which of the following
levels?
A) Unit-level activity.
C) Batch-level activity.
B) Product-level activity.
D) Organization-sustaining activity.
Ans: D Difficulty: Medium
27. Which of the following would be classified as a product-level activity?
A) Machine setup for a batch of a standard product.
B) Cafeteria facilities available to and used by all employees.
C) Human resource management.
D) Advertising a product.
Ans: D Difficulty: Medium
Page 3
28. Why may departmental overhead rates NOT correctly assign overhead costs?
A) Because of the use of direct labour hours in allocating overhead costs to products
rather than machine time or quantity of materials.
B) Because of the high correlation between direct labour hours and the incurrence of
overhead costs.
C) Because of the over-reliance on volume as a basis for allocating overhead costs
where products differ regarding the number of units produced, lot size, or
complexity of production.
D) Because of the difficulties associated with identifying cost pools for the first stage
of the allocation process.
Ans: C Difficulty: Hard
29. Which of the following statements about overhead allocation based on volume alone is
correct?
A) It is a key aspect of the activity-based costing model.
B) It will systematically overcost high-volume products and undercost low-volume
products.
C) It will systematically overcost low-volume products and undercost high-volume
products.
D) It must be used for external financial reporting.
Ans: B Difficulty: Medium
30. What is a duration driver?
A) A simple count of the number of times an activity occurs.
B) An activity measure that is used for the life of the company.
C) A measure of the amount of time required to perform an activity.
D) An activity measure that is used for the life of an activity-based costing system.
Ans: C Difficulty: Easy
31. What is a transaction driver?
A) An event that causes a transaction to begin.
B) A measure of the amount of time required to perform an activity.
C) An event that causes a transaction to end.
D) A simple count of the number of times an activity occurs.
Ans: D Difficulty: Easy
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
32. Which of the following is NOT a limitation of activity-based costing?
A) Maintaining an activity-based costing system is more costly than maintaining a
traditional direct labour-based costing system.
B) Changing from a traditional direct labour-based costing system to an activity-based
costing system changes product margins and other key performance indicators used
by managers. Such changes are often resisted by managers.
C) In practice, most managers insist on fully allocating all costs to products,
customers, and other costing objects in an activity-based costing system. This
results in overstated costs.
D) More accurate product costs may result in increasing the selling prices of some
products.
Ans: D Difficulty: Easy
33. (Appendix 5B) Why would an activity-based costing system that is designed for internal
decision making NOT conform to generally accepted accounting principles?
A) Some manufacturing costs (i.e., the costs of idle capacity and organizationsustaining costs) will not be assigned to products.
B) Some non-manufacturing costs are assigned to products.
C) First-stage allocations may be based on subjective interview data.
D) All of the above.
Ans: D Difficulty: Easy
34. (Appendix 5A) Which of the following statements concerning ease of adjustment codes is
NOT correct?
A) “Green” costs adjust automatically to changes in activity.
B) “Yellow” costs could be adjusted to changes in activity, but such adjustments
require management action; the adjustment is not automatic.
C) “Red” costs cannot be adjusted to changes in activity.
D) The costs of idle capacity and organization-sustaining costs are not assigned codes.
Ans: C Difficulty: Hard
35. (Appendix 5A) Which of the following best describes a cost object, such as a product or
customer, that has a negative green margin?
A) Its yellow margin will be positive.
B) Its yellow margin may be either positive or negative.
C) Its yellow margin will be negative.
D) Its yellow margin will be zero.
Ans: C Difficulty: Medium
Page 5
36. (Appendix 5A) Which of the following best describes a cost object, such as a product or
customer, that has a negative red margin?
A) Its yellow margin will be positive.
B) Its yellow margin may be positive, negative, or zero.
C) Its yellow margin will be negative.
D) Its yellow margin will be zero.
Ans: B Difficulty: Medium
37. (Appendix 5A) Which of the following best describes a cost object, such as a product or
customer, that has a positive green margin?
A) Its yellow margin will be positive.
B) Its yellow margin may be either positive, negative, or zero.
C) Its yellow margin will be negative.
D) Its yellow margin will be zero.
Ans: B Difficulty: Medium
38. (Appendix 5A) Which of the following best describes a cost object, such as a product or
customer, that has a positive red margin?
A) Its green margin will be positive.
B) Its green margin may be positive, negative, or zero.
C) Its green margin will be negative.
D) Its green margin will be zero.
Ans: A Difficulty: Medium
39. Paul Company has two products: A and B. The company uses activity-based costing. The
estimated total cost and expected activity for each of the company's three activity cost
pools are as follows:
Activity
Cost Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$22,000
$16,240
$14,600
Expected Activity
Product A
Product B
Total
400
100
500
380
200
580
500
250
750
The activity rate under the activity-based costing system for Activity 3 is closest to which
of the following?
A) $19.47. B) $28.87. C) $58.40. D) $70.45.
Ans: A Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
40. Selena Company has two products: A and B. The company uses activity-based costing.
The estimated total cost and expected activity for each of the company's three activity
cost pools are as follows:
The activity rate under the activity-based costing system for Activity 3 is closest
to which of the following?
A) $18.53. B) $21.67. C) $46.33. D) $65.00.
Ans: B Difficulty: Medium
41. Matt Company uses activity-based costing. The company has two products: A and B. The
annual production and sales of Product A is 8,000 units and of Product B is 6,000 units.
There are three activity cost pools, with estimated total cost and expected activity as
follows:
The cost per unit of Product A under activity-based costing is closest to which of the
following?
A) $ 2.40. B) $ 3.90. C) $ 6.60. D) $10.59.
Ans: C Difficulty: Hard
42. Bridget Company uses activity-based costing. The company has two products: A and B.
The annual production and sales of Product A is 2,000 units and of Product B is 3,000
units. There are three activity cost pools, with estimated total cost and expected activity
as follows:
The cost per unit of Product A under activity-based costing is closest to which of the
following?
A) $ 6.00. B) $ 8.63. C) $ 9.60. D) $13.80.
Ans: C Difficulty: Hard
Page 7
Use the following to answer questions 43-45:
Dideda 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
Selling and Administrative Expenses
Total
$360,000
$240,000
$600,000
Distribution of Resource
Consumption:
Manufacturing Overhead
Selling and Administrative
Expenses
Activity Cost Pools
Order Customer
Size
Support Other
Total
25%
65%
10% 100%
60%
20%
20% 100%
The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining
costs. You have been asked to complete the first-stage allocation of costs to the activity cost
pools.
43. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A) $150,000. B) $234,000. C) $255,000. D) $360,000.
Ans: B Difficulty: Easy
44. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A) $120,000. B) $255,000. C) $282,000. D) $390,000.
Ans: C Difficulty: Easy
45. 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) $
0. B) $ 60,000. C) $ 84,000. D) $120,000.
Ans: C Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 46-48:
Diehl 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
Selling and Administrative Expenses
Total
$480,000
$100,000
$580,000
Distribution of Resource Consumption:
Activity Cost Pools
Order Customer
Size Support
Other
Total
5%
85%
10% 100%
60%
20%
20% 100%
Manufacturing Overhead
Selling and Administrative Expenses
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.
46. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A) $ 29,000. B) $ 84,000. C) $188,000. D) $348,000.
Ans: B Difficulty: Easy
47. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A) $116,000. B) $304,500. C) $428,000. D) $493,000.
Ans: C Difficulty: Easy
48. 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) $
0. B) $ 58,000. C) $ 68,000. D) $116,000.
Ans: C Difficulty: Medium
Page 9
Use the following to answer questions 49-51:
Dierich 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
Selling and Administrative Expenses
Total
$600,000
$220,000
$820,000
Distribution of Resource Consumption:
Manufacturing Overhead
Selling and Administrative Expenses
Activity Cost Pools
Order Customer
Size
Support
Other
Total
15%
75%
10% 100%
60%
20%
20% 100%
The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining
costs. You have been asked to complete the first-stage allocation of costs to the activity cost
pools.
49. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A) $123,000. B) $222,000. C) $307,500. D) $492,000.
Ans: B Difficulty: Easy
50. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A) $164,000. B) $389,500. C) $494,000. D) $615,000.
Ans: C Difficulty: Easy
51. 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) $
0. B) $ 82,000. C) $104,000. D) $164,000.
Ans: C Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 52-54:
Davis Company uses an activity-based costing system 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:
Manufacturing Overhead
Selling and Administrative Expenses
Total
$400,000
$200,000
$600,000
Distribution of Resource
Consumption:
Manufacturing Overhead
Selling and Administrative Expenses
Activity Cost Pools
Order Customer
Size
Support
Other
Total
35%
55%
10% 100%
50%
30%
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 the costs to the activity cost
pools.
52. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A) $210,000. B) $240,000. C) $255,000. D) $300,000.
Ans: B Difficulty: Easy
53. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A) $180,000. B) $255,000. C) $280,000. D) $330,000.
