4-2 Test Bank for ISV Managerial Accounting, Fourth Edition BE 165 Stereo City Co. manufacturers speakers and receivers and uses activity-based costing. The following information is available: Activity Cost C ost Pool Poo l Ordering BRIEF EXERCISES BE 163 Soldering Inspecting Packing Sanchez Co. has three activities in its manufacturing process: machine setups, machining, and inspections. Estimated annual overhead cost for each activity is $80,000, $162,500, and $28,000, respectively. The expected annual use in each department is 1,000 setups, 12,500 machine hours, and 875 inspections. Instructions Instructions Solution 165 Solution 163 $80,000 ÷ 1,000 = $80 per setup $162,500 ÷ 12,500 = $13 per machine hour $28,000 ÷ 875 = $32 per inspection 64,000 machine hours 120,000 labor hours 56,000 boxes (5 min.) Activity Cost C ost Pool Poo l Ordering Soldering Inspecting (5 min.) 192,000 930,000 840,000 Expected Use of Cost Driver Dr iver per Activity 24,000 orders Compute the activity-based overhead rates. Compute the overhead rate for each activity. Machine setups Machining Inspections Estimated Estimate d Overhead Overh ead $180,000 Packing Estimated Overhead Overhe ad $180,000 192,000 930,000 ÷ 840,000 Expected Use of Cost Driver D river per pe r Activity 24,000 orders 64,000 machine hours 120,000 labor hours Activity-Based Overhead Overhe ad Rates Rat es $ 7.50 per order $ 3.00 per machine hour $ 7.75 per labor hour = 56,000 boxes $15.00 per box BE 166 BE 164 Boots and More, Inc. uses activity-based costing to assist management in setting prices for the company’s three major product lines. The following information is available: Activity Cost C ost Pool Poo l Cutting Stitching Inspections Packing Estimated Estimate d Overhead Overh ead $ 900,000 8,000,000 2,800,000 800,000 Expected Use of Cost Driver D river per pe r Activity 25,000 labor hours 320,000 machine hours 160,000 labor hours 64,000 finished goods units Plum Tired manufactures tires for dune buggies and has two different products, nubby tires and smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and incurs $171,000 of overhead costs. The following information is available: Activity Materials handling Machine setups Quality inspections Total Co Cost st $60,000 54,000 57,000 Cost Driver D river Number of requisitions Number of setups Number of inspections For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The BE 164 (cont.) Instructions smooth (cont.) 600 requisitions, 300 setups, and 400 inspections. BE 166tires require Compute the activity-based overhead rates. Instructions Determine the overhead rate for each activity. Solution 164 (5 min.) Activity Cost C ost Pool Poo l Cutting Stitching Inspections Packing Estimated Overhead Overhe ad $ 900,000 8,000,000 2,800,000 800,000 ÷ Expected Use of Cost Driver D river per pe r Activity 25,000 labor hours 320,000 machine hours 160,000 labor hours 64,000 finished units = Activity-Based Overhead Overhe ad Rates Rat es $36.00 per labor hour $25.00 per machine hour $17.50 per labor hour $12.50 per finished unit Solution 166 (5–10 min.) The overhead rates are: Activity Materials handling Machine setups Quality inspections Overhead Overhea d $60,000 54,000 57,000 Expected Use of Cost Drivers Driver s 1,000 500 600 Overhead Overhe ad Rate $ 60/req. $108/setup $ 95/insp. Activity-Based Activity-Ba sed Costing Cos ting 4-3 BE 167 Malt Co. manufactures several types of microbrew beers. Malt has identified the following activities: a. Inventory control e. Machine setups b. Purchasing f. Brewing c. Receiving g. Packing and shipping d. Employee training Classify each activity as value-added or non-value-added. (5 min.) a. b. c. d. e. f. Activity Inventory control Purchasing Receiving Employee training Machine setups Brewing Classification Classifica tion Non-value-added Non-value-added Non-value-added Non-value-added Non-value-added Value-added g. Packing and shipping Value-added EXERCISES Ex. 168 All Wood Corporation Corpor ation manufactures manuf actures dining chairs and tables. The following followin g information inform ation is available: Dining Chairs Tables Total Cost Machine setups 200 600 $36,000 Inspections 250 470 $54,000 Labor hours 2,600 2,400 All Wood W ood is considering co