Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
True/False Questions
1. If a manufacturing company is using activity-based costing for internal purposes only,
then organization-sustaining overhead costs should not be allocated to any of the
products.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
2. Batch-level activities are performed each time a batch of goods is handled or
processed.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
3. Organization-sustaining activities are carried out regardless of how many units are
made, how many batches are run, or how many different products are made.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
4. Direct labor-hours or direct labor cost should not be used as a measure of activity in an
activity-based costing system.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
5. Activity-based costing is a costing method that is designed to provide managers with
cost information for strategic and other decisions that potentially affect capacity and
therefore “fixed” costs.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
6. Activity-based costing is a costing method that is designed to provide managers with
cost information for strategic and other decisions that potentially affect only variable
costs.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-5
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
7. A duration driver provides a measure of the amount of time required to perform an
activity.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
8. In general, transaction drivers are more accurate measures of the consumption of
resources than duration drivers.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
9. The costs of idle capacity should not be assigned to products in activity-based costing.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
10. In traditional costing systems, all manufacturing costs are assigned to products--even
manufacturing costs that are not caused by the products.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
11. Activity-based costing involves a two-stage allocation in which overhead costs are
first assigned to departments and then to jobs on the basis of direct labor hours.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,4 Level: Medium
12. In activity-based costing, some costs may be broken down and assigned to two activity
cost pools. For example, part of a supervisor's salary may be classified as a productlevel activity and part of it may be classified as a batch-level activity.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
13. Activity rates in activity-based costing are computed by dividing costs from the firststage allocations by the activity measure for each activity cost pool.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
8-6
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
14. In the second-stage allocation in activity-based costing, activity rates are used to apply
costs to products, customers, and other cost objects.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Medium
15. When a company shifts from a traditional cost system in which manufacturing
overhead is applied based on direct labor-hours to an activity-based costing system in
which there are batch-level and product-level costs, the unit product costs of high
volume products typically decrease whereas the unit product costs of low volume
products typically increase.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 8
AICPA BB: Critical Thinking
Level: Medium
Multiple Choice Questions
16. Which terms would make the following sentence true? Manufacturing companies that
benefit the most from activity-based costing are those where overhead costs are a
_________ percentage of total product cost and where there is ___________ diversity
among the various products that they produce.
A) low, little
B) low, considerable
C) high, little
D) high, considerable
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
17. Would factory security and assembly activities be best classified at an appliance
manufacturing plant as unit-level, batch-level, product-level, or organizationsustaining?
Security
Assembly
A)
Product
Unit
B)
Batch
Batch
C) Organization
Unit
D) Organization Product
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-7
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
18. Which of the following would be an acceptable measure of activity for a material
handling activity cost pool?
A)
B)
C)
D)
Number of
Weight of
material moves material moved
Yes
Yes
No
Yes
Yes
No
No
No
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
19. An activity-based costing system that is designed for internal decision-making
generally will not conform to generally accepted accounting principles. Which of the
following is NOT a reason for this happening?
A) Some manufacturing costs (i.e., the costs of idle capacity and organizationsustaining costs) will not be assigned to products.
B) Some nonmanufacturing costs are assigned to products.
C) Allocation bases other than direct labor-hours, direct labor cost, and machinehours are used.
D) First-stage allocations may be based on subjective interview data.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard
20. Providing the power required to run production equipment is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
21. Parts administration is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining.
Ans: C
8-8
LO: 1
Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
22. If a cost object such as a product or customer has a negative green margin, then:
A) its red margin will be positive.
B) its red margin may be either positive or negative.
C) its red margin will be negative.
D) its red margin will be zero.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting Appendix: 8A LO: 6 Level: Medium
23. Tatman Corporation uses an activity-based costing system with the following three
activity cost pools:
Activity Cost Pool
Total Activity
Fabrication ......................... 10,000 machine-hours
Order processing................
800 orders
Other ..................................
Not applicable
The Other activity cost pool is used to accumulate costs of idle capacity and
organization-sustaining costs.
The company has provided the following data concerning its costs:
Wages and salaries ............
Depreciation ......................
Occupancy .........................
Total...................................
$320,000
220,000
120,000
$660,000
The distribution of resource consumption across activity cost pools is given below:
Wages and salaries ......
Depreciation ................
Occupancy ...................
Activity Cost Pools
Order
Fabrication Processing
Other
20%
65%
15%
15%
35%
50%
5%
70%
25%
Total
100%
100%
100%
The activity rate for the Fabrication activity cost pool is closest to:
A) $3.30 per machine-hour
B) $13.20 per machine-hour
C) $10.30 per machine-hour
D) $8.80 per machine-hour
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-9
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Solution:
Total Fabrication Cost:
Wages and salaries: 20% × $320,000 ....... $ 64,000
Depreciation: 15% × $220,000 .................
33,000
Occupancy: 5% × $120,000 .....................
6,000
Total.......................................................... $103,000
(a) ÷ (b)
Activity Cost Pool
Fabrication
(a)
Total Cost
$103,000
(b)
Total Activity
10,000 machine-hours
Activity Rate
$10.30 per machine-hour
24. Leaper Corporation uses an activity-based costing system with the following three
activity cost pools:
Activity Cost Pool
Fabrication .........................
Order processing................
Other ..................................
Total Activity
40,000 machine-hours
200 orders
Not applicable
The Other activity cost pool is used to accumulate costs of idle capacity and
organization-sustaining costs.
The company has provided the following data concerning its costs:
Wages and salaries ......
Depreciation ................
Occupancy ...................
Total.............................
$360,000
140,000
160,000
$660,000
The distribution of resource consumption across activity cost pools is given below:
Wages and salaries ......
Depreciation ................
Occupancy ...................
Activity Cost Pools
Order
Fabrication Processing
Other
35%
40%
25%
5%
55%
40%
30%
45%
25%
Total
100%
100%
100%
The activity rate for the Order Processing activity cost pool is closest to:
A) $1,485 per order
B) $1,540 per order
C) $1,465 per order
D) $1,320 per order
8-10
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
Solution:
Total Order Processing Cost:
Wages and salaries: 40% × $360,000 ....... $144,000
Depreciation: 55% × $140,000 .................
77,000
Occupancy: 45% × $160,000 ...................
72,000
Total.......................................................... $293,000
(a) ÷ (b)
Activity Cost Pool
Order Processing
(a)
Total Cost
$293,000
(b)
Total Activity
200 orders
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Activity Rate
$1,465 per order
8-11
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
25. Huelskamp Corporation has provided the following data concerning its overhead costs
for the coming year:
Wages and salaries ......
Depreciation ................
Rent .............................
Total.............................
$360,000
120,000
180,000
$660,000
The company has an activity-based costing system with the following three activity
cost pools and estimated activity for the coming year:
Activity Cost Pool
Total Activity
Assembly ..................... 60,000 labor-hours
Order processing..........
400 orders
Other ............................
Not applicable
The Other activity cost pool does not have a measure of activity; it is used to
accumulate costs of idle capacity and organization-sustaining costs.
The distribution of resource consumption across activity cost pools is given below:
Wages and salaries ......
Depreciation ................
Rent .............................
Activity Cost Pools
Order
Assembly Processing Other
25%
65%
10%
15%
45%
40%
35%
40%
25%
Total
100%
100%
100%
The activity rate for the Assembly activity cost pool is closest to:
A) $2.65 per labor-hour
B) $3.85 per labor-hour
C) $2.85 per labor-hour
D) $2.75 per labor-hour
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
8-12
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Solution:
Total Assembly Cost:
Wages and salaries: 25% × $360,000 ....... $ 90,000
Depreciation: 15% × $120,000 .................
18,000
Rent: 35% × $180,000 ..............................
63,000
Total.......................................................... $171,000
(a) ÷ (b)
Activity Cost Pool
Assembly
(a)
Total Cost
$171,000
(b)
Total Activity
60,000 labor-hours
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Activity Rate
$2.85 per labor-hour
8-13
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
26. Bennette Corporation has provided the following data concerning its overhead costs
for the coming year:
Wages and salaries ......
Depreciation ................
Rent .............................
Total.............................
$340,000
120,000
140,000
$600,000
The company has an activity-based costing system with the following three activity
cost pools and estimated activity for the coming year:
Activity Cost Pool
Assembly ..................
Order processing.......
Other .........................
Total Activity
30,000 labor-hours
500 orders
Not applicable
The Other activity cost pool does not have a measure of activity; it is used to
accumulate costs of idle capacity and organization-sustaining costs.
The distribution of resource consumption across activity cost pools is given below:
Wages and salaries ......
Depreciation ................
Rent .............................
Assembly
40%
15%
35%
Activity Cost Pools
Order
Processing
Other
35%
25%
45%
40%
30%
35%
Total
100%
100%
100%
The activity rate for the Order Processing activity cost pool is closest to:
A) $430 per order
B) $420 per order
C) $360 per order
D) $440 per order
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
8-14
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Solution:
Total Order Processing Cost:
Wages and salaries: 35% × $340,000 ....... $119,000
Depreciation: 45% × $120,000 .................
54,000
Rent: 30% × $140,000 ..............................
42,000
Total.......................................................... $215,000
(a) ÷
(b)
Activity Cost Pool
Order Processing
(a)
Total Cost
$215,000
(b)
Total Activity
500 orders
Activity Rate
$430 per order
27. Eccles Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs and its
activity based costing system:
Costs:
Wages and salaries ............ $340,000
Depreciation ...................... 180,000
Utilities .............................. 200,000
Total................................... $720,000
Distribution of resource consumption:
Wages and salaries ......
Depreciation ................
Utilities ........................
Assembly
20%
15%
5%
Activity Cost Pools
Setting Up
Other
60%
20%
35%
50%
55%
40%
Total
100%
100%
100%
How much cost, in total, would be allocated in the first-stage allocation to the
Assembly activity cost pool?
A) $144,000
B) $96,000
C) $36,000
PD) $105,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-15
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Solution:
Total Assembly Cost:
Wages and salaries: 20% × $340,000 ....... $ 68,000
Depreciation: 15% × $180,000 .................
27,000
Utilities: 5% × $200,000 ..........................
10,000
Total.......................................................... $105,000
28. Mayeux Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs and its
activity based costing system:
Costs:
Wages and salaries ............
Depreciation ......................
Utilities ..............................
Total...................................
$320,000
160,000
240,000
$720,000
Distribution of resource consumption:
Wages and salaries ......
Depreciation ................
Utilities ........................
Assembly
50%
10%
15%
Activity Cost Pools
Setting Up
Other
40%
10%
55%
35%
50%
35%
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) $360,000
B) $336,000
C) $288,000
D) $348,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Total Setting Up Cost:
Wages and salaries: 40% × $320,000 ....... $128,000
Depreciation: 55% × $160,000 .................
88,000
Utilities: 50% × $240,000 ........................ 120,000
Total.......................................................... $336,000
8-16
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
29. Gutknecht Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs and its
activity based costing system:
Costs:
Wages and salaries ............
Depreciation ......................
Utilities ..............................
Total...................................
$300,000
180,000
240,000
$720,000
Distribution of resource consumption:
Wages and salaries ........
Depreciation ..................
Utilities ..........................
Assembly
35%
5%
10%
Activity Cost Pools
Setting Up
Other
40%
25%
60%
35%
60%
30%
Total
100%
100%
100%
How much cost, in total, would be allocated in the first-stage allocation to the Other
activity cost pool?
A) $138,000
B) $210,000
C) $180,000
D) $216,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Total Other Cost:
Wages and salaries: 25% × $300,000 ....... $ 75,000
Depreciation: 35% × $180,000 .................
63,000
Utilities: 30% × $240,000 ........................
72,000
Total.......................................................... $210,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-17
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
30. Lakatos Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs:
Costs:
Wages and salaries ............
Depreciation ......................
Occupancy .........................
Total...................................
$420,000
240,000
220,000
$880,000
The distribution of resource consumption across the three activity cost pools is given
below:
Activity Cost Pools
Order
Fabricating Processing
Other
Wages and salaries ........
10%
75%
15%
Depreciation ..................
5%
50%
45%
Occupancy .....................
30%
35%
35%
Total
100%
100%
100%
How much cost, in total, would be allocated in the first-stage allocation to the
Fabricating activity cost pool?
A) $88,000
B) $132,000
C) $264,000
D) $120,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Total Fabricating Cost:
Wages and salaries: 10% × $420,000 ....... $ 42,000
Depreciation: 5% × $240,000 ...................
12,000
Occupancy: 30% × $220,000 ...................
66,000
Total.......................................................... $120,000
8-18
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
31. Perl Corporation uses an activity-based costing system with three activity cost pools.
The company has provided the following data concerning its costs:
Costs:
Wages and salaries ............
Depreciation ......................
Occupancy .........................
Total...................................
$360,000
200,000
100,000
$660,000
The distribution of resource consumption across the three activity cost pools is given
below:
Activity Cost Pools
Order
Fabricating Processing
Other
Wages and salaries ........
15%
60%
25%
Depreciation ..................
20%
35%
45%
Occupancy .....................
25%
50%
25%
Total
100%
100%
100%
How much cost, in total, would be allocated in the first-stage allocation to the Order
Processing activity cost pool?
A) $336,000
B) $319,000
C) $330,000
D) $396,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Total Order Processing Cost:
Wages and salaries: 60% × $360,000 ....... $216,000
Depreciation: 35% × $200,000 .................
70,000
Occupancy: 50% × $100,000 ...................
50,000
Total.......................................................... $336,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-19
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
32. Hosley Corporation uses an activity-based costing system with three activity cost
pools. The company has provided the following data concerning its costs:
Costs:
Wages and salaries ......
Depreciation ................
Occupancy ...................
Total.............................
$360,000
100,000
120,000
$580,000
The distribution of resource consumption across the three activity cost pools is given
below:
Activity Cost Pools
Order
Fabricating Processing
Other
Total
Wages and salaries ........
50%
40%
10%
100%
Depreciation ..................
10%
45%
45%
100%
Occupancy .....................
5%
60%
35%
100%
How much cost, in total, would be allocated in the first-stage allocation to the Other
activity cost pool?
A) $123,000
B) $174,000
C) $58,000
D) $203,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Total Other Cost:
Wages and salaries: 10% × $360,000 ....... $ 36,000
Depreciation: 45% × $100,000 .................
45,000
Occupancy: 35% × $120,000 ...................
42,000
Total.......................................................... $123,000
8-20
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
33. Feldpausch Corporation has provided the following data from its activity-based
costing system:
Activity Cost Pool
Assembly .....................
Processing orders .........
Inspection ....................
Total Cost
$1,137,360
$28,479
$97,155
Total Activity
84,000 machine-hours
1,100 orders
1,270 inspection-hours
The company makes 470 units of product W26B a year, requiring a total of 660
machine-hours, 50 orders, and 40 inspection-hours per year. The product's direct
materials cost is $40.30 per unit and its direct labor cost is $42.22 per unit. The
product sells for $118.00 per unit. According to the activity-based costing system, the
product margin for product W26B is:
A) $6,444.70 per unit
B) $4,679.20 per unit
C) $3,384.70 per unit
D) $16,675.60 per unit
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4,5 Level: Medium
Solution:
Activity Cost Pool
Assembly
(a)
Total Cost
$1,137,360
Processing Orders
Inspection
28,479
97,155
(b)
Total Activity
84,000 machinehours
1,100 orders
1,270 inspectionhours
(a) ÷ (b)
Activity Rate
$13.54 per
machine-hour
$25.89 per order
$76.50 per
inspection-hour
Calculation of Overhead Costs:
Activity Cost Pool
Assembly
Processing Orders
Inspection
(a)
Activity Rate
$13.54 per MH
$25.89 per order
$76.50 per IH
(b)
Total Activity
660 MHs
50 orders
40 IHs
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(a) × (b)
ABC Cost
$8,936.40
$1,294.50
$3,060.00
8-21
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Sales.............................................................................$55,460.00
Costs:
Direct materials (470 × $40.30) ...............................
$18,941.00
Direct labor (470 × $42.22) .....................................
19,843.40
Assembly .................................................................
8,936.40
Processing ................................................................
1,294.50
Inspection .................................................................
3,060.00
52,075.30
Product margin ............................................................$ 3,384.70
34. Houseal Corporation has provided the following data from its activity-based costing
system:
Activity Cost Pool
Assembly .....................
Processing orders .........
Inspection ....................
Total Cost
$613,250
$46,170
$146,110
Total Activity
55,000 machine-hours
1,500 orders
1,900 inspection-hours
Data concerning one of the company’s products, Product W58B, appear below:
Selling price per unit ...........................
Direct materials cost per unit...............
Direct labor cost per unit .....................
Annual unit production and sales ........
Annual machine-hours ........................
Annual orders ......................................
Annual inspection-hours......................
$113.70
$48.14
$11.62
360
1,040
60
30
According to the activity-based costing system, the product margin for product W58B
is:
A) $3,668.60
B) $5,975.60
C) $5,515.40
D) $19,418.40
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4,5 Level: Medium
8-22
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Solution:
Activity Cost Pool
Assembly
(a)
Total Cost
$613,250
Processing Orders
Inspection
46,170
146,110
(b)
Total Activity
55,000 machinehours
1,500 orders
1,900 inspectionhours
(a) ÷ (b)
Activity Rate
$11.15 per
machine-hour
$30.78 per order
$76.90 per
inspection-hour
Calculation of Overhead Costs:
Activity Cost Pool
Assembly
Processing Orders
Inspection
(a)
Activity Rate
$11.15 per MH
$30.78 per order
$76.90 per IH
(b)
Total Activity
1,040 MHs
60 orders
30 IHs
(a) × (b)
ABC Cost
$11,596.00
$1,846.80
$2,307.00
Sales (360 × $113.70) ..................................................$40,932.00
Costs:
Direct materials (360 × $48.14) ...............................
$17,330.40
Direct labor (360 × $11.62) .....................................
4,183.20
Assembly .................................................................
11,596.00
Processing ................................................................
1,846.80
Inspection .................................................................
2,307.00
37,263.40
Product margin ............................................................$ 3,668.60
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-23
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
35. Dobles Corporation has provided the following data from its activity-based costing
system:
Activity Cost Pool
Assembly .....................
Processing orders .........
Inspection ....................
Total Cost
$228,060
$34,068
$125,560
Total Activity
18,000 machine-hours
1,200 orders
1,720 inspection-hours
The company makes 420 units of product D28K a year, requiring a total of 460
machine-hours, 80 orders, and 10 inspection-hours per year. The product's direct
materials cost is $48.96 per unit and its direct labor cost is $25.36 per unit. According
to the activity-based costing system, the average cost of product D28K is closest to:
A) $95.34 per unit
B) $93.60 per unit
C) $74.32 per unit
D) $89.93 per unit
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4 Level: Medium
Solution:
Activity Cost Pool
Assembly
(a)
Total Cost
$228,060
Processing Orders
Inspection
34,068
125,560
(b)
Total Activity
18,000 machinehours
1,200 orders
1,720 inspectionhours
Average Cost of Product D28K:
Direct materials .........................................
Direct labor ................................................
Assembly [($12.67 × 460) ÷ 420] .............
Processing orders [($28.39 × 80) ÷ 420] ...
Inspection [($73.00 × 10) ÷ 420]...............
8-24
(a) ÷ (b)
Activity Rate
$12.67 per
machine-hour
$28.39 per order
$73.00 per
inspection-hour
$48.96
25.36
13.88
5.40
1.74
$95.34
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
36. Paparo Corporation has provided the following data from its activity-based costing
system:
Activity Cost Pool
Assembly .....................
Processing orders .........
Inspection ....................
Total Cost
$846,040
$64,056
$102,408
Total Activity
52,000 machine-hours
1,700 orders
1,360 inspection-hours
Data concerning the company’s product Q79Y appear below:
Annual unit production and sales ........
450
Annual machine-hours ........................ 1,080
Annual number of orders .....................
70
Annual inspection hours ......................
20
Direct materials cost ............................ $44.00 per unit
Direct labor cost .................................. $41.03 per unit
According to the activity-based costing system, the average cost of product Q79Y is
closest to:
A) $133.29 per unit
B) $85.03 per unit
C) $127.43 per unit
D) $129.94 per unit
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-25
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Solution:
Activity Cost Pool
Assembly
(a)
Total Cost
$846,040
Processing Orders
Inspection
64,056
102,408
(b)
Total Activity
52,000 machinehours
1,700 orders
1,360 inspectionhours
Average Cost of Product Q79Y:
Direct materials .........................................
Direct labor ................................................
Assembly [($16.27 × 1,080) ÷ 450] ..........
Processing orders [($37.68 × 70) ÷ 450] ...
Inspection [($75.30 × 20) ÷ 450]...............
(a) ÷ (b)
Activity Rate
$16.27 per
machine-hour
$37.68 per order
$75.30 per
inspection-hour
$ 44.00
41.03
39.05
5.86
3.35
$133.29
37. 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
$1,372,448
$33,300
$126,160
Total Activity
7,798 product design hours
740 batch set-ups
6,640 assembly hours
The activity rate for the “designing products” activity cost pool is closest to:
A) $101 per product design hour
B) $1,372,448 per product design hour
C) $176 per product design hour
D) $57 per product design hour
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Activity Cost Pool
Designing Products
8-26
(a)
Total Cost
$1,372,448
(b)
Total Activity
7,798 PDHs
(a) ÷ (b)
Activity Rate
$176 per PDH
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
38. Data concerning three of the activity cost pools of Salcido LLC, a legal firm, have
been provided below:
Activity Cost Pools
Researching legal issues ....
Meeting with clients ..........
Preparing documents .........
Total Cost
Total Activity
$20,480
640 research hours
$1,182,239 7,253 meeting hours
$91,840 5,740 documents
The activity rate for the “meeting with clients” activity cost pool is closest to:
A) $95 per meeting hour
B) $61 per meeting hour
C) $163 per meeting hour
D) $1,182,239 per meeting hour
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Activity Cost Pool
Meeting with clients
(a)
Total Cost
$1,182,239
(b)
Total Activity
7,253 meeting
hours
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(a) ÷ (b)
Activity Rate
$163 per
meeting hour
8-27
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
39. Gould Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products:
Activity Cost Pools
Setting up batches ..........................
Processing customer orders ...........
Assembling products .....................
Activity Rate
$59.06 per batch
$72.66 per customer order
$3.75 per assembly hour
Data concerning two products appear below:
Number of batches.........................
Number of customer orders ...........
Number of assembly hours ............
Product K91B Product F65O
84
50
32
43
483
890
How much overhead cost would be assigned to Product K91B using the activity-based
costing system?
A) $9,097.41
B) $81,146.53
C) $4,961.04
D) $135.47
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Activity Cost Pool
Setting up batches
Processing customer
orders
Assembling products
8-28
(a)
Activity Rate
$59.06 per
batch
$72.66 per
order
$3.75 per AH
(b)
Total Activity
84 batches
(a) × (b)
ABC Cost
$4,961.04
32 orders
2,325.12
483 AHs
1,811.25
$9,097.41
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
40. Hane Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products:
Activity Cost Pools
Assembling products .....................
Processing customer orders ...........
Setting up batches ..........................
Activity Rate
$8.90 per assembly hour
$31.23 per customer order
$43.72 per batch
Data for one of the company’s products follow:
Number of assembly hours ............
Number of customer orders ...........
Number of batches.........................
Product U94W
389
53
61
How much overhead cost would be assigned to Product U94W using the activitybased costing system?
A) $42,176.55
B) $83.85
C) $7,784.21
D) $2,666.92
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Activity Cost Pool
Assembling products
Processing customer
orders
Setting up batches
(a)
Activity Rate
$8.90 per AH
$31.23 per
order
$43.72 per
batch
(b)
Total Activity
389 AHs
53 orders
(a) × (b)
ABC Cost
$3,462.10
1,655.19
61 batches
2,666.92
$7,784.21
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-29
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
41. Activity rates from Lippard Corporation's activity-based costing system are listed
below. The company uses the activity rates to assign overhead costs to products:
Activity Cost Pools
Processing customer orders ...........
Assembling products .....................
Setting up batches ..........................
Activity Rate
$31.62 per customer order
$2.86 per assembly hour
$46.61 per batch
Last year, Product H50E involved 9 customer orders, 666 assembly hours, and 77
batches. How much overhead cost would be assigned to Product H50E using the
activity-based costing system?
