Exam 8: Activity-Based Costing

Lyons, SA., has identified the following overhead costs and activity drivers for next year: The following are two of the jobs completed during the year: The company's normal activity is 20,000 direct labour hours. Required: a. Determine the unit cost for each job using direct labour hours to apply overhead. b. Determine the unit cost for each job using the four activity drivers. (Round amounts to 2 decimal places.) c. Which method produces the more accurate cost assignment? Why?

Figure 2 The management of Chott Industries predicted that overhead cost would total £180,000 for the current year. Management further estimated that under absolutely perfect conditions they could produce 25,000 units. Under efficient conditions, they can produce 23,000 units. The product is expected to appeal to the public for approximately three years during which time Chott expects to sell a total of 60,000 units. Because poor economic conditions are forecast for the upcoming year, Chott plans to produce only 18,000 units. -Refer to Figure 2. What will Chott's overhead application rate be if Chott uses the expected activity level?

Discuss how volume-based unit-level analysis underestimates and/or overestimates the cost of products.

Owens Ltd. produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Activity cost drivers for each activity have been identified and their practical capacities listed: The costs of facility-level activities are assigned using machine hours. What is the cost pool rate for the facility-level activities?

King Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are as follows: Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. 50,000 direct labour hours are budgeted for next year. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually, bids are based upon full manufacturing cost plus 30 percent. Estimates for the proposed job are as follows: In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based activity driver, direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers. Expected activity for the four activity drivers that would be used are: Required: a. Determine the amount of overhead that would be allocated to the proposed job if direct labour hours are used as the volume-based activity driver. Determine the total cost of the proposed job. Determine the company's bid if the bid is based upon full manufacturing cost plus 30 percent. b. Determine the amount of overhead that would be applied to the proposed project if activity-based costing is used. Determine the total cost of the proposed job if activity-based costing is used. Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 percent. c. Which product costing method produces the more competitive bid?

Owens Ltd. produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Activity cost drivers for each activity have been identified and their practical capacities listed: The costs of facility-level activities are assigned using machine hours. What is the cost pool overhead rate for the unit-level activities?

Product costs can be distorted if a unit-based cost driver is used and

Refer to Figure 1 in the previous question. What is the cost of resource usage?

The Evans Company uses an ABC system and has provided the following information: Other data: Total fixed costs (ABC) £135,000 Unit selling price ) £30 Required: a. Determine the break-even point in units. b. Determine the number of units that must be sold to earn £90,000 in profit before taxes. c. Determine the number of units that must be sold to generate an after-tax profit of £36,000 if there is a 40 percent tax rate.

Explain how the activity resource usage model is used in assessing relevancy.

Describe several of the major differences between a traditional functional-based cost management system and an activity-based cost management system.

Moss Ltd. has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the equipment's time is used for improving processes and 65 percent is used for designing tools. The salaries are for two engineers. One is paid £50,000, while the other earns £25,000. The £50,000 engineer spends 40 percent of his time training employees in new processes and 60 percent of his time on improving processes. The remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions: What is the cost assigned to the designing tooling activity?

The proportion of an overhead activity consumed by a product is the

Spear Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are as follows: Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. 20,000 direct labour hours are budgeted for next year. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 15 percent. Estimates for the proposed job are as follows: In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based activity driver, direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers. Expected activity for the four activity drivers that would be used are: If the number of inspections is used to assign inspection costs, the amount of inspection costs allocated to the proposed job would be

Zipp Company manufactures two products (X and Y). The overhead costs (£84,000) have been divided into three cost pools that use the following activity drivers: What is the amount of overhead cost to be assigned to Product X using machine hours as the activity driver in an activity-based costing system?

If activity-based costing is used, security is an example of a

If activity-based costing is used, materials handling would be classified as a

Quint Manufacturing uses an activity-based costing system. The company produces Model 1 and Model 2. Information relating to the two products is as follows: The following costs are reported: Setup costs assigned to Model 2 are

When a firm acquires the resources needed to perform an activity, it is obtaining

Owens Ltd. produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Activity drivers for each activity have been identified and their practical capacities listed: The costs of facility-level activities are assigned using machine hours. What is(are) the batch-level activity(ies)?