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Exam 5: Activity-Based Costing

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Question 31

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Reference: 05-02 Addy Company has two products: A and B. The annual production and sales of Product A are 1,700 units and of Product B are 1,100 units. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour-hours per unit and Product B requires 0.6 direct labour-hours per unit. The total estimated overhead for next period is $98,785. 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: $\begin{array}{|l|l|l|l|l|}\hline \text { Activity } & &{\text { Expected Activity }} \\\hline \text { Cost Pool } & \begin{array}{l}\text { Estimated } \\\text { Overhead Costs }\end{array} & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \\\hline \text { Activity 2 } & \$ 17,385 & 1,700 & 200 & 1,900 \\\hline \text { General Factory } & \$ 50,872 & 510 & 660 & 1,170 \\\hline \text { Total } & \$ 98,785 & & & \\\hline\end{array}$ (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour-hours.) -The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system is closest to:

A) $86.93.
B) $51.99.
C) $10.23.
D) $9.15.

E) A) and D)
F) A) and C)

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Question 32

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Facility-level costs can be easily and accurately allocated to different products using activity-based costing.

A) True
B) False

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Question 33

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When there are batch-level or product-level costs, in comparison to a traditional cost system, an activity-based costing system ordinarily will shift costs from high-volume to low-volume products.

Reference: 05-13 Bressler Corporation uses activity-based costing to determine product costs for external financial reports. Activity rates computed at the beginning of the year are used to apply manufacturing overhead costs to products. The company has provided the following data concerning its activity-based costing system. The data used to develop activity rates were: $\begin{array} { | l | l | l | l | } \hline \text { Activity Cost Pools } & \begin{array} { l } \text { Estimated } \\\text { Overhead Cost }\end{array} & { \text { Expected Activity } } \\\hline \text { Machine related (machine-hours) } & \$ 332,800 & 16,000 & \mathrm { MHs } \\\hline \text { Batch setup (setups) } & \$ 1,580,500 & 29,000 & \text { setups } \\\hline \begin{array} { l } \text { General factory (direct } \\\text { labour-hours) }\end{array} & \$ 305,600 & 16,000 & \text { DLHs } \\\hline \begin{array} { l } \text { The actual activity for the year } \\\text { was: }\end{array} & & & \\\hline & & \text { Actual Activity for the Year } \\\hline \text { Activity Cost Pools } & \text { Total } & \text { Product X } & \text { Product } Y \\\hline \text { Machine related (machine-hours) } & 15,000 & 7,000 & 8,000 \\\hline \text { Batch setup (setups) } & 30,000 & 22,000 & 8,000 \\\hline \begin{array} { l } \text { General factory (direct } \\\text { labour-hours) }\end{array} & 15,000 & 12,000 & 3,000 \\\hline\end{array}$ The actual total manufacturing overhead cost incurred for the year was $2,202,600. -The credits to the Manufacturing Overhead control account during the year (prior t? closing out the balance) would have totalled:

What is the allocation rate for Materials Handling using Activity Based Costing

Reference: 05-01 Acton Company has two products: A and B. The annual production and sales of Product A are 800 units and of Product B are 500 units. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour-hours per unit and Product B requires 0.2 direct labour-hours per unit. The total estimated overhead for next period is $92,023. 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: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & & { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated } \\\text { Overhead } \\\text { Costs }\end{array} & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 14,487 & 500 & 600 & 1,100 \\\hline \text { Activity 2 } & \$ 64,800 & 2,500 & 500 & 3,000 \\\hline \text { General Factory } & \$ 12,736 & 240 & 100 & 340 \\\hline \text { Total } & \$ 92,023 & & & \\\hline\end{array}$ (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour-hours.) -The predetermined overhead rate per DLH under the traditional costing system is closest to:

Reference: 05-04 Monson Company has two products: G and P. The company uses activity-based costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & & { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated Ovhd. } \\\text { Cost }\end{array} & \text { Product G } & \text { Product P } & \text { Total } \\\hline \text { Activity 1 } & \$ 30,000 & 200 & 400 & 600 \\\hline \text { Activity 2 } & \$ 24,000 & 600 & 900 & 1,500 \\\hline \text { Activity 3 } & \$ 80,000 & 400 & 3,600 & 4,000 \\\hline\end{array}$ The annual production and sales of Product G is 10,640 units. The annual production and sales of Product P is 26,600. -The activity rate under the activity-based costing system for Activity 2 is closest to:

Reference: 05-09 Aujla Corporation uses activity-based costing to determine product costs for external financial reports. The company has provided the following data concerning its activity-based costing system: $\begin{array}{l}\begin{array} { | l | l | } \hline \text { Activity Cost Pools (and Activity Measures) } & \text { Estimated Overhead Cost } \\\hline \text { Machine related (machine-hours) } & \$ 239,000 \\\hline \text { Batch setup (setups) } & \$ 234,900 \\\hline \text { General factory (direct labour-hours) } & \$ 159,300 \\\hline\end{array}\\\begin{array} { | l | l | l | l | } \hline & & \text { Expected Activity } & \\\hline \begin{array} { l } \text { Activity Cost } \\\text { Pools }\end{array} & \text { Total } & \text { Product X } & \text { Product Y } \\\hline \text { Machine related } & 10,000 & 4,000 & \\\hline \text { Batch setup } & 9,000 & 8,000 & 6,000 \\\hline \text { General factory } & 9,000 & 3,000 & 1,000 \\\hline\end{array}\end{array}$ -The activity rate for the batch setup activity cost pool is closest to:

Reference: 05-11 Andruschack Corporation uses activity-based costing to determine product costs for external financial reports. Overapplied or underapplied overhead is closed to the Cost of Goods Sold account at the end of each year. The company has provided the following data concerning its activity-based costing system: $\begin{array}{l}\begin{array} { | l | l | } \hline \begin{array} { l } \text { Activity Cost Pools (and Activity } \\\text { Measures) }\end{array} & \text { Estimated Overhead Cost } \\\hline \text { Machine related (machine-hours) } & \$ 213,000 \\\hline \text { Batch setup (setups) } & \$ 339,000 \\\hline \text { General factory (direct labour-hours) } & \$ 193,200 \\\hline\end{array}\\\\\begin{array} { | l | l | l | l | } \hline & & { \text { Expected Activity } } \\\hline \text { Activity Cost Pools } & \text { Total } & \text { Product } X & \text { Product } Y \\\hline \text { Machine related } & 10,000 & 3,000 & 7,000 \\\hline \text { Batch setup } & 10,000 & 4,000 & 6,000 \\\hline \text { General factory } & 14,000 & 7,000 & 7,000 \\\hline\end{array}\end{array}$ -Assuming that the actual overhead costs of the three pools totalled $746,000 and actual activity was equal to expected activity, what would be the required entry to the Cost of Goods Sold account?

Reference: 05-07 Alam Company uses activity-based costing to compute product costs for external reports. The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Overapplied or underapplied overhead is closed to the Cost of Goods Sold account at the end of each year. Estimated costs and activities for the current year are presented below for the three activity cost pools: $\begin{array}{l}\begin{array} { | l | l | l | } \hline & \text { Estimated Overhead } \text { Cost } & \text { Expected Activity } \\\hline \text { Activity } 1 & \$ 29,328 & 1,200 \\\hline \text { Activity } 2 & \$ 30,024 & 2,400 \\\hline \text { Activity 3 } & \$ 65,142 & 2,200 \\\hline\end{array}\\\text { Actual costs and activities for the current year were as follows: }\\\begin{array} { | l | l | l | } \hline & \text { Actual Overhead Cost } & \text { Actual Activity } \\\hline \text { Activity } 1 & \$ 29,238 & 1,185 \\\hline \text { Activity } 2 & \$ 29,899 & 2,415 \\\hline \text { Activity } 3 & \$ 65,117 & 2,225 \\\hline\end{array}\end{array}$ -The entry to the Cost of Goods Sold account at the end of the year was (round your final answer to nearest dollar value) :

Reference: 05-03 Arthur Company has two products: S and D. The company uses activity-based costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } && { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated Ovhd. } \\\text { Cost }\end{array} & \text { Product S } & \text { Product D } & \text { Total } \\\hline \text { Activity 1 } & \$ 20,000 & 100 & 400 & 500 \\\hline \text { Activity 2 } & \$ 14,600 & 500 & 250 & 750 \\\hline \text { Activity 3 } & \$ 90,000 & 300 & 2,700 & 3,000 \\\hline\end{array}$ The annual production and sales of Product S is 4,547 units. The annual production and sales of Product D is 7,913. -The overhead cost per unit of Product S under activity-based costing is closest to:

An activity-based costing that is designed for internal decision making may not confor? to generally accepted accounting principles. Which of the following would cause that to be the case?

The clerical activity associated with processing purchase orders to produce an order for a standard product is an example of a:

Reference: 05-12 Brenot Corporation uses activity-based costing to determine product costs for external financial reports. Activity rates computed at the beginning of the year are used to apply manufacturing overhead costs to products. The company has provided the following data concerning its activity-based costing system. The data used to develop activity rates were: $\begin{array} { | l | l | l | l | } \hline \text { Activity Cost Pools } & \begin{array} { l } \text { Estimated } \\\text { Overhead Cost }\end{array} &{ \text { Expected Activity } } \\\hline \text { Machine related (machine-hours) } & \$ 379,600 & 13,000 & \text { MHs } \\\hline \text { Batch setup (setups) } & \$ 1,144,800 & 27,000 & \text { setups } \\\hline \text { General factory (direct labour-hours) } & \$ 420,500 & 29,000 & \text { DLHs } \\\hline \text { The actual activity for the year was: } & & & \\\hline & & \text { Actual Activity for the Year } \\\hline \text { Activity Cost Pools } & \text { Total } & \text { Product X } & \text { Product } Y \\\hline \text { Machine related (machine-hours) } & 13,000 & 11,000 & 2,000 \\\hline \text { Batch setup (setups) } & 26,000 & 3,000 & 23,000 \\\hline \text { General factory (direct labour-hours) } & 30,000 & 24,000 & 6,000 \\\hline\end{array}$ The actual total manufacturing overhead cost incurred for the year was $1,942,300. -The credits to the Manufacturing Overhead control account during the year (prior to closing out the balance) would have totalled:

Reference: 05-13 Bressler Corporation uses activity-based costing to determine product costs for external financial reports. Activity rates computed at the beginning of the year are used to apply manufacturing overhead costs to products. The company has provided the following data concerning its activity-based costing system. The data used to develop activity rates were: $\begin{array} { | l | l | l | l | } \hline \text { Activity Cost Pools } & \begin{array} { l } \text { Estimated } \\\text { Overhead Cost }\end{array} & { \text { Expected Activity } } \\\hline \text { Machine related (machine-hours) } & \$ 332,800 & 16,000 & \mathrm { MHs } \\\hline \text { Batch setup (setups) } & \$ 1,580,500 & 29,000 & \text { setups } \\\hline \begin{array} { l } \text { General factory (direct } \\\text { labour-hours) }\end{array} & \$ 305,600 & 16,000 & \text { DLHs } \\\hline \begin{array} { l } \text { The actual activity for the year } \\\text { was: }\end{array} & & & \\\hline & & \text { Actual Activity for the Year } \\\hline \text { Activity Cost Pools } & \text { Total } & \text { Product X } & \text { Product } Y \\\hline \text { Machine related (machine-hours) } & 15,000 & 7,000 & 8,000 \\\hline \text { Batch setup (setups) } & 30,000 & 22,000 & 8,000 \\\hline \begin{array} { l } \text { General factory (direct } \\\text { labour-hours) }\end{array} & 15,000 & 12,000 & 3,000 \\\hline\end{array}$ The actual total manufacturing overhead cost incurred for the year was $2,202,600. -The total amount of overhead cost allocated to Product X during the year would be closest to:

Reference 05-16 Washie manufactures two types of products for washing vehicles: the washing mitt, and the polishing cloth. Up to this point, Washie has been utilizing traditional costing with one plant-wide overhead rate using machine hours as the allocation base. The company has been receiving complaints that the polishing mitt seems over-priced. Management is wondering if there's merit to this claim since the washing mitt is a more complex product compared to the polishing cloth. As such, management has gathered information on the potential activity areas to be used. $\begin{array}{|l|l|l|}\hline \text { Activity } & \text { Activity Measure } & \begin{array}{l}\text { Estimated } \\\text { Manufacturing } \\\text { Overhead Cost }\end{array} \\\hline \text { Design } & \text { Design hours } & \$ 12,000 \\\hline \text { Setups } & \text { Number of set-ups } & 40,000 \\\hline \text { Materials Handling } & \text { Meters of fabric } & 30,000 \\\hline \text { Production } & \text { Machine Hours } & 250,000 \\\hline\end{array}$ The company expected has determined the expected activity for each of the product lines: During the year, the company sold 100,000 washing mitts and 50,000 polishing cloths. Direct costs are $\$ 8.00$ for washing mitts and $\$ 2.00$ for polishing costs. $\begin{array}{|l|l|l|}\hline \text { Activity Measure } & \text { Washing Mitt } & \text { Polishing Cloth } \\\hline \# \text { of design hours } & 50 & 5 \\\hline \# \text { of setups } & 30 & 20 \\\hline \# \text { of meters of fabric } & 4,000 & 1,000 \\\hline \# \text { of machine hours } & 40,000 & 10,000 \\\hline\end{array}$ -Compute the predetermined overhead rate using machine hours as the basis for allocating overhead costs to products.

Reference: 05-02 Addy Company has two products: A and B. The annual production and sales of Product A are 1,700 units and of Product B are 1,100 units. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour-hours per unit and Product B requires 0.6 direct labour-hours per unit. The total estimated overhead for next period is $98,785. 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: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & & { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated } \\\text { Overhead Costs }\end{array} & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \\\hline \text { Activity 2 } & \$ 17,385 & 1,700 & 200 & 1,900 \\\hline \text { General Factory } & \$ 50,872 & 510 & 660 & 1,170 \\\hline \text { Total } & \$ 98,785 & & & \\\hline\end{array}$ (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour-hours.) -The overhead cost per unit of Product B under the traditional costing system is closest to:

In the initial stages of a quality improvement process, there usually will be immediate reductions in total quality costs.

Reference: 05-02 Addy Company has two products: A and B. The annual production and sales of Product A are 1,700 units and of Product B are 1,100 units. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour-hours per unit and Product B requires 0.6 direct labour-hours per unit. The total estimated overhead for next period is $98,785. 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: $\begin{array}{|l|l|l|l|l|}\hline \text { Activity } & &{\text { Expected Activity }} \\\hline \text { Cost Pool } & \begin{array}{l}\text { Estimated } \\\text { Overhead Costs }\end{array} & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \\\hline \text { Activity 2 } & \$ 17,385 & 1,700 & 200 & 1,900 \\\hline \text { General Factory } & \$ 50,872 & 510 & 660 & 1,170 \\\hline \text { Total } & \$ 98,785 & & & \\\hline\end{array}$ (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour-hours.) -The predetermined overhead rate per DLH under the traditional costing system is closest to:

Setting up equipment is an example of a: