ASSIGNMENT: ACTIVITY BASED COSTING AND ACTIVITY BASED MANAGEMENT

NAME: Mary Ann F. Mendez

INSTRUCTION: Please answer the following exercises (16 -22) that will be found in the PDF
that was given to you under “LECTURES: THE MANAGER AND MANAGEMENT
ACCOUNTING”. Put your answers on the answer sheet provided below. If there are problems
that are computational in nature, please show your solutions. Thank you.

EXERCISE 5-16: ANSWERS

1. a. Indirect manufacturing labor costs of $1,450,000 that supports direct manufacturing

labor is an output unit level cost because overtime, direct manufacturing labor
increases with additional output units produced and so with the indirect cost to support it.

b. Procurement costs of placing purchase orders, receiving materials and paying

suppliers related to the number of purchase orders placed, are considered as batch
level costs because they are activities related to a group of units of products or service
rather than an individual unit of product or service.

c. Indirect materials here are considered output unit level cost because they change in
accordance with the labor or machine hours that are unit level costs.

d. Set up costs are batch level costs because they relate to a group of units produced
rather than each individual unit after the machines are set up.

e. The cost of designing processes, drawing process charts, making engineering

process changes for products are product-sustaining costs because they relate to
activities undertaken to support individual products or services regardless of the number
of units or batches in which the units are produced.

f. Machine related overhead costs such as depreciation, maintenance and production

engineering are considered as output unit level unit costs because they change with
the number of units or services produced.

g. Plant management, plant rent and plant insurance are facility-sustaining cost
because they are activities that cannot be traced in the individual products or services
but support the whole organization.

2. If Hamilton would only use machine hours to allocate overhead costs to boom boxes,
both simple and complex would be allocated the same amount of overhead costs per
boom box. This case would result into under costing of complex boom box because it
consumes a relatively high level of resources but reported at low cost (assigning too little
cost to it) and over costing of simple boom boxes as it consumes low level of resources
 but is reported at a high cost (assigning too much cost to it). Because Hamilton uses
only single cost-allocation base, costing system led to mis costed boom boxes.

3. Utilizing cost hierarchy will help Hamilton to appropriately price the boom boxes
according to their category and costs. The company will also be able to see what
product is more profitable or not. It will also help Hamilton to improve the processes and
reduce the cost of different activities. Through the use of cost hierarchies, they can also
evaluate designs in improving their business’ performance. It will be very helpful for
Hamilton to manage its company activities and as well as the costs of these activities.

EXERCISE 5-17: ANSWERS

a. Direct labor costs are output-unit level cost because they increase based on the
number or unit of materials tested for every hour.

b. Equipment related costs (rent, maintenance, energy and so on) are output-unit level
cost because they increase with the number of test hours used or incurred.

c. Set up costs are batch-level costs because, over time, the cost of this set up activity
increases each time a batch of materials are set up for either HT or ST. The setup hours
increase with setup-hours needed to produce batches of test.

d. Cost of designing test is a product-sustaining cost because it depends largely on

the time required for designers to design the test regardless of the number of units or
batches tested.

1. Equipment-related cost per hour = $350,000 ÷ (40,000 + 30,000) = $5 per hour

Setup cost per hour = $430,000 ÷ (13,600 + 3,600) = $25 per hour

Cost of designing test per hour = $264,000 ÷ (3,000 + 1,400) = $60 per hour

HEAT TESTING STRESS TESTING

Total Per Hour Total Per Hour

Direct Labor cost $100,000 $2.50 $46,000 $1.53

Equipment related cost

$5 x 40,000 200,000 5.00

$5 x 30,000 150,000 5.00

Setup cost

$25 x 13,600 340,000 8.50

$25 x 3,600 90,000 3.00

 Cost of Designing test

$60 x 3,000 180,000 4.50

$60 x 1,400 84,000 2.80

Total Cost $820,000 $20.50 $370,000 $12.33

Simple costing and ABC system differs from their methods in acquiring cost just
like what we have seen from the table above which uses ABC system. The $17 per test
hour using simple costing system over-costed stress testing and under-costed heat
testing because in simple costing, the company utilizes only single cost-allocation base
which results to assigning too much cost to stress testing and too little cost to heat
testing. On the other hand, the use of ABC system as shown in table, per hour cost
showed different amount because for each activity cost pool, the cost driver is use as the
allocation base such as using setup hour rather than number of setups. Since heat
testing uses a more intensive direct labor, setup and design resources than stress
testing, its total cost will be greater than stress testing. Unlike simple testing that sees
stress testing and heat testing to have the same testing cost per hour.

