BriefExercises

Identify BE51
difference

sbetween
InfotracInc.sellsahighspeedretrievalsystemforinformation.Itprovidesthefollowing
costing
informationfortheyear.
systems.

Budgeted
Actual
Overheadcost

$500,000

$450,000

Machinehours

50,000

40,000

100,000

90,000

Directlabourhours
Overheadisappliedonthebasisofmachinehours.

(a)Calculatethepredeterminedoverheadrate.
(b)Determinetheamountofoverheadappliedfortheyear.
(c)Explainhowanactivitybasedcostingsystemmightdifferintermsofcalculatinga
predeterminedoverheadrate.
Identify BE52SassafrasInc.hasconductedananalysisofoverheadcostsrelatedtooneofitsproductlines
difference
usingatraditionalcostingsystem(volumebased)andanactivitybasedcostingsystem.
sbetween
Followingareitsresults:
costing

TraditionalCosting
ABC
systems.
Salesrevenues
$1,000,000
$1,000,000
Overheadcosts:

Identify
cost
drivers.
Identify
cost
drivers.

ProductRX3

$68,000

$100,000

ProductY12

72,000

40,000

$140,000

$140,000

Explainhowadifferenceintheoverheadcostsbetweenthetwosystemsmayhave
occurred.
BE53AltexCo.identifiesthefollowingactivitiesthatpertaintomanufacturingoverhead:
materialshandling,machinesetups,factorymachinemaintenance,factorysupervision,and
qualitycontrol.Foreachactivity,identifyanappropriatecostdriver.
BE54AyalaCompanymanufacturesfourproductsinasingleproductionfacility.Thecompany
usesactivitybasedcosting.Thecompanyhasidentifiedthefollowingactivitiesthroughits
activityanalysis:(a)inventorycontrol,(b)machinesetups,(c)employeetraining,(d)quality
inspections,(e)materialordering,(f)drillingoperations,and(g)buildingmaintenance.

Foreachactivity,nameacostdriverthatmightbeusedtoassignoverheadcoststoproducts.
Calculat BE55XOXCo.producesthreeproducts,ProductsRed,Black,andYellow.ProductRedrequires
e
180machinesetups,ProductBlackrequires240setups,andProductYellowrequires540
activity
setups.XOXhasidentifiedanactivitycostpoolwithallocatedmanufacturingoverheadof
based
$960,000forwhichthecostdriverismachinesetups.Howmuchmanufacturingoverheadis
overhead
assignedtoeachproduct?
rates.
Calculat BE56CoatsGalore,Inc.usesactivitybasedcostingasthebasisforinformationtosetpricesforits
e
sixlinesofseasonalcoats.Calculatetheactivitybasedoverheadratesusingthefollowing
activity
budgeteddataforeachoftheactivitycostpools.

based
overhead
rates.

ActivityCostPools

EstimatedOverhead

Designing

ExpectedUseofCostDriversperActivity

$450,000

12,000designerhours

Sizingandcutting

4,000,000

160,000machinehours

Stitchingandtrimming

1,440,000

80,000labourhours

Wrappingandpacking

336,000

32,000finishedunits

Calculat BE57ComputerParts,Inc.,amanufacturerofcomputerchips,employsactivitybasedcosting.The
e
followingbudgeteddataforeachoftheactivitycostpoolsareprovidedbelowfortheyear
activity
2012.
based
ActivityCostPools
EstimatedOverhead ExpectedUseofCostDriversperActivity
overhead
Orderingandreceiving
$90,000 15,000orders
rates.
Etching
Soldering

480,000 60,000machinehours
1,760,000 440,000labourhours

For2012,thecompanyhad11,000ordersandused50,000machinehours,andlabourhours
totalled500,000.Whatisthetotaloverheadapplied?
Classify BE58HiraniNoveltyCompanyidentifiedthefollowingactivitiesinitsproductionandsupport
activities
operations.Classifyeachoftheseactivitiesaseithervalueaddedornonvalueadded.
asvalue
(a)Purchasing
addedor
(b)Receiving
non
(c)Designengineering
value
(d)Storinginventory
added.
(e)Costaccounting
(f)Movingworkinprocess
(g)Inspectingandtesting
(h)Paintingandpacking
Classify BE59WuandMartinisanarchitecturalfirmthatiscontemplatingtheinstallationofactivitybased
service
costing.Thefollowingactivitiesareperformeddailybystaffarchitects.Classifythese
compan
activitiesasvalueaddedornonvalueadded:(a)designinganddrafting,3hours;(b)staff
y
meetings,1hour;(c)onsitesupervision,2hours;(d)lunch,1hour;(e)consultationwith
activities
clientonspecifications,1.5hours;(f)entertainingaprospectiveclientfordinner,2hours.
asvalue
addedor
non
value
added.
Classify BE510
activities

accordin
QuickPixisalargedigitalprocessingcentrethatserves130outletsingrocerystores,
gto
servicestations,cameraandphotoshops,anddrugstoresin16nearbytowns.QuickPix
level.
operates24hoursaday,sixdaysaweek.Classifyeachofthefollowingactivitycostsof
QuickPixaseitherunitlevel,batchlevel,productlevel,orfacilitylevel.
(a)Colourprintingmaterials
(b)Photocopypaper
(c)Depreciationofmachinery
(d)Setupsforenlargements
(e)Supervisor'ssalary

(f)Orderingmaterials
(g)Pickupanddelivery
(h)Commissiontodealers
(i)Insuranceonthebuilding
(j)Loadingdevelopingmachines
Classify BE511
activities

accordin
ToolTime,Inc.operates20injectionmouldingmachinesintheproductionoftoolboxesof
gto
fourdifferentsizes,namedtheApprentice,theHandyman,theJourneyman,andthe
level.
Professional.Classifyeachofthefollowingcostsasunitlevel,batchlevel,productlevel,
orfacilitylevel.
(a)Firstshiftsupervisor'ssalary
(b)Powderedrawplastic
(c)Diesforcastingplasticcomponents
(d)Depreciationoninjectionmouldingmachines
(e)Changingdiesonmachines
(f)Movingcomponentstotheassemblydepartment
(g)Engineeringdesign
(h)Employeehealthandmedicalinsurancecoverage
Calculat BE512MontrealInc.'schieffinancialofficerisnotsatisfiedwiththetraditionalmethodof
erates
allocatingmanufacturingoverhead.Hebelievesthatmostofthemanufacturingoverhead
and
costsrelatetotheV120productlinebecauseofitscomplexity.Hethereforedevelopsthe
activity
followingthreeactivitycostpoolsandrelatedcostdriverstobetterunderstandthesecosts:
levels.
ExpectedUseofCostDrivers
EstimatedOverhead
ActivityCostPools
Costs
Settingupmachines
Assembling
Inspection

1,500
50,000

setups

$300,000

labourhours

1,500,000

60 inspections

300,000

(a) Calculatethepredeterminedoverheadrate
foreachactivity.
(b)Classifyeachoftheseactivitiesasunitlevel,batchlevel,productlevel,orfacility
level.

DoIt!Review
Identify
D513Instructions
characteristic
Indicatewhetherthefollowingstatementsaretrueorfalse.
sof
(a)ThereasoningbehindABCcostallocationisthatproductsconsumeactivitiesand
traditional
activitiesconsumeresources.
andABC
(b)Activitybasedcostingisanapproachforallocatingdirectlabourtoproducts.
costing
(c)Intoday'sincreasinglyautomatedenvironment,directlabourisneveranappropriate
systems.
basisforallocatingcoststoproducts.
(d)Acostdriverisanyfactororactivitythathasadirectcauseeffectrelationshipwith
resourcesconsumed.
(e)Activitybasedcostingsegregatesoverheadintovariouscostpoolsinaneffortto
providemoreaccuratecostinformation.
CalculateD514WeberIndustrieshasthreeactivitycostpoolsandtwoproducts.Itexpectstoproduce3,000
activity
unitsofProductBC113and1,400ofProductAD908.Havingidentifieditsactivitycostpools
based
andthecostdriversforeachpool,Weberaccumulatedthefollowingdatarelativetothose
overhead
activitycostpoolsandcostdrivers.
ratesand
ExpectedUseofCost
assign
overhead
AnnualOverheadData
DriversperProduct

using
ExpectedUseof
ABC.
Activity
Cost
Estimated
CostDriversper
Product
Product
CostPool
Drivers
Overhead
Activity
BC113
AD908
Machineset
up

Setups

$20,000

40

25

15

Machining

Machine
hours

110,000

5,000

1,000

4,000

Packing

Orders

30,000

500

150

350

Instructions
(a)Prepareascheduleshowingthecalculationsoftheactivitybasedoverheadratespercost
driver.
(b)Prepareascheduleassigningeachactivity'soverheadcosttothetwoproducts.
(c)Calculatetheoverheadcostperunitforeachproduct.(Roundtonearestcent.)
(d)Commentonthecomparativeoverheadcostperproduct.
Classify D515
activities

asvalue
Instructions
addedor
non
Classifyeachofthefollowingactivitieswithinataxpreparationbusinessasvalueadded
value
(VA)ornonvalueadded(NVA).
added.
(a)Advertising
(b)Completingtaxreturns
(c)Cleaningtheoffice

(d)Billingclients
(e)Answeringclientquestions
(f)Accompanyingclientstoauditproceedings
Classify D516GoodHarvestCompanymanufacturesfourlinesofgardentools.Asaresultofanactivity
activities
analysis,theaccountingdepartmenthasidentifiedeightactivitycostpools.Eachofthe
accordin
productlinesisproducedinlargebatches,withthewholeplantdevotedtooneproductata
gto
time.
level.