nsidering switching switchin g from fr om one overhead overhe ad rate based on labor hours to activity-bas a ctivity-based ed costing. (cont.) Ex. 168 Instructions Perform the following analyses for these two components compone nts of overhead: a. Compute total machine setups and ins inspection pection costs assigned to each product, using a single overhead rate. b. Compute total machine setups setups and inspection costs assigned tto o each product, using using activitybased costing. c. Comment on your findings. Solution 168 Test Bank for ISV Managerial Accounting, Fourth Edition Dining chairs: Tables: 2,600 ! $18 = $46,800 2,400 ! $18 = 43,200 $90,000 b. Activity-based costing Machine setups: $36,000 ÷ 800 = $45 per setup Inspections: Instructions Solution 167 4-4 (8–12 min.) a. Single overhead rate ($36,000 + $54,000) ÷ 5,000 = $18 per labor hour $54,000 ÷ 720 = $75 per inspection Dining chairs: (200 ! $45) + (250 ! $75) = $27,750 Tables: (600 ! $45) + (470 ! $75) = 62,250 $90,000 c. The use of activity-based activity-based costing resulted in in the allocation of less less cost to dining chairs chairs and more cost to tables. The change in cost allocation reflects a more accurate allocation based on cause and effect. Ex. 169 Vid-saver, Inc. has five activity cost pools and two products (a budget tape rewinder and a deluxe tape rewinder). Information is is presented below: Activity Cost C ost Pool Poo l Ordering and Receiving Machine Setup Machining Assembly Assemb ly Inspection Cost Driver D river Est. Overhead Ove rhead Orders $ 110,000 Setups 297,000 Machine hours 1,000,000 Parts 1,200,000 1,200,0 00 Inspections 300,000 Cost Drivers by Product Budget Budge t Deluxe 600 400 500 400 150,000 100,000 1,200,000 1,200, 000 800,000 550 450 Instructions Compute the overhead cost per unit for each each product. Production is 700,000 units of Budget and 200,000 units of Deluxe. Round your answer to the nearest cent. Solution 169 (15–20 min.) Activity Cost C ost Pool Poo l Ordering & Receiving Machine Setup Machining Assembly Assemb ly Inspection Est. Overhead Over head $ 110,000 297,000 1,000,000 1,200,000 1,200,0 00 300,000 Activity Cost C ost Pool Poo l Ordering & Receiving Cost Driver 600 ÷ Total Est. Est . Activity = 1,000 orders 900 setups 250,000 mach. hours 2,000,000 2,000,0 00 parts part s 1,000 inspections Overhead Overhe ad Rate Rat e $110/order $330/setup $4/machine hour $.60/part $.60/pa rt $300/inspection Budget Machine Setup Machining Assembly Assemb ly 500 150,000 1,200,000 1,200,0 00 ! Deluxe Rate $110 Cost = Assigned $ 66,000 Cost Driver 400 330 4 .60 165,000 600,000 720,000 720,00 0 400 100,000 800,000 800,00 0 ! Cost Rate = Assigned $110 $ 44,000 330 4 .60 132,000 400,000 480,000 480,00 0 Activity-Based Activity-Ba sed Costing Cos ting Inspection 550 300 165,000 $1,716,000 ÷ 700,000 $2.45 per unit 450 300 4-5 135,000 $1,191,000 ÷ 200,000 $5.96 per unit 4-6 Test Bank for ISV Managerial Accounting, Fourth Edition Solution 170 (6–9 min.) Cost Pool Cost Driver a. Placing orders number of orders; volume of individual orders b. Stocking Stocking merchandise number of orders; dollar volume of orders Ex. 170 c. Waiting on customers number of customers; dollar volume of sales Ami Reed owns a small department depar tment store in a metropolitan metrop olitan area. For twenty years, the accountant has applied overhead to the various departments—Women's Apparel, Men's Apparel, Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee hours worked. Ami Reed 's daughter, who is an accounting student at a local university, has suggested her mother should consider using activity-based costing (ABC). In an attempt to implement ABC, Ami Reed Re ed and her daughter da ughter have identified id entified the following follo wing activities. act ivities. d. Janitorial and Maintenance e. Training employees square feet occupied; traffic through area total number of employees; number of new employees f. h. Accounting and Legal Services dollar volume of sales Instructions i. number of packages Determine a cost driver for each of the activities listed below. Cost Pool Cost Driver a. Placing orders ______________________________ b. Stocking merchandise ______________________________ c. Waiting on customers d. Janitorial and Maintenance ______________________________ ______________________________ e. Training employees ______________________________ f. ______________________________ Administrative g. Advertising and Marketing ______________________________ h. Accounting and Legal Services ______________________________ i. ______________________________ Wrapping packages Administrative number of employees; dollar volume of business g. Advertising and Marketing Wrapping packages number of ad campaigns Ex. 171 A list of possible p ossible cost co st drivers driver s is presented pre sented below: Code A Enginee Engineering ring hours ho urs B Setups C Machine hours Code D Number Numbe r of subassemb sub assemblies lies E Boxes F Orders Instructions For each of the following activity cost pools, select the most appropriate cost driver: Code Cost Pool _____ 1. Machine setup _____ 2. Ordering Orderin g and receiving _____ 3. Packaging Packagin g and shipping _____ 4. Engineering Enginee ring design de sign _____ 5. Machining Machinin g _____ 6. Assembly Assemb ly Solution 171 1. B 2. F 3. E (4–6 min.) 4. A 5. C 6. D Activity-Based Activity-Ba sed Costing Cos ting 4-7 4-8 Test Bank for ISV Managerial Accounting, Fourth Edition Ex. 172 Ex. 175 Identify appropriate cost drivers for the following activity cost pools: 1. Human resources 2. Security 3. Receiving 4. Data processing Compute activity-based costing rates from the following budgeted data for Tatum's Tools: Solution 172 1. 2. 3. 4. Activity Cost C ost Pool Poo l Designing Machining Packing Budgeted Budge ted Cost Cos t Driver 75,000 designer hours 21,000 machine hours 31,000 labor hours (3–5 min.) Number of employees, number of hires Square footage Shipments received; pounds received Lines printed, CPU minutes, minutes, storage units Ex. 173 Solution 175 (3–5 min.) Designing Machining Packing ($2,250,000 ÷ 75,000) ($525,000 ÷ 21,000) ($620,000 ÷ 31,000) = $30 per designer hour = $25 per machine hour = $20 per labor hour Ex. 176 Two of the activity cost pools for Montana Company are (a) machining ($300,000) and (b) inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours (12,500), square footage (2,000), and number of inspections (200). Holiday Favorites manufactures a wide variety of holiday and seasonal decorative items. Holiday’s activity-based costing overhead rates are: Instructions Compute the overhead rate for each activity. Solution 173 Budget Budgeted ed Cost $2,250,000 525,000 620,000 (4–6 min.) (a) $300,000 Machining: —————————— = $24 per machine hour 12,500 machine hours (b) $42,000 Inspections: ———————- = $210 per inspection 200 inspections Purchasing $350 per order Storing Machining Supervision $2 per square foot/days $100 per machine hour $5 per direct labor hour The Haunted House project involved three purchase orders, 4,000 square feet/days, 60 machine hours, and 30 direct labor hours. The cost of direct materials on the job was $19,000 and the direct labor rate is $30 per hour. hou r. Instructions Determine the total cost of the Haunted H aunted House project. Solution 176 (5–7 min.) Ex. 174 Tanner, Inc. produces two models of cameras, Standard and Luxury. It sells 100,000 Standard cameras and 15,000 Luxury cameras annually. Tanner switched from traditional costing to activity-based costing and discovered that the cost allocated to Luxury cameras increased so dramatically that the Luxury was now only marginally marg inally profitable. Instructions Give a probable explanation for this shift. Solution 174 (4–6 min.) Low-volume products often require more special handling, such as more machine setups and inspections, than high-volume products. Also, the overhead costs incurred by the low-volume product are often disproportionate to a traditional allocation base such as direct labor hours. Direct Direct materials labor (30 ! $30) Factory overhead Purchasing (3 ! $350) Storing (4,000 ! $2) Machining (60 ! $100) Supervision (30 ! $5) Total cost $19,000 900 $1,050 8,000 6,000 150 15,200 $35,100 Ex. 177 Label the following costs as value-adding (VA) or non-value-adding (NVA): (NV A): ____ 1. Engineering Enginee ring design de sign ____ 2. Machine repair ____ 3. Inventory Invento ry storage stora ge Activity-Based Activity-Ba sed Costing Cos ting Ex. 177 4-9 (cont.) 4 - 10 Ex. 179 Test Bank for ISV Managerial Accounting, Fourth Edition (cont.) ____ 4. Machining Machinin g ___________ ______ ________ ___ ____ 5. Assembly Assemb ly ___________ ______ ________ ___ 6. Cutting ____ 6. Painting ___________ ______ ________ ___ 7. Inspection Inspect ion ____ 7. Inspections Inspectio ns ___________ ______ ________ ___ 8. Inventory Invento ry manageme man agement nt ____ 8. Packaging Packagin g Solution 179 Solution 177 1. 2. 3. 4. (3–5 min.) VA NVA NVA VA 5. 6. 7. 8. VA VA NVA VA 1. 2. 3. 4. 5. Product Produ ct design (4–6 min.) Facility Unit Unit Batch 5. 6. 7. 8. Product Unit Batch Product Ex. 180 Ex. 178 Borke and Falvery is a law firm that uses activity-based costing. Classify these activities as valueadded or non-value-added: ___________ ______ ________ ___ 1. Taking appointm a ppointments ents ___________ ______ ________ ___ 2. Reception Recep tion ___________ ______ ________ ___ 3. Meeting Meetin g with clients c lients ___________ ______ ________ ___ 4. Bookkeeping Bookke eping ___________ ______ ________ ___ 5. Court time ___________ ______ ________ ___ 6. Meeting Meetin g with opposing o pposing attorneys attorne ys ___________ ______ ________ ___ 7. Billing ___________ ______ ________ ___ 8. Advertising Advert ising Solution 178 1. 2. 3. 4. Salaries and wages Travel expense Plan reproduction expense Total Salaries and wages Travel expense Plan reproduction expense $360,000 100,000 120,000 $580,000 Activity Cost C ost Pools Poo ls Project Business Assignment Assignm ent Development Develo pment 60% 30% 40% 40% 35% 40% Other 10% 20% 25% Instructions (3–5 min.) Non-value-added Non-value-added Value-added Non-value-added Brewer & Carr, PSC is an architectural firm that uses activity-based costing. The three activity cost pools used by Brewer & Carr are: Salaries and Wages, Travel Expense, and Plan Reproduction Expense. The firm has provided the following information concerning activity and costs: 5. 6. 7. 8. Value-added Value-added Non-value-added Non-value-added Ex. 179 Tim Taylor Tool Company manufactures small tools. Classify each of the followi following ng activity costs of the tool company as either unit level, batch level, product level, or facility level: ___________ ______ ________ ___ 1. Plant manage m anagement ment ___________ ______ ________ ___ ______ ________ ___________ ___ 2. Drilling 3. Painting ___________ ______ ________ ___ 4. Machine Machin e setups setup s Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business Development, and (c) Other activity cost pools. Solution 180 (6–9 min.) (a) Project Assignment Assignm ent Salaries and wages $216,000 Travel expense 40,000 Plan reproduction expense 42,000 Total $298,000 Activity Cost C ost Pools Poo ls (b) Business Development Develop ment $108,000 40,000 48,000 $196,000 (c) Other $36,000 20,000 30,000 $86,000 Total $360,000 100,000 120,000 $580,000 Activity-Based Activity-Ba sed Costing Cos ting 4 - 11 4 - 12 Test Bank for ISV Managerial Accounting, Fourth Edition COMPLETION STATEMENTS 181. In traditional traditional costing costing systems, direct labor labor cost is often often used for the assignment of all ___________ _____ ___________ _________. ____. 182. A __________________ is any act activity ivity that has a direct cause-effect relationship with the resources consumed. 183. In activity-based costing, overhead costs are allocated to ____________________, then assigned to products. 184. The number of ___________________ is an appropriate cost driver for the the ordering and receiving activity cost pool. MATCHING 192. Match the items in in the two columns below below by entering the appropriate appropriate code letter in in the space provided. A. B. C. D. E. Pull approach app roach Cost driver Facility-level Facility-level activity Unit-level activity Activity-based costing F. G. H. I. J. Just-in-time Just-in-t ime processing pro cessing Batch-level activity Product-level activity Non-value-added activity Value-added activity _____ 1. Allocates Allocate s overhead overhe ad to multiple m ultiple activity ac tivity cost pools, p ools, then the n assigns assign s the activity ac tivity cost pools p ools to products. 185. The primary benefit of activity-based costing is ___________________ product costing. 186. When product lines differ greatly in volume volume and manufacturing complexity, a switch switch from traditional costing to ___________________ is indicated. _____ 3. Increases Increa ses the worth w orth of a product prod uct or service se rvice to customers. custom ers. 187. ______________________ increase increase the worth of a product or service to customers. _____ 4. Should be eliminated elimin ated or o r reduced. redu ced. 188. In the hierarchy hierarchy of activity levels, the four levels are __________, ___________, _____ _______, ___________ _, and ___________ _____ ________. __. _____ 5. Plant managem m anagement. ent. 189. Equipment setups are a ______________-level activity. _____ 2. An activity activ ity that has h as a direct dir ect cause-effect caus e-effect relationship relation ship with wit h the resource re sources s consumed. consum ed. _____ 6. Engineering Enginee ring changes. cha nges. a a _____ 7. Equipment Equipm ent setups. setu ps. 190. A primary objective of __________________ processing is is to eliminate all manufacturing manufacturing inventories. 191. Dependable suppliers, suppliers, a multi-skilled multi-skilled workforce, and a __________________________ are necessary elements of just-in-time processing. _____ 8. Assembling. Assemb ling. _____ 9. Primary Primar y objective objectiv e is to eliminate e liminate all manufacturin manu facturing g inventories. invent ories. _____ 10. Used to initiate manufac m anufacturing turing under u nder JIT JI T processing. proce ssing. Answers to Completion Statements 181. 182. 183. 184. 185. 186. 187. 188. 189. a 190. a 191. overhead costs cost driver activity cost pools purchase orders more accurate activity-based costing value-added activities unit, batch, product, facility batch just-in-time total quality control system Answers to Matching 1. 2. 3. 4. 5. E B J I C 6. 7. 8. 9. 10. H G D F A Activity-Based Activity-Ba sed Costing Cos ting 4 - 13 SHORT-ANSWER ESSAY QUESTIONS S-A E 193 Borg Corporation uses a traditional traditional costing system. Management is considering switching to an activity-based costing system. What steps must Borg take in initiating an activity-based costing system? Solution 193 Borg Corporation must first identify the major activities that pertain to the manufacture of specific products, then allocate manufacturing overhead to activity cost pools. Next, Borg must identify the cost drivers that accurately measure each activity's contribution to the finished product and compute activity-level overhead rates for each pool. Finally, the manufacturing overhead costs for each activity pool must be allocated to products, using the activity-based overhead rates. S-A E 194 Seven Company produces phasers (sales of 200,000 units per year) and force field enhancers (sales of 25,000 units per year). If Seven switches from traditional costing to activity-based costing, what is the likely effect on overhead assigned to the two tw o products? Solution 194 When overhead is properly assigned in ABC, it will usually increase the unit cost of low-volume products like the force field enhancers. This is because low-volume products often require more special handling, such as machine setups and inspections, than high-volume products. Also, overhead costs incurred by low-volume products often are disproportionate to a traditional allocation base. S-A E 195 What are the conditions that would indicate to the management of a firm that they should switch from traditional costing to activity-based costing? Solution 195 The presence of one or more of the following conditions indicates ABC as the superior costing system: 1) Product lines differ greatly greatly in volume and manufacturing manufacturing complexity. complexity. 2) Product lines are numerous and diverse, and they require differing differing degrees of support services. 3) Overhead costs constitute a significant significant portion of total costs. 4) The manufacturing process or the number of products has changed significantly. significantly. 5) Production or marketing managers are ignoring data provided by the existing existing system and are instead using alternative data in decision-making.
