Cost Accounting 2 Final Revision — Part 1 Content: 2021Chapter “4” ‘A cost object is anything for which a measurement of costs is desired. Cost object Cost Object | could be: product, production line, department, activity, or specific custamar. Costs related to a particular cost object that can be traced to itin an Direct Costs | economically feasible (cost-effective) way. Such as: Direct materials and direct labor. Costs related to a particular cost object that cannot be traced to it in an economically feasible (cost-effective) way. Such as: Indirect materials, indirect labor and factory overhead. Indirect Costs Cost Pool _| Grouping of individual indirect cost items, Cost-Allocation | The cost allocations base is a systematic way to link an indirect cost or group of Base indirect costs to cost objects. Remember that: Cost Assignment: Is a general term for assigning costs, whether direct or indirect, to a cost object. - Cost Tracing: is the process of assigning direct costs. - Cost Allocation: is the process of assigning indirect costs. The ideal cost-allocation base is the cost driver of the indirect costs because there is a cause-and- effect relationship between the cost-allocation base and the indirect costs. = Job-Costing and Process-Costing Systems: Job-Costing System In a job-costing system, the cost object is a unit or multiple units of a distinct product or service called a job. Each job generally uses different amounts of resources. The product or service is often a single unit, such as a specialized machines, aircraft, In a process-costing system, the cost object is masses of identical or similar units of a product or service. Such as: orange juice, soda cans, chemical industries, food industries, electronic industries, and vehicles. In each period, process-costing systems divide advertising and furniture. the total costs of producing an identical or Because the products and services are distinct, | similar product or service by the total number of Job-costing systems are used to accumulate _| units produced to obtain an average per-unit costs separately for each product or service. _| cost. " Actual Costing and Normal Costing: Actual Costing Normal Costing Isa system that uses actual costs to determine the cost of individual jobs. Itallocates indirect costs based on the actual indirect-cost rate(s) times the actual quantity of the cost-allocation base(s). Defi Isa method that allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s) Actual direct-cost Rates x Actual quantities of direct-cost inputs Direct Costs (DM & DL) Actual direct-cost Rates x Actual quantities of direct-cost inputs Actual indirect-cost Rates x Actual quantities of cost-allocation bases Indirect Costs (MoH) Budgeted indirect-cost Rates x Actual quantities of cost-allocation bases Page | 1Actual Manaufactring Overhead Costs ‘Actual Manufacturing Overhead Rate = ee OS ictual Manufacturing Overhead Rate = actual Total Quantity of Cost Alocation Base Budgeted Manaufactring Overhead Costs Budgeted Manufacturing Overhead Rate = 5 cted Total Quantity of Cost Alocation Base Allocated MOH = Budgeted MOH Rate x Actual Allocation Base = Under-allocated or Over-allocated Indirect Costs: Allocated OH < ActualOH | AllocatedOH > ActualOH | AllocatedOH = Actual OH + + + Under-allocated OH Over-allocated OH No Under or Over allocation Also called, Under or Over Applied, Under or Over Absorbed. How to calculate the under or over allocated: Under-allocated (Over-allocated) OH = Actual OH Costs incurred — OH Costs Allocated - Ifthe result is positive > Under-allocated, - Ifthe result is negative > Over-allocated = Methods for adjusting over or under allocated overhead in Job order costing: There are 4 methods to deal with over or under allocated overhead as follows: 1. Write-off to COGS approach: The under or over allocated overhead is simply written off to cost of goods sold. 2. Proration approach (ending balance): To prorate (divide/allocate) the under or over allocated between cost of goods sold, work-in- process, and finished goods based on their ending balances. 3. Proration approach (Allocated OH): To prorate (divide/allocate) the under or over allocated between cost of goods sold, work-in- process, and finished goods based on the amount of overhead allocated. Note: + Adjusted Under-allocated The Bal: After Adj = Bal: Pr i e Balance After Adjustment = Balance before Proration * Division nier Home 4, Adjusted allocation rate approach: All allocations are recalculated with the actual, exact allocation rate. Under this method we have to follow the following steps: 1. To compute the percentage of over or under allocated overhead as follows: ie Ainount of Over or Under Allocared) ercentage oF Over or Under AMlocated ON The Total Allocated Overhead * 2. To compute total cost as normal 3. To adjust the allocated overhead as follows: + (Allocated OH x % of Under-allocated) Adjusted Total Cost = Total Cost before adjusting * (hiiocsved OH x % of Overalloceted) Page | 2Dr. Hanafy Important Notes ~ Ch 4: © The Job Costing Method is used for distinct (unique) products. ‘* The Process Costing Method is used for identical products. * Process Costing Method uses average cost but Job Costing Method traces and allocates costs to distinct products. © Cost Tracing: is the process of assigning direct costs, * Cost Allocation: is the process of assigning indirect costs. © Costs under process costing method are classified according to the time when they are incurred. ‘© Cost object under Job Costing Method is a job. © Cost object under Process Costing Method is a batch. Both Actual Costing and Normal Costing, trace direct costs to a cost object in the same way: by using actual direct cost rates x actual consumption. * Indirect costs are assigned to jobs using Indirect Allocation Rates, this rates (under normal costing) should be calculated using longer periods (usually one year); because the shorter the period, the grater is the influence of seasonal patterns on the amount of costs. ‘* Job costing system records the flow of costs for each product. * under Job Costing System, Direct Materials (DM) and Direct Labor (DL) are traceable, and could be assigned directly through Source Document. ©. Source document such as Material Requisition for DM, and Labor Time Record for DL. The only difference between Normal Costing and Actual Costing: - Normal Costing uses budgeted indirect cost rates calculated at the beginning of the year. - Actual Costing uses actual indirect cost rates calculated at the end of the year. © Under the Normal Costing, actual overhead cost will almost never equal budgeted cost. - If Overhead allocated (applied) is less than actual overhead, the difference is under- allocated (under-applied) - If Overhead allocated (applied) is more than actual overhead, the difference is over= allocated (over-applied) * Over-allocated or Under-allocated will be eliminated (disposed) at the end of the year using three methods: 1 Adjusted Allocation-Rate Approach: this method restates all overhead entries in the General and Subsidiary Ledgers using actual rates instead of budgeted rates. 2- The Proration Approach (ending balance): spreads under or over allocated between cost of goods sold, work-in process, and finished goods proration to ending balances (General Ledger) 3+ The Write Off Approach: The under or over allocated overhead adjusted (eliminated) (disposed) to COGS and this approach is used when the amount is small. Page | 3Chapter “5 “ * Traditional Costing: Traditional costing is the old way of costing in which simple costing systems is used to allocate ‘overhead costs broadly in an easy, inexpensive and reasonably accurate way. + Main Features of Traditional Costing: 1- One or few indirect cost pools. 2- One or few cost drivers is used to allocate overhead costs. 3- Broadly averages or spreads the cost of resources uniformly (equally) to cost objects. 4- Peanut-butter costing is used, therefore cost per unit is nearly an average cost. 5- Only one costing rate is used. 6- It results into product over-costing or under-costing. Over-Costing Under-Costing Over-costed products are the products that __| Under-costed products are the products that the the costs allocated to them are higher than _| costs allocated to them are lower than their their individual cost. Individual cost. It consumed a low level of resources but the _| It consumed a high level of resources but the cost allocated to it are higher than the costs _| costs allocated are lower than the costs consumed, consumed. Occurs with high volume of production. ‘Occurs with low volume of production. Over-costed products will lead to overpricing, | Under-costed products will be underpriced and causing those products to lose market share | may even lead to sales that actually result in to competitors producing similar products. _| losses because the sales may bring in less revenue than the cost of resources they use. © Product-cost cross-subsidization: means that if a company undercosts one of its products, it will overcost at least one of its other products. Similarly, if a company overcosts one of its products, it will undercost at least one of its other products. * Refined Costing System: reduces the use of broad averages for assigning the cost of resources to cost objects (such as jobs, products, and services) and provides better measurement of the costs of indirect resources used by different cost objects. ctivity-Based Costing (ABC Refines a costing system by identifying individual activities as the fundamental cost objects. ABC helps to get more accurate cost per unit by using more than one rate (Rate for each activity). An activity is an event, task, or unit of work with a specified purpose—for example, designing products, setting up machines, operating machines, or distributing products. More informally, activities are verbs; they are things that a firm does. © Steps of using ABC: 1- Identify the activities. 2- Compute the overhead costs for each activity. 3- Determine the relevant cost driver for each activity and its volume. 