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BRIEF EXERCISES

BE 163 Sanchez Co. has three activities in its manufacturing process: machine setups, machining, and inspections. Estimated annual overhead cost for each activity is $80,000, $162,500, and $28,000, respectively. The expected annual use in each department is 1,000 setups, 12,500 machine hours, and 875 inspections. Instructions Compute the overhead rate for each activity. Solution 163 Machine setups Machining Inspections BE 164 Boots and More, Inc. uses activity-based costing to assist management in setting prices for the companys three major product lines. The following information is available: Activity Cost Pool Cutting Stitching Inspections Packing BE 164 (cont.) Estimated Overhead $ 900,000 8,000,000 2,800,000 800,000 Expected Use of Cost Driver per Activity 25,000 labor hours 320,000 machine hours 160,000 labor hours 64,000 finished goods units (5 min.) $80,000 1,000 = $80 per setup $162,500 12,500 = $13 per machine hour $28,000 875 = $32 per inspection

Instructions Compute the activity-based overhead rates. Solution 164 (5 min.) Estimated Overhead $ 900,000 8,000,000 2,800,000 800,000 Expected Use of Cost Driver per Activity 25,000 labor hours 320,000 machine hours 160,000 labor hours 64,000 finished units = Activity-Based Overhead Rates $36.00 per labor hour $25.00 per machine hour $17.50 per labor hour $12.50 per finished unit

Activity Cost Pool Cutting Stitching Inspections Packing

4-2 BE 165

Test Bank for ISV Managerial Accounting, Fourth Edition

Stereo City Co. manufacturers speakers and receivers and uses activity-based costing. The following information is available: Activity Cost Pool Ordering Soldering Inspecting Packing Estimated Overhead $180,000 192,000 930,000 840,000 Expected Use of Cost Driver per Activity 24,000 orders 64,000 machine hours 120,000 labor hours 56,000 boxes

Instructions Compute the activity-based overhead rates. Solution 165 (5 min.) Estimated Overhead $180,000 192,000 930,000 840,000 Expected Use of Cost Driver per Activity 24,000 orders 64,000 machine hours 120,000 labor hours 56,000 boxes = Activity-Based Overhead Rates $ 7.50 per order $ 3.00 per machine hour $ 7.75 per labor hour $15.00 per box

Activity Cost Pool Ordering Soldering Inspecting Packing BE 166

Plum Tired manufactures tires for dune buggies and has two different products, nubby tires and smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and incurs $171,000 of overhead costs. The following information is available: Activity Materials handling Machine setups Quality inspections Total Cost $60,000 54,000 57,000 Cost Driver Number of requisitions Number of setups Number of inspections

For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The smooth tires require 600 requisitions, 300 setups, and 400 inspections. BE 166 (cont.) Instructions Determine the overhead rate for each activity. Solution 166 (510 min.) Expected Use of Cost Drivers 1,000 500 600

The overhead rates are: Activity Materials handling Machine setups Quality inspections Overhead $60,000 54,000 57,000 Overhead Rate $ 60/req. $108/setup $ 95/insp.

Activity-Based Costing BE 167

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Malt Co. manufactures several types of microbrew beers. Malt has identified the following activities: a. Inventory control e. Machine setups b. Purchasing f. Brewing c. Receiving g. Packing and shipping d. Employee training Instructions Classify each activity as value-added or non-value-added. Solution 167 a. b. c. d. e. f. g. (5 min.) Classification Non-value-added Non-value-added Non-value-added Non-value-added Non-value-added Value-added Value-added

Activity Inventory control Purchasing Receiving Employee training Machine setups Brewing Packing and shipping

EXERCISES
Ex. 168 All Wood Corporation manufactures dining chairs and tables. The following information is available: Dining Chairs Tables Total Cost Machine setups 200 600 $36,000 Inspections 250 470 $54,000 Labor hours 2,600 2,400 All Wood is considering switching from one overhead rate based on labor hours to activity-based costing. Ex. 168 (cont.) Instructions Perform the following analyses for these two components of overhead: a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate. b. Compute total machine setups and inspection costs assigned to each product, using activitybased costing. c. Comment on your findings. Solution 168 (812 min.)

a. Single overhead rate ($36,000 + $54,000) 5,000 = $18 per labor hour

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Test Bank for ISV Managerial Accounting, Fourth Edition 2,600 ! $18 = $46,800 2,400 ! $18 = 43,200 $90,000

Dining chairs: Tables:

b. Activity-based costing Machine setups: $36,000 800 = $45 per setup Inspections: $54,000 720 = $75 per inspection

Dining chairs: (200 ! $45) + (250 ! $75) = $27,750 Tables: (600 ! $45) + (470 ! $75) = 62,250 $90,000 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. Ex. 169 Vid-saver, Inc. has five activity cost pools and two products (a budget tape rewinder and a deluxe tape rewinder). Information is presented below: Activity Cost Pool Ordering and Receiving Machine Setup Machining Assembly Inspection Cost Driver Est. Overhead Orders $ 110,000 Setups 297,000 Machine hours 1,000,000 Parts 1,200,000 Inspections 300,000 Cost Drivers by Product Budget Deluxe 600 400 500 400 150,000 100,000 1,200,000 800,000 550 450

Instructions Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and 200,000 units of Deluxe. Round your answer to the nearest cent.

