Managerial Accounting Tools for Business Decision-Making, 4th Canadian Edition by Jerry J. Weygandt – Test Bank

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Sample Questions Posted Below

 

 

 

 

 

CHAPTER 5

 

Activity-Based COSTING

 

Summary of Question TYPES by STUDY Objectives and LEVEL OF DIFFICULTY

 

Item SO LOD Item SO LOD Item SO LOD Item SO LOD Item SO LOD

True-False Statements

1. 1 E 7. 2 E 13. 3 E 19. 3 M 25. 4 E
2. 1 E 8. 2 E 14. 3 E 20. 3 E 26. 4 E
3. 1 E 9. 2 E 15. 3 E 21. 3 E      
4. 1 E 10. 3 E 16. 3 E 22. 3 E      
5. 1 E 11. 3 E 17. 3 E 23. 3 E      
6. 2 E 12. 3 E 18. 3 E 24. 4 E      

Multiple Choice Questions

27. 1 E 39. 2 M 51. 2 H 63. 3 E 75. 3 M
28. 1 M 40. 2 M 52. 2 M 64. 3 E 76. 3 M
29. 1 E 41. 2 H 53. 2 E 65. 3 M 77. 3,4 M
30. 1 M 42. 2 H 54. 2 E 66. 3 M 78. 3,4 M
31. 1 M 43. 2 M 55. 3 M 67. 3 M 79. 4 M
32. 1 E 44. 2 M 56. 3 E 68. 3 E 80. 4 E
33. 2 E 45. 2 H 57. 3 E 69. 3 E 81. 4 M
34. 2 E 46. 2 H 58. 3 E 70. 3 E 82. 4 E
35. 2 M 47. 2 H 59. 3 E 71. 3 E 83. 4 M
36. 2 E 48. 2 H 60. 3 M 72. 3 E 84. 4 H
37. 2 M 49. 2 H 61. 3 M 73. 3 M 85. 4 H
38. 2 E 50. 2 H 62. 3 E 74. 3 M 86. 4 H
Brief Exercises
87. 2 M 89. 2 H 91. 3 M 93. 3 M 95. 4 H
88. 2 H 90. 2 M 92. 3 M 94. 4 H      
Exercises
96. 1,2 H 100. 1,2 H 104. 2 M 108. 2,3 M 112. 4 H
97. 1,2 H 101. 1,2 H 105. 2 M 109. 3 M 113. 4 H
98. 1,2 H 102. 2 H 106. 2 E 110. 3 M      
99. 1,2 H 103. 2 M 107. 2 M 111. 3 M      
Completion Statements
114. 1 M 116. 2 M 118. 3 M 120. 3 M 122. 3 M
115. 1 M 117. 2 M 119. 3 M 121. 3 M 123. 4 M
Matching
124. 3 M                        
Short Answer Essay
125. 1,3 M 126. 2 M 127. 3 M 128. 4 M 129. 4 M
Multi-Part Question
130. 1,2,3 H                        

 

Note:          E = Easy           M = Medium          H = Hard

Summary of Question TYPES by STUDY Objectives and Bloom’s Taxonomy

 

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT

True-False Statements

1. 1 K 7. 2 C 13. 3 K 19. 3 K 25. 4 K
2. 1 K 8. 2 K 14. 3 C 20. 3 K 26. 4 K
3. 1 K 9. 2 C 15. 3 K 21. 3 C      
4. 1 C 10. 3 K 16. 3 K 22. 3 K      
5. 1 C 11. 3 K 17. 3 K 23. 3 K      
6. 2 K 12. 3 K 18. 3 K 24. 4 K      

Multiple Choice Questions

27. 1 K 39. 2 AP 51. 2 AP 63. 3 C 75. 3 C
28. 1 K 40. 2 AP 52. 2 AP 64. 3 C 76. 3 C
29. 1 K 41. 2 AP 53. 2 C 65. 3 C 77. 3,4 C
30. 1 C 42. 2 AP 54. 2 K 66. 3 C 78. 3,4 C
31. 1 AP 43. 2 AP 55. 3 K 67. 3 K 79. 4 K
32. 1 C 44. 2 AP 56. 3 C 68. 3 C 80. 4 K
33. 2 K 45. 2 AP 57. 3 K 69. 3 C 81. 4 K
34. 2 K 46. 2 AP 58. 3 C 70. 3 C 82. 4 K
35. 2 AP 47. 2 AP 59. 3 K 71. 3 C 83. 4 C
36. 2 C 48. 2 AP 60. 3 K 72. 3 C 84. 4 AP
37. 2 C 49. 2 AP 61. 3 C 73. 3 C 85. 4 AP
38. 2 K 50. 2 AP 62. 3 C 74. 3 C 86. 4 AP
Brief Exercises
87. 2 AP 89. 2 AP 91. 3 A 93. 3 AP 95. 4 A
88. 2 AP 90. 2 AP 92. 3 A 94. 4 AP      
Exercises
96. 1,2 A 100. 1,2 AP 104. 2 C 108. 2,3 E 112. 4 AP
97. 1,2 AP 101. 1,2 A 105. 2 C 109. 3 C 113. 4 AP
98. 1,2 AP 102. 2 AP 106. 2 AP 110. 3 C      
99. 1,2 A 103. 2 C 107. 2 AP 111. 3 C      
Completion Statements
114. 1 K 116. 2 K 118. 3 K 120. 3 K 122. 3 K
115. 1 K 117. 2 K 119. 3 K 121. 3 K 123. 4 K
Matching
124. 3 K                        
Short Answer Essay
125. 1,3 C 126. 2 C 127. 3 C 128. 4 C 129. 4 C
Multi-Part Question
130. 1,2,3 A                        

 

Note:          AP = Application      C = Comprehension        K = Knowledge

 

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

 

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 4. TF 28. MC 31. MC 97. Ex 100. Ex 115. C
2. TF 5. TF 29. MC 32. MC 98. Ex 101. Ex 125. SAE
3. TF 27. MC 30. MC 96. Ex 99. Ex 114. C 130. MP
Study Objective 2
6. TF 36. MC 43. MC 50. MC 89. BE 101. Ex 108. Ex
7. TF 37. MC 44. MC 51. MC 90. BE 102. Ex 116. C
8. TF 38. MC 45. MC 52. MC 96. Ex 103. Ex 117. C
9. TF 39. MC 46. MC 53. MC 97. Ex 104. Ex 126. SAE
33. MC 40. MC 47. MC 54. MC 98. Ex 105. Ex 130. MP
34. MC 41. MC 48. MC 87. BE 99. Ex 106. Ex    
35. MC 42. MC 49. MC 88. BE 100. Ex 107. Ex    
Study Objective 3
10. TF 18. TF 57. MC 65. MC 73. MC 93. BE 121. C
11. TF 19. TF 58. MC 66. MC 74. MC 108. Ex 122. C
12. TF 20. TF 59. MC 67. MC 75. MC 109. Ex 124. Ma
13. TF 21. TF 60. MC 68. MC 76. MC 110. Ex 125. SAE
14. TF 22. TF 61. MC 69. MC 77. MC 111. Ex 127. SAE
15. TF 23. TF 62. MC 70. MC 78. MC 118. C 130. MP
16. TF 55. MC 63. MC 71. MC 91. BE 119. C    
17. TF 56. MC 64. MC 72. MC 92. BE 120. C    
Study Objective 4
24. TF 77. MC 80. MC 83. MC 86. MC 112. Ex 128. SAE
25. TF 78. MC 81. MC 84. MC 94. BE 113. Ex 129. SAE
26. TF 79. MC 82. MC 85. MC 95. BE 123. C    

 

Note:   TF  =  True-False                             C  = Completion            BE = Brief Exercise

MC =  Multiple Choice                     Ex = Exercise                SAE = Short Answer Essay

Ma = Matching                                 MP = Multi-Part Question

 

The chapter also contains one set of eight Matching questions and four Short-Answer Essay questions.

 

CHAPTER STUDY OBJECTIVES

 

 

  1. Recognize the difference between traditional costing and activity-based costing (ABC) and understand the nature of ABC. A traditional costing system allocates overhead to products based on a predetermined plant-wide or department-wide volume of unit-based output rates, such as direct labour or machine hours. An ABC system allocates overhead to identify activity cost pools, and then assigns costs to products using related cost drivers that measure the activities (resources) consumed.

 

 

  1. Apply activity-based costing to a manufacturer. The development of an activity-based costing system for a manufacturer involves four steps: (1) Identify and classify the major activities that pertain to the manufacture of specific products, and allocate manufacturing overhead costs to the appropriate cost pools. To identify activity cost pools, a company must perform an analysis of each operation or process, documenting and timing every task, action, or transaction. (2) Identify the cost driver that has a strong correlation to the costs accumulated in each activity cost pool. Cost drivers that companies identify for activity cost pools must (a) accurately measure the actual consumption of the activity by the various products, and (b) have data on them that are easily available. (3) Calculate the activity-based overhead rate per cost driver. (4) Use the cost drivers to assign overhead costs for each activity cost pool to products or services.

 

 

  1. Understand the benefits and limitations of activity-based costing. What makes ABC a more accurate product costing system is (1) the increased number of cost pools used to assign overhead, (2) the enhanced control over overhead costs, and (3) the better management decisions it makes possible. The limitations of ABC are (1) the higher analysis and measurement costs that accompany multiple activity centres and cost drivers, and (2) the need to still allocate some costs arbitrarily.

Value-added activities increase the worth of a product or service. Non–value-added activities simply add cost to, or increase the time spent on, a product or service without increasing its market value. Being aware of these classifications helps managers reduce or eliminate the time spent on the non–value-added activities.

Activities may be classified as unit-level, batch-level, product-level, and facility-level. A company controls overhead costs at unit, batch, product, and facility levels by modifying unit-, batch-, product-, and facility-level activities, respectively. Failure to recognize this classification of levels can result in distorted product costing.

 

 

  1. Apply activity-based costing to service industries. The overall objective of using ABC in service industries is the same as in manufacturing industries; that is, improved costing of the services provided (by job, service, contract, or customer). The general approach to costing is the same: analyze operations, identify activities, accumulate overhead costs by activity cost pools, and identify and use cost drivers to assign the cost pools to the services.

 

TRUE-FALSE STATEMENTS

 

 

  1. Traditional costing systems use multiple predetermined overhead rates.

 

 

  1. Traditionally, overhead is allocated based on direct labour cost or direct labour hours.

 

 

  1. Current trends in manufacturing include less direct labour and more overhead.

 

 

  1. Activity-based costing allocates overhead to multiple cost pools and assigns the cost pools to products using cost drivers.

 

 

  1. A cost driver does NOT generally have a direct cause-effect relationship with the resources consumed.

 

 

  1. The first step in activity-based costing is to assign overhead costs to products, using cost drivers.

 

 

  1. To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the activity cost pool.

 

 

  1. Low-volume products often require more special handling than high-volume products.

 

 

  1. When overhead is properly assigned in ABC, it will usually decrease the unit cost of high-volume products.

 

 

  1. ABC leads to enhanced control over overhead costs.

 

 

  1. ABC usually results in less appropriate management decisions.

 

 

  1. ABC is generally more costly to implement than traditional costing.

 

 

  1. ABC eliminates all arbitrary cost allocations.

 

 

  1. ABC is particularly useful when product lines differ greatly in volume and manufacturing complexity.

 

 

  1. ABC is particularly useful when overhead costs are an insignificant portion of total costs.

 

 

  1. Activity-based management focuses on reducing costs and improving processes.

 

 

  1. Any activity that increases the cost of producing a product is a value-added activity.

 

 

  1. Engineering design is a value-added activity.

 

 

  1. Non-value-added activities increase the cost of a product but NOT its market value.

 

 

  1. Machining is a non-value-added activity.

 

 

  1. Not all activities labelled non-value-added are totally wasteful, nor can they be totally eliminated.

 

 

  1. Plant management is a batch-level activity.

 

 

  1. Painting is a product-level activity.

 

 

  1. The overall objective of installing ABC in service firms is no different than it is in a manufacturing company.

 

 

  1. What sometimes makes implementation of activity-based costing difficult in service industries is that a smaller proportion of overhead costs are company-wide costs.

 

 

  1. The general approach to identifying activities, activity cost pools, and cost drivers is used by a service company in the same manner as a manufacturing company.

 

ANSWERS TO TRUE-FALSE STATEMENTS

 

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. F 11. F 16. T 21. T 26. T
2. T 7. T 12. T 17. F 22. F    
3. T 8. T 13. F 18. T 23. F    
4. T 9. F 14. T 19. T 24. T    
5. F 10. T 15. F 20. F 25. F    

 

MULTIPLE CHOICE QUESTIONS

 

 

  1. Which of the following is typical of traditional costing systems?
  2. a) Uses multiple cost drivers to allocate overhead.
  3. b) It is more complicated than Activity Based Costing systems.
  4. c) Is still the best way to allocate direct labour costs.
  5. d) Uses a single cost driver to allocate overhead.

 

 

  1. In traditional costing systems, overhead is generally applied based on
  2. a) direct labour for job-order costing, and machine hours for process-costing.
  3. b) direct material for job-order costing, and direct labour for process-costing.
  4. c) factory usage for both job-order costing and process-costing.
  5. d) units of production.

 

 

  1. A cost driver is
  2. a) any factor or activity that has a direct cause-effect relationship with the resources consumed.
  3. b) always based on time consumed by the activity.
  4. c) another name for cost pool.
  5. d) a term used only in traditional costing systems.

 

 

  1. Which best describes the flow of overhead costs in an activity-based costing system?
  2. a) overhead costs – direct labour cost or hours – products
  3. b) overhead costs – products
  4. c) overhead costs – activity cost pools – cost drivers – products
  5. d) overhead costs – machine hours – products

 

 

  1. Sleep-Tight manufactures mattresses for the hotel industry. It has two products, Downy and Firm, and total overhead of $504,000. The company plans to manufacture 200 Downy mattresses and 300 Firm mattresses this year. In manufacturing the mattresses, the company must perform 700 material moves for the Downy and 300 for the Firm; it processes 114 purchase orders for the Downy and 90 for the Firm; and the company’s employees work 2,800 direct labour hours on the Downy product and 3,500 on the Firm. Sleep-Tight’s total material handling costs are $300,000 and its total purchasing costs are $204,000.

Under a traditional costing approach based on direct labour hours, how much overhead would be assigned to the Downy product?

  1. a) $224,000
  2. b) $252,000
  3. c) $280,000
  4. d) $336,000

 

 

  1. In companies where there is good reason to change from a traditionally-based costing system to an activity-based costing system, management might expect
  2. a) products or services with high volumes will have higher overhead costs.
  3. b) products or services with high volumes will have lowered overhead costs.
  4. c) products or services with low volumes will have lowered overhead costs.
  5. d) products or services with high volumes are generally costed accurately.

 

 

  1. The first step in activity-based costing is to
  2. a) assign manufacturing overhead costs for each activity cost pool to products.
  3. b) calculate the activity-based overhead rate per cost driver.
  4. c) identify and classify the major activities involved in the manufacture of specific products.
  5. d) identify the cost driver that has a strong correlation to the activity cost pool.

 

 

  1. A well designed activity-based costing system starts with
  2. a) identifying the activity-cost pools.
  3. b) computing the activity-based overhead rate.
  4. c) assigning manufacturing overhead costs for each activity cost pool to products.
  5. d) analyzing the activities performed to manufacture a product.

 

 

  1. One of Astro Fireworks Company’s activity cost pools is machine setups, with estimated overhead of $200,000. Astro produces sparklers (75 setups) and lighters (25 setups). How much of the machine setup cost pool should be assigned to sparklers?
  2. a) $50,000
  3. b) $150,000
  4. c) $166,666
  5. d) $200,000

 

 

  1. Activity-based costing normally allocates overhead costs
  2. a) to products only.
  3. b) more accurately than traditional costing systems.
  4. c) to services, where as traditional costing systems normally allocate overhead costs to products.
  5. d) based on no more than three cost drivers.

 

 

  1. When using a single cost driver to allocate overhead costs, the amount of overhead costs that are applied is
  2. a) usually greater for low-volume products than for high-volume products.
  3. b) usually greater for high-volume products than for low-volume products.
  4. c) usually equal for both low and high-volume products.
  5. d) sometimes greater for higher-volume products, and sometimes greater for low-volume products.

 

 

  1. A good cost driver should have a high correlation with
  2. a) the actual number of units produced.
  3. b) the actual consumption of overhead costs.
  4. c) the actual number of products produced.
  5. d) the actual consumption of direct costs.

 

 

Use the following information to answer questions 39–42.

 

Poodle Company manufactures two products, Mini A and Maxi B. Poodle’s overhead costs consist of setting up machines, $800,000; machining, $2,000,000; and inspecting, $600,000. Information on the two products is:

Mini A                 Maxi B

Direct labour hours               15,000                 25,000

Machine setups                         600                      400

Machine hours                      24,000                 26,000

Inspections                                800                      700

 

 

  1. Overhead applied to Mini A using traditional costing and direct labour hours is
  2. a) $1,275,000.
  3. b) $1,536,000.
  4. c) $1,670,000.
  5. d) $1,700,000.

 

 

  1. Overhead applied to Maxi B using traditional costing and direct labour hours is
  2. a) $1,280,000.
  3. b) $1,664,000.
  4. c) $1,700,000.
  5. d) $2,125,000.

 

 

  1. Overhead applied to Mini A using activity-based costing is
  2. a) $1,275,000.
  3. b) $1,536,000.
  4. c) $1,760,000.
  5. d) $1,920,000.

 

 

  1. Overhead applied to Maxi B using activity-based costing is
  2. a) $1,280,000.
  3. b) $1,640,000.
  4. c) $1,664,000.
  5. d) $2,125,000.

 

 

  1. Veronica Co. produces 3 products, Products Rain, Snow, and Wind. Product Rain requires 15 machine setups, Product Snow requires 20 setups, and Product Wind requires 35 setups. Veronica has identified an activity cost pool with allocated overhead of $420,000 for which the cost driver is machine setups. How much overhead is assigned to each product?