4- Compute the overhead rate for each activity. 5- Use activities’ overhead rates to compute the allocated overhead costs for each job (product). Activity’s Overhead Costs act Activity’s Allocation Base (Cost Driver) s’ Overhead Rate Page | 4Benefits of ABC: a. Itavoids cost distortion (under or over costing). b. Lead to more accurate costs. c. Identifying value adding and non-value adding activities (value adding activities should continue and non-value adding activities should be eliminated). d. Ithelps in using activity-based management (ABM) and activity-based budgeting (ABB). * Activity-based management (ABM) is a method of management decision making that uses activity-based costing information to improve customer satisfaction and profitability. We define ABM broadly to include decisions about pricing and product mix, cost reduction, process improvement, and product and process design * Signals that suggest that ABC implementation could help a firm: 2a. Significant amounts of indirect costs are allocated using only one or two cost pools. b. All or most indirect costs are identified as output unit-level costs. c. Products make diverse demands on resources because of volume, process steps, batch size, or complexity. 4d. Products that a company is well-suited to make and sell show small profits; whereas products that a company is less suited to make and sell show large profits. . Operations staff have significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services. * Choosing between Traditional or ABC Costing: - Traditional Costing is more relevant if overhead costs are relatively small, small businesses, or fewer products. - ABC Costing: is more relevant if overhead costs are relatively high, large businesses, or several different products. = The four-part cost hierarchy: A cost hierarchy categorizes various activity cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in determining cause-and-effect (or benefits-received) relationships. ABC systems commonly use a cost hierarchy with four levels to identify cost-allocation bases that are cost drivers of the activity cost pools: ‘Are the costs of activities performed on each individual unit of a product or service. (such as energy, machine depreciation, and repair). These costs increase with the increase in units. ‘Are the costs of activities related to a group of units of a product or service 2-Batch-Level | rather than each individual unit of product or service (such as setup-hours 1-Output-Unit Level Costs Costs costs, procurement costs, Material handling costs, and quality inspection costs associated with batches. Or (service-sustaining costs): Are the costs of activities undertaken to support 3- Product- ion individual products or services regardless of the number of units or batches in which the units are produced or services provided (such as Design and Costs engineering costs). = ‘Are the costs of activities that managers cannot trace to individual products or 4-Facility- : Sestalving | Se*vices but that support the organization as a whole. (Such as the general Coste | administration costs including top management compensation, rent, and building security. Page 15Hanafy Important Note: Ch5: Assignment of Direct costs to cost object is completely accurate but the assignment of Indirect Costs is not completely accurate and the accuracy degree depends on the method used for assigning overhead costs. Methods of Applying Plant Overhead to Products: 1- Simple Methods © Plant - wide OH rate: ° ° © Departmental OH rat Was used in ancient times, and there was no variety of goods, so the Indirect costs were relatively small it’s a simple method that uses one allocation base (one single rate) for the whole plant (factory). Its Manufacturing OH rate is calculated through dividing the total Plant OH costs by the total allocation base Every department has its OH cost pool and its selected allocation base, which is, relevant to the cost driver (for each department separately). Its Manufacturing OH rate is calculated through dividing the Department OH costs by the allocation base for the department. The calculated overhead allocation rate in each department would be used to allocate each product with a share of overhead. Both of these two methods are called Traditional product costing, broad averaging, or peanut butter costing, because they broadly average or spread the costs uniformly to the cost object. Using a single indirect-cost allocation rate distorts product costs, because there is an assumption that all the support activities, affect all the products. 2- Complex Method ‘© Activity Based Costing: The ABC costing system eliminate cost distortions, as it establishes cause & effect relationships with activities performed. Three main reasons accelerated the need for refining a costing system: 1 - Increase in product diversity. 2- Increase in indirect costs. 3: Intense competition in product markets (the effect of over or under costing). Page |6Questions Ch 4&5 Exercise 1 (Final 2019): 1, If the total allocated overhead cost is LE 8,000, the budgeted and actual rates are LE 5 and LE 8 per total direct cost respectively, direct cost of labor is LE 500, then the cost of direct material is: A) LE 1,600 8) LE 1,100 C) LE 1,000 D) Le 500 2. In a consulting firm a supervisor is paid a monthly (consisting of four chargeable weeks) salary of LE 40,000 and a junior assistant is paid LE 560 per 8 hour day. If an assistant works beyond the regular time in a day, an additional 50% premium is added to the hourly rate. The supervisor is not entitled to overtime. An assignment was performed over a 5-day week where one supervisor and five junior assistants worked 12 hours each day. Which of the following is the total cost of the assignment? A) LE 27,500 8) LE 31,000 ) LE 34,500 D) Le 42,000 3. The Five Stars Co. uses a predetermined overhead rate based on direct labor cost to apply manufacturing overhead to job orders. For the year ended December 2018, the estimated manufacturing overhead was $600,000, based on estimated volume of 50,000 direct labor hours at a direct labor rate of $6 per hour. Actual manufacturing overheads amounted to $620,000 with actual direct labor cost of $325,000. For the year, manufacturing overhead was: A) Over-applied by LE 20,000 8) Under-applied by LE 22,000 C) Over-applied by LE 30,000 D) Under-applied by LE 30,000 4. If setup cost is LE 25,000 (its cost driver is number of setup which was 30 and 20 times for products A and B respectively), maintenance cost is LE 15,000 (its cost driver is maintenance hours which was 350 and 650 hours A and B respectively), using traditional method based on maintenance hours as an allocation base, then the allocation rate is: A) LE 25 8) LEIS, LE 40 D) Le 800 5. If overhead allocation rate is LE S per machine hour (traditional method), total machine hours is 14,000 hrs, overhead costs composed of utilities and inspections, total cost of inspections is LE 28,000, factory decided to use ABC using machine hours as a cost driver for utilities, then allocation rate for utilities would be: A)LE2 B)LES Cle 4 D)LES 6. Using ABC, the factory has two activities, machine maintenance and quality inspections, the cost driver rates are LE 5 per machine hour and LE 10 per inspections respectively, total machine hours are 8,000 hours, the total overhead costs are LE 60,000, then total number of inspections is: A) 1,000 times B) 1,500 times €) 2,000 times D) 2,500 times 7. f overhead inspection cost is LE 25,000 (its cost driver is number of inspections which are 30 and 20 times for products "A” and "B” respectively), cost of quality control is LE 15,000 (its cost driver is direct hours which are 350 and 650 hours respectively), using ABC method, the overhead cost for product B is: A) LE 26,000 8) LE 19,750 C) LE 20,250 D) Le 28,000 8. Using traditional method, the direct cost per unit is LE 10 (included LE 6 labor cost) and allocated cost per unit is LE 20 (5 direct hours x LE 4 per hour), the factory turned to ABC, the factory performed two activities were maintenance (its cost driver is direct labor hours with rate LE 3) and employees services {its cost driver is direct labor cost with rate LE2), the selling price per unit is 50, then the profit per unit is A) LE 16 8) LEIS, C)LE a4 D) LE 13 True or Fals 9. A company may choose to use budgeted rates to allocate difficult to trace to jobs as they are complete. 10. At the end of the year, the direct costs traced to jobs using the budgeted rates will equal actual direct costs. 11. Activity based costing system differes from trad sct labor accounts if direct labor costs are nal costing systems in the treatement of piExercise 1 Answers: No. | Choice Calculations 8,000 |g _| Total Actual Direct Costs =" = $1,600 Direct Material Cost = Total Direct Costs — Direct Labor Cost = $1,600 ~ $500 = $1,100 Assignment performed over a 5-day week: 100 (monthly) _ (One Supervisor cost per week: TT = LE 10,000/ 5-day week Five junior assistants: Each junior works 12 hrs/day 2] ¢ The overtime hours cost per day The normal hours cost per day 560 8 hrs = 560 LE 4 hrs x (= cost per hour x 150%) = 420 LE Then, cost of each junior per day = 560 + 420 = LE 980 per day Five juniors cost per week = 5 x 980 x 5 days = LE 24,500/ 5-day week Total Cost of assignment = LE 10,000 + LE 24,500 = LE 34,500 $ 600,000 ale Budgeted OH Rate = Tagg = $2/ Dh cost Allocated OH Cost = $ 2 x $ 325,000 Actual DL cost = $ 650,000 ‘Over-applied OH = $ 620,000 Actual OH ~ $ 650,000 Allocated OH = $ 30,000 Over-applied Total OH Cost _ LE 25,000 +15,000 4) C | Single OH Rate == =@ SETAE’ = 140 ‘Allocation Base 350+ 650 Total OH Cost = OH Rate x Allocation Base (Cost driver) = LES x 14,000 MH = LE 70,000 Utilities Cost = Total OH Cost - Inspection Cost = 70,000 - 28,000 = LE 42,000 ae LE 42,000 Utilities Rate = 7 = LES per MH Maintenance Cost = Maintenance Rate x Maintenance Cost driver = LES x 8,000MH=LE 40,000 6 | C__| Inspection Cost = Total OH Cost ~ Maintenance Cost = LE 60,000 - 40,000 = LE 20,000 Inspection Cost _ LE 20,000 Number of Inspections = =P-°" =. “UTE _ 2,000 times inspection Rate 10 £25,000 = Inspection Rate = ~~ = LE 500 per inspection 30420 7) 8 = Maintenance Rate = = 59% « 16 15 per hour Maint Rate = rag = LE 15 per hi OH Cost allocated for Product B = (LE S00 x 20) + (LE 15 x 650) = LE 19,750 Selling Price per unit LESO - Direct Cost per unit (10) 8 | D__||-Allocated Maintenance Cost (LE 3/DLH x 5DLH) (a5) Allocated employee services cost (LE 2/DL Cost x LE6 DL Cost) _| (12) Profit per unit LE 13 9[T 10 | _F__| The direct costs traced to jobs using the actual rates will equal actual direct costs. 