Activity Accounting: Activity-Based Costing and Activity-Based Management 1
Chapter 14
ACTIVITY ACCOUNTING: ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT
PROBLEM
2.
Distortion of Batch-Level Costs. Maupin Company's existing cost system accumulates all overhead in a single cost pool
and allocates it based on direct labor hours. Last year, overhead costs totaled $1,500,000, and Product A used 3,000 of
the 30,000 total direct labor hours. An ABC study revealed that of the total overhead cost for last year, $100,000
represented batch-level costs; these batch-level costs are driven by work orders; and a total of 500 work orders were
issued, of which 25 were for Product A.
Required: With respect to batch-level costs only, calculate the existing cost system's direction and amount of cost
distortion for Product A.
SOLUTION
The existing system allocated 3,000/30,000 = 10% of all overhead to Product A last year; but A accounted for only 25/500
= 5% of batch-level activity. So, with respect to batch-level costs only, the existing system overstated A's cost last year by
a total of:
(10% - 5%) x $100,000 = $5,000 overstatement
PROBLEM
3.
Value-Added and Non-Value-Added Activities. Sequential Company's sole product, a unique end table made from
lumber, is produced and sold in the following sequence of steps:
(a) wood received and inspected at receiving dock
(b) wood moved to stores inventory
(c) wood moved to Cutting Department
(d) wood cut to size
(e) moved to Planing Department
(f) placed in queue to await planing
(g) wood smoothed and shaped
(h) moved to Inspection Department
(i) inspected
(j) moved to in-process storage area
(k) moved to Assembly Department
(l) various parts of the table are assembled
(m) placed on hand truck to await material handler
(n) moved to Staining Department
(o) tables stained
(p) moved to Inspection Department
(q) inspected
(r) moved to Shipping Department
(s) tables shipped
Required: Which of the steps add value to the product?
SOLUTION
Activities (d), (g), (l), and (o) are the only ones which add value.
PROBLEM
4.
Allocation Rates and Driver Rates. The Barre Division of Scranton Company manufactures many high-volume products
and many low-volume products. Selected information follows for Barre's most recent year of operations:
Indirect costs:
Machine related:
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Machine operation..................................................................................................................... $ 75,000
Machine setup.......................................................................................................................... 50,000
Total machine overhead...................................................................................................... $ 125,000
Materials related:
Materials handling..................................................................................................................... $ 45,000
Other materials-related.............................................................................................................. 60,000
Total materials overhead..................................................................................................... $ 105,000
Other overhead......................................................................................................................... $ 190,000
Total overhead.......................................................................................................................... $ 420,000
Machine hours................................................................................................................................. 10,000
Pounds of materials.......................................................................................................................... 50,000
Setup hours..................................................................................................................................... 1,000
Purchase orders............................................................................................................................... 1,200
Direct labor hours............................................................................................................................ 25,000
Barre's existing cost system allocates all machine-related overhead based on machine hours and all the remaining overhead
based on direct labor hours. However, a recent study determined that machine setup costs and material handling costs are
primarily related to setup hours, and other materials-related costs are primarily related to the number of purchase orders
issued. Barre does not keep significant materials inventories on hand.
Required:
(1) Calculate the two overhead rates in Barre's existing cost system for the most recent year.
(2) Calculate the overhead (driver) rates that an ABC system would use for the most recent year, making only the
changes suggested by the results of the recent study.
SOLUTION
$125,000 of machine- related overhead
= $12.50 per machine hour
10,000 machine hours
$295,000 of remaining overhead costs
= $11.80 per direct labor hour
25,000 DLH
(1)
$75,000 of machine operation overhead
= $7.50 per machine hour
10,000 machine hours
$50,000 of machine- setup overhead + $45,000 of materials handling overhead
= $95 per se
1,000 setup hours
$60,000 of other materials- related cost
= $50 per purchase order
1,200 purchase orders
$190,000 of _ other overhead _
= $7.60 per direct labor hour
25,000 DLH
(2)
PROBLEM
5.
Activity Accounting: Activity-Based Costing and Activity-Based Management 3
Comparison of ABC and Traditional Costing; Two Products. Blaine Company produces two products, Nifty and So-So,
and uses a costing system in which all overhead is accumulated in a single cost pool and allocated based on machine hours.
Blaine's management has decided to implement ABC because a cost study has revealed significant amounts of overhead
cost related to setup activity and design activity. The number of setups and the number of design hours will be the activity
drivers for the two new cost pools, and machine hours will continue as the base for allocating the remaining overhead.
Selected information follows for Blaine Company's most recent year of operations:
Nifty So-So Total
Units produced............................................................................. 500 15,500 16,000
Direct material cost:
Per unit................................................................................ $ 200 $ 20
Total.................................................................................... $ 100,000 $ 310,000 $ 410,000
Machine hours............................................................................. 3,000 47,000 50,000
Direct labor cost........................................................................... $ 50,000 $ 350,000 $ 400,000
Setups........................................................................................ 120 80 200
Design hours............................................................................... 6,000 4,000 10,000
Overhead:
Setup-related........................................................................ $ 250,000
Design-related...................................................................... 350,000
Other................................................................................... 900,000
Total overhead...................................................................... $ 1,500,000
Required:
(1) Calculate the total and per-unit costs reported for the two products by the existing costing system.
(2) Calculate the total and per-unit costs reported for the two products by the ABC system.
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SOLUTION
(1) Blaine Company
Product Costs from Existing Cost System
Overhead Rate:
$1,500,000 of overhead divided by 50,000 machine hours = $30 per machine hour
Nifty So-So Total
Direct material............................................................................. $ 100,000 $ 310,000 $ 410,000
Direct labor................................................................................. 50,000 350,000 400,000
Overhead:
$30 x 3,000.......................................................................... 90,000
$30 x 47,000........................................................................ 1,410,000 1,500,000
Total cost.................................................................................... $ 240,000 $ 2,070,000 $ 2,310,000
Units produced............................................................................. 500 15,500
Cost per unit................................................................................ $ 480.00 $ 133.55
(2) Blaine Company
Product Costs from Activity-Based Costing System
Overhead Rate:
$250,000 setup-related costs divided by 200 setups = 1,250 per setup
$350,000 design-related costs divided by 10,000 design hours = $35 per design hour
$900,000 of other overhead divided by 50,000 machine hours = $18 per machine hour
Nifty So-So Total
Direct material............................................................................. $ 100,000 $ 310,000 $ 410,000
Direct labor................................................................................. 50,000 350,000 400,000
Overhead:
$1,250 x 120 setups.............................................................. 150,000
$1,250 x 80 setups................................................................ 100,000 250,000
$35 x 6,000 design hours....................................................... 210,000
$35 x 4,000 design hours....................................................... 140,000 350,000
$18 x 3,000 machine hours.................................................... 54,000
$18 x 47,000 machine hours.................................................. 846,000 900,000
Total cost.................................................................................... $ 564,000 $ 1,746,000 $ 2,310,000
Units produced............................................................................. 500 15,500
Cost per unit..............................................................................$ 1,128.00 $ 112.65
