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Exam 17: Activity-Based Costing and Analysis

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Question 21

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A company produces paint that goes through two operations,operation A and operation B,before it is complete.Expected costs and activities for the two departments are shown below.Given this information,the departmental overhead rate for Department B based on machine hours is $4 per machine hour. $\begin{array} { l c c } & \text { Department } & \text { Department } \\& \text { A } & \text { B } \\\text { Machine hours } & 50,000 \mathrm { MH } & 60,000 \mathrm { MH } \\\text { Direct labor hours } & 78,500 \mathrm { DLH } & 100,800 \mathrm { DLH } \\\text { Overhead costs } & \$ 392,500 & \$ 403,200\end{array}$

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B) False

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The ________________________ is the target of the cost assignment.

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Question 23

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A company produces computer chips that go through two operations,operation A1 and operation B2,before they are complete.Expected costs and activities for the two departments are shown below.Departmental overhead rates are based on machine hours in department A1 and direct labor hours in department B2.Therefore,the overhead rates for department A1 and department B2 are $3.62 per machine hour and $5.73 per direct labor hour,respectively. $\begin{array} { l c c } & \text { Department } & \text { Department } \\& \text { Al } & \text { B2 } \\\text { Machine hours } & 40,000 \mathrm { MH } & 30,000 \mathrm { MH } \\\text { Direct labor hours } & 36,200 \mathrm { DLH } & 28,650 \mathrm { DLH } \\\text { Overhead costs } & \$ 144,800 & \$ 171,900\end{array}$

When using the plantwide overhead rate method,total budgeted overhead costs are combined into one overhead cost pool.

Rising Sun,Inc.produces granola that requires two processes,mixing and baking,to complete.The best-selling type of granola is cherry almond delight.Information related to the 100,000 units of cherry almond delight produced annually is shown in the following table: $\begin{array}{|l|r|}\hline \text { Direct materials } & \$ 230,000 \\\hline \text { Direct labor } & \\\hline\begin{array}{c} \text { Mixing Department (600 DLH } \times \$ 24 \text { per } \\\text { DLH) }\end{array} & \$ 14,400\\\hline \begin{array}{l}\text { Baking Department (400 DLH } \times \$ 22 \text { per } \\\text { DLH) }\end{array} & \$ 8,800 \\\hline \text { Machine hours } & \\\hline \text { Mixing Department } & 200 \mathrm{MH} \\\hline \text { Baking Department } &300 \mathrm{MH} \\\hline\end{array}$ Rising Sun's total expected overhead costs and related overhead data are shown below.The company uses departmental overhead rates based on machine hours in the mixing department and direct labor hours in the baking department. $\begin{array} { | l | r | r | } \hline & { \begin{array} { c } \text { Mixing } \\\text { Department }\end{array} } & \begin{array} { c } \text { Baking } \\\text { Department }\end{array} \\\hline \text { Direct labor hours } & 11,000 \mathrm { DLH } & 5,000 \mathrm { DLH } \\\hline \text { Machine hours } & 4,000 \mathrm { MH } & \mathbf { 3 , 0 0 0 \mathrm { MH } } \\\hline \begin{array} { l } \text { Manufacturing overhead } \\\text { costs }\end{array} & \$ 80,000 & \$ 12,500 \\\hline\end{array}$ Determine the total product cost of this product line and each unit of cherry almond delight.

Which of the following would not be considered a product cost?

The ______________________ overhead rate method uses a different overhead rate for each production department.

A company expects next year's overhead costs to be $400,000.During this time,the company also expects to produce 1,000,000 units,have 200,000 direct labor hours,and 800,000 machine hours. Make the following independent calculations. a.Compute a plantwide overhead rate using units of production as the allocation base. b.Compute a plantwide overhead rate using direct labor hours as the allocation base. c.Compute a plantwide overhead rate using machine hours as the allocation base.

A company has two products: A and A) B) It uses a plantwide overhead allocation method based on activity 2 and has prepared the following analysis showing budgeted costs and activities. Use this information to compute (a) the company's plantwide overhead rate and (b) the amount of overhead allocated to Product

Reference: 17_01 Kudzu Company sells two products Big X and Little X. Current direct material and direct labor costs are detailed below. Next year, the company wishes to use a plantwide overhead rate with direct labor hours as its allocation base. Next year's overhead is estimated to be $525,000. The direct labor and direct materials costs are estimated to be consistent with the current year. Direct labor costs $20 per hour and the company expects to manufacture 16,000 units of Big X and 18,000 units of Little X next year. $\begin{array}{|c|c|c|}\hline & \begin{array}{l}\text { Direct } \\\text { Material } \\\text { per Unit }\end{array} & \begin{array}{c}\text { Direct } \\\text { Labor Dollars } \\\text { per Unit }\end{array} \\\hline \operatorname{Big} X & \$5 & \$ 20 \\\hline \text { Little X } &\$3 & \$ 10 \\\hline\end{array}$ -Kudzu's plantwide overhead rate will be $21 per direct labor hour next year.

What are three advantages of activity-based costing over traditional volume-based allocation methods?

Reference: 17_04 Wall Nuts, Inc. produces paneling that requires two processes, A and B, to complete. Oak is the best-selling of all the many types of paneling produced. Information related to the 40,000 units of oak paneling produced annually is shown in the following table: $\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 380,000 \\\hline \text { Direct labor } & \\\hline \text { Department A (6,000 DLH x \$25 per DLH) } &\$ 150,000 \\\hline \text { Department B (35,125 DLH x \$16 per DLH) } & \$ 562,000\\\hline\end{array}$ $\begin{array} { | l | r | } \hline \text { Machine Hours } & \\\hline \text { Department A } & 24,000 \mathrm { MH } \\\hline \text { Department B } & 32,000 \mathrm { MH } \\\hline\end{array}$ Wall Nuts’ total expected overhead costs and related overhead data are shown below. $\begin{array} { | l | r | r | } \hline & \text { Department A } & \text { Department B } \\\hline \text { Direct labor hours } & 67,000 \mathrm { DLH } & 170,000 \mathrm { DLH } \\\hline \text { Machine hours } & 100,000 \mathrm { MH } & 80,000 \mathrm { MH } \\\hline \begin{array} { l } \text { Manufacturing overhead } \\\text { costs }\end{array} & \$ 450,000 & \$ 600,000 \\\hline\end{array}$ -Use the above data for Wall Nuts,Inc.to compute the total manufacturing cost per unit of oak paneling assuming the company uses departmental overhead rates based on machine hours in Department A and machine hours in Department B.

Fischer Company identified the following activities,costs,and activity drivers: $\begin{array} { | l | c | c | } \hline \text { Activity } & \text { Expected Costs } & \text { Expected Activity } \\\hline \text { Handling parts } & \$ 425,000 & 25,000 \text { parts in stock } \\\hline \text { Inspecting product } & \$ 390,000 & 940 \text { batches } \\\hline \text { Processing purchase orders } & \$ 220,000 & 440 \text { orders } \\\hline \text { Designing packaging } & \$ 230,000 & 5 \text { models } \\\hline\end{array}$ a.Compute a plantwide overhead rate assuming the company assigns overhead based on 70,000 budgeted direct labor hours (Round to two decimals). b.Compute separate rates for each of the four activities using the activity based costing.

Which of the following statements is true with regard to the departmental overhead rate method?

A company produces surgical equipment that goes through threes processes,1A1,2B2,and 3C3,before they are complete.Expected costs and activities for the three departments are shown below.All departments have departmental overhead rates based on direct labor hours.Therefore,the overhead rate for each department is $5 per direct labor hour. $\begin{array} { l c c c } & \text { Department } & \text { Department } & \text { Department } \\& 1 \mathrm { A1 } & 2 \mathrm { B2 } & 3 \mathrm { C3 } \\\text { Machine hours } & 15,000 \mathrm { MH } & 25,000 \mathrm { MH } & 20,000 \mathrm { MH } \\\text { Direct labor hours } & 22,830 \mathrm { DLH } & 10,650 \mathrm { DLH } & 29,200 \mathrm { DLH } \\\text { Overhead costs } & \$ 114,150 & \$ 213,000 & \$ 73,000\end{array}$

Outer Limits,Inc.produces fencing units which require two processes,A and B,to complete.The best-selling type of fence is made of pvc.Information related to the 8,000 units of pvc fencing produced annually is shown below. $\begin{array}{|l|c|}\hline \text { Direct materials } & \$ 450,000 \\\hline \text { Direct labor } & \\\hline \text { Department A }(5,000 \mathrm{DLH} \times \$ 23 \text { per DLH }) & \$ 115,000 \\\hline \text { Department B } 4,000 \mathrm{DLH} \times \$ 25 \text { per DLH }) & \$ 100,000 \\\hline \text { Machine hours } & \\\hline \text { Department A } & 2,000 \mathrm{MH} \\\hline \text { Department B } & 3,000 \mathrm{MH} \\\hline\end{array}$ Outer Limits' total expected overhead costs and related overhead data are shown below.The company uses departmental overhead rates based on machine hours in department A and direct labor hours in department B. $\begin{array} { | l | r | r | } \hline & \text { Department A } & \text { Department B } \\\hline \text { Direct labor hours } & 9,000 \mathrm { DLH } & 7,000 \mathrm { DLH } \\\hline \text { Machine hours } & 6,500 \mathrm { MH } & 13,000 \mathrm { MH } \\\hline \begin{array} { l } \text { Manufacturing overhead } \\\text { costs }\end{array} & \$ 54,600 & \$ 67,060 \\\hline\end{array}$ Determine the total amount of overhead assigned to each unit of pvc fencing.

Reference: 17_03 Heritage Industries produces miniature models of farm equipment. These collectibles are in great demand. It takes two operations, molding and finishing, to complete the miniatures. Next year's expected activities are shown in the following table: $\begin{array} { | l | c | c | } \hline & \text { Molding } & \text { Finishing } \\\hline \text { Direct labor hours } & 65,000 \mathrm { DLH } & 162,500 \mathrm { DLH } \\\hline \text { Machine hours } & 97,500 \mathrm { MH } & 81,250 \mathrm { MH } \\\hline\end{array}$ -Heritage Industries uses departmental overhead rates and is planning on a $3 per direct labor hour overhead rate for the molding department.Compute the estimated manufacturing overhead cost for the molding department given the information shown in the table.

Departments are the cost objects when the plantwide overhead rate method is used.

The ________________________ overhead rate method uses multiple volume-based measures to allocate overhead costs to products.

Match the following definitions with the appropriate terms