11 | ¢__ | Activity based costing system differes from traditional costing systems in the treatement of Overhead (Indirect) cost. Page |8Exercise 2 (Final 2018): 1. Amr Enterprises manufactures digital video equipment. For each unit, $3,000 of direct material is used and there is $2,000 of direct manufacturing labor at $20 per hour. Manufacturing overhead is applied at $25 per direct manufacturing labor hour. Calculate the profit earned on 50 units if each unit sells for $9,000. A) $75,000 8) $80,000 ¢) $65,000 ) $2,500 2. The method that restates all overhead entries in the general ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates is called: A) the proration approach 8B) the adjusted allocation rate approach C) the write-off of cost of goods sold approach _D) the weighted-average cost approach 3. Cost of making design changes is an example of costs. a) output unit-level 8) batch-level C) product-sustaining D)facility-sustaining 4. Extracts from cost information of SABRY corp. Simple (3 pack | Complex 7 Pack | Total ‘Setup cost allocated using direct labor-hours | $18,750 $6,250 $25,000 Setup cost allocated using setup-hours $13,200 $11,800 ‘$25,000 Which of the following statement is true of SABRY's setup costs under traditional costing? A) L3 pack is overcosted by $5,550 8) 13 pack is undercosted by $5,550 C) L7 pack is undercosted by $5,450 D) L7 pack is overcosted by $5,550 ‘Answer the following questions (5 & Hanafi printers has contracts to complete weekly supplements required by forty-six customers. For the year 2017, manufacturing overhead cost estimated total $840,000 for an annual production capacity of 12 million pages. For 2017 Hanafi printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups and inspections are the primary manufacturing overhead cost drivers. The following information was gathered: Cost Pool Manufacturing overhead costs | _ Activity level Design changes $120,000 300 design changes Setups 640,000 5,000 setups Inspections 80,000 8,000 inspections Total manufacturing ovethead costs 840,000 During 2017, two customers, Alpha & Sigma, are expected to use the following printing services: Activity Alpha Sigma Pages 60,000 76,000 Design changes 10 0 Setups 20 10 Inspections 30 38 5. Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools? ‘A) $360 per change, $320 per setup, $6.40 per inspection 8) $168 per change, $538 per setup, $42 per inspection C) $286 per change, $152 per setup, $20 per inspection D) $400 per change, $128 per setup, $10 per inspection 6. Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Alpha during 2017? A) $6,860 B) $13,700 C) $6,500 D) $10,192 Page |97. Tarek Company manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $18 per direct labor-hour. The following data are obtained from the accounting records for April 2018. Direct materials, $140,000 Direct labor (4,000 hours @ $10/hour) 40,000 Indirect labor 13,000 Plant facility rent 30,000 Depreciation on plant machinery and equipment | 22,500 Sales Commissions 24,000 ‘Administrative expenses 28,000 For April 2018, manufacturing overhead is: A) underallocated by $21,500 C) Overallocated by $21,500 B) overallocated by $6,500 D) underallocated by $6,500 Exercise 2 Answers: No. | Choice Justification of Calculations Directlabor Cost _ LE 2,000 Direct Labor hours = = Foc SPOS. = OOS = 100 DLH Selling Price per unit $9,000 - Direct Material per unit (3,000) 1 | A _ || -Direct Labor per unit (2,000) - OH Cost allocated per unit ($25 x 100 DLH) (2,500) = Profit per unit $1,500 x Number of units sold x50 unit Total Profits ‘$75,000 2 aie 3_| _C _ | Because itis made once for the whole product. L3 Pack product is allocated $ 18,750 under traditional costing (using DLH), 4 | A _ | While itis allocated only $ 13,200 under ABC (based on setup hours), So, it is over costed by $ 5,550 (18,750 ~ 13,200) s | D $80,000 f = _Inspeetion = ~ {77 =$ 10 per inspection ‘OH Cost allocated to Alpha Customer: Design Changes (400 x 10) $4,000 6 | A || Setup (128 x 20) 2,560 Inspection (10 x 30) 300 Total OH cost allocated $6,860 Actual OH Cost (13,000 + 30,000 + 22,500) $65,500 - Allocated OH Cost ($18 x 4,000 DLH ) 72,000 7 | B | Overallocated OH $6,500 Note: Sales commission and Administrative expenses are not an overhead, (rather they are period cost) Page | 10Exercise 3 (Final 2017 1. If the budgeted and actual allocation rates are LE 4 and LE 6 per machine hour respectively, budgeted and actual machine hours are 2,000 and 1,600 hours respectively, then the total allocated overhead cost. of the job order is: A) LE 8,000 8B) LE 6,400 C) LE 9,600 D) LE 12,000 2. If the issued direct materials to Job orders product A and B are LE 20,000 and LE 16,000 respectively, returned direct materials are LE 4,000 and LE 6,000 respectively, and transferred direct materials from A to Bis LE 8,000, then the total direct materials used are: A) LE 8,000 8) LE 18,000 C) LE 26,000 D) Le 36,000 3. If setup cost is LE 25,000 (its cost driver is number of setup which are 30 and 20 times for products (A & B respectively), maintenance cost is LE 15,000 (its cost driver is maintenance hours which are 350 & 650 hours respectively), using ABC, the cost driver rate for setup is: A) LE 500 8) LE 40, C) LE 800 D) Le 15 4. If overhead allocation rate is LE 5 per machine hour (traditional method), total machine hours are 14,000 hours, overhead costs composed of utilities and inspections, total cost of inspections is LE 28,000, factory decided to use ABC using machine hours as a cost driver for utilities, then cost driver rate for utilities is: ALES 8) LE2 CLES D)LES 5. Using ABC, the factory has two main activities, machine maintenance and quality inspections, the cost driver rates are LE 5 each machine hour and LE 10 per time (No. of inspections) respectively, total machine hours are 8,000 hours, the total overhead costs are LE 60,000, then total number of inspections is: A) 1,500 times B) 2,000 times €) 1,000 times D) 2,500 times 6. If setup cost is LE 25,000 (its cost driver is number of setup which was 30 and 20 times for products (A & B respectively), maintenance cost is LE 15,000 (its cost driver is maintenance hours which was 350 and 650 hours for A and B respectively), using traditional method based on maintenance hours as an allocation base, then the allocation rate is: A)LE AO B) LE 800 CLE 25 D) Leas 7. If setup cost is LE 50,000 (its cost driver is number of setup which are 60 and 40 times for products A and B respectively), maintenance cost is LE 30,000 (its cost driver is maintenance hours which are 700 and 1,300 hours respectively), using traditional method based on maintenance hours as an allocation base, then the allocated overhead cost for product A is: A) LE 10,500 8) LE 17,500 C) LE 28,000 D) Le 52,000 8, If overhead inspection cost is LE 25,000 (its cost driver is number of inspections which are 30 & 20 times for products (A and B respectively), cost of quality control is LE 15,000 (its cost driver is direct labor hours which are 350 and 650 hours respectively), using ABC method, the overhead cost for product B is: A) LE 20,250 8) LE 19,750 C) LE 28,000 D) LE 26,000 9. Using traditional method, the direct cost per unit is LE 10 (included LE 6 Labor cost) and allocated overhead cost per unit is LE 20 (5 direct hours x LE 4 per hour), the factory turned to ABC, the factory performed two activities were maintenance (its cost driver is direct labor hours with rate LE 3) and ‘employees services (its cost driver is direct labor cost with rate LE 2), the selling price per unit is 50, then the profit per unit is: ALE 1S 8) LE 13, cle 14 D)LE 16 Page | 11Exercise 3 Answers: No. | Choice Justification or Calculations 1 |p _ | Allocated OH Cost = Budgeted OH Rate x Actual Allocation Base =lE4 x 1,600MH_=LE6,400 Product A | Product B_| Total Issued Direct Material LE 20,000 | LE 16,000 | LE 36,000 2 | C || -Returned Direct Material (4,000) | (6,000) | (10,000) Transferred DM from A to B (8,000) _| 8,000 : Direct Material Used LE8,000 | LE18,000_| LE 26,000 LE 25,000 3 | A | Setup Rate=="T22°°° - Le S00 Total OH Cost = OH Rate x Allocation Base (Cost driver) = LE 5 x 14,000 MH = LE 70,000 4 | c___ | Utilities Cost = Total OH Cost - Inspection Cost = 70,000 — 28,000 = LE 42,000 LE 42,000 Utilities Rate => ATE = Le 3 per MH Maintenance Cost = Maintenance Rate x Maintenance Cost driver = LES x 8,000 MH= LE 40,000 5 | B__ | Inspection Cost = Total OH Cost - Maintenance Cost = LE 60,000 ~ 40,000 = LE 20,000 Inspection Cost _ LE 20,000 Number of Inspections = PEON EOS! _ LE A000" = 2,000 times inspection Rate" 10 Total OH Cost _ LE 25,000 415,000 6 | A | Single OH Rate = =~ S OR COS _ BE ZEON EO = LE AO location Base 350+ 650 "i Total OH Cost __LES0,000 + 30,000 7 | ¢_ | Single OH Rate= Zi cation Base” 700 + 1,300 OH Costs Allocated to product A= LE40 x 700H = LE28,000 ; 1LE25,000 a ~ _Inspeaton Rat =!iegg = LESOO per iepecton s| B ~ Maintenance Rate = ="? - 16 15 per hour 350+ 650 OH Cost allocated for Product B = (LE 500 x 20) + (LE 15 x 650) = LE 19,750 Selling Price per unit LE 50 ~ Direct Cost per unit (10) 9 | 8 |)-Allocated Maintenance Cost (LE 3/DLH x 5 DLH) (15) Allocated employee services cost (LE 2/DL Cost x LE6DLCost) _| (12) Profit per unit E13 Exercise 4 (Midterm 2019} (True or False) 1. Normal costing allocates direct costs to a cost object by using budgeted direct-cost rates times actual consumption of resources. 2. If overhead control exceeds overhead allocated, this is called under-allocated overhead. 