Ans: C Difficulty: Easy
54. 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) $
0. B) $ 60,000. C) $ 80,000. D) $120,000.
Ans: C Difficulty: Medium
Page 11
Use the following to answer questions 55-57:
Escau 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
Other Expenses
Total
$380,000
$100,000
$480,000
Distribution of Resource Consumption:
Activity Cost Pools
Filling Customer
Orders
Support
Other
Total
30%
60%
10% 100%
35%
45%
20% 100%
Wages and Salaries
Other Expenses
The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining
costs. The activity measures for the activity cost pools for the year are as follows:
Activity Cost Pool
Filling Orders
Customer Support
Activity
3,000 orders
20 customers
55. What would be the total overhead cost per order according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall
activity rate for the Filling Orders activity cost pool?
A) $48.00. B) $49.67. C) $52.00. D) $56.00.
Ans: B Difficulty: Medium
56. What would be the total overhead cost per customer according to the activity-based
costing system, rounded to the nearest whole dollar? In other words, what would be the
overall activity rate for the Customer Support activity cost pool?
A) $10,800. B) $12,600. C) $13,650. D) $14,400.
Ans: C Difficulty: Medium
57. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who placed eight orders in a year?
A) $ 7,392. B) $ 9,548. C) $11,704. D) $14,784.
Ans: C Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 58-60:
Escalona 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
Other Expenses
Total
$580,000
$200,000
$780,000
Distribution of Resource Consumption:
Activity Cost Pools
Filling Customer
Orders
Support
Other
Total
40%
50%
10% 100%
35%
45%
20% 100%
Wages and Salaries
Other Expenses
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
Filling Orders
Customer Support
Activity
1,000 orders
30 customers
58. What would be the total overhead cost per order according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall
activity rate for the Filling Orders activity cost pool?
A) $273.00. B) $292.50. C) $302.00. D) $312.00
Ans: C Difficulty: Medium
59. What would be the total overhead cost per customer according to the activity-based
costing system, rounded to the nearest whole dollar? In other words, what would be the
overall activity rate for the Customer Support activity cost pool?
A) $11,700. B) $12,350. C) $12,667. D) $13,000.
Ans: C Difficulty: Medium
60. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who placed four orders in a year?
A) $ 7,124. B) $ 8,859. C) $10,595. D) $14,248.
Ans: C Difficulty: Hard
Page 13
Use the following to answer questions 61-63:
Escoto 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
Other Expenses
Total
$540,000
$200,000
$740,000
Distribution of Resource Consumption:
Activity Cost Pools
Filling Customer
Orders
Support
10%
80%
20%
60%
Wages and Salaries
Other Expenses
Other
Total
10% 100%
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
Filling Orders
Customer Support
Activity
4,000 orders
40 customers
61. What would be the total overhead cost per order according to the activity-based costing
system, rounded to the nearest whole cent? In other words, what would be the overall
activity rate for the Filling Orders activity cost pool?
A) $18.50. B) $23.50. C) $27.75. D) $37.00.
Ans: B Difficulty: Medium
62. What would be the total overhead cost per customer according to the activity-based
costing system, rounded to the nearest whole dollar? In other words, what would be the
overall activity rate for the Customer Support activity cost pool?
A) $11,100. B) $12,950. C) $13,800. D) $14,800.
Ans: C Difficulty: Medium
63. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who placed eight orders in a year?
A) $ 7,474. B) $ 9,191. C) $10,908. D) $14,948.
Ans: C Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 64-67:
Acton Company has two products: A and B. The annual production and sales of Product A is
800 units and of Product B is 500 units. The company has traditionally used direct labour hours
as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct
labour hours per unit, and Product B requires 0.2 direct labour hours per unit. The total estimated
overhead for next period is $92,023.
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 cfost pools—Activity 1, Activity 2, and General Factory—with
estimated overhead costs and expected activity as follows:
Activity
Cost Pool
Activity 1
Activity 2
General
Factory
Total
Estimated
Overhead
Costs
$14,487
$64,800
$12,736
Expected Activity
Product A
Product B
500
600 1,100
2,500
500 3,000
240
100 340
Total
$92,023
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour
hours.)
64. The predetermined overhead rate under the traditional costing system is closest to which
of the following?
A) $ 13.17. B) $ 21.60. C) $ 37.46. D) $270.66.
Ans: D Difficulty: Medium
65. The overhead cost per unit of Product B under the traditional costing system is closest to
which of the following?
A) $ 2.63. B) $ 4.32. C) $ 7.49. D) $54.13.
Ans: D Difficulty: Medium
66. The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activitybased costing system is closest to which of the following?
A) $13.17. B) $24.15. C) $28.97. D) $83.66.
Ans: A Difficulty: Medium
67. The overhead cost per unit of Product A under the activity-based costing system is closest
to which of the following?
A) $11.24. B) $70.79. C) $81.20. D) $86.97.
Ans: D Difficulty: Hard
Page 15
Use the following to answer questions 68-71:
Addy Company has two products: A and B. The annual production and sales of Product A is
1,700 units and of Product B is 1,100 units. The company has traditionally used direct labour
hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3
direct labour hours per unit, and Product B requires 0.6 direct labour hours per unit. The total
estimated overhead for next period is $98,785.
The company is considering switching to an activity-based costing system for the purpose of
computing unit product costs for external reports. The new activity-based costing system would
have three factory overhead activity cost pools—Activity 1, Activity 2, and General Factory—
with estimated overhead costs and expected activity as follows:
Activity
Cost Pool
Activity 1
Activity 2
General Factory
Total
Estimated
Overhead
Costs
$30,528
$17,385
$50,872
$98,785
Expected Activity
Product A
Product B
Total
1,000
600 1,600
1,700
200 1,900
510
660 1,170
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour
hours.)
68. (Appendix 5B) The predetermined overhead rate under the traditional costing system is
closest to which of the following?
A) $ 9.15. B) $19.08. C) $43.48. D) $84.43.
Ans: D Difficulty: Medium
69. (Appendix 5B) The overhead cost per unit of Product B under the traditional costing
system is closest to which of the following?
A) $ 5.49. B) $11.45. C) $26.09. D) $50.66.
Ans: D Difficulty: Medium
70. (Appendix 5B) The predetermined overhead rate (i.e., activity rate) for Activity 2 under
the activity-based costing system is closest to which of the following?
A) $ 9.15. B) $10.23. C) $51.99. D) $86.93.
Ans: A Difficulty: Medium
71. (Appendix 5B) The overhead cost per unit of Product B under the activity-based costing
system is closest to which of the following?
A) $26.09. B) $35.28. C) $38.16. D) $50.66.
Ans: C Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 72-73:
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:
Activity
Cost Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$16,660
$18,450
$ 9,731
Expected Activity
Product A
Product B
600
100 700
1,100
700 1,800
60
160
Total
220
72. The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activitybased costing system is closest to which of the following?
A) $10.25. B) $16.77. C) $24.91. D) $26.36.
Ans: A Difficulty: Medium
73. The cost per unit of Product B is closest to which of the following?
A) $17.69. B) $41.58. C) $74.73. D) $81.53.
Ans: B Difficulty: Hard
Use the following to answer questions 74-75:
Accola Company uses activity-based costing. The company has two products: A and B. The
annual production and sales of Product A is 1,100 units and of Product B is 700 units. There are
three activity cost pools, with estimated costs and expected activity as follows:
Activity
Cost Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$18,270
$35,891
$48,796
Expected Activity
Product A
Product B
600
500 1,100
1,600
300 1,900
440
420 860
74. The activity rate for Activity 3 is closest to which of the following?
A) $ 26.67. B) $ 56.74. C) $116.18. D) $119.72.
Ans: B Difficulty: Medium
75. The cost per unit of Product A is closest to which of the following?
A) $22.70. B) $47.89. C) $57.20. D) $59.23.
Ans: D Difficulty: Hard
Page 17
Total
Use the following to answer questions 76-77:
Arthur Company has two products: S and D. The company uses activity-based costing and has
prepared the following analysis, showing the estimated total cost and expected activity for each
of its three activity cost pools:
Activity
Cost Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$20,000
$14,600
$90,000
Expected Activity
Product S
Product D
100
400 500
500
250 750
300
2,700 3,000
Total
The annual production and sales of Product S is 4,547 units. The annual production and sales of
Product D is 7,913.
76. The activity rate under the activity-based costing system for Activity 3 is closest to which
of the following?
A) $29.32. B) $30.00. C) $33.33. D) $41.53.
Ans: B Difficulty: Medium
77. The cost per unit of Product S under activity-based costing is closest to which of the
following?
A) $ 1.83. B) $ 1.98. C) $ 5.00. D) $10.00.
Ans: C Difficulty: Hard
Use the following to answer questions 78-79:
Monson Company has two products: G and P. The company uses activity-based costing and has
prepared the following analysis, showing the estimated total cost and expected activity for each
of its three activity cost pools:
Activity
Cost Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
$30,000
$24,000
$80,000
Expected Activity
Product G
Product P
200
400 600
600
900 1,500
400
3,600 4,000
Total
The annual production and sales of Product G is 10,640 units. The annual production and sales of
Product P is 26,600.
78. The activity rate under the activity-based costing system for Activity 2 is closest to which
of the following?
A) $16.00. B) $21.97. C) $26.67. D) $89.33.
Ans: A Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
79. The cost per unit of Product P under activity-based costing is closest to which of the
following?
A) $ 4.00. B) $ 6.88. C) $10.00. D) $30.16.
Ans: A Difficulty: Hard
Use the following to answer questions 80-81:
Forse 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 activitybased costing system:
Overhead Costs:
Wages and Salaries
Other Expenses
Total
$80,000
$40,000
$120,000
Distribution of Resource Consumption:
Activity Cost Pools
Making
Bouquets
Delivery
60%
30%
45%
25%
Wages and Salaries
Other Expenses
Other
Total
10% 100%
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
Making Bouquets
Delivery
Activity
60,000 bouquets
5,000 deliveries
80. What would be the total overhead cost per bouquet according to the activity-based
costing system, rounded to the nearest whole cent? In other words, what would be the
overall activity rate for the Making Bouquets activity cost pool?
A) $0.90. B) $1.05. C) $1.10. D) $1.20.
Ans: C Difficulty: Medium
81. What would be the total overhead cost per delivery according to the activity-based
costing system, rounded to the nearest whole cent? In other words, what would be the
overall activity rate for the Deliveries activity cost pool?
A) $6.00 B) $6.60 C) $6.80 D) $7.20
Ans: C Difficulty: Medium
Page 19
Use the following to answer questions 82-83:
Foster Florist specializes in large floral bouquets for hotels and other commercial spaces. The
company has provided the following data concerning its annual overhead costs and its activitybased costing system:
Overhead Costs:
Wages and Salaries
Other Expenses
Total
$70,000
$50,000
$120,000
Distribution of Resource Consumption:
Activity Cost Pools
Making
Bouquets
Delivery
70%
20%
45%
25%
Wages and Salaries
Other Expenses
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
Making Bouquets
Delivery
Activity
40,000 bouquets
1,000 deliveries
82. What would be the total overhead cost per bouquet according to the activity-based
costing system, rounded to the nearest whole cent? In other words, what would be the
overall activity rate for the Making Bouquets activity cost pool?
A) $1.35. B) $1.73. C) $1.79. D) $2.10.
Ans: C Difficulty: Medium
83. What would be the total overhead cost per delivery according to the activity-based
costing system, rounded to the nearest whole cent? In other words, what would be the
overall activity rate for the Deliveries activity cost pool?
A) $24.00. B) $26.50. C) $27.00. D) $30.00.
Ans: B Difficulty: Medium
Other
10% 100%
30% 100%
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 84-85:
Foss 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 activitybased costing system:
Overhead Costs:
Wages and Salaries
Other Expenses
Total
$70,000
$40,000
$110,000
Distribution of Resource Consumption:
Wages and Salaries
Other Expenses
Activity Cost Pools
Making
Bouquets
Delivery
55%
35%
45%
25%
Other
Total
10% 100%
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
Making Bouquets
Delivery
Activity
20,000 bouquets
7,000 deliveries
84. What would be the total overhead cost per bouquet according to the activity-based
costing system, rounded to the nearest whole cent? In other words, what would be the
overall activity rate for the Making Bouquets activity cost pool?
A) $2.48. B) $2.75. C) $2.83. D) $3.03.
Ans: C Difficulty: Medium
85. What would be the total overhead cost per delivery according to the activity-based
costing system, rounded to the nearest whole cent? In other words, what would be the
overall activity rate for the Deliveries activity cost pool?
A) $3.93. B) $4.71. C) $4.93. D) $5.50.
Ans: C Difficulty: Medium
Page 21
Use the following to answer questions 86-88:
Grogam 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:
Wages
Supplies
Other Expenses
Activity Cost Pools
Preparing
Arranging
Meals Functions
$1.15 $110.00
$0.35 $380.00
$0.25 $ 70.00
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 100 meals were served. The company catered the function for a fixed price of $21.00 per
meal. The cost of the raw ingredients for the meals was $8.25 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.
86. According to the activity-based costing system, what was the total cost (including the
costs of raw ingredients) of the function mentioned above, rounded to the nearest whole
dollar?
A) $ 910. B) $1,060. C) $1,560. D) $1,760.
Ans: C Difficulty: Medium
87. (Appendix 5A) In an action analysis report prepared for the function mentioned above,
what would be the "red margin" in the report, rounded to the nearest whole dollar?
A) $390. B) $440. C) $540. D) $690.
Ans: C Difficulty: Hard
88. (Appendix 5A) In an action analysis report prepared for the function mentioned above,
what would be the "yellow margin" in the report, rounded to the nearest whole dollar?
A) $635. B) $710. C) $760. D) $815.
Ans: A Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 89-91:
Groce 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:
Wages
Supplies
Other Expenses
Activity Cost Pools
Preparing
Arranging
Meals Functions
$0.70 $145.00
$0.45 $230.00
$0.40 $100.00
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 $14.00 per
meal. The cost of the raw ingredients for the meals was $8.75 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.
89. According to the activity-based costing system, what was the total cost (including the
costs of raw ingredients) of the function mentioned above, rounded to the nearest whole
dollar?
A) $1,370. B) $1,520. C) $2,020. D) $2,220.
Ans: C Difficulty: Medium
90. (Appendix 5A) In an action analysis report prepared for the function mentioned above,
what would be the "red margin" in the report, rounded to the nearest whole dollar?
A) ($70). B) ($20). C) $ 80. D) $230.
Ans: C Difficulty: Hard
91. (Appendix 5A) In an action analysis report prepared for the function mentioned above,
what would be the "yellow margin" in the report, rounded to the nearest whole dollar?
A) $240. B) $315. C) $365. D) $420.
Ans: A Difficulty: Hard
Page 23
Use the following to answer questions 92-94:
Grodt 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:
Wages
Supplies
Other Expenses
Activity Cost Pools
Preparing
Arranging
Meals Functions
$0.85 $110.00
$0.50 $310.00
$0.30 $120.00
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 60 meals were served. The company catered the function for a fixed price of $19.00 per
meal. The cost of the raw ingredients for the meals was $8.60 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.
92. According to the activity-based costing system, what was the total cost (including the
costs of raw ingredients) of the function mentioned above, rounded to the nearest whole
dollar?
A) $ 505. B) $ 655. C) $1,155. D) $1,355.
Ans: C Difficulty: Medium
93. (Appendix 5A) In an action analysis report prepared for the function mentioned above,
what would be the "red margin" in the report, rounded to the nearest whole dollar?
A) ($165). B) ($115). C) ($15). D) $135.
Ans: C Difficulty: Hard
94. (Appendix 5A) In an action analysis report prepared for the function mentioned above,
what would be the "yellow margin" in the report, rounded to the nearest whole dollar?
A) $123. B) $198. C) $248. D) $303.
Ans: A Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
95. Which of the following types of costs present the greatest difficulty in efforts to trace
them to products and services?
A) Unit-level costs
C) Product / service-level costs
B) Batch-level costs
D) Organization-sustaining costs
Ans: D Difficulty: Hard
96. Which of the following is a distinctive feature of an ABC system in comparison to a
departmental overhead application system?
A) It is a two-stage allocation system.
B) It uses transactional drivers.
C) It must include at least one non unit-level driver.
D) It uses duration drivers.
Ans: C Difficulty: Hard
97. Which of the following is the fundamental and primary driver of costs in the ABC
model?
A) Cost objects.
C) Consumption of resources.
B) Activities.
D) Process improvements.
Ans: A Difficulty: Medium
98. Which of the following is NOT a technique directly or indirectly useful in process
improvements?
A) The lean thinking model.
C) Activity-based costing.
B) Process costing.
D) Activity-based management.
Ans: B Difficulty: Medium
Page 25
Use the following to answer questions 99-102:
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 labour-hours
as the basis for applying all manufacturing overhead to products. Product A requires 0.2 direct
labour hours per unit and Product B requires 0.6 direct labour 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 factory overhead activity cost pools–Activity 1, Activity 2, and General Factory–with
estimated overhead costs and expected activity as follows:
Expected Activity
Activity Cost Pool
Activity 1
Activity 2
General Factory
Total
Estimated
Overhead Costs
$20,272
29,380
21,634
$71,286
Product A
300
800
160
Product B
500
500
420
Total
800
1,300
580
(Note: The General Factory activity cost pool's are allocated on the basis of direct labour hours.)
