BRIEF EXERCISES

BE 163
Sanchez Co. has three activities in its manufacturing process: machine setups, machining, and
inspections. Estimated annual overhead cost for each activity is $80,000, $162,500, and $28,000,
respectively. The expected annual use in each department is 1,000 setups, 12,500 machine
hours, and 875 inspections.

Instructions
Compute the overhead rate for each activity.

Solution 163 (5 min.)

Machine setups $80,000 ÷ 1,000 = $80 per setup
Machining $162,500 ÷ 12,500 = $13 per machine hour
Inspections $28,000 ÷ 875 = $32 per inspection

BE 164
Boots and More, Inc. uses activity-based costing to assist management in setting prices for the
company’s three major product lines. The following information is available:
Expected Use of
Activity Cost Pool Estimated Overhead Cost Driver per Activity
Cutting $ 900,000 25,000 labor hours
Stitching 8,000,000 320,000 machine hours
Inspections 2,800,000 160,000 labor hours
Packing 800,000 64,000 finished goods units
BE 164 (cont.)
Instructions
Compute the activity-based overhead rates.

Solution 164 (5 min.)

Estimated Expected Use of Activity-Based

Activity Cost Pool Overhead ÷ Cost Driver per Activity = Overhead Rates
Cutting $ 900,000 25,000 labor hours $36.00 per labor hour
Stitching 8,000,000 320,000 machine hours $25.00 per machine hour
Inspections 2,800,000 160,000 labor hours $17.50 per labor hour
Packing 800,000 64,000 finished units $12.50 per finished unit
4-2 Test Bank for ISV Managerial Accounting, Fourth Edition

BE 165
Stereo City Co. manufacturers speakers and receivers and uses activity-based costing. The
following information is available:
Expected Use of
Activity Cost Pool Estimated Overhead Cost Driver per Activity
Ordering $180,000 24,000 orders
Soldering 192,000 64,000 machine hours
Inspecting 930,000 120,000 labor hours
Packing 840,000 56,000 boxes

Instructions
Compute the activity-based overhead rates.

Solution 165 (5 min.)

Estimated Expected Use of Activity-Based

Activity Cost Pool Overhead ÷ Cost Driver per Activity = Overhead Rates
Ordering $180,000 24,000 orders $ 7.50 per order
Soldering 192,000 64,000 machine hours $ 3.00 per machine hour
Inspecting 930,000 120,000 labor hours $ 7.75 per labor hour
Packing 840,000 56,000 boxes $15.00 per box

BE 166
Plum Tired manufactures tires for dune buggies and has two different products, nubby tires and
smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and
incurs $171,000 of overhead costs. The following information is available:
Activity Total Cost Cost Driver
Materials handling $60,000 Number of requisitions
Machine setups 54,000 Number of setups
Quality inspections 57,000 Number of inspections

For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The
smooth tires require 600 requisitions, 300 setups, and 400 inspections.
BE 166 (cont.)
Instructions
Determine the overhead rate for each activity.

Solution 166 (5–10 min.)

The overhead rates are:
Expected Use
Activity Overhead of Cost Drivers Overhead Rate
Materials handling $60,000 1,000 $ 60/req.
Machine setups 54,000 500 $108/setup
Quality inspections 57,000 600 $ 95/insp.
 Activity-Based Costing 4-3

BE 167
Malt Co. manufactures several types of microbrew beers. Malt has identified the following
activities:
a. Inventory control e. Machine setups
b. Purchasing f. Brewing
c. Receiving g. Packing and shipping
d. Employee training

Instructions
Classify each activity as value-added or non-value-added.

Solution 167 (5 min.)

Activity Classification
a. Inventory control Non-value-added
b. Purchasing Non-value-added
c. Receiving Non-value-added
d. Employee training Non-value-added
e. Machine setups Non-value-added
f. Brewing Value-added
g. Packing and shipping Value-added

EXERCISES
Ex. 168
All Wood Corporation manufactures dining chairs and tables. The following information is
available:
Dining Chairs Tables Total Cost
Machine setups 200 600 $36,000
Inspections 250 470 $54,000
Labor hours 2,600 2,400

All Wood is considering switching from one overhead rate based on labor hours to activity-based
costing.
Ex. 168 (cont.)
Instructions
Perform the following analyses for these two components of overhead:
a. Compute total machine setups and inspection costs assigned to each product, using a single
overhead rate.
b. Compute total machine setups and inspection costs assigned to each product, using activity-
based costing.
c. Comment on your findings.

Solution 168 (8–12 min.)

a. Single overhead rate
($36,000 + $54,000) ÷ 5,000 = $18 per labor hour
4-4 Test Bank for ISV Managerial Accounting, Fourth Edition

Dining chairs: 2,600 × $18 = $46,800

Tables: 2,400 × $18 = 43,200
$90,000

b. Activity-based costing
Machine setups: $36,000 ÷ 800 = $45 per setup

Inspections: $54,000 ÷ 720 = $75 per inspection

Dining chairs: (200 × $45) + (250 × $75) = $27,750

Tables: (600 × $45) + (470 × $75) = 62,250
$90,000

c. The use of activity-based costing resulted in the allocation of less cost to dining chairs and
more cost to tables. The change in cost allocation reflects a more accurate allocation based
on cause and effect.