Rain                   Snow                    Wind

  1. a) $140,000 $140,000 $140,000
  2. b) $28,000 $21,000               $12,000
  3. c) $90,000 $120,000             $210,000
  4. d) $12,000 $21,000               $28,000

 

 

  1. GoFish Inc. has an overhead rate for machine setups of $200 per machine setup, for a total of $56,000 of overhead. The company produces two products, Product Salamander and Product Gold, which require 120 and 160 setups each, respectively. The overhead assigned to each product is

 Salamander                     Gold

  1. a) $28,000 $28,000
  2. b) $32,000 $24,000
  3. c) $26,000 $30,000
  4. d) $24,000 $32,000

 

 

  1. Hammock Company manufactures two models of its hammock, the Superior and the Deluxe. The Superior model requires 10,000 direct labour hours and the Deluxe requires 40,000 direct labour hours. The company produces 4,000 units of the Superior model and 1,000 units of the Deluxe model each year. The company produces the Superior model in batch sizes of 200, while it produces the Deluxe model in batch sizes of 100. The company expects to incur $120,000 of total setup costs this year. How much of the setup costs are allocated to the Superior model using ABC costing?
  2. a) $80,000
  3. b) $60,000
  4. c) $24,000
  5. d) $100,000

 

 

  1. Jaime Inc. manufactures 2 products, sweaters and jackets. The company has estimated its overhead in the order-processing department to be $180,000. The company produces 50,000 sweaters and 80,000 jackets each year. Sweater production requires 25,000 machine hours, jacket production requires 50,000 machine hours. The company places raw materials orders 10 times per month, 2 times for raw materials for sweaters and the remainder for raw materials for jackets. How much of the order processing overhead should be allocated to jackets?
  2. a) $90,000
  3. b) $120,000
  4. c) $110,770
  5. d) $144,000

 

 

  1. Canterra Co. incurs $160,000 of overhead costs each year in its three main departments, setup ($10,000), machining ($110,000), and packing ($40,000). The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year. Information about Canterra’s 2 products is as follows:

Product One        Product Two

Number of setups                        20                        20

Machining hours                     1,000                   4,000

Orders packed                           150                      350

If machining hours are used as a base, how much overhead is assigned to Product One each year?

  1. a) $32,000
  2. b) $80,000
  3. c) $55,000
  4. d) $48,000

 

 

  1. Canterra Co. incurs $540,000 of overhead costs each year in its three main departments, setup ($40,000), machining ($400,000), and packing ($100,000). The setup department performs 50 setups per year, the machining department works 8,000 hours per year, and the packing department packs 200 orders per year. Information about Canterra’s 2 products is as follows:

Product One        Product Two

Number of setups                        10                        40

Machining hours                     3,000                   5,000

Orders packed                           110                        90

Using ABC, how much overhead is assigned to Product One each year?

  1. a) $540,000
  2. b) $327,000
  3. c) $270,000
  4. d) $213,000

 

 

  1. Canterra Co. incurs $160,000 of overhead costs each year in its three main departments, setup ($10,000), machining ($110,000), and packing ($40,000). The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year. Information about Canterra’s 2 products is as follows:

Product One        Product Two

Number of setups                        20                        20

Machining hours                     1,000                   4,000

Orders packed                           150                      350

Number of product

Manufactured                             600                      400

Using ABC, how much overhead is assigned to Product Two each year?

  1. a) $80,000
  2. b) $64,000
  3. c) $121,000
  4. d) $128,000

 

 

  1. A company incurs $1,200,000 of overhead each year in three departments, Processing, Packaging, and Testing. The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of oil and 600,000 drums of sludge. The following data are available:

Department          Expected use of Driver                 Cost

Processing                                 800                  $500,000

Packaging                          200,000                   500,000

Testing                                    2,000                    200,000

 

Production information for oil is as follows:

Department          Expected use of Driver

Processing                                 300

Packaging                          120,000

Testing                                    1,600

Calculate the amount of overhead assigned to oil.

  1. a) $600,000
  2. b) $647,500
  3. c) $552,500
  4. d) $460,000

 

 

  1. A company incurs $1,200,000 of overhead each year in three departments, Processing, Packaging, and Testing. The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of oil and 600,000 drums of sludge. The following data are available:

Department          Expected use of Driver                 Cost

Processing                                 800                  $500,000

Packaging                          200,000                   500,000

Testing                                    2,000                   200,000

 

Production information for sludge is as follows:

Department          Expected use of Driver

Processing                                 500

Packaging                            80,000

Testing                                       400

Calculate the amount of overhead assigned to sludge.

  1. a) $600,000
  2. b) $552,500
  3. c) $647,500
  4. d) $460,000

 

 

  1. Sleep-Tight manufactures mattresses for the hotel industry. It has two products, Downy and Firm and total overhead of $504,000. The company plans to manufacture 200 Downy mattresses and 300 Firm mattresses this year. In manufacturing the mattresses, the company must perform 700 material moves for the Downy and 300 for the Firm; it processes 114 purchase orders for the Downy and 90 for the Firm; and the company’s employees work 2,800 direct labour hours on the Downy product and 3,500 on the Firm. Sleep-Tight’s total material handling costs are $300,000 and its total purchasing costs are $204,000.

Using ABC, how much overhead would be assigned to the Downy product?

  1. a) $504,000
  2. b) $324,000
  3. c) $252,000
  4. d) $180,000

 

 

  1. A relevant unit-level cost driver for a spa is
  2. a) advertising the offerings in the spa.
  3. b) products used for facial care.
  4. c) training of new staff.
  5. d) hours patrons spend in the whirlpool.

 

 

  1. A critical component of an activity-based accounting system is
  2. a) the ability to accurately measure activities that consume cost.
  3. b) few areas in the facility that capture costs.
  4. c) the ability to eliminate non-value-added activities.
  5. d) flexible job-order costing information.

 

 

  1. Which of the following is a limitation of activity-based costing?
  2. a) more cost pools
  3. b) less control over overhead costs
  4. c) poorer management decisions
  5. d) some arbitrary allocations continue

 

 

  1. Which of the following factors would suggest a switch to activity-based costing?
  2. a) product lines similar in volume and manufacturing complexity
  3. b) overhead costs constitute a significant portion of total costs
  4. c) the manufacturing process has been stable
  5. d) production managers use data provided by the existing system

 

 

  1. Which of the following is true of activity-based costing?
  2. a) more cost pools
  3. b) same base as traditional costing
  4. c) less costly to use
  5. d) eliminates arbitrary allocations

 

 

  1. The primary benefit of ABC is it provides
  2. a) faster management decisions.
  3. b) enhanced control over overhead costs.
  4. c) more cost pools.
  5. d) more accurate product costing.

 

 

  1. Which of the following is NOT a benefit of activity-based costing?
  2. a) more accurate product costing
  3. b) enhanced control over overhead costs
  4. c) better management decisions
  5. d) less costly to use

 

 

  1. Each of the following is a limitation of activity-based costing EXCEPT that
  2. a) it can be expensive to use.
  3. b) it is more complex than traditional costing.
  4. c) more cost pools are used.
  5. d) some arbitrary allocations continue.

 

 

  1. The presence of any of the following factors would suggest a switch to ABC EXCEPT when
  2. a) product lines differ greatly in volume.
  3. b) overhead costs constitute a minor portion of total costs.
  4. c) the manufacturing process has changed significantly.
  5. d) production managers are ignoring data provided by the existing system.

 

 

  1. What might be an impediment in changing from a traditionally-based costing system to an activity-based costing system?
  2. a) Management may not be in favour of a change.
  3. b) Excessive costs may be incurred to assist in capturing costs.
  4. c) Some costs would still have to be allocated arbitrarily after the changeover.
  5. d) All of the above are impediments.

 

 

  1. What might be a reason to NOT change from a traditionally-based costing system to an activity-based costing system?
  2. a) Products or services are similar in volume and activity.
  3. b) Support services are spread evenly throughout the company’s activities.
  4. c) Overhead is a low component of the overall cost.
  5. d) All of the above are valid reasons.

 

 

  1. A major advantage in changing from a traditionally-based costing system to an activity-based costing system is
  2. a) a company’s customers can benefit from any reduction in costs.
  3. b) management will be able to identify the true cost of non-added-value activities.
  4. c) direct labour and material costs will be reduced.
  5. d) supplier costs will be reduced after the changeover.

 

 

  1. Which of the following is a value-added activity?
  2. a) engineering design
  3. b) machinery repair
  4. c) inventory storage
  5. d) inspections

 

 

  1. Which of the following is a non-value-added activity?
  2. a) engineering design
  3. b) machining
  4. c) inspection
  5. d) packaging

 

 

  1. Value-added activities
  2. a) should be reduced or eliminated.
  3. b) involve resource usage customers are willing to pay for.
  4. c) add cost to a product without affecting selling price.
  5. d) cannot be differentiated from non-value-added activities.

 

 

  1. Which of the following is a unit-level activity?
  2. a) cleaning the paint sprayer when switching from one colour of paint to another
  3. b) paint used in the manufacturing process
  4. c) test marketing to see which colour of paint customers prefer
  5. d) painting the executive offices

 

 

  1. Which of the following is a batch-level activity?
  2. a) sandpaper used to smooth the wood used in the manufacture of a chair
  3. b) the design of a chair
  4. c) the chairs in the staff cafeteria
  5. d) shipment of chairs to a customer

 

 

  1. Which of the following is a product-level activity?
  2. a) regulatory approval of a new prescription drug
  3. b) an advertisement campaign that focuses on the large number of products the company produces
  4. c) equipment cleaning between batches
  5. d) material handling

 

 

  1. Which of the following is a facility-level activity?
  2. a) the Human Resources Department
  3. b) the Product Manager’s salary
  4. c) insurance on the factory that is used exclusively to manufacture one of the company’s seven products
  5. d) inspections

 

 

  1. Which of the following is a batch-level activity?
  2. a) plant management
  3. b) product design
  4. c) equipment setups
  5. d) assembling

 

 

  1. Which of the following is an example of a product-level activity in a refinery?
  2. a) transportation of fuel to gas stations
  3. b) product testing for quality control
  4. c) advertising the benefits of the company’s products
  5. d) maintenance activities in the refinery

 

 

  1. Which of the following is an example of unit-level activity in a major automotive parts distribution company?
  2. a) preparing cheques for suppliers
  3. b) promotional materials
  4. c) packing parts for shipment
  5. d) shipping costs of parts to dealers

 

 

  1. Which of the following is an example of batch-level activity in a company marketing cell phones?
  2. a) internet advertising
  3. b) preparing monthly customer invoices
  4. c) rent for kiosks in shopping malls
  5. d) offering discounts on monthly payment plans

 

 

  1. Which of the following is an example of a facility-level activity in an airport?
  2. a) wages for security screening personnel
  3. b) parking lot revenue and expenses
  4. c) airline landing fees
  5. d) salaries of air traffic controllers

 

 

  1. A non-value-added activity in a service enterprise is
  2. a) taking appointments.
  3. b) travelling.
  4. c) advertising.
  5. d) all of these.

 

 

  1. All of the following are examples of a value-added activity in a service company EXCEPT
  2. a) delivering packages by a delivery service.
  3. b) ordering supplies.
  4. c) performing surgery.
  5. d) providing legal research for legal services.

 

 

  1. Activity-based costing has been found to be useful in each of the following service industries EXCEPT
  2. a) banks.
  3. b) hospitals.
  4. c) telephone companies.
  5. d) ABC has been useful in any of these industries.

 

 

  1. What sometimes makes implementation of activity-based costing difficult in service industries is
  2. a) the labelling of activities as value-added.
  3. b) identifying activities, activity cost plus, and cost drivers.
  4. c) that a larger proportion of overhead costs are company-wide costs.
  5. d) attempting to reduce or eliminate non-value-added activities.

 

 

  1. All of the following statements are correct EXCEPT that
  2. a) activity-based costing has been widely adopted in service industries.
  3. b) the objective of installing ABC in service firms is different than it is in a manufacturing firm.
  4. c) a larger proportion of overhead costs are company-wide costs in service industries.
  5. d) the general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company.

 

 

  1. The use of activity-based costing in service industries
  2. a) has the same objective as in manufacturing.
  3. b) results in improved costing of services provided.
  4. c) uses cost pools to assign overhead.
  5. d) all of these.

 

 

  1. All of the following are examples of a value-added activity in a service company EXCEPT
  2. a) delivering packages by a delivery service.
  3. b) ordering supplies.
  4. c) performing surgery.
  5. d) providing legal research for legal services.

 

 

  1. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs consist of computer support, $240,000; and legal support, $120,000. Information on the two services is:

 Audit                      Tax

Direct labour cost               $50,000             $100,000

CPU minutes                        40,000                 10,000

Legal hours used                       200                      800

Overhead applied to audit services using ABC is

  1. a) $120,000.
  2. b) $144,000.
  3. c) $216,000.
  4. d) $240,000.

 

 

  1. Port Accounting performs two types of services, Audit and Tax. Port’s overhead costs consist of computer support, $240,000; and legal support, $120,000. Information on the two services is:

 Audit                      Tax

Direct labour cost               $50,000             $100,000

CPU minutes                        40,000                 10,000

Legal hours used                       200                      800

Overhead applied to audit services using traditional costing is

  1. a) $120,000.
  2. b) $144,000.
  3. c) $216,000.
  4. d) $240,000.

 

 

  1. Jackal Security Inc. provides security guards to shopping malls. Data related to Jackal’s overhead costs for the current year are as follows:

Head Office Activity                          Total Overhead          Cost Driver               Estimated

Cost                                                         Activity

Supervision                                         $128,000                 # of employees                       80

Technology fees                                      58,000                 computer hours                 2,000

Rent/Utilities/Taxes                                 42,000                 direct labour hours         160,000

Total                                                    $228,000

During the year, Jackal provided security to the Apple Creek Mall including 5 employees, 150 computer hours and 10,800 labour hours. Overhead applied to the Apple Creek Mall job for the year using ABC is

  1. a) $1,629.26
  2. b) $15,185.00
  3. c) $15,390.00
  4. d) $17,100.00.

 

 

ANSWERS TO MULTIPLE CHOICE QUESTIONS

 

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
27. d 36. b 45. a 54. a 63. d 72. c 81. b
28. a 37. b 46. d 55. d 64. b 73. b 82. d
29. a 38. b 47. a 56. b 65. a 74. c 83. b
30. c 39. a 48. d 57. a 66. c 75. b 84. c
31. a 40. d 49. c 58. d 67. b 76. d 85. a
32. b 41. c 50. b 59. d 68. b 77. d 86. b
33. c 42. b 51. b 60. c 69. d 78. b    
34. d 43. c 52. b 61. b 70. a 79. d    
35. b 44. d 53. d 62. d 71. a 80. c    

 

BRIEF Exercises

Brief Exercise 87

Sanchez Co. has three activities in its manufacturing process: machine setups, machining, and inspections. Estimated annual overhead cost for each activity is $75,000, $132,000, and $22,000, respectively. The expected annual use in each department is 500 setups, 4,000 machine hours, and 2,750 inspections.

 

Instructions

Calculate the overhead rate for each activity.

 

Solution 87 (5 min.)

Machine setups             $75,000 ÷ 500 = $150 per setup

Machining                     $132,000 ÷ 4,000 = $33 per machine hour

Inspections                    $22,000 ÷ 2,750 = $8 per inspection

 

Brief Exercise 88

Boots and More, Inc. uses activity-based costing to assist management in setting prices for the company’s 3 major product lines. The following information is available:

 

Activity Cost Pool                 Estimated Overhead            Expected Use of Cost Driver

 Per Activity

Cutting                                  $1,200,000                           60,000 labour hours

Stitching                                7,000,000                         50,000 machine hours

Inspections                               750,000                            10,000 labour hours

Packing                                    900,000                        3,600 finished goods units

 

Instructions

Calculate the activity-based overhead rates.

 

Solution 88 (5 min.)
 

Activity Cost Pool

  Estimated

Overhead

 

÷

Expected Use of

Cost Drivers per Activity

 

=

Activity-Based

Overhead Rates

             
Cutting

Stitching

Inspections

Packing

  $1,200,000

7,000,000

750,000

900,000

  60,000 Labour hours

50,000 Machine hours

10,000 Labour hours

3,600 Finished units

  $20 per labour hour

$140 per machine hour

$75 per labour hour

$250 per finished unit

 

 

Brief Exercise 89

Stereo City Co. manufactures speakers and receivers and uses activity-based costing. The following information is available:

 

Activity Cost Pool        Estimated Overhead               Expected Use of Cost Driver

 Per Activity

Ordering                                  $72,000                                   12,000 orders

Soldering                                 390,000                                   52,000 machine hours

Inspecting                                805,100                                   97,000 labour hours

Packing                                   226,800                                   63,000 boxes

 

Instructions

Calculate the activity-based overhead rates.

 

Solution 89 (5 min.)
 

Activity Cost Pool

  Estimated

Overhead

 

÷

Expected Use of

Cost Drivers per Activity

 

=

Activity-Based

Overhead Rates

             
Ordering

Soldering

Inspecting

Packing

  $ 72,000

390,000

805,100

226,800

  12,000 Orders

52,000 Machine hours

97,000 Labour hours

63,000 Boxes

 

  $ 6.00 per order

$ 7.50 per machine hour

$ 8.30 per labour hour

$ 3.60 per box

 

 

Brief Exercise 90

Plum Tired manufactures tires for dune buggies and has two different products, Nubby Tires and Smooth Tires. The company produces 8,750 Nubby Tires and 12,600 Smooth Tires each year and incurs $65,050 of overhead costs. The following information is available:

 

Activity                   Total Cost                 Cost Driver

Materials handling            $37,500        Number of requisitions

Machine setups                4,750              Number of setups

Quality inspections            22,800         Number of inspections

 

For the Nubby Tires, the company has 700 requisitions, 80 setups, and 225 inspections. The Smooth Tires requires 800 requisitions, 45 setups, and 175 inspections.

 

Instructions

Determine the overhead rate for each activity.

 

Solution 90 (5–10 min.)

