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Chapter 26(11) Cost Allocation and Activity-Based Costing OBJECTIVES Obj 1 Obj 2 Obj 3 Obj 4 Obj 5 Obj 6 Identify thre

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Chapter 26(11) Cost Allocation and Activity-Based Costing OBJECTIVES

Obj 1 Obj 2 Obj 3 Obj 4 Obj 5 Obj 6

Identify three methods used for allocating factory overhead costs to products. Use a single plantwide factory overhead rate for product costing. Use multiple production department factory overhead rates for product costing. Use activity-based costing for product costing. Use activity-based costing to allocate selling and administrative expenses to products. Use activity-based costing in a service business.

QUESTION GRID

True / False No. Objective 26(11)-01 1 26(11)-01 2 26(11)-01 3 26(11)-01 4 26(11)-02 5 26(11)-02 6 26(11)-02 7 26(11)-02 8 26(11)-02 9

Difficulty Easy Moderate Easy Easy Easy Moderate Moderate Easy Easy

No. 14 15 16 17 18 19 20 21 22

Objective 26(11)-02 26(11)-02 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03

Difficulty Moderate Easy Easy Easy Easy Easy Easy Easy Easy

No. 27 28 29 30 31 32 33 34 35

26(11)-02 26(11)-02 26(11)-02 26(11)-02

Easy Easy Easy Moderate

23 24 25 26

26(11)-03 26(11)-03 26(11)-03 26(11)-04

Easy Easy Easy Easy

36 37 38 39

10 11 12 13

412

Objective 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-05 26(11)-05 26(11)-05 26(11)-05/ 26(11)-06 26(11)-06 26(11)-06 26(11)-06 26(11)-06

Difficulty Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy

Chapter 26(11)/Cost Allocation and Activity-Based Costing  413

Multiple Choice No. Objective 26(11)-01 1 26(11)-01 2 26(11)-02 3 26(11)-02 4 26(11)-02 5 26(11)-02 6 26(11)-02 7 26(11)-02 8 26(11)-02 9 10 26(11)-02 11 26(11)-02 12 26(11)-02 13 26(11)-02 14 26(11)-02 15 26(11)-02 16 26(11)-02 17 26(11)-02 18 26(11)-02 19 26(11)-03

Difficulty Easy Moderate Moderate Difficult Moderate Moderate Moderate Moderate Moderate Moderate Easy Easy Easy Easy Easy Moderate Moderate Moderate Difficult

No. 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

Objective 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-03 26(11)-04 26(11)-04 26(11)-04

Difficulty Difficult Difficult Difficult Easy Moderate Easy Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Easy Easy Moderate Moderate Moderate

No. 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56

Objective 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-04 26(11)-05 26(11)-05 26(11)-06 26(11)-06 26(11)-06 26(11)-06

Exercise/Other No. Objective Difficulty No. Objective Difficulty No. Objective 26(11)-02 Moderate 3 26(11)-03 Easy 26(11)-05 1 5 26(11)-03 Difficult 26(11)-04 Easy 26(11)-06 2 4 6 Problem No. Objective Difficulty No. Objective 26(11)-02 Moderate 5 26(11)-03 1 26(11)-02 Moderate 6 26(11)-02/ 2 26(11)-04 26(11)-03 Moderate 7 26(11)-04 3 26(11)-03 Moderate 26(11)-04 4 8

Difficulty Moderate Moderate Moderate Moderate Moderate Easy Easy Easy Easy Moderate Moderate Moderate Moderate Easy Moderate Easy Easy Easy

Difficulty Easy Moderate

Difficulty No. Objective Difficulty Difficult 26(11)-04 Difficult 9 Moderate 10 26(11)-06 Moderate Moderate Moderate

Chapter 26(11)—Cost Allocation and Activity-Based Costing TRUE/FALSE 1. Product costing consists of only direct materials and direct labor. ANS: F DIF: Easy OBJ: 26(11)-01 NAT: AACSB Analytic | IMA-Cost Management

414  Chapter 26(11)/Cost Allocation and Activity-Based Costing

2.

The selection of the factory overhead allocation method is important because the method selected determines the accuracy of the product cost. ANS: T DIF: Moderate OBJ: 26(11)-01 NAT: AACSB Analytic | IMA-Cost Management 3.

Managers depend on accurate factory overhead allocation to make decisions regarding product mix and product price. ANS: T DIF: Easy OBJ: 26(11)-01 NAT: AACSB Analytic | IMA-Cost Management 4.

Managers depend on product costing to make decisions regarding continuing operations, advertising, and product mix. ANS: T DIF: Easy OBJ: 26(11)-01 NAT: AACSB Analytic | IMA-Cost Management 5.

A plant-wide factory overhead rate is computed by dividing total budgeted factory overhead costs by the plant-wide allocation base. ANS: T DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 6.

Zorn Co. budgeted $600,000 of factory overhead cost for the coming year. Its plant-wide allocation base, machine hours, is budgeted at 100,000 hours. Budgeted units to be produced are 200,000 units. Zorn's plant-wide factory overhead rate is $6.00 per unit. ANS: F DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 7.

Zorn Co. budgeted $300,000 of factory overhead cost for the coming year. Its plant-wide allocation base, machine hours, is budgeted at 50,000 hours. Budgeted units to be produced are 100,000 units. Zorn's plant-wide factory overhead rate is $6.00 per machine hour. ANS: T DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 8.

When a plant-wide factory overhead rate is used, the total overhead costs allocated to all products is the same. ANS: F DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 9.

When a plant-wide factory overhead rate is used, overhead costs are applied to all products by a single rate. ANS: T DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 10. Use of a plant-wide factory overhead rate assumes that the activities causing overhead costs are the same across all departments and products. ANS: T DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  415

11. Use of a plant-wide factory overhead rate assumes that the activities causing overhead costs are different across different departments and products. ANS: F DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 12. If the activities causing overhead costs are different across different departments and products, use of a plant-wide factory overhead rate will cause distorted product costs. ANS: T DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 13. If the budgeted factory overhead cost is $460,000, the budgeted direct labor hours is 80,000, and the actual direct labor hours is 6,700 for the month, the amount of factory overhead to be allocated is $38,525 (if the allocation is based on direct labor hours). ANS: T DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 14. If the budgeted factory overhead cost is $460,000, the budgeted direct labor hours is 80,000, and the actual direct labor hours is 6,700 for the month, the factory overhead rate for the month is $68.65 (if the allocation is based on direct labor hours). ANS: F DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 15. The single plantwide overhead rate method is very expensive to apply. ANS: F DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 16. Multiple production department factory overhead rates are most useful when production departments differ in their manufacturing processes. ANS: T DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 17. Multiple production department factory overhead rates are most useful when production departments are very similar in their manufacturing processes. ANS: F DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 18. Multiple production department factory overhead rates are more accurate and more costly than are plant-wide factory overhead rates. ANS: T DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 19. Multiple production department factory overhead rates are less accurate and less costly than are plant-wide factory overhead rates. ANS: F DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 20. A plant-wide factory overhead rate assumes that all overhead is directly related to one activity representing the entire plant. ANS: T DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