Ex. 169
Vid-saver, Inc. has five activity cost pools and two products (a budget tape rewinder and a deluxe
tape rewinder). Information is presented below:

Cost Drivers by Product

Activity Cost Pool Cost Driver Est. Overhead Budget Deluxe
Ordering and Receiving Orders $ 110,000 600 400
Machine Setup Setups 297,000 500 400
Machining Machine hours 1,000,000 150,000 100,000
Assembly Parts 1,200,000 1,200,000 800,000
Inspection Inspections 300,000 550 450

Instructions
Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and
200,000 units of Deluxe. Round your answer to the nearest cent.

Solution 169 (15–20 min.)

Activity Cost Pool Est. Overhead ÷ Total Est. Activity = Overhead Rate
Ordering & Receiving $ 110,000 1,000 orders $110/order
Machine Setup 297,000 900 setups $330/setup
Machining 1,000,000 250,000 mach. hours $4/machine hour
Assembly 1,200,000 2,000,000 parts $.60/part
Inspection 300,000 1,000 inspections $300/inspection

Budget Deluxe
Cost Cost Cost Cost
Activity Cost Pool Driver × Rate = Assigned Driver × Rate = Assigned
Ordering & Receiving 600 $110 $ 66,000 400 $110 $ 44,000
Machine Setup 500 330 165,000 400 330 132,000
Machining 150,000 4 600,000 100,000 4 400,000
Assembly 1,200,000 .60 720,000 800,000 .60 480,000
 Activity-Based Costing 4-5

Inspection 550 300 165,000 450 300 135,000

$1,716,000 $1,191,000
÷ 700,000 ÷ 200,000
$2.45 per unit $5.96 per unit

Ex. 170
Ami Reed owns a small department store in a metropolitan area. For twenty years, the
accountant has applied overhead to the various departments—Women's Apparel, Men's Apparel,
Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee hours
worked. Ami Reed 's daughter, who is an accounting student at a local university, has suggested
her mother should consider using activity-based costing (ABC). In an attempt to implement ABC,
Ami Reed and her daughter have identified the following activities.

Instructions
Determine a cost driver for each of the activities listed below.
Cost Pool Cost Driver
a. Placing orders ______________________________
b. Stocking merchandise ______________________________
c. Waiting on customers ______________________________
d. Janitorial and Maintenance ______________________________
e. Training employees ______________________________
f. Administrative ______________________________
g. Advertising and Marketing ______________________________
h. Accounting and Legal Services ______________________________
i. Wrapping packages ______________________________
4-6 Test Bank for ISV Managerial Accounting, Fourth Edition

Solution 170 (6–9 min.)

Cost Pool Cost Driver
a. Placing orders number of orders; volume of individual orders
b. Stocking merchandise number of orders; dollar volume of orders
c. Waiting on customers number of customers; dollar volume of sales
d. Janitorial and Maintenance square feet occupied; traffic through area
e. Training employees total number of employees; number of new employees
f. Administrative number of employees; dollar volume of business
g. Advertising and Marketing number of ad campaigns
h. Accounting and Legal Services dollar volume of sales
i. Wrapping packages number of packages

Ex. 171
A list of possible cost drivers is presented below:

Code Code
A Engineering hours D Number of subassemblies
B Setups E Boxes
C Machine hours F Orders

Instructions
For each of the following activity cost pools, select the most appropriate cost driver:

Code Cost Pool

_____ 1. Machine setup

_____ 2. Ordering and receiving

_____ 3. Packaging and shipping

_____ 4. Engineering design

_____ 5. Machining

_____ 6. Assembly

Solution 171 (4–6 min.)

1. B 4. A
2. F 5. C
3. E 6. D
 Activity-Based Costing 4-7

Ex. 172
Identify appropriate cost drivers for the following activity cost pools:
1. Human resources
2. Security
3. Receiving
4. Data processing

Solution 172 (3–5 min.)

1. Number of employees, number of hires
2. Square footage
3. Shipments received; pounds received
4. Lines printed, CPU minutes, storage units

Ex. 173
Two of the activity cost pools for Montana Company are (a) machining ($300,000) and (b)
inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours
(12,500), square footage (2,000), and number of inspections (200).

Instructions
Compute the overhead rate for each activity.

Solution 173 (4–6 min.)

