Questions

1. Traditional costing systems based their allocations on a single companywide

cost driver because labor hours were the best way to correlation depreciation
costs. The same logic applies to supervisory salaries, production supplies,
factory rent expense, and other overhead costs.

2. Labor hours are ineffective as a companywide allocation base because

overhead costs were relatively small compared to the costs of labor and
materials. Automation has changed the nature of manufacturing processes,
so the number of direct labor hours is no longer an effective allocation base.

3. Volume-based cost drivers deal with material dollars and direct labor hours
while activity-based cost drivers deal with distributing relevant costs to the
appropriate products.

4. Activity based cost drivers provide more accurate allocations of overhead in

an automated manufacturing environment because

5. It would be appropriate to use volume-based cost drivers in an activity based

costing system when the amount of product that is being produced reflects
the cost more than the activity.

6. If the cost accountant chooses to allocate engineering department costs

based on the number of units produced, then if engineering services are to
be outsourced, the decision to do so will be askew. This is because, even if
the units produced are low, it is still expensive to produce because of the
technically complex process.

E6-2B

a. # of hours, lbs

b. # of machine hours

c. # of units

d. # of hours
e. Square footage, # of labor hours

f. # of machine hours

g. # of hours

h. # of setups

i. # of work orders

j. # of materials requisition forms

E6-5B

Cost to be allocated/cost driver=Allocation rate

a. Unit Level Activities

300,000/50,000=6/direct labor hour

Handy: 26,000x6=156,000

Action: 24,000x6=144,000

b. Bach Level Activities

300,000/60=5,000/batch

Handy: 38x5,000=190,000

Action: 22x5,000=110,000

c. Product level Consumption

300,000/15=20,000/engineer

Handy: 10x20,000=200,000

Action: 5x20,000=100,000

d. Facility level Activities

300,000/120,000=2.50

Handy: 37,000x2.50=92,500

Action: 83,000x2.50=207,500

E6-6B

A.

Machine setup:60,000/120=500

Machine operator: 150,000/4,000=37.50

Quality Control: 24,000/250=96

Packaging: 16,000/40,000=0.40
B.

(VC620)

Machine setup: 500x48=24,000

Machine operator: 37.50x1,400=52,500

Quality Control: 96x78=7,488

Packaging: 0.40x25,000= 10,000

Total: 93,988 for overhead for the VC620

(PH630)

Machine setup: 500x72=36,000

Machine operator: 37.50x2,600=97,500

Quality control:96x172=16,512

Packaging: 0.40x15,000=6,000

Total: 156,012 for overheads for PH630

Total cost: 93,988+156,012=250,000