416  Chapter 26(11)/Cost Allocation and Activity-Based Costing

21. Use of a plant-wide factory overhead rate distorts product costs only when there are differences in the factory overhead rates across different production departments. ANS: F DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 22. Use of a plant-wide factory overhead rate distorts product costs only when products require different ratios of allocation-base usage in each production department. ANS: F DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 23. Use of a plant-wide factory overhead rate distorts product costs when there are differences in the factory overhead rates across different production departments and when products require different ratios of allocation-base usage in each production department. ANS: T DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 24. When production departments differ significantly in their manufacturing process, it is recommended that the single plantwide factory overhead rate be used for allocating factory overhead. ANS: F DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 25. In an effort to simplify the multiple production department factory overhead rate method, the same rate can be used for all departments. ANS: F DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 26. Activity cost pools are cost accumulations associated with a given activity. ANS: T DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 27. Activity cost pools are assigned to products, using factory overhead rates for each activity. ANS: T DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 28. Activity rates are computed by dividing the cost budgeted for each activity pool by the estimated activity base for that pool. ANS: T DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 29. Direct labor hours is not a cost pool that is regularly used in the activity-based costing method. ANS: F DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 30. Estimated activity-base usage quantities are the total activity-base quantities related to each product ANS: T DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 31. Activity based costing is much easier to apply than single plantwide factory overhead allocation. ANS: F DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  417

32. Service organizations can use activity based costing to allocate selling and administrative costs to services provided. ANS: T DIF: Easy OBJ: 26(11)-05 NAT: AACSB Analytic | IMA-Cost Management 33. ABC costing is used to allocate selling and administrative expenses to each product based on the product’s individual differences in consuming these activities. ANS: T DIF: Easy OBJ: 26(11)-05 NAT: AACSB Analytic | IMA-Cost Management 34. Activity Based Costing can be used to allocate period costs to various products that the company sells. ANS: T DIF: Easy OBJ: 26(11)-05 NAT: AACSB Analytic | IMA-Cost Management 35. Activity based costing can only be used to allocate manufacturing factory overhead. ANS: F DIF: Easy OBJ: 26(11)-05 | 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management 36. In a service organization, multiple department overhead rate method is the most effective in providing information about the cost of services. ANS: F DIF: Easy OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management 37. Service companies can effectively use multiple department overhead rate costing to compute product (service) costs. ANS: F DIF: Easy OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management 38. Service companies can effectively use single facility wide overhead costing to compute product (service) costs. ANS: F DIF: Easy OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management 39. Service companies can effectively use activity-based costing to compute product (service) costs. ANS: T DIF: Easy OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management MULTIPLE CHOICE 1.

Which of the following is not a factory overhead allocation method? a. Single Plantwide Rate Method b. Multiple Production Department Rate Method c. Traditional Costing Method d. Activity-Based Costing Method ANS: C DIF: Easy OBJ: 26(11)-01 NAT: AACSB Analytic | IMA-Cost Management

418  Chapter 26(11)/Cost Allocation and Activity-Based Costing

2.

Which of the following does not support managerial decisions involving accurate product costing? a. product constraints b. emphasis of a product line c. product mix d. product price ANS: A DIF: Moderate OBJ: 26(11)-01 NAT: AACSB Analytic | IMA-Cost Management 3.

Lasso Corp. budgeted $250,000 of overhead cost for 2008. Actual overhead costs for the year were $240,000. Lasso's plant-wide allocation base, machine hours, was budgeted at 50,000 hours. Actual machine hours were 40,000. Budgeted units to be produced are 100,000 units. Lasso's plant-wide factory overhead rate for 2008 is: a. $1.25 per unit b. $6.00 per machine hour c. $6.25 per machine hour d. $5.00 per machine hour ANS: D DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 4.

Hoskins Co. uses a plant-wide factory overhead rate based on direct labor hours. Overhead costs would be overcharged to which of the following departments? a. A labor-intensive department b. A capital-intensive department c. A materials-intensive department d. None of the above ANS: A DIF: Difficult OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 5.

Stewart Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plant-wide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. From the following information, determine the plant-wide factory overhead rate:

Painting Dept. Finishing Dept. Totals

a. b. c. d. ANS: NAT:

Overhead $248,000 72,000 $320,000 ========

Direct Labor Hours 10,000 10,000 20,000 ======

$24.80 per dlh $32.00 per dlh $16.00 per dlh $ 7.20 per dlh C DIF: Moderate OBJ: 26(11)-02 AACSB Analytic | IMA-Cost Management

Product A 16 4 20 ==

B 4 16 20 ==

Chapter 26(11)/Cost Allocation and Activity-Based Costing  419

6.

Stewart Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plant-wide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. From the following information, using a single plant-wide rate, determine the overhead rate per unit for Product A:

Painting Dept. Finishing Dept. Totals

a. b. c. d. ANS: NAT: 7.

Overhead $248,000 72,000 $320,000 ========

Direct Labor Hours (dlh) 10,000 dlh 10,000 20,000 dlh ==========

Product A 16 dlh 4 20 dlh ======

B 4 dlh 16 20 dlh ======

$320.00 per unit $496.00 per unit $144.00 per unit $640.00 per unit A DIF: Moderate OBJ: 26(11)-02 AACSB Analytic | IMA-Cost Management

Stewart Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plant-wide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. From the following information, using a single plant-wide rate, determine the overhead rate per unit for Product B:

Painting Dept. Finishing Dept. Totals

a. b. c. d. ANS: NAT:

Overhead $248,000 72,000 $320,000 ========

Direct Labor Hours (dlh) 10,000 dlh 10,000 20,000 dlh ==========

$496.00 $144.00 $640.00 $320.00 D DIF: Moderate OBJ: 26(11)-02 AACSB Analytic | IMA-Cost Management

Product A 16 dlh 4 20 dlh ======

B 4 dlh 16 20 dlh ======

420  Chapter 26(11)/Cost Allocation and Activity-Based Costing

8.

The Delph Company produces two products, Blinks and Dinks. They are manufactured in two departments, Fabrication and assembly. Data for the products and departments are listed below. Number of Labor hrs Machine hours per Product units per unit unit Blinks 1,000 4 5 Dinks 2,000 2 8 All of the Machine hours take place in the Fabrication department, which has an estimated overhead of $84,000. All of the labor hours take place in the Assembly department, which has an estimated total overhead of $72,000.

The Delph Company uses a single overhead rate to apply all overhead costs based on labor hours. What is the overhead cost per unit for Blinks? a. $78 b. $18 c. $72 d. $14.40 ANS: A DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 9.

The Delph Company produces two products, Blinks and Dinks. They are manufactured in two departments, Fabrication and assembly. Data for the products and departments are listed below. Number of Labor hrs per Machine hours Product units unit per unit Blinks 1,000 4 5 Dinks 2,000 2 8 All of the Machine hours take place in the Fabrication department, which has an estimated overhead of $84,000. All of the labor hours take place in the Assembly department, which has an estimated total overhead of $72,000.

The Delph Company uses a single overhead rate to apply all overhead costs based on labor hours. What is the overhead cost per unit for Dinks? a. $36 b. $39 c. $19.50 d. $52 ANS: B DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  421

10. The Delph Company produces two products, Blinks and Dinks. They are manufactured in two departments, Fabrication and assembly. Data for the products and departments are listed below. Number of Labor hrs per Machine hours Product units unit per unit Blinks 1,000 4 5 Dinks 2,000 2 8 All of the Machine hours take place in the Fabrication department, which has an estimated overhead of $84,000. All of the labor hours take place in the Assembly department, which has an estimated total overhead of $72,000. The Delph Company uses a single overhead rate to apply all overhead costs based on labor hours. What would the single plant-wide rate be? a. $9 b. $52 c. $19.50 d. $18.00 ANS: C DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 11. Common allocation bases are a. direct labor dollars, direct labor hours, and square footage b. direct labor dollars, direct labor hours, machine hours c. direct labor dollars, direct labor hours, and machine dollars d. machine dollars, direct labor dollars, machine hours ANS: B DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 12. The Nite Lite Factory has determined that its budgeted factory overhead budget for the year is $6,750,000 and budgeted direct labor hours are 5,000,000. Using the single plantwide factory overhead rate based on direct labor hours, determine the factory overhead rate for the year. a. $1.35 b. $1.20 c. $.74 d. cannot be determined ANS: A DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 13. The Nite Lite Factory has determined that its budgeted factory overhead budget for the year is $6,750,000 and budgeted direct labor hours are 5,000,000. If the actual direct labors for the period are 180,000 and direct labor hours is the allocation base, the factory overhead allocation using the single plantwide factory overhead rate is? a. $375,000 b. $133,333 c. $243,000 d. cannot be determined ANS: C DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management

422  Chapter 26(11)/Cost Allocation and Activity-Based Costing

14. Nite Lite Factory produces two similar products - small lamps and desk lamps. The total plant overhead budget is $640,000 with 400,000 estimated direct labor hours. It is further estimated that small lamp production will have 275,000 direct labor hours and desk lamp production will require 125,000 direct labor hours. Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will be allocated to the small lamp production if the actual direct hours for the period is 290,000? a. $220,690 b. $400,000 c. $440,000 d. $464,000 ANS: D DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 15. Nite Lite Factory produces two similar products - small lamps and desk lamps. The total plant overhead budget is $640,000 with 400,000 estimated direct labor hours. It is further estimated that small lamp production will have 275,000 direct labor hours and desk lamp production will require 125,000 direct labor hours. Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will be allocated to the desk lamp production if the actual direct hours for the period is 121,000? a. $220,690 b. $200,000 c. $193,600 d. $279,000 ANS: C DIF: Easy OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 16. Nite Lite Factory produces two similar products - small lamps and desk lamps. The total plant overhead budget is $640,000 with 400,000 estimated direct labor hours. It is further estimated that small lamp production will use 3 direct labor hours for each unit and desk lamp production will require 1.25 direct labor hours for each unit. Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will be allocated to the desk lamp production if the actual production for the period is 121,000 units? a. $151,250 b. $242,000 c. $580,800 d. $363,000 ANS: B DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  423

17. Nite Lite Factory produces two similar products - small lamps and desk lamps. The total plant budget is $640,000 with 400,000 estimated direct labor hours. It is further estimated that small lamp production will use 3 direct labor hours for each unit and desk lamp production will require 1.25 direct labor hours for each unit. Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will be allocated to the small lamp production if the actual production for the period is 108,000 units? a. $518,400 b. $324,000 c. $580,800 d. $363,000 ANS: A DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 18. The Southwest Leather Company manufactures leather handbags (H) and moccasins (M). For simplicity reasons, they have decided to use the single plantwide factory overhead rate method to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices. Calculate the amount of factory overhead to be allocated to each unit using direct labor hours. Handbags = 60,000 units, 2 hours of direct labor Moccasins= 40,000 units, 3 hours of direct labor Total Budgeted factory overhead cost = $360,000 a. (H) $1.50 , (M) $1.50 b. (H) $3.00, (M) $4.50 c. (H) $3.00, (M) $3.00 d. (H) $2.40, (M) $2.40 ANS: B Handbags: 60,000 units  2 direct labor hours = 120,000 direct labor hours Moccasins: 40,000 units  3 direct labor hours = 120,000 direct labor hours 240,000 direct labor hours Single plantwide factory overhead rate =

$360,000 240,000 DL hour = $1.50

DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management

424  Chapter 26(11)/Cost Allocation and Activity-Based Costing

19. The Nite Lite Factory produces two products - small lamps and desk lamps. It has two separate departments - finishing and production. The overhead budget for the finishing department is $550,000, using 500,000 direct labor hours. The overhead budget for the production department is $400,000 using 80,000 direct labor hours. If the budget estimates that a small lamp will require 2 hours of finishing and 1 hours of production, how much factory overhead will be allocated to each unit of small lamps using the multiple production department factory overhead rate method with an allocation base of direct labor hours? a. $6.33 b. $4.91 c. $5.00 d. $7.20 ANS: D DIF: Difficult OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 20. The Nite Lite Factory produces two products - small lamps and desk lamps. It has two separate departments - finishing and production. The overhead budget for the finishing department is $550,000, using 500,000 direct labor hours. The overhead budget for the production department is $400,000 using 80,000 direct labor hours. If the budget estimates that a desk lamp will require 1 hours of finishing and 2 hours of production, how much factory overhead will be allocated to each unit of desk lamps using the multiple production department factory overhead rate method with an allocation base of direct labor hours? a. $11.10 b. $4.91 c. $5.00 d. $10.00 ANS: A DIF: Difficult OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 21. The Nite Lite Factory produces two products - small lamps and desk lamps. It has two separate departments - finishing and production. The overhead budget for the finishing department is $550,000, using 500,000 direct labor hours. The overhead budget for the production department is $400,000 using 80,000 direct labor hours. If the budget estimates that a small lamp will require 2 hours of finishing and 1 hours of production, what is the total amount of factory overhead to be allocated to small lamps using the multiple production department factory overhead rate method with an allocation base of direct labor hours, if 75,000 units are produced? a. $400,000 b. $540,000 c. $550,000 d. $368,250 ANS: B DIF: Difficult OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  425