The overhead rates are:

 

Activity

   

Overhead

  Expected Use

of Cost Drivers

   

Overhead Rate

             
Materials handling

Machine setups

Quality inspections

  $37,500

4,750

22,800

  1,500

125

400

  $ 25

38

57

 

 

Brief Exercise 91

Myrna’s Mowing provides lawn service in her town. Myrna has identified the following activities:

  1. Advertising
  2. Scheduling
  3. Equipment inspection and maintenance
  4. Travel
  5. Lawn cutting
  6. Trimming
  7. Billing
  8. Bill collecting

 

Instructions

Classify each activity as value-added or non-value-added.

 

Solution 91 (5 min.)

Activity                                                                     Classification

  1. Advertising Non-value-added
  2. Scheduling Non-value-added
  3. Equipment inspection and maintenance Non-value-added
  4. Travel Non-value-added
  5. Lawn cutting Value-added
  6. Trimming Value-added
  7. Billing Non-value-added
  8. Bill collecting Non-value-added

 

Brief Exercise 92

Rong Number Cell Phones repairs broken phone systems in large office buildings. It has a number of repair technicians who travel to a customer and work on the phone systems. Sometimes a phone has to be brought back to Rong Number’s office and repaired there. The company has identified a number of activities that their repair staff perform each day.

  1. a) The repair technicians must get a list of clients to visit from the dispatcher.
  2. b) They must drive to each client’s office.
  3. c) Time is needed to discuss the problem with the client.
  4. d) Time is needed to diagnose and then fix the problem.
  5. e) Broken parts must be removed and replaced as needed.
  6. f) The client must sign for the work done.

 

Classify each of the above into value-added or non-value added activities.

 

Solution 92 (5 min.)

 

  1. a) NVA

 

  1. b) NVA

 

  1. c) VA

 

  1. d) VA

 

  1. e) VA

 

  1. f) NVA

 

 

Brief Exercise 93

Mike’s Motors manufactures small gas motors. Mike has identified the following activities:

  1. a) design
  2. b) regulatory approval
  3. c) machine set up
  4. d) staff annual picnic
  5. e) electricity
  6. f) sales commission, (percent of sale price)

 

Instructions

Classify each of the above activities with regards to level of activity.

 

Solution 93 (5 min.)

Activity                                                                 Activity Level

  1. a) design Product-level

 

  1. b) regulatory approval Product-level

 

  1. c) machine set up Batch-level

 

  1. d) staff annual picnic Facility-level

 

  1. e) electricity Unit-level

 

  1. f) sales commission, (percent of sale price) Unit-level

 

 

Brief Exercise 94

Spooners Spa is setting its holiday spa package prices and needs to allocate its overhead. It gathers the following data on its main offerings:

Expected Usage of Cost

Estimated Overhead               Driver per Offering

Massage                             $20,000                    800 massage hours

Whirlpool                            $80,000                    10,000 whirlpool hours

Mud baths                          $15,000                    1,000 mud baths

Facials                             $100,000                    5,000 facials

 

Spooners Spa uses ABC as the basis to help set its prices for its pricing packages. Package A includes a two hour massage, three hours in the whirlpool, a mud bath and a facial.

 

Instructions

Determine the amount of overhead that should be applied to Package A.

 

Solution 94 (5–10 min.)

Estimated                    Expected Usage of Cost         Activity Based

Overhead                    Driver per Offering                  OH rates         

Massage             $20,000                    800 massage hours                $25 per hour

Whirlpool            $80,000                    10,000 whirlpool hours           $8 per hour

Mud baths          $15,000                    1,000 mud baths                     $15 per bath

Facials              $100,000                    5,000 facials                           $20 per facial

 

Package A: ($25 x 2) + ($8 x 3) + $15 + $20 =  $109

 

 

Brief Exercise 95

Explorit Travel Services arranges group tours in the Vancouver area. Explorit employs four employees in their downtown office who research and develop various tours for their customers. They advertise upcoming tours in travel magazines and on travel websites. The cost associated with the three overhead activities at Explorit are as follows:

Estimated

Overhead

Advertising                                                      $82,560

Information Technology Costs                          42,000

Office Wages                                                    92,000

 

In their implementation of ABC costing, Explorit identified a number of potential cost drivers for these overhead activities including:

 

Expected

Usage

# of tours                                                                500

Hours spent by office staff working on tours      8,000

# of ads placed per tour                                         320

# of customers                                                  14,000

Computer hours (can be tracked by tour)          5,000

 

Instructions

Identify the cost driver most correlated to each of the three activity costs incurred by Explorit. Calculate the overhead cost rate for each activity cost.

 

Solution 95 (10–15 min.)

Overhead Cost                       Best Cost Driver        

Advertising                              # of ads placed per tour

Information Technology          computer hours

Office Wages                          hours spent by office staff working on tours

 

Estimated                    Expected

Overhead                    Driver                          OH rates         

Advertising                  $82,560                       320                              $258 ad placed

IT                                 $42,000                       5,000                           $8.4 per computer hour

Office Wages              $92,000                       8,000                           $11.5 per hour spent on tour

 

Exercises

Exercise 96

All Wood Corporation manufactures dining chairs and tables. The following information is available:

Activity Volume                  Total Activity

Dining Chairs      Tables               Cost

Machine setups                        50                    75                $9,000

Inspections                              300                  190                $7,590

Labour hours                           700                  300

 

All Wood is considering switching from one overhead rate based on labour hours to activity-based costing.

 

Instructions

Perform the following analyses of overhead for these two components:

  1. a) Calculate total machine setups and inspection costs assigned to each product, using a single overhead rate.
  2. b) Calculate total machine setups and inspection costs assigned to each product, using activity-based costing.
  3. c) Comment on your findings.

 

Solution 96 (8–12 min.)
  1. a) Single overhead rate

($9,000 + $7,595) ÷ 1,000 = $16.59 per labour hour

 

Dining chairs:  700 × $16.59 =    $11,613

Tables:            300 x $16.59 =        4,977

$16,590

 

  1. b) Activity-based costing

Machine setups:    $9,000 ÷ 125 = $72 per setup

 

Inspections:           $7,590 ÷ 490 = $15.49 per inspection

 

Dining chairs: (50 × $72) + (300 × $15.49) = $8,247

Tables:  (75 × $72) + (190 × $15.49) =            8,343

$ 16,590

 

  1. c) The use of activity-based costing resulted in the allocation of less cost to dining chairs and more cost to tables. The change in cost allocation reflects a more accurate allocation based on cause and effect.

 

 

Exercise 97

Holiday Favourites manufactures a wide variety of holiday and seasonal decorative items. Holiday’s activity-based costing overhead rates are:

Purchasing                 $450 per order

Storing                        $5 per square metre

Machining                   $30 per machine hour

Supervision                 $10 per direct labour hour

 

The Haunted House Project involved five purchase orders, 2,000 square metres, 45 machine hours, and 25 direct labour hours. The cost of direct materials on the job was $35,000 and the direct labour rate is $15 per hour.

 

Instructions

  1. Calculate the total cost of the Haunted House Project using activity based costing.
  2. Calculate the total cost of the Haunted House Project using traditional costing, when manufacturing overhead is applied at 250% of direct labour cost.

 

Solution 97 (5–7 min.)
  1. Direct materials……………………………………………………. $ 35,000

Direct labour (25 × $15)……………………….. ………………              375

Factory overhead

Purchasing (5 × $450)…………………… ….. $  2,250

Storing (2,000 × $5)………………………. ……. 10,000

Machining (45 × $30)…………………….. ……… 1,350

Supervision (25 × $10)…………………… ……..     250        13,850

Total cost……………………………………………. ………………       $49,225

 

  1. Direct materials……………………………………………………. $35,000

Direct labour (25 x $15)……………………….. ………………              375

Factory overhead: $375 x 250%……………. ………………              938

$36,313

 

 

Exercise 98

Seats On Chairs (SOC) manufactures funky chairs. SOC has identified various activity centres to which overhead costs are assigned. The cost pools for these centres and their selected cost drivers for 2015 are as follows:

 

Activity Centres                       Cost Pools

Utilities                                        $278,000

Scheduling and set-up               $260,000

Materials handling                      $640,000

Total overhead                        $1,178,000

 

SOC’s products and other operating statistics follow:

Metaz Chair        Yak Chair     Latko Chair

Direct costs                                  $80,000          $80,000           $90,000

Machine hours                               30,000            10,000             20,000

Number of set-ups                              130                  380                  270

Pounds of materials                     500,000          300,000           800,000

Number of units produced             40,000            20,000             60,000

Direct labour hours                        40,000            20,000             60,000

 

Instructions

  1. Determine unit product costs using traditional costing, using direct labour hours as the driver.
  2. Determine unit product costs using the ABC method, using appropriate cost drivers for each product.

 

Solution 98 (20–25 min.)

