Test Bank - Chapter 8 ABC for Decision Making

Chapter 8 Activity-Based Costing: A Tool to Aid Decision-Making

True/False 1. T Easy

When combining activities in an activitybased costing system, activities should be grouped together at the same level. For example, batchlevel activities should not be combined with unitlevel activities.

2. T Easy

Unitlevel activities arise as a result of the total volume of production and are performed each time a unit is produced.

3. T Easy

Unitlevel production activities are performed each time a unit is made.

4. T Easy

Organizationsustaining activities are carried out regardless of how many units are made, how many batches are run, or how many different products are made.

5. F Easy

Activitybased costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct laborhours.

6. F Medium

The firststage allocation in activitybased costing is the process by which overhead costs are assigned to products before they are assigned to customers.

7. T Easy

Activity rates in activitybased costing are computed by dividing costs from the firststage allocations by the activity measure for each activity cost pool.

8. T Medium

In the secondstage allocation in activitybased costing, activity rates are used to apply costs to products, customers, and other cost objects.

9. T Medium

In traditional costing systems, all manufacturing costs are assigned to productseven manufacturing costs that are not caused by the products.

10. T Hard

When there are batchlevel or productlevel costs, in comparison to a traditional cost system, an activitybased costing system ordinarily will shift costs from highvolume to lowvolume products.

Managerial Accounting, 9/e

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11. F Medium

An activitybased costing system is generally easier to set up and run than a traditional cost system.

12. F Medium

Activitybased costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect only variable costs.

13. F Medium

In activitybased costing, as in traditional costing systems, nonmanufacturing costs are not assigned to products.

14. F Medium

In activitybased costing, a plantwide overhead rate is used to apply overhead to products.

15 F Medium

Changing a cost accounting system is likely to meet with little resistance in an organization since it is a technical matter of little interest to individuals outside of the accounting department.

Multiple Choice 16. D Medium

Which of the following levels of costs should not be allocated to products for decisionmaking purposes? a. Unitlevel activities. b. Batchlevel activities. c. Productlevel activities. d. Organizationsustaining activities

17. C Easy

Testing a prototype of a new product is an example of a: a. Unitlevel activity. b. Batchlevel activity. c. Productlevel activity. d. Organizationsustaining activity.

18. B Medium

Setting up equipment is an example of a: a. Unitlevel activity. b. Batchlevel activity. c. Productlevel activity. d. Organizationsustaining activity.

19. B Hard

The clerical activity associated with processing purchase orders to produce an order for a standard product is an example of a: a. Unitlevel activity. b. Batchlevel activity. c. Productlevel activity. d. Organizationsustaining activity.


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20. D Medium

Worker recreational facilities is an example of a cost that would ordinarily be considered to be: a. Unitlevel. b. Batchlevel. c. Productlevel. d. Organizationsustaining.

21. B Medium

Arranging for a shipment of a number of different products to a customer is an example of an activity at which of the following levels? a. Unitlevel activity. b. Batchlevel activity. c. Customerlevel activity. d. Organizationsustaining activity.

22. D Medium

Human resource management is an example of an activity at which of the following levels? a. Unitlevel activity. b. Productlevel activity. c. Batchlevel activity. d. Organizationsustaining activity.

23. D Medium

Which of the following would be classified as a productlevel activity? a. Machine setup for a batch of a standard product. b. Cafeteria facilities available to and used by all employees. c. Human resource management. d. Advertising a product.

24. C Hard

Departmental overhead rates may not correctly assign overhead costs due to: a. the use of direct labor hours in allocating overhead costs to products rather than machine time or quantity of materials used. b. the high correlation between direct laborhours and the incurrence of overhead costs. c. overreliance on volume as a basis for allocating overhead costs where products differ regarding the number of units produced, lot size, or complexity of production. d. difficulties associated with identifying cost pools for the first stage of the allocation process.

25. B Medium

Overhead allocation based on volume alone: a. is a key aspect of the activitybased costing model. b. will systematically overcost highvolume products and undercost lowvolume products. c. will systematically overcost lowvolume products and undercost highvolume products. d. must be used for external financial reporting.


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26. C Medium

Paul Company has two products: A and B. The company uses activitybased costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P22,000 400 100 500 Activity 2 P16,240 380 200 580 Activity 3 P14,600 500 250 750 The activity rate under the activitybased costing system for Activity 3 is closest to: a. P70.45. b. P28.87. c. P19.47. d. P58.40.

27. B Medium

Selena Company has two products: A and B. The company uses activitybased costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P17,600 800 300 1,100 Activity 2 P12,000 500 200 700 Activity 3 P26,000 800 400 1,200 The activity rate under the activitybased costing system for Activity 3 is closest to: a. P46.33. b. P21.67. c. P65.00. d. P18.53.


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28. D Hard

Matt Company uses activitybased 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: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P20,000 100 400 500 Activity 2 P37,000 800 200 1,000 Activity 3 P91,200 800 3,000 3,800 The cost per unit of Product A under activitybased costing is closest to: a. P2.40. b. P3.90. c. P10.59. d. P6.60.

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Bridget Company uses activitybased costing. The company has two products: A and B. The annual production and sales of Product A is 2,000 units and of Product B is 3,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P9,000 400 350 750 Activity 2 P12,000 100 400 500 Activity 3 P48,000 400 1,200 1,600 The cost per unit of Product A under activitybased costing is closest to: a. P6.00. b. P9.60. c. P8.63. d. P13.80.