99. (Appendix 5B) 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 Difficulty: Medium
100. (Appendix 5B) 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 Difficulty: Medium
101. (Appendix 5B) 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 Difficulty: Medium
102. (Appendix 5B) 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: A Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 103-104:
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
labour-hours (DLHs). The company has two products, P85G and C43S, about which it has
provided the following data:
P85G
$36.50
$20.80
0.80
35,000
Direct materials per unit
Direct labour per unit
Direct labour-hours per unit
Annual production
C43S
$63.10
$31.20
1.20
10,000
The company’s estimated total manufacturing overhead for the year is $2,264,000 and the
company’s estimated total direct labour-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:
Activities and Activity Measures
Supporting direct labour (DLHs)
Setting up machines (setups)
Parts administration (part types)
Total
DLHs
Setups
Part types
P85G
28,000
1,480
1,880
Estimated
Overhead Cost
$1,160,000
288,000
816,000
$2,264,000
Expected Activity
C43S
Total
12,000
40,000
920
2,400
840
2,720
103. (Appendix 5B) 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 Difficulty: Medium
104. (Appendix 5B) 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 Difficulty: Medium
Page 27
Use the following to answer questions 105-106:
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
labour-hours (DLHs). The company has two products, R58G and R09O, about which it has
provided the following data:
R58G
$15.90
$1.30
0.10
30,000
Direct materials per unit
Direct labour per unit
Direct labour-hours per unit
Annual production
R09O
$52.40
$27.30
2.10
10,000
The company’s estimated total manufacturing overhead for the year is $1,617,600 and the
company’s estimated total direct labour-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:
DLHs
Batches
Product variations
R58G
3,000
528
1,056
Expected Activity
R09O
Total
21,000
24,000
1,152
1,680
1,176
2,232
105. (Appendix 5B) 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 Difficulty: Medium
106. (Appendix 5B) 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 Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 107-108:
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
labour-hours (DLHs). The company has two products, U86Y and M91F, about which it has
provided the following data:
U86Y
$19.80
$18.20
0.70
40,000
Direct materials per unit
Direct labour per unit
Direct labour-hours per unit
Annual production
M91F
$45.80
$49.40
1.90
10,000
The company’s estimated total manufacturing overhead for the year is $2,541,760 and the
company’s estimated total direct labour-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:
Activities and Activity Measures
Direct labour (DLHs)
Setting up machines (setups)
Parts administration (part types)
Total
DLHs
Setups
Part types
U86Y
28,000
2,256
1,034
Estimated
Overhead Cost
$1,175,000
407,960
958,800
$2,541,760
Expected Activity
M91F
Total
19,000
47,000
658
2,914
2,162
3,196
107. (Appendix 5B) 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 Difficulty: Medium
108. (Appendix 5B) 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 Difficulty: Medium
Page 29
Use the following to answer questions 109-110:
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
labour-hours (DLHs). The company has two products, R21V and D00B, about which it has
provided the following data:
R21V
$19.60
$3.90
0.30
45,000
Direct materials per unit
Direct labour per unit
Direct labour-hours per unit
Annual production
D00B
$61.70
$19.50
1.50
15,000
The company’s estimated total manufacturing overhead for the year is $1,262,880 and the
company’s estimated total direct labour-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:
Activities and Activity Measures
Assembling products (DLHs)
Preparing batches (batches)
Product support (product variations)
Total
DLHs
Batches
Product variations
R21V
13,500
1,440
1,404
Estimated
Overhead Cost
$ 108,000
362,880
792,000
$1,262,880
Expected Activity
D00B
Total
22,500
36,000
1,152
2,592
576
1,980
109. (Appendix 5B) 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 Difficulty: Medium
110. (Appendix 5B) 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 Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
111. Ingersol 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
Office Expense
Total
$120,000
$120,000
$240,000
Distribution of Resource Consumption:
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:
Page 31
Activity Cost Pool
Making Drapes
Job Support
Annual Activity
2,000 metres
160 jobs
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Other
Not applicable
Page 33
Required:
a) Prepare the first-stage allocation of overhead costs to the activity cost pools by filling
in the table below:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Making
Page 35
Job
Drapes
Support
Other
Total
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Production Overhead
Office Expense
Page 37
Total
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
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:
Page 39
Making
Job
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Drapes Support
Page 41
Production Overhead
Office Expense
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Total
Page 43
c) (Appendix 5A) Prepare an action analysis report in good form of a job that involves
making 71 metres of drapes and has direct materials and direct labour cost of $2,510. The
sales revenue from this job is $4,400. For purposes of this action analysis report, direct
materials and direct labour 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
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Activity
2,000
metres jobs
160
b) Activity rates (costs divided by activity)
Production Overhead
Office Expense
Total
Difficulty: Hard
Page 45
$21.00
$337.50
$3.00 $487.50
$24.00 $825.00
112. Hasty 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 activitybased costing system:
Overhead Costs:
Production Overhead
Office Expense
Total
$190,000
$140,000
$330,000
Distribution of Resource Consumption:
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:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Activity Cost Pool
Installing Floors
Job Support
Annual Activity
200 squares
160 jobs
Page 47
Other
Not applicable
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
A "square" is a measure of area that is roughly equivalent to 1,000 square metres.
Required:
a) Prepare the first-stage allocation of overhead costs to the activity cost pools by filling
in the table below:
Page 49
Installing
Floors
Job
Support
Other
Total
Production Overhead
Office Expense
Total.
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
Floors Support
Job
Production Overhead
Office Expense
Total.
c) Compute the overhead cost, according to the activity-based costing system, of a job
that involves installing 3.4 squares.
Ans: a) First-stage allocation
Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
113. Goel 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:
Page 51
Overhead Costs:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Wages and Salaries
Non-wage Expenses
Total
$580,000
$460,000
$120,000
Distribution of Resource Consumption:
Wages and Salaries
Non-wage Expenses
Activity Cost Pools
Filling
Product
Orders
Support
15%
75%
10%
70%
Other
Total
10% 100%
20% 100%
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool
Filling Orders
Product Support
Other
Annual Activity
4,000 orders
30 products
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
Orders Support
Wages and Salaries
Non-wage Expenses
Total
Ans: First-stage allocation
Page 53
Product
Difficulty: Medium
114. Fife & Jones 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
Travel Expenses
Other Expenses
Total
$540,000
$100,000
$140,000
$780,000
Distribution of Resource Consumption:
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.
a) $379,000
b) $173,000
c) $228,000
Difficulty: Easy
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
115. Huish Awnings makes custom awnings 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:
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:
Page 55
Activity Cost Pool
Making Awnings
Job Support
Other
Annual Activity
5,000 metres
200 jobs
Not applicable
Required:
a) Prepare the first-stage allocation of overhead costs to the activity cost pools by filling
in the table below:
Making
Awnings
Job
Support
Other
Total
Production Overhead
Office Expense
Total
b) Compute the activity rates (i.e., cost per unit of activity) for the Making Awnings and
Job Support activity cost pools by filling in the table below:
Making
Awnings Support
Job
Production Overhead
Office Expense
Total
c) (Appendix 5A) Prepare an action analysis report in good form of a job that involves
making 80 yards of awnings and has direct materials and direct labour cost of $3,000.
The sales revenue from this job is $4,000. For purposes of this action analysis report,
direct materials and direct labour 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
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Difficulty: Hard
116. Phoenix Company makes custom covers for air conditioning units 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
Office Expense
Total
$100,000
$ 50,000
$150,000
Distribution of Resource Consumption:
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:
Page 57
Activity Cost Pool
Making Covers
Job Support
Other
Annual Activity
2,500 yards
200 jobs
Not applicable
Required:
a) Prepare the first-stage allocation of overhead costs to the activity cost pools by filling
in the table below:
Making
Covers
Job
Support
Other
Total
Production Overhead
Office Expense
Total
b) Compute the activity rates (i.e., cost per unit of activity) for the Making Covers and
Job Support activity cost pools by filling in the table below:
Making
Covers Support
Job
Production Overhead
Office Expense
Total
c) (Appendix 5A) Prepare an action analysis report in good form of a job that involves
making 50 yards of covers and has direct materials and direct labour cost of $1,500. The
sales revenue from this job is $2,500. For purposes of this action analysis report, direct
materials and direct labour 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
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Difficulty: Hard
Page 59
117. Jackson 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.
The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
The company has already finished the first stage of the allocation process in which costs
were allocated to the activity cost centres. The results are listed below:
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.
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Painting
Job
Support
Production Overhead
Office Expense
Total
b) (Appendix 5A) Prepare an action analysis report in good form of a job that involves
painting 63 square metres and has direct materials and direct labour cost of $2,070. The
sales revenue from this job is $2,500. For purposes of this action analysis report, direct
materials and direct labour should be classified as a Green cost, painting overhead as a
Red cost, and office expense as a Yellow cost.
Ans: a) Activity rates (costs divided by activity)
Difficulty: Medium
Page 61
118. Cabanos Company manufactures two products, Product C and Product D. The company
estimated it would incur $160,790 in manufacturing overhead costs during the current
period. Overhead currently is applied to the products on the basis of direct labour hours.
Data concerning the current period's operations appear below:
Estimated Volume
Direct Labour Hours per Unit
Direct Materials Cost per Unit
Direct Labour Cost per Unit
Product C
Product D
3,400 units 4,800 units
1.40 hour 1.90 hours
$ 7.40 $12.70
$14.00 $19.00
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 labour hours. The activity-based costing system would use three activity cost pools.
Data relating to these activities for the current period are given below:
Determine the unit product cost of each product for the current period using the
activity-based costing approach.
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Ans: a) The expected total direct labour hours during the period are computed as
follows:
Product C: 3,400 units x 1.4 hr.