A) $60,979.68
B) $3,588.97
C) $5,778.31
D) $81.09
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Activity Cost Pool
Processing customer
orders
Assembling products
Setting up batches
(a)
Activity Rate
$31.62 per
order
$2.86 per AH
$46.61 per
batch
(b)
Total Activity
9 orders
(a) × (b)
ABC Cost
$ 284.58
666 AHs
77 batches
1,904.76
3,588.97
$5,778.31
8-30
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 42-43:
Weldon Corporation has provided the following data from its activity-based costing
accounting system:
Indirect factory wages ............................
Factory equipment depreciation .............
$340,000
$240,000
Distribution of Resource Consumption across Activity Cost Pools:
Indirect factory wages ...................
Factory equipment depreciation ....
Activity Cost Pools
Customer
Product
Orders
Processing Other Total
25%
65%
10% 100%
40%
40%
20% 100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs that are not assigned to products.
42. How much indirect factory wages and factory equipment depreciation cost would be
assigned to the Customer Orders activity cost pool?
A) $188,500
B) $181,000
C) $290,000
D) $580,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Easy
Solution:
Customer Orders Cost:
Indirect factory wages: 25% × $340,000............................................
$ 85,000
Factory equipment depreciation: 40% × $240,000 ............................
96,000
Total....................................................................................................
$181,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-31
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
43. How much indirect factory wages and factory equipment depreciation cost would
NOT be assigned to products using the activity-based costing system?
A) $340,000
B) $82,000
C) $0
D) $240,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Easy
Solution:
Other Cost:
Indirect factory wages: 10% × $340,000............................................
$34,000
Factory equipment depreciation: 20% × $240,000 ............................
48,000
Total....................................................................................................
$82,000
Use the following to answer questions 44-45:
Tomasini Corporation has provided the following data from its activity-based costing
accounting system:
Supervisory wages ............
Factory supplies ................
$660,000
$280,000
Distribution of Resource Consumption across Activity Cost Pools:
Supervisory wages ...
Factory supplies .......
Activity Cost Pools
Batch
Unit
Processing
Processing Other
20%
70%
10%
45%
35%
20%
Total
100%
100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs that are not assigned to products.
8-32
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
44. How much supervisory wages and factory supplies cost would be assigned to the
Batch Processing activity cost pool?
A) $940,000
B) $470,000
C) $305,500
D) $258,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Easy
Solution:
Batch Processing Cost:
Supervisory wages: 20% × $660,000 .................................................
$132,000
Factory supplies: 45% × $280,000 .....................................................
126,000
Total....................................................................................................
$258,000
45. How much supervisory wages and factory supplies cost would NOT be assigned to
products using the activity-based costing system?
A) $122,000
B) $660,000
C) $280,000
D) $0
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Easy
Solution:
Other Cost:
Supervisory wages: 10% × $660,000 .................................................
$ 66,000
Factory supplies: 20% × $280,000 .....................................................
56,000
Total....................................................................................................
$122,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-33
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 46-47:
The following data have been provided by Letze Corporation from its activity-based costing
accounting system:
Factory supervision ...........
Indirect factory labor .........
$460,000
$220,000
Distribution of Resource Consumption across Activity Cost Pools:
Activity Cost Pools
Batch Set-Up Expediting
Other
Factory supervision ...........
55%
35%
10%
Indirect factory labor .........
60%
20%
20%
Total
100%
100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs that are not assigned to products.
46. How much factory supervision and indirect factory labor cost would be assigned to the
Batch Set-Up activity cost pool?
A) $680,000
B) $385,000
C) $391,000
D) $340,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Easy
Solution:
Batch Set-Up Cost:
Factory supervision: 55% × $460,000 ................................................
$253,000
Indirect factory labor: 60% × $220,000 .............................................
132,000
Total....................................................................................................
$385,000
8-34
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
47. How much factory supervision and indirect factory labor cost would NOT be assigned
to products using the activity-based costing system?
A) $220,000
B) $90,000
C) $0
D) $460,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Easy
Solution:
Other Cost:
Factory supervision: 10% × $460,000 ................................................
$46,000
Indirect factory labor: 20% × $220,000 .............................................
44,000
Total....................................................................................................
$90,000
Use the following to answer questions 48-49:
Forliche Florist specializes in large floral bouquets for hotels and other commercial spaces.
The company has provided the following data concerning its annual overhead costs and its
activity based costing system:
Overhead costs:
Wages and salaries ............
Other expenses ..................
Total ..................................
$ 80,000
40,000
$120,000
Distribution of resource consumption:
Activity Cost Pools
Wages and salaries ...
Other expenses .........
Making
Bouquets
60%
45%
Delivery
30%
25%
Other
10%
30%
Total
100%
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
Making bouquets ......
Delivery ....................
Activity
40,000 bouquets
5,000 deliveries
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-35
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
48. What would be the total overhead cost per bouquet according to the activity based
costing system? In other words, what would be the overall activity rate for the making
bouquets activity cost pool? (Round to the nearest whole cent.)
A) $1.65
B) $1.35
C) $1.58
D) $1.80
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
Solution:
Making Bouquets Cost:
Wages and salaries: 60% × $80,000 ...................................................
$48,000
Other expenses: 45% × $40,000 .........................................................
18,000
Total....................................................................................................
$66,000
Activity Cost Pool
Making Bouquets
(a)
Total Cost
$66,000
(b)
Total Activity
40,000 bouquets
(a) ÷ (b)
Activity Rate
$1.65 per bouquet
49. What would be the total overhead cost per delivery according to the activity based
costing system? In other words, what would be the overall activity rate for the
deliveries activity cost pool? (Round to the nearest whole cent.)
A) $7.20
B) $6.60
C) $6.00
D) $6.80
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Medium
Solution:
Delivery Cost:
Wages and salaries: 30% × $80,000 ...................................................
$24,000
Other expenses: 25% × $40,000 .........................................................
10,000
Total....................................................................................................
$34,000
Activity Cost Pool
Delivery
8-36
(a)
Total Cost
$34,000
(b)
Total Activity
5,000 deliveries
(a) ÷ (b)
Activity Rate
$6.80 per delivery
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 50-52:
Dietz Company uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity based costing
system:
Costs:
Manufacturing overhead ...........................
Selling and administrative expenses .........
Total ..........................................................
$440,000
240,000
$680,000
Distribution of resource consumption:
Manufacturing overhead .....................
Selling and administrative expenses ...
Order
Size
55%
30%
Activity Cost Pools
Customer
Support Other Total
35%
10% 100%
50%
20% 100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the first-stage allocation of costs to the
activity cost pools.
50. How much cost, in total, would be allocated in the first-stage allocation to the Order
Size activity cost pool?
A) $314,000
B) $289,000
C) $204,000
D) $374,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Order Size Cost:
Manufacturing overhead: 55% × $440,000 ........................................
$242,000
Selling and administrative expenses: 30% × $240,000 ......................
72,000
Total....................................................................................................
$314,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-37
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
51. How much cost, in total, would be allocated in the first-stage allocation to the
Customer Support activity cost pool?
A) $274,000
B) $238,000
C) $289,000
D) $340,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Customer Support Cost:
Manufacturing overhead: 35% × $440,000 ........................................
$154,000
Selling and administrative expenses: 50% × $240,000 ......................
120,000
Total....................................................................................................
$274,000
52. How much cost, in total, should NOT be allocated to orders and products in the second
stage of the allocation process if the activity-based costing system is used for internal
decision-making?
A) $68,000
B) $0
C) $92,000
D) $136,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Other Cost:
Manufacturing overhead: 10% × $440,000 ........................................
$44,000
Selling and administrative expenses: 20% × $240,000 ......................
48,000
Total....................................................................................................
$92,000
8-38
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 53-54:
The controller of Hendershot Company estimates the amount of materials handling overhead
cost that should be allocated to the company's two products using the data that are given
below:
Total expected units produced ..................
Total expected material moves..................
Expected direct labor-hours per unit .........
Wall Mirrors Specialty Windows
6,000
3,000
500
100
6
9
The total materials handling cost for the year is expected to be $6,123.60.
53. If the materials handling cost is allocated on the basis of direct labor-hours, how much
of the total materials handling cost would be allocated to the wall mirrors? (Round off
your answer to the nearest whole dollar.)
A) $2,449
B) $4,144
C) $3,499
D) $3,062
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4 Level: Easy Source: CMA, adapted
Solution:
Total Direct Labor-Hours
Wall Mirrors: 6,000 units × 6 DLHs per unit ....................................
36,000 DLHs
Specialty Mirrors: 3,000 units × 9 DLHs per unit .............................
27,000 DLHs
Total ...................................................................................................
63,000 DLHs
Activity Cost Pool
Direct labor-hours
(a)
Total Cost
$6,123.60
(b)
Total Activity
63,000 DLHs
(a) ÷ (b)
Activity Rate
$.0972 per DLH
Materials Handling Cost for Wall Mirrors:
Activity Cost Pool
Direct labor-hours
(a)
Activity Rate
$.0972 per DLH
(b)
Total Activity
36,000 DLHs
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(a) × (b)
ABC Cost
$3,499
8-39
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
54. If the materials handling cost is allocated on the basis of material moves, how much of
the total materials handling cost would be allocated to the specialty windows? (Round
off your answer to the nearest whole dollar.)
A) $1,021
B) $3,674
C) $3,062
D) $1,980
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4 Level: Easy Source: CMA, adapted
Solution:
(a)
Activity Cost Pool Total Cost
Material moves
$6,123.60
*500 + 100 = 600 moves
(b)
Total Activity
600 moves*
(a) ÷ (b)
Activity Rate
$10.206 per move
Materials Handling Cost for Specialty Mirrors:
Activity Cost Pool
Material moves
(a)
(b)
Activity Rate
Total Activity
$10.206 per move
100 moves
(a) × (b)
ABC Cost
$1,021
Use the following to answer questions 55-56:
Swimm Company allocates materials handling cost to the company's two products using the
below data:
Total expected units produced ............
Total expected material moves............
Expected direct labor-hours per unit ...
Modular Homes Prefab Barns
3,000
4,000
400
100
700
200
The total materials handling cost for the year is expected to be $72,065.
8-40
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
55. If the materials handling cost is allocated on the basis of direct labor-hours, how much
of the total materials handling cost would be allocated to the prefab barns? (Round off
your answer to the nearest whole dollar.)
A) $16,014
B) $19,880
C) $36,890
D) $36,033
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4 Level: Easy Source: CMA, adapted
Solution:
Total Direct Labor-Hours
Modular Homes: 3,000 units × 700 DLHs per unit ............................
2,100,000 DLHs
Prefab Barns: 4,000 units × 200 DLHs per unit .................................
800,000 DLHs
Total....................................................................................................
2,900,000 DLHs
Activity Cost Pool
Direct labor-hours
(a)
Total Cost
$72,065
(b)
Total Activity
2,900,000 DLHs
(a) ÷ (b)
Activity Rate
$.02485 per DLH
Materials Handling Cost for Prefab Barns:
Activity Cost Pool
Direct labor-hours
(a)
Activity Rate
$.02485 per DLH
(b)
Total Activity
800,000 DLHs
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(a) × (b)
ABC Cost
$19,880
8-41
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
56. If the materials handling cost is allocated on the basis of material moves, how much of
the total materials handling cost would be allocated to the modular homes? (Round off
your answer to the nearest whole dollar.)
A) $36,033
B) $57,652
C) $56,051
D) $35,175
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4 Level: Easy Source: CMA, adapted
Solution:
(a)
Activity Cost Pool Total Cost
Material moves
$72,065
*400 + 100 = 500 moves
(b)
Total Activity
500 moves*
Materials Handling Cost for Modular Homes:
(a)
(b)
Activity Cost Pool
Activity Rate
Total Activity
Material moves
$144.13 per move
400 moves
(a) ÷ (b)
Activity Rate
$144.13 per move
(a) × (b)
ABC Cost
$57,652
Use the following to answer questions 57-58:
Abel Company uses activity-based costing. The company has two products: A and B. The
annual production and sales of Product A is 200 units and of Product B is 400 units. There are
three activity cost pools, with estimated costs and expected activity as follows:
Expected Activity
Activity Cost Pool
Activity 1 ...............
Activity 2 ...............
Activity 3 ...............