Reference: 81 Note to the Instructor: Questions 30 to 32, 33 to 35, and 36 to 38 are different versions of the same questions. Dideda Company uses an activitybased costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:


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Costs: Manufacturing overhead ........... P360,000 Selling and admin. expenses ...... P240,000 Total .......................... P600,000 Distribution of resource consumption: Activity Cost Pools Order Customer Size Support Other Total Manufacturing overhead ......... 25% 65% 10% 100% Selling and admin. expenses .... 60% 20% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the firststage allocation of costs to the activity cost pools. 30. D Easy Refer To: 81

How much cost, in total, would be allocated in the firststage allocation to the Order Size activity cost pool? a. P150,000 b. P360,000 c. P255,000 d. P234,000

31. B Easy Refer To: 81

How much cost, in total, would be allocated in the firststage allocation to the Customer Support activity cost pool? a. P255,000 b. P282,000 c. P120,000 d. P390,000

32. C Medium Refer To: 81

How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activitybased costing system is used for internal decision making? a. P60,000. b. P0. c. P84,000. d. P120,000.

Reference: 82 NOTE TO THE INSTRUCTOR: Questions 30 to 32, 33 to 35, and 36 to 38 are different versions of the same questions. Diehl Company uses an activitybased costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:


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Costs: Manufacturing overhead ........... P480,000 Selling and admin. expenses ...... P100,000 Total .......................... P580,000 Distribution of resource consumption: Activity Cost Pools Order Customer Size Support Other Total Manufacturing overhead ........ 5% 85% 10% 100% Selling and admin. expenses ... 60% 20% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the firststage allocation of costs to the activity cost pools. 33. D Easy Refer To: 82


34. D Easy Refer To: 82


35. A Medium Refer To: 82

How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activitybased costing system is used for internal decision making? a. P68,000. b. P0. c. P116,000. d. P58,000.

Reference: 83 NOTE TO THE INSTRUCTOR: Questions 30 to 32, 33 to 35, and 36 to 38 are different versions of the same questions. Dierich Company uses an activitybased costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:


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Costs: Manufacturing overhead ........... P600,000 Selling and admin. expenses ...... P220,000 Total .......................... P820,000 Distribution of resource consumption: Activity Cost Pools Order Customer Size Support Other Total Manufacturing overhead ........ 15% 75% 10% 100% Selling and admin. expenses ... 60% 20% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the firststage allocation of costs to the activity cost pools. 36. A Easy Refer To: 83




38. B Medium Refer To: 83

How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activitybased costing system is used for internal decision making? a. P82,000. b. P104,000. c. P0. d. P164,000.

Reference: 84 Davis Company uses an activitybased costing system in which there are three activity cost pools. The company has provided the following data concerning its costs and its activitybased costing system: Costs: Manufacturing overhead .......... P400,000 Selling and admin. Expenses ..... P200,000 Total ......................... P600,000


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Distribution of resource consumption: Activity Cost Pools Order Customer Size Support Other Total Manufacturing overhead ........... 35% 55% 10% 100% Selling and admin. Expense ....... 50% 30% 20% 100% The "other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. You have been asked to complete the firststage allocation of the costs to the activity cost pools. 39. B Easy Refer To: 84

How much cost, in total, would be allocated in the firststage allocation to the Order Size activity cost pool? a. P210,000. b. P240,000. c. P300,000. d. P255,000.


How much cost, in total, would be allocated in the firststage allocation to the Customer Support activity cost pool? a. P255,000. b. P180,000. c. P330,000. d. P280,000.

41. C Medium Refer To: 84

How much cost, in total should NOT be allocated to orders and products in the second stage of the allocation process if the activitybased costing system is used for internal decision making? a. P0. b. P60,000. c. P80,000. d. P120,000.

Reference: 85 NOTE TO THE INSTRUCTOR: Questions 42 to 44, 45 to 47, and 48 to 50 are different versions of the same questions. Escau Company is a wholesale distributor that uses activitybased costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Wages and salaries .. P380,000 Other expenses ...... P100,000 Total ............. P480,000


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Distribution of resource consumption: Activity Cost Pools Filling Customer Orders Support Other Total Wages and salaries .. 30% 60% 10% 100% Other expenses ...... 35% 45% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The activity measures for the activity cost pools for the year are as follows: Activity Cost Pool Activity Filling orders ...... 3,000 orders Customer support..... 20 customers 42. C Medium Refer To: 85

What would be the total overhead cost per order according to the activity based costing system? In other words, what would be the overall activity rate for the filling orders activity cost pool? (Round to the nearest whole cent.) a. P56.00 b. P48.00 c. P49.67 d. P52.00


What would be the total overhead cost per customer according to the activity based costing system? In other words, what would be the overall activity rate for the customer support activity cost pool? (Round to the nearest whole peso.) a. P13,650 b. P12,600 c. P14,400 d. P10,800

44. B Hard Refer To: 85

To the nearest whole peso, how much wages and salaries cost would be allocated to a customer who made 8 orders in a year? a. P14,784. b. P11,704. c. P7,392. d. P9,548.

Reference: 86 NOTE TO THE INSTRUCTOR: Questions 42 to 44, 45 to 47, and 48 to 50 are different versions of the same questions. Escalona Company is a wholesale distributor that uses activitybased costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:


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Overhead costs: Wages and salaries .. P580,000 Other expenses ...... P200,000 Total ............. P780,000 Distribution of resource consumption: Activity Cost Pools Filling Customer Orders Support Other Total Wages and salaries .. 40% 50% 10% 100% Other expenses ...... 35% 45% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Activity Filling orders ...... 1,000 orders Customer support .... 30 customers 45. B Medium Refer To: 86


46. D Medium Refer To: 86


47. C Hard Refer To: 86



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Reference: 87 NOTE TO THE INSTRUCTOR: Questions 42 to 44, 45 to 47, and 48 to 50 are different versions of the same questions. Escoto Company is a wholesale distributor that uses activitybased costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Wages and salaries .. P540,000 Other expenses ...... P200,000 Total ............. P740,000 Distribution of resource consumption: Activity Cost Pools Filling Customer Orders Support Other Total Wages and salaries .. 10% 80% 10% 100% Other expenses ...... 20% 60% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Activity Filling orders ...... 4,000 orders Customer support .... 40 customers 48. C Medium Refer To: 87