Instructions

Classifyeachofthefollowingactivitiesorcostsasunitlevel,batchlevel,productlevel,or
facilitylevel.
(a)Machiningparts
(b)Productdesign
(c)Plantmaintenance
(d)Machinesetup
(e)Assemblingparts
(f)Purchasingrawmaterials
(g)Propertytaxes
(h)Painting

Exercises
Assign E517ElleInc.hastwotypesofhandbags:standardandcustom.Thecontrollerhasdecidedtouse
overhead
aplantwideoverheadratebasedondirectlabourcosts.Thepresidenthasheardofactivity
using
basedcostingandwantstoseehowtheresultswoulddifferifthissystemwereused.Two
traditiona
activitycostpoolsweredeveloped:machiningandmachinesetup.Presentedbelowis
lcosting
informationrelatedtothecompany'soperations.
and

Standard
Custom
ABC.
Directlabourcosts

$50,000

$100,000

Machinehours

500

1,000

Setuphours

100

400

Totalestimatedoverheadcostsare$277,500.Theoverheadcostallocatedtothemachining
activitycostpoolis$177,000,and$100,500isallocatedtothemachinesetupactivitycost
pool.

Instructions
(a)Calculatetheoverheadrateusingthetraditional(plantwide)approach.
(b)Calculatetheoverheadrateusingtheactivitybasedcostingapproach.
(c)

Determinethedifferenceinallocationbetweenthetwoapproaches.
Explai E518PerdonInc.hasconductedthefollowinganalysisrelatedtoitsproductlinesusingatraditional
nthe
costingsystem(volumebased)andanactivitybasedcostingsystem.Boththetraditionaland
differe
theactivitybasedcostingsystemsincludedirectmaterialsanddirectlabourcosts.
nce

TotalCosts
betwee
n
Products
SalesRevenue
Traditional
ABC
traditio
Product440X
$200,000
$50,000
$40,000
naland
activit
Product137Y
160,000
60,000
45,000
y
Product249S
80,000
20,000
45,000
based
costing
Instructions
.
(a)Foreachproductline,calculateoperatingincomeusingthetraditionalcostingsystem.
(b)Foreachproductline,calculateoperatingincomeusingtheactivitybasedcostingsystem.
(c)Usingthefollowingformula,calculatethepercentagedifferenceinoperatingincomefor
eachofPerdon'sproduct
lines:
.(Roundthepercentagetotwodecimals.)
(d)ProvidearationaleforwhythecostsforProduct440Xareapproximatelythesameusing
eitherthetraditionaloractivitybasedcostingsystem.

Assign E519InternationalFabricshasbudgetedoverheadcostsof$955,000.Ithasallocatedoverheadon
overhead
aplantwidebasistoitstwoproducts(woolandcotton)usingdirectlabourhours,whichare
using
estimatedtobe477,500forthecurrentyear.Thecompanyhasdecidedtoexperimentwith
traditiona
activitybasedcostingandhascreatedtwoactivitycostpoolsandrelatedactivitycost
lcosting
drivers.Thesetwocostpoolsarecutting(thecostdriverismachinehours)anddesign(the
andABC.
costdriveristhenumberofsetups).Overheadallocatedtothecuttingcostpoolis$400,000
and$555,000isallocatedtothedesigncostpool.Additionalinformationrelatedtothese
poolsisasfollows:

Wool

Machinehours
Numberofsetups

Cotton

Total

100,000

100,000

200,000

1,000

500

1,500

(a)Determinetheamountofoverheadallocatedtothewoolproductlineandthecotton
productlineusingactivitybasedcosting.
(b)Whatisthedifferencebetweentheallocationofoverheadtothewoolandcottonproduct
linesusingactivitybasedcostingversusthetraditionalapproach,assumingdirectlabour
hourswereincurredevenlybetweenthewoolandcotton?
Assign E520
overhead
using
traditional
costing
andABC.

AlonzoInc.manufacturestwoproducts:carwheelsandtruckwheels.
Todeterminetheamountofoverheadtoassigntoeachproductline,the
controller,YuYuOrtega,hasdevelopedthefollowinginformation:
Estimatedwheelsproduced
Directlabourhoursperwheel

Car

Truck

40,000

10,000

Totalestimatedoverheadcostsforthetwoproductlinesare$840,000.
(a)Calculatetheoverheadcostassignedtothecarwheelsandtruckwheels,assumingthat
directlabourhoursisusedtoallocateoverheadcosts.
(b)YuYuisnotsatisfiedwiththetraditionalmethodofallocatingoverheadbecausehe
believesthatmostoftheoverheadcostsrelatetothetruckwheelproductlinebecauseof
itscomplexity.Hethereforedevelopsthefollowingthreeactivitycostpoolsandrelated
costdriverstobetterunderstandthesecosts:
ActivityCostPools
Settingupmachines
Assembling
Inspection

ExpectedUseofCostDrivers
500 setups

EstimatedOverheadCosts
$260,000

35,000 labourhours

280,000

600 inspections

300,000

Calculatetheactivitybasedoverheadratesforthesethreecostpools.
(c)Calculatethecostthatisassignedtothecarandtruckproductlinesusinganactivity
basedcostingsystem,giventhefollowinginformation:

Numberofsetups

ExpectedUseofCostDriversperProduct
Car

Truck
100

400

ExpectedUseofCostDriversperProduct

Car

Truck

Directlabourhours

20,000

15,000

50

550

Numberofinspections

(d)WhatdoyoubelieveYuYushoulddo?
Assign E521
overhead

using
ShadyLadysellswindowcoveringstobothcommercialandresidentialcustomers.The
traditional
followinginformationrelatestoitsbudgetedoperationsforthecurrentyear:
costing
andABC.

Commercial

Residential
Revenues

$300,000

$480,000

Directmaterialcosts

$30,000

$70,000

Directlabourcosts

100,000

300,000

55,000

185,000

162,000

532,000

$115,000

$(52,000)

Overheadcosts
Operatingincome(loss)

Thecontroller,SusanChan,isconcernedabouttheresidentialproductline.Shecannot
understandwhythislineisnotmoreprofitablegiventhatwindowcoveringsarelesscomplex
toinstallforresidentialcustomers.Inaddition,theresidentialclientbaseresidesinclose
proximitytothecompanyoffice,sotravelcostsarenotasexpensiveonaperclientvisitfor
residentialcustomers.Asaresult,shehasdecidedtotakeacloserlookattheoverheadcosts
assignedtothetwoproductlinestodeterminewhetheramoreaccurateproductcosting
modelcanbedeveloped.Followingarethethreeactivitycostpoolsandrelatedinformation
shedeveloped:
ActivityCostPools

EstimatedOverhead

CostDrivers

Schedulingandtravel

$84,000

Hoursoftravel

Setuptime

77,000

Numberofsetups

Supervision

56,000

Directlabourcost

ExpectedUseofCostDriversperProduct

Commercial

Residential

Schedulingandtravel

1,000

680

Setuptime

450

250

Instructions
(a)Calculatetheactivitybasedoverheadratesforeachofthethreecostpools,and
determinetheoverheadcostassignedtoeachproductline.
(b)Calculatetheoperatingincomeforeachproductline,usingtheactivitybasedoverhead
rates.
(c)WhatdoyoubelieveSusanChanshoulddo?