8-42
Estimated
Cost
$16,660
$18,450
$9,731
Product A
600
1,100
60
Product B
100
700
160
Total
700
1,800
220
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
57. The activity rate for Activity 2 is closest to:
A) $24.91
B) $26.36
C) $16.77
D) $10.25
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Activity Cost Pool
Activity 2
(a)
Total Cost
$18,450
(b)
(a) ÷ (b)
Total Activity Activity Rate
1,800
$10.25
58. The cost per unit of Product B is closest to:
A) $41.58
B) $81.53
C) $74.73
D) $17.69
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Hard
Solution:
Activity Cost Pool
Activity 1
Activity 2
Activity 3
(a)
Total Cost
$16,660
$18,450
$9,731
(b)
Total Activity
700
1,800
220
(a) ÷ (b)
Activity Rate
$23.80
$10.25
$44.23
Total Cost of Product B:
Activity Cost Pool
Activity 1
Activity 2
Activity 3
(a)
Activity Rate
$23.80
$10.25
$44.23
(b)
Total Activity
100
700
160
(a) × (b)
ABC Cost
$ 2,380.00
7,175.00
7,076.80
$16,631.80
Cost per unit of Product B = $16,631.80 ÷ 400 units = $41.58 per unit
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-43
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 59-60:
Andris Corporation uses activity-based costing to determine product costs for external
financial reports. The company has provided the following data concerning its activity-based
costing system:
Estimated Overhead
Activity Cost Pools(and Activity Measures)
Cost
Machine related (machine-hours) ................
$46,400
Batch setup (setups) .....................................
$434,000
General factory (direct labor-hours).............
$226,500
Activity Cost Pools
Machine related ...........
Batch setup ..................
General factory ............
Expected Activity
Total Product X Product Y
4,000
3,000
1,000
7,000
3,000
4,000
15,000
7,000
8,000
59. The activity rate for the batch setup activity cost pool is closest to:
A) $62.00
B) $101.00
C) $144.70
D) $108.50
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Activity Cost Pool
Batch setup
8-44
(a)
Total Cost
$434,000
(b)
(a) ÷ (b)
Total Activity Activity Rate
7,000
$62.00
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
60. Assuming that actual activity turns out to be the same as expected activity, the total
amount of overhead cost allocated to Product X would be closest to:
A) $353,450
B) $303,000
C) $326,500
D) $434,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Activity Cost Pool
Machine related
Batch setup
General factory
(a)
Total Cost
$46,400
$434,000
$226,500
(b)
(a) ÷ (b)
Total Activity Activity Rate
4,000
$11.60
7,000
$62.00
15,000
$15.10
Total Overhead Cost Allocated to Product X:
Activity Cost Pool
Machine related
Batch setup
General factory
(a)
Activity Rate
$11.60
$62.00
$15.10
(b)
Total Activity
3,000
3,000
7,000
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(a) × (b)
ABC Cost
$ 34,800
186,000
105,700
$326,500
8-45
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 61-63:
Nissley Wedding Fantasy Company makes very elaborate wedding cakes to order. The owner
of the company has provided the following data concerning the activity rates in its activitybased costing system:
Activity Cost Pools
Size-related .....................
Complexity-related .........
Order-related ..................
Activity Rate
$1.13 per guest
$28.22 per tier
$74.72 per order
The measure of activity for the size-related activity cost pool is the number of planned guests
at the wedding reception. The greater the number of guests, the larger the cake. The measure
of complexity is the number of tiers in the cake. The activity measure for the order-related
cost pool is the number of orders. (Each wedding involves one order.) The activity rates
include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity
rates do not include the costs of purchased decorations such as miniature statues and wedding
bells, which are accounted for separately.
Data concerning two recent orders appear below:
Number of reception guests ......................
Number of tiers on the cake ......................
Cost of purchased decorations for cake ....
8-46
Tijerina
Wedding
49
2
$28.60
Twersky
Wedding
126
4
$54.64
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
61. Assuming that all of the costs listed above are avoidable costs in the event that an
order is turned down, what amount would the company have to charge for the Tijerina
wedding cake to just break even?
A) $74.72
B) $215.13
C) $28.60
D) $260.31
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4,5 Level: Medium
Solution:
Total Cost for Tijerina Wedding Cake Order:
(a)
(b)
Activity Cost Pool
Activity Rate
Total Activity
Size-related
$1.13 per guest
49 guests
Complexity-related
$28.22 per tier
2 tiers
$74.72 per
1 order
Order-related
order
Cost of purchased decorations for cake .............................
Total cost ...........................................................................
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(a) × (b)
ABC Cost
$ 55.37
56.44
74.72
28.60
$215.13
8-47
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
62. Assuming that the company charges $465.39 for the Twersky wedding cake, what
would be the overall margin on the order?
A) $135.41
B) $80.77
C) $384.62
D) $155.49
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4,5 Level: Medium
Solution:
(a)
(b)
Activity Rate
Total Activity
$1.13 per guest
126 guests
$28.22 per tier
4 tiers
$74.72 per
1 order
Order-related
order
Cost of purchased decorations for cake .............................
Total cost ...........................................................................
Activity Cost Pool
Size-related
Complexity-related
Sales ...............................
Total cost ........................
Margin on order ..............
(a) × (b)
ABC Cost
$142.38
112.88
74.72
54.64
$384.62
$465.39
384.62
$ 80.77
63. Suppose that the company decides that the present activity-based costing system is too
complex and that all costs (except for the costs of purchased decorations) should be
allocated on the basis of the number of guests. In that event, what would you expect to
happen to the costs of cakes?
A) The costs of all cakes would go up.
B) The cost of cakes for receptions with fewer than the average number of guests
would go down.
C) The cost of cakes for receptions with more than the average number of guests
would go down.
D) The costs of all cakes would go down.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4,5 Level: Medium
8-48
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 64-65:
Meade Nuptial Bakery makes very elaborate wedding cakes to order. The company has an
activity-based costing system with three activity cost pools. The activity rate for the SizeRelated activity cost pool is $1.13 per guest. (The greater the number of guests, the larger the
cake.) The activity rate for the Complexity-Related cost pool is $43.52 per tier. (Cakes with
more tiers are more complex.) Finally, the activity rate for the Order-Related activity cost
pool is $61.44 per order. (Each wedding involves one order for a cake.) The activity rates
include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity
rates do not include the costs of purchased decorations such as miniature statues and wedding
bells, which are accounted for separately.
Data concerning two recent orders appear below:
Number of reception guests .....................
Number of tiers on the cake .....................
Cost of purchased decorations for cake ...
Ericson
Wedding
60
4
$16.89
Haupt Wedding
162
3
$38.61
64. Assuming that all of the costs listed above are avoidable costs in the event that an
order is turned down, what amount would the company have to charge for the Ericson
wedding cake to just break even?
A) $61.44
B) $387.45
C) $16.89
D) $320.21
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4,5 Level: Medium
Solution:
Total Cost for Ericson Wedding Cake Order:
(a)
(b)
Activity Cost Pool
Activity Rate
Total Activity
Size-related
$1.13 per guest
60 guests
Complexity-related
$43.52 per tier
4 tiers
$61.44 per
1 order
Order-related
order
Cost of purchased decorations for cake .............................
Total cost ...........................................................................
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(a) × (b)
ABC Cost
$ 67.80
174.08
61.44
16.89
$320.21
8-49
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
65. Assuming that the company charges $500.54 for the Haupt wedding cake, what would
be the overall margin on the order?
A) $86.87
B) $413.67
C) $148.31
D) $125.48
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4,5 Level: Medium
Solution:
(a)
(b)
Activity Rate
Total Activity
$1.13 per guest
162 guests
$43.52 per tier
3 tiers
$61.44 per
1 order
Order-related
order
Cost of purchased decorations for cake .............................
Total cost ...........................................................................
Activity Cost Pool
Size-related
Complexity-related
Sales ...............................
Total cost ........................
Margin on order ..............
8-50
(a) × (b)
ABC Cost
$183.06
130.56
61.44
38.61
$413.67
$500.54
413.67
$ 86.87
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 66-68:
(Appendix 8A) Espinoza Company is a wholesale distributor that uses activity-based costing
for all of its overhead costs. The company has provided the following data concerning its
annual overhead costs and its activity based costing system:
Overhead costs:
Wages and salaries ...
Other expenses .........
Total .........................
$220,000
160,000
$380,000
Distribution of resource consumption:
Activity Cost Pools
Wages and salaries ......
Other expenses ............
Filling
Orders
35%
15%
Customer
Support Other Total
55%
10% 100%
65%
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 ...............
Customer support ........
Activity
4,000 orders
20 customers
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-51
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
66. What would be the total overhead cost per order according to the activity based
costing system? In other words, what would be the overall activity rate for the filling
orders activity cost pool? (Round to the nearest whole cent.)
A) $25.25
B) $23.75
C) $33.25
D) $14.25
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Medium
Solution:
Filling Orders Cost:
Wages and salaries: 35% × $220,000 ....... $ 77,000
Other expenses: 15% × $160,000 .............
24,000
Total.......................................................... $101,000
Activity Cost Pool
Filling orders
(a)
Total Cost
$101,000
(b)
Total Activity
4,000 order
(a) ÷ (b)
Activity Rate
$25.25 per order
67. What would be the total overhead cost per customer according to the activity based
costing system? In other words, what would be the overall activity rate for the
customer support activity cost pool? (Round to the nearest whole dollar.)
A) $10,450
B) $11,250
C) $12,350
D) $11,400
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Medium
8-52
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Solution:
Customer Support Cost:
Wages and salaries: 55% × $220,000 ....... $121,000
Other expenses: 65% × $160,000 ............. 104,000
Total.......................................................... $225,000
Activity Cost Pool
Customer support
(a)
Total Cost
$225,000
(b)
Total Activity
20 customers
(a) ÷ (b)
Activity Rate
$11,250 per customer
68. To the nearest whole dollar, how much wages and salaries cost would be allocated to a
customer who made 6 orders in a year?
A) $5,745
B) $10,650
C) $6,166
D) $5,325
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Hard
Solution:
Wages and Salaries Cost:
Allocated to Filling Orders: 35% × $220,000 ....................................
$77,000
Allocated to Customer Support: 55% × $220,000 .............................
$121,000
Activity Cost Pool
Filling orders
Customer support
Activity Cost Pool
Filling orders
Customer support
(a)
Total Cost
$77,000
(b)
Total Activity
4,000 orders
20 customers
$121,000
(a)
Activity Rate
$19.25 per order
$6,050 per customer
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
(a) ÷ (b)
Activity Rate
$19.25 per order
$6,050 per
customer
(b)
Total Activity
6 orders
1 customer
(a) × (b)
ABC Cost
$ 116
6,050
$6,166
8-53
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 69-71:
(Appendix 8A) Groats Catering uses activity-based costing for its overhead costs. The
company has provided the following data concerning the activity rates in its activity-based
costing system:
Activity Cost Pools
Wages .......................
Supplies ....................
Other expenses .........
Preparing Meals Arranging Functions
$1.15
$180.00
$0.40
$320.00
$0.15
$130.00
The number of meals served is the measure of activity for the Preparing Meals activity cost
pool. The number of functions catered is used as the activity measure for the Arranging
Functions activity cost pool.
Management would like to know whether the company made any money on a recent function
at which 150 meals were served. The company catered the function for a fixed price of $18.00
per meal. The cost of the raw ingredients for the meals was $12.40 per meal. This cost is in
addition to the costs of wages, supplies, and other expenses detailed above.
For the purposes of preparing action analyses, management has assigned ease of adjustment
codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw
ingredients as a Green cost; and other expenses as a Red cost.
69. According to the activity-based costing system, what was the total cost (including the
costs of raw ingredients) of the function mentioned above? (Round to the nearest
whole dollar.)
A) $2,945
B) $2,745
C) $2,095
D) $2,245
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Medium
Solution:
Cost of preparing meals [($1.15 + $0.40 + $0.15)
× 150] ..............................................................................................
$ 255
Cost of arranging functions ($180 + $320 + $130) ............................
630
Cost of raw ingredients ($12.40 × 150) ..............................................
1,860
Total....................................................................................................
$2,745
8-54
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
70. Suppose an action analysis report is prepared for the function mentioned above. What
would be the “red margin” in the action analysis report? (Round to the nearest whole
dollar.)
A) $(45)
B) $(195)
C) $(145)
D) $105
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Hard
Solution:
Sales ($18.00 × 150) ....................................................