50. D Hard Refer To: 87



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Reference: 88 NOTE TO THE INSTRUCTOR: Questions 51 to 54 and 55 to 58 are different versions of the same questions. Acton Company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 500 units. The company has traditionally used direct laborhours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor hours per unit and Product B requires 0.2 direct labor hours per unit. The total estimated overhead for next period is P92,023. The company is considering switching to an activitybased costing system for the purpose of computing unit product costs for external reports. The new activitybased costing system would have three overhead activity cost poolsActivity 1, Activity 2, and General Factorywith estimated overhead costs and expected activity as follows: Estimated Activity Overhead Expected Activity Cost Pool Costs Product A Product B Total Activity 1 P14,487 500 600 1,100 Activity 2 P64,800 2,500 500 3,000 General Factory P12,736 240 100 340 Total P92,023 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.) 51. D Medium Refer To: 88

The predetermined overhead rate under the traditional costing system is closest to: a. P37.46. b. P21.60. c. P13.17. d. P270.66.


The overhead cost per unit of Product B under the traditional costing system is closest to: a. P54.13. b. P7.49. c. P4.32. d. P2.63.


The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activitybased costing system is closest to: a. P28.97. b. P13.17. c. P83.66. d. P24.15.


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54. A Hard Refer To: 88

The overhead cost per unit of Product A under the activity based costing system is closest to: a. P86.97. b. P70.79. c. P81.20. d. P11.24.

Reference: 89 NOTE TO THE INSTRUCTOR: Questions 51 to 54 and 55 to 58 are different versions of the same questions. Addy Company has two products: A and B. The annual production and sales of Product A is 1,700 units and of Product B is 1,100 units. The company has traditionally used direct laborhours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor hours per unit and Product B requires 0.6 direct labor hours per unit. The total estimated overhead for next period is P98,785. The company is considering switching to an activitybased costing system for the purpose of computing unit product costs for external reports. The new activitybased costing system would have three overhead activity cost poolsActivity 1, Activity 2, and General Factorywith estimated overhead costs and expected activity as follows: Estimated Activity Overhead Expected Activity Cost Pool Costs Product A Product B Total Activity 1 P30,528 1,000 600 1,600 Activity 2 P17,385 1,700 200 1,900 General Factory P50,872 510 660 1,170 Total P98,785 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.) 55. C Medium Refer To: 89

The predetermined overhead rate under the traditional costing system is closest to: a. P9.15. b. P43.48. c. P84.43. d. P19.08.


The overhead cost per unit of Product B under the traditional costing system is closest to: a. P50.66. b. P5.49. c. P26.09. d. P11.45.


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The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activitybased costing system is closest to: a. P9.15. b. P51.99. c. P86.93. d. P10.23.


The overhead cost per unit of Product B under the activity based costing system is closest to: a. P50.66. b. P26.09. c. P35.28. d. P38.16.

Reference: 810 NOTE TO THE INSTRUCTOR: Questions 59 to 60 and 61 to 62 are different versions of the same questions. Abel Company uses activitybased costing. The company has two products: A and B. The annual production and sales of Product A is 200 units and of Product B is 400 units. There are three activity cost pools, with estimated costs and expected activity as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P16,660 600 100 700 Activity 2 P18,450 1,100 700 1,800 Activity 3 P 9,731 60 160 220 59. D Medium Refer To: 810

a. P24.91. b. P26.36. c. P16.77. d. P10.25.


The cost per unit of Product B is closest to: a. P41.58. b. P81.53. c. P74.73. d. P17.69.

Reference: 811 NOTE TO THE INSTRUCTOR: Questions 59 to 60 and 61 to 62 are different versions of the same questions. Accola Company uses activitybased costing. The company has two products: A and B. The annual production and sales of Product A is 1,100 units and of Product B is 700 units. There are three activity cost pools, with estimated costs and expected activity as follows:


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Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P18,271 600 500 1,100 Activity 2 P35,891 1,600 300 1,900 Activity 3 P48,796 440 420 860 61. D Medium Refer To: 811

The activity rate for Activity 3 is closest to: a. P119.72. b. P116.18. c. P26.67. d. P56.74.


The cost per unit of Product A is closest to: a. P59.23. b. P57.20. c. P47.89. d. P22.70.

Reference: 812 Arthur Company has two products: S and D. The company uses activitybased costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools: Activity Estimated Expected Activity Cost Pool Cost Product S Product D Total Activity 1 P20,000 100 400 500 Activity 2 P14,600 500 250 750 Activity 3 P90,000 300 2,700 3,000 The annual production and sales of Product S is 4,547 units. The annual production and sales of Product D is 7,913. 63. B Medium Refer To: 812

The activity rate under the activitybased costing system for Activity 3 is closest to: a. P33.33. b. P30.00. c. P29.32. d. P41.53.


The cost per unit of Product S under activitybased costing is closest to: a. P5.00. b. P1.98. c. P10.00. d. P1.83.

Reference: 813 Monson Company has two products: G and P. The company uses activitybased costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools:


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Activity Estimated Expected Activity Cost Pool Cost Product G Product P Total Activity 1 P30,000 200 400 600 Activity 2 P24,000 600 900 1,500 Activity 3 P80,000 400 3,600 4,000 The annual production and sales of Product G is 10,640 units. The annual production and sales of Product P is 26,600. 65. D Medium Refer To: 813

The activity rate under the activitybased costing system for Activity 2 is closest to: a. P89.33. b. P21.97. c. P26.67. d. P16.00.


The cost per unit of Product P under activitybased costing is closest to: a. P4.00. b. P30.16. c. P10.00. d. P6.88.