Product D: 4,800 units x 1.9 hrs.
Total direct labour hours
4,760 hours
9,120 hours
13,880 hours
Using these hours as a base, the predetermined overhead using direct labour hours
would be:
Predetermined overhead rate = $160,790 / 13,880 DLHs = $11.58/DLH
Using this overhead rate, the unit product costs are:
Product C
Product D
$ 7.40 $12.70
$14.00 $19.00
$16.22 $22.01
$37.62 $53.71
Direct Materials
Direct Labour
Manufacturing Overhead
Total Unit Product Cost
b) The overhead rates for each activity centre are as follows:
Estimated
Overhead
Costs
$12,190
$79,200
$69,400
Machine Setups
Purchase Orders
General Factory
Expected
Overhead
Activity Rate
230 $53.00
1,650 $48.00
13,880 $ 5.00
The overhead cost charged to each product is:
Overhead cost per unit:
Product C: $63,080 / 3,400 units = $18.55 per unit.
Product D: $97,710 / 4,800 units = $20.36 per unit.
Using activity-based costing, the unit product cost of each product would be:
Page 63
Direct Materials
Direct Labour
Manufacturing Overhead
Total Unit Product Cost
Product C
Product D
$ 7.40 $12.70
$14.00 $19.00
$18.55 $20.36
$39.95 $52.06
Difficulty: Hard
119. Lionel Corporation manufactures two products, Product B and Product H. Product H is of
fairly recent origin, having been developed as an attempt to enter a market closely related
to that of Product B. Product H is the more complex of the two products, requiring two
hours of direct labour time per unit to manufacture, compared to one hour of direct labour
time for Product B. Product H is produced on an automated production line.
Overhead is currently assigned to the products on the basis of direct labour hours. The
company estimated it would incur $450,000 in manufacturing overhead costs and
produce 7,500 units of Product H and 30,000 units of Product B during the current year.
Unit costs for materials and direct labour are:
Direct
Materials
Direct Labour
Product B
$12 $25
Product H
$10 $20
Required:
a) Compute the predetermined overhead rate under the current method of allocation, and
determine the unit product cost of each product for the current year.
b) The company's overhead costs can be attributed to four major activities. These
activities and the amount of overhead cost attributable to each for the current year are
given below:
Using the data above and an activity-based costing approach, determine the unit
product cost of each product for the current year.
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Ans: a) The company expects to work 45,000 direct labour hours during the current year,
computed as follows:
Product B: 30,000 units x 1 hr.
Product H: 7,500 units x 2 hrs.
Total direct labour hours
45,000 hours
30,000 hours
15,000 hours
Using these hours as a base, the predetermined overhead using direct labour hours
would be:
Predetermined overhead rate = $450,000 / 45,000 DLHs = $10.00/DLH
Using this overhead rate, the unit product cost of each product would be:
Direct Materials
Direct Labour
Manufacturing Overhead:
Product B-one hour
Product H-two hours
Total
Product
Product
BH
$12 $25
$10 $20
$10
___
$32 $65
b) The overhead rates are computed as follows:
The overhead cost attributable to each product is:
Page 65
$20
Overhead cost per unit:
Product B: $189,236 / 30,000 units = $6.3079/unit.
Product H: $260,764 / 7,500 units = $34.7685/unit.
Using activity-based costing, the unit product cost of each product would be:
Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
120. Flyer Corporation manufactures two products, Product A and Product B. Product B is of
fairly recent origin, having been developed as an attempt to enter a market closely related
to that of Product A. Product B is the more complex of the two products, requiring three
hours of direct labour time per unit to manufacture, compared to one and one-half hours
of direct labour time for Product A. Product B is produced on an automated production
line.
Overhead is currently assigned to the products on the basis of direct labour hours. The
company estimated it would incur $396,000 in manufacturing overhead costs and
produce 5,500 units of Product B and 22,000 units of Product A during the current year.
Unit costs for materials and direct labour are:
Page 67
Direct Materials
Product A
$9 $20
Product B
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Direct Labour
$7 $15
Page 69
Required:
a) Compute the predetermined overhead rate under the current method of allocation, and
determine the unit product cost of each product for the current year.
b) The company's overhead costs can be attributed to four major activities. These
activities and the amount of overhead cost attributable to each for the current year are
given below:
Using the data above and an activity-based costing approach, determine the unit product
cost of each product for the current year.
Ans: a) The company expects to work 49,500 direct labour hours during the current year,
computed as follows:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Product A: 22,000 units x 1.5 hr.
33,000 hours
Product B: 5,500 units x 3.0 hrs.
16,500 hours
Total direct labour hours
49,500 hours
Using these hours as a base, the predetermined overhead using direct labour hours
would be:
Predetermined overhead rate = $396,000 / 49,500 DLHs = $8.00/DLH
Using this overhead rate, the unit product cost of each product would be:
b) The overhead rates are computed as follows:
The overhead cost attributable to each product is:
Overhead cost per unit:
Product A: $159,400 / 22,000 units = $7.2455/unit.
Product B: $236,600 / 5,500 units = $43.0182/unit.
Page 71
Using activity-based costing, the unit product cost of each product would be:
Direct Materials
Direct Labour
Manufacturing Overhead
Total Unit Product Cost
Difficulty: Hard
Product A
Product B
$ 9.0000 $20.0000
$ 7.0000 $15.0000
$ 7.2455 $43.0182
$23.2455 $78.0182
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
121. EMD Corporation manufactures two products, Product S and Product W. Product W is of
fairly recent origin, having been developed as an attempt to enter a market closely related
to that of Product S. Product W is the more complex of the two products, requiring one
hour of direct labour time per unit to manufacture, compared to a half-hour of direct
labour time for Product S. Product W is produced on an automated production line.
Overhead is currently assigned to the products on the basis of direct labour hours. The
company estimated it would incur $500,000 in manufacturing overhead costs and
produce 10,000 units of Product W and 60,000 units of Product S during the current year.
Unit cost for materials and direct labour are:
Page 73
Direct Materials
Product S
Product W
$10 $24
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Direct Labour
$ 8 $12
Page 75
Required:
a) Compute the predetermined overhead rate under the current method of allocation, and
determine the unit product cost of each product for the current year.
b) The company's overhead costs can be attributed to four major activities. These
activities and the amount of overhead cost attributable to each for the current year are
given below:
Using the data above and an activity-based costing approach, determine the unit product
cost of each product for the current year.
Ans: a) The company expects to work 40,000 direct labour hours during the current year,
computed as follows:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Product S: 60,000 units x 0.5 hr.
Product W: 10,000 units x 1.0 hrs.
Page 77
30,000 hours
10,000 hours
Total direct labour hours
40,000 hours
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Using these hours as a base, the predetermined overhead using direct labour hours
would be:
Predetermined overhead rate = $500,000 / 40,000 DLHs = $12.50/DLH
Using this overhead rate, the unit product cost of each product would be:
b) The overhead rates are computed as follows:
The overhead cost attributable to each product is:
Overhead cost per unit:
Product S: $205,825 / 60,000 units = $3.4304/unit.
Product W: $294,175 / 10,000 units = $29.4175/unit.
Using activity-based costing, the unit product cost of each product would be:
Page 79
Difficulty: Hard
122. Daba Company manufactures two products, Product F and Product G. During the current
year, the company expects to produce and sell 1,400 units of Product F and 1,800 units of
Product G. 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:
Required:
Using the activity-based costing approach, determine the overhead cost per unit for each
product.
Ans: The overhead rates for each activity centre are as follows:
The overhead cost charged to each product is:
Overhead cost per unit:
Product F: $59,930 / 1,400 units = $42.81 per unit.
Product G: $104,310 / 1,800 units = $57.95 per unit.
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Difficulty: Medium
123. Eaker Company uses activity-based costing to compute product costs for external reports.
The company has three activity cost pools and applies overhead using predetermined
overhead rates for each activity cost pool. Estimated costs and activities for the current
year are presented below for the three activity centres:
Activity
Centre
Batch Setups
Material Handling
General Factory
Estimated
Overhead
Expected
Costs Activity
$20,400 1,200
$52,800 2,400
$78,000 2,600
Actual costs and activities for the current year were as follows:
Activity
Centre
Batch Setups
Material Handling
General Factory
Actual
Overhead
Actual
Costs Activity
$20,740 1,230
$52,360 2,470
$77,590 2,680
Required:
a) How much total overhead was applied to products during the year?
b) By how much was overhead overapplied or underapplied? (Be sure to clearly label
your answer as to whether the overhead was overapplied or underapplied for each activity
centre as well as for the total.)