Green costs:
Supplies−Preparing meals ($0.40 × 150).................
Supplies−Arranging functions .................................
Raw ingredients ($12.40 × 150) ..............................
Green margin ...............................................................
Yellow costs:
Wages−Preparing meals ($1.15 × 150) ...................
Wages−Arranging functions ....................................
Yellow margin .............................................................
Red costs:
Other expenses−Preparing meals ($0.15 × 150) ......
Other expenses−Arranging functions ......................
Red margin ..................................................................
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
$2,700.00
$ 60.00
320.00
1,860.00
172.50
180.00
22.50
130.00
2,240.00
460.00
352.50
107.50
152.50
$(45.00)
8-55
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
71. Suppose an action analysis report is prepared for the function mentioned above. What
would be the “yellow margin” in the action analysis report? (Round to the nearest
whole dollar.)
A) $183
B) $288
C) $233
D) $108
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Hard
Solution:
Sales ($18.00 × 150) ....................................................
Green costs:
Supplies−Preparing meals ($0.40 × 150).................
Supplies−Arranging functions .................................
Raw ingredients ($12.40 × 150) ..............................
Green margin ...............................................................
Yellow costs:
Wages−Preparing meals ($1.15 × 150) ...................
Wages−Arranging functions ....................................
Yellow margin .............................................................
8-56
$2,700
$ 60
320
1,860
173
180
2,240
460
353
$ 108
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 72-75:
(Appendix 8B) Addison Company has two products: A and B. Annual production and sales
are 800 units of Product A and 700 units of Product B. The company has traditionally used
direct labor-hours as the basis for applying all manufacturing overhead to products. Product A
requires 0.2 direct labor hours per unit and Product B requires 0.6 direct labor hours per unit.
The total estimated overhead for next period is $71,286.
The company is considering switching to an activity-based costing system for the purpose of
computing unit product costs for external reports. The new activity-based costing system
would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows:
Expected Activity
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 costs are allocated on the basis of direct labor
hours.)
72. The predetermined overhead rate under the traditional costing system is closest to:
A) $25.34
B) $22.60
C) $37.30
D) $122.91
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Total Direct Labor-Hours
Product A: 800 units × .2 DLHs per unit ...........................................
160 DLHs
Product B: 700 units × .6 DLHs per unit ............................................
420 DLHs
Total....................................................................................................
580 DLHs
Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.91
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-57
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
73. The overhead cost per unit of Product B under the traditional costing system is closest
to:
A) $22.38
B) $13.56
C) $73.74
D) $15.20
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Total Direct Labor-Hours
Product A: 800 units × .2 DLHs per unit ...........................................
160 DLHs
Product B: 700 units × .6 DLHs per unit ............................................
420 DLHs
Total....................................................................................................
580 DLHs
Predetermined overhead rate = $71,286 ÷ 580 DLHs = $122.9069
Total overhead cost applied to Product B using traditional costing: $122.9069 × 420
DLHs = $51,621 (rounded)
Overhead cost per unit = $51,621 ÷ 700 units = $73.74
74. The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activitybased costing system is closest to:
A) $22.60
B) $54.84
C) $58.76
D) $36.73
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Activity Cost Pool
Activity 2
8-58
(a)
(b)
(a) ÷ (b)
Estimated Cost Estimated Activity Activity Rate
$29,380
1,300
$22.60
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
75. The overhead cost per unit of Product B under the activity-based costing system is
closest to:
A) $73.74
B) $56.62
C) $22.38
D) $47.52
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Hard
Solution:
Activity Cost Pool
Activity 1
Activity 2
General Factory
(a)
(b)
Estimated Cost Estimated Activity
$20,272
800
$29,380
1,300
$21,634
580
(a) ÷ (b)
Activity Rate
$25.34
$22.60
$37.30
Total Cost of Product B:
Activity Cost Pool
Activity 1
Activity 2
General Factory
(a)
Activity Rate
$25.34
$22.60
$37.30
(b)
Activity
500
500
420
(a) × (b)
ABC Cost
$12,670
11,300
15,666
$39,636
Overhead cost per unit = $39,636 ÷ 700 units = $56.62 per unit (rounded)
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-59
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 76-77:
(Appendix 8B) Koszyk Manufacturing Corporation has a traditional costing system in which
it applies manufacturing overhead to its products using a predetermined overhead rate based
on direct labor-hours (DLHs). The company has two products, P85G and C43S, about which
it has provided the following data:
Direct materials per unit ..........
Direct labor per unit ................
Direct labor-hours per unit ......
Annual production ...................
P85G C43S
$36.50 $63.10
$20.80 $31.20
0.80
1.20
35,000 10,000
The company’s estimated total manufacturing overhead for the year is $2,264,000 and the
company’s estimated total direct labor-hours for the year is 40,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system appear
below:
Estimated
Activities and Activity Measures
Overhead Cost
Supporting direct labor (DLHs) ....
$1,160,000
Setting up machines (setups) .........
288,000
Parts administration (part types) ...
816,000
Total ..............................................
$2,264,000
DLHs ............
Setups ...........
Part types ......
8-60
Expected Activity
P85G C43S Total
28,000 12,000 40,000
1,480
920 2,400
1,880
840 2,720
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
76. The manufacturing overhead that would be applied to a unit of product P85G under
the company's traditional costing system is closest to:
A) $89.67
B) $45.28
C) $44.39
D) $23.20
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Predetermined overhead rate = $2,264,000 ÷ 40,000 DLHs = $56.60 per DLH
Applied overhead per unit =
$56.60 per DLH × 0.80 DLHs per unit = $45.28 per unit
77. The manufacturing overhead that would be applied to a unit of product C43S under
the activity-based costing system is closest to:
A) $71.04
B) $138.96
C) $67.92
D) $11.04
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-61
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Solution:
Activity Cost Pool
Supporting direct labor
Setting up machines
Parts administration
(a)
Estimated
Cost
$1,160,000
$288,000
$816,000
(b)
Estimated
Activity
40,000 DLHs
2,400 setups
2,720 part types
(a) ÷ (b)
Activity Rate
$29 per DLH
$120 per setup
$300 per part type
Total Overhead applied to Product C43S:
(a)
(b)
Activity Cost Pool
Activity Rate
Expected Activity
Supporting direct labor
$29 per DLH
12,000 DLHs
Setting up machines
$120 per setup
920 setups
Parts administration
$300 per part type
840 part types
(a) × (b)
ABC Cost
$348,000
110,400
252,000
$710,400
Applied overhead per unit = $710,400 ÷ 10,000 units = $71.04 per unit
8-62
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 78-79:
(Appendix 8B) Binegar Manufacturing Corporation has a traditional costing system in which
it applies manufacturing overhead to its products using a predetermined overhead rate based
on direct labor-hours (DLHs). The company has two products, R58G and R09O, about which
it has provided the following data:
Direct materials per unit ..........
Direct labor per unit ................
Direct labor-hours per unit ......
Annual production ...................
R58G R09O
$15.90 $52.40
$1.30 $27.30
0.10
2.10
30,000 10,000
The company’s estimated total manufacturing overhead for the year is $1,617,600 and the
company’s estimated total direct labor-hours for the year is 24,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system appear
below:
Estimated
Activities and Activity Measures
Overhead Cost
Assembling products (DLHs) ...............
$ 696,000
Preparing batches (batches)...................
252,000
Product support (product variations) .....
669,600
Total ......................................................
$1,617,600
DLHs ...........................
Batches ........................
Product variations........
Expected Activity
R58G R09O Total
3,000 21,000 24,000
528 1,152 1,680
1,056 1,176 2,232
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-63
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
78. The manufacturing overhead that would be applied to a unit of product R58G under
the company's traditional costing system is closest to:
A) $6.74
B) $16.10
C) $22.84
D) $2.90
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Predetermined overhead rate = $1,617,600 ÷ 24,000 DLHs = $67.40 per DLH
Total applied overhead = 3,000 DLHs × $67.40 per DLH = $202,200
Applied overhead per unit = $202,200 ÷ 30,000 units = $6.74 per unit
8-64
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
79. The manufacturing overhead that would be applied to a unit of product R09O under
the activity-based costing system is closest to:
A) $113.46
B) $255.00
C) $141.54
D) $17.28
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Activity Cost Pool
Assembling products
Preparing batches
Product support
(a)
Estimated
Cost
$696,000
$252,000
$669,600
(b)
Estimated Activity
24,000 DLHs
1,680 batches
2,232 product
variations
Total Overhead applied to Product R09O:
(a)
Activity Cost Pool
Activity Rate
Assembling products
$29 per DLH
Preparing batches
$150 per batch
$300 per product
Product support
variation
(a) ÷ (b)
Activity Rate
$29 per DLH
$150 per batch
$300 per product
variation
(b)
Expected Activity
21,000 DLHs
1,152 batches
1,176 product
variations
(a) × (b)
ABC Cost
$ 609,000
172,800
352,800
$1,134,600
Applied overhead per unit = $1,134,600 ÷ 10,000 units = $113.46 per unit
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-65
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 80-81:
(Appendix 8B) Kebort Manufacturing Corporation has a traditional costing system in which it
applies manufacturing overhead to its products using a predetermined overhead rate based on
direct labor-hours (DLHs). The company has two products, U86Y and M91F, about which it
has provided the following data:
Direct materials per unit ..........
Direct labor per unit ................
Direct labor-hours per unit ......
Annual production ...................
U86Y M91F
$19.80 $45.80
$18.20 $49.40
0.70
1.90
40,000 10,000
The company’s estimated total manufacturing overhead for the year is $2,541,760 and the
company’s estimated total direct labor-hours for the year is 47,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system appear
below:
Activities and Activity Measures
Direct labor support (DLHs) ............
Setting up machines (setups) ............
Part administration (part types) ........
Total .................................................
DLHs ...............
Setups ..............
Part types .........
8-66
Estimated
Overhead Cost
$1,175,000
407,960
958,800
$2,541,760
Expected Activity
U86Y M91F Total
28,000 19,000 47,000
2,256
658 2,914
1,034 2,162 3,196
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
80. The unit product cost of product U86Y under the company's traditional costing system
is closest to:
A) $71.15
B) $55.50
C) $75.86
D) $38.00
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Predetermined overhead rate = $2,541,760 ÷ 47,000 DLHs = $54.08 per DLH
Applied overhead = [(40,000 units × 0.70 DLHs per unit) × $54.08 per DLH] ÷ 40,000
units = $37.86 per unit
Unit Product Cost:
Direct materials ...............................
Direct labor .....................................
Applied manufacturing overhead ....
Total ................................................
$19.80
18.20
37.86
$75.86
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-67
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
81. The unit product cost of product M91F under the activity-based costing system is
closest to:
A) $95.20
B) $121.57
C) $216.77
D) $197.95
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
(a)
Activity Cost Pool
Direct labor support
Setting up machines
Part administration
Estimated Cost
$1,175,000
$407,960
$958,800
(b)
Expected
Activity
47,000 DLHs
2,914 setups
3,196 part types
Total Overhead applied to Product M91F:
(a)
Activity Cost Pool
Activity Rate
Direct labor support
$25 per DLH
Setting up machines
$140 per setup
$300 per part
Part administration
type
(a) ÷ (b)
Activity Rate
$25 per DLH
$140 per setup
$300 per part
type
(b)
Expected Activity
19,000 DLHs
658 setups
2,162 part types
(a) × (b)
ABC Cost
$ 475,000
92,120
648,600
$1,215,720
Overhead Cost per unit = $1,215,720 ÷ 10,000 units = $121.57 per unit
Unit Product Cost:
Direct materials ............................... $ 45.80
Direct labor ......................................
49.40
Applied manufacturing overhead .... 121.57
Total................................................. $216.77
8-68
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Use the following to answer questions 82-83:
(Appendix 8B) Pacchiana Manufacturing Corporation has a traditional costing system in
which it applies manufacturing overhead to its products using a predetermined overhead rate
based on direct labor-hours (DLHs). The company has two products, R21V and D00B, about
which it has provided the following data:
Direct materials per unit ................
Direct labor per unit ......................
Direct labor-hours per unit ............
Annual production .........................
R21V D00B
$19.60 $61.70
$3.90 $19.50
0.30
1.50
45,000 15,000
The company’s estimated total manufacturing overhead for the year is $1,262,880 and the
company’s estimated total direct labor-hours for the year is 36,000.