Assign E522MYCompanymanufacturestwoproducts,StandardandDeluxe.MY'smanufacturing
overhead
overheadcostsconsistofsettingupmachines,$400,000;machining,$1,500,000;inspecting,
using
$450,000;materialhandling$750,000;andpurchasingorders$150,000.Informationonthe
traditional
twoproductsis:
costing

Standard
Deluxe
andABC.
Directlabourhours

150,000

250,000

Machinesetups

300

200

Machinehours

48,000

52,000

800

700

Materialhandling

5,000

10,000

Purchasingorders

300

200

Inspections

Instructions
(a)Assignthetotalmanufacturingoverheadcoststothetwoproductsusingtraditional
costing.
(b)Assignthetotalmanufacturingoverheadcoststothetwoproductsusingactivitybased
costing(ABC).
Identify E523QuikPrintsCompanyisasmallprintingandcopyingfirmwiththreehighspeedoffset
activity
printingpresses,fivecopiers(twocolourandthreeblackandwhite),onecollator,onecutting
cost
andfoldingmachine,andonefaxmachine.Toimproveitspricingpractices,ownermanager
pools.
DamonWhiteboneisinstallingactivitybasedaccounting.Damonemploysfiveemployees:
twoprinters/designers,onereceptionist/bookkeeper,onesalesperson/copymachineoperator,
andonejanitor/deliveryclerk.Damoncanoperateanyofthemachinesand,inadditionto
managingtheentireoperation,performsthetraining,designing,selling,andmarketing
functions.

Instructions

AsQuikPrints'independentaccountantwhopreparestaxformsandquarterlyfinancial
statements,youhavebeenaskedtoidentifytheactivitiesthatwouldbeusedtoaccumulate
overheadcostsforassignmenttojobsandcustomers.Usingyourknowledgeofasmall
printingandcopyingfirm(andsomeimagination),identifyatleast12activitycostpoolsas
thestartofanactivitybasedcostingsystemforQuikPrintsCompany.

Identif E524GalavicCorporationmanufacturessnowmobilesinitsBlueMountainplant.Ithasbudgetedthe
y
followingcostsforthefirstquarter'soperations.
activity
Machinesetup,indirect
$4,000 Propertytaxes
$29,000
cost
materials
pools
and
Inspections
16,000 Oil,heating
19,000
cost
Tests
4,000 Electricity,plantlighting
21,000
drivers.
Insurance,plant

110,000

Engineeringprototypes

Engineeringdesign

140,000

Depreciation,plant

Depreciation,machinery

520,000

Electricity,machinery

36,000

Custodial(machinemaintenance)
wages

19,000

Machinesetup,indirectlabour

20,000

60,000
210,000

ClassifytheabovecostsofGalavicCorporationintoactivitycostpoolsusingthefollowing:
engineering,machinery,machinesetup,qualitycontrol,factoryutilities,andmaintenance.
Thenidentifyacostdriverthatmaybeusedtoassigneachcostpooltoeachlineof
snowmobiles.
Identif E525PeterCatalano'sVerdeVineyards,intheNiagaraPeninsula,producesthreevarietiesofwine:
y
merlot,viognier,andpinotnoir.Hiswinemaster,KylePohle,hasidentifiedthefollowing
activity
activitiesascostpoolsforaccumulatingoverheadandassigningittoproducts.
cost
1. Cullingandreplanting.Deadorovercrowdedvinesareculled,andnewvinesare
drivers.
plantedorrelocated.(Eachvarietyhasaseparatevineyard.)
2. Tying.Thepostsandwiresarereset,andvinesaretiedtothewiresforthedormant
season.
3. Trimming.Attheendoftheharvest,thevinesarecutandtrimmedbackinpreparation
forthenextseason.
4. Spraying.Thevinesaresprayedwithchemicalsforprotectionagainstinsectsand
fungi.
5. Harvesting.Thegrapesarehandpicked,placedincarts,andtransportedtothe
crushers.
6. Stemmingandcrushing.Cartfulsofbunchesofgrapesofeachvarietyareseparately
loadedintomachines,whichremovestemsandgentlycrushthegrapes.
7. Pressingandfiltering.Thecrushedgrapesaretransferredtopresses,which
mechanicallyremovethejuicesandfilteroutbulkandimpurities.
8. Fermentation.Thegrapejuice,byvariety,isfermentedineitherstainlesssteeltanksor
oakbarrels.
9. Aging.Thewinesareagedineitherstainlesssteeltanksoroakbarrelsforonetothree
years,dependingonthevariety.
10. Bottlingandcorking.Bottlesaremachinefilledandcorked.

11.

12.

13.

14.

15.

Labellingandboxing.Eachbottleislabelled,asiseachninebottlecase,withthename
ofthevintner,vintage,andvariety.
Storing.Packagedandboxedbottlesarestoredawaitingshipment.
Shipping.Thewineisshippedtodistributorsandprivateretailers.
Heatingandairconditioningofplantandoffices.
Maintenanceofbuildingsandequipment.Printing,repairs,replacements,andgeneral
maintenanceareperformedintheoffseason.

ForeachofVerde's15activitycostpools,identifyaprobablecostdriverthatmightbeusedto
assignoverheadcoststoitsthreewinevarieties.
Calculate E526FontillasInstrument,Inc.manufacturestwoproducts:missilerangeinstrumentsandspace
overhead
pressuregauges.DuringApril,itproduced50rangeinstrumentsand300pressuregauges
rates,
andincurredestimatedoverheadcostsof$85,500.Ananalysisofestimatedoverheadcosts
assign
revealsthefollowingactivities:
overhead
Activities
CostDrivers
TotalCost
using
ABC,and
1.Materialshandling
Numberofrequisitions
$33,000
discussthe
2.Machinesetups
Numberofsetups
27,900
advantage
sofABC.
3.Qualityinspections
Numberofinspections
24,600
Thecostdrivervolumeforeachproductwasasfollows:
CostDrivers

Instruments

Gauges

Total

Numberofrequisitions

400

600

1,000

Numberofsetups

150

300

450

Numberofinspections

200

400

600

Instructions
(a)Determinetheoverheadrateforeachactivity.
(b)AssignthemanufacturingoverheadcostsforApriltothetwoproductsusingactivity
basedcosting.
(c)WriteamemorandumtothepresidentofFontillasInstrumentexplainingthebenefitsof
activitybasedcosting.
Calculate E527H&YCompanyusesfouractivitypoolstoapplyoverheadtoitsproducts.Eachactivityhas
overhead
acostdriverusedtoallocatetheoverheadcoststotheproduct.Theactivitiesandrelated
ratesand
overheadcostsareasfollows:
assign
Activity
TotalCosts VolumeofCostDriver
overhead
using
Materialhandling
$200,000 100,000parts
ABC.
Purchaseorders
210,000 35orders
Setuphours

300,000

150hours

Machining

480,000

3,000machinehours

Activity

TotalCosts

VolumeofCostDriver

Totalcosts

$1,190,000

Theaboveactivitiesareusedbythetwodifferentproductsasfollows:

PC21

WX34

Materialhandling

75,000parts

25,000parts

Purchaseordersperproduct

15

20

Setuphours

100hours

50hours

Numberofmachinehours

2,000machinehours

1,000machinehours

(a)

Calculatehowmuchofthematerialhandlingcostwillbe
allocatedtoPC21.
(b)
DeterminetheABCallocationrateforPurchaseorders.
(c)CalculatehowmuchoftheSetupcostswillbeallocatedtoWX34.
(d)CalculatehowmuchofthetotalactivitycostswillbeallocatedtoPC21.
Assign E528LimClothingCompanymanufacturesitsowndesignedandlabelledsportsattireandsellsits
overhead
productsthroughcataloguesalesandretailoutlets.WhileLimhasusedactivitybased
using
costinginitsmanufacturingactivitiesforyears,ithasalwaysusedtraditionalcostingin
traditional
assigningitssellingcoststoitsproductlines.Sellingcostshavetraditionallybeenassigned
costing
toLim'sproductlinesatarateof80%ofdirectmaterialcosts.Itsdirectmaterialcostsforthe
andABC;
monthofMarchforLim'shighintensitylineofattireare$400,000.Thecompanyhas
classify
decidedtoextendactivitybasedcostingtoitssellingcosts.Datarelatingtothehighintensity
activities
lineofproductsforthemonthofMarchareasfollows:
asvalue
NumberofCostDrivers
addedor
ActivityCostPools
CostDrivers
OverheadRate
UsedperActivity
non
value
Salescommissions Dollarsales
$0.06 perdollar
$950,000
added.
sales
Advertising
TV/Radio

Minutes

Advertising
Newspaper

Column
inches

Catalogues

Catalogues
mailed

Costofcatalogue
sales

Catalogue
orders

Creditand
collection

Dollarsales

$300 perminute

250

$10 percolumn
inch

2,000

$2.50 percatalogue

6,000

$1 percatalogue
order

9,000

$0.04 perdollar
sales

$950,000

Instructions
(a)Calculatethesellingcoststobeassignedtothehighintensitylineofattireforthemonth
ofMarchusing
1. thetraditionalproductcostingsystem(directmaterialcostisthecostdriver),and

2. activitybasedcosting.