22. The Nite Lite Factory produces two products - small lamps and desk lamps. It has two separate departments - finishing and production. The overhead budget for the finishing department is $550,000, using 500,000 direct labor hours. The overhead budget for the production department is $400,000 using 80,000 direct labor hours. If the budget estimates that a desk lamp will require 1 hours of finishing and 2 hours of production, what is the total amount of factory overhead to be allocated to desk lamps using the multiple production department factory overhead rate method with an allocation base of direct labor hours, if 26,000 units are produced? a. $540,000 b. $300,000 c. $400,000 d. $288,600 ANS: D DIF: Difficult OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 23. Using multiple department factory overhead rates instead of a single plant-wide factory overhead rate: a. results in more accurate product costs b. results in distorted product costs c. is simpler and less costly d. applies overhead costs to all departments equally ANS: A DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 24. Zinn Co. uses 3 machine hours and 1 direct labor hour to produce Product X. It uses 4 machine hours and 8 direct labor hours to produce Product Y. Zinn's Assembly and Finishing Departments have factory overhead rates of $240 per machine hour and $160 per direct labor hour, respectively. How much overhead cost will be charged to the two products? a. Product X = $240; Product Y = $160 b. Product X = $400; Product Y = $400 c. Product X = $880; Product Y = $2,240 d. Product X = $720; Product Y = $1,280 ANS: C DIF: Moderate OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 25. Using a plant-wide factory overhead rate distorts product costs when: a. products require different ratios of allocation-base usage in each production department b. significant differences exist in the factory overhead rates used across different production departments c. both A and B exist d. either A or B exist ANS: C DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

426  Chapter 26(11)/Cost Allocation and Activity-Based Costing

26. Stewart Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plant-wide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. From the following information, determine the overhead rate in the Painting Department for each unit of Product B if the company uses a multiple department rate system.

Painting Dept. Finishing Dept. Totals

a. b. c. d. ANS: NAT:

Overhead $248,000 72,000 $320,000 ========

Direct Labor Hours (dlh) 10,000 dlh 10,000 20,000 dlh ==========

Product A 16 dlh 4 20 dlh ======

B 4 dlh 16 20 dlh ======

$12.40 per dlh $24.80 per dlh $7.20 per dlh $3.60 per dlh B DIF: Moderate OBJ: 26(11)-03 AACSB Analytic | IMA-Cost Management

27. Stewart Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plant-wide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. From the following information, determine the overhead rate in the Finishing Department for each unit of Product A if the company uses a multiple department rate system.

Painting Dept. Finishing Dept. Totals

a. b. c. d. ANS: NAT:

Overhead $248,000 72,000 $320,000 ========

Direct Labor Hours (dlh) 10,000 dlh 10,000 20,000 dlh ==========

$24.80 per dlh $12.40 per dlh $3.60 per dlh $7.20 per dlh D DIF: Moderate OBJ: 26(11)-03 AACSB Analytic | IMA-Cost Management

Product A 16 dlh 4 20 dlh ======

B 4 dlh 16 20 dlh ======

Chapter 26(11)/Cost Allocation and Activity-Based Costing  427

28. Stewart Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plant-wide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. From the following information, determine the overhead from both production departments allocated to each unit of Product A if the company uses a multiple department rate system.

Painting Dept. Finishing Dept. Totals

a. b. c. d. ANS: NAT:

Overhead $248,000 72,000 $320,000 ========

Direct Labor Hours (dlh) 10,000 dlh 10,000 20,000 dlh ==========

Product A 16 dlh 4 20 dlh ======

B 4 dlh 16 20 dlh ======

$396.80 per unit $425.60 per unit $320.00 per unit $214.40 per unit B DIF: Moderate OBJ: 26(11)-03 AACSB Analytic | IMA-Cost Management

29. Stewart Marketing Inc. manufactures two products, A and B. Presently, the company uses a single plant-wide factory overhead rate for allocating overhead to products. However, management is considering moving to a multiple department rate system for allocating overhead. From the following information, determine the overhead from both production departments allocated to each unit of Product B if the company uses a multiple department rate system.

Painting Dept. Finishing Dept. Totals

a. b. c. d. ANS: NAT:

Overhead $248,000 72,000 $320,000 ========

Direct Labor Hours (dlh) 10,000 dlh 10,000 20,000 dlh ==========

$425.60 per unit $99.20 per unit $214.40 per unit $320.00 per unit C DIF: Moderate OBJ: 26(11)-03 AACSB Analytic | IMA-Cost Management

Product A 16 dlh 4 20 dlh ======

B 4 dlh 16 20 dlh ======

428  Chapter 26(11)/Cost Allocation and Activity-Based Costing

The Delph Company produces two products, Blinks and Dinks. They are manufactured in two departments, Fabrication and assembly. Data for the products and departments are listed below. Number of Labor hrs per Machine hours per Product units unit unit Blinks 1,000 4 5 Dinks 2,000 2 8 All of the Machine hours take place in the Fabrication department, which has an estimated overhead of $84,000. All of the labor hours take place in the Assembly department, which has an estimated total overhead of $72,000. The Delph Company uses a departmental overhead rates. The fabrication department uses machine hours for an allocation base, and the assembly department uses labor hours. 30. What is the assembly department overhead rate per labor hour? a. $9.00 b. $19.50 c. $24.00 d. $7.00 ANS: A DIF: Moderate OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 31. What is the overhead cost per unit for Blinks? a. $50 b. $56 c. $44 d. $64 ANS: B DIF: Moderate OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 32. What is the overhead cost per unit for Dinks? a. $50 b. $56 c. $64 d. $44 ANS: A DIF: Moderate OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 33. What is the fabrication department overhead rate per machine hour? a. $7.43 b. $16.80 c. $28.00 d. $4.00 ANS: D DIF: Moderate OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  429

34. All of the following can be used as an allocation base for calculating factory overhead rates except: a. Direct labor dollars b. Direct labor hours c. Square footage d. Total overhead expenses ANS: D DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management 35. Which two are the most common allocation bases for factory overhead? a. Square footage and machine hours b. Direct labor hours and machine hours c. Direct labor hours and factory expenses d. Machine hours and factory expenses ANS: B DIF: Easy OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management Phelan Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base information, along with the estimated activity-base information, is provided below.

Procurement Scheduling Materials handling Product development Production

Disk drives Tape drives Wire drives

Number of Purchase Orders 4,000 2,000 12,000

Activity Cost $ 360,000 240,000 480,000 720,000 1,420,000 Number of Production Orders 300 150 800

Activity Base Number of purchase orders Number of production orders Number of moves Number of engineering changes Machine hours

Number of Moves 1,400 600 4,000

Number of Engineering Changes 10 5 25

36. Determine the activity rate for procurement per purchase order. a. $192 b. $20 c. $80 d. $71 ANS: B DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

Machine Hours 2,000 8,000 10,000

Number of Units 2,000 4,000 2,500

430  Chapter 26(11)/Cost Allocation and Activity-Based Costing

37. Determine the activity rate per purchase order for scheduling. a. $192 b. $20 c. $80 d. $71 ANS: A DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 38. Determine the activity rate for materials handling per move. a. $192 b. $20 c. $71 d. $80 ANS: D DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 39. Determine the activity rate for product development per change. a. $72,000 b. $28,000 c. $36,000 d. $18,000 ANS: D DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  431

40. Phelan Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base information, along with the estimated activity-base information, is provided below.