The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system appear
below:
Estimated
Activities and Activity Measures
Overhead Cost
Assembling products (DLHs) ...................
$ 108,000
Preparing batches (batches).......................
362,880
Product support (product variations) .........
792,000
Total ..........................................................
$1,262,880
DLHs ........................
Batches .....................
Product variations.....
Expected Activity
R21V D00B Total
13,500 22,500 36,000
1,440 1,152 2,592
1,404
576 1,980
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-69
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
82. The unit product cost of product R21V under the company's traditional costing system
is closest to:
A) $34.02
B) $24.40
C) $41.36
D) $23.50
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Predetermined overhead rate = $1,262,880 ÷ 36,000 DLHs = $35.08 per DLH
Applied overhead = [(45,000 units × 0.30 DLHs per unit) × $35.08 per DLH] ÷ 45,000
units = $10.52 per unit
Unit Product Cost:
Direct materials ...............................
Direct labor ......................................
Applied manufacturing overhead ....
Total.................................................
8-70
$19.60
3.90
10.52
$34.02
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
83. The unit product cost of product D00B under the activity-based costing system is
closest to:
A) $111.81
B) $133.82
C) $81.20
D) $30.61
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
Solution:
(a)
Activity Cost Pool
Assembling
products
Preparing batches
Product support
Estimated Cost
$108,000
$362,880
$792,000
(b)
Expected
Activity
36,000 DLHs
Activity Rate
$3 per DLH
2,592 batches
1,980 product
variations
$140 per batches
$400 per product
variation
Total Overhead applied to Product D00B:
(a)
Activity Cost Pool
Activity Rate
Assembling products
$3 per DLH
Preparing batches
$140 per batch
$400 per product
Product support
variation
(a) ÷ (b)
(b)
Expected Activity
22,500 DLHs
1,152 batches
576 product
variations
(a) × (b)
ABC Cost
$ 67,500
161,280
230,400
$459,180
Overhead Cost per unit = $459,180 ÷ 15,000 units = $30.61 per unit
Unit Product Cost:
Direct materials ............................... $ 61.70
Direct labor ......................................
19.50
Applied manufacturing overhead ....
30.61
Total................................................. $111.81
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-71
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Essay Questions
84. Beckley Corporation has provided the following data from its activity-based costing
accounting system:
Indirect factory wages ................... $16,000
Factory equipment depreciation .... $193,000
Distribution of Resource Consumption across Activity Cost Pools:
Activity Cost Pools
Indirect factory wages ...................
Factory equipment depreciation ....
Customer
Product
Orders
Processing
48%
47%
61%
25%
Other
5%
14%
Total
100%
100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs that are not assigned to products.
Required:
a. Determine the total amount of indirect factory wages and factory equipment
depreciation costs that would be allocated to the Product Processing activity cost
pool. Show your work!
b. Determine the total amount of indirect factory wages and factory equipment
depreciation costs that would NOT be assigned to products. Show your work!
Ans:
a. Allocations to the Product Processing activity cost pool:
Indirect factory wages (47% × $16,000) ........................ $ 7,520
Factory equipment depreciation (25% × $193,000) .......
48,250
Total................................................................................ $55,770
b. As stated in the problem, the costs allocated to the “Other” cost pool are not
assigned to products.
Indirect factory wages (5% × $16,000) .......................... $ 800
Factory equipment depreciation (14% × $193,000) .......
27,020
Total................................................................................ $27,820
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1,2 Level: Easy
8-72
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
85. Desilets Corporation has provided the following data from its activity-based costing
accounting system:
Supervisory wages .............
Factory utilities ..................
$94,000
$128,000
Distribution of Resource Consumption across Activity Cost Pools:
Batch
Unit
Activity Cost Pools
Set-Ups Processing Other
Total
Supervisory wages .......
34%
64%
2%
100%
Factory utilities ............
49%
35%
16%
100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs that are not assigned to products.
Required:
a. Determine the total amount of supervisory wages and factory utilities costs that
would be allocated to the Unit Processing activity cost pool. Show your work!
b. Determine the total amount of supervisory wages and factory utilities costs that
would NOT be assigned to products. Show your work!
Ans:
a. Allocations to the Unit Processing activity cost pool:
Supervisory wages (64% × $94,000) ........ $ 60,160
Factory utilities (35% × $128,000)............
44,800
Total........................................................... $104,960
b. As stated in the problem, the costs allocated to the “Other” cost pool are not
assigned to products.
Supervisory wages (2% × $94,000) .......... $ 1,880
Factory utilities (16% × $128,000)............ 20,480
Total........................................................... $22,360
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1,2 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
8-73
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
86. The following data have been provided by Hooey Corporation from its activity-based
costing accounting system:
Supervisory wages .............
Factory utilities ..................
$46,000
$199,000
Distribution of Resource Consumption across Activity Cost Pools:
Activity Cost Pools
Supervisory wages .......
Factory utilities ............
Product
Change-Overs Machining
59%
33%
18%
69%
Other
8%
13%
Total
100%
100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs that are not assigned to products.
Required:
a. Determine the total amount of supervisory wages and factory utilities costs that
would be allocated to the Machining activity cost pool. Show your work!
b. Determine the total amount of supervisory wages and factory utilities costs that
would NOT be assigned to products. Show your work!
Ans:
a. Allocations to the Machining activity cost pool:
Supervisory wages (33% × $46,000) ........ $ 15,180
Factory utilities (69% × $199,000)............ 137,310
Total........................................................... $152,490
b. As stated in the problem, the costs allocated to the “Other” cost pool are not
assigned to products.
Supervisory wages (8% × $46,000) .......... $ 3,680
Factory utilities (13% × $199,000)............ 25,870
Total........................................................... $29,550
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1,2 Level: Easy
8-74
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
87. Fidler & Jenkins PLC, a consulting firm, uses an activity-based costing in which there
are three activity cost pools. The company has provided the following data concerning
its costs and its activity based costing system:
Costs:
Wages and salaries ............ $620,000
Travel expenses ................. 140,000
Other expenses .................. 120,000
Total................................... $880,000
Distribution of resource consumption:
Activity Cost Pools
Wages and salaries ......
Travel expenses ...........
Other expenses ............
Working On
Engagements
60%
50%
35%
Business
Development
10%
40%
25%
Other
30%
10%
40%
Total
100%
100%
100%
Required:
a. How much cost, in total, would be allocated to the Working On Engagements
activity cost pool?
b. How much cost, in total, would be allocated to the Business Development activity
cost pool?
c. How much cost, in total, would be allocated to the Other activity cost pool?
Ans:
All three parts can be answered using a first-stage allocation of costs.
Wages and salaries ....
Travel expenses .........
Other expenses ..........
Total ..........................
Working On
Engagements
$372,000
70,000
42,000
$484,000
Business
Development
Other
Total
$ 62,000
$186,000 $620,000
56,000
14,000 140,000
30,000
48,000 120,000
$148,000
$248,000 $880,000
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
8-75
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
88. Dane Housecleaning provides housecleaning services to its clients. The company uses
an activity-based costing system for its overhead costs. The company has provided the
following data from its activity-based costing system.
Activity Cost Pool
Cleaning....................
Job support ...............
Client support ...........
Other .........................
Total..........................
Total Cost
$263,784
145,180
4,774
170,000
$583,738
Total Activity
34,800 hours
7,000 jobs
220 clients
Not applicable
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
One particular client, the Hoium family, requested 45 jobs during the year that
required a total of 90 hours of housecleaning. For this service, the client was charged
$2,000.
Required:
a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools.
Round off all calculations to the nearest whole cent.
b. Using the activity-based costing system, compute the customer margin for the
Hoium family. Round off all calculations to the nearest whole cent.
c. Assume the company decides instead to use a traditional costing system in which
ALL costs are allocated to customers on the basis of cleaning hours. Compute the
margin for the Hoium family. Round off all calculations to the nearest whole cent.
8-76
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
a. The computation of the activity rates follow:
Total Cost Total Activity Activity Rates
Cleaning...........
$263,784 34,800 hours
$7.58 per hour
Job support ......
$145,180
7,000 jobs
$20.74 per job
Client support ..
$4,774
220 clients $21.70 per client
b. The customer margin for the family is computed as follows:
Client charges ..............
$2,000.00
Costs:
Cleaning ................... $682.20
Job support ...............
933.30
Client support ...........
21.70 1,637.20
Customer margin .........
$ 362.80
Computations for costs:
Cleaning: 90 hours × $7.58 per hour = $682.20
Job support: 45 jobs × $20.74 per job = $933.30
Client support: 1 client × $21.70 per client = $21.70
c. The margin if all costs are allocated on the basis of cleaning hours:
Predetermined overhead rate = $583,738 ÷ 34,800 hours = $16.77 per hour
Client charges ....................
Allocated costs* ................
Customer margin ...............
$2,000.00
1,509.30
$ 490.70
* 90 hours × $16.77 per hour = $1,509.30
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3,4,5 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
8-77
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
89. The Kamienski Cleaning Brigade Company provides housecleaning services to its
clients. The company uses an activity-based costing system for its overhead costs. The
company has provided the following data from its activity-based costing system.
Activity Cost Pool
Cleaning.................
Job support ............
Client support ........
Other ......................
Total.......................
Total Cost
$185,752
171,532
15,124
240,000
$612,408
Total Activity
21,700 hours
6,100 jobs
760 clients
Not applicable
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
One particular client, the Whiddon family, requested 15 jobs during the year that
required a total of 60 hours of housecleaning. For this service, the client was charged
$1,170.
Required:
a. Using the activity-based costing system, compute the customer margin for the
Whiddon family. Round off all calculations to the nearest whole cent.
b. Assume the company decides instead to use a traditional costing system in which
ALL costs are allocated to customers on the basis of cleaning hours. Compute the
margin for the Whiddon family. Round off all calculations to the nearest whole
cent.
8-78
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
a. The first step is to compute activity rates:
Total Cost Total Activity Activity Rates
Cleaning.................
$185,752 21,700 hours
$8.56 per hour
Job support ............
$171,532
6,100 jobs
$28.12 per job
Client support ........
$15,124
760 clients $19.90 per client
The customer margin for the family is computed as follows:
Client charges ..............
$1,170.00
Costs:
Cleaning ................... $513.60
Job support ...............
421.80
Client support ...........
19.90
955.30
Customer margin .........
$ 214.70
Computations for costs:
Cleaning: 60 hours × $8.56 per hour = $513.60
Job support: 15 jobs × $28.12 per job = $421.80
Client support: 1 client × $19.90 per client = $19.90
b. The margin if all costs are allocated on the basis of cleaning hours:
Predetermined overhead rate = $612,408 ÷ 21,700 hours = $28.22 per hour
Client charges ..............
Allocated costs* ..........
Customer margin .........
$1,170.00
1,693.20
($523.20)
* 60 hours × $28.22 per hour = $1,693.20
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3,4,5 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
8-79
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
90. Cabio Company manufactures two products, Product C and Product D. The company
estimated it would incur $119,100 in manufacturing overhead costs during the current
period. Overhead currently is applied to the products on the basis of direct labor hours.
Data concerning the current period's operations appear below:
Estimated volume ..........................
Direct labor hours per unit.............
Direct materials cost per unit.........
Direct labor cost per unit ...............
Product C
400 units
1.20 hours
$4.00
$12.00
Product D
3,000 units
1.30 hour
$22.80
$13.00
Required:
a. Compute the predetermined overhead rate under the current method, and
determine the unit product cost of each product for the current year.
b. The company is considering using an activity-based costing system to compute
unit product costs for external financial reports instead of its traditional system
based on direct labor hours. The activity-based costing system would use three
activity cost pools. Data relating to these activities for the current period are given
below:
Expected Activity
Estimated
Overhead
Activity Cost Pool
Costs
Product C Product D
Total
Machine setups ......
$ 10,440
60
120
180
Purchase orders......
78,000
820
1,180
2,000
General factory ......
30,660
480
3,900
4,380
Total.......................
$119,100
Determine the unit product cost of each product for the current period using the
activity-based costing approach.
8-80
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
a. The expected total direct labor hours during the period are computed as follows:
Product C: 400 units × 1.2 hours per unit ..........
Product D: 3,000 units × 1.3 hours per unit .......
Total direct labor hours ......................................