Solution 169

(1520 min.) Est. Overhead $ 110,000 297,000 1,000,000 1,200,000 300,000 Budget Total Est. Activity = 1,000 orders 900 setups 250,000 mach. hours 2,000,000 parts 1,000 inspections Cost = Assigned $ 66,000 165,000 600,000 720,000 Overhead Rate $110/order $330/setup $4/machine hour $.60/part $300/inspection

Activity Cost Pool Ordering & Receiving Machine Setup Machining Assembly Inspection

Cost Activity Cost Pool Driver ! Ordering & Receiving 600 Machine Setup 500 Machining 150,000 Assembly 1,200,000

Rate $110 330 4 .60

Deluxe Cost Cost Driver ! Rate = Assigned 400 $110 $ 44,000 400 330 132,000 100,000 4 400,000 800,000 .60 480,000

Activity-Based Costing Inspection 550 300 165,000 $1,716,000 700,000 $2.45 per unit 450 300

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135,000 $1,191,000 200,000 $5.96 per unit

Ex. 170 Ami Reed owns a small department store in a metropolitan area. For twenty years, the accountant has applied overhead to the various departmentsWomen's Apparel, Men's Apparel, Cosmetics, Housewares, Shoes, and Electronicsbased on the basis of employee hours worked. Ami Reed 's daughter, who is an accounting student at a local university, has suggested her mother should consider using activity-based costing (ABC). In an attempt to implement ABC, Ami Reed and her daughter have identified the following activities. Instructions Determine a cost driver for each of the activities listed below. Cost Pool a. Placing orders b. Stocking merchandise c. Waiting on customers d. Janitorial and Maintenance e. Training employees f. Administrative g. Advertising and Marketing h. Accounting and Legal Services i. Wrapping packages Cost Driver ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________

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Test Bank for ISV Managerial Accounting, Fourth Edition (69 min.) Cost Driver number of orders; volume of individual orders number of orders; dollar volume of orders number of customers; dollar volume of sales square feet occupied; traffic through area total number of employees; number of new employees number of employees; dollar volume of business number of ad campaigns dollar volume of sales number of packages

Solution 170 Cost Pool

a. Placing orders b. Stocking merchandise c. Waiting on customers d. Janitorial and Maintenance e. Training employees f. Administrative g. Advertising and Marketing h. Accounting and Legal Services i. Wrapping packages

Ex. 171 A list of possible cost drivers is presented below: Code A Engineering hours B Setups C Machine hours Code D Number of subassemblies E Boxes F Orders

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 171 1. B 2. F 3. E (46 min.) 4. A 5. C 6. D

Activity-Based Costing Ex. 172 Identify appropriate cost drivers for the following activity cost pools: 1. Human resources 2. Security 3. Receiving 4. Data processing Solution 172 1. 2. 3. 4. (35 min.)

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Number of employees, number of hires Square footage Shipments received; pounds received Lines printed, CPU minutes, storage units

Ex. 173 Two of the activity cost pools for Montana Company are (a) machining ($300,000) and (b) inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours (12,500), square footage (2,000), and number of inspections (200). Instructions Compute the overhead rate for each activity. Solution 173 (a) (46 min.)

$300,000 Machining: = $24 per machine hour 12,500 machine hours $42,000 Inspections: - = $210 per inspection 200 inspections

(b)

Ex. 174 Tanner, Inc. produces two models of cameras, Standard and Luxury. It sells 100,000 Standard cameras and 15,000 Luxury cameras annually. Tanner switched from traditional costing to activity-based costing and discovered that the cost allocated to Luxury cameras increased so dramatically that the Luxury was now only marginally profitable. Instructions Give a probable explanation for this shift. Solution 174 (46 min.)

Low-volume products often require more special handling, such as more machine setups and inspections, than high-volume products. Also, the overhead costs incurred by the low-volume product are often disproportionate to a traditional allocation base such as direct labor hours.