3. Proration method spreads overheads among beginning work in process, ending work in process, and finished goods. 4, The cost driver of a direct cost is often used as the cost-allocation base. 5. The actual indirect cost rate is calculated as the actual indirect costs divided by budgeted quantity of the cost allocation base. 6. Write-off approach to account for under/over allocated overhead is simply written off to cost of finished goods. Page | 12(micas) 7. Moon Company had expected overhead of $100,000 when 25,000 labor hours were worked. During 2018, there were 30,000 labor hours worked and $115,000 in overhead resulted. If a normal costing. system were used, over-applied (0) under-applied (U) overhead would be: A) $15,000 (U) 8) $5,000 (U) ) $5,000 (0) 0) $15,000 (0) 8 During March, the following costs were incurred in completing Job FOC4: direct materials $13,700; direct labor $4,800; administrative costs $1,400; and selling costs $5,600. Factory overhead was applied at the rate of $25 per machine hour, and Job FOC4 required 800 machine hours. If Job FOC4 resulted in 7,000 good units, then the cost of goods sold per unit would be: A) S65 8) $55 $5.7 0) $6.3 9. Mooly Co. manufactured 1,200 units of its product (A) in the month of March. It incurred a total cost ‘of $120,000 during the month. Out of this $120,000, $45,000 comprised of direct materials used in the product and the rest was the conversion cost involved in the process. There was no opening or closing inventory. What will be the total cost per unit of the product, assuming conversion costs contained 10,000 of indirect labor? A) $100 8) $91.66 ©) $37.5 0) $62.5 10. Fixed overhead costs remain constant at $400,000 per month. During high-output months, variable overhead costs are $320,000, and during low-output months, variable overhead costs are $80,000. What are the overhead allocation rates with respective to the high and the low output months if budgeted professional labor-hours are 16,000 for high-output months and 4,000 for low-output months? A) $45 per hour; $120 per hour 8) $45 per hour; $45 per hour C) $25 per hour; $20 per hour D) $56.20 per hour; $120 per hour Use the following information to answer questions from (11) to (14): The Red ribbon Co. has three job orders that began in February 2018, and applies manufacturing overhead on the basis of direct-labor cost. The following charges relate to the job orders by the end of February: Job # Direct Materials | Direct Labor Job#101 (completed and sold) $152,500 $35,000 Job#102 (completed and not yet sold) 297,750 65,000 Job#103 (still in production) 69,750 80,000 Further information ~ Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 & $250,000 respectively. ~ Actual manufacturing overhead for February totaled $233,000. 11. Manufacturing overhead costs applied are: A) $225,000 8) $100,000 ¢) $925,000 D) $444,000 12. Over applied (0) /under-applied (U) overhead is: A) $9.00 (0) 8) $8,000 (U) ) $33,000 (U) D) $8,000 (0) 13. Using the proration method based on ending balances, the ending balance of WIP after proration is A) $249,750 8) $251,910 ) $231,250 D) $247,950 14. Using the proration method based on ending balances, the ending balance of finished goods after proration is: A) $449,750 8) $444,000 ¢) 447,840 D) $440,160 Use the following information to answer questions from (15) to (20): Esprit Co. makes two models of watches - the Classic (C) anal the Sport (S). A traditional product costing system is used at present. Details of the two products for a typical period are: Page | 13,— Hours per Unit Materials Cost] Production Laborhours [ Machinehours | per unit ($) Units Product C os 1 200) 3,000 Product $ 15 3 250) 7,000 Direct labor costs $60 per hour and manufacturing overheads are allocated based on a machine hour basis. The overhead allocation rate for the period is $28 per machine hour. Total manufacturing overheads are $672,000. An activity based costing (ABC) system is being considered and further analysis shows that the total manufacturing overheads can be divided among the following: Set-up costs 55% Storeroom costs 15% Inspection costs 30% The following activities volumes are associated with each product line for the period as a whole: Noofset-ups | No. ofrequisitions | No. of inspections Product (C) 85 2 180 Product _(S) us 79 120 Total 200 300 300 15. Based on the traditional costing system, the total cost per unit of product (C) is: A) $200 8) $230 c) $424 ) $258 16. Based on ABC system, the allocation rate of set-up costs is: A) $672 8) $1,848 C) $1,008 D) $28 17. Based on ABC system, the total inspection costs to be allocated to product (S) is: A) $80,640 8) $212,520 c) $21,168 ) $120,960 18. Based on ABC system, the total overhead costs to be allocated to product (C) is: A) $299,208 8) $372,792 c) $157,080 D) $120,960 19. Based on ABC system, the direct costs per unit of product (C) is: A) $320 8) $230 c) $340 D) $200 20. Based on ABC system, the total cost per unit of product (S) is: A) $299.73 8) $329.736 ) $393,256 ) $253,256 Exercise 4 Answers: No. | Mark Correction, Justification or Calculations Normal costing traces direct costs to a cost object by using actual direct-cost rates times + |_F | actual consumption of resources. > | 7 | Overhead control isthe account of actual overhead, and when it exceeds the overhead allocated, there is an under-allocated overhead. 3_|_F | Ending WIP, Finished Goods, and Cost of Goods sold 4 | _F_| The cost driver of an indirect cost is often used as the cost-allocation base. 5 | g_| The actual indirect cost rate is calculated as the actual indirect costs divided by actual quantity of the cost allocation base. 6 |g _| Write-off approach to account for under/over allocated overhead is simply written off to cost of goods sold. Budgeted OH Rate = Budgeted cost + Budgeted base = $ 100,000 + 25,000 DLH=$ 4 /DLH 7 | | Allocated OH Cost = Budgeted Rate x Actual base = $ 4 x 30,000 DLH = $120,000 Over applied = Applied OH ~ Actual OH = $ 120,000 ~$ 115,000 = $ 5,000 over applied Direct Materials $13,700 Direct labor 4,800 a | p || Overhead (800 x 25) 20,000 Total Cost of goods sold $38,500 + Number of units +7,000 Cost of goods sold per unit $5.5 Page | 149 Total cost per unit of the product = 120,000 + 1,200 units = $100 overhead allocation rates the high output months = “W000 0000 - 45 per hour 10 overhead allocation rates the low output months = “°° 080° - 120 per hour Budgeted OH Rate = = ""8 - $ 1.25 / DL cost 200,000 Job 101 (COGS) Job 102 (FG) Job 103 (WIP) Total 1 DM cost 152,500 297,750 69,750 DL cost 35,000 65,000 80,000 Allocated 1.25x35,000= | 1.25x65,000= | 1.25x80,000= overhead 43,750 81,250 100,000 225,000 | Total cost 231,250 ‘444,000 249,750 ‘925,000, 12 Under-applied (U) overhead = 233,000 Actual OH — 225,000 Allocated OH = $ 8,000 Under WIP Ending balance before proration = LE 249,750 ; 249,750 2B + Proration of under applied = (8,000 x ===> 160 WIP Ending balance after proration LE 251,910 FG Ending balance before proration LE 444,000 ' 444,000 14 + Proration of under applied = (8,000 x 925,001 FG Ending balance after proration Total cost per unit of product (C): Direct Materials $200 1s Direct labor (60 x 0.5) 30 Overhead (28 x 1) 28 Total Cost per unit $258 Using AB G Setup costs rate = (55% x LE 672,000) + 200 = 1,848 Storeroom costs rate = (15% x LE 672,000) + 100 = 1,008 Inspection costs rate = (30% x LE 672,000) = 300 = 672 17 Total inspection costs to be allocated to product (S) = 672 x 120 = 80,640 18 Overhead costs to allocated to product C = (1,848 x 85) + (1,008 x 21) + (672 x 180) = 299,208 | Direct costs per unit of product (C): 19 Direct Material = 1 x 200 = $200 per unit Direct labor = 0.5 x 60 per hour = $30 per unit Total direct costs = 200 + 3 Total cost per unit of product (S): Direct Materials (250 x 7,000) 1,750,000 Direct Labor (1.5 x 60 x 7,000) 630,000 Allocated OH: Setup costs (1,848 x 115) 212,520 20 ‘Storeroom costs (1,008 x 79) 79,632 Inspection costs (672 x 120) 80,640 Total Allocated OH 372,792 Total Cost of Lamp LE 2,752,792 + Total number of units 7,000 cost per unit of product (8): 393.256 Page | 15Exercise 5 (Midterm 2018} Costing systems that are used for the costing of like or similar units of products in mass production are called: a) inventory-costing systems b) job-costing systems ©) process-costing systems d) weighted-average costing systems Why are actual cost systems rare in practice? a)it is difficult to obtain actual cost information for prime costs. b)itis difficult to obtain actual cost information for conversion costs. c) prime costs cannot easily be assigned to products and services. d)accurate cost information cannot be obtained on a timely basis. The actual costing method uses which of the following? a)actual cost of direct material, direct labor, and overhead b)estimated cost of direct material, direct labor, and overhead c) actual cost of direct material and direct labor and estimated cost of overhead d)estimated cost of direct material and direct labor and actual cost of overhead Ina job-order costing system, the amount of overhead cost applied to a job that remains incomplete at the end of a period is part of which of the following at the end of the period? a) raw materials inventory _b) work in process _¢) finished goods inventory d) overhead control For a company which produce its products in batches, the CEO's salary is a(n) cost. a)batch-level —_b) output unit-level _c) facility-sustaining d) product-sustaining ‘When applied overhead exceeds actual overhead cost, a) overapplied overhead is added to cost of goods sold b) overapplied overhead is deducted from cost of goods sold ) underapplied overhead is added to cost of goods sold 4d) underapplied overhead is deducted from cost of goods sold The following information is reported by XYZ Company: Estimated overhead $200,000 estimated activity 20,000 direct labor hours, actual overhead $175,000, actual activity 18,000 direct labor hours. ‘At the end of the accounting period, overhead is overapplied in the amount of a) $6,000 b) $7,000 c) $5,000 d) $8,000 XYZ Company adjusts cost of goods sold when overhead is overapplied or underapplied. The predetermined overhead rate for the year is $2 per direct labor hour. Estimated direct labor hours were 20,000. Actual direct labor hours were 25,000 and actual overhead cost was $55,000. What is the amount of adjustment to cost of goods sold? a) $2,000 b) $3,000 c) $4,000 d) $5,000 Unit-level cost drivers are most appropriate as an overhead assignment base when a) several complex products are manufactured —_b) only one product is manufactured ¢) direct material costs are low d) prime costs are low 10 Quality-inspection cost is an example of __costs. a) output unit-level b) batch-level ©) facility-sustaining 4) product-sustaining 1 The following information pertains to Job No. 15: Direct materials $1,000, Direct labor $2,000 Manufacturing overhead is applied at 60 percent of direct labor cost. 1f 100 units were produced in Job No. 15, the unit cost of Job No. 15 would be? a) $42 b) $24 ©) $52 4) $25 Page | 1612 13 ‘An actual overhead rate can be calculated a) at the beginning of the year_b) at the beginning of each month c) atthe end ofeach month _d) either at the beginning of the year or at the beginning of the month XYZ Company uses job-order costing and applies overhead based on 75 percent of direct labor cost. If Job 5555 is applied with $30,000 of manufacturing overhead, How much direct labor was incurred? a) $40,000 b) $10,000 ) $30,000 4) $50,000 14 15 If an overhead variance is immaterial, what is the appropriate accounting treatment? a) the amount is closed to cost of goods sold b) the amount is closed to cost of goods sold and work in process ) the amount is closed to cost of goods sold, work in process and finished goods inventory d) the amount is closed to raw materials inventory, work in process and finished goods inventory ‘Answer the following questions (15 & 16) using the information below: XYZ Corporation manufactures two models of office chairs, a standard and a deluxe model. ‘The following activity and cost information has been compiled: Product No. of Setups | No. of Components | No. of Direct Labor Hours Standard 2 8 255) Deluxe 28 12 245, Overhead costs $52,000 $78,000 Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model? a) $65,700 b) $63,600 ©) $66,300 4) $66,700 16 Number of setups and number of components are identified as activity-cost drivers for overhead. ‘Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model? a) $45,600 b) $46,800 ) $47,400 ) $49,200 Exercise 5 Answers: No | Choice Justification or Calculations vec 2 | D | Actual costs are only determined at the end of the period not the beginning. 3A 4 | 8 _| incomplete means still work-in process 5 | C | Related to the whole facility 6] 8 Budgeted OH Rate = Budgeted cost + Budgeted base = $ 200,000 +20,000 DLH = $ 10 / DLH 7 | C | Allocated OH Cost = Budgeted Rate x Actual base = $ 10 x 18,000 DLH = $180,000 Over applied = Applied OH ~ Actual OH = $ 180,000 - $ 175,000 = $ 5,000 over applied 3 |p __ Allocated OH Cost = Budgeted Rate x Actual base = $ 2 x 25,000 DLH = $50,000 ‘Adjustment for under applied = 55,000 Actual OH — 50,000 Allocated OH = $ 5,000 Under 9 | B | Asunit level costs are assumed for each unit of activity, increases with number of units. 10 | 8 _| Quality inspection is done for each batch of activity. Page | 17Job order No. “15” Direct Materials $1,000 Direct labor 2,000 11 | A _ | | Overhead (2,000 x 60%) 200 Total Cost $4,200 + Number of units 100 Cost per unit $42 mic Allocated OH = 75% x DL Cost Bl A $ 30,000 = 75% x DL Cost 30,000 + 75% = $ 40,000, lA it 220000 $78,000, a5 | ¢__| Single OH Rate => == OH assigned to standard model = $ 260 x 255 DLH = $ 66,300 Setup Rate = $ 52,000 + (12 + 28)=$ 1,300 Components Rate = $ 78,000 + (8 + 12) OH assigned to Standard model under ABC: 16) 8 Setup costs = $1,300x12 =$15,600 Components cost = $ 3,900 x 8 = $ 31,200 Total OH assigned to standard model = $ 46,800 3,900 Exercise 6 (Midterm 2017): (True or False) 1. A job costing system is a grouping of individual indirect cost items. 2. Direct costs are costs related to a particular cost object that cannot be traced to that cost object in a cost-effective manner. Cost allocation is the process of distributing indirect costs to cost objects. Direct costs are allocated to the cost object using a cost-allocation method. The cost driver of an indirect cost is often used as the cost-allocation base. The budgeted indirect cost rate is actual indirect costs divided by budgeted quantity of the cost allocation base. 7. Proration is the spreading of under allocated or over allocated overhead among beginning work in process, ending work in process, and finished goods. Activity based costing system differs from traditional costing systems in the treatment of prime cost. 9. Activity-based costing (ABC) can eliminate cost distortions because ABC systems use single cost pool for all overhead costs, thereby enabling simplicity. oy aw 2 (micas) 10. Filex Company manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of L.E. 18 per direct labor-hour. The following data are obtained from the accounting records for June 2014: direct materials L.E. 140,000, direct labor (4,000 direct hours x LE. 10/hour) L.E. 40,000, indirect labor L.E. 13,000, plant facility rent L.E, 30,000, depreciation on plant machinery L.E, 22,500, sales commissions LE. 24,000, administrative expenses L.E. 28,000, then the total amount of manufacturing overhead costs allocated to all jobs during June 2014 is A) LE. 93,500 8) LE. 72,000 C)LE. 89,000 D)LE. 65,500 Page | 1811. If the issued direct materials to orders "101" and "102" are LE. 5,000 and LE. 4,000 respectively, returned direct materials from orders are L.E. 1,000 and L.E. 1,500 respectively, and transferred direct materials from "101" to "102" is LE. 2,000 , then the cost of direct materials for order "101" is: A) LE. 2,000 B) LE. 4,500 C) LE. 4,000 D) LE. 2,500 12, If the budgeted overhead costs are LE, 10,000 , the factory decided to depend on a direct labor costs as an allocation base, budgeted and actual direct labor costs are L.E. 5 000, and LE. 4,000, then the total allocated (normal) overhead cost is: A) LE, 9,000 8) LE. 10,000 C) LE. 8,000 D) LE. 12,500 13. If the total allocated overhead cost is L.E. 8,000, the budgeted and actual rates are LE. S and LE. 8 per direct labor cost respectively, direct cost of labor is L.E. 8 per direct hour, then the direct labor hours are: A) 160 hours 8) 250 hours ¢) 125 hours ) 200 hours 14, If the budgeted and actual allocation rates are LE. 2 and L.E, 4 per direct labor hour respectively, total budgeted and actual direct labor hours are 2,000 and 3,000 hours respectively, then the factory has: A) LE, 6,000 under allocation B) LE, 6,000 over allocation C) LE. 3,000 under allocation D) LE. 3,000 over allocation 15. If the total allocated costs for all orders are L.E. 100,000 (of which 40% are allocated to sold orders), the revenue for sold orders is L.E. 70,000, total over allocated manufacturing overhead is L.E. 20,000. The factory decided to use ending balance method to prorate over allocation. Based on this information the gross profit is: A) LE. 50,000 8) LE. 22,000 ) LE. 38,000 D) Le. (30,000) Use the following data and information to determine the best choice from number 16 to 19: The Golden Coffee manufacturer applies overhead based upon machine-hours. Budgeted factory overhead was L.E, 200,000 and budgeted machine-hours were 10,000, Actual factory overhead was LE. 215,000 and actual machine-hours were 13,000. Before disposition of under/over applied overhead, the cost of goods sold was L.£, 440,000 and ending inventories were as follows: Direct materials Le. 81,000 wip Le, 132,000 Finished goods LE, 308,000 Total Le. 521,000 16. Factory overhead costs applied are: A) LE, 215,000 8) LE, 260,000, C)LE. 415,000 ) 200,000 17. Over applied (0)/under-applied (U) overhead is: A) L.E.15,000 0 B) LE, 150,000U —C) LE. 45,0000) LE. 45,000 18. Using the proration method based on ending balances, the ending balance of WIP after proration is: A)LE, 125,250 B) LE. 6,750 C)LE, 138,750 D) LE. 132,000 19. Using the proration method based on ending balances, the ending balance of finished goods after AVLE 15750 )LE. 0600 ¢)LE.323,750.—_p)Le. 292,250 Page | 19Use the following data and information to determine the best choice from number 20 to 29: PLB Co produces two meat types: lamb and beef. The cost information per ton is as follows: Lamb Beef Direct materials $500 $1,550 Labor time 2.5 hours 1.26 hours Production (tones) 100 100 Direct labor costs $10 per hour The costs of activities were identified for January and February 2017 as below: Activity Costs Machine set up cost LE 16,000 Ordering materials LE 10,500 Storage LE 9,900 Packing costs LE 10,600 ‘The usage of activities by each of the two products is: lamb Beef Production runs 8 24 Inventory orders 20 55 Days of storage 45 54 Packing costs are incurred on a per ton basis, and are the same per ton for all products. 20. With traditional method, using No. of hours as an allocation base, total costs of Lamb are: A) LE, 155,000 8) Le. 172,010 C) LE. 83,750 D) LE, 50,000 21. With traditional method, using No. of hours as an allocation base, total costs of Beef are: A) LE, 155,000 8) Le. 172,010 C) LE. 83,750 D) LE. 50,000 22. Using ABC, how much of the machine set up cost will be assigned to Lamb? A) LE. 12,000 8) LE. 4,000 C)LE. 16,000 D) LE. 500 23. Using ABC, how much of the ordering materials cost will be assigned to Beef? A) LE. 2,800 8) LE. 10,500 C) LE. 7,700 D) LE, 9,900 24. Using ABC, how much of the storage cost will be assigned to Lamb? A) LE. 4,500 8) LE. 5,400 C)LE. 9,900 D)LE. 10,500 25. Using ABC, how much of the storage cost will be assigned to Beef? A) LE. 4,500 8) LE. 5,400 C)LE. 9,900 D)LE. 10,500 26. Using ABC, how much of packing costs will be assigned to Lamb? A) LE. 5,600 8) LE. 3,600 C) LE. 10,600 D) Le. 5,300 27. Using ABC, how much of packing costs will be assigned to Beef? A) LE. 5,300 8) LE. 10,600 C)LE. 6,500 D)LE. 7,000 28. Using ABC, how much of the total costs will be assigned to Lamb? A) LE. 16,600 8) LE, 50,000 C)LE. 69,100 D) LE. 2,500 29. Using ABC, how much of the total costs will be assigned to Beef? A) LE, 155,000 B) Le. 186,660 C) LE. 155,000 D) LE, 30,400 Page | 20Exercise 6 Answers: No. | Mark Correction, Justification or Calculations 1 | F | Cost Pool is a grouping of individual indirect cost items 2 |_F | Canbe traced 3[7 4 |_F | indirect costs Saat 6 | f__| The budgeted indirect cost rate is budgeted indirect costs divided by budgeted quantity of the cost allocation base 7 | F _| Ending WIP, Ending FG, and Cost of Goods Sold 8 |_F _| Treatment of indirect costs 9 | _F__| Use more than one cost pool for overhead costs, thereby enabling accuracy. 10 | B | Allocated OH = Budgeted rate x actual usage = LE 18 x 4,000 DLH = LE 72,000 11 |_A__| Cost of DM for order “101” = 5,000 issued — 1,000 returned — 2,000 transferred out = 2,000 12 | c__| Budgeted OH Rate = 10,000 Budgeted cost + 5,000 budgeted Labor cost = LE 2/ DL cost Allocated OH cost = LE 2 Budgeted Rate x LE 4,000 actual DL cost = LE 8,000 Allocated OH cost = LE 8,000 , Budgeted Rate=LES per DL.cost , DL. cost = LE 8 per DLH 13 | D_ | Total actual DL cost = LE 8,000 allocated OH + LE 5 budgeted rate = LE 1,600 Since DL cost per hour = LE 8, then, DL hours = LE 1,600 + LE 8 = 200 DL hours Actual OH = (LE 4 actual rate x 3,000 Actual Hours) = LE 12,000 14 | A_ | Allocated OH = (LE 2 budgeted rate x 3,000 Actual hours) = LE 6,000 Under or (over) allocated = 12,000 ~ 6,000 = LE 6,000 under allocated COGS balance before proration = LE 100,000 x 40% = LE 40,000 = Proration of Over allocated (20,000 x 40%) (8,000) 15 | C_ | cogs balance after Proration LE 32,000 Gross profit = Sales revenues ~ COGS = 70,000 ~ 32,000 = LE 38,000 16 | — | Budgeted OH Rate = Budgeted OH cost + Budgeted MH=LE 200,000 + 10,000 MH = LE 20/MH Applied OH = Budgeted Rate x Actual MH = LE 20 x 13,000 MH = LE 260,000 17 |__| Overapplied OH = 215,000 actual OH ~ 260,000 allocated OH = LE 45,000 Over applied WIP Ending balance before proration LE 132,000 132,000 18 | A | ~Proration of over applied = (45,000 x ————“"° ___) = 6,750 440,000+132,000+308,000 WIP Ending balance after proration E 125,250 FG Ending balance before proration = LE 308,000 308,000 19 | D_ | —Proration of over applied = (45,000 x °°" ___)_ = 15,750 440,000+132,000+308,000 FG Ending balance after proration = LE 292,250 Under traditional costing for No 21 & 22: Total OH costs = 16,000 + 10,500 + 9,900 + 10,600 = LE 47,000 Total DL hours= (2.5 Hr per ton x 100 ton) + (1.26 Hr per ton x 100 ton}= 250 + 126 = 376 DLH i 7,000 Single OH Rate = =" = LE 125 / DLH 2) ¢ Total Cost of Lamp: £500 x 100 ton = LE50,000 LE 10 x 2.5 hr per ton x 100 tons = LE 2,500 E 125 x(2.5 hr per ton x 100 ton) =LE 31,250 Total Cost of Lamp = LE 83,750 Page | 21,Total Cost of Be Direct Materials = LE 1,550x 100ton = LE 155,000 21 | B | Direct Labor = LE 10 x 1.26 Hr x 100 ton = LE 1,260 Overhead = LE 125 x (1.26 HR x 100 ton) = LE 15,750 Total Cost of Beef = LE 172,010 Under ABC, from 23 to 30: Machine Setup Rate = LE 16,000 + (8 + 24) = LE 500 per production run Ordering Materials = LE 10,500 + (20 + 55) = LE 140 per Inventory order 22 | B | storage Rate = LE 9,900 + (45 +54) = LE 100 per storage day Packing Costs = LE 10,600 + (100 + 100) = LE 53 per ton, Machine setup costs assigned to Lamp = LE 500 x8 = LE 4,000 23 |__| Ordering Materials cost assigned to beef = LE 140 x 55 = LE 7,700 24 | A__| Storage cost assigned to Lamp = LE 100 x 45 = LE 4,500 25 |B _| Storage cost assigned to Beef = LE 100 x 54 = LE 5,400 26 | D_| Packing cost assigned to Lamp = LE $3 x 100 = LE 5,300 27 | A _| Packing cost assigned to Beef = LE 53 x 100 = LE 5,300 Total Cost of Lamp Direct Materials (LE 500 x 100 ton) LE 50,000 Direct Labor (LE 10 x 2.5 Hr x 100 ton) 2,500 Allocated OH: ela Machine setup (LE 500 x 8) 4,000 Ordering Materials (LE 140 x 20) 2,800 Storage (LE 100 x 45) 4,500 Packing (LE 53 x 100) 5,300 Total Allocated OH 16,600 Total Cost of Lamp LE 69,100 Total Cost of Beef Direct Materials (LE 1,550 x 100 ton) LE 155,000 Direct Labor (LE 10 x 1.26 Hr x 100 ton) 1,260 Allocated OH: Machine setup (LE 500 x 24) 12,000 aaa) 8 Ordering Materials (LE 140 x 55) 7,700 Storage (LE 100 x 54) 5,400 Packing (LE 53 x 100) 5,300 Total Allocated OH 30,400 Total Cost of Lamp LE 186,660 Page | 22Exercise 7 (Quiz Dr Waleed 2019): (True or False) 1. The cost-allocation base is a systematic way to link an indirect cost or group of indirect costs to cost objects. 2. Adjusted allocation rate equals dividing total allocated overhead by under or over allocation. 3. Indirect manufacturing costs should be allocated equally to each job. 4, ABC gives more accurate results than traditional cost method. (cas) 5. Ifthe issued direct materials to order (A & B) are 10,000 LE and 8,000 LE respectively, returned direct materials are 2,000 LE and 3,000 LE respectively, and transferred direct materials from A to B is 4,000 LE, then the direct materials for order Ais: A) 4,000 LE 8) 9,000 LE c) 8,000 Le D) 5,000 LE 6. If the budgeted overhead costs are 20,000 LE, the factory decided to depend on a direct labor costs as an allocation base, budgeted and actual direct labor costs are 10,000 LE and 8,000 LE, then the total allocated (normal) overhead cost is: A) 18,000 LE 8B) 20,000 LE C) 16,000 LE 1) 25,000 LE 7. Ifthe budgeted and actual allocation rates are 2 LE & 3 LE per machine hour respectively, budgeted and actual machine hours are 1,000 & 800 hours respectively, then the total allocated overhead cost: A) 2,000 LE 8) 1,600 LE C) 3,000 LE D) 2,400 LE 8. Ifthe budgeted & actual allocation rates are 1 LE & 2 LE per direct labor hour respectively, budgeted & actual direct labor hours are 2,000 & 3,000 hours respectively, then the actual overhead cost is: ‘A) 6,000 LE 8) 3,000 LE C) 4,000 LE D) 2,000 LE 9. Ifthe budgeted and actual allocation rates are 2 LE & 4 LE per direct labor hour respectively, total budgeted and actual direct labor hours are 2,000 and 3,000 hours respectively, and total actual overhead costs are 5,000 LE, then the factory has: A) 1,000 under allocation 8B) 1,000 over allocation C) 3,000 under allocation D) 3,000 over allocation 10. If the total allocated overhead cost is 8,000 LE, the budgeted & actual rates are 5 LE & 8 LE per direct labor cost respectively, direct cost of labor is 8 LE per direct hour, then the direct labor hours are: A) 160 LE 8) 250 LE ©) 125 Le D) 200 LE 11, If total allocated costs for orders (101, 102 &103) are 20,000, 25,000 & 30,000 LE respectively, under allocation is 15,000 LE, the factory decided to prorate under allocation based on ending balance method, then total actual costs for order 101 are: A) 36,000 LE 8) 30,000 LE C) 16,000 LE D) 24,000 LE 12. If total allocated costs for orders (101, 102 & 103) are 20,000, 25,000 & 28,000 LE respectively, {included direct costs 60%, 80% and 75% of total costs), over allocation is 10,000 LE, the proration of, over allocation based on allocated overhead costs, then total actual costs for order 101 are: A) 16,000 LE B) 22,500 LE C) 24,500 LE D) 24,000 LE 13. If total allocated costs for orders (101, 102 & 103) are 20,000, 25,000 & 28,000 LE respectively, {included overhead costs 2,000 LE, 5,000 LE and 3,000 LE), over allocation is 4,000 LE, the proration of over allocation based on adjusted allocation rate, then over allocation for order 101 is: A) 400 LE 8) 1,200 LE ) 2,000 Le ) 800 LE Page | 2314, If total allocated costs for all orders are 100,000 LE (included 40% cost of sold orders}, the revenue for sold orders is 70,000 LE, total over allocation 20,000 LE, the factory decided to use ending balance method to prorate over allocation, then the gross profit is: ‘A) 50,000 LE 8) 22,000 LE C) 38,000 LE D) 30,000 LE Answer the following questions (from 15 to 20): Following information of activities and costs for 2016: Activities Overhead costs Cost driver Activities level Setup 100,000 LE No. of machine hours | 20,000 M. hours Mixing 60,000 LE No. of Kilos of material _| 10,000 Kilogram Quality control 80,000 LE No. of products 2,000 units Products A, B and C used the following activities services: A B c ] Direct costs 52,000 LE 108,000 LE 80,000 LE | Setup 4,000 machine hours | 6,000 machine hours | 10,000 machine hours | Mixing 3,000 Kilograms 3,800 Kilograms. 3,200 Kilograms Quality control 300 units 900 units ‘800 units | 15. With traditional method, using No. of machine hours as an allocation base, total costs of product (A) ‘A) 480,000 LE 8) 200,000 LE ) 180,000 LE ) 100,000 LE 16. With traditional method, using No. of machine hours as an allocation base, total costs of product (C): A) 480,000 LE 8) 200,000 LE C) 180,000 LE ) 100,000 Le 17. According to ABC method, cost driver rate for setup activity is: A) 40 LE 8) 6 LE C)SLE D)12Le 18. According to ABC method, cost driver rate for mixing activity is: A) 40 LE 8) 6 LE C)SLE D)12LE 19. With ABC method, total costs of product (A) are: ‘A) 480,000 LE 8) 102,000 LE C) 196,800 LE D) 181,200 LE 20. With ABC method, total costs of product (B) are: ‘A) 480,000 LE 8) 102,000 LE C) 196,800 LE D) 181,200 LE ‘Answer the following questions (from 21 to 27): Minons Company uses Job order system costing. The following information is available for 2015: Budget ‘Actual Overhead costs, LE 60,000 LE 80,000 Total direct materials LE 50,000 LE 50,000 sis the allocation base. Next information is about two job order which was working. Job order 101_| Job order 102 LE 30,000 LE 20,000 Direct material transferred to job No. 101 = LE 2,000 Direct material transferred to job No. 102 LE 4,000 = Direct labor costs LE 38,400 LE 51,600 21. Cost of material for order (102) is: A) 26,000 LE B) 28,000 LE C) 22,000 LE ) 50,000 LE 22. Total costs of material for all orders are: A) 26,000 LE 8B) 28,000 LE C) 22,000 LE ) 50,000 LE Page | 2423. 24, 25. 26. 27. Budgeted overhead cost rate is: A)3 LE 8) 24LE C)1.2 LE D)1.6LE There is: A) under allocation 20,000 B) over allocation 20,000 ) under allocation 16,000 D) over allocation 16,000 Using allocated ovethead costs method to prorate under/over allocated overhead costs, under/over allocation for order (102) is: ‘A) 10,000 8) 8,800 LE C) 8,000 LE D) 11,200 LE Using ending balance method to prorate under/over allocated overhead costs, under/over allocation for order (101) is: ‘A) 10,000 8) 8,800 LE C) 8,000 LE D) 11,200 LE Using allocated overhead costs method to prorate under/over allocated overhead costs, total actual costs for order (102) is: A) 91,200 LE B) 108,800 LE C) 88,800 LE D) 111,200 LE Exercise 7 Answers: No. | Choice Calculations aa] aT 2 | f__ | Percentage of over/under allocation equals under/over allocation divided by total allocated overhead. 3 | F | Should not be allocated equally because each job consumes different amount of resources. a[T 5 | A _| Direct materials for order A = 10,000 ~ 2,000 - 4,000 = 4,000 20,000 Budgeted allocation rate LE 2/labor hour 6] oc 10,000 Allocated overhead cost = budgeted allocation rate x actual quantity = 2 x 8,000 = 16,000 LE 7 | __B _| Allocated overhead cost = budgeted allocation rate x actual quantity = LE 2x 800 = 1,600 LE 8 | A _| The actual overhead cost = actual allocation rate x actual quantity = LE 2 x 3,000 = 6,000 LE 9 |B _| The factory has: 5,000 actual OH — (2 x 3,000) allocated OH = LE 1,000 Over allocation 3000 Total direct labor cost = °° = 1,600 LE 10} D q Then, Direct labor hours = ~~ = 200 LE Balance before proration = LE 20,000 20,000 11 | D__ | +Proration of under applied = (15,000 x") = ie 4,000 20,000+25,000+30,000 Balance after proration = LE 24,000 ‘Allocated overhead cost of Job 101 = 20,000 — (60% x 20,000) = 8,000 Allocated overhead cost of Job 102 = 25,000 - (80% x 25,000) = 5,000 Allocated overhead cost of Job 103 = 28,000 - (75% x 28,000) = 7,000 12°) A’ | Balance of job 101 before proration = LE 20,000 8,000 = Proration of over allocated = (10,000 x "= LE 4,000 8,000+5,000+7,000, Total actual costs of job 101 after proration LE 16,000 4000 13 | D__| Proration of over allocation for order 103 2,000) =LE 800 2,000 + 5,000 + 3,000 Page | 25‘COGS balance before proration = LE 100,000 x 40% = LE 40,000 = Proration of Over allocated (20,000 x 40%) (8,000) a COGS balance after Proration LE 32,000 Gross profit = Sales revenues — COGS = 70,000 - 32,000 = LE 38,000 Under traditional costin; Total OH costs = 100,000 + 60,000 + 80,000 = 240,000 Total machine hours = 4,000 + 6,000 + 10,000 = 20,000 Single OH Rate = 240,000 + 20,000 = LE 12 / machine hours [ Total Cost of product Direct costs £ 52,000 Overhead = LE 12 x 4,000 = LE 48,000 Total Cost of product A = LE 100,000 Total Cost of product C: Direct costs £ 80,000 Overhead = LE 12 x 20,000 = LE 120,000 Total Cost of product v7 + per machine hour ia isos] mean cco oa scopenee Quality Control = LE 80,000 + 2,000 units = LE 40 per unit Total Cost of product A: Direct costs = LE52,000 19 Overhead: Set up (5 x 4,000) £ 20,000 Mixing (6 x 3,000) = LE 18,000 Quality Control (40 x 300) = LE 12,000 Total Cost of product A 7 Total Cost of product Direct costs = LE 108,000 Eo Overhead: Set up (5 x6,000) = LE 30,000 Mixing (6 x 3,800) = LE 22,800 Quality Control (40 x 900) = LE 36,000 Total Cost of product B Job 101 (COGS) Job 102 (FG) Total 2 DM cost {30,000 + 2,000 ~ 4,000) =| (20,000 + 4,000-2,000]= | a5 28,000 22,000 Di cost 38,400 51,600 90,000 25,000 22,000 oS Allocated overhead | "x 60,000 = 33,600 | =~" x 60,000= 26,400 | 60,000 Total cost 100,000 100,000 200,000 Overhead costs — _ 60,000 23 Budgeted overhead cost rate ee ee eee hale 24 There is = 80,000 Actual OH - 60,000 Allocated OH = $ 20,000 Under allocation 25 Proration of under applied for order 102 = (20,000 x ==" ) = 8,800 LE ; 5 700,000 26 Proration of under applied = (20,000 x55 55, )= 10,000 balance before proration = LE 100,000 26,400 27 + Proration of under applied =(20,000x20"0°) = 8,800 balance after proration = LE 108,800 Page | 26Exercise 8 (Final 2020 - Model 3): True or False: L 17 Companies often use multiple cost-allocation bases to allocate indirect costs because indirect costs have different cost drivers. Grounds-maintenance costs incurred during the summer months will distort indirect-cost rates that are computed monthly. Direct costs are traced the same way for actual costing and normal costing, Job costing information system is only used in non-manufacturing compat Direct costs are assigned to cost objects through allocation. If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run. A refined costing system provides better measurement of the costs of indirect resources used by different cost objects, no matter how differently various cost objects use indirect resources. ‘An ABC system with many activities can become overly detailed and unwieldy to operate. Service-sustaining costs are the costs of activities that managers can't trace to individual services but that support the organization as a whole. Cost of acquiring reliable data is considered when choosing a cost-allocation base to allocate costs in ABC systems. Implementing ABC system involves use of different cost rates for different activities to compute indirect costs of a product. Implementing ABC system never demotivates employees. ABC systems can’t be used in marketing decisions links an indirect cost to a cost object. A) Cost-allocation base B) Cost Pool C) Cost Assignment D) Cost Tracing Process costing: A) allocates all product costs, including materials and labor. 8B) results in different costs for different units produces. C)is commonly used by general contractors who construct custom-built homes. D) is used exclusively in manufacturing. Fora given job the direct costs associated with the job are... A) Actual overhead B) Raw material C) sunk costs D) fixed costs Which of the following statements is true of a peanut-butter costing systern? A) A peanut-butter costing system typically has more-homogeneous indirect cost pools. 8) A peanut-butter costing system broadly averages or spreads the cost of resources u objects. C) A peanut-butter costing system assumes that all costs are variable. D) In a peanut-butter costing system, costs of activities are used to assign costs to other cost objects such as products or services based on the activities the products or services consume. rmly to cost Which of the following statements is true of activity-based costing? A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non manufacturing indirect costs. 8) Activity based costing is more suited to companies with high product diversity than companies with single product line. C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services. D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products. Page | 2719+ Facility-sustaining costs are the costs of activities .... A) undertaken to support individual products or services regardless of the number of units or batches in which the units are produced. B) related to a group of units of a product or services, rather than each individual unit of product or service. C) that managers cannot trace to individual products or services but that support the organization as a whole. D) performed on each individual unit of a product or service such as the cost of energy, machine depreciation, and repair, 20- Which of the following statements is true of ABC systems? ‘A) ABC systems provide less insight than traditional systems into the management of the indirect costs. B) ABC systems are used by managers for strategic decisions rather than for inventory valuation in merchandising companies. C) Service companies find great value from ABC because a vast majority of their cost structure is composed of direct costs. D) ABC systems is valuable for pricing decisions but not for understanding, managing, and reducing costs in government institutions. 21- Which of the following is a disadvantage of an ABC system? A) It classifies some indirect costs as direct costs. B) It assumes all costs as direct costs. C) It needs activity-cost rates to be updated regularly. D) It ignores direct costs of a product. Using the following information to answer questions (22 to 25] Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled: Product No. of setups | No.of components | No. of DL hours Standard 2 8 255, Deluxe 28 I 12 245 Overhead Costs $52,000 $78,000 22- Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the Standard Model? A) $65,700 8) $ 63,600 C) $ 66,300 D) $66,700 23- Assume a trad nal costing system applies the overhead costs based on direct labor hours. What the total amount of overhead costs assigned to the Deluxe Model? A) $ 64,300 8) $ 63,700 ©) $63,300 D) $63,600 24- Number of setups and number of components are identified as activity-cost drivers for overhead. ‘Assuming an ABC system is used, What is the total amount of overhead costs assigned to the Standard Model? A) $49,200 B) $45,600 c) $46,800 0) $47,400 25- Number of setups and number of components are identified as activity-cost drivers for overhead. ‘Assuming an ABC system is used, What is the total amount of overhead costs assigned to the Deluxe Model? A) $84,400 B) $ 83,200 C) $82,600 D) $ 80,800 Page | 28Exercise 8 Answers: No] 1]2|/3]4,/5|]6]7]8]9 | 10] 11] 12] 13 aT eee) | ied ST es | ee No. | Choice Explanation 14 A 15 16 7 18 19 20 22 ol@|o|a|a|a|> a2 |__| Overhead Rate= “SO = 260 Allocated amount to Standard Model = 260 x 255 = $ 66,300 Overhead Rate= 2 = 260 23 | 5 _| Allocated amount to Deluxe Model = 260 x 245 = $ 63,700 oR Allocated amount to Deluxe Model = 130,000 - 66,300 = $ 63,700 Overhead Setup Rate= 73,000 24 | ¢__ | Overhead Component Rate= =°°° = 3,900 20 Total amount of OH costs assigned to Standards Model = 12x1,300 + 8x3,900 = $ 46,800 Total amount of OH costs assigned to Deluxe Model = 28x1,300 + 12x3,900 = $83,200 25 B True / False Questions 1) Each cost pool may have multiple cost allocation bases. 2) All costs other than direct materials and direct manufacturing labor are classified as indirect costs. 3) Actual costing helps managers get information earlier and take corrective measures to improve labor efficiency. - ‘| 4) A budgeted indirect-cost rate is computed for each cost pool using budgeted indirect costs and the budgeted quantity of the cost-allocation base. 5) Product-cost cross-subsidization is very common when costs are uniformly spread across various products. 6) Peanut-butter costing system is a more refined costing system compared to activity-based costing system. | Page | 297) Direct tracing of costs reduces the amount of costs classified as indirect costs. 8) In activity based costing systems, limiting cost-allocation bases to only units of output strengthens the cause-and-effect relationship between the cost-allocation base and the costs in a cost pool. 9) An effective activity-based cost system always ignores facility-sustaining | cost drivers. 10) ABC systems attempt to trace more costs as indirect costs. 11) As ABC systems get very detailed and more cost pools are created, more allocations are necessary to calculate activity costs for each cost pool, which increases the chances of misidentifying the costs of different activity cost pools. = _ _ _ 12) Activity-based management refers to the use of information derived from ABC analysis to analyze and improve operations, Multiple Choice Questions 13)A is a grouping of individual indirect cost items. ‘A) cost allocation | B) cost assignment | C) cost pool ] D) job-costing system base | | 14) Assigning direct costs to a cost object is called : ‘A) cost allocation _| B) cost assignment _| C) cost pooling [D) cost tracinj [ 15) The cost allocation base A)isa B) are costs related toa | C)isanything | D) isa systematic grouping of | particular cost object that _| for which a way to link an | individual cannot be traced to that | measurement of || indirect cost or indirect cost | cost object in an costs is desired | group of indirect items economically feasible way costs to cost objects 16) Which of the following are reasons for using longer periods, such as a year, to calculate indirect cost rates? ‘A) shorter the B) longer the ©) shorter the D) longer the period, the greater | period, the greater | period, the smaller | period, the smaller is the influence of | is the influence of _| is the influence of | is the influence of seasonal patterns | seasonal patterns _| seasonal patterns _| seasonal patterns ontheamountof | onthe amount of | on the amount of _| on the amount of costs costs opportunity costs _| opportunity costs 17) Ina normal costing system, the Manufacturing Overhead Control account A) is increased by B) is credited with ] C)isdecreased by | D) is debited | allocated amounts transferred | allocated with actual manufacturing to Work-in-Process | manufacturing overhead costs overhead | overhead Page | 3018) Which of the following is true of refinement of a costing system? ‘A) While refining a costing system, companies should identify as many indirect costs as is B)A homogeneous cost pool will use multiple cost drivers to C) It reduces the use of broad averages for assigning the cost of resources to cost D) It is likely to yield the most decision-making benefits when direct costs are a economically allocate costs. | objects. high percentage of feasible. total costs. 19) Extracts from cost information of Hebar Corp.: Simple L3. Complex L7 | = Pack Pack _ Total ‘etup cost allocated using direct labor- ours 18,750 6,250 §525,000 Setup cost allocated using setup-hours 513,200 __[511,800 25,000 Which of the following statement is true of costing? Hebar's setup costs under traditional A) L3 pack is | undercosted by B) L7 pack is undercosted by $5,550 $5,450 C) L3 pack is D) L7 pack is covercosted by overcosted by $5,550 $5,550 20) Which of the following differentiates job costing from process costing? A) Job costing is used when each unit of output is identical, and process costing deals with unique products. B) Job costing is used when each unit of output is identical and | not produced in batches, and process costing deals with unique products produced on large scale. ©) Process costing. | D) Job costing is is used when each | used by unit of outputis | manufacturing industries, and process costing is used by service industries identical, and job costing deals with unique products not produced in batches. Answer the following questions (21, 22, 23, 24,25) using the information below: Stark Corporation has two departments, Car Rental and Truck Rental. Central costs may be allocated to the two departments in various ways. Car Rental Truck Rental Number of Vehicles in fleet 850 430 Number of employees 125 5 Sales $750,000 $375,000 21) If administrative expense of $77,500 is allocated on the basis of number of employees, the amount allocated to the Car Rental Department would be A) $47,387.50, B) $48,437.50 ©) $46,877.50 D) $49,247.50 Page | 3122) If advertising expense of $125,000 is allocated on the basis of sales, the amount allocated to the Car Rental Department would be A) $83,333.33, B) $87,777.67 C) $86,666.67, D) $85,467.33 23) If the facility lease expense of $384,000 is allocated on the basis of vehicles in the fleet, the amount allocated to the Truck Rental Department would be A) $125,000 B) $127,000 C) $129,000 D) $123,000 24) If the facility lease expense of $384, 000 is allocated on the ba fleet, the amount allocated to the Car Rental Department would be sis of vehicles in the | A) $249,000 B) $255,000 C) $267,000 D) $261,000 25) If advertising expense of $112,500 is allocated on the basis of sales, the cost per cost driver rate would be A) $0.15 B) $0. _D) $0.13 No.| i | 2 a[s 7 9 [40 [a1] 12 we| Tt [T i No. | Choice Explanation B c 14 D 15 D 16 A 7 c 18 c 3 Pack product is allocated $ 18,750 under traditional costing (using DLH), 19 | While it is allocated only $ 13,200 under ABC (based on setup hours), So, itis over costed by $ 5,550 (18,750 — 13,200) 20 c ‘Administration Expenses= $ 77,500 2a B | Overhead Rate= 725° — 387.5 Allocated amount to Car Rental = 387.5 x 125 = $ 48,4375 ‘Advertising Expenses= $ 125,000 2 A | Overhead Rates “000. = * Allocated amount to Car Rental = 7 x 750,000 = $83,333.3 Facility lease Expense= $ 384,000 23 C | Overhead Rate= “8° = 300 Allocated amount to Truck Rental = 300 x 430 = $ 129,000 ea | Facility lease Expense= $ 384,000 Allocated amount to Car Rental = 384,000 ~ 129,000 = $255,000 Advertising Expenses = 112,500 25 c = Total overhead cost __112.500 _ Cost per cost driver rate = 7 $0.10 Page | 32Exercise 10 (Final 2020 ~ Second Chance): ‘The First Part: TRUE or FALSE For the following statements from number 1 to number 5, determine whether each statement is true (A) or false (B): 1. A job costing system is applied in calculating the cost of identical products. 2. Direct costs are costs related to a particular cost object that can be traced to that cost object in a cost- effective manner. 3. Cost allocation is the process of distributing direct costs to products. 4. Demand for refinements to the costing system has accelerated due to increase in direct costs. 5. The budgeted indirect cost rate is actual indirect costs divided by budgeted quantity of the cost allocation base. ‘The Second Part: MULTIPLE CHOICE For each of the following statements from number (6) to number (25), determine the best choice: 6. If the budgeted overhead costs are $ 10,000, the factory decided to depend on a direct labor costs as an allocation base, budgeted and actual direct labor costs are $ 5,000 and S 4,000, then the total allocated (normal) overhead cost is: _ - [LAYS 9,000 'B) $ 10,000 TO)$ 8,000 ‘D)S 12,500 ] 7. ABC Company manufactures watches and applies manufacturing overhead costs to production based on direct labor-hour. The following data are obtained from the accounting records for October 2019: {$370,000 _| Direct material Direct labor (3,300 hours @ $17/hour) | Indirect labor Plant facility rent ‘Depreciation on plant machinery and equipment ‘Sales commissions ‘Administrative expenses ‘The actual amount of manufacturing overhead costs incurred in October 2019 totals ‘A) $277,500 B)_ $162,000 ©_ $116,000 D)_$123.000 1 \se the following data to answer questions from number (8) to number (10) Velshi Printers estimates manufacturing overhead by $1,400,000 for an annual production capacity of 10 million pages. For 2019, Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing ‘manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool ‘Manufacturing overhead | Activity level costs _| = Design changes $100,000 400 design changes Setups zi 1,200,000 3,000 setups | Inspections 100,000 10,000 inspections Total manufacturing overhead costs $1,400,000 During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: ‘Activity | Money Managers | Hospital Systems Pages 90,000 106,000 ‘Design changes 3 0 ‘| Sekine 1a vecenees | cxeaneee RUSE] Inspections 30 38 Page | 338. Under traditional costing system, using No. of pages ASO |B) S011 S140 —*[D) S14 9, Using ABC, the setup cost rate ‘ [A)s40 B) 3400 ‘5000 [py S00 ] 10. Using ABC, the cost of setups assigned to Hospital Systems is [ays72000 TB) $720 Tc) $3200 TDS Exercise 9 Answers: an allocation base, the manufacturing overhead rate No. | Mark Correction / Explanation 1 F A job costing system is applied in calculating the cost of unique products z2[ T 5 a Cost allocation is the process of distributing indirect costs to products’ 4 F | Demand for refinements to the costing system has accelerated due to competition in product markets. 5 F The budgeted indirect cost rate is budgeted indirect costs divided by budgeted quantity of the cost allocation base. 6 c Allocated (Normal) OH Cost = budgeted rate x actual allocation base Budgeted costs 19,000 Budgeted Rate = 77 ored allocation base ~ "5,000 Allocated OH = 2 x 4,000 = $ 8,000 7 c Actual amount of manufacturing overhead costs = 22,000 + 53,000 + 41,000 = $116,000 8 A OH = $ 1,400,000, Capacity = 10 million The Manufacturing Overhead Rate = “20 — $9.14 000,000 oalaae 7007000 — The Setup Cost Rate: 73000 $400 10 c the cost of setup assigned to Hospital Systems= 400 x 8 = $ 3,200 Page | 34