480 hours
3,900 hours
4,380 hours
Using these hours as a base, the predetermined overhead using direct labor hours
would be:
Estimated overhead cost ÷ Estimated direct labor-hours =
$119,100 ÷ 4,380 DLHs = $27.19 per DLH
Using this overhead rate, the unit product costs are:
Direct materials .......................
Direct labor ..............................
Manufacturing overhead..........
Total unit product cost .............
Product C Product D
$ 4.00
$22.80
12.00
13.00
32.63
35.35
$48.63
$71.15
b. The activity rates for each activity cost pool are as follows:
Machine setups ......
Purchase orders......
General factory ......
Estimated
Overhead
Costs
$10,440
$78,000
$30,660
Expected
Activity
180
2,000
4,380
Activity
Rate
$58.00
$39.00
$7.00
The overhead cost charged to each product is:
Machine setups .........
Purchase orders.........
General factory .........
Total overhead cost ..
Product C
Activity Amount
60
$ 3,480
820
31,980
480
3,360
$38,820
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Product D
Activity Amount
120 $ 6,960
1,180 46,020
3,900 27,300
$80,280
8-81
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Overhead cost per unit:
Product C: $38,820 ÷ 400 units = $97.05 per unit
Product D: $80,280 ÷ 3,000 units = $26.76 per unit
Using activity based costing, the unit product cost of each product would be:
Direct materials .............................
Direct labor ....................................
Manufacturing overhead................
Total unit product cost ...................
Product C Product D
$ 4.00
$22.80
12.00
13.00
97.05
26.76
$113.05
$62.56
AACSB: Analytic AICPA BB: Critical Thinking
LO: 7 Level: Hard
AICPA FN: Reporting
91. Danton Company manufactures two products, Product F and Product G. The company
expects to produce and sell 600 units of Product F and 3,000 units of Product G during
the current year. The company uses activity-based costing to compute unit product
costs for external reports. Data relating to the company's three activity cost pools are
given below for the current year:
Expected Activity
Estimated
Overhead
Activity Cost Pool
Costs
Product F Product G
Total
Machine setups ......
$13,720
140
140
280
Purchase orders......
$74,730
630
960
1,590
General factory ......
$15,000
600
2,400
3,000
Required:
Using the activity-based costing approach, determine the overhead cost per unit for
each product.
8-82
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
The activity rates for each activity cost pool are as follows:
Activity Cost Pool
Machine setups ............
Purchase orders............
General factory ............
Overhead
Estimated
Costs
$13,720
$74,730
$15,000
Expected
Activity
280
1,590
3,000
Activity
Rate
$49.00
$47.00
$5.00
The overhead cost charged to each product is:
Machine setups ............
Purchase orders............
General factory ............
Total overhead cost .....
Product F
Activity Amount
140 $ 6,860
630 29,610
600
3,000
$39,470
Product G
Activity Amount
140 $ 6,860
960 45,120
2,400 12,000
$63,980
Overhead cost per unit:
Product F: $39,470 ÷ 600 units = $65.78 per unit
Product G: $63,980 ÷ 3,000 units = $21.33 per unit
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3,4 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
8-83
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
92. Kretlow Corporation has provided the following data from its activity-based costing
accounting system:
Activity Cost Pools
Designing products ......
Setting up batches ........
Assembling products ...
Total Cost
$700,502
$12,400
$125,440
Total Activity
3,746 product design hours
620 batch set-ups
8,960 assembly hours
Required:
Compute the activity rates for each of the three cost pools. Show your work!
Ans:
Activity Cost Pools
Designing products ............
Setting up batches ..............
Assembling products .........
Total Cost Total Activity Activity Rate
$700,502
3,746
$187
$12,400
620
$20
$125,440
8,960
$14
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Easy
AICPA FN: Reporting
93. Data concerning three of Kilmon Corporation's activity cost pools appear below:
Activity Cost Pools
Assembling products .........
Designing products ............
Setting up batches ..............
Total Cost
$150,300
$1,177,535
$14,400
Total Activity
8,350 assembly hours
7,597 product design hours
600 batch set-ups
Required:
Compute the activity rates for each of the three cost pools. Show your work!
Ans:
Activity Cost Pools
Assembling products .........
Designing products ............
Setting up batches ..............
Total Cost Total Activity Activity Rate
$150,300
8,350
$18
$1,177,535
7,597
$155
$14,400
600
$24
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Easy
8-84
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
94. Doles Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products.
Activity Cost Pools
Setting up batches ....................
Processing customer orders .....
Assembling products ...............
Activity Rate
$98.54 per batch
$42.00 per customer order
$3.53 per assembly hour
Data concerning two products appear below:
Number of batches.........................
Number of customer orders ...........
Number of assembly hours ............
Product K52W Product X94T
55
73
9
17
697
402
Required:
How much overhead cost would be assigned to each of the two products using the
company's activity-based costing system?
Ans:
Setting up batches .......................
Processing customer orders ........
Assembling products ..................
Total overhead cost ....................
Product K52W Product X94T
$5,419.70
$7,193.42
378.00
714.00
2,460.41
1,419.06
$8,258.11
$9,326.48
AACSB: Analytic AICPA BB: Critical Thinking
LO: 4 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
8-85
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
95. Desjarlais Corporation uses the following activity rates from its activity-based costing
to assign overhead costs to products.
Activity Cost Pools
Setting up batches ..........................
Assembling products .....................
Processing customer orders ...........
Activity Rate
$32.22 per batch
$6.13 per assembly hour
$72.75 per customer order
Data concerning two products appear below:
Number of batches.........................
Number of assembly hours ............
Number of customer orders ...........
Product S96U Product Q06F
78
24
412
178
53
18
Required:
a. How much overhead cost would be assigned to Product S96U using the company's
activity-based costing system? Show your work!
b. How much overhead cost would be assigned to Product Q06F using the company's
activity-based costing system? Show your work!
Ans:
a. Product S96U
Setting up batches (78 batches × $32.22 per batch) .......
Assembling products (412 assembly hours × $6.13 per
assembly hour) ............................................................
Processing customer orders (53 customer orders ×
$72.75 per customer order) .........................................
Total overhead cost .........................................................
b. Product Q06F
Setting up batches (24 batches × $32.22 per batch) .......
Assembling products (178 assembly hours × $6.13 per
assembly hour) ............................................................
Processing customer orders (18 customer orders ×
$72.75 per customer order) .........................................
Total overhead cost .........................................................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 4 Level: Easy
8-86
$2,513.16
2,525.56
3,855.75
$8,894.47
$ 773.28
1,091.14
1,309.50
$3,173.92
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
96. Archie Corporation uses the following activity rates from its activity-based costing to
assign overhead costs to products.
Activity Cost Pools
Setting up batches ....................
Processing customer orders .....
Assembling products ...............
Activity Rate
$16.68 per batch
$98.60 per customer order
$7.89 per assembly hour
Last year, Product X26X involved 18 batches, 4 customer orders, and 103 assembly
hours.
Required:
How much overhead cost would be assigned to Product X26X using the company's
activity-based costing system? Show your work!
Ans:
Setting up batches (18 batches × $16.68 per batch) .......
Processing customer orders (4 customer orders ×
$98.60 per customer order) .........................................
Assembling products (103 assembly hours × $7.89 per
assembly hour) ............................................................
Total overhead cost ........................................................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 4 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
$ 300.24
394.40
812.67
$1,507.31
AICPA FN: Reporting
8-87
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
97. IGL Draperies makes custom draperies for homes and businesses. The company uses
an activity-based costing system for its overhead costs. The company has provided the
following data concerning its annual overhead costs and its activity cost pools.
Overhead costs:
Production overhead ....
Office expense .............
Total.............................
$140,000
140,000
$280,000
Distribution of resource consumption:
Activity Cost Pools
Making Drapes Job Support Other Total
Production overhead ....
60%
20%
20% 100%
Office expense .............
15%
55%
30% 100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
The amount of activity for the year is as follows:
Activity Cost Pool
Making drapes .......
Job support ............
Other ......................
Annual Activity
3,000 yards
140 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
Drapes
Job
Support
Other
Total
Production overhead ....
Office expense .............
Total.............................
b. Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes
and Job Support activity cost pools by filling in the table below:
Making Drapes Job Support
Production overhead ....
Office expense .............
Total.............................
8-88
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
c. Prepare an action analysis report in good form of a job that involves making 85
yards of drapes and has direct materials and direct labor cost of $2,990. The sales
revenue from this job is $6,000. For purposes of this action analysis report, direct
materials and direct labor should be classified as a Green cost; production
overhead as a Red cost; and office expense as a Yellow cost.
Ans:
a. First-stage allocation
Production overhead ....
Office expense .............
Total.............................
Activity ........................
Making Drapes Job Support Other
Total
$84,000
$28,000 $28,000 $140,000
21,000
77,000 42,000 140,000
$105,000
$105,000 $70,000 $280,000
3,000 yards
140 jobs
b. Activity rates (costs divided by activity)
Making
Drapes
Activity ........................ 3,000 yards
Production overhead ....
Office expense .............
Total.............................
$28.00
7.00
$35.00
Job
Support
140 jobs
$200.00
550.00
$750.00
c. Overhead cost of the job.
Activity ..............................
Production overhead ..........
Office expense ...................
Total...................................
Making Drapes Job Support
85
1
$2,380
$200
595
550
$2,975
$750
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Total
$2,580
1,145
$3,725
8-89
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Sales...............................................
Green costs:
Direct materials and labor ..........
Green margin .................................
Yellow costs:
Office expense ............................
Yellow margin ...............................
Red costs:
Production overhead ...................
Red margin ....................................
$6,000
2,990
3,010
1,145
1,865
2,580
($ 715)
AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 8A LO: 6 Level: Hard
8-90
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
98. Haskell Hardwood Floors installs oak and other hardwood floors in homes and
businesses. The company uses an activity-based costing system for its overhead costs.
The company has provided the following data concerning its annual overhead costs
and its activity based costing system:
Overhead costs:
Production overhead .......... $120,000
Office expense ................... 140,000
Total................................... $260,000
Distribution of resource consumption:
Installing
Job
Activity Cost Pools
Floors
Support Other Total
Production overhead ..........
55%
25%
20% 100%
Office expense ...................
20%
50%
30% 100%
The “Other” activity cost pool consists of the costs of idle capacity and organizationsustaining costs.
The amount of activity for the year is as follows:
Activity Cost Pool
Installing floors......
Job support ............
Other ......................
Annual Activity
800 squares
100 jobs
Not applicable
A “square” is a measure of area that is roughly equivalent to 1,000 square feet.
Required:
a. Prepare the first-stage allocation of overhead costs to the activity cost pools by
filling in the table below:
Installing
Floors
Job
Support
Other
Total
Production overhead ..........
Office expense ...................
Total...................................
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-91
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
b. Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors
and Job Support activity cost pools by filling in the table below:
Installing
Floors
Job
Support
Production overhead ..........
Office expense ...................
Total...................................
c. Compute the overhead cost, according to the activity-based costing system, of a
job that involves installing 3.2 squares.
Ans:
a. First-stage allocation
Installing
Job
Floors
Support
Other
Total
$66,000 $ 30,000 $24,000 $120,000
28,000
70,000 42,000 140,000
$94,000 $100,000 $66,000 $260,000
Production overhead ....
Office expense .............
Total .............................
b. Activity rates (costs divided by activity)
Activity ..............................
Production overhead ..........
Office expense ...................
Total ...................................
Installing
Floors
800 squares
Job
Support
100 jobs
$ 82.50 $ 300.00
35.00
700.00
$117.50 $1,000.00
c. Overhead cost of the job.
Installing
Floors
Activity ........................
3.2
Production overhead ....
Office expense .............
Total .............................
Job
Support
1
$264.00 $ 300.00 $ 564.00
112.00
700.00
812.00
$376.00 $1,000.00 $1,376.00
AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 8A LO: 6 Level: Medium
8-92
Total
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
99. Golden Company, a wholesale distributor, uses activity-based costing for its overhead
costs. The company has provided the following data concerning its annual overhead
costs and its activity based costing system:
Overhead costs:
Wages and salaries ......
Nonwage expenses ......
Total.............................
