Activity Based Costing Example / Problem:

Learning Objectives:

1. Perform the first stage allocation of overhead costs to the activity cost pools. 2. Compute activity rates for the activity cost pools. 3. Construct a table showing the overhead costs of units and four orders.
Ferris Corporation makes a single product - a fire resistant commercial filing cabinet - that it sells tooffice furniture distributors. The company has a simple ABC system that it uses for internal decision making. The company has two overhead departments whose costs are listed below:

Manufacturing overhead Selling and administrative overhead Total overhead costs

$5,00,000 $300,000 $8,00,000

The company's activity based costing system has the following activity cost pools and activity measures:

Activity Cost Pool Assembling units Processing orders Supporting customers Other

Activity Measures Number of units Number of orders Number of customers Not applicable

Costs assigned to the "other" activity cost pool have no activity measure; they consist of the costs of unused capacity and organization-sustaining costs - neither of which are assigned to products, orders or customers. Ferris Corporation distributes the costs of manufacturing overhead and of selling and administrative overhead to the activity cost poolsbased on employee interviews, the results of which are reported below:

Distribution of Resource Consumption Across Activity Cost Pools Assembling Processing Supporting Other Units Orders Customers Manufacturing overhead 50% 35% 5% 10% Selling and administrative overhead Total activity 10% 1,000 units 45% 250 orders 25% 100 customers 20% --

Total 100% 100% --

Required:

1. Perform the first stage allocation of overhead costs to the activity cost pools. 2. Compute activity rates for the activity cost pools.

3. OfficeMart is one of the Ferris Corporation's customers. Last year OfficeMart

ordered filing cabinets four different times. OfficeMart ordered a total of 80 cabinets during the year. Construct a table showing the overhead costs of these 80 units and four orders.

Solution: 1. The first stage allocation of costs to the activity cost pools appears below:
Activity Cost Pools Assembling Units Manufacturing overhead Selling and administrative overhead Total activity $250,000 30,000 $280,000 Processing Orders $175,000 135,000 $310,000 Supporting Customers $25,000 75,000 $100,000 Other $50,000 60,000 $110,000 Total $500,000 300,000 $800,000

2. The activity rates for the activity cost pools are:

Activity CostPools Assembling units Processing orders Supporting customers

Total Cost $280,000 $310,000 $100,000

Total Activity 1,000 units 250 units 100 customers

Activity Rate $280 per unit $1,240 per order $1,000 per customer

3. The overhead cost for the four orders of a total of 80 filing cabinets would be computed as follows:

Activity CostPools Assembling units Processing orders Supporting customers

Total Cost $280

Total Activity 80 units 4 units Not applicable

Activity Rate $22,400 $4,960

per unit

$1,240 per order $1000 per customer

4. The product and customer margin can be computed as follows:

Filing Cabinet Product Margin: Sales ($595 per unit 80 units) Cost: Direct materials ($180 per unit 80 units) Direct materials ($50 per unit 80 units) Volume related overhead (above) Order related overhead (above) $14,400 4,000 22,400 4,960 45,760 $1,840 ========== Customer Profitability Analysis - OfficeMart $47,600

Product margin (above) Less: Customer support overhead (above)

$1,840 1,000 $840 ===========