Procurement Scheduling Materials handling Product development Production

Disk drives Tape drives Wire drives

Activity Cost $ 360,000 240,000 480,000 720,000 1,420,000

Activity Base Number of purchase orders Number of production orders Number of moves Number of engineering changes Machine hours

Number of Purchase Orders 4,000

Number of Production Orders 300

Number of Moves 1,400

Number of Engineering Changes 10

Machine Hours 2,000

Number of Units 2,000

2,000

150

600

5

8,000

4,000

12,000

800

4,000

25

10,000

2,500

Determine the activity rate for production per machine hour. a. $20 b. $192 c. $71 d. $80 ANS: C DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

432  Chapter 26(11)/Cost Allocation and Activity-Based Costing

41. Phelan Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base information, along with the estimated activity-base information, is provided below.

Procurement Scheduling Materials handling Product development Production

Disk drives Tape drives Wire drives

Number of Purchase Orders 4,000 2,000 12,000

Activity Cost $ 360,000 240,000 480,000 720,000 1,420,000

Number of Production Orders 300 150 800

Activity Base Number of purchase orders Number of production orders Number of moves Number of engineering changes Machine hours

Number of Moves 1,400 600 4,000

Determine the activity-based cost for each disk drive unit. a. $193.70 b. $192.00 c. $142.90 d. $285.80 ANS: D DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

Number of Engineering Changes 10 5 25

Machine Hours 2,000 8,000 10,000

Number of Units 2,000 4,000 2,500

Chapter 26(11)/Cost Allocation and Activity-Based Costing  433

42. Phelan Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base information, along with the estimated activity-base information, is provided below.

Procurement Scheduling Materials handling Product development Production

Disk drives Tape drives Wire drives

Activity Cost $ 360,000 240,000 480,000 720,000 1,420,000

Activity Base Number of purchase orders Number of production orders Number of moves Number of engineering changes Machine hours

Number of Purchase Orders 4,000

Number of Production Orders 300

Number of Moves 1,400

Number of Engineering Changes 10

Machine Hours 2,000

Number of Units 2,000

2,000

150

600

5

8,000

4,000

12,000

800

4,000

25

10,000

2,500

Determine the activity-based cost for each tape drive unit. a. $192.00 b. $193.70 c. $285.80 d. $387.40 ANS: B DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

434  Chapter 26(11)/Cost Allocation and Activity-Based Costing

43. Phelan Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base information, along with the estimated activity-base information, is provided below.

Procurement Scheduling Materials handling Product development Production

Disk drives Tape drives Wire drives

Number of Purchase Orders 4,000 2,000 12,000

Activity Cost $ 360,000 240,000 480,000 720,000 1,420,000

Number of Production Orders 300 150 800

Activity Base Number of purchase orders Number of production orders Number of moves Number of engineering changes Machine hours

Number of Moves 1,400 600 4,000

Number of Engineering Changes 10 5 25

Machine Hours 2,000 8,000 10,000

Number of Units 2,000 4,000 2,500

Determine the activity-based cost for each wire drive unit. a. $187.36 b. $192.00 c. $749.44 d. $468.40 ANS: C DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 44. Which of the following is not a cost pool used with the activity-based costing method? a. Direct Labor Hours b. Production Setups c. Engineering d. All are used. ANS: D DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 45. Activity rates are determined by a. dividing the actual cost for each activity pool by the actual activity base for that pool. b. dividing the cost budgeted for each activity pool by the estimated activity base for that pool. c. dividing the actual cost for each activity pool by the estimated activity base for that pool. d. dividing the cost budgeted for each activity pool by the actual activity base in that pool. ANS: B DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  435

46. Nite Lite Company is changing to an activity-based costing method. They have determined that they will use three cost pools. They are set-ups, inspections, and assembly. Which of the following would be used as the activity base for assembly? a. direct labor hours b. inventory cost c. inspections d. number of units to be produced ANS: A DIF: Easy OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 47. Using the following information prepared by the Nite Lite Company, determine the activity rate for set-ups. Activity Pool Set-ups Inspections Assembly (DLH) a. b. c. d. ANS: NAT:

Activity Base

Budgeted Amount 10,000 24,000 80,000

$60,000 $120,000 $400,000

$60.00 $6.00 $.06 $.60 B DIF: Easy OBJ: 26(11)-04 AACSB Analytic | IMA-Cost Management

48. The Nite Lite Company manufactures small lamps and desk lamps. The following shows the activities per product: Set-ups Small Lamps - 4,000 units Desk Lamps - 8,000 units

Inspections 1 2

Assembly (DLH) 4 1

1 3

Using the following information prepared by the Nite Lite Company, determine the factory overhead rate to be charged to each unit of small lamps. Activity Pool Set-ups Inspections Assembly (DLH) a. b. c. d. ANS: NAT:

Activity Base

Budgeted Amount 20,000 24,000 28,000

$38.00 $35.00 $10.00 $20.00 A DIF: Moderate OBJ: 26(11)-04 AACSB Analytic | IMA-Cost Management

$60,000 $120,000 $420,000

436  Chapter 26(11)/Cost Allocation and Activity-Based Costing

49. The Nite Lite Company manufactures small lamps and desk lamps. The following shows the activities per product: Set-ups Small Lamps - 4,000 units Desk Lamps - 8,000 units

4,000 16,000

Inspections Assembly (DLH) 16,000 4,000 8,000 24,000

Using the following information prepared by the Nite Lite Company, determine the total factory overhead rate to be charged to desk lamps. Activity Pool Set-ups Inspections Assembly (DLH) a. b. c. d. ANS: NAT:

Activity Base

Budgeted Amount 24,000 24,000 28,000

$60,000 $120,000 $280,000

$380,000 $320,000 $140,000 cannot be determined B DIF: Moderate OBJ: 26(11)-04 AACSB Analytic | IMA-Cost Management

50. The Nite Lite Company manufactures small lamps and desk lamps. The following shows the activities per product: Set-ups Small Lamps - 4,000 units Desk Lamps - 8,000 units

Inspections Assembly (DLH) 4,000 16,000 4,000 16,000 8,000 24,000

Using the following information prepared by the Nite Lite Company, determine the total factory overhead rate to be charged to small lamps. Activity Pool Set-ups Inspections Assembly (DLH) a. b. c. d. ANS: NAT:

Activity Base

Budgeted Amount 20,000 24,000 28,000

$380,000 $240,000 $152,000 cannot be determined C DIF: Moderate OBJ: 26(11)-04 AACSB Analytic | IMA-Cost Management

$60,000 $120,000 $420,000

Chapter 26(11)/Cost Allocation and Activity-Based Costing  437

51. If selling and administrative expenses are allocated to different products, they should be reported as a. product cost b. contra sales account c. period cost d. cost of goods sold ANS: C DIF: Moderate OBJ: 26(11)-05 NAT: AACSB Analytic | IMA-Cost Management 52. Activity based costing for selling and administrative expenses can also be beneficial in allocating expenses to various products. Which of the following can be used as a base in allocating help desk costs? a. Number of calls b. Square footage of the help desk office c. Number of products sold d. Number of field failures ANS: A DIF: Easy OBJ: 26(11)-05 NAT: AACSB Analytic | IMA-Cost Management 53. A bank may decide to use activity-based costing to determine all of the following except: a. the amounts charged to customers for services provided b. service quality c. profitability by services provided d. all are correct ANS: B DIF: Moderate OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management

438  Chapter 26(11)/Cost Allocation and Activity-Based Costing

The It’s All About Hair Salon uses an activity-based costing system in its beauty salon to determine the cost of services. The salon has determined the costs of services by activity as follows: Activity Hair Washing Conditioning Chemical Treatment Styling

Hair Cut Complete Style Perms Hi-Lights

Activity Rate $2.50 $3.00 $25.00 $10.00

Hair Washing

Conditioning

Styling

1 1

Chemical Treatment 0 0

1 1 2 3

3 4

1 2

1 1

0 1

54. Determine the cost of services for a hair cut? a. $2.00 b. $5.50 c. $3.00 d. $10.00 ANS: B DIF: Easy OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management 55. Determine the cost of services for a perm? a. $49.00 b. $5.50 c. $54.00 d. $29.00 ANS: A DIF: Easy OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management 56. An airline can allocate overhead costs to each flight by using activity based costing by first identifying activity drivers, then allocating costs to the different flights. All but one of the following could be a viable activity drivers. a. Baggage handlers b. Pilots c. No. of tickets sold d. Number of inspections ANS: B DIF: Easy OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management

Chapter 26(11)/Cost Allocation and Activity-Based Costing  439

EXERCISE/OTHER 1.

The total factory overhead for Nite Lite Company is budgeted for the year at $800,000. Nite Lite manufactures two different products - night lights and desk lamps. Night lights is budgeted for 30,000 units, each unit requiring two hours of direct labor per unit. Desk lamps, on the other hand, is budgeted for 40,000 units, each unit requiring two and a half hours of direct labor per unit. Determine (a) the total number of budgeted direct labor hours for year, (b) the single plantwide factory overhead rate using direct labor hours as the allocation base, and (c) the factory overhead allocated per unit for each product using the single plantwide factory overhead rate using direct labor hours as the allocation base. ANS: (a) (30,000 * 2) + (40,000 * 2.5) = 160,000 direct labor hours (b) $800,000 / 160,000 = $5 per direct labor hour (c) Night Lights = $5 * 2 = $10 Desk Lamps = $5 * 2.5 = $12.5 DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management 2.

TOP:

Example Exercise 26(11)-1

Explain why it is imperative that proper factory overhead be allocated in factories that produce multiple products. ANS: Proper allocation of factory overhead avoids ‘bad pricing’. If too much overhead is allocated to a unit, then overpricing could be the outcome. On the other hand, if a product is not charged enough overhead, then underpricing could occur. Both situations can be very detrimental to the profits of the company. DIF: Difficult OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

440  Chapter 26(11)/Cost Allocation and Activity-Based Costing

3.

The Camp Gear Factory produces two products - canopies and tents. It has two separate departments - cutting and sewing. The budget for the cutting department is $350,000 and $400,000 for the sewing department. Each canopy will require 2 hours of cutting and 1 hour of sewing. Each tent will require 1 hour of cutting and 6 hours of sewing. The budget estimates that 20,000 canopies and 10,000 tents will need to be manufactured for the year. Determine (a) the total number of budgeted direct labor hours for the year in each department, (b) the departmental factory overhead rates for both departments and (c) the factory overhead allocated per unit each product using the department factory overhead allocation rates using direct labor hours as the base. ANS: (a) Cutting: (20,000 canopies * 2 dlh) + (10,000 tents * 1 dlh) = 50,000 direct labor hours Sewing: (20,000 canopies * 1 dlh) + (10,000 tents * 6 dlh) = 80,000 direct labor hours (b) Cutting: $350,000 / 50,000 dlh = $7.00 Sewing: $400,000 / 80,000 dlh = $5.00 (c) Canopy: Cutting: 2 dlh * $7.00 = Sewing: 1 dlh * $5.00 = Tot. FOH per canopy =

$14.00 5.00 $ 19.00

Tent: Cutting: 1 dlh * $7.00 = $ 7.00 Sewing: 6 dlh * $5.00 = 30.00 Tot. FOH per tent = $37.00 DIF: Moderate OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

TOP:

Example Exercise 26(11)-2

Chapter 26(11)/Cost Allocation and Activity-Based Costing  441

4.

The Nite Lite Company manufactures small lamps and desk lamps. The following shows the activities per product: Set-ups Small Lamps - 8,000 units Desk Lamps - 16,000 units

8,000 32,000

Inspections Assembly (DLH) 32,000 8,000 16,000 48,000

Using the following information prepared by the Nite Lite Company, determine (a) the activity rates for each activity and (b) the activity based factory overhead per unit for each product. Activity Pool Activity Base Budgeted Amount Set-ups 40,000 $160,000 Inspections 48,000 $192,000 Assembly (DLH) 56,000 $336,000 ANS: (a) Set-ups: $160,000 / 40,000 = $4 Inspections: $192,000 / 48,000 = $4 Assembly: $336,000 / 56,000 = $6 (b) Small Lamp: (8,000 * $4 ) + (32,000* $4 ) + (8,000 * $6) = $208,000 /8,000= $26 Desk Lamp: (32,000 * $4) + (16,000 * $4) + (48,000 * $6) = $480,000/16,000 =$30 DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

TOP:

Example Exercise 26(11)-3

5.

Southwest China Company sells glasses, fine china, and everyday dinnerware. They use activitybased costing to determine the cost of the shipping and handling activity. The shipping and handling activity has an activity rate of $7 per pound. A box of glasses weigh 2 lbs, the box of china weighs 4 lbs, and a box of everyday dinnerware weighs 6 lbs. (a) Determine the shipping and handling activity for each product and (b) determine the total shipping and receiving costs for the china if 3,500 boxes are shipped. ANS: (a) Glasses: 2 lbs * $7 = $14 China: 4 lbs * $7 = $28 Everyday dinnerware: 6 lbs * $7 = $42 (b) $28 * 3,500 = $98,000 DIF: Easy OBJ: 26(11)-05 NAT: AACSB Analytic | IMA-Cost Management

TOP:

Example Exercise 26(11)-4

442  Chapter 26(11)/Cost Allocation and Activity-Based Costing

The It’s All About Hair Salon uses an activity-based costing system in its beauty salon to determine the cost of services. The salon has determined the costs of services by activity as follows: Activity Hair Washing Conditioning Chemical Treatment Styling

Hair Cut Complete Style Perms Hi-Lights

Activity Rate $2.50 $3.00 $25.00 $10.00

Hair Washing

Conditioning

Styling

1 1

Chemical Treatment 0 0

1 1 2 3

3 4

1 2

1 1

6. Determine the cost of services for a hi-light? ANS: Hair washing 3 Conditioning 4 Chemicals 2 Style 1 Total DIF: Moderate OBJ: 26(11)-06 NAT: AACSB Analytic | IMA-Cost Management

0 1

$2.50 $3.00 $25.00 $10.00

TOP:

$7.50 12.00 50.00 10.00 $79.50

Example Exercise 26(11)-5

Chapter 26(11)/Cost Allocation and Activity-Based Costing  443

PROBLEM 1.

