9. Flynn Industries has three activity cost pools and two products.

It expects to produce 3,000 units of Product

BC113 and 1,500 of Product AD908. Having identified its activity cost pools and the cost drivers for each pool,
Flynn accumulated the following data relative to those activity cost pools and cost drivers.
Expected Use of
Annual Overhead Data Cost Drivers per Product
Estimated Expected Use of Cost Product Product
Activity Cost Pools Cost Drivers Overhead Drivers per Activity BC113 AD908
Machine setup Setups $ 16,000 40 25 15
Machining Machine hours 110,000 5,000 1,000 4,000
Packing Orders 30,000 500 150 350
Using the above data, do the following:
(a) Prepare a schedule showing the computations of the activity-based overhead rates per cost driver.
(b) Prepare a schedule assigning each activity’s overhead cost to the two products.
(c) Compute the overhead cost per unit for each product. (Round to nearest.)
Solution

(a) Computations of activity-based overhead rates per cost driver:

Activity Cost Estimated Expected Use of Cost Activity-Based

Pools Overhead Drivers per Activity Overhead Rates

Machine setup $ 16,000 40 setups $400 per setup

Machining 110,000 5,000 machine hours $ 22 per machine hr.

Packing 30,000 500 orders $ 60 per order

$156,000

(b) Assignment of each activity’s overhead cost to products using ABC:

BC113 AD908

Estimated Use
of Cost EstimatedUse of Activity-
Activity Drivers Activity-Based Cost Cost Drivers BasedOverhead Cost
Cost Pools per Product Overhead Rates Assigned per Product Rates Assigned

Machine setup 25 $400 $10,000 15 $ 400 $ 6,000

Machining 1,000 $ 22 22,000 4,000 $ 22 88,000

Packing 150 $ 60 9,000 350 $ 60 21,000

Total assigned costs $ 41,000 $115,000

(c) Computation of overhead cost per unit:

BC113 AD908

Total costs assigned (a) $41,000 $115,000

Total units produced (b) 3,000 1,500

Overhead cost per unit (a) ÷ (b) $13.67 $76.67

10. Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to use a plant wide
overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see
how the results would differ if this system were used. Two activity cost pools were developed: machining and
machine setup. Presented below is information related to the company’s operations.
Standard Custom
Direct labor costs $50,000,000 $100,000,000
Machine hours 1,000 1,000
Setup hours 100 400
Total estimated overhead costs are $240,000,000. Overhead cost allocated to the machining activity cost pool is
$140,000,000, and $100,000,000 is allocated to the machine setup activity cost pool.
Instructions
(a) Compute the overhead rate using the traditional (plantwide) approach.
(b) Compute the overhead rates using the activity-based costing approach.
(c) Determine the difference in allocation between the two approaches.
Solution
(a) Estimated overhead
= Predetermined overhead rate
Direct labor costs
$240,000,000
= 160% of direct labor cost
$50,000,000 + $100,000,000

(b) Activity cost pools Cost drivers Estimated overhead

Machining Machine hours $140,000,000
Machine setup Set up hours 100,000,000
Activity-based overhead rates
Machining: Machine setup:
$140,000,000 = $70,000 per $100,000,000 = $200,000 per
1,000 + 1,000 machine hour 400 + 100 setup hour

(c) Traditional costing Standard Custom

$50,000,000 X 160% $80,000,000
$100,000,000 X 160% $160,000,000
$80,000,000 $160,000,000
Activity-based costing
Machining:
1,000 X $70,000 $70,000,000
1,000 X $70,000 $70,000,000
Machine setup:
100 X $200,000 20,000,000
400 X $200,000 80,000,000
$90,000,000 $150,000,000
11. American Fabrics has budgeted overhead costs of $9.450,000. It has allocated overhead on a plantwide basis
to its two products (wool and cotton) using direct labor hours which are estimated to be 450,000 for the current
year. The company has decided to experiment with activity-based costing and has created two activity cost pools
and related activity cost drivers. These two cost pools are cutting (cost driver is machine hours) and design (cost
driver is number of setups). Overhead allocated to the cutting cost pool is $3,600,000 and $5,850,000 is allocated
to the design cost pool. Additional information related to these pools is as follows.
Wool Cotton Total
Machine hours 100,000 100,000 200,000
Number of setups 1,000 500 1,500
Instructions
(a) Determine the amount of overhead allocated to the wool product line and the cotton product line using
activity-based costing.
(b) What amount of overhead would be allocated to the wool and cotton product lines using the traditional
approach, assuming direct labor hours were incurred evenly between the wool and cotton? How does this
compare with the amount allocated using ABC in part (a)?
Solution
(a) Activity cost pools Cost drivers Estimated overhead
Cutting Machine hours Rs3,600,000
Design Number of setups 5,850,000

Activity-based overhead rates

Cutting Design
Rs3,600,000 $5,850,000
= $18 per machine hour = $3,900 per setup
200,000 1,500
Wool Cotton
Activity-based costing
Cutting
100,000 X $18 $1,800,000
100,000 X $18 $1,800,000

Design
1,000 X $3,900 3,900,000
500 X $3,900 1,950,000
Total cost allocated $5,700,000 $3,750,000

(b) Estimated overhead $9,450,000

= = $21 per direct labor hour
Direct labors hours 450,000
Wool Cotton
Traditional costing
225,000 X $21 $4,725,000
225,000 X $21 $4,725,000

The wool product line is allocated $975,000 ($5,700,000 – $4,725,000) more overhead cost when
an activity-based costing system is used. As a result, the cotton product line is allocated
$975,000 ($4,725,000 – $ 3,750,000) less.
12. Santana Corporation manufactures snow mobiles in its Blue Mountain, Wisconsin, plant. The following costs
are budgeted for the first quarter’s operations.
Machine setup, indirect materials $ 4,000
Inspections 16,000
Tests 4,000
Insurance, plant 110,000
Engineering design 140,000
Depreciation, machinery 520,000
Machine setup, indirect labor 20,000
Property taxes 29,000
Oil, heating 19,000
Electricity, plant lighting 21,000
Engineering prototypes 60,000
Depreciation, plant 210,000
Electricity, machinery 36,000
Machine maintenance wages 19,000
Instructions
Classify the above costs of Santana Corporation into activity cost pools using the following: engineering,
machinery, machine setup, quality control, factory utilities, maintenance. Next, identify a cost driver that may be
used to assign each cost pool to each line of snowmobiles.
Solution

Budgeted Costs Activity Cost Pool Cost Driver

Engineering design
Engineering Engineering hours
Engineering prototypes

Depreciation, machinery
Machinery Machine hours
Electricity, machinery

Machine setup, indirect labor

Machine setup Number of setups
Machine setup, indirect
materials

Inspections Number of tests or

Quality control
Tests inspections

Depreciation, plant
Insurance, plant
Square meters or
Property taxes Factory utilities
Machine hours
Oil, heating
Electricity, plant lighting

Number of
Machine maintenance wages Maintenance
machines or
Machine hours
13. Major Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges.
During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were
estimated. An analysis of estimated overhead costs reveals the following activities.
Activities Cost Drivers Total Cost
1. Materials handling Number of requisitions $40,000
2. Machine setups Number of setups 21,500
3. Quality inspections Number of inspections 33,000
$94,500
The cost driver volume for each product was as follows.
Cost Drivers Instruments Gauges Total
Number of requisitions 400 600 1,000
Number of setups 200 300 500
Number of inspections 200 400 600
Instructions
(a) Determine the overhead rate for each activity.
(b) Assign the manufacturing overhead costs for April to the two products using activity-based costing.
Solution

(a) The overhead rates are:

Estimated Use
Estimated of Cost Drivers Activity-Based
Activity Cost Pools Overhead ÷ per Activity = Overhead Rates
Materials handling $40,000 1,000 $40
Machine setups 21,500 500 43
Quality inspections 33,000 600 55

(b) The assignment of the overhead costs to products is as follows:

Instruments Gauges Cost

Cost Driver Number Cost Number Cost Assigned
Requisitions ($40) 400 $16,000 600 $24,000 $40,000
Machine setups ($43) 200 8,600 300 12,900 21,500
Inspections ($55) 200 11,000 400 22,000 33,000
Total costs
assigned (a) $35,600 $58,900 $94,500

Units produced (b) 50 300

Overhead cost per
Unit (a) ÷ (b) $ 712 $ 196*
*Rounded to nearest dollar