Reference: 814 NOTE TO THE INSTRUCTOR: Questions 67 to 68, 69 to 70, and 71 to 72 are different versions of the same questions. Forse Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Wages and salaries .. P80,000 Other expenses ...... P40,000 Total ............. P120,000 Distribution of resource consumption: Activity Cost Pools Making Bouquets Delivery Other Total Wages and salaries .. 60% 30% 10% 100% Other expenses ...... 45% 25% 30% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Activity Making bouquets ...... 60,000 bouquets Delivery ............. 5,000 deliveries


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What would be the total overhead cost per bouquet according to the activity based costing system? In other words, what would be the overall activity rate for the making bouquets activity cost pool? (Round to the nearest whole cent.) a. P0.90 b. P1.05 c. P1.20 d. P1.10


What would be the total overhead cost per delivery according to the activity based costing system? In other words, what would be the overall activity rate for the deliveries activity cost pool? (Round to the nearest whole cent.) a. P6.00 b. P6.60 c. P7.20 d. P6.80

Reference: 815 NOTE TO THE INSTRUCTOR: Questions 67 to 68, 69 to 70, and 71 to 72 are different versions of the same questions. Foster Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Wages and salaries .. P70,000 Other expenses ...... P50,000 Total ............. P120,000 Distribution of resource consumption: Activity Cost Pools Making Bouquets Delivery Other Total Wages and salaries .. 70% 20% 10% 100% Other expenses ...... 45% 25% 30% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Activity Making bouquets ...... 40,000 bouquets Delivery ............. 1,000 deliveries


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Reference: 816 NOTE TO THE INSTRUCTOR: Questions 67 to 68, 69 to 70, and 71 to 72 are different versions of the same questions. Foss Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Wages and salaries .. P70,000 Other expenses ...... P40,000 Total ............. P110,000 Distribution of resource consumption: Activity Cost Pools Making Bouquets Delivery Other Total Wages and salaries .. 55% 35% 10% 100% Other expenses ...... 45% 25% 30% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Activity Making bouquets ...... 20,000 bouquets Delivery ............. 7,000 deliveries


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Reference: 817 NOTE TO THE INSTRUCTOR: Questions 73 to 75, 76 to 78, and 79 to 81 are different versions of the same questions. Grogam Catering uses activitybased costing for its overhead costs. The company has provided the following data concerning the activity rates in its activitybased costing system: Activity Cost Pools Preparing Arranging Meals Functions Wages ............ P1.15 P110.00 Supplies ......... P0.35 P380.00 Other expenses ... P0.25 P70.00 The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool. Management would like to know whether the company made any money on a recent function at which 100 meals were served. The company catered the function for a fixed price of P21.00 per meal. The cost of the raw ingredients for the meals was P8.25 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above. For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost.


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According to the activitybased costing system, what was the total cost (including the costs of raw ingredients) of the function mentioned above? (Round to the nearest whole peso.) a. P1,560 b. P1,760 c. P1,060 d. P910


Suppose an action analysis report is prepared for the function mentioned above. What would be the "red margin" in the action analysis report? (Round to the nearest whole peso.) a. P690 b. P440 c. P390 d. P540


Suppose an action analysis report is prepared for the function mentioned above. What would be the "yellow margin" in the action analysis report? (Round to the nearest whole peso.) a. P635 b. P815 c. P710 d. P760

Reference: 818 NOTE TO THE INSTRUCTOR: Questions 73 to 75, 76 to 78, and 79 to 81 are different versions of the same questions. Groce Catering uses activitybased costing for its overhead costs. The company has provided the following data concerning the activity rates in its activitybased costing system: Activity Cost Pools Preparing Arranging Meals Functions Wages ............ P0.70 P145.00 Supplies ......... P0.45 P230.00 Other expenses ... P0.40 P100.00 The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool. Management would like to know whether the company made any money on a recent function at which 150 meals were served. The company catered the function for a fixed price of P14.00 per meal. The cost of the raw ingredients for the meals was P8.75 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above. For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost. Managerial Accounting, 9/e

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(including the costs of raw ingredients) of the function mentioned above? (Round to the nearest whole peso.) a. P1,520 b. P2,020 c. P1,370 d. P2,220


Suppose an action analysis report is prepared for the function mentioned above. What would be the "red margin" in the action analysis report? (Round to the nearest whole peso.) a. P80 b. (P20) c. (P70) d. P230



Reference: 819 NOTE TO THE INSTRUCTOR: Questions 73 to 75, 76 to 78, and 79 to 81 are different versions of the same questions. Grodt Catering uses activitybased costing for its overhead costs. The company has provided the following data concerning the activity rates in its activitybased costing system: Activity Cost Pools Preparing Arranging Meals Functions Wages ............ P0.85 P110.00 Supplies ......... P0.50 P310.00 Other expenses ... P0.30 P120.00 The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool. Management would like to know whether the company made any money on a recent function at which 60 meals were served. The company catered the function for a fixed price of P19.00 per meal. The cost of the raw ingredients for the meals was P8.60 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above. For the purposes of preparing action analyses, management has assigned ease of adjustment codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw ingredients as a Green cost; and other expenses as a Red cost.


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According to the activitybased costing system, what was the total cost (including the costs of raw ingredients) of the function mentioned above? (Round to the nearest whole peso.) a. P655 b. P1,155 c. P505 d. P1,355


Suppose an action analysis report is prepared for the function mentioned above. What would be the "red margin" in the action analysis report? (Round to the nearest whole peso.) a. P135 b. (P165) c. (P115) d. (P15)




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Essay 82. Hard

Ingersol Draperies makes custom draperies for homes and businesses. The company uses an activitybased costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity cost pools. Overhead costs: Production overhead .. P120,000 Office expense ....... P120,000 Total .............. P240,000 Distribution of resource consumption: Activity Cost Pools Making Job Drapes Support Other Total Production overhead .. 35% 45% 20% 100% Office expense ....... 5% 65% 30% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Annual Activity Making drapes ....... 2,000 yards Job support ......... 160 jobs Other ............... Not applicable Required: a. Prepare the firststage allocation of overhead costs to the activity cost pools by filling in the table below: Making Job Drapes Support Other Total Production overhead .. Office expense ....... Total .............. b. Compute the activity rates (i.e., cost per unit of activity) for the Making Drapes and Job Support activity cost pools by filling in the table below: Making Job Drapes Support Production overhead .. Office expense ....... Total ..............


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c. Prepare an action analysis report in good form of a job that involves making 71 yards of drapes and has direct materials and direct labor cost of P2,510. The sales revenue from this job is P4,400. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost. Answer: a. Firststage allocation Making Job Drapes Support Other Total Production overhead .. P42,000 P54,000 P24,000 P120,000 Office expense ....... P6,000 P78,000 P36,000 P120,000 Total .............. P48,000 P132,000 P60,000 P240,000 Activity ............. 2,000 160 yards jobs b. Activity rates (costs divided by activity) Production overhead .. P21.00 P337.50 Office expense ....... P3.00 P487.50 Total .............. P24.00 P825.00 c. Overhead cost of the job. Making Job Drapes Support Total Activity ............ 71 1 Production overhead . P1,491.00 P337.50 P1,828.50 Office expense ...... P213.00 P487.50 P700.50 Total ............. P1,704.00 P825.00 P2,529.00

Revenue ......................... P4,400.00 Green costs: Direct materials and labor ... P2,510.00 Green margin .................... P1,890.00 Yellow costs: Office expense ............... P700.50 Yellow margin ................... P1,190.50 Red costs: Production overhead .......... P1,828.50 Red margin ...................... (P638.00)


42

83. Medium

Hasty Hardwood Floors installs oak and other hardwood floors in homes and businesses. The company uses an activitybased costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Production overhead .. P190,000 Office expense ....... P140,000 Total .............. P330,000 Distribution of resource consumption: Activity Cost Pools Installing Job Floors Support Other Total Production overhead .. 40% 40% 20% 100% Office expense ....... 10% 60% 30% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Annual Activity Installing floors ... 200 squares Job support ......... 160 jobs Other ............... Not applicable A "square" is a measure of area that is roughly equivalent to 1,000 square feet. Required: a. Prepare the firststage allocation of overhead costs to the activity cost pools by filling in the table below: Installing Job Floors Support Other Total Production overhead .. Office expense ....... Total .............. b. Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors and Job Support activity cost pools by filling in the table below: Installing Job Floors Support Production overhead .. Office expense ....... Total ..............


43

Answer: a. Firststage allocation Installing Job Floors Support Other Total Production overhead P76,000 P76,000 P38,000 P190,000 Office expense ..... P14,000 P84,000 P42,000 P140,000 Total ............ P90,000 P160,000 P80,000 P330,000 Activity ........... 200 160 squares jobs b. Activity rates (costs divided by activity) Production overhead .. P380 P475 Office expense ....... P70 P525 Total .............. P450 P1,000 c. Overhead cost of the job. Installing Job Floors Support Total Activity ........... 3.4 1 Production overhead .. P1,292 P475 P1,767 Office expense ....... P238 P525 P763 Total .............. P1,530 P1,000 P2,530 84. Medium

Goel Company, a wholesale distributor, uses activitybased costing for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Wages and salaries .. P460,000 Nonwage expenses .... P120,000 Total ............. P580,000 Distribution of resource consumption: Activity Cost Pools Filling Product Orders Support Other Total Wages and salaries .. 15% 75% 10% 100% Nonwage expenses .... 10% 70% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Annual Activity Filling orders ...... 4,000 orders Product support ..... 30 products Other ............... Not applicable


44

Required: Compute the activity rates (i.e., cost per unit of activity) for the Filling Orders and Product Support activity cost pools by filling in the table below: Filling Product Orders Support Wages and salaries .. Nonwage expenses .... Total ............. Answer: Firststage allocation Filling Product Orders Support Other Total Wages and salaries . P69,000 P345,000 P46,000 P460,000 Nonwage expenses ... P12,000 P84,000 P24,000 P120,000 Total ............ P81,000 P429,000 P70,000 P580,000 Activity ........... 4,000 30 orders products Activity rates (costs divided by activity) Wages and salaries.. P17.25 P11,500 Nonwage expenses.... P3.00 P2,800 Total............. P20.25 P14,300 85. Medium

Fife & Jones PLC, a consulting firm, uses an activitybased costing in which there are three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Costs: Wages and salaries ... P540,000 Travel expenses ...... P100,000 Other expenses ....... P140,000 Total .............. P780,000 Distribution of resource consumption: Activity Cost Pools Working On Business Engagements Development Other Total Wages and salaries 50% 20% 30% 100% Travel expenses ... 60% 30% 10% 100% Other expenses .... 35% 25% 40% 100%


45

Required: a. How much cost, in total, would be allocated to the Working On Engagements activity cost pool? b. How much cost, in total, would be allocated to the Business Development activity cost pool? c. How much cost, in total, would be allocated to the Other activity cost pool? Answer: All three parts can be answered using a firststage allocation of costs. Working On Business Engagements Development Other Total Wages and salaries P270,000 P108,000 P162,000 540,000 Travel expenses .. P60,000 P30,000 P10,000 P100,000 Other expenses ... P49,000 P35,000 P56,000 P140,000 Total .......... P379,000 P173,000 P228,000 P780,000 a. P379,000 b. P173,000 c. P228,000 86. Hard

Huish Awnings makes custom awnings for homes and businesses. The company uses an activitybased costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity cost pools: Overhead costs: Production overhead .. P150,000 Office expense ....... P100,000 Total .............. P250,000 Distribution of resource consumption: Activity Cost Pools Making Job Awnings Support Other Total Production overhead .. 45% 40% 15% 100% Office expense ....... 8% 65% 27% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Annual Activity Making awnings ...... 5,000 yards Job support ......... 200 jobs Other ............... Not applicable


46

Required: a. Prepare the firststage allocation of overhead costs to the activity cost pools by filling in the table below: Making Job Awnings Support Other Total Production overhead .. Office expense ....... Total .............. b. Compute the activity rates (i.e., cost per unit of activity) for the Making Awnings and Job Support activity cost pools by filling in the table below: Making Job Awnings Support Production overhead .. Office expense ....... Total .............. c. Prepare an action analysis report in good form of a job that involves making 80 yards of awnings and has direct materials and direct labor cost of P3,000. The sales revenue from this job is P4,000. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost. Answer: a. Firststage allocation Making Job Awnings Support Other Total Production overhead.. P67,500 P60,000 P22,500 P150,000 Office expense....... P 8,000 P65,000 P27,000 P100,000 Total.............. P75,500 P125,000 P49,500 P250,000 Activity ............ 5,000 200 yards jobs b. Activity rates (costs divided by activity) Production overhead . P13.50 P300.00 Office expense ...... P 1.60 P325.00 Total ............. P15.10 P625.00


47

c. Overhead cost of the job. Making Job Awnings Support Total Activity ............. 80 1 Production overhead .. P1,080.00 P300.00 P1,380.00 Office expense ....... P 128.00 P325.00 P 453.00 Total .............. P1,208.00 P625.00 P1,833.00 Revenue ......................... P4,000.00 Green costs: Direct materials and labor ... P3,000.00 Green margin .................... P1,000.00 Yellow costs: Office expense ............... P 453.00 Yellow margin ................... P 547.00 Red costs: Production overhead .......... P1,380.00 Red margin ...................... P( 833.00) 87. Hard

Phoenix Company makes custom covers for air conditioning units for homes and businesses. The company uses an activitybased costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity cost pools: Overhead costs: Production overhead .. P100,000 Office expense ....... P 50,000 Total .............. P150,000 Distribution of resource consumption: Activity Cost Pools Making Job Covers Support Other Total Production overhead .. 40% 42% 18% 100% Office expense ....... 12% 60% 28% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Annual Activity Making covers ....... 2,500 yards Job support ......... 200 jobs Other ............... Not applicable


48

Required: a. Prepare the firststage allocation of overhead costs to the activity cost pools by filling in the table below: Making Job Covers Support Other Total Production overhead .. Office expense ....... Total .............. b. Compute the activity rates (i.e., cost per unit of activity) for the Making Covers and Job Support activity cost pools by filling in the table below: Making Job Covers Support Production overhead .. Office expense ....... Total .............. c. Prepare an action analysis report in good form of a job that involves making 50 yards of covers and has direct materials and direct labor cost of P1,500. The sales revenue from this job is P2,500. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost. Answer: a. Firststage allocation Making Job Covers Support Other Total Production overhead .. P40,000 P42,000 P18,000 P100,000 Office expense ....... P 6,000 P30,000 P14,000 P 50,000 Total .............. P46,000 P72,000 P32,000 P150,000 Activity ............. 2,500 200 yards jobs b. Activity rates (costs divided by activity) Production overhead .. P16.00 P210.00 Office expense ....... P 2.40 P150.00 Total .............. P18.40 P360.00


49

c. Overhead cost of the job. Making Job Covers Support Total Activity ............. 50 1 Production overhead .. P 800.00 P210.00 P1,010.00 Office expense ....... P 120.00 P150.00 P 270.00 Total .............. P 920.00 P360.00 P1,280.00 Revenue ......................... P2,500.00 Green costs: Direct materials and labor ... P1,500.00 Green margin .................... P1,000.00 Yellow costs: Office expense ............... P 270.00 Yellow margin ................... P 730.00 Red costs: Production overhead .......... P1,010.00 Red margin ...................... (P 280.00) 88. Medium

Jackson Painting paints the interiors and exteriors of homes and commercial buildings. The company uses an activitybased costing system for its overhead costs. The company has provided the following data concerning its activitybased costing system. Activity Cost Pool Activity Measure Annual Activity Painting overhead ... Square meters 10,000 square meters Job support ......... Jobs 320 jobs Other ............... None Not applicable The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The company has already finished the first stage of the allocation process in which costs were allocated to the activity cost centers. The results are listed below: Job Painting Support Other Total Painting overhead .. P54,000 P42,000 P24,000 P120,000 Office expense ..... P16,000 P96,000 P48,000 P160,000 Total ............ P70,000 P138,000 P72,000 P280,000


50

Required: a. Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job Support activity cost pools by filling in the table below. Round off all calculations to the nearest whole cent. Job Painting Support Painting overhead .... Office expense ....... Total .............. b. Prepare an action analysis report in good form of a job that involves painting 63 square meters and has direct materials and direct labor cost of P2,070. The sales revenue from this job is P2,500. For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; painting overhead as a Red cost; and office expense as a Yellow cost. Answer: a. Activity rates (costs divided by activity) Job Painting Support Painting overhead .... P5.40 P131.25 Office expense ....... P1.60 P300.00 Total .............. P7.00 P431.25 b. Overhead cost of the job. Job Painting Support Total Activity ............. 63 1 Painting overhead .... P340.20 P131.25 P471.45 Office expense ....... P100.80 P300.00 P400.80 Total .............. P441.00 P431.25 P872.25 Sales ............................. P2,500.00 Green costs: Direct materials and labor ... P2,070.00 Green margin .................... P430.00 Yellow costs: Office expense ............... P400.80 Yellow margin ................... P29.20 Red costs: Painting overhead ............ P471.45 Red margin ...................... (P442.25)


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89. Hard

Cabanos Company manufactures two products, Product C and Product D. The company estimated it would incur P160,790 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period’s operations appear below: Product C Product D Estimated volume 3,400 units 4,800 units Direct labor hours per unit 1.40 hour 1.90 hours Direct materials cost per unit P 7.40 P12.70 Direct labor cost per unit P14.00 P19.00 Required: a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year. b. The company is considering using an activitybased costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activitybased costing system would use three activity cost pools. Data relating to these activities for the current period are given below: Estimated Activity Overhead Expected Activity Cost Pool Costs Product C Product D Total Machine setups P12,190 80 150 230 Purchase orders 79,200 730 920 1,650 General factory 69,400 4,760 9,120 13,880 P160,790 Determine the unit product cost of each product for the current period using the activitybased costing approach. Answer: a. The expected total direct labor hours during the period are computed as follows: Product C: 3,400 units x 1.4 hr. 4,760 hours Product D: 4,800 units x 1.9 hrs. 9,120 hours Total direct labor hours 13,880 hours Using these hours as a base, the predetermined overhead using direct labor hours would be: Estimated overhead cost, P160,790 ÷ Estimated direct labor hours, 13,880 = P11.58/DLH


52

Using this overhead rate, the unit product costs are: Product C Product D Direct materials P 7.40 P12.70 Direct labor 14.00 19.00 Manufacturing overhead 16.22 22.01 Total unit product cost P37.62 P53.71 b. The overhead rates for each activity center are as follows: Estimated Overhead Expected Overhead Costs Activity Rate Machine setups P12,190 230 P53.00 Purchase orders P79,200 1,650 P48.00 General factory P69,400 13,880 P 5.00 The overhead cost charged to each product is: Product C Product D Activity Amount Activity Amount Machine setups 80 P 4,240 150 P 7,950 Purchase orders 730 35,040 920 44,160 General factory 4,760 23,800 9,120 45,600 Total overhead cost P63,080 P97,710 Overhead cost per unit: Product C: P63,080 ÷ 3,400 units = P18.55 per unit. Product D: P97,710 ÷ 4,800 units = P20.36 per unit. Using activity based costing, the unit product cost of each product would be: Product C Product D Direct materials P 7.40 P12.70 Direct labor 14.00 19.00 Manufacturing overhead 18.55 20.36 Total unit product cost P39.95 P52.06


53

90. Hard

Lionel Corporation manufactures two products, Product B and Product H. Product H is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product B. Product H is the more complex of the two products, requiring two hours of direct labor time per unit to manufacture compared to one hour of direct labor time for Product B. Product H is produced on an automated production line. Overhead is currently assigned to the products on the basis of directlabor hours. The company estimated it would incur P450,000 in manufacturing overhead costs and produce 7,500 units of Product H and 30,000 units of Product B during the current year. Unit costs for materials and direct labor are: Product B Product H Direct material ..... P12 P25 Direct labor ........ P10 P20 Required: 1. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year. 2. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

Estimated Expected Activity Overhead Product Product Activity Cost Pools Costs B H Total Machine setups required ... P180,000 600 1,200 1,800 Purchase orders issued .... 38,382 500 100 600 Machinehours required .... 92,650 6,800 10,200 17,000 Maintenance requests issued 138,968 693 907 1,600 P450,000 Using the data above and an activitybased costing approach, determine the unit product cost of each product for the current year. Answer: 1. The company expects to work 45,000 direct laborhours during the current year, computed as follows: Product B: 30,000 units x 1 hr. ..... 30,000 hours Product H: 7,500 units x 2 hrs. .... 15,000 hours Total direct laborhours ............. 45,000 hours


54

Using these hours as a base, the predetermined overhead using direct laborhours would be: Pred. ovhd. rate = P450,000 ÷ 45,000 DLHs = P10.00/DLH Using this overhead rate, the unit product cost of each product would be: Product Product B___ H Direct materials .............. P12 P25 Direct labor .................. 10 20 Manufacturing overhead: Product Bone hour 10 Product Htwo hours ...... _____ 20 Total ......................... P32 P 65 2. The overhead rates are computed as follows: Estimated Total Overhead Expected Activity Cost Pools Costs Activity Rate Machine setups ....... P180,000 1,800 P100.000/setup Purchase orders ...... 38,382 600 63.970/order Machinehours ........ 92,650 17,000 5.450/hour Maintenance requests . 138,968 1,600 86.855/request P450,000 The overhead cost attributable to each product is: Product B Product H Activity Amount Activity Amount Machine setups, P100.00/setup ........ 600 P 60,000 1,200 P120,000 Purchase orders, P63.97/order ......... 500 31,985 100 6,397 Machinehours, P5.45/hour 6,800 37,060 10,200 55,590 Maintenance request, at P86.855/request ... 693 60,191 907 78,777 P189,236 P260,764 Overhead cost per unit: Product B: P189,236  30,000 units = P6.3079/unit. Product H: P260,764  7,500 units = P34.7685/unit.


55

Using activitybased costing, the unit product cost of each product would be: Product B Product H Direct materials ............... P12.0000 P25.0000 Direct labor ................... 10.0000 20.0000 Manufacturing overhead ......... 6.3079 34.7685 Total unit product cost ..... P28.3079 P79.7685 91. Hard

Flyer Corporation manufactures two products, Product A and Product B. Product B is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product A. Product B is the more complex of the two products, requiring three hours of direct labor time per unit to manufacture compared to one and onehalf hours of direct labor time for Product A. Product B is produced on an automated production line. Overhead is currently assigned to the products on the basis of directlabor hours. The company estimated it would incur P396,000 in manufacturing overhead costs and produce 5,500 units of Product B and 22,000 units of Product A during the current year. Unit costs for materials and direct labor are: Product A Product B Direct material ...... P9 P20 Direct labor ......... P7 P15 Required: 1. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year. 2. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: Estimated Expected Activity Overhead Product Product Activity Cost Pools Costs A B Total Machine setups required ... P170,000 700 1,000 1,700 Purchase orders issued .... 37,000 300 200 500 Machinehours required .... 91,000 4,000 9,000 13,000 Maintenance requests issued 98,000 400 600 1,000 P396,000 Using the data above and an activitybased costing approach, determine the unit product cost of each product for the current year.