Arlon Co. manufactures three types of cookies: Fluffs, Crinkles, and Snaps. The production process is relatively simple, and factory overhead costs are allocated to products using a single plant-wide factory rate based on direct labor hours. Information for the month of May 2000, Arlon's first month of operations, follows: Budgeted Direct Labor Unit Volume Hours per unit Fluffs 80,000 boxes 0.10 Crinkles 60,000 boxes 0.20 Snaps 20,000 boxes 1.00 Arlon has budgeted direct labor costs for May at $4.50 per hour. Budgeted direct materials costs for May are: Fluffs, $0.85/unit; Crinkles $0.40/unit; and Snaps $0.30/unit. Arlon's budgeted overhead costs for May are: Indirect labor Utilities Supplies Depreciation Total

$280,000 65,000 45,000 30,000 $420,000 =======

Assume that Arlon sells all the boxes it produces in May. (a) Compute Arlon's plant-wide factory overhead rate for May. (b)

Compute May's product cost for each type of cookie.

(c)

Does Arlon's use of a plant-wide factory overhead rate in any way distort May's product costs?

ANS: (a) Budgeted overhead costs/Budgeted plant-wide allocation base = Plant-wide factory overhead rate $420,000/40,000 direct labor hours = $10.50 per direct labor hour (b)

Cost per box Direct materials Direct labor Overhead Total manufacturing cost

(c)

The bulk of Arlon's factory overhead costs are charged to the product (Snaps) that uses the bulk of the single allocation base, which may be an incorrect allocation of factory overhead costs.

DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management

Fluffs $0.85 0.45 1.05 $2.35 =====

Crinkles $0.40 0.90 2.10 $3.40 =====

Snaps $ 0.30 4.50 10.50 $15.30 ======

444  Chapter 26(11)/Cost Allocation and Activity-Based Costing

2.

Nite Lite Factory produces two similar products - small lamps and desk lamps. The total plant budget is $800,000 with 640,000 estimated direct labor hours. It is further estimated that small lamp production will have 375,000 direct labor hours and desk lamp production will require 265,000 direct labor hours. (a) Determine the single plant factory overhead rate based on direct labor hours. (b) How much is the factory overhead cost per unit if each small lamp uses 3 hours per unit? (c) How much is the factory overhead cost per unit if each desk lamp uses 2.5 hours per unit? (d) How much total factory overhead will be allocated to the small lamp production if 130,000 units are produced during the period? (e) How much total factory overhead will be allocated to the desk lamp production if 104,000 are produced during the period?

ANS: (a) $800,000 / 640,000 = $1.25 per direct labor hour (b) 3 hours * $1.25 = $3.75 (c) 2.5 hours * $1.25 = $3.125 (d) $3.75 * 130,000 = $487,500 (e) $3.125 * 104,000 = $325,000 DIF: Moderate OBJ: 26(11)-02 NAT: AACSB Analytic | IMA-Cost Management

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3.

Powell Co. manufactures two products, A and B, in two production departments, Assembly and Finishing. Powell Co. expects to produce 10,000 units of Product A and 20,000 units of Product B in the coming year. Budgeted factory overhead costs for the coming year are: Assembly Finishing Total

$310,000 245,000 $555,000 =======

The machine hours expected to be used in the coming year are as follows: Assembly Dept. 15,100 4,900 20,000 =====

Product A Product B Total

(a) (b)

Compute the production department factory overhead rates. Compute the factory overhead per unit for each product.

ANS: (a) Factory overhead rates: Assembly Dept.

= $310,000/20,000 mhr = $15.50/mhr

Finishing Dept.

= $245,000/20,000 mhr = $12.25/mhr

(b)

Factory overhead cost per unit: Product A: $15.50/mhr $12.25/mhr Total

15,100 mhr 9,000 mhr

= =

$234,050 110,250 $344,300 =======

Per unit:

$344,300/10,000

=

$34.43

Product B:

$15.50/mhr $12.25/mhr Total

= =

$ 75,950 134,750 $210,700 =======

Per unit:

$210,700/20,000

=

$10.535

4,900 mhr 11,000 mhr

DIF: Moderate OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

Finishing Dept. 9,000 11,000 20,000 =====

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4.

Wall Clocks Deluxe manufactures alarm clocks and wall clocks and allocates overhead based on direct labor hour. The production process is set up in three departments: assembly, finishing, and calibrating. The following is information regarding the direct labor used to produce one unit of the two clocks: Per Unit Hours: Alarm clocks Wall clocks

Assembly 3 2 5

Finishing 1 3 4

Calibrating 1 2 3

The budget includes the following factory overhead by department: Assembly Department Finishing Department Calibrating Department Total

$595,000 $200,000 $140,000 $935,000

Wall Clocks Deluxe is planning to manufacture 50,000 alarm clocks and 10,000 wall clocks. (a)

Determine the total number of hours that will be needed by department.

(b)

Determine the factory overhead rate by department using the multiple production department factory overhead rate method.

(c)

Determine the amount of factory overhead to be allocated to each unit of alarm clocks and wall clocks.

(d)

Determine the amount of total factory overhead to be allocated to the alarm clocks and wall clocks.

ANS: (a) Assembly: (3 dlh * 50,000) + (2 dlh * 10,000) = 170,000 dlh Finishing: (1 dlh * 50,000) + (3 dlh * 10,000) = 80,000 dlh Calibrating: (1 dlh * 50,000) + (2 dlh * 10,000) = 70,000 dlh (b)

Assembly: ($595,000 / 170,000) = $3.50 per direct labor hour Finishing: ($200,000 / 80,000) = $2.50 per direct labor hour Calibrating: ($140,000 / 70,000) = $2.00 per direct labor hour

(c)

Alarm Clock: (3 dlh * $3.50) + (1 dlh * $2.50) + (1 dlh * $2.00) = $15.00 per unit Wall Clock : (2 dlh * $3.50) + (3 dlh * $2.50) + (2 dlh * $2.00) = $18.50 per unit

(d)

Alarm Clock: (50,000 units * $15.00) = Wall Clock: (10,000 units * $18.50) = Total

DIF: Moderate OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

$750,000 185,000 $935,000

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5.

The Southwest Leather Company manufactures leather handbags (H) and moccasins (M). The company has been using the factory overhead rate method but has decided to evaluate the multiple production department factory overhead rate to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices. Handbags = 60,000 units, 2 hours of direct labor Moccasins= 40,000 units, 3 hours of direct labor Total Budgeted factory overhead cost = $360,000 The company has two different production departments: Cutting and Sewing. The cutting department has a factory overhead budget of $80,000. Each unit will require one direct labor hour or a total of 100,000 direct labor hours. The Sewing Departments estimates factory overhead in the amount of $280,000. Each unit will require 1.4 direct labor hour and estimates a total of 140,000 direct labor hours.