 

Metaz Chair        Yak Chair     Latko Chair                   Totals

Direct costs                                  $80,000          $80,000           $90,000               250,000

Machine hours                               30,000            10,000             20,000           60,000 hrs

Number of set-ups                              130                  380                  270         780 Set-ups

Pounds of materials                     500,000          300,000           800,000       1,600,000 lbs

Number of units produced             40,000            20,000             60,000       120,000 units

Direct labour hours                        40,000            20,000             60,000         120,000 hrs

 

  1. Traditional Costing:

Pre-determined overhead rate:   Total overhead:           $1,178,000 = $9.82 per DLH

Total direct labour hours 120,000

 

Unit Costs:                             Metaz Chair        Yak Chair     Latko Chair

Direct costs (given)                      $80,000          $80,000           $90,000

Overhead ($9.82 x

individual DLH per chair type) $392,800          $196,400         $589,200

Total Product Costs (A):            $472,800        $276,400         $679,200

# units produced (B):                     40,000            20,000             60,000

Cost per unit (A) / (B):                    $11.82            $13.82             $11.32

 

  1. Activity Based Costing:

 

Activity Centres                       Cost Pools       Selected Cost Drivers             Activity Rate__

Utilities                                     $278,000         60,000 machine hours            $4.63/mach hr

Scheduling and set-up            $260,000         780 set-ups                             $333.33/set-up

Materials handling                   $640,000         1,600,000 lbs of materials      $0.40/lb

Total overhead                        $1,178,000

 

Unit Costs:                             Metaz Chair        Yak Chair     Latko Chair

Direct costs (given)                      $80,000          $80,000           $90,000

Overhead

Utilities: ($4.63 x # machine

hours used per chair type)         $138,900          $46,300           $92,600

Scheduling and set-up

($333.33 x # set-ups)                   $43,333        $126,666           $90,000

Materials handling ($0.40/lb

x # lbs moved per chair type)    $200,000        $120,000         $320,000

Total Product Costs (A):            $462,233        $372,966         $592,600

# units produced (B):                     40,000            20,000             60,000

Cost per unit (A) / (B):                    $11.55            $18.65               $9.88

 

 

Exercise 99

This is a continuation of Ex.98

Prior to installing an ABC system, Seats on Chairs (SOC) had been pricing its products on the basis of traditional costing using direct labour hours to allocate total overhead. Because the firm operates in a competitive environment, it sets prices on only a 20% mark-up on cost.

 

Instructions

  1. Determine selling prices using conventional costing and ABC costing.
  2. Comment on the results.

 

Solution 99 (5–10 min.)

  1. Prices Using Traditional Costing:

 

Unit Costs:                             Metaz Chair        Yak Chair     Latko Chair

Cost per unit (from above):            $11.82            $13.82             $11.32

Mark-up on cost (20%)                   $ 2.36             $ 2.76              $ 2.26

Selling price                                   $14.18            $16.58             $13.58

 

Prices Using ABC:

 

Unit Costs:                             Metaz Chair        Yak Chair     Latko Chair

Cost per unit (from above):            $11.55            $18.65               $9.88

Mark-up on cost (20%)                   $ 2.31             $ 3.73               $1.98

Selling price                                   $13.86            $22.38             $11.86

 

  1. SOC produces 60,000 units of the Latko chair and therefore sells the most units of Latko as well. A change from traditional costing to ABC reduces the selling price of Latko, making it even more favourable to the buying public. In contrast, the least popular chair, the Yak model increases in price as a result of the switch to ABC. Since ABC best allocates the cost of the resources used per model, it might signal to management that since the Yak is more expensive to produce but not as popular with the public, it may need to reconsider offering this model.

 

 

Exercise 100

FlyOver Airlines is a cargo air freight company and plans to add two new routes: Victoria to Los Angeles (Route 105) and Calgary to San Francisco (Route 106). The company is setting its rate charges for the two routes and expects to have 300 flights per year on Route 105 and 400 flights per year on Route 106.

In preparation for each flight, the company must load 500 containers onto each flight for Route 105 and 300 containers for each flight of Route 106. In addition, 30 regulatory forms must be filled out for Route 105 and 70 forms for Route 106 every time a plane flies. In preparing the flights, it takes FlyOver 100 hours to load containers for Route 105 and 140 hours for Route 106.

The company’s total container handling costs for the year are expected to be $600,000 and total costs for receiving regulatory approval is $250,000.

 

Instructions

Under a traditionally based accounting system, using container loads as basis for allocating overhead:

  1. Determine the amount of overhead that will be assigned to Route 105.
  2. Determine the amount of overhead that will be assigned to Route 106.

 

If the company switches to an ABC accounting system:

  1. Determine the amount of overhead that will be assigned to Route 105.
  2. Determine the amount of overhead that will be assigned to Route 106.

 

Solution 100 (5–10 min.)

  1. $531,250 ($600,000 + $250,000 / 500 + 300 = $1,062.50 x 500 = $531,250)

 

  1. $318,750 ($600,000 + $250,000 / 500 + 300 = $1,062.50 x 300 = $318,750)

 

Expected Use     Activity Based

Activity Cost Pool                             Cost Driver             of Driver            OH Rates

Container handling costs                    $600,000          ÷240 hours             =$2,500

Regulatory costs                                  250,000          ÷100 forms            =$2,500

Total                                                    $850,000

 

  1. d.

Allocation:                                              Route 105                     Route 106

Containers $2,500 x 100 =                     $250,000

$2,500 x 140                                                              $350,000

Regulatory fees $2,500 x 30 =                 75,000

$2,500 x 70 =               _______                        175,000

Total Overhead allocated                       $325,000                       $525,000

 

 

Exercise 101

Jack Bauer Co. has decided to use a predetermined overhead rate to assign factory overhead to production. The following predictions have been made for 2016:

 

Total Factory Overhead Costs: $150,000

Direct Labour Hours:              40,000 hrs

Direct Labour Costs:               $200,000

Machine Hours:                       60,000 hrs

 

Instructions

  1. Compute the predetermined factory overhead rate under three different scenarios: 1) direct labour hours, 2) direct labour costs and 3) machine hours.
  2. Assume that actual factory overhead was $152,500 and that Jack Bauer Co. elected to apply factory overhead to WIP inventory based on direct labour hours. If actual direct labour hours were 42,000 for 2016, was factory overhead over-applied or under-applied? By how much?
  3. Jack Bauer Co. typically writes off any under- or over-applied factory overhead to Cost of Goods Sold at year end. Show the necessary journal entry at the end of 2016 to dispose of the balance you calculated in part b.

 

Solution 101 (13–17 min.)

  1. 1. Direct Labour Hours: ($150,000/40,000 hrs) = $3.75/DLH
  2. Direct Labour Costs:   ($150,000/$200,000) = 75% of Direct Labour Cost
  3. Machine Hours:           ($150,000/60,000 hrs) = $2.50 per MH

 

  1. Overhead applied is based on DLH, and calculated at 42,000 hours x $3.75

Overhead applied:                       $157,500

Actual overhead incurred:           $152,500

Over-applied by:                              $5,000

 

  1. Write off over-applied overhead as follows:

Factory Overhead Clearing Account……………………… $5,000

Cost of Goods Sold…………………………………………………         $5,000

 

 

Exercise 102

DVD-saver, Inc. has five activity cost pools and two products (a budget DVD cleaner and a deluxe DVD cleaner). Information is presented below:

 

 

Cost Drivers by Product

Activity Cost Pool                    Cost Driver         Est. Overhead       Budget              Deluxe

Ordering and Receiving          Orders                    $  140,000                  500                  200

Machine Setup                        Setups                         90,000                  100                  200

Machining                               Machine hours        2,500,000             25,000             25,000

Assembly                                Parts                          750,000           150,000           250,000

Inspection                                Inspections                480,000                  700                  500

 

Instructions

Calculate the overhead cost per unit for each product. Production is 1,000,000 units of Budget and 600,000 units of Deluxe. Round your answer to the nearest dollar.

 

Solution 102 (15–20 min.)

 

Activity Cost Pool              Est. Overhead    ÷    Total Est. Activity      =        Overhead Rate

Ordering & Receiving         $ 140,000               700 orders                            $200/order

Machine Setup                         90,000               300 setups                            $300/setup

Machining                           2,500,000               50,000 mach. hours             $50/machine hour

Assembly                               750,000               400,000 parts                       $1.875/part

Inspection                              480,000               1,200 inspections                 $400/inspection

 

                    Budget                                                         Deluxe                

Cost                                 Cost              Cost                              Cost

Activity Cost Pool           Driver      ×     Rate    =  Assigned         Driver    ×    Rate   =  Assigned

Ordering & Receiving            500          $200       $   100,000              200        $200        $   40,000

Machine Setup                      100            300              30,000              200           300             60,000

Machining                         25,000              50         1,250,000        25,000             50        1,250,000

Assembly                       150,000         1.875            281,250      250,000       1.875           468,750

Inspection                              700            400            280,000              500           400           200,000

$1,941,250                                          $2,018,750

 ÷ 1,000,000                                           ÷ 600,000

$1.94 per unit                                      $3.36 per unit

 

 

Exercise 103

Woody’s Furniture manufactures wooden tables and chairs. The company has divided the manufacturing process into two teams: one making tables, and one making chairs. Woody has decided that he should adopt an activity-based costing system (ABC).

 

Instructions

Determine a cost driver for each of the activities listed below.

 

Cost Pool                                                                    Cost Driver

  1. Product design ______________________________
  2. Sawing ______________________________
  3. Sanding ______________________________
  4. Supervisor salary ______________________________
  5. Depreciation on finishing equipment ______________________________
  6. Administrative ______________________________
  7. Advertising and Marketing ______________________________
  8. Storage ______________________________
  9. Shipping ______________________________

 

Solution 103 (6–9 min.)

Cost Pool                                                                          Cost Driver

  1. Product design Designer hours

 

  1. Sawing Machine hours

 

  1. Sanding Direct labour hours

 

  1. Supervisor salary Direct labour hours

 

  1. Depreciation on finishing equipment Machine hours

 

  1. Administrative Number of employees

 

  1. Advertising and Marketing Sales revenue

 

  1. Storage Square footage occupied

 

  1. Shipping Number of shipments
Exercise 104
A list of possible cost drivers is presented below:

Code

A       Engineering hours

B       Setups

C      Machine hours

D      Pounds of materials handled

E       Boxes

F       Number of sales orders taken

G      Number of subassemblies

H      Number of purchase orders placed

 

Instructions

For each of the following activity cost pools, select the most appropriate cost driver:

 

Code        Cost Pool

_____  1.   Machine setup

_____  2.   Ordering and receiving

_____  3.   Packaging and shipping

_____  4.   Engineering design

_____  5.   Machining

_____  6.   Assembly

 

Solution 104 (4–6 min.)

 

  1. B

 

  1. H

 

  1. E

 

  1. A

 

  1. C

 

  1. G

 

 

Exercise 105

Identify appropriate cost drivers for the following activity cost pools:

  1. Human resources
  2. Security
  3. Receiving
  4. Data processing

 

Solution 105 (3–5 min.)
  1. Number of employees, number of hires

 

  1. Square metres

 

  1. Shipments received; kilograms received

 

  1. Lines printed, CPU minutes, storage units

 

 

Exercise 106

Two of the activity cost pools for Calgary Company are

  1. machining ($150,000) and
  2. inspections ($80,000).

Possible cost drivers are direct labour hours (7,000), machine hours (7,500), square footage (10,000), and number of inspections (80).

 

Instructions

Calculate the overhead rate for each activity.

 

Solution 106 (4–6 min.)

$150,000

  1. Machining: —————————— = $20 per machine hour

7,500 machine hours

 

$80,000

  1. Inspections: ———————- = $1,000 per inspection

80 inspections

 

 

Exercise 107

Calculate activity-based costing rates from the following budgeted data for Tatum’s Tools:

 

Activity Cost Pool                        Budgeted Cost                  Budgeted Cost Driver   

Designing                                      $7,500,000                         50,000   design hours

Machining                                          625,000                       100,000   machine hours

Packing                                              540,000                           9,000   labour hours

 

Solution 107 (3–5 min.)

Designing                                ($7,500,000 ÷50,000)      =  $150 per design hour

Machining                               ($625,000 ÷ 100,000)      =  $6.25 per machine hour

Packing                                   ($540,000 ÷ 9,000)          =  $60 per labour hour

Exercise 108

EKP Inc. produces two products. Their main product is simple to produce, but only marginally profitable on a per unit basis. Nonetheless, EKP makes most of its profit on this product due to high volume of sales despite the fact that it only has a small portion of the market. The second product is complex to produce, but is very profitable on a per unit basis. Sales volume of the second product is low despite EKP’s dominance of the market. EKP uses a traditional costing system with all overhead allocated based on direct labour hours.

 

Instructions

  1. Identify which factors would suggest that EKP should consider switching to an activity-based costing system.
  2. What outcomes can be expected if EKP switched to an activity-based costing system?

 

Solution 108 (4–6 min.)
  1. EKP’s high volume product is only marginally profitable on a per unit basis and it has only a small portion of the market share. The high volume, low profit per unit and low market share suggests that this product may have been assigned a large portion of the overhead costs; probably more than the competition have assigned to their products.

 

EKP’s low volume product is very profitable on a per unit basis and it has a large portion of the market share. The low volume, high profit per unit and high market share suggests that this product may have been assigned a small portion of the overhead costs; probably less than the competition have assigned to their products.

 

A further factor that suggests that EKP should consider switching to an activity-based costing system is that the high volume product is simple to produce, where as the low volume product is complex.

 

  1. If EKP switches to an activity-based costing system, it is apt to find that less of the overhead costs will be allocated to the high volume product, and more will be allocated to the low volume product. That may lead EKP to lower its selling price for the high volume product—making it more competitive, and raise its selling price for the low volume product.

 

 

Exercise 109

Label the following costs as value-adding (VA) or non-value-adding (NVA):

____    1.   Engineering design

____    2.   Machine repair

____    3.   Inventory storage

____    4.   Machining

____    5.   Assembly

____    6.   Painting

____    7.   Inspections

____    8.   Packaging

 

Solution 109 (3–5 min.)
  1. VA

 

  1. NVA

 

  1. NVA

 

  1. VA

 

  1. VA

 

  1. VA

 

  1. NVA

 

  1. VA

 

 

Exercise 110

Bjork and Falvery is a law firm that uses activity-based costing. Classify these activities as value-added or non-value-added:

_______________    1.   Taking appointments

_______________    2.   Reception

_______________    3.   Meeting with clients

_______________    4.   Bookkeeping

_______________    5.   Court time

_______________    6.   Meeting with opposing lawyers

_______________    7.   Billing

_______________    8.   Advertising

Solution 110 (3–5 min.)
  1. Non-value-added

 

  1. Non-value-added

 

  1. Value-added

 

  1. Non-value-added

 

  1. Value-added

 

  1. Value-added

 

  1. Non-value-added

 

  1. Non-value-added

 

 

Exercise 111

Tim Taylor Tool Company manufactures small tools. Classify each of the following activity costs of the tool company as either unit level, batch level, product level, or facility level:

_______________    1.   Plant management

_______________    2.   Drilling

_______________    3.   Painting

_______________    4.   Machine setups

_______________    5.   Product design

_______________    6.   Cutting

_______________    7.   Inspection

_______________    8.   Inventory management

 

Solution 111 (4–6 min.)

  1. Facility

 

  1. Unit

 

  1. Unit

 

  1. Batch

 

  1. Product

 

  1. Unit

 

  1. Unit

 

  1. Product

 

 

Exercise 112

Brewer & Carr, Ltd. is an architectural firm that uses activity-based costing. The three activity cost pools used by Brewer & Carr are: Salaries and Wages, Travel Expense, and Plan Reproduction Expense. The firm has provided the following information concerning activity and costs:

Salaries and wages                      $360,000

Travel expense                                 80,000

Plan reproduction expense           120,000

Total                                             $560,000

 

                 Activity Cost Pools               

Project             Business

Assignment       Development       Other

Salaries and wages                                    60%                  30%                 10%

Travel expense                                           40%                  40%                 20%

Plan reproduction expense                         30%                  40%                 30%

Instructions

Calculate the total cost to be allocated to the

  1. Project Assignment,
  2. Business Development, and
  3. Other activity cost pools.

 

Solution 112 (6–9 min.)

                     Activity Cost Pools                  

  1. b.                          c.

Project              Business

Assignment       Development          Other               Total     

Salaries and wages                $216,000            $108,000              $36,000            $360,000

Travel expense                           32,000                32,000                16,000                80,000

Plan reproduction expense        36,000                48,000               36,000             120,000

Total                                        $284,000            $188,000              $88,000            $560,000

 

 

Exercise 113

Ahmet, McGuire, and Able, a law firm, employs ABC. The following budgeted data for each of the activity cost pools is provided for the year 2016:

 

Estimated           Expected Use of

Activity Cost Pools                     Overhead     Cost Drivers per Activity

Researching legal issues           $   31,500         900 research hours

Meeting with clients                   1,760,000    8,800 professional hours

Preparing legal documents         480,000               30,000 pages

During 2016 the firm experienced 660 research hours, prepared 25,000 document pages, and 10,000 professional hours.

 

Instructions

Compute the total overhead applied during 2016.

 

Solution 113 (5 min.)

 

Estimated            Expected Use of               Activity-Based

Activity Cost Pool                  Overhead      Cost Drivers per Activity       Overhead Rates

Researching legal issues      $  31,500          900 research hours           $35 per res. hour

Preparing legal documents    480,000                30,000 pages                  $16 per page

Meeting with clients              1,760,000           8,800 prof. hours           $200 per prof. hour

 

Overhead                       Total Overhead

Cost Drivers                                                 Rates                                 Applied

660 research hours                             $35/research hour                   $   23,100

25,000 document pages                     $16/page                                    400,000

10,000 professional hours                  $200/professional hour           2,000,000

$2,423,100

 

COMPLETION STATEMENTS

 

 

  1. In traditional costing systems, direct labour cost is often used for the assignment of all ___.

 

 

  1. A ___ is any activity that has a direct cause-effect relationship with the resources consumed.

 

 

  1. In activity-based costing, overhead costs are allocated to ___, then assigned to products.

 

 

  1. The number of ___ is an appropriate cost driver for the ordering and receiving activity cost pool.

 

 

  1. The primary benefit of activity-based costing is ___ product costing.

 

 

  1. When product lines differ greatly in volume and manufacturing complexity, a switch from traditional costing to ___ is indicated.