Ans: a) The overhead rates for each activity centre are as follows:
The amount of overhead applied to production is determined as follows:
b) The amount of underapplied (overapplied) for each centre and all activity
Page 81
centres is as follows:
Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
124. Kya, Inc. manufactures two models of high-pressure steam valves, the XR7 model and
the ZD5 model. Budgeted manufacturing overhead cost and operating data regarding
production and sales of 2,000 units of the XR7 model and 8,000 units of the ZD5 model
for 2005 follow:
Page 83
Activity Cost Pool
Machine setups
Vendor negotiation
Assembly
Budgeted
Overhead
Costs
$800,000
200,000
400,000
Cost Driver
Number of setups
Number of parts
Direct labour hours
XR7
150
800
4,000
Budgeted Level
for Cost Driver
ZD5
Total
100
250
200 1,000
36,000 40,000
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
$1,400,000
Page 85
Required:
a) Identify and briefly explain each of the three cost drivers as either unit-level or batchlevel or product-level or organization-sustaining level.
b) Calculate the budgeted manufacturing overhead cost for each unit of the two models,
using only one unit-level cost driver.
c) Calculate the budgeted manufacturing overhead cost for each unit of the two models,
using the activity-based-costing (ABC) method.
d) Assume Kya, Inc. will use only the unit-level driver. Compared to the ABC method,
by how much (in terms of total allocated / applied manufacturing overhead cost), if any,
will the total output of each model be either under-costed or over-costed?
e) Is the result obtained in part (d) above consistent with your expectations? Explain.
Ans: a) Number of setup is a batch-level activity in the sense that machine has to be
setup for each batch independent of the number units in a batch. Number of parts
is a product-level activity because the vendor negotiation costs increase with the
number of different vendors to be sourced. Direct labour is a traditional unit-level
activity that is performed on each unit of output.
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
b) Predetermined rate =
=
$1,400,000 / 40,000 DLHs
$35 / DLH
XR7 Model
Applied overhead @ $35 per DLH:
(4,000 x $35); (36,000 x $35)
Number of units
Cost per unit
c)
Rates:
setups ($800,000 / 250)
Vendor negotiations ($200,000 / 1,000)
Assembly ($400,000 / 40,000)
$140,000 $1,260,000
2,000 8,000
$70,000 $157.50
= $3,200 per machine setup
= $200 per part
= $10 per DLH
XR7 Model
Machine setup @ $3,200
Vendor negotiations @ $20
Assembly @ $10
Total
Units
Cost per unit
ZD5 Model
ZD5 Model
$320,000
$480,000 40,000
160,000 360,000
40,000 720,000
2,000 8,000
$430
$90
d)
XR7 Model ZD5 Model
$680,000 $ 720,000
$140,000 $1,260,000
$540,000
$ 540,000
ABC Allocations
Unit-level allocations
Amount of under-costing
Amount of over-costing
e) The result in part (d) above is consistent with expectations. In comparison with
ABC, use of only unit-level cost drivers such as direct labour hours generally tends
to over-cost the high volume product (in this case, ZD5 Model) while it under-costs
the low-volume product (in this case XR7 Model). This is the result obtained in
part (d) above.
Difficulty: Hard
Page 87
125. Activity-based-costing (ABC) charges products for the cost of capacity used, NOT for
idle capacity.
Required:
a) The use of which activity level, budgeted (same as expected) or maximum capacity, is
consistent with ABC? Explain.
b) How might the use of ABC based on maximum capacity activity level enhance a firm's
ability to compete on price? Explain.
Ans: a) Use of maximum capacity activity level is consistent with the ABC method. It
will ensure a reasonably stable (if not constant) activity rate regardless of the
expected level of activity. Since, by definition, expected level of activity cannot
exceed the maximum capacity, the resulting activity rate is also likely to be lower.
A lower activity rate when applied to a less-than-capacity expected or actual
activity level will ensure that cost of idle capacity is not charged to products.
b) Since the cost of idle capacity will not be charged to products, products are
unlikely to be overcosted. The fact that ABC generally achieves more accurate
product costs (because it uses multiple unit-level and non unit-level cost drivers)
also avoids undercosting or overcosting. Accurate product cost information is a
good starting point for competitive pricing. This is especially important in diverse
multiple product firms where product emphasis decisions are routinely made.
Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
126. (Appendix 5B) 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 labour-hours (DLHs). The company has two products, W82R and
L48S, about which it has provided the following data:
Page 89
Direct materials per unit
Direct labour per unit
Direct labour-hours per unit
W82R
$11.50
$2.00
0.20
L48S
$62.90
$13.00
1.30
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Annual production
45,000
Page 91
10,000
The company’s estimated total manufacturing overhead for the year is $1,521,960 and the
company’s estimated total direct labour-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:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Estimated Overhead
Cost
$ 352,000
201,960
968,000
Activities and Activity Measures
Supporting direct labour (DLHs)
Setting up machines (setups)
Parts administration (part types)
Page 93
Total
$1,521,960
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Page 95
Activities
Supporting direct labour
Setting up machines
Parts administration
W82R
9,000
814
924
L48S
13,000
374
1,012
Total
22,000
1,188
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 activitybased costing system.
Ans: a. Traditional Unit Product Costs
Predetermined overhead rate = $1,521,960 ÷ 22,000 DLHs = $69.18 per DLH
Direct materials
Direct labour
Manufacturing overhead (0.2 DLHs × $69.18 per DLH;
1.3 DLHs × $69.18 per DLH)
Unit product cost
W82R
$11.50
2.00
L48S
$ 62.90
13.00
13.84
$27.34
89.93
$165.83
b. ABC Unit Product Costs
Supporting direct labour
Setting up machines
Parts administration
Estimated
Overhead
Cost
$352,000
$210,960
$968,000
Total Expected
Activity
22,000 DLHs
1,188 setups
1,936 part types
Activity Rate
$16 per DLH
$170 per setup
$500 per part type
Overhead cost for W82R
Supporting direct labour
Setting up machines
Parts administration
Total
Activity Rate
$16 per DLH
$170 per setup
$500 per part type
Direct materials
Direct labour
Manufacturing overhead ($744,400 ÷ 45,000 units;
$777,600 ÷ 10,000 units)
Unit product cost
Difficulty: Medium
Activity
13,000 DLHs
374 setups
1,012 part types
ABC
Cost
$208,000
63,580
506,000
$777,580
W82R
$11.50
2.00
L48S
$ 62.90
13.00
16.54
$30.04
77.76
$153.66
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
127. (Appendix 8B) 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 labour-hours (DLHs). The company has two products, B40W and
C63J, about which it has provided the following data:
Page 97
Direct materials per unit
Direct labour per unit
Direct labour-hours per unit
B40W C63J
$34.90 $63.70
$20.80 $62.40
0.80 2.40
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Annual production
35,000 15,000
Page 99
The company's estimated total manufacturing overhead for the year is $2,656,000 and the
company's estimated total direct labour-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:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Activities and Activity Measures
Assembling products (DLHs)
Preparing batches (batches)
Milling (MHs)
Estimated Overhead Cost
$1,216,000
480,000
960,000
Page 101
Total
$2,656,000
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Page 103
Activities
Assembling products
Preparing batches
B40W C63J
Total
28,000 36,000 64,000
2,304 2,496 4,800
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Milling
1,088
2,112 3,200
Page 105
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 activitybased costing system.
Ans: a. Traditional Unit Product Costs
Predetermined overhead rate = $2,656,000 ÷ 64,000 DLHs = $41.50 per DLH
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Direct materials
Direct labour
Manufacturing overhead (0.8 DLHs × $41.50 per DLH;
2.4 DLHs × $41.50 per DLH)
Unit product cost
B40W
C63J
$34.90 $ 63.70
20.80 62.40
33.20 99.60
$88.90 $225.70
b. ABC Unit Product Costs
Assembling products
Preparing batches
Milling
Estimated
Overhead
Cost
$1,216,000
$480,000
$960,000
Total Expected
Activity
Activity Rate
64,000 DLHs
4,800 batches
3,200 MHs
$19 per DLH
$100 per setup
$300 per MH
Overhead cost for B40W
Activity Rate
Assembling products
Preparing batches
Milling
Total
Activity
$19 per DLH
$100 per setup
$300 per MH
ABC Cost
28,000 DLHs
2,304 batches
1,088 MHs
Overhead cost for C63J
Activity Rate
Assembling products
Preparing batches
Milling
Total
Activity
$19 per DLH
$100 per setup
$300 per MH
ABC Cost
36,000 DLHs
2,496 batches
2,112 MHs
Direct materials
Direct labour
Manufacturing overhead ($1,088,800 ÷ 35,000 units;
$1,567,200 ÷ 15,000 units)
Unit product cost
Difficulty: Medium
Page 107
$ 532,000
230,400
326,400
$1,088,800
$ 684,000
249,600
633,600
$1,567,200
B40W
C63J
$34.90 $ 63.70
20.80 62.40
31.11 104.48
$86.81 $230.58
128. (Appendix 8B) 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 labour-hours (DLHs). The company has two products, H16Z and
P25P, about which it has provided the following data:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Direct materials per unit
Direct labour per unit
Direct labour-hours per unit
H16Z P25P
$10.20 $50.50
$8.40 $25.20
0.40 1.20
Page 109
Annual production
30,000 10,000
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
The company's estimated total manufacturing overhead for the year is $1,464,480 and the
company's estimated total direct labour-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:
Page 111
Activities and Activity Measures
Supporting direct labour (DLHs)
Setting up machines (setups)
Parts administration (part types)
Estimated Overhead Cost
$ 552,000
132,480
780,000
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Total
$1,464,480
Page 113
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Supporting direct labour
Setting up machines
H16Z P25P
Total
12,000 12,000 24,000
864
240 1,104
Page 115
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.