4-8 Ex. 175

Test Bank for ISV Managerial Accounting, Fourth Edition

Compute activity-based costing rates from the following budgeted data for Tatum's Tools: Activity Cost Pool Designing Machining Packing Solution 175 Designing Machining Packing Ex. 176 Holiday Favorites manufactures a wide variety of holiday and seasonal decorative items. Holidays activity-based costing overhead rates are: Purchasing Storing Machining Supervision $350 per order $2 per square foot/days $100 per machine hour $5 per direct labor hour (35 min.) ($2,250,000 75,000) ($525,000 21,000) ($620,000 31,000) = $30 per designer hour = $25 per machine hour = $20 per labor hour Budgeted Cost $2,250,000 525,000 620,000 Budgeted Cost Driver 75,000 designer hours 21,000 machine hours 31,000 labor hours

The Haunted House project involved three purchase orders, 4,000 square feet/days, 60 machine hours, and 30 direct labor hours. The cost of direct materials on the job was $19,000 and the direct labor rate is $30 per hour. Instructions Determine the total cost of the Haunted House project. Solution 176 (57 min.) $19,000 900 $1,050 8,000 6,000 150

Direct materials Direct labor (30 ! $30) Factory overhead Purchasing (3 ! $350) Storing (4,000 ! $2) Machining (60 ! $100) Supervision (30 ! $5) Total cost Ex. 177

15,200 $35,100

Label the following costs as value-adding (VA) or non-value-adding (NVA): ____ ____ ____ 1. Engineering design 2. Machine repair 3. Inventory storage

Activity-Based Costing Ex. 177 ____ ____ ____ ____ ____ (cont.)

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4. Machining 5. Assembly 6. Painting 7. Inspections 8. Packaging (35 min.) 5. 6. 7. 8. VA VA NVA VA

Solution 177 1. 2. 3. 4. VA NVA NVA VA

Ex. 178 Borke and Falvery is a law firm that uses activity-based costing. Classify these activities as valueadded or non-value-added: ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ Solution 178 1. 2. 3. 4. 1. Taking appointments 2. Reception 3. Meeting with clients 4. Bookkeeping 5. Court time 6. Meeting with opposing attorneys 7. Billing 8. Advertising

(35 min.) 5. 6. 7. 8. Value-added Value-added Non-value-added Non-value-added

Non-value-added Non-value-added Value-added Non-value-added

Ex. 179 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

4 - 10 Ex. 179

Test Bank for ISV Managerial Accounting, Fourth Edition (cont.) 5. Product design 6. Cutting 7. Inspection 8. Inventory management

______________ ______________ ______________ ______________ Solution 179 1. 2. 3. 4. Ex. 180 Facility Unit Unit Batch

(46 min.) 5. 6. 7. 8. Product Unit Batch Product

Brewer & Carr, PSC 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 Travel expense Plan reproduction expense Total $360,000 100,000 120,000 $580,000 Activity Cost Pools Project Business Assignment Development 60% 30% 40% 40% 35% 40%

Salaries and wages Travel expense Plan reproduction expense

Other 10% 20% 25%

Instructions Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business Development, and (c) Other activity cost pools. Solution 180 (69 min.) (c) Other $36,000 20,000 30,000 $86,000 Total $360,000 100,000 120,000 $580,000

Activity Cost Pools (a) (b) Project Business Assignment Development Salaries and wages $216,000 $108,000 Travel expense 40,000 40,000 Plan reproduction expense 42,000 48,000 Total $298,000 $196,000

Activity-Based Costing

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COMPLETION STATEMENTS
181. 182. 183. 184. 185. 186. 187. 188. 189.
a

In traditional costing systems, direct labor cost is often used for the assignment of all ____________________. A __________________ is any activity that has a direct cause-effect relationship with the resources consumed. In activity-based costing, overhead costs are allocated to ____________________, then assigned to products. The number of ___________________ is an appropriate cost driver for the ordering and receiving activity cost pool. The primary benefit of activity-based costing is ___________________ product costing. When product lines differ greatly in volume and manufacturing complexity, a switch from traditional costing to ___________________ is indicated. ______________________ increase the worth of a product or service to customers. In the hierarchy of activity levels, the four levels are __________, ___________, ____________, and _____________. Equipment setups are a ______________-level activity.

190. A primary objective of __________________ processing is to eliminate all manufacturing inventories. 191. Dependable suppliers, a multi-skilled workforce, and a __________________________ are necessary elements of just-in-time processing.

Answers to Completion Statements 181. 182. 183. 184. 185. 186. 187. 188. 189. a 190. a 191. overhead costs cost driver activity cost pools purchase orders more accurate activity-based costing value-added activities unit, batch, product, facility batch just-in-time total quality control system

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Test Bank for ISV Managerial Accounting, Fourth Edition

MATCHING
192. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E. Pull approach Cost driver Facility-level activity Unit-level activity Activity-based costing F. G. H. I. J. Just-in-time processing Batch-level activity Product-level activity Non-value-added activity 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. _____ 9. Primary objective is to eliminate all manufacturing inventories. _____ 10. Used to initiate manufacturing under JIT processing.

Answers to Matching 1. 2. 3. 4. 5. E B J I C 6. 7. 8. 9. 10. H G D F A

Activity-Based Costing

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SHORT-ANSWER ESSAY QUESTIONS


S-A E 193 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 193 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 compute 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.

S-A E 194 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 194 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.

S-A E 195 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 195 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 and diverse, and they 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.