Chapter 5 Activity Based Costing and Service Costs Allocation

Answer Key

I TRUE OR FALSE
1 TRUE 11 TRUE 22 TRUE 33 TRUE
2 TRUE 12 TRUE 23 FALSE 34 TRUE
3 TRUE 13 FALSE 24 FALSE 35 FALSE
4 TRUE 14 TRUE 25 TRUE 36 TRUE
5 TRUE 15 TRUE 26 TRUE 37 FALSE
6 TRUE 16 FALSE 27 FALSE 38 TRUE
7 FALSE 17 TRUE 28 FALSE 39 FALSE
8 FALSE 18 TRUE 29 TRUE 40 TRUE
9 TRUE 19 FALSE 30 TRUE
10 FALSE 20 TRUE 31 TRUE
11 TRUE 21 TRUE 32 FALSE

II MULTIPLE CHOICE QUESTIONS

1 A 11 D 21 A
2 C 12 D 22 D
3 B 13 A 23 D
4 C 14 C 24 B
5 B 15 C 25 C
6 B 16 D 26 D
7 B 17 B 27 A
8 A 18 B 28 C
9 C 19 D 29 B
10 B 20 B 30 D

III MULTIPLE CHOICE PROBLEMS

1 C P2,000
2 A P100.00
3 B P300
4 D P970.00
5 C P410.00

solutions:
1 Machine set ups (P1,600,000 / 800 set ups ) = P2,000 per set up

2 Model A
*Cost Driver Actual cost Cost
Activity rate driver units allocated
Purchasing materials 20.00 1,200 24,000.00
Machine Set ups 2,000.00 14 28,000.00
Inspections 100.00 200 20,000.00
Running Machines 30.00 1,600 48,000.00
Total overhead costs allocated to model A 120,000.00
Overhead cost per unit ( P120,000 / 1,200 units) 100.00
* Cost driver rate computations
 estimated OH Estimated no. of
Activity Costs cost driver units cost driver rate
Purchasing materials 400,000.00 20,000 frames 20.00 per frame
Machine set ups 1,600,000.00 800 set ups 2,000.00 per set up
Inspections 800,000.00 8,000 hours 100.00 per hour
Running Machines 1,200,000.00 40,000 hours 30.00 per hour

3 Model B
*Cost Driver Actual cost Cost
Activity rate driver units allocated
Purchasing materials 20.00 400 8,000.00
Machine Set ups 2,000.00 48 96,000.00
Inspections 100.00 400 40,000.00
Running Machines 30.00 1,200 36,000.00
Total overhead costs allocated to model A 180,000.00
Overhead cost per unit ( P180,000 / 400 units) 450.00
under traditional P120.00 x 250% 300.00

4 MODEL A MODEL B
ACTIVITY BASED COSTING
Direct materials 200.00 400.00
Direct labor 60.00 120.00
Overhead 100.00 450.00
TOTAL COST PER UNIT 360.00 970.00

5 TRADITIONAL COSTING
Direct materials 200.00 400.00
Direct labor 60.00 120.00
Overhead 150.00 300.00
TOTAL COST PER UNIT 410.00 820.00

6 A P24,000
7 B P96,000
8 C P544,000
9 D P396,000
SOLUTIONS: Quality
control Maintenance Cutting Finishing
Direct departmental costs 120,000.00 180,000.00 400,000.00 240,000.00
Allocation of support costs:
Quality Control Dept.: (120,000.00)
#6 Cutting = (4,000 / 20,000 ) x P120,000 = 24,000.00
#7 Fnishing = (16,000 / 20,000 ) x P120,000 = 96,000.00
Maintenance Dept.: (180,000.00)
Cutting = (40,000 / 60,000 ) x P120,000 = 120,000.00
Finishing = (20,000 / 60,000 ) x P120,000 = 60,000.00
#8 544,000.00 396,000.00
#9
10 D P167,500 QC = 7,000 / 28,000 x P350,000 = 87,500.00
Maint = 12,000 / 30,000 x P200,000 = 80,000.00
Total allocated to Assembly Dept. 167,500.00

11 D P15.65 Direct Costs 400,000.00

Add, Allocated costs from:
QC = 21,000 / 28,000 x P350,000 = 262,500.00
MNT = 18,000 / 30,000 x P200,000 = 120,000.00 382,500.00
Total costs to Machining Department 782,500.00
Total machine hours 50,000
Cost per machine hour 15.65