(b)Bywhatamountdoesthetraditionalproductcostingsystemundercostorovercostthe
highintensityproductline?
(c)Classifyeachoftheactivitiesasvalueaddedornonvalueadded.

Assign E529HealthyProducts,Inc.usesatraditionalproductcostingsystemtoassignoverheadcosts
overhead
uniformlytoallproducts.TomeetCanadianFoodInspectionAgency(CFIA)requirements
using
andtoassureitscustomersofsafe,sanitary,andnutritiousfood,HealthyProductsengagesin
traditional
ahighlevelofqualitycontrol.Itassignsitsqualitycontroloverheadcoststoallproductsata
costing
rateof17%ofdirectlabourcosts.ItsdirectlabourcostforthemonthofJuneforitslow
andABC;
caloriedessertlineis$55,000.Inresponsetorepeatedrequestsfromitsvicepresident,
classify
finance,Healthy'smanagementagreestoadoptactivitybasedcosting.Datarelatingtothe
activities
lowcaloriedessertlineforthemonthofJuneareasfollows:
asvalue
NumberofCostDrivers
addedor
ActivityCostPools
CostDrivers
Rate
UsedperActivity
non
value
Inspectionsof
Numberof
$0.60 per
6,000 kilograms
added.
materialreceived
kilograms
kilogram
Inprocess
inspections

Numberof
servings

$0.33

CFIAcertification

Customer
orders

$12.00

per
serving
perorder

10,000

servings

420 orders

Instructions
(a)Calculatethequalitycontroloverheadcosttobeassignedtothelowcaloriedessert
productlineforthemonthofJuneusing
1. thetraditionalproductcostingsystem(directlabourcostisthecostdriver),and

2. activitybasedcosting.

(b)Bywhatamountdoesthetraditionalproductcostingsystemundercostorovercostthe
lowcaloriedessertline?
(c)Classifyeachoftheactivitiesasvalueaddedornonvalueadded.
Classify E530Inanefforttoexpandtheusefulnessofitsactivitybasedcostingsystem,PeterCatalano's
activities
VerdeVineyardsdecidestoadoptactivitybasedmanagementtechniques(AMB).Oneof
ad
theseABMtechniquesisclassifyingitsactivitiesaseithervalueaddedornonvalueadded.
value
Instructions
addedor
UsingVerde'slistof15activitycostpoolsinE525,classifyeachoftheactivitiesaseither
non
valueaddedornonvalueadded.
value
added.

Classify E531AnnaBellatorre,Inc.isinterestedinusingitsactivitybasedcostingsystemtoimproveits
activities
operatingefficiencyanditsprofitmarginsbyapplyingactivitybasedmanagementtechniques.
asvalue
Aspartofthisundertaking,youhavebeenaskedtoclassifyitsplantactivitiesasvalueadded
addedor
ornonvalueadded.
non
Instructions
value
Usingthelistofactivitiesbelow,classifyeachactivityaseithervalueaddedornonvalue
added.
added.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

11.

12.

Designingnewmodels
Purchasingrawmaterialsandparts
Storingandmanaginginventory
Receivingandinspectingrawmaterialsandparts
Interviewingandhiringnewpersonnel
Machineformingsheetsteelintoapplianceparts
Manuallyassemblingpartsintoappliances
Trainingallemployeesofthecompany
Insuringalltangiblefixedassets
Supervisingproduction
Maintainingandrepairingmachineryandequipment
Paintingandpackagingfinishedappliances

Classify E532
service

compan
DuplessisandNajaraliisalawfirmthatisinitiatinganactivitybasedcostingsystem.Rjean
y
Duplessis,theseniorpartnerandastrongsupporterofABC,haspreparedthefollowinglistof
activities
activitiesperformedbyatypicallawyerinadayatthefirm:
asvalue
addedor
Activities
Hours
non
Writingcontractsandletters
1.0
value
added.
Attendingstaffmeetings
0.5
Takingdepositions

1.0

Doingresearch

1.0

Travellingto/fromcourt

1.0

Contemplatinglegalstrategy

1.0

Eatinglunch

1.0

Litigatingacaseincourt

2.5

Entertainingaprospectiveclient

2.0

Instructions
ClassifyeachoftheactivitieslistedbyRjeanDuplessisasvalueaddedornonvalueadded
anddefendyourclassification.Howmuchtimewasvalueaddedandhowmuchwasnon
valueadded?

Classify E533Havingitemizeditscostsforthefirstquarterofnextyear'sbudget,GalavicCorporationwants
activities
toinstallanactivitybasedcostingsystem.First,itidentifiedtheactivitycostpoolsinwhichto
bylevel.
accumulatefactoryoverhead;second,itidentifiedtherelevantcostdrivers.(Thiswasdonein
E524.)

Instructions
UsingtheactivitycostpoolsidentifiedinE524,classifyeachofthosecostpoolsaseither
unitlevel,batchlevel,productlevel,orfacilitylevel.
Classify E534OttoDieffenbach&Sons,Inc.isasmallmanufacturingcompanythatusesactivitybased
activities
costing.Dieffenbach&Sonsaccumulatesoverheadinthefollowingactivitycostpools.
bylevel.
1.
2.
3.
4.
5.
6.
7.
8.

Hiringpersonnel
Managingpartsinventory
Purchasing
Testingprototypes
Designingproducts
Settingupequipment
Trainingemployees
Inspectingmachineparts

9. Machining
10. Assembling

Instructions
Foreachactivitycostpool,indicatewhethertheactivitycostpoolwouldbeunitlevel,batch
level,productlevel,orfacilitylevel.

Problems:SetA
Assign P535AFireOut,Inc.manufacturessteelcylindersandnozzlesfortwomodelsoffireextinguishers:
overhead
(1)ahomefireextinguisherand(2)acommercialfireextinguisher.Thehomemodelisa
using
highvolume(54,000units),halflitrecylinderthatholds2.5kilogramsofmultipurpose
traditiona
drychemicalat480PSI(poundspersquareinch).Thecommercialmodelisalowvolume
lcosting
(10,200units),twolitrecylinderthatholds10kilogramsofmultipurposedrychemicalat
and
390PSI.Bothproductsrequire1.5hoursofdirectlabourforcompletion.Therefore,total
ABC;
annualdirectlabourhoursare96,300or
.Expected
calculate
annualmanufacturingoverheadis$1,502,280.Thus,thepredeterminedoverheadrateis
unit
$15.60or
perdirectlabourhour.Thedirectmaterialscostper
costs;
unitis$18.50forthehomemodeland$26.50forthecommercialmodel.Thedirectlabour
classify
costis$19perunitforboththehomeandthecommercialmodels.
activities
asvalue
Thecompany'smanagersidentifiedsixactivitycostpoolsandrelatedcostdrivers,and
addedor
accumulatedoverheadbycostpoolasfollows:
non

value
added.

Estimated
Overhead

ExpectedUse
ofCost
Drivers

$70,350

335,000

215,000

120,000

Machine
hours

150,500

35,000

27,000

8,000

Assembling

Numberof
parts

390,600

217,000

165,000

52,000

Testing

Numberof
tests

51,000

25,500

15,500

10,000

Painting

Litres

52,580

5,258

3,680

1,578

Packingand
shipping

Kilograms

787,250

335,000

215,000

120,000

$1,502,280

ActivityCost
Pools

Cost
Drivers

Receiving

Kilograms

Forming

ExpectedUseofDrivers
byProduct
Home

Commercial

Instructions
(a)Undertraditionalproductcosting,calculatethetotalunitcostofeachproduct.Prepare
asimplecomparativescheduleoftheindividualcostsbyproduct(similarto
Illustration54).
(b)UnderABC,prepareascheduleshowingthecalculationsoftheactivitybased
overheadrates(percostdriver).
(c)Prepareascheduleassigningeachactivity'soverheadcostpooltoeachproductbased
ontheuseofcostdrivers.(Includeacalculationofoverheadcostperunit,roundingto
thenearestcent.)
(d)CalculatethetotalcostperunitforeachproductunderABC.
(e)Classifyeachoftheactivitiesasavalueaddedactivityoranonvalueaddedactivity.
(f)Commenton
1. thecomparativeoverheadcostperunitforthetwoproductsunderABC,and

2. thecomparativetotalcostsperunitundertraditionalcostingandABC.

Assign P536AAllenInc.isamanufacturerofqualityshoes.Thecompanyhasalwaysusedaplantwide
overhead
allocationrateforallocatingmanufacturingoverheadtoitsproducts.Theplantmanager
costs
believesitistimetochangetoabettermethodofcostallocation.Theaccounting
using
departmenthasestablishedthefollowingrelationshipsbetweenproductionactivitiesand
traditional
manufacturingoverheadcosts:
costing
Activities
CostDrivers
AllocationRate
andABC;
compare
Materialhandling
Numberofparts
$8perpart
results.
Assembly
Labourhours
80perhour
Inspection

Timespentbyitematinspectionstation

12perminute

Thepreviousplantwideallocationratemethodwasbasedondirectmanufacturinglabour

hours,andifthatmethodisused,theallocationrateis$800perlabourhour.

Instructions
(a)Assumethatabatchof1,000pairsofshoesrequires4,000parts,50direct
manufacturinglabourhours,and60minutesofinspectiontime.Whataretheindirect
manufacturingcostsperpairofshoestoproduceabatchof1,000pairsofshoes,
assumingthepreviousplantwideallocationratemethodisused?
(b)Whataretheindirectmanufacturingcostsperpairofshoestoproduceabatchof1,000
pairsofshoes,assumingtheactivitybasedmethodofallocationisused?
(c)Commentontheresults.
(adaptedfromCMACanada)
Assign P537AJacobsonElectronicsmanufacturestwoHDtelevisionmodels:theRoyale,whichsellsfor
overhead
$1,400,andanewmodel,theMajestic,whichsellsfor$1,100.Theproductioncosts
to
calculatedperunitundertraditionalcostingforeachmodelin2012wereasfollows:
products
TraditionalCosting
Royale
Majestic
using
ABCand
Directmaterials
$600
$320
evaluate
Directlabour($20perhour)
100
80
the
decision.
Manufacturingoverhead($35perdirectlabourhour)
175
140
Totalperunitcost

$875

$540

In2012,Jacobsonmanufactured20,000unitsoftheRoyaleand10,000unitsofthe
Majestic.Theoverheadrateof$35perdirectlabourhourwasdeterminedbydividingtotal
expectedmanufacturingoverheadof$4.9millionbythetotaldirectlabourhours(140,000)
forthetwomodels.
Undertraditionalcosting,thegrossprofitonthemodelswas$525fortheRoyale
or
,and$560fortheMajesticor
.Becauseof
thisdifference,managementisconsideringphasingouttheRoyalemodelandincreasing
theproductionoftheMajesticmodel.
Beforefinalizingitsdecision,managementasksJacobson'scontrollertoprepareananalysis
usingactivitybasedcosting(ABC).Thecontrolleraccumulatesthefollowinginformation
aboutoverheadfortheyearendedDecember31,2012:
ActivityCost
Pools

CostDrivers

Estimated
Overhead

ExpectedUse
ofCostDrivers

$750,000

25,000

ActivityBased
OverheadRate

Purchasing

Numberof
orders

Machineset
ups

Numberofset
ups

600,000

20,000

30 persetup

Machining

Machinehours

3,100,000

100,000

31 perhour

Quality
control

Numberof
inspections

450,000

5,000

90 perinspection

Thecostdriversusedforeachproductwereasfollows:

$30 perorder

CostDrivers

Royale

Majestic

Purchaseorders

11,250

13,750

25,000

Machinesetups

10,000

10,000

20,000

Machinehours

40,000

60,000

100,000

2,250

2,750

5,000

Inspections

Total

Instructions
(a)Assignthetotal2012manufacturingoverheadcoststothetwoproductsusingactivity
basedcosting(ABC).
(b)WhatwasthecostperunitandgrossprofitofeachmodelusingABCcosting?
(c)

Aremanagement'sfutureplansforthetwomodelssound?Explain.

Assign P538AKiddyCompanymanufacturesbicycles.Itrecentlyreceivedarequesttomanufacture10
overhead
unitsofamountainbikeatapricelowerthanitnormallyaccepts.Bruce,thesalesmanager,
costs
indicatedthatiftheorderwereacceptedatthatprice,thecompanycouldexpectadditional
using
ordersfromthesameclient.BrucebelievesthatifKiddycouldofferthispriceinthe
traditional
marketgenerally,salesofthisbikewouldincreaseby30%.Melany,presidentofKiddy,is
costing
skepticalaboutacceptingtheorder.Thecompanyhasapolicyofnotacceptinganyorder
andABC;
thatdoesnotprovideamarkupof20%onfullmanufacturingcosts.Thepriceofferedis
compare
$575perbike.
results.
Thecontroller,Sanjay,hasrecentlyresearchedthepossibilityofusingactivitybased
multipleoverheadratesinsteadofthesingleratecurrentlyinuse.Hehaspromisedmore
accurateestimatedoverheadproductcosting,andMelanyiscuriousabouthowthis
approachwouldaffectproductcostingandpricingofthemountainbike.

Theplantwideoverheadrateisbasedonanexpectedvolumeof10,000directlabourhours
andthefollowingbudgetedoverhead:
Machineoperatingcosts

$75,000

Reworklabour

45,000

Inspection

25,000

Scrapcosts

35,000

Generalfactoryoverhead
Total

120,000
$300,000

Expectedactivitiesforselectedcostdriversfor2012:
Machinehours

25,000

Unitsreworked

600

Inspectionhours

500

Unitsscrapped

140

Directlabourhours

12,000

Estimateddatafortheproductionofonemountainbike:
Directmaterials

$160

Directlabour(7.5hours/unit)

$180

Numberofmachinehours

Numberofunitsreworked

0.25

Numberofinspectionhours

0.10

Numberofunitsscrapped

0.05

Instructions
(a)Usingthesingleratemethodtoassignoverheadonaplantwidebasis,determine
whetherornotKiddyshouldaccepttheorderforthe10mountainbikes.Explainyour
decision.
(b)Usingactivitybasedcostingtoassignoverhead,determinewhetherornotKiddy
shouldaccepttheorderforthe10mountainbikes.Explainyourdecision.
(adaptedfromCGACanada)

Assign P539AStellarStairsCo.designsandbuildsfactorymadepremiumwoodenstairsforhomes.The
overhead
manufacturedstaircomponents(spindles,risers,hangers,handrails)permitinstallationof
costs
stairsofvaryinglengthsandwidths.Allaremadeofwhiteoakwood.Thecompany's
using
budgetedmanufacturingoverheadcostsfor2012areasfollows:
traditional
OverheadCostPools
Amount
costing
andABC;
Purchasing
$57,000
compare
Handlingmaterials
82,000
results.
Production(cutting,milling,finishing)

210,000

Settingupmachines

85,000

Inspecting

90,000

Inventorycontrol(rawmaterialsandfinishedgoods)

126,000

Utilities

180,000

Totalbudgetoverheadcosts

$830,000

Forthelastfouryears,StellarStairsCo.hasbeenchargingoverheadtoproductsonthe
basisofmachinehours.For2012,ithasbudgeted100,000machinehours.
HeatherFujar,ownermanagerofStellarStairsCo.,recentlydirectedheraccountant,Kiko
Nishikawa,toimplementtheactivitybasedcostingsystemthatshehasrepeatedly
proposed.AtHeatherFujar'srequest,Kikoandtheproductionforepersonidentifythe
followingcostdriversandtheirusageforthepreviouslybudgetedoverheadcostpools.
ExpectedUseofCost
Drivers

ActivityCostPools

CostDrivers

Purchasing

Numberoforders

600

Handlingmaterials

Numberofmoves

8,000

Production(cutting,milling,finishing)

Directlabourhours

Settingupmachines

Numberofsetups

1,250

Inspecting

Numberof
inspections

6,000

Inventorycontrol(rawmaterialsand
finishedgoods)

Numberof
components

168,000

Utilities

Squaremetres
occupied

100,000

9,000

JasonDion,salesmanager,hasreceivedanorderfor280stairsfromCommunityBuilders,
Inc.,alargehousingdevelopmentcontractor.AtJason'srequest,Kikopreparescost
estimatesforproducingcomponentsfor280stairwayssoJasoncansubmitacontractprice
perstairtoCommunityBuilders.Sheaccumulatesthefollowingdatafortheproductionof
280stairways:

Directmaterials
Directlabour
Machinehours
Directlabourhours

$103,600
112,000
14,500
5,000

Numberofpurchaseorders

60

Numberofmaterialmoves

800

Numberofmachinesetups

100

Numberofinspections

450

Numberofcomponents
Numberofsquaremetresoccupied

16,000
800

Instructions
(a)Calculatethepredeterminedoverheadrateusingtraditionalcostingwithmachinehours
asthebasis.
(b)Whatisthemanufacturingcostperstairwayundertraditionalcosting?(Roundtothe
nearestcent.)
(c)Whatisthemanufacturingcostperstairwayundertheproposedactivitybasedcosting?
(Roundtothenearestcent.Prepareallofthenecessaryschedules.)
(d)

Whichofthetwocostingsystemsispreferableinpricingdecisionsandwhy?

Assign P540AInternationalSteelCompanyhasbudgetedmanufacturingoverheadcostsof$1,930,000.It
overhead
hasallocatedoverheadonaplantwidebasistoitstwoproducts(softsteelandhardsteel)
costs
usingmachinehours,whichareestimatedtobe90,000forthecurrentyear.Thecompany
using
hasdecidedtoexperimentwithactivitybasedcostingandhascreatedfiveactivitycost
traditional
poolsandrelatedactivitycostdriversasfollows:
costing
ActivityCentre
Costdriver
EstimatedOverhead ExpectedActivity
andABC;
compare
Materialhandling Numberofmoves
$280,000
40,000moves
results.
Purchaseorders
Numberoforders
$100,000
1,200orders
Producttesting

Numberoftests

$420,000

3,500tests

Machinesetup

Numberofsetups

$320,000

5000setups

Machining

Machinehours

$810,000

90,000machinehours

Eachunitoftheproductsrequiresthefollowing:

SoftSteel

HardSteel

Directmaterialscosts

$300

$200

Directlabourcosts

$120

$60

Purchaseorders

Machinesetup

10

Producttesting

Machining

50

50

Materialhandling

Instructions
(a)Undertraditionalproductcostingusingmachinehours,calculatethetotal
manufacturingcostperunitofbothproducts.
(b)UnderABC,prepareascheduleshowingthecalculationoftheactivitybasedoverhead
rates(percostdriver).
(c)CalculatethetotalmanufacturingcostperunitforbothproductsunderABC.
(d)Writeamemotothepresidentofthecompanydiscussingtheimplicationsofyour
analysisforthecompany'splans.Inthismemo,provideabriefdescriptionofABC,as
wellasanexplanationofhowthetraditionalapproachcanresultindistortions.

Assign P541A
overhead

costsof
HyandvanLamsweerdeisapublicaccountingfirmthatofferstwoprimaryservices,
services
auditingandtaxreturnpreparation.Acontroversyhasdevelopedbetweenthepartnersof
using
thetwoservicelinesregardingwhoiscontributingthegreateramounttothebottomline.
traditional
Theareaofcontentionistheassignmentofoverhead.Thetaxpartnersargueforassigning
costing
overheadonthebasisof40%ofdirectlabourdollars,whiletheauditpartnersarguefor
anad
implementingactivitybasedcosting.Thepartnersagreetousenextyear'sbudgeteddata
ABC;
foranalysisandcomparison.Thefollowingoverheaddataarecollected:
calculate
overhead
ExpectedUseofCost
ratesand
DriversperService

unitcosts;
ExpectedUse
compare
Activity
Estimated
ofCost
results.
CostPools
CostDrivers
Overhead
Drivers
Audit
Tax
Employee
training

Directlabour
dollars

$216,000

$1,800,000

$1,000,000

$800,000

Typingand
secretarial

Numberof
reportsand
forms

76,200

2,500

600

1,900

Computing

Numberof
minutes

204,000

60,000

25,000

35,000

Facility
rental

Numberof
employees

142,500

40

22

18

Travel

Perexpense
reports

81,300

Direct

56,000

25,300

$720,000

Instructions
(a)Usingtraditionalproductcostingasproposedbythetaxpartners,calculatethetotal
overheadcostassignedtobothservices(auditandtax)ofHyandvanLamsweerde.
(b)
1. Usingactivitybasedcosting,prepareascheduleshowingthecalculationsofthe
activitybasedoverheadrates(percostdriver).
2. Prepareascheduleassigningeachactivity'soverheadcostpooltoeachservice
basedontheuseofthecostdrivers.
(c)Classifyeachoftheactivitiesasavalueaddedactivityoranonvalueaddedactivity.
(d)Commentonthecomparativeoverheadcostforthetwoservicesunderbothtraditional

costingandABC.

Assign P542AGoGoLtd.manufacturesthreemodelsofchildren'sswingsets:Standard,Deluxe,and
overhead
Super.TheStandardsetismadeofsteel,theDeluxesetismadeofaluminum,andthe
costs
Supersetismadeofatitaniumaluminumalloy.Becauseofthedifferentmaterialsused,
using
productionrequirementsdiffersignificantlyacrossmodelsintermsofmachinetypesand
traditional
timerequirements.However,oncethepartsareproduced,assemblytimepersetissimilar
costing
forthethreemodels.Forthisreason,GoGohasadoptedthepracticeofallocatingoverhead
andABC;
costsonthebasisofmachinehours.Lastyear,thecompanyproduced5,000Standardsets,
compare
500Deluxesets,and2,000Supersets.Thecompanyhadthefollowingrevenuesand
results.
expensesfortheyear:
GOGOLTD.
IncomeStatement
YearEndedDecember31,2012

Standard

Deluxe

Super

Total

Sales

$475,000

$380,000

$560,000

$1,415,000

200,000

150,000

240,000

590,000

54,000

14,000

24,000

92,000

Machinesetups

25,000

Orderprocessing

60,000

Warehouse

90,000

Shipping

35,000

523,000

Plantadministration

88,000

Other

182,000

Grossprofit

$253,000

Directcosts:
Directmaterials
Directlabour
Variableoverheadcosts:

Contributionmargin
Fixedoverheadcosts:

ThechieffinancialofficerofGoGohashiredaconsultanttorecommendcostallocation
bases.Theconsultanthasrecommendedthefollowing:

Activities

CostDrivers

Machinesetups

No.ofproductionruns

Salesorder
processing

ActivityLevel
Standard

Deluxe

Super

Total

22

11

17

50

No.ofsalesordersreceived

300

200

300

800

Warehousecosts

No.ofunitsheldin
inventory

200

100

100

400

Shipping

No.ofunitsshipped

5,000

500

2,000

7,500

Theconsultantfoundnobasisforallocatingtheplantadministrationandotherfixed
overheadcosts,andrecommendedthattheynotbeappliedtoproducts.

Instructions
(a)Completetheincomestatementusingthebasesrecommendedbytheconsultant.Do
notallocateanyfixedoverheadcosts.
(b)ExplainhowactivitybasedcostingmightresultinbetterdecisionsbyGoGo's
management.

Problems:SetB
Assign P543BVidPlayers,Inc.manufacturestwotypesofDVDplayers,adeluxemodelandastandard
overhead
model.ThedeluxemodelisamultiformatprogressivescanDVDplayerwithnetworking
using
capability,Dolbydigital,andDTSdecoder.Thestandardmodel'sprimaryfeatureis
traditiona
progressivescan.Annualproductionis20,000unitsforthedeluxeand50,000unitsforthe
lcosting
standard.
and
Bothproductsrequiretwohoursofdirectlabourforcompletion.Therefore,totalannual
ABC;
directlabourhoursare140,000or
.Expectedannual
calculate
manufacturingoverheadis$980,000.Thus,thepredeterminedoverheadrateis$7
unit
costs;
or
perdirectlabourhour.Thedirectmaterialscostperunitis
classify
$11forthedeluxemodeland$42forthestandardmodel.Thedirectlabourcostis$18per
activities
unitforboththedeluxeandthestandardmodels.
asvalue
Thecompany'smanagersidentifiedsixactivitycostpoolsandrelatedcostdriversand
addedor
accumulatedoverheadbycostpoolasfollows.
non
value
ExpectedUseof
added.
DriversbyProduct

CostDriver

Estimated
Overhead

ExpectedUse
ofCost
Drivers

Purchasing

Orders

$130,000

Receiving

Kilograms

Assembling

ActivityCost
Pool

Deluxe

Standard

500

150

350

30,000

20,000

4,000

16,000

Numberof
parts

370,000

74,000

20,000

54,000

Testing

Numberof
tests

115,000

23,000

10,000

13,000

Finishing

Units

140,000

70,000

20,000

50,000

Packingand
shipping

Kilograms

195,000

78,000

17,000

61,000

$980,000

(a) Undertraditionalproductcosting,calculatethetotalunitcostofbothproducts.

Prepareasimplecomparativescheduleoftheindividualcostsbyproduct.
(b) UnderABC,prepareascheduleshowingthecalculationsoftheactivitybased
overheadrates(percostdriver).
(c)Prepareascheduleassigningeachactivity'soverheadcostpooltoeachproductbased
ontheuseofcostdrivers.(Includeacalculationofoverheadcostperunit,roundingto
thenearestcent.)
(d)CalculatethetotalcostperunitforeachproductunderABC.
(e)Classifyeachoftheactivitiesasavalueaddedactivityoranonvalueaddedactivity.
(f)Commenton
1. thecomparativeoverheadcostperunitforthetwoproductsunderABC,and

2. thecomparativetotalcostsperunitundertraditionalcostingandABC.

Assign P544BToughThermos,Inc.manufacturestwoplasticthermoscontainersatitsplasticmoulding
overhead
facilityinLethbridge,Alberta.Itslargecontainer,calledtheIceHouse,hasavolumeoffive
to
litres,sidecarryinghandles,asnapdownlid,andasidedrainandplug.Itssmaller
products
container,calledtheCoolChest,hasavolumeoftwolitres,anoverthetopcarryinghandle,
using
whichispartofatiltinglid,andaremovableshelf.Bothcontainersandtheirpartsaremade
ABCand
entirelyofhardmouldedplastic.TheIceHousesellsfor$35andtheCoolChestsellsfor
evaluate
$24.Theproductioncostscalculatedperunitundertraditionalcostingforeachmodelin
decision.
2012wereasfollows:
TraditionalCosting

IceHouse

CoolChest

Directmaterials

$9.50

$6.00

Directlabour($10perhour)

8.00

5.00

Manufacturingoverhead($17.08perdirectlabour
hour)

13.66

8.54

Totalperunitcost

$31.16

$19.54

In2012,ToughThermosmanufactured50,000unitsoftheIceHouseand20,000unitsof
theCoolChest.Theoverheadrateof$17.08perdirectlabourhourwasdeterminedby
dividingtotalexpectedmanufacturingoverheadof$854,000bythetotaldirectlabourhours
(50,000)forthetwomodels.
Undertraditionalcosting,thegrossprofitonthetwocontainerswas$3.84fortheIceHouse
or
,and$4.46fortheCoolChestor
.Thegrossmargin
ratesoncostare12%fortheIceHouseor
,and23%fortheCoolChest
or
.BecauseToughThermoscanearnagrossmarginrateontheCool
ChestthatisnearlytwiceasgreatasthatearnedontheIceHouse,withlessinvestmentin
inventoryandlabourcosts,itsmanagementisurgingitssalesstafftoputitseffortsinto
sellingtheCoolChestovertheIceHouse.
Beforefinalizingitsdecision,managementasksthecontrollerSvenMezatopreparea
productcostinganalysisusingactivitybasedcosting(ABC).Mezaaccumulatesthe
followinginformationaboutoverheadfortheyearendedDecember31,2012:
Activities

CostDrivers

Estimated
Overhead

ExpectedUseof
CostDrivers

ActivityBased
OverheadRate

ExpectedUseof
CostDrivers

ActivityBased
OverheadRate

195,000

780

$250persetup

Machinehours

320,000

80,000

$4permachine
hour

Testsand
inspections

160,000

8,000

$20pertest

Activities

CostDrivers

Machineset
ups

Numberofset
ups

Extruding
Quality
control

Estimated
Overhead

Thecostdriversusedforeachproductwerethefollowing:
CostDrivers

IceHouse

CoolChest

Total

Purchaseorders

2,500

1,975

4,475

Machinesetups

480

300

780

60,000

20,000

80,000

5,000

3,000

8,000

Machinehours
Testsandinspections

Instructions
(Assignthetotal2012manufacturingoverheadcoststothetwoproductsusingactivitybased
acosting(ABC).
)

(WhatwasthecostperunitandgrossprofitofeachmodelusingABCcosting?
b
)

cAremanagement'sfutureplansforthetwomodelssound?
)

Assign P545BMarsCompanyhasfourcategoriesofoverhead:purchasingandreceivingmaterials,
overhead
machineoperatingcosts,materialshandling,andshipping.Thecostsexpectedforthese
costs
categoriesforthecomingyearareasfollows:
using
Purchasingandreceiving
$300,000
traditional
materials
costing
andABC;
Machineoperatingcosts
900,000
compare
Materialshandling
160,000
results.
Shipping
Total

140,000
$1,500,000

Theplantcurrentlyappliesoverheadusingmachinehoursandexpectedannualcapacity.
Expectedcapacityis300,000machinehours.Pragya,thefinancialcontroller,hasbeen
askedtosubmitabidonjob#287,onwhichshehasassembledthefollowingdata:
Directmaterialsperunit

$1.35

Directlabourperunit

$1.85

Appliedoverhead
Numberofunitsproduced
Numberofpurchasesandreceipts

$?
6,000
3

Numberofmachinehours

3,000

Numberofmaterialmoves

300

Numberofkilometrestoshiptothecustomer

2,300

PragyahasbeentoldthatArrowCompany,amajorcompetitor,isusingactivitybased
costingandwillbidonjob#287withapriceof$6.75perunit.Beforesubmittingherbid,
Pragyawantstoassesstheeffectsofthisalternativecostingapproach.Sheestimatesthat
850,000unitswillbeproducednextyear,3,000purchasesandreceiptswillbemade,
400,000moveswillbeperformedplantwide,andthedeliveryoffinishedgoodswillrequire

280,000kilometres.Thebidpricepolicyisfullmanufacturingcostplus25%.

Instructions
(Calculatethebidpriceperunitofjob#287usingmachinehourstoassignoverhead.
a
)

(Usinganactivitybasedapproach,determinewhetherMarsorArrowwillproducethemost
bcompetitivebidandobtainthecontract.Showallyourcalculations.
)
(adaptedfromCGACanada)

Assign P546BPrimeFurnituredesignsandbuildsfactorymade,premium,woodarmoiresforhomes.All
overhead
aremadeofwhiteoak.Itsbudgetedmanufacturingoverheadcostsfortheyear2012areas
costs
follows.
using
OverheadCostPools
Amount
traditional
costing
Purchasing
$40,000
andABC;
Handlingmaterials
45,000
compare
results.
Production(cutting,milling,finishing)
130,000
Settingupmachines

50,000

Inspecting

60,000

Inventorycontrol(rawmaterialsandfinishedgoods)

80,000

Utilities

105,000

Totalbudgetoverheadcosts

$510,000

Forthelastfouryears,PrimeFurniturehasbeenchargingoverheadtoproductsonthebasis
ofmaterialscost.Fortheyear2012,materialscostof$500,000werebudgeted.
WeiHuang,ownermanagerofPrimeFurniture,recentlydirectedheraccountant,Tom
Turkel,toimplementtheactivitybasedcostingsystemthathehasrepeatedlyproposed.
AtWeiHuang'srequest,Tomandtheproductionmanageridentifythefollowingcost
driversandtheirusageforthepreviouslybudgetedoverheadcostpools.
OverheadCostPools

ActivityCost
Drivers

ExpectedUseofCost
Drivers

Purchasing

Numberoforders

500

Handlingmaterials

Numberofmoves

5,000

Production(cutting,milling,finishing)

Directlabourhours

65,000

OverheadCostPools

ActivityCost
Drivers

ExpectedUseofCost
Drivers

Settingupmachines

Numberofsetups

1,000

Inspecting

Numberof
inspections

4,000

Inventorycontrol(rawmaterialsand
finishedgoods)

Numberof
components

40,000

Utilities

Squaremetres
occupied

5,000

MariaCarvalho,salesmanager,hasreceivedanorderfor10luxuryarmoiresfromCohn's
InteriorDesign.AtMaria'srequest,Tompreparescostestimatesforproducingcomponents
for10armoiressoMariacansubmitacontractpriceperarmoiretoCohn's.Heaccumulates
thefollowingdatafortheproductionof10armoires.
Directmaterials

$5,200

Directlabour

$3,500

Directlabourhours

200

Numberofpurchaseorders

Numberofmaterialmoves

32

Numberofmachinesetups

Numberofinspections

20

Numberofcomponents

640

Numberofsquaremetresoccupied

32

Instructions
(a)Calculatethepredeterminedoverheadrateusingtraditionalcostingwithmaterialscost
asthebasis.
(b)Whatisthemanufacturingcostperarmoireundertraditionalcosting?
(c)Whatisthemanufacturingcostperarmoireundertheproposedactivitybasedcosting?
(Prepareallofthenecessaryschedules.)
(d)Determinewhichofthetwocostingsystemsispreferableinpricingdecisionsandwhy.