 

 

  1. ___ increase the worth of a product or service to customers.

 

 

  1. In the hierarchy of activity levels, the four levels are ___, ___, ___, and ___.

 

 

  1. Equipment setups are a ___-level activity.

 

 

  1. In a service industry, a large proportion of the overhead costs are ___.

 

 

ANSWERS TO COMPLETION STATEMENTS

 

  1. overhead costs

 

  1. cost driver

 

  1. activity cost pools

 

  1. purchase orders

 

  1. more accurate

 

  1. activity-based costing

 

  1. value-added activities

 

  1. unit, batch, product, facility

 

  1. batch

 

  1. company-wide costs

 

MATCHING

 

 

  1. Match the items in the two columns below by entering the appropriate code letter in the space provided.

 

  1. Cost driver                                                     E.    Batch-level activity
  2. Facility-level activity                                       F.    Product-level activity
  3. Unit-level activity                                           G.    Non-value-added activity
  4. Activity-based costing                                   H.    Value-added activity

 

 

____     1.    Allocates overhead to multiple activity cost pools, then assigns the activity cost pools to products.

 

____     2.    An activity that has a direct cause-effect relationship with the resources consumed.

 

____     3.    Increases the worth of a product or service to customers.

 

____     4.    Should be eliminated or reduced.

 

____     5.    Plant management.

 

____     6.    Engineering changes.

 

____     7.    Equipment setups.

 

____     8.    Assembling.

 

 

ANSWERS TO MATCHING

 

  1. D

 

  1. A

 

  1. H

 

  1. G

 

  1. B

 

  1. F

 

  1. E

 

  1. C

 

SHORT-ANSWER ESSAY QUESTIONS

 

SAE 125

What are the conditions that would indicate to the management of a firm that they should switch from traditional costing to activity-based costing?

 

Solution 125

The presence of one or more of the following conditions indicates ABC as the superior costing system:

1)    Product lines differ greatly in volume and manufacturing complexity.

2)    Product lines are numerous, diverse, and require differing degrees of support services.

3)    Overhead costs constitute a significant portion of total costs.

4)    The manufacturing process or the number of products has changed significantly.

5)    Production or marketing managers are ignoring data provided by the existing system and are, instead, using alternative data in decision-making.

SAE 126

Borg Corporation uses a traditional costing system. Management is considering switching to an activity-based costing system. What steps must Borg take in initiating an activity-based costing system?

 

Solution 126

Borg Corporation must first identify the major activities that pertain to the manufacture of specific products, then allocate manufacturing overhead to activity cost pools. Next, Borg must identify the cost drivers that accurately measure each activity’s contribution to the finished product and calculate activity-level overhead rates for each pool. Finally, the manufacturing overhead costs for each activity pool must be allocated to products, using the activity-based overhead rates.

 

SAE 127

Seven Company produces phasers (sales of 200,000 units per year) and force field enhancers (sales of 25,000 units per year). If Seven switches from traditional costing to activity-based costing, what is the likely effect on overhead assigned to the two products?

 

Solution 127

When overhead is properly assigned in ABC, it will usually increase the unit cost of low-volume products like the force field enhancers. This is because low-volume products often require more special handling, such as machine setups and inspections, than high-volume products. Also, overhead costs incurred by low-volume products often are disproportionate to a traditional allocation base.

 

 

SAE 128

In a service company, a large percentage of overhead costs are company-wide costs. Why does this present a unique challenge for an ABC implementation in a service company, as compared to a manufacturing company?

 

Solution 128

Company-wide costs are costs that are necessary in order to run a company but are not explicitly related to producing a distinct product or providing a specific service. Company-wide costs are difficult to accurately attribute to a specific product or service provided by either a manufacturing or service company. In service industries, however, company-wide costs often represent a significant proportion of overhead costs as compared to a manufacturing company. This presents a challenge in an ABC implementation in a service company as the inability to tie overhead costs to specific services may lead to arbitrary allocations which can, in essence, negate the purpose of an ABC implementation (which is to improve the accuracy of service costing).

 

 

SAE 129

Describe how the application of ABC to service companies is the same as its application to manufacturing companies.

 

 

Solution 129

The overall objective of ABC in service companies is the same as that for manufacturing companies—improved costing of services provided. The general approach to costing is the same: analyze operations, identify activities, assign overhead costs to activity cost pools, and identify and use cost drivers to assign the cost pools to the services.

 

MULTI PART QUESTION

 

 

  1. Randy’s Roofing is a city wide company specializing in replacing shingle roofs. Lately, Randy has been puzzled by the fact that though some of his jobs appear to make good money, he doesn’t seem to come out as profitable at the end of each month as he thinks he should.

 

In exchange for some work on your own roof, Randy asks you to help him better understand his costs and how he can price his jobs better. He tells you his total costs are $220,000 every month and that number never changes. You ask him what are the different components of his costs and he lists them as shown below, together with what Randy says is a breakdown of where the costs are incurred.

 

Replacing        Travelling      Office           Promotion           Total      Cost per

Activity               Shingles           to Jobs         Work         for New Jobs     Allocation      Month

Wages                  80%                 20%              0                      0                  100%    $160,000

Shingles               100%                  0                 0                      0                  100%        20,000

Shingle Disposal 100%                  0                 0                      0                  100%          5,000

Truck Expenses      0                  100%             0                      0                  100%          5,000

Randy`s Car            0                      0              30%                 70%               100%          3,000

Randy`s Salary       0                      0              20%                 80%               100%        10,000

Office Expenses     0                      0              70%                 30%               100%        17,000

Total                                                                                                                           $220,000

 

Randy then tells you that he does 5,000 square metres of shingle roofs every month and his crews travel about 2,000 kilometres to get to and from the jobs. Last month his crews did 200 roofs. He also shows that he did a job for Leaky Eaves last month for $7,000 and he allocated $6,000 in costs, based on his usual method of allocating costs (which was an estimate of what he thought the job should cost.)

Randy said that the Leaky Eaves roof was 200 square metres and to get to the job and back to his yard was 150 kilometres.

 

Instructions

See if there is a way that ABC can help Randy understand whether the Leaky Eaves job actually made a profit or not.

 

Solution 130 (20–30 min.)

(requires the student to allocate costs in three steps to arrive at the answer to the Leaky Eaves job)

 

Step 1 Allocation of costs to activities

 

Replacing     Travelling      Office           Promotion           Total

Activity                 Shingles         to Jobs         Work         for New Jobs     Allocation

Wages                  128,000        32,000                 0                      0           $160,000

Shingles                 20,000                 0                 0                      0               20,000

Shingle Disposal      5,000                 0                 0                      0                 5,000

Truck Expenses              0          5,000                 0                      0                 5,000

Randy`s Car                    0                 0             900               2,100                 3,000

Randy`s Salary                0                 0          2,000               8,000               10,000

Office Expenses              0                 0        11,900               5,100               17,000

Totals                 $153,000      $37,000      $14,800           $15,200           $220,000

 

Step 2 Allocate rates for each activity

 

Replacing             Travelling                Office               Promotion

Activity                        Shingles                to Jobs                  Work             for New Jobs

(per 5,000            (per 2,000            (200 jobs)            (200 jobs)

square metres)       kilometres)

Wages                         $25.60                 $16.00                           0                          0

Shingles                          4.00                          0                           0                          0

Shingle Disposal             1.00                          0                           0                          0

Truck Expenses                   0                     2.50                           0                          0

Randy`s Car                         0                          0                      4.50                   10.50

Randy`s Salary                    0                          0                   10.00                   40.00

Office Expenses                  0                          0                   59.50                   25.50

Totals                          $30.60                 $18.50                 $74.00                 $76.00

 

Step 3 Determine cost for Leaky Eaves job by using rates above

 

Replacing        Travelling           Office           Promotion        Total Job

Activity                   Shingles           to Jobs             Work         for New Jobs         Cost

(for a 200       (for 150 km       (for 1 job)        (200 jobs)

  1. m. roof) to job)

Wages                    $5,120             $2,400                      0                      0        $7,520.00

Shingles                       800                      0                      0                      0             800.00

Shingle Disposal         200                      0                      0                      0             200.00

Truck Expenses              0                  375                      0                      0             375.00

Randy`s Car                    0                      0                 4.50               10.50               15.00

Randy`s Salary                0                      0              10.00               40.00               50.00

Office Expenses              0                      0              59.50               25.50               85.00

Totals                     $6,120             $2,770            $74.00             $76.00          9,045.00

 

Comments:

Randy has lost money on the Leaky Eaves job when he thought he had made a profit. His original cost allocation of $6,000 to the job did not cover his wages and the overall charge to the customer of $7,000 did not cover his laid-down costs.

 

Worse, he has not considered his own salary and car expenses that are needed to help promote any new jobs.

 

If Randy was to use ABC to help him build up his expected costs of repairing a roof, he will most likely have to raise his prices for any future jobs that he bids on.

 

 

 

 

 

LEGAL NOTICE

 

 

 

Copyright © 2015 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.

 

 

The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.

 

The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.

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