Ans: a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,464,480 ÷ 24,000 DLHs = $61.02 per DLH
Direct labour-hours
Predetermined overhead rate per DLH
Manufacturing overhead cost per unit
b. ABC Manufacturing Overhead Costs
Estimated
Overhead
Cost
Supporting direct labour
$552,000
Setting up machines
$132,480
Parts administration
$780,000
H16Z P25P
0.40 1.20
$61.02 $61.02
$24.41 $73.22
Total Expected
Activity
Activity Rate
24,000 DLHs
1,104 setups
1,560 part types
$23 per DLH
$120 per setup
$500 per part type
Overhead cost for H16Z
Supporting direct labour
Setting up machines
Parts administration
Total
Annual production
Manufacturing overhead
cost per unit
Activity Rate
$23 per DLH
$120 per setup
$500 per part type
Activity
ABC Cost
12,000 DLHs
$276,000
864 setups
103,680
600 part types
300,000
$679,680
30,000
$22.66
Activity Rate
$23 per DLH
$120 per setup
$500 per part type
Activity
ABC Cost
12,000 DLHs
$276,000
240 setups
28,800
960 part types
480,000
$784,800
10,000
$78.48
Overhead cost for P25P
Supporting direct labour
Setting up machines
Parts administration
Total
Annual production
Manufacturing overhead
cost per unit
Difficulty: Medium
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
129. (Appendix 8B) 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 labour-hours (DLHs). The company has two products, D31X and
U75X, about which it has provided the following data:
Page 117
Direct materials per unit
Direct labour per unit
Direct labour-hours per unit
D31X U75X
$29.20 $47.40
$1.10 $23.10
0.10 2.10
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Annual production
35,000 15,000
Page 119
The company's estimated total manufacturing overhead for the year is $1,147,650 and the
company's estimated total direct labour-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:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Activities and Activity Measures
Assembling products (DLHs)
Preparing batches (batches)
Axial milling (MHs)
Estimated Overhead Cost
$ 140,000
241,150
766,500
Page 121
Total
$1,147,650
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Page 123
Assembling products
Preparing batches
D31X U75X Total
3,500 31,500 35,000
560 1,295 1,855
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
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.
Ans: a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH
Direct labour-hours
Predetermined overhead rate per DLH
Manufacturing overhead cost per unit
D31X U75X
0.10 2.10
$32.79 $32.79
$3.28 $68.86
b. ABC Manufacturing Overhead Costs
Estimated
Total Expected
Overhead
Activity
Cost
Assembling products
$140,000 35,000 DLHs
Preparing batches
$241,150
1,855 batches
Axial milling
$766,500
2,555 MHs
Activity Rate
$4 per DLH
$130 per batch
$300 per MH
Overhead cost for D31X
Assembling products
Preparing batches
Axial milling
Total
Annual production
Manufacturing overhead
cost per unit
Activity Rate
$4 per DLH
$130 per batch
$300 per MH
Activity
ABC Cost
3,500 DLHs
$ 14,000
560 batches
72,800
1,540 MHs
462,000
$548,800
35,000
$15.68
Activity Rate
$4 per DLH
$130 per batch
$300 per MH
Activity
ABC Cost
31,500 DLHs
$126,000
1,295 batches
168,350
1,015 MHs
304,500
$598,850
15,000
$39.92
Overhead cost for U75X
Assembling products
Preparing batches
Axial milling
Total
Annual production
Manufacturing overhead
cost per unit
Difficulty: Medium
Page 125
130. Mike Kyekyeku is a sole proprietorship that provides consulting and tax preparation
services to its clients. Mike charges a fee of $100 per hour for each service and can
devote a maximum of 4,000 hours annually to his clients. He reported the following
revenues and expenses for 2008:
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Revenue
$ 400,000
Page 127
Expenses (All overhead costs):
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Secretarial support
$ 84,000
Page 129
Supplies
72,000
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Computer costs, etc.
48,000
Page 131
204,000
Net income (loss)
$196,000
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Being an accountant, Mike kept good records of the following data for 2008:
(i) Revenue:
Page 133
Tax Preparation
Consulting
$130,000
270,000
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Total
$400,000
Page 135
(ii) ACTIVITY LEVEL
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Overhead Cost
Secretarial support
Supplies
Computer costs, etc.
Cost Driver
Number of clients
Transactions with clients
Computer hours
Tax
72
200
1,000
Consulting
48
300 500
600 1,600
Total
120
Required:
a. Should Mike emphasize one service more than the other if Mike were to allocate all the
overhead costs using direct-labours as the only overhead cost driver (1,300 for Tax and
2,700 for Consulting)? Support your decision with the relevant calculations and/or
analysis.
b. Identify each of the three cost drivers as either unit-level, batch-level, product-level,
customer-level, or organization-sustaining.
c. How might Mike's product/service emphasis decision in Part a above be altered if he
were to allocate all the overhead costs using activity-based costing and the three cost
drivers, that is, number of clients, number of transactions with clients, and computer
hours? Show all your supporting calculations and/or analysis, including any necessary
explanation.
Ans: a.
Decision: No
Analysis and/or calculations:
Preliminary analysis:
The overhead allocation rate = $51 per DLH, i.e. $204,000 / (1,300 + 2,700)
Tax
Consulting
Revenue
$130,000
$270,000
Expenses:
Allocations at $51 per DLH
($51 x 1,300; $51 x 2,700)*
66,300
137,700
Profit
$63,700 $132,300
Number of DLHs
1,300
2,700
Profit per DLH:
($63,700 / 1,300; $132,300 / 2,700)
$
49** $ 49**
The two services generate the same profit for each hour of Mike's scarce time.
Note: Since the $100 billing rate per DLH is the same, the decision can be based
only on allocated cost per DLH ($51) which is the same for both services
* Alternatively, allocate in proportion to Tax and Consulting at 32.5% and 67.5%,
respectively.
** Same as the $100 billing rate less the $51 allocation rate.
b.
Number of clients: Customer-level
Number of transactions with clients: Unit-level
Computer hours: Unit-level
c.
Page 137
Preliminary analysis (ABC)
Revenue
Expenses:
Allocations
Secretarial support (60%, 40%)*
Supplies (40%, 60%)**
Computer costs, etc. (62.5%, 37.5%)***
Profit
Profit per DLH ($20,800 / 1,300; $175,200/2,700)
Tax Consulting
$130,000 $270,000
50,400
33,600
28,800 43,200
30,000 18,000
$109,200 $ 94,800
$ 20,800 $175,200
$
16.00 $
64.89
Decision:
Consulting should receive greater emphasis since every hour of Mike's scarce time
generates a profit of $64.89 compared to $16.00 for Tax. (Note: The decision can
be based only on the total allocated cost per DLH (that is, $109,200 / 1,300 =
$84.00 for Tax; $94,800 / 2,700 = $35.11 for Consulting) since the billing rate per
DLH of $100 is the same for both services. Alternatively, base decision on total
allocated cost for each service together with an explanation that consulting has less
allocated cost and also fewer number of direct labour hours.
* same as using activity rate of $700 per client (i.e., $84,000 / 120)
** same as using activity rate of $144 per transactions (i.e., $72,000 / 500)
*** same as using activity rate of $30 per computer hour (i.e., $48,000 / 1,600)
Difficulty: Hard
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
131. 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
Depreciation
Utilities
Total
$312,000
163,000
239,000
$714,000
Distribution of resource consumption:
Wages and salaries
Depreciation
Utilities
Assembly
46%
9%
11%
Activity Cost Pools
Setting Up
Other
38%
16%
50%
41%
48%
41%
Total
100%
100%
100%
How much cost, in total, would be allocated in the first-stage allocation to the Setting Up
activity cost pool?
A) $332,780 B) $314,780 C) $352,780 D) $306,780
Ans: B
132. 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
Depreciation
Utilities
Total
$305,000
177,000
242,000
$724,000
Distribution of resource consumption:
Wages and salaries
Depreciation
Utilities
Assembly
33%
4%
13%
Activity Cost Pools
Setting Up
Other
39%
28%
57%
39%
59%
28%
Total
100%
100%
100%
How much cost, in total, would be allocated in the first-stage allocation to the Other
activity cost pool?
A) $237,190 B) $222,190 C) $257,190 D) $204,190
Ans: B
Page 139
133. 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
Depreciation
Occupancy
Total
$417,000
243,000
216,000
$876,000
The distribution of resource consumption across the three activity cost pools is given
below:
Wages and salaries
Depreciation
Occupancy
Activity Cost Pools
Order
Fabricating Processing
Other
10%
67%
23%
10%
43%
47%
25%
33%
42%
Total
100%
100%
100%
How much cost, in total, would be allocated in the first-stage allocation to the Fabricating
activity cost pool?
A) $131,000 B) $136,000 C) $116,000 D) $120,000
Ans: D
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
134. 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
Depreciation
Occupancy
Total
$358,000
209,000
95,000
$662,000
The distribution of resource consumption across the three activity cost pools is given
below:
Activity Cost Pools
Order
Other
Total
Processing
10%
57%
33%
100%
18%
35%
47% 100%
23%
50%
27% 100%
Fabricating
Wages and salaries
Depreciation
Occupancy
How much cost, in total, would be allocated in the first-stage allocation to the Order
Processing activity cost pool?
A) $324,710 B) $345,710 C) $360,710 D) $309,710
Ans: A
Page 141
135. 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
Depreciation
Occupancy
Total
$358,000
97,000
124,000
$579,000
The distribution of resource consumption across the three activity cost pools is given
below:
Activity Cost Pools
Order
Other
Total
Processing
43%
40%
17%
100%
10%
41%
49% 100%
4%
53%
43% 100%
Fabricating
Wages and salaries
Depreciation
Occupancy
How much cost, in total, would be allocated in the first-stage allocation to the Other
activity cost pool?
A) $161,710 B) $172,710 C) $184,710 D) $155,710
Ans: A
136. Millner Corporation has provided the following data from its activity-based costing
accounting system:
Activity Cost Pools
Designing products
Setting up batches
Assembling products
Total Cost
$1,390,00
0
$33,300
$128,200
Total Activity
7,750 product design hours
790 batch set-ups
assembly hours
6,980
The activity rate for the “designing products” activity cost pool is closest to:
A) $233 per product design hour
C) $179 per product design hour
B) $281 per product design hour
D) $148 per product design hour
Ans: C
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
137. Data concerning three of the activity cost pools of Salcido LLC, a legal firm, have been
provided below:
Activity Cost Pools
Researching legal issues
Meeting with clients
Preparing documents
Total Cost
Total Activity
$19,850
640 research hours
$1,182,00
0 7,030 meeting hours
documents
$86,900 5,690
The activity rate for the “meeting with clients” activity cost pool is closest to:
A) $175 per meeting hour
C) $168 per meeting hour
B) $186 per meeting hour
D) $154 per meeting hour
Ans: C
138. Gould Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products:
Activity Cost Pools
Setting up batches
Processing customer orders
Assembling products
Activity Rate
$59.11 per batch
$72.13 per customer order
per assembly hour
$3.52
Data concerning two products appear below:
Number of batches
Number of customer orders
Number of assembly hours
Product K91B
81
33
488
Product F65O
52
43
885
How much overhead cost would be assigned to Product K91B using the activity-based
costing system?
A) $8,885.96 B) $9,585.96 C) $10,285.96 D) $8,285.96
Ans: A
Page 143
Use the following to answer questions 139-140:
The following data have been provided by Letze Corporation from its activity-based costing
accounting system:
Factory supervision
Indirect factory labor
$490,000
$220,000
Distribution of Resource Consumption across Activity Cost Pools:
Activity Cost Pools
Batch Set-Up Expediting
Other
Factory supervision
53%
35%
12%
Indirect factory labor
56%
20%
24%
Total
100%
100%
The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining
costs that are not assigned to products.
139. How much factory supervision and indirect factory labor cost would be assigned to the
Batch Set-Up activity cost pool?
A) $308,500 B) $296,000 C) $287,100 D) $321,600
Ans: B
140. How much factory supervision and indirect factory labor cost would NOT be assigned to
products using the activity-based costing system?
A) $140,200 B) $124,600 C) $0 D) $112,800
Ans: B
Use the following to answer question 141:
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:
Total expected units produced
Total expected material moves
Expected direct labor-hours per unit
Wall Mirrors Specialty Windows
7,000
4,000
600
190
6
10
The total materials handling cost for the year is expected to be $8,142.60.
141. If the materials handling cost is allocated on the basis of direct labor-hours, The total
materials handling cost allocated to the wall mirrors is closest to which of the following?
(Round off your answer to 2 decimal places.)
A) $3,665 B) $3,207 C) $2,069.12 D) $1,723
Ans: C
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 142-143:
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)
Machine related (machine-hours)
Batch setup (setups)
General factory (direct labor-hours)
Activity Cost Pools
Machine related
Batch setup
General factory
Estimated Overhead Cost
$84,700
$617,000
$275,400
Expected Activity
Product
Product
Total
X
Y
7,000
6,000
1,000
10,000
6,000 4,000
17,000
10,000 7,000
142. The activity rate for the batch setup activity cost pool is closest to:
A) $63.70 B) $75.92 C) $89.08 D) $49.74
Ans: A
143. 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) $1,372,200 B) $1,367,700 C) $1,358,000 D) $1,345,400
Ans: C
Page 145
Use the following to answer questions 144-146:
(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
Other expenses
Total
$162,000
169,000
$331,000
Distribution of resource consumption:
Filling Customer
Activity Cost Pools
Orders
Support
Wages and salaries
31%
50%
Other expenses
11%
60%
Other
19%
29%
Total
100%
100%
The 揙ther?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
Filling orders
Customer support
Activity
3,100 orders
12 customers
144. 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 2 decimal places..)
A) $18.08 B) $35.62 C) $30.36 D) $8.41
Ans: A
145. 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) $12,283 B) $11,016 C) $11,988 D) $10,130
Ans: B
146. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who made 8 orders in a year?
(Round your Activity Rate to 2 decimal places.)
A) $7,828 B) $6,957 C) $5,972 D) $4,915
Ans: C
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer question 147:
(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
Wages
Supplies
Other expenses
Preparing Meals
$1.14
$0.33
$0.19
Arranging Functions
$190
$317
$136
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 $22 per
meal. The cost of the raw ingredients for the meals was $12.00 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.
147. 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) $ 387
B) $ 402
C) $ 416
D) $( 375 )
Ans: A
Page 147
Use the following to answer questions 148-149:
(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:
Direct materials per unit
Direct labor per unit
Direct labor-hours per unit
Annual production
P85G
C43S
$40.5 $54.1
$27.8
$22.2
0.80
1.2
27,000 8,000
The company's estimated total manufacturing overhead for the year is $1,857,000 and the
company's estimated total direct labor-hours for the year is 33,000.
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
Supporting direct labor (DLHs)
Setting up machines (setups)
Parts administration (part types)
Total
DLHs
Setups
Part types
Estimated
Overhead Cost
$660,000
247,000
950,000
$1,857,000
Expected Activity
P85G C43S
Total
23,100 9,900 33,000
1,178
722 1,900
1,725
775 2,500
148. The manufacturing overhead that would be applied to a unit of product P85G under the
company's traditional costing system is closest to:
(Round your intermediate calculation to 2 decimal places.)
A) $58.84 B) $40.56 C) $49.80 D) $33.02
Ans: B
149. The manufacturing overhead that would be applied to a unit of product C43S under the
activity-based costing system is closest to:
A) $126.33 B) $144.86 C) $135.87 D) $118.75
Ans: A
Chapter 5, Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 150-151:
(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
$16.9
$2.5
0.1
28,000
Direct materials per unit
Direct labor per unit
Direct labor-hours per unit
Annual production
R09O
$57.4
$18.3
2.1
13,000
The company's estimated total manufacturing overhead for the year is $2,183,000 and the
company's estimated total direct labor-hours for the year is 34,000.
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
Assembling products (DLHs)
Preparing batches (batches)
Product support (product variations)
Total
DLHs
Batches
Product variations
Estimated Overhead
Cost
$ 1,360,000
448,000
375,000
$2,183,000
Expected Activity
R58G
R09O
Total
4,420
29,580
34,000
868
1,932 2,800
705
795 1,500
150. The manufacturing overhead that would be applied to a unit of product R58G under the
company's traditional costing system is closest to:
(Round your Intermediate calculation to 2 decimal places.)
A) $7.38 B) $19.92 C) $16.26 D) $3.83
Ans: A
151. The manufacturing overhead that would be applied to a unit of product R09O under the
activity-based costing system is closest to:
A) $116.47 B) $139.05 C) $128.94 D) $103.32
Ans: A
Page 149
Use the following to answer question 152:
(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:
Direct materials per unit
Direct labor per unit
Direct labor-hours per unit
Annual production
U86Y
$14.80
$21.20
0.70
36,000
M91F
$38.80
$57.40
1.90
7,000
The company's estimated total manufacturing overhead for the year is $2,407,500 and the
company's estimated total direct labor-hours for the year is 45,000.
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
Direct labor support (DLHs)
Setting up machines (setups)
Part administration (part types)
Total
DLHs
Setups
Part types
Estimated
Overhead Cost
$1,107,400
385,200
914,900
$2,407,500
Expected Activity
U86Y
M91F
Total
27,000 18,000
45,000
2,216
728 2,944
1,114
2142 3,256
152. The unit product cost of product U86Y under the company's traditional costing system is
closest to:
A) $89.13 B) $80.34 C) $70.57 D) $58.13
Ans: C