12 C P12.00 P300,000 / 25,000 hours = 12.00 per hour

13 B P108,000 QC Maintenance Machining Assembly

Direct costs 350,000.00 200,000.00 400,000.00 300,000.00
Allocated costs
QC (350,000.00) 70,000.00 210,000.00 70,000.00
Maintenance (270,000.00) 162,000.00 108,000.00
- - 772,000.00 478,000.00

Quality Control Dept Costs Allocation:

MNT = 7,000/35,000 x P350,000 = 70,000.00
Machining = 21,000 / 35,000 x P350,000 = 210,000.00
Assembly = 7,000/35,000 x P350,000 = 70,000.00

Maintenance Dept Costs = P200,000 + P70,000 = P270,000

Machining = 18,000 / 30,000 x P270,000 = 162,000.00
Assembly = 12,000/30,000 x P270,000 = 108,000.00
Note: no need to present the entire solution, this just to present the format. Computation can be
done directly to get the P108,000 after allocating costs of QC to Maintenance Dept.

14 D P421,053 rounded off

Formula = QC = P350,000 + .25 MNT
MNT = P200,000 + .20 QC
Solve for QC:, Let X as the MNT
X = P350,000 + .25 MNT
X = P350,000 + .25 (P200,000 + .20X)
X = P350,000 + P50,000 + .05X
X - .05X = P400,000
X = P400,000 / .95 = P421,052.63
15 A P1,200,000 Total Costs activities Cost per item
16 D P2,000,000 Set up costs 800,000.00 1,000 800.00
17 C P1,664,000 Machining 1,800,000.00 50,000 36.00
18 B P1,536,000 Inspecting 600,000.00 1,500 400.00
Total costs 3,200,000.00
Total DLH 40,000
Cost per hour 80.00
Mini A hours 15,000
#15 Cost allocated to Mnin A 1,200,000.00

# 16 (P3,200,000 / 40,000 ) x 25,000 hours = 2,000,000.00

#17 & # 18
Activities Costs allocated
cost per item Mini A Maxi B Mini A Maxi B
(a) (b) ( c ) ( a x b) ( a x c)
Set up costs 800.00 600 400 480,000.00 320,000.00
Machining 36.00 24000 26,000 864,000.00 936,000.00
Inspecting 400.00 800 700 320,000.00 280,000.00
Total costs 1,664,000.00 1,536,000.00
# 17 # 18

19 A P32,000 (P160,000 / 5,000 hours ) x 1,000 hours = 32,000.00

20 D P39,000 Activity Total costs total activities Cost per unit activities by P1 Product One
Set up 10,000.00 40 250.00 20 5,000.00
Machining 110,000.00 5,000 22.00 1000 22,000.00
Packing 40,000.00 500 80.00 150 12,000.00
39,000.00
PROBLEMS
5.1 Estimated Estimated number of Cost driver
activity OH costs cost drivers units rate
1 materials handling 400,000.00 50,000 kilos 8.00 per kilo
production set ups 900,000.00 300 run 3,000.00 per run
quality inspections 800,000.00 4,000 hours 200.00 per hour
machine depreciation 400,000.00 20,000 hours 20.00 per hour
total estimated overhead 2,500,000.00

2 MODEL A
cost Actual Cost Cost driver
Activity driver rate driver units rate
materials handling 8.00 900 kilos 7,200.00
production set ups 3,000.00 9 run 27,000.00
quality inspections 200.00 80 hours 16,000.00
machine depreciation 20.00 280 hours 5,600.00
Total Overhead costs allocated to Model A 55,800.00
Overhead cost per unit P55,800 / 450 units ) = P124

MODEL B
cost Actual Cost Cost driver
Activity driver rate driver units rate
materials handling 8.00 3,200 kilos 25,600.00
production set ups 3,000.00 15 run 45,000.00
quality inspections 200.00 120 hours 24,000.00
machine depreciation 20.00 505 hours 10,100.00
Total Overhead costs allocated to Model A 104,700.00
Overhead cost per unit ( P104,700 / 800 units ) = P130.875

3 ACTIVITY BASED COSTING

MODEL A MODEL B
Direct materials 400.00 600.00
Direct labor 90.00 150.00
Overhead 125.00 130.88
Total cost per unit 615.00 880.88

4 TRADITIONAL COSTING
Direct materials 400.00 600.00
Direct labor 90.00 150.00
Overhead (100% of direct labor cost) 90.00 150.00
Total cost per unit 580.00 900.00
5.2
Cost function
1 Purchase oders 50,000.00 / 100 500.00 per order

2 Machine set ups 120,000.00 / 200 600.00 per set up

Electricity 30,000.00 / 100000 0.30 per kw

3 cost drivers JO # 1
Purchase orders 20 orders at P500 10,000.00
Machine set ups 40 set ups at P600 24,000.00
Electricity 1,000 kw at P.30 300.00
Total cost assigned to JO # 1 34,300.00

4 cost drivers JO # 2
Purchase orders 30 orders at P500 15,000.00
Machine set ups 40 set ups at P600 24,000.00
Electricity 2,000 kw at P.30 600.00
Total cost assigned to JO # 1 39,600.00
Number of units produced 4,000
Total support cost per unit produced 9.90

5.3
1 Direct materials P60,000 / 2000 30.00
Direct labor P30,000 / 2000 15.00
Support costs * P1,200,000 / 100,000 = P12.00 per hour 12.00
57.00
2 Direct materials 30.00
Direct labor 15.00
Support costs * 17.40
62.40
* Electricity P200,000 / 40,000 = P5 x 2,000 = 10,000.00
Machine set ups P600,000 / 1,500 = P400 x 50 = 20,000.00
Materials moves P160,000 / 40,000 = P4.00 x 200 = 800.00
Quality Inspections P240,000 / 30,000 = P8.00 x 500 = 4,000.00
34,800.00
number of units produced 2,000
Total support costs per unit 17.40

5.4
1
annual quantiy of
traceable annual cost Cost driver
Activity Centers Cost Drivers costs driver activity per unit
Quality number of pcs. Scrapped 8,000,000.00 100,000 80.00
Production scheduling number of set ups 500,000.00 5,000 100.00
Set up number of set ups 6,000,000.00 5,000 1,200.00
Shipping number of items shipped 3,000,000.00 60,000 50.00
Shipping administration number of shipments 500,000.00 10,000 50.00
Production number of machine hours 15,000,000.00 100,000 150.00
TOTALS 33,000,000.00
 number of cost
driver used per Cost driver
Activity Centers part per unit
Quality 1,200 96,000.00
Production scheduling 40 4,000.00
Set up 40 48,000.00
Shipping 100 5,000.00
Shipping administration 50 2,500.00
Production 150 22,500.00
TOTALS support costs 178,000.00
Add Direct materials 500,000.00
Direct labor 100,000.00
Total cost of production 778,000.00
Number of units produced 20,000
Cost per unit 38.90
Selling price per unit 75.00
Gross margin 36.10
Gross margin percentage 48.13%

2 Under the traditional costing system, unit cost per part is P50 as compared to the total
cost per unit of P38.90 under the ABC method.
ABC is more accurate costing method and thus the management may use this
costing method to all of its products.
5.5
Fabrication = P80,000 x (200 / 500) = 32,000.00

Assemby = P80,000 x (300 / 500) = 48,000.00

5.6 To the Professors:

Please correct the problem. Insert the following phrase after the word "First" ..
First, the costs of the Personnel Department allocated based on the number of employees. Next, the costs of the
Inspection deparment are allocated on….
This means that allocation should be made firest to the Personnel department and not the Inspection department.
It cannot be Inspection first as Inspection Dept does not serve Personnel.
Thank you.
Personnel Inpection Cutting Finishing
Direct costs 160,000.00 100,000.00 160,000.00 60,000.00
Allocated costs:
Personnel (a) (160,000.00) 20,000.00 80,000.00 60,000.00
Inspection (b) (120,000.00) 64,000.00 56,000.00
- - 304,000.00 176,000.00
(a) Personnel Dept costs = P160,000
Inspection = P160,000 x 20/160 = 20,000.00
Cutting = P160,000 x 80/160 = 80,000.00
Finishing = P160,000 x 60/160 = 60,000.00

(b) Inspection Dept costs = P120,000

Cutting = P120,000 x 3,200/ 6,000 = 64,000.00
Finishing = P120,000 x 2,800/ 6,000 = 56,000.00

5.7
1 Direct method Nursing Laboratory
Direct costs 8,000,000.00 800,000.00
Administration = N= P1,200,000 x (40,000/50,000) = 960,000.00
L= P1,200,000 x (10,000/50,000) = 240,000.00
Maintenance = N= P400,000 x (60,000/75,000) = 320,000.00
L= P400,000 x (15,000/75,000) = 80,000.00
Total allocated costs 1,280,000.00 320,000.00
Total costs 9,280,000.00 1,120,000.00

2 Step-down method
Maintenance Administration Nursing Laboratory
Direct costs 400,000.00 1,200,000.00 8,000,000.00 800,000.00
Allocated costs:
Maintenance (a) (400,000.00) 25,000.00 300,000.00 75,000.00
Administration (b) (1,225,000.00) 980,000.00 245,000.00
Total allocated costs 1,280,000.00 320,000.00
- - 9,280,000.00 1,120,000.00
(a) Maintenance costs = P400,000
Administration = P400,000 x 5,000/ 80,000 = 25,000.00
Nursing = P400,000 x 60,000/80,000 = 300,000.00
Laboratory = P400,000 x 15,000/80,000 = 75,000.00

(b) Administration costs = P1,225,000

Nursing = P1,225,000 x 40,000/50,000 = 980,000.00
Laboratory = P1,225,000 x 10,000/50,000 = 245,000.00
 3 Reciprocal method
Administration = P1,200,000 + (5,000 / 80,000) = P1,200,000 +.625 MNT
Maintenance = P400,000 + (10,000 / 60,000) = P400,000 + .1667 ADM
Solve for Maintenance firs and Let X = ADM
X = P400,000 + .1667 ADM
X = P400,000 + .1667 (P1,200,000 + .0625X)
X = P400,000 + P200,040 + .010418X
X - .010418 = P600,040
X = P600,040 / .989582 = P606,357 Maintenance costs

Solve for Administration

X = P1,200,000 + .0625 (P606,357)
X = P1,200,000 + P37,897 = P1,237,897 Administration costs
Maintenance Administration Nursing Laboratory
Direct costs 400,000.00 1,200,000.00 8,000,000.00 800,000.00
Allocated costs:
206,357.00 37,897.00
(606,357.00) (1,237,897.00)
Nursing (a) 454,767.75 113,691.94
Laboratory (b) 825,264.67 206,316.17
Total allocated costs - - 1,280,032.42 320,008.10
- - 9,280,032.42 1,120,008.10
(a) Maintenance costs = P606,357
Nursing = P606,357 x 60,000/80,000 = 454,767.75
Laboratory = P606,357 x 15,000/80,000 = 113,691.94

(b) Administration costs = P1,237,897

Nursing = P1,237,897 x 40,000 / 60,000 = 825,264.67
Laboratory = P1,237,897 x 10,000 / 60,000 = 206,316.17

5.8 Total Total Cost driver

Costs Activities per activity
Cutting 900,000.00 24,000 37.50 per labor hour
Stitching 8,000,000.00 320,000 25.00 per machine hour
Inspection 2,800,000.00 160,000 17.50 per labor hour
Packing 672,000.00 64,000 10.50 per finished goods unit

5.90 Total Total Overhead

Costs Activities rate
Materials handling 70,000.00 1,000 70.00
Machine setup 54,000.00 500 108.00
Quality inspection 54,000.00 600 90.00
5.10 a Single overhead rate
(P32,000 + P54,000) / (2,600 + 2,400) = 17.20 per labor hour
Dining chairs = 2,600 x P17.20 = 44,720.00
Tables = 2,400 x P17.20 = 41,280.00
86,000.00
b ABC Method
Machine setup P32,000 / (200 + 600) = 40.00 per setup
Inspections P54,000 / (250 + 500) = 72.00 per inspection

Dining Chairs Tables

Machining setups
Dining chair = 200 x P40.00 8,000.00
Table = 600 x P40.00 24,000.00
Inspection
Dining chair = 250 x P72.00 18,000.00
Table = 500 x P72.00 36,000.00
Total costs 26,000.00 60,000.00

c The use of ABC resulted in the allocation of less costs to Dining chairs and more costs to Tables.
This will affect pricing decisions as well.