56

Answer: 1. The company expects to work 45,000 direct laborhours during the current year, computed as follows: Product A: 22,000 units x 1.5 hr. ..... 33,000 hours Product B: 5,500 units x 3.0 hrs. .... 16,500 hours Total direct laborhours ............... 49,500 hours Using these hours as a base, the predetermined overhead using direct laborhours would be: Pred. ovhd. rate = P396,000 ÷ 49,500 DLHs = P8.00/DLH Using this overhead rate, the unit product cost of each product would be: Product Product A___ B Direct materials ............. P 9 P20 Direct labor ................. 7 15 Manufacturing overhead: Product B1.5 hour ......... 12 Product Hthree hours ...... 24 Total ........................ P28 P59 2. The overhead rates are computed as follows: Estimated Total Overhead Expected Activity Cost Pools Costs Activity Rate Machine setups ....... P170,000 1,700 P100/setup Purchase orders ...... 37,000 500 74/order Machinehours ........ 91,000 13,000 7/hour Maintenance requests . 98,000 1,000 98/request P396,000 The overhead cost attributable to each product is: Product B Product H Activity Amount Activity Amount Machine setups, P100.00/setup ....... 700 P 70,000 1,000 P100,000 Purchase orders, P74.00/order ........ 300 22,200 200 14,800 Machinehours, P7.00/hour 4,000 .... 28,000 9,000 63,000 Maintenance request, at P98.00/request ... 400 39,200 600 58,800 P159,400 P236,600


57

Overhead cost per unit: Product A: P159,400  22,000 units = P7.2455/unit. Product B: P236,600  5,500 units = P43.0182/unit. Using activitybased costing, the unit product cost of each product would be: Product A Product B Direct materials .............. P 9.0000 P20.0000 Direct labor .................. 7.0000 15.0000 Manufacturing overhead ........ 7.2455 43.0182 Total unit product cost .... P23.2455 P78.0182 92. Hard

EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product W. Product W is the more complex of the two products, requiring one hour of direct labor time per unit to manufacture compared to onehalf hour of direct labor time for Product S. Product W is produced on an automated production line. Overhead is currently assigned to the products on the basis of directlabor hours. The company estimated it would incur P500,000 in manufacturing overhead costs and produce 10,000 units of Product W and 60,000 units of Product S during the current year. Unit cost for materials and direct labor are: Product S Product W Direct material .... P10 P24 Direct labor ....... P 8 P12 Required: 1. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.


58

2. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: Estimated Expected Activity Overhead Product Product Activity Cost Pools Costs S W Total Machine setups required .. P200,000 800 1,200 2,000 Purchase orders issued ... 43,500 500 100 600 Machinehours required ... 104,000 3,000 10,000 13,000 Maintenance requests issued ................ 152,500 860 1,140 2,000 P500,000 Using the data above and an activitybased costing approach, determine the unit product cost of each product for the current year. Answer: 1. The company expects to work 40,000 direct laborhours during the current year, computed as follows: Product S: 60,000 units x 0.5 hr. .... 30,000 hours Product W: 10,000 units x 1.0 hrs. ... 10,000 hours Total direct laborhours .............. 40,000 hours Using these hours as a base, the predetermined overhead using direct laborhours would be: Pred. ovhd. rate = P500,000 ÷ 40,000 DLHs = P12.50/DLH Using this overhead rate, the unit product cost of each product would be: Product Product S W Direct materials ............ P10.00 P24.00 Direct labor ................ 8.00 12.00 Manufacturing overhead: Product Bhalf hour .... 6.25 Product Hone hour ..... 12.50 Total ....................... P24.25 P48.50


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2. The overhead rates are computed as follows: Estimated Total Overhead Expected Activity Cost Pools Costs Activity Rate Machine setups ..... P200,000 2,000 P100.00/setup Purchase orders .... 43,500 600 72.50/order Machinehours ...... 104,000 13,000 8.00/hour Maintenance requests 152,500 2,000 76.25/request P500,000 The overhead cost attributable to each product is: Product S Product W Activity Amount Activity Amount Machine setups, P100.00/setup...... 800 P 80,000 1,200 P120,000 Purchase orders, P72.50/order....... 500 36,250 100 7,250 Machinehours, P8.00/hour......... 3,000 24,000 10,000 80,000 Maintenance request, at P76.25/request.. 860 65,575 1,140 86,925 P205,825 P294,175 Overhead cost per unit: Product S: P205,825  60,000 units = P3.4304/unit. Product W: P294,175  10,000 units = P29.4175/unit. Using activitybased costing, the unit product cost of each product would be: Product S Product W Direct materials .............. P10.0000 P24.0000 Direct labor .................. 8.0000 12.0000 Manufacturing overhead ........ 3.4304 29.4175 Total unit product cost .... P21.4304 P65.4175


60

93. Medium

Daba Company manufactures two products, Product F and Product G. The company expects to produce and sell 1,400 units of Product F and 1,800 units of Product G during the current year. The company uses activitybased costing to compute unit product costs for external reports. Data relating to the company’s three activity cost pools are given below for the current year: Estimated Activity Overhead Expected Activity Cost Pool Costs Product F Product G Total Machine setups P10,800 80 100 180 Purchase orders P77,520 510 1,010 1,520 General factory P75,920 2,240 3,600 5,840 Required: Using the activitybased costing approach, determine the overhead cost per unit for each product. Answer: The overhead rates for each activity center are as follows: Estimated Activity Overhead Expected Overhead Cost Pool Costs Activity Rate Machine setups P10,800 180 P60.00 Purchase orders P77,520 1,520 P51.00 General factory P75,920 5,840 P13.00 The overhead cost charged to each product is: Product F Product G Activity Amount Activity Amount Machine setups 80 P 4,800 100 P 6,000 Purchase orders 510 26,010 1,010 51,510 General factory 2,240 29,120 3,600 46,800 Total overhead cost P59,930 P104,310 Overhead cost per unit: Product F: P59,930 ÷ 1,400 units = P42.81 per unit. Product G: P104,310 ÷ 1,800 units = P57.95 per unit.


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Test Bank - Chapter 8 ABC for Decision Making

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