Simple costing system is less accurate and may also lead to mis-costing of
products and activities because in only use single cost-allocation base for two products
which over-costed and/or under-costed the other. Unlike simple costing, ABC system is
more accurate and reliable because it refines the costing system by identifying individual
activities that will prevent mis-cost of products. It identifies activities in all functions of the
value chain, calculate costs of individual activities and assign costs to costs objects.

Vineyard can use the cost hierarchy and ABC information to achieve a sound
decision making that would eventually satisfy customers and improve profits. ABC
information are used for such management decisions s pricing, product-mix, cost
reduction, process improvement, product and process redesign and planning and
managing activities.

EXERCISE 5-18: ANSWERS

1.  

Clients Direct Professional Time Support Services Amount Billed to

Clients

San Antonio Billing Hours Total Rate Total

Dominion rate per per
hour client
 Walliston $640 26 $16,640 30% $4,992 $21,632

Boutin 220 5 1,100 30% 330 1,430

Abbington 100 39 3,900 30% 1,170 5,070

Total $960 70 $21,640 30% 6,492 $28,132

Clients Direct Professional Time Support Services Amount Billed to

Clients

Amsterdam Billing Hours Total Rate Total

Enterprises rate per per
hour client

Walliston $640 4 $2,560 30% $768 $3,328

Boutin 220 14 3,080 30% 924 4,004

Abbington 100 52 5,200 30% 1,560 6,760

Total $960 70 $10,840 30% $3,252 $14,092

Total amount billed to San Antonio Dominion is $28,132 and Amsterdam Enterprises is $14,092.
2.

Clients Direct Professional Time Support Services Amount Billed to

Clients

San Antonio Billing Hours Total Rate per Total

Dominion rate per per labor hour
hour client

Walliston $640 26 $16,640 $75 $1,950 $18,590

Boutin 220 5 1,100 75 375 1,475

Abbington 100 39 3,900 75 2,925 6,825

Total $960 70 $21,640 $75 5,250 $26,890

Clients Direct Professional Time Support Services Amount Billed to

Clients

Amsterdam Billing Hours Total Rate per Total

Enterprises rate per per labor hour
hour client

Walliston $640 4 $2,560 $75 $300 $2,860

Boutin 220 14 3,080 75 1,050 4,130

 Abbington 100 52 5,200 75 3,900 9,100

Total $960 70 $10,840 $75 $5,250 $16,090

Requirement 1 Requirement 2

San Antonio Dominion $28,132 $26,890

Amsterdam Enterprises $14,092 $16,090

Total $42,224 $42,980

Using a professional labor per hour of $75 under support service, the amount billed to clients
will be higher compared to requirement 1 that uses a 30% of professional labor costs that billed
clients at a lower cost.

3. Some ways to determine whether professional labor hour or professional labor cost is more
appropriate to use as allocation base for support services of WG is through gathering
information by conducting interviews with personnel and analyzing tasks undertaken for
certain clients.

EXERCISE 5-19: ANSWERS

$308,600 ÷ 4000 = $77.15 machine per hour 

 Variable manufacturing overhead allocated to each customer

Variable United Motors Holden Motors Leland Vehicle Total

manufacturing
overhead allocated
based on machine
hours

$77.15 x 120 $9,258

$77.15 x 2,800 $216,020

$77.15 x 1,080 $83,322

$308,600

Variable manufacturing overhead rates

Design rate = $39,000 ÷ 390 = $100

 Production rate = $29,600 ÷ 370 =$80

Engineering rate = $240,000 ÷ 4000 = $60

Variable manufacturing overhead allocated to each customer

United Motors Holden Motors Leland Vehicle Total

Design overhead,
allocated on CAD-
design-hours

$100 x 110 $11,000

$100 x 200 $20,000

$100 x 80 $8,000 $39,000

Production overhead,
allocated on engineering
hours

$80 x 70 $5,600

$80 x 60 $4,800

$80 x 240 $19,200 $29,600

Engineering overhead,
allocated on machine
hours

$60 x 120 $7,200

$60 x 2,800 $168,000

$60 x 1,080 $64,800 $240,000

Total $23,800 $192,800 $92,000 $308,600

United Motors Holden Motors Leland Motors

Requirement 1 $9,258 $216,020 $83,322

Requirement 2 $23,800 $192,800 $92,000

1. The variable manufacturing overhead allocated to United Motors increases by 2.57 or

157% under the department rates, the overhead allocated to Holden was decreased by
 about 0.89 or 11% and the overhead allocated to Leland vehicles increases by 1.10 or
10%. Holden will probably complain upon utilizing simple costing system because its
contract was being over-costed relative to its consumption of MOH resources. On the
other hand, United and Leland were under-costed by the simple costing system. But if
the new department rates were used to price contracts, United and Leland will be
disappointed and unhappy. To respond on this situation, Automotive Products (AP)
should explain the calculations made and point out United’s high use of design and
engineering resources and Leland’s high use of engineering resources relative to
production machine hours. Helping them or collaborating with them on how to reduce the
consumption of those resources would may lessen their unhappiness in this case.

2. AP may use the information available from its department-by-department analysis of

manufacturing overhead costs, other than pricing, is to set targets over time to reduce
both the consumption of each indirect resource and unit costs of the resources, to
reevaluate employee scales and to examine and streamline its own operations so that
there is a maximum value-added from all indirect resources.

3. It would not be worthwhile to further refine the cost system into an ABC system if a
single activity accounts for a sizable proportion of the department’s costs or if significant
costs are incurred on different activities within a department, but each activity has the
same cost driver or if there wasn’t much variation among contracts in the consumption of
activities within a department.

EXERCISE 5-20: ANSWERS 

Trophies Plaques Total

Direct Material

Forming $13,000 $11,000

Assembly 2,600 9,375

Total 15,600 20,625

Direct Labor

Forming 15,600 9,000

Assembly 7,800 10,500

Total 23,400 19,500

Total Direct Cost $39,000 $40,125 $79.125

 
Budgeted overhead rate = $12,000 + $ 10,386 + $23,000 + $10,960 = $56,346 ÷ $79,125
= $0.712114 per dollar of direct cost
 Trophies Plaques Total

Direct materials $15,600 $20,625 $36,225

Direct labor 23,400 19,500 42,900

Total Direct Cost 39,000 40,125 79,125

Allocated Overhead 27,772 28,574 56,346

Total Costs $66,772 $68,699 $135,471

1. Budgeted overhead rate-forming Dept = ($12,000 + $10,386) ÷ ($15,600 + $9000)

= $22,386 ÷ $24,600
= $0.91 per Forming Department direct labor
Dollar
Budgeted overhead rate-Assembly Dept = ($23,000 + $10,960) ÷ ($11,975 + $18,300)
= $33,960 ÷ $30,275
= $1.121718 per Assembly Department direct
Cost Dollar

Trophies Plaques Total

Direct materials $15,600 $20,625 $36,225

Direct labor 23,400 19,500 42,900

Total Direct Cost 39,000 40,125 79,125

Allocated Overhead

Forming Dept. 14,196 8,190 22,386

Assembly Dept. 11,666 22,294 33,960

Total Costs $64,862 $70,609 $135,471

The budgeted cost for trophies is $64,862 and $70,609 for Plaques which totals $135,471.
 2. Forming Department
Setup overhead cost = $12,000
Batches = 40 + 116 = 156

Budgeted set-up rate = $12,000 ÷ 156 = $76.9230 per batch

Supervision overhead cost = $10,386

Direct Labor cost = $24,600

Budgeted supervision rate = $10,386 + $24,600 = $0.4222 per direct-labor dollar

Assembly Department
Set up overhead cost = $23,000
Batches = 146

Budgeted setup rate = $23,000 + 146 = $157.5342

Supervision overhead cost = $10,960

Direct Labor Cost = $18,300

Budgeted supervision rate = $10,960 + $18,300 = $0.5989

Trophies Plaques Total

Direct materials $15,600 $20,625 $36,225

Direct labor 23,400 19,500 42,900

Total Direct Cost 39,000 40,125 79,125

Allocated Overhead

Forming Dept.

Setup overhead
($76.9230 x 40;116) 3,077 8,923 12,000

Supervision overhead
($0.4222 x $15,600; 6,586 3,800 10,386
$9000)

Assembly Dept.
Setup overhead
($157.5342 x 43;103) 6,774 16,226 23,000
 Supervision overhead
($0.5989 x $7,800; 4,671 6,289 10,960
$10,500)
Total overhead cost 21,108 35,238 56,346

Total Cost $60,108 $75,363 $135,471

The budgeted cost of trophies and plaques equals to $60,108 and $76,363 respectively, which
totals to $135,471.

3. Through disaggregated information, managers could understand the drivers of different

cost categories and will be able to use them for pricing and product mix decision, cost-
reduction, process improvement, design decision and to plan and manage activities
soundly and effectively. It also allows managers to see details that would help them
clearly understand how various aspects of costs affect total cost per unit.

PROBLEM 5-21: ANSWERS

1. Rates per unit cost driver

Machining Costs

Cost Driver- Machine hours

= $375,000 ÷ (25,000 + 50,000) =$5 per machine hour

Setup Costs

Cost Driver – Number of production runs

= $120,000 ÷ (50 + 50) = $1,200 per production run

Inspection Costs

Cost Driver – Inspection hours

= $105,000 ÷ (1,000 + 500) = $70 per inspection hour

Manufacturing Overhead Cost per Unit

Mathematical Financial

Machining cost

(5 x 25,000;50,000) $125,000 $250,000

Setup cost

(1,200 x 50;50) 60,000 60,000

Inspection cost

(70 x 1,000;500) 70,000 35,000

Total manufacturing $255,000 ÷ 50,000 $345,000 ÷ 100,000

overhead cost/number of
units

Manufacturing overhead cost $5.1 $3.45

per unit

2.

Mathematical Financial

Direct materials

$150,000 ÷ 50,000 $3.00

$300,000 ÷ 100,000 $3.00

Direct manufacturing labor

$50,000 ÷ 50,000 1.00

$100,000 ÷ 100,000 1.00

Manufacturing overhead 5.10 3.45

cost per unit

Manufacturing cost per $9.10 $7.45

unit
 PROBLEM 5-22: ANSWERS

1. Total Indirect cost = $150,000 + $90,000 + $36,000 + $40,000 + $39,000 + $48,000

= $403,000

Total Machine-hour = 400 x 10 = 4,000

200 x 10 = 2,000

4,000 + 2,000 = 6,000

Indirect cost rate per machine-hour = $403,000 ÷ 6,000 = $67.17

Simple Costing System

Standard Job Special Job

Cost of Supplies per job $200 $250
Direct Labor cost per job 180 200
Total Direct costs 380 450
Indirect cost allocated 671.70 671.70
(10 x 67.17)
Total Costs $1,051.70 $1,121.70

2. Activity based Costing System

Machine Operations
Cost Driver = Machine-hours
Total Cost of Activity = $150,000
Quantity of cost driver consumed:
Standard Job = 400 x 10 = 4,000
Special Job = 200 x 10 = 2,000
Allocation rate = $150,000 ÷ (4000 + 2000) = $25 per machine-hour

Setups
Cost Driver = Setup hours
Total Cost of Activity = $90,000
Quantity of cost driver consumed:
Standard Job = 400 x 4 = 1,600
Special Job = 200 x 7 = 1,400
Allocation rate = $90,000 ÷ (1,600 + 1,400) = $30 per setup hour
Purchase Orders
Cost Driver = Number of purchase orders
Total Cost of Activity = $36,000
Quantity of cost driver consumed:
Standard Job = 400
Special Job = 500
Allocation rate = $36,000 ÷ (400 + 500) = $40 per purchase order

Design
Total Cost of Activity = $40,000

Marketing
Cost Driver = Selling price
Total Cost of Activity = $39,000
Allocation rate = 0.05

Administration
Cost Driver = Direct Labor Cost
Total Cost of Activity = $48,000
Quantity of cost driver consumed:
Standard Job = $180 x 400 = 72,000
Special Job = $200 x 200 = 40,000
Allocation rate = $48,000 ÷ (72,000 + 40,000) = $0.42857

Standard Job Special Job

Cost of Supplies
($200 x 400) $80,000
($250 x 200) $50,000
Direct Labor Cost
($180 x 400) 72,000
($200 x 200) 40,000
Indirect Cost allocated:
Machine Operations
(25 x 4,000;2,000) 100,000 50,000
Setups
(30 x 1,600;1,400) 48,000 42,000
Purchase Orders
(40 x 400;500) 16,000 20,000
Design 8,000 32,000
Marketing
(0.05 x 1,200 x 400) 24,000
(0.05 x 1,500 x 200) 15,000
Administration
(0.42857 x72,000; 40,000) 30,857 17,143
Total Costs $378,857 $266,143

Cost of each Job

 ($358,857 ÷ 400) $947.1425
($266,143 ÷ 200) $1,330.715
3. In relation with the ABC system, simple costing system is seen to over-cost standard
jobs and under-cost special jobs because the same indirect cost was allocated to both
jobs. On the other hand, ABC system differs with regards to the result of costs as it
shows that each standard job consumes less of the indirect resources compared to
special job which consumes higher indirect costs. ABC system reveals and identified all
of the specific overhead operations related to each job. It expands the number of
indirect cost pools that can be allocated to specific job.

4. Quikprint might use the information revealed by the ABC system by changing its price
which is based on the ABC costs instead of simple costing system and will therefore
improve profits. It can also make use of the information obtained from ABC system to
further manage the business’ operations effectively. It let managers to foresee and
create various strategies by being able to examine indirect cost categories and to
analyze if there will be a possibility to reduce indirect cost but services to provide will
remain in the same level or might also help managers to seek on how to lessen or
reduce indirect costs.