$680,000
120,000
$800,000
Distribution of resource consumption:
Filling Product
Activity Cost Pools
Orders Support Other Total
Wages and salaries ............ 15%
75%
10% 100%
Nonwage expenses ............ 25%
55%
20% 100%
The “Other” activity cost pool consists of the costs of idle capacity and 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
40 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
Product
Support
Other
Total
Wages and salaries ............
Nonwage expenses ............
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-93
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
First-stage allocation
Filling
Product
Orders
Support
Other
Total
Wages and salaries ...... $102,000 $510,000 $68,000 $680,000
Nonwage expenses ......
30,000
66,000 24,000 120,000
Total............................. $132,000 $576,000 $92,000 $800,000
Activity .......................................
Filling
Orders
4,000 orders
Wages and salaries .....................
Nonwage expenses .....................
Total............................................
$25.50
7.50
$33.00
AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 8A LO: 6 Level: Medium
8-94
Product
Support
40 products
$12,750
1,650
$14,400
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
100. Jared Painting paints the interiors and exteriors of homes and commercial buildings.
The company uses an activity-based costing system for its overhead costs. The
company has provided the following data concerning its activity-based costing system.
Activity Cost Pool
Painting overhead ..............
Job support ........................
Other ..................................
Activity
Measure
Square meters
Jobs
None
Annual Activity
10,000 square meters
200 jobs
Not applicable
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 centers. The results are listed below:
Painting overhead .....
Office expense ..........
Total..........................
Job
Painting Support
Other
Total
$ 99,000 $ 45,000 $36,000 $180,000
6,000
78,000 36,000 120,000
$105,000 $123,000 $72,000 $300,000
Required:
a. Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job
Support activity cost pools by filling in the table below. Round off all calculations
to the nearest whole cent.
Painting
Job
Support
Painting overhead .....
Office expense ..........
Total..........................
b. Prepare an action analysis report in good form of a job that involves painting 71
square meters and has direct materials and direct labor cost of $2,410. The sales
revenue from this job is $3,800.
For purposes of this action analysis report, direct materials and direct labor should
be classified as a Green cost; painting overhead as a Red cost; and office expense
as a Yellow cost.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-95
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
a. Activity rates (costs divided by activity)
Painting overhead .....
Office expense ..........
Total ..........................
Job
Painting Support
$ 9.90 $225.00
0.60 390.00
$10.50 $615.00
b. Overhead cost of the job.
Activity ........................
Job
Painting Support
71
1
Painting overhead ........
Office expense .............
Total .............................
$702.90 $225.00 $ 927.90
42.60 390.00
432.60
$745.50 $615.00 $1,360.50
Sales ...............................................
Green costs:
Direct materials and labor ...........
Green margin .................................
Yellow costs:
Office expense ............................
Yellow margin ...............................
Red costs:
Painting overhead .......................
Red margin .....................................
$3,800.00
2,410.00
1,390.00
432.60
957.40
927.90
$ 29.50
AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 8A LO: 6 Level: Medium
8-96
Total
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
101. Werger Manufacturing Corporation has a traditional costing system in which it applies
manufacturing overhead to its products using a predetermined overhead rate based on
direct labor-hours (DLHs). The company has two products, W82R and L48S, about
which it has provided the following data:
W82R L48S
Direct materials per unit ................ $11.50 $62.90
Direct labor per unit ...................... $2.00 $13.00
Direct labor-hours per unit ............
0.20
1.30
Annual production ......................... 45,000 10,000
The company’s estimated total manufacturing overhead for the year is $1,521,960 and
the company’s estimated total direct labor-hours for the year is 22,000.
The company is considering using a variation of activity-based costing to determine its
unit product costs for external reports. Data for this proposed activity-based costing
system appear below:
Activities and Activity Measures
Supporting direct labor (DLHs) ..........
Setting up machines (setups) ...............
Parts administration (part types)..........
Total.....................................................
Activities
Supporting direct labor ......
Setting up machines...........
Parts administration ...........
Estimated Overhead
Cost
$ 352,000
201,960
968,000
$1,521,960
W82R L48S Total
9,000 13,000 22,000
814
374 1,188
924 1,012 1,936
Required:
a. Determine the unit product cost of each of the company's two products under the
traditional costing system.
b. Determine the unit product cost of each of the company's two products under
activity-based costing system.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8-97
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
a. Traditional Unit Product Costs
Predetermined overhead rate = $1,521,960 ÷ 22,000 DLHs = $69.18 per DLH
Direct materials ..............................................................
Direct labor .....................................................................
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
89.93
$27.34 $165.83
b. ABC Unit Product Costs
Supporting direct labor ...
Setting up machines........
Parts administration ........
Estimated
Overhead
Cost
$352,000
$201,960
$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 labor ...
Setting up machines........
Parts administration ........
Total................................
8-98
Activity Rate
$16 per DLH
$170 per setup
$500 per part type
Activity
9,000 DLHs
814 setups
924 part types
ABC
Cost
$144,000
138,380
462,000
$744,380
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Overhead cost for L48S
Supporting direct labor ...
Setting up machines........
Parts administration ........
Total................................
Activity Rate
$16 per DLH
$170 per setup
$500 per part type
Activity
13,000 DLHs
374 setups
1,012 part types
Direct materials ..............................................................
Direct labor .....................................................................
Manufacturing overhead ($744,400 ÷ 45,000 units;
$777,600 ÷ 10,000 units) ............................................
Unit product cost ............................................................
AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 8B LO: 7 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
W82R
$11.50
2.00
ABC
Cost
$208,000
63,580
506,000
$777,580
L48S
$62.90
13.00
16.54
77.76
$30.04 $153.66
AICPA FN: Reporting
8-99
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
102. Torri Manufacturing Corporation has a traditional costing system in which it applies
manufacturing overhead to its products using a predetermined overhead rate based on
direct labor-hours (DLHs). The company has two products, B40W and C63J, about
which it has provided the following data:
Direct materials per unit ..........
Direct labor per unit ................
Direct labor-hours per unit ......
Annual production ...................
B40W C63J
$34.90 $63.70
$20.80 $62.40
0.80
2.40
35,000 15,000
The company’s estimated total manufacturing overhead for the year is $2,656,000 and
the company’s estimated total direct labor-hours for the year is 64,000.
The company is considering using a variation of activity-based costing to determine its
unit product costs for external reports. Data for this proposed activity-based costing
system appear below:
Activities and Activity Measures
Assembling products (DLHs) ..............
Preparing batches (batches) .................
Milling (MHs) .....................................
Total.....................................................
Activities
Assembling products .........
Preparing batches ..............
Milling ...............................
Estimated Overhead
Cost
$1,216,000
480,000
960,000
$2,656,000
B40W C63J
Total
28,000 36,000 64,000
2,304 2,496 4,800
1,088 2,112 3,200
Required:
a. Determine the unit product cost of each of the company's two products under the
traditional costing system.
b. Determine the unit product cost of each of the company's two products under
activity-based costing system.
8-100
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
a. Traditional Unit Product Costs
Predetermined overhead rate = $2,656,000 ÷ 64,000 DLHs = $41.50 per DLH
Direct materials ..............................................................
Direct labor .....................................................................
Manufacturing overhead (0.8 DLHs × $41.50 per DLH;
2.4 DLHs × $41.50 per DLH) .....................................
Unit product cost ............................................................
B40W
$34.90
20.80
C63J
$ 63.70
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
64,000 DLHs
4,800 batches
3,200 MHs
Activity Rate
$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 $ 532,000
2,304 batches
230,400
1,088 MHs
326,400
$1,088,800
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 $ 684,000
2,496 batches
249,600
2,112 MHs
633,600
$1,567,200
Direct materials ..............................................................
Direct labor .....................................................................
Manufacturing overhead ($1,088,800 ÷ 35,000 units;
$1,567,200 ÷ 15,000 units) .........................................
Unit product cost ............................................................
AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 8B LO: 7 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
B40W
$34.90
20.80
C63J
$ 63.70
62.40
31.11 104.48
$86.81 $230.58
AICPA FN: Reporting
8-101
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
103. Welk Manufacturing Corporation has a traditional costing system in which it applies
manufacturing overhead to its products using a predetermined overhead rate based on
direct labor-hours (DLHs). The company has two products, H16Z and P25P, about
which it has provided the following data:
Direct materials per unit ................
Direct labor per unit ......................
Direct labor-hours per unit ............
Annual production .........................
H16Z P25P
$10.20 $50.50
$8.40 $25.20
0.40
1.20
30,000 10,000
The company’s estimated total manufacturing overhead for the year is $1,464,480 and
the company’s estimated total direct labor-hours for the year is 24,000.
The company is considering using a variation of activity-based costing to determine its
unit product costs for external reports. Data for this proposed activity-based costing
system appear below:
Activities and Activity Measures
Supporting direct labor (DLHs) .................
Setting up machines (setups) .....................
Parts administration (part types) ................
Total ...........................................................
Supporting direct labor ......
Setting up machines ...........
Parts administration ...........
Estimated Overhead
Cost
$ 552,000
132,480
780,000
$1,464,480
H16Z P25P
Total
12,000 12,000 24,000
864
240 1,104
600
960 1,560
Required:
a. Determine the manufacturing overhead cost per unit of each of the company's two
products under the traditional costing system.
b. Determine the manufacturing overhead cost per unit of each of the company's two
products under activity-based costing system.
8-102
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,464,480 ÷ 24,000 DLHs = $61.02 per DLH
Direct labor-hours......................................
Predetermined overhead rate per DLH ......
Manufacturing overhead cost per unit .......
H16Z P25P
0.40
1.20
$61.02 $61.02
$24.41 $73.22
b. ABC Manufacturing Overhead Costs
Supporting direct labor ...
Setting up machines........
Parts administration ........
Estimated
Overhead
Cost
$552,000
$132,480
$780,000
Total Expected
Activity
24,000 DLHs
1,104 setups
1,560 part types
Activity Rate
$23 per DLH
$120 per setup
$500 per part type
Overhead cost for H16Z
Supporting direct labor ...
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
12,000 DLHs
864 setups
600 part types
ABC
Cost
$276,000
103,680
300,000
$679,680
30,000
$22.66
Overhead cost for P25P
Supporting direct labor ...
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
AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 8B LO: 7 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Activity
12,000 DLHs
240 setups
960 part types
ABC
Cost
$276,000
28,800
480,000
$784,800
10,000
$78.48
AICPA FN: Reporting
8-103
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
104. Bullie Manufacturing Corporation has a traditional costing system in which it applies
manufacturing overhead to its products using a predetermined overhead rate based on
direct labor-hours (DLHs). The company has two products, D31X and U75X, about
which it has provided the following data:
Direct materials per unit ..........
Direct labor per unit ................
Direct labor-hours per unit ......
Annual production ...................
D31X U75X
$29.20 $47.40
$1.10 $23.10
0.10
2.10
35,000 15,000
The company’s estimated total manufacturing overhead for the year is $1,147,650 and
the company’s estimated total direct labor-hours for the year is 35,000.
The company is considering using a variation of activity-based costing to determine its
unit product costs for external reports. Data for this proposed activity-based costing
system appear below:
Activities and Activity Measures
Assembling products (DLHs) ........
Preparing batches (batches) ...........
Axial milling (MHs) ......................
Total...............................................
Assembling products .........
Preparing batches ..............
Axial milling......................
Estimated Overhead
Cost
$ 140,000
241,150
766,500
$1,147,650
D31X U75X Total
3,500 31,500 35,000
560 1,295 1,855
1,540 1,015 2,555
Required:
a. Determine the manufacturing overhead cost per unit of each of the company's two
products under the traditional costing system.
b. Determine the manufacturing overhead cost per unit of each of the company's two
products under activity-based costing system.
8-104
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
Ans:
a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH
Direct labor-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
Assembling products ...
Preparing batches ........
Axial milling................
Estimated
Overhead
Cost
$140,000
$241,150
$766,500
Total Expected
Activity
35,000 DLHs
1,855 batches
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
3,500 DLHs
560 batches
1,540 MHs
ABC
Cost
$ 14,000
72,800
462,000
$548,800
35,000
$15.68
Overhead cost for U75X
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
AACSB: Analytic AICPA BB: Critical Thinking
Appendix: 8B LO: 7 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Activity
31,500 DLHs
1,295 batches
1,015 MHs
ABC
Cost
$126,000
168,350
304,500
$598,850
15,000
$39.92
AICPA FN: Reporting
8-105
Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
8-106
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition