ACTIVITY-BASED COSTING EXERCISE

PROBLEM 1. Dragon Furniture Company has identified activity centers to which overhead costs are
assigned. The following data are available:

ACTIVITY CENTERS COSTS ACTIVITY DRIVERS

Utilities P300,000 60,000 machine hours

Scheduling and Setup 273,000 780 setups

Material Handling 640,000 1,600,000 pounds of materials

The Company’s products and other operating statistics follow:

PRODUCT

A B C
Prime costs P 80,000 P80,000 P90,000
Machine hours 30,000 10,000 20,000
Number of setups 130 380 270
Pounds of materials 500,000 300,000 800,000
Number of units 40,000 20,000 60,000
produced
Direct labor hours 32,000 18,000 50,000

Required:

(1) Using ABC Method, determine the total production costs for each product. Determine also
the unit cost of each product.
(2) Using Traditional Method of costing using direct labor hours as basis of applying overhead,
what is the unit cost of Product A, B and C.

PROBLEM 2 ABC and CONVENTIONAL METHOD

The Accountant of Camera Film Company has established the following activity cost of pools and
cost drivers:

Activity Cost Pool Budgeted Cost Drivers Budgeted Level Pool Rate
Overhead Cost for Cost Driver
Machine setups P200,000 Number of 100 P2,000/setup
setups
Materials P100,000 Weight of raw 50,000 lbs P2/lb
handling materials
Hazardous waste P50,000 Weight of 10,000 lbs P5/lb
control hazardous
chemicals used
Quality control P75,000 Number of 1,000 P75/inspection
inspections
Other overhead P200,000 Machine hours 20,000 hours P10/machine
 costs hour
An order for 2,000 boxes of film development chemicals has the following production requirements:

Machine setups 4

Raw materials 10,000 pounds

Hazardous materials 2,000 pounds

Inspections 20

Machine hours 500

Direct manufacturing cost actually incurred to produce 2,000 pounds are the following:

Direct materials P425,000

Direct labor 400,000

Before the company adopts the ABC approach of costing, the traditional approach of allocating
overhead, which is based on machine hours, is being used.

Required:

a. The amount of overhead applied to each box of chemical under:

(1) ABC method is _______________________
(2) Traditional costing method is ___________________

b. The manufacturing cost per box under:

(1) ABC method is ________________________
(2) Traditional costing ______________________

PROBLEM 3. Activity Based Costing

ABC Company has budgeted 84,000 machine hours in the production of 3 product lines for the
coming year. Other budgeted information is summarized below:

Machine related costs P2,520,000

Materials receiving order costs 1,255,800

Production orders/Engineering costs 1,080,000

Production run/Setup costs 112,200

Inspection costs 576,000

The following is a summary of actual data for the current year

P1 P2 P3
Units produced 28,000 18,000 6,000
Production costs per
unit:
Materials P60 P45 39
Direct Labor 36 42 30
MH required per unit 1.5 2 1
Activities per product
line:
Receiving orders 48 120 600
Production orders 42 36 57
Setup 12 24 66
Inspections 24 12 60

Required: Determine the following:

(1) Using Activity Based Costing, determine the overhead applied to each product line P1, P2
and P3
(2) Using Activity Based Costing, determine the total manufacturing costs per product line

PROBLEM 4

Levels of cost drivers. Each of the following is a potential activity driver. Identify the most likely level
of each driver with U for a unit-level driver, B for a batch-level diver and P for a product-level driver.
(a) Loads of materials moved
(b) Materials cost
(c) Pounds of finished product produced
(d) Shipments to customers (where no finished goods inventory is maintained
(e) Number of part numbers used
(f) Machine hours
(g) Purchase orders issued (where large materials inventories are maintained
(h) Direct costs
(i) Pieces inspected (where output is 100% inspected)
(j) Pieces inspected (where only the first piece is inspected after each setup)

Problem 5. Levels of cost drivers.

Each of the following is a potential activity driver. Identify most likely level of each driver
with U for a unit-level driver, B for a batch-level driver and P for a product-level driver.
(a) Pounds of materials used
(b) Work orders
(c) Direct labor hours
(d) Total value added
(e) Units produced
(f) Machine setups
 (g) Design changes
(h) Marketing promotions

Problem 6. Value-added and non-value added activities. Pleasantville Company’s sole piece of
machine housing made from sheet metal, is produced in the following steps:

(a) Metal received and inspected at receiving dock

(b) Metal moved to stores inventory
(c) Metal placed into stores
(d) Metal retrieved from stores as needed
(e) Metal moved to Cutting Department
(f) Metal placed in queue to await cutting machine
(g) Pieces cut to size
(h) Placed on hand truck to await material handler
(i) Moved to Deburring Department
(j) Placed in queue to await deburring
(k) Sandblasted to remove burrs from cut edges
(l) Placed on hand truck to await material handler
(m) Moved to in-process storage area
(n) Moved to Inspection Department
(o) Placed in queue to await inspection
(p) Inspected
(q) Placed on hand truck to await material handler
(r) Moved to in-process storage area
(s) Moved to Drilling Department
(t) Placed in queue to await drilling machine
(u) Holes drilled to accommodate customer’s fasteners
(v) Placed on hand truck to await material handler
(w) Moved to Deburring Department
(x) Placed in queue to await deburring machine
(y) Sandblasted to remove burrs from edges of holes
(z) Placed on hand truck to await deburring machine
(aa) Moved to in-process storage area
(bb)Moved to Painting Department
(cc)Placed in queue to await painting
(dd) Painted and oven-dried
(ee) Placed on hand truck to await material handler
(ff) Moved to in-process storage area
(gg) Moved to Inspection Department
(hh) Placed in queue to await inspection
(ii) Inspected
(jj) Placed on hand truck to await material handler
(kk) Moved to shipping dock

Required : Identify each activity as value-added activity or non-value added activity