Assign P547BQualityPaintsInc.usesatraditionalcostaccountingsystemtoapplyqualitycontrolcosts
overhead
uniformlytoallitsproductsatarateof30%ofthedirectlabourcost.Themonthlydirect
costs
labourcostforthevarnishpaintlineis$100,000.Thecompanyisconsideringactivity
using
basedcostingtoapplyqualitycontrolcosts.Themonthlydataforthevarnishpaintline
traditional
havebeengatheredasfollows:
costing
UseofDriversforVarnish
andABC;
ActivityCostPools
CostDrivers
UnitRates
Paint
compare
results.
Incomingmaterial
Typeof
$25.00per
50types
inspection
material
type
Inprocessinspection

Numberof
units

0.30per
unit

30,000units

Productcertification

Perorder

150.00per
order

80orders

Instructions
(a)Calculatethemonthlyqualitycontrolcosttobeassignedtothevarnishpaintlineusing
atraditionalcostingsystemthatallocatesoverheadbasedonthedirectlabourcost.
(b)Calculatethemonthlyqualitycontrolcosttobeassignedtothevarnishpaintlineusing
anactivitybasedcostingsystem.
(c)Commentontheresults.
(adaptedfromCMACanada)

Assign P548B
overhead

costs
InternationalSteelCompanyhasbudgetedmanufacturingoverheadcostsof$2,500,000.It
using
hasallocatedoverheadonaplantwidebasistoitstwoproducts(StandardSteelandDeluxe
traditional
Steel)usingmachinehours,whichareestimatedtobe100,000forthecurrentyear.The
costing
companyhasdecidedtoexperimentwithactivitybasedcostingandhascreatedfive
andABC;
activitycostpoolsandrelatedactivitycostdriversasfollows:
compare
results.
ActivityCentre
Costdriver
EstimatedOverhead ExpectedActivity
Materialhandling

Numberofmoves

$250,000

50,000moves

Purchaseorders

Numberoforders

$200,000

4,000orders

Producttesting

Numberoftests

$450,000

9,000tests

Machinesetup

Numberofsetups

$600,000

6,000setups

Machining

Machinehours

$1,000,000

100,000machinehours

Eachunitoftheproductsrequiresthefollowing

StandardSteel

DeluxeSteel

Directmaterialscosts

$200

$250

Directlabourcosts

$100

$120

Purchaseorders

StandardSteel

DeluxeSteel

Machinesetup

10

Producttesting

Machining

50

50

Materialshandling

10

Instructions
(a)Undertraditionalproductcostingusingmachinehours,calculatethetotal
manufacturingcostperunitofbothproducts.
(b)UnderABC,prepareascheduleshowingthecalculationoftheactivitybasedoverhead
rates(percostdriver).
(c)CalculatethetotalmanufacturingcostperunitforbothproductsunderABC.
(d)Writeamemotothepresidentofthecompanydiscussingtheimplicationsofyour
analysisforthecompany'splans.Inthismemo,provideabriefdescriptionofABC,as
wellasanexplanationofhowthetraditionalapproachcanresultindistortions.

Assign P549B
overhead

costs
ScalarManufacturingproducesautomobilepartsinbatchesinonecontinuous
using
manufacturingprocess.Thecompanyusesdirectlabourhourstoassignoverheadtoeach
traditional
part.Magda,thefinancialcontroller,iswonderingwhatthereasonsareforthelowprofits
costing
in2012andwhythegearproductlinedidnotattainScalar's20%netprofitmargintarget
andABC;
(netprofitperunitonsaleprice).Shehascalculatedthe2012netprofitperunitasfollows:
compare
results.

BrakeDisk
Gear
Salespriceperunit
Manufacturingcostsperunit:
Directmaterials
Directlabour

Overhead

$35.00

$43.00

10.00

7.50

1.20

6.00

5.00

BrakeDisk

Gear

25.00

Totalmanufacturingcostperunit

$16.20

$38.50

Netprofitperunit

$18.80

$4.50

Netprofitmarginpercentage

53.7%

10.5%

MagdaintendstoimplementactivitybasedcostingatScalar.Eachpartrequires
engineeringdesignactivity.Oncethedesigniscompleted,theequipmentcanbesetupfor
batchproduction.Oncethebatchiscompleted,asampleistakenandinspectedtoseeifthe
partsarewithinthetolerancesallowed.Themanufacturingprocesshasfiveactivities:
engineering,setups,machining,inspection,andprocessing.Overheadhasbeenassignedto
eachactivityusingdirectattributionandresourcedrivers:
Engineering

$80,000

Setups

45,000

Machining

120,000

Inspection

60,000

Processing

35,000

Totaloverhead

$340,000

Magdahasidentifiedactivitydriversforeachactivityandlistedtheirpracticalcapacities:
Engineering
Hours

Numberof
Setups

Machine
Hours

Numberof
Inspections

DirectLabour
Hours

4,000

250

20,000

1,500

7,000

Followingaretheproductiondatain2012forbrakedisksandgears:

BrakeDisk

Gear

Numberofunitsproduced

5,000

3,000

Engineeringhoursperunit

0.05

0.15

Numberofsetups

25

Machinehoursperunit

2.5

Numberofinspections

250

125

Instructions
(a)Usingtheactivitybasedapproach,calculatetheactivityrates,thenetprofitperunit,
andthenetprofitmarginpercentageforboththebrakediskandthegear.
(b)Explainwhythenewprofitmarginpercentagesforthebrakediskandthegearare
differentfromwhattheywereoriginally.
(adaptedfromCGACanada)

Assign P550B
overhead

coststo
McDonaldandO'Tooleisalawfirmthatservesbothindividualsandcorporations.A
service
controversyhasdevelopedbetweenthepartnersofthetwoservicelinesastowhois
using
contributingthegreateramounttothebottomline.Theareaofcontentionistheassignment
traditional
ofoverhead.Theindividualpartnersargueforassigningoverheadonthebasisof28.125%
costing
ofdirectlabourdollars,whilethecorporatepartnersargueforimplementingactivitybased
andABC;
costing.Thepartnersagreetousenextyear'sbudgeteddataforpurposesofanalysisand
calculate
comparison.Thefollowingoverheaddataarecollectedtodevelopthecomparison.
overhead
rates;
ExpectedUseofCost
compare
DiversperService

results.
ExpectedUse
Activity
Estimated
ofCost
CostPool
CostDriver
Overhead
Drivers
Corporate
Individual
Employee
training

Directlabour
dollars

$120,000

$1,600,000

$900,000

$700,000


Activity
CostPool

CostDriver

ExpectedUseofCost
DiversperService

Estimated
Overhead

ExpectedUse
ofCost
Drivers

Corporate

Individual

Typingand
secretarial

Numberof
reportsand
forms

60,000

2,000

500

1,500

Computing

Numberof
minutes

100,000

40,000

17,000

23,000

Facility
rental

Numberof
employees

100,000

25

14

11

Travel

Perexpense
reports

70,000

Direct

48,000

22,000

$450,000

Instructions
(a)Usingtraditionalproductcostingasproposedbythetaxpartners,calculatethetotal
overheadcostassignedtobothservices(individualandcorporate)ofMcDonaldand
O'Toole.
(b)
1. Usingactivitybasedcosting,prepareascheduleshowingthecalculationsofthe
activitybasedoverheadrates(percostdriver).
2. Prepareascheduleassigningeachactivity'soverheadcostpooltoeachservice
basedontheuseofthecostdrivers.
(c)Classifyeachoftheactivitiesasavalueaddedactivityoranonvalueaddedactivity.
(d)Commentonthecomparativeoverheadcostservicelineunderbothtraditionalcosting
andABC.

Assign P551BProDriverInc.(PDI)recentlystartedoperationstoobtainashareofthegrowingmarketfor
overhead
golfequipment.PDImanufacturestwomodelsofspecialtydrivers:theThunderboltmodel
costs
andtheEarthquakemodel.Twoprofessionalengineersandaprofessionalgolfer,noneof
using
whomhadanyaccountingbackground,formedthecompanyasapartnership.Thebusiness
ABC.
hasbeenverysuccessful,andtocopewiththeincreasedlevelofactivity,thepartnershave
hiredaCGAastheircontroller.Oneofthefirstimprovementsthatthecontrollerwantsto
makeistoupdatethecostingsystembychangingfromasingleoverheadapplicationrate
usingdirectlabourhourstoactivitybasedcosting.Thecontrollerhasidentifiedthe
followingthreeactivitiesascostdrivers,alongwiththerelatedcostpools:

NumberofMaterial
Requisitions

NumberofProduct
Inspections

NumberofOrders
Shipped

Thunderbolt

46

23

167

Earthquake

62

31

129

Costsper
pool

$54,000

$8,200

$103,000

Model

Instructions
(a)Usingactivitybasedcosting,prepareaschedulethatshowstheallocationofthecosts
ofeachcostpooltoeachmodel.Showyourcalculations.
(b)IdentifythreeconditionsthatshouldbepresentinPDIinorderfortheimplementation
ofactivitybasedcostingtobesuccessful.
(adaptedfromCGACanada)