Problem 1:

Rocket Products manufactures three types of remote-control devices: Economy,

Standard, and Deluxe. The company, which uses activity-based costing, has identified
five activities (and related cost drivers). Each activity, its budgeted cost, and related cost
driver is identified below.

Activity Cost Cost Driver

Material handling $ 225,000 Number of parts
Material insertion 2,475,000 Number of parts
Automated machinery 840,000 Machine hours
Finishing 170,000 Direct labor hours
Packaging 170,000 Orders shipped
Total $ 3,880,000

The following information pertains to the three product lines for next year:

Economy Standard Deluxe

Units to be produced 10,000 5,000 2,000
Orders to be shipped 1,000 500 200
Number of parts per unit 10 15 25
Machine hours per unit 1 3 5
Labor hours per unit 2 2 2

Assume that Rocket is using a volume-based costing system, and the preceding
overhead costs are applied to all products on the basis of direct labor hours.

a) The overhead cost that would be assigned to the Deluxe product line is closest
to:

SOLUTION:

Total labor hours

= Sum of Units from Economy, Standard, and Deluxe × Number of Labor hours

= (10,000 + 5,000 + 2,000) × 2 = 34,000;

Ratio of Deluxe labor hours to total labor hours × Total overhead costs

= (4,000 ÷ 34,000) × $3,880,000

= $456,471.
b) The overhead cost that would be assigned to the Standard product line is
closest to:

SOLUTION:

Total labor hours

= Sum of Units from Economy, Standard, and Deluxe × Number of Labor hours

= (10,000 + 5,000 + 2,000) × 2 = 34,000;

Ratio of Standard labor hours to total labor hours × Total overhead costs

= (10,000 ÷ 34,000) × $3,880,000

= $1,141,176.
Problem 2:

Kramerica, Incorporated currently uses traditional costing procedures. They apply $800,000 of
overhead to products Beta and Zeta on the basis of direct labor hours. The company is
considering a shift to activity-based costing and the creation of individual cost pools that will use
direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost
drivers. Data on the cost pools and respective driver volumes follow.

Product Pool Number 1 (Driver: DLH) Pool Number 2 (Driver: SU) Pool Number 3 (Driver: PC)
Beta 1,200 45 2,250
Zeta 2,800 55 750
Pool
$ 160,000 $ 280,000 $ 360,000
Cost

a) The overhead cost allocated to Beta by using traditional costing procedures would be:

SOLUTION:

Total Pool Cost = Sum of Number 1, 2, and 3

= $160,000 + $280,000 + $360,000 = $800,000;

Overhead allocated to Beta = (Beta DLH ÷ Total DLH) × Total Pool Cost

= (1,200 ÷ 4,000) × $800,000 = $240,000.

b) The overhead cost allocated to Beta by using activity-based costing procedures would
be:

SOLUTION:

(Total Pool Costs for Number 1 × Pool Number 1 Beta ratio to Total Pool Costs) + (Total Pool
Costs for Number 2 × Pool Number 2 Beta ratio to Total Pool Costs) + (Total Pool Costs for
Number 3 × Pool Number 3 Beta ratio to Total Pool Costs)

= [($180,000 × 1,800 ÷ 6,000) + ($300,000 × 35 ÷ 100) + ($380,000 × 3,750 ÷ 5,000)]

= $54,000 + $105,000 + $285,000

= $444,000.
Problem 3:

Private Corporation manufactures two types of transponders—number 156 and number 157—
and applies manufacturing overhead to all units at the rate of $80.50 per machine hour.
Production information follows.

Number 156 Number 157

Anticipated volume (units) 6,000 14,624

Direct material cost $ 40 $ 65

Direct labor cost 25 25

The controller, who is studying the use of activity-based costing, has determined that the firm's
overhead can be identified with three activities: manufacturing setups, machine processing, and
product shipping. Data on the number of setups, machine hours worked, and outgoing
shipments, the activities' three respective cost drivers, follow.

Number 156 Number 157 Total

Setups 60 40 100

Machine hours worked 15,000 25,000 40,000

Outgoing shipments 120 80 200

The firm's total overhead of $3,220,000 is subdivided as follows: manufacturing setups,

$290,000; machine processing, $2,400,000; and product shipping, $530,000.

Required:
A. Compute the pool rates that would be used for manufacturing setups, machine
processing, and product shipping in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit overhead costs of product
numbers 156 and 157 if the expected manufacturing volume is attained.
C. Assuming use of activity-based costing, compute the total cost per unit of product
number 156.
SOLUTION:

A. Manufacturing setups: $290,000 ÷ 100 setups (SU) = $2,900 per SU

Machine processing: $2,400,000 ÷ 40,000 machine hours (MH) = $60 per MH
Product shipping: $530,000 ÷ 200 outgoing shipments (OS) = $2,650 per OS

B.

Activity Number 156 Number 157

Manufacturing setup:

60 SU × $2,900 $ 174,000

40 SU × $2,900 $ 116,000

Machine processing:

15,000 MH × $60 900,000

25,000 MH × $60 1,500,000

Product Shipping:

120 OS × $2,650 318,000

80 OS × $2,650 212,000

Total $ 1,392,000 $ 1,828,000

Production volume (units) 6,000 14,624

Cost per unit

$ 232 $ 125

$1,392,000 ÷ 6,000 units = $232

$1,828,000 ÷ 14,624 units = $125

C. Direct material ($40) + direct labor ($25) + overhead ($232) = $297