Calculate the amount of factory overhead to be allocated to each unit using direct labor hours. ANS: $192,000 Moccasins 3 hours total = (1  $.80)* + (2  $2.00)** = $.4.80 *40 000 = $168,000 Handbags 2 hours total = (1 $.80)* + (1 $2.00)** = $ 2.80 *60,000 = Total Factory Overhead Allocation $360,000 *Cutting Department Rate per Hour = $80,000 / 100,000 = $.80 **Sewing Department Rate per Hour = $280,000/140,000 = $2.00 DIF: Difficult OBJ: 26(11)-03 NAT: AACSB Analytic | IMA-Cost Management

448  Chapter 26(11)/Cost Allocation and Activity-Based Costing

6.

Daisy Company produces two products, T and U. The indirect labor costs include the following two items: Plant supervision Setup labor (indirect) Total indirect labor

$600,000 300,000 $900,000 =======

The following activity-base usage and unit production information is available for the two products:

Product T Product U Total

Number of Setups 100 300 400 ===

Direct Labor Hours 25,000 25,000 50,000 =====

Units 1,000 1,000 2,000 ====

(a)

Determine the single plant-wide factory overhead rate, using direct labor hours as the activity base.

(b)

Determine the factory overhead cost per unit for Products T and U, using the single plant-wide factory overhead rate.

(c)

Determine the activity rate for plant supervision and setup labor, assuming that the activity base for supervision is direct labor hours and the activity base for setup is number of setups.

(d)

Determine the factory overhead cost per unit for Products T and U, using activitybased costing.

(e)

Why is the factory overhead cost per unit different for the two products under the two methods?

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ANS: (a) Single plant-wide factory overhead rate

(b)

Product T Product U

(c)

Activity rates: Activity cost Activity base Activity rate

Direct Labor Hours 25,000 25,000

= Overhead $450,000 $450,000

Setup $300,000 ÷ 400 $ 750 per setup ========

(d) Product T: Setup Production Total Units Factory overhead cost per unit

Product U: Setup Production Total Units Factory overhead cost per unit

(e)

Rate $18 $18

= $900,000/50,000 dlh = $18 per dlh

÷

Units 1,000 1,000

Overhead Per Unit $450 $450

Supervision $600,000 ÷ 50,000 $ 12 per dlh ========

ActivityBase Usage 100 25,000

Activity Rate $750 $ 12

Activity-Base Usage 300 25,000

Activity Rate $750 $ 12

=

=

Cost $ 75,000 300,000 $375,000 ÷ 1,000 $ 375 ======

Activity Cost $225,000 300,000 $525,000 ÷ 1,000 $ 525 ======

The factory overhead cost per unit under the single plant-wide rate method is distorted because Product U consumes more setup-related activity, relative to the amount of direct labor consumed, than does Product T. Thus, the activity-based approach, which separates setup according to its own activity base, provides a more accurate estimate of the factory overhead cost per unit.

DIF: Moderate OBJ: 26(11)-02 | 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

450  Chapter 26(11)/Cost Allocation and Activity-Based Costing

The Taylor Corp. produces two products, saws and drills. Three activities are used in their manufacture. These activities and their associated costs and bases are as follows: Activity Stamping Assembly Setup

Budgeted Costs $180,000 $390,000 $28,000

Activity base machine hours labor hours number of setups

Saws 4,000 6,500 2

Drills 5,000 13,000 12

Units produced

400

600

Activity Base Machine hours Labor hours number of setups Total 9,000 19,500 14

7. Determine the activity rate for each activity. ANS: Stamping: $20 per machine hour. $180,000/9,000 Assembly: $20 per labor hour. $390,000/19,500 Setup: $2,000 per setup. $28,000/14 DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management 8. Determine the overhead cost per unit for each product. ANS: Saws: $535 per unit. [(4,000 20) + (6,500 20) + (2 2,000)]/400 Drills: $640 per unit. [(5,000 20) + (13,000 20) + (12 2,000)]/600 DIF: Moderate OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

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9.

The Southwest Leather Company manufactures leather handbags (H) and moccasins (M). The company has been using the factory overhead rate method but has decided to evaluate the activity based costing to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices.

Products Handbags Moccasins Total Budget

Total Budgeted factory overhead cost = $360,000 Cutting Sewing Set-Ups QC Inspections 60,000 dlh 60,000 dlh 500 200 40,000 dlh 80,000 dlh 300 800 100,000 dlh 140,000 dlh 800 set-ups 1,000 inspect $40,000 $210,000 $80,000 $20,000

Purchase Orders 100 300 400 PO’s $10,000

Calculate the amount of factory overhead to be allocated to each unit using activity based costing. The factory plans to produce 60,000 handbags, and 40,000 moccasins. ANS: Handbags: Cutting - $40,000/100,000 * 60,000 = $24,000 Sewing - $210,000/140,000 * 60,000= 90,000 Set-Ups - $80,000/800 * 500 = 50,000 QC Inspections - $20,000/1,000 * 200 = 4,000 PO’s - $10,000/400 * 100 = 2,500 Total Allocation of Factory Overhead $170,500 / 60,000=$2.84 per unit Moccasins: Cutting - $40,000/100,000 * 40,000 = Sewing - $210,000/140,000 * 80,000= Set-Ups - $80,000/800 * 300 = QC Inspections - $20,000/1,000 * 800 = PO’s - $10,000/400 * 300 = Total Allocation of Factory Overhead

DIF: Difficult OBJ: 26(11)-04 NAT: AACSB Analytic | IMA-Cost Management

$16,000 120,000 30,000 16,000 7,500 $189,500 / 40,000=$4.74 per unit

452  Chapter 26(11)/Cost Allocation and Activity-Based Costing

10. The It’s All About Hair Salon uses an activity-based costing system in its beauty salon to determine the cost of services. The salon has determined the costs of services by activity as follows: Activity Hair Washing Conditioning Chemical Treatment Styling (a)

Using the following information determine the cost of services for each of the following services provided by the salon:

Hair Cut Complete Style Perms Hi-Lights (b)

Activity Rate $1.50 $2.00 $20.00 $10.00

Hair Washing

Conditioning

Styling

1 1

Chemical Treatment 0 0

1 1 2 3

3 4

1 2

1 1

0 1

If the company budgets 10,000 hair cuts, 4,000 complete styles, 3,500 perms, and 5,500 hi-lights, determine their budget for cost of services.

ANS: (a) Hair Cuts : $1.50 + $2.00 = $3.50 Style : $1.50 + $2.00 + $10.00 = $13.50 Perms: ($1.50 * 2) +($2.00 * 3) + $20 + $10 = $39.00 Hi-Lights : ($1.50 * 3) + ($2.00 * 4) + ($20 * 2) + $10 = $62.50 (b) Services Hair Cut Complete Style Perms Hi-Lights Total