1. Jennifer Company has two products: A and B. The company uses Activity-Based Costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows:
Estimated Expected Activity
Activity Cost Pool Cost Product A Product B Total Activity 1... $23,500 400 100 500 Activity 2... $18,000 500 200 700 Activity 3... $34,600 600 300 900
The activity rate under the Activity-Based Costing system for Activity 3 is closest to:
A) $36.24. B) $38.44. C) $84.56. D) $115.33.
The correct answer is B. To calculate the activity rate for activity 3, you would divide: Estimated Cost / Estimated Driver
$34,600 / 900 $38.44
2. Reach Consulting Corporation has its headquarters in Chicago and operates from three branch offices in Portland, Dallas, and Miami. Reach's headquarter activities are assigned to two activity cost pools: General Service and Research Service. These costs are then allocated to the three branch offices. Information for next year related to this Activity-Based Costing system is as follows:
Activity Cost Pool Activity Measure
Estimated Overhead Cost
General service... % of time devoted to branch $700,000 Research service... Computer time $140,000 Estimated branch data for next year is as follows:
% of time devoted to
branch Computer Time
How much of the headquarters cost allocation should Dallas expect to receive next year? A) $280,000 B) $409,500 C) $472,500 D) $504,000
C is correct. You don’t have to do this with this problem, but I like to calculate an activity rate (application rate) for each activity:
Activity Cost Driver Information
Portland Dallas Miami Total
General Service $700,000 30% 60% 10% 100%
Research Service $140,000 200K mins 150K mins 50K mins 400K mins General Service = $7,000 per percentage point ($700,000/100%).
Research Service = 35 cents per minute ($140,000/ 400,000). Dallas would receive:
Activity Cost Allocated to Dallas
General Service $420,000 $7,000 x 60(% points)
Research Service 52,500 .35 x 150,000
Total Cost $472,500
3. Matt Company uses Activity-Based Costing. The company has two products: A and B. The annual production and sales of Product A is 8,000 units and of Product B is 6,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows:
Estimated Expected Activity
Activity Cost Pool Cost Product A Product B Total Activity 1... $20,000 100 400 500 Activity 2... $37,000 800 200 1,000 Activity 3... $91,200 800 3,000 3,800
The cost per unit of Product A under Activity-Based Costing is closest to: A) $2.40.
B) $3.90. C) $10.59. D) $6.60.
D is correct. First, calculate an activity rate (application rate) for each activity:
Activity Cost Driver Information
A B Total
Activity 1 $20,000 100 400 500
Activity 2 $37,000 800 200 1000
Activity 3 $91,200 800 3000 3800
Activity 1 = $40 per driver unit ($20,000/500). Activity 2 = $37 per driver unit ($37,000/1,000). Activity 3 = $24 per driver unit ($91,200/3800). Product A would receive:
Activity Cost Allocated to Product A
Activity 1 $4,000 $40 x 100
Activity 2 $29,600 $37 x 800
Activity 3 19,200 $24 x 800
Total Cost $52,800
The cost per unit of Product A is $6.60 ($52,800/8,000). Use the following to answer questions 4-7:
Adelberg Company has two products: A and B. The annual production and sales of Product A is 500 units and of Product B is 1,000 units. The company has traditionally used Direct Labor Hours as the basis for applying all Manufacturing Overhead to products. Product A requires 0.4 Direct Labor Hours per unit and Product B requires 0.2 Direct Labor Hours per unit. The total estimated overhead for next period is $68,756. The company is considering switching to an Activity-Based Costing system for the purpose of computing unit product costs for external reports. The new Activity-Based Costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:
Estimated
Overhead Expected Activity
Activity Cost Pool Costs Product A Product B Total Activity 1 ... $31,031 1,000 300 1,300 Activity 2 ... $22,249 1,600 300 1,900 General Factory... $15,476 200 200 400
4. The Predetermined Overhead Rate under the traditional costing system is closest to: A) $11.71. B) $38.69. C) $171.89. D) $23.87.
C is correct. The traditional approach would have a single plant-wide predetermined application rate. The rate is calculated as follows:
Estimated Overhead/ Estimated Driver
You are told that the estimated overhead is $68,756 and that the driver for General Factory is direct labor hours.
$68,756/400 = $171.89
5. The overhead cost per unit of Product B under the traditional costing system is closest to:
A) $2.34. B) $7.74. C) $4.77. D) $34.38.
D is correct. You are told that Product B take .2 direct labor hours per unit. So, you would calculate the overhead cost per unit as follows:
6. The Predetermined Overhead Rate (i.e., activity rate) for Activity 2 under the Activity-Based Costing system is closest to:
A) $13.91. B) $11.71. C) $74.16. D) $36.19.
B is correct. First, calculate an activity rate (application rate) for each activity:
Activity Cost Driver Information
A B Total
Activity 1 $31,031 1000 300 1300
Activity 2 $22,249 1600 300 1900
General Factory $15,476 200 200 400
Activity 1 = $23.87 per driver unit ($31,031/1300). Activity 2 = $11.71 per driver unit ($22,249/1900). General Factory = $38.69 per driver unit ($15,476/400).
7. The overhead cost per unit of Product B under the Activity-Based Costing system is closest to:
A) $45.84. B) $7.74. C) $34.38. D) $18.41.
D is correct. Product B would receive:
Activity Cost Allocated to Product B
Activity 1 $7,161 $23.87 x 300
Activity 2 $3,513 $11.71 x 300
Activity 3 7,738 $38.69 x 200
Total Cost $18,412