$300,000
(a) Machining: —————————— = $24 per machine hour
12,500 machine hours

$42,000
(b) Inspections: ———————- = $210 per inspection
200 inspections

Ex. 174
Tanner, Inc. produces two models of cameras, Standard and Luxury. It sells 100,000 Standard
cameras and 15,000 Luxury cameras annually. Tanner switched from traditional costing to
activity-based costing and discovered that the cost allocated to Luxury cameras increased so
dramatically that the Luxury was now only marginally profitable.

Instructions
Give a probable explanation for this shift.

Solution 174 (4–6 min.)

Low-volume products often require more special handling, such as more machine setups and
inspections, than high-volume products. Also, the overhead costs incurred by the low-volume
product are often disproportionate to a traditional allocation base such as direct labor hours.
4-8 Test Bank for ISV Managerial Accounting, Fourth Edition

Ex. 175
Compute activity-based costing rates from the following budgeted data for Tatum's Tools:

Activity Cost Pool Budgeted Cost Budgeted Cost Driver

Designing $2,250,000 75,000 designer hours
Machining 525,000 21,000 machine hours
Packing 620,000 31,000 labor hours

Solution 175 (3–5 min.)

Designing ($2,250,000 ÷ 75,000) = $30 per designer hour
Machining ($525,000 ÷ 21,000) = $25 per machine hour
Packing ($620,000 ÷ 31,000) = $20 per labor hour

Ex. 176
Holiday Favorites manufactures a wide variety of holiday and seasonal decorative items.
Holiday’s activity-based costing overhead rates are:
Purchasing $350 per order
Storing $2 per square foot/days
Machining $100 per machine hour
Supervision $5 per direct labor hour

The Haunted House project involved three purchase orders, 4,000 square feet/days, 60 machine
hours, and 30 direct labor hours. The cost of direct materials on the job was $19,000 and the
direct labor rate is $30 per hour.

Instructions
Determine the total cost of the Haunted House project.

Solution 176 (5–7 min.)

Direct materials $19,000
Direct labor (30 × $30) 900
Factory overhead
Purchasing (3 × $350) $1,050
Storing (4,000 × $2) 8,000
Machining (60 × $100) 6,000
Supervision (30 × $5) 150 15,200
Total cost $35,100

Ex. 177
Label the following costs as value-adding (VA) or non-value-adding (NVA):
____ 1. Engineering design
____ 2. Machine repair
____ 3. Inventory storage
 Activity-Based Costing 4-9

Ex. 177 (cont.)

____ 4. Machining
____ 5. Assembly
____ 6. Painting
____ 7. Inspections
____ 8. Packaging

Solution 177 (3–5 min.)

1. VA 5. VA
2. NVA 6. VA
3. NVA 7. NVA
4. VA 8. VA

Ex. 178
Borke and Falvery is a law firm that uses activity-based costing. Classify these activities as value-
added or non-value-added:
______________ 1. Taking appointments
______________ 2. Reception
______________ 3. Meeting with clients
______________ 4. Bookkeeping
______________ 5. Court time
______________ 6. Meeting with opposing attorneys
______________ 7. Billing
______________ 8. Advertising

Solution 178 (3–5 min.)

1. Non-value-added 5. Value-added
2. Non-value-added 6. Value-added
3. Value-added 7. Non-value-added
4. Non-value-added 8. Non-value-added

Ex. 179
Tim Taylor Tool Company manufactures small tools. Classify each of the following activity costs
of the tool company as either unit level, batch level, product level, or facility level:
______________ 1. Plant management
______________ 2. Drilling
______________ 3. Painting
______________ 4. Machine setups
4 - 10 Test Bank for ISV Managerial Accounting, Fourth Edition

Ex. 179 (cont.)

______________ 5. Product design

______________ 6. Cutting
______________ 7. Inspection
______________ 8. Inventory management

Solution 179 (4–6 min.)

1. Facility 5. Product
2. Unit 6. Unit
3. Unit 7. Batch
4. Batch 8. Product

Ex. 180
Brewer & Carr, PSC is an architectural firm that uses activity-based costing. The three activity
cost pools used by Brewer & Carr are: Salaries and Wages, Travel Expense, and Plan
Reproduction Expense. The firm has provided the following information concerning activity and
costs:
Salaries and wages $360,000
Travel expense 100,000
Plan reproduction expense 120,000
Total $580,000

Activity Cost Pools

Project Business
Assignment Development Other
Salaries and wages 60% 30% 10%
Travel expense 40% 40% 20%
Plan reproduction expense 35% 40% 25%

Instructions
Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business Development,
and (c) Other activity cost pools.

Solution 180 (6–9 min.)

Activity Cost Pools
(a) (b) (c)
Project Business
Assignment Development Other Total
Salaries and wages $216,000 $108,000 $36,000 $360,000
Travel expense 40,000 40,000 20,000 100,000
Plan reproduction expense 42,000 48,000 30,000 120,000
Total $298,000 $196,000 $86,000 $580,000
 Activity-Based Costing 4 - 11

COMPLETION STATEMENTS
181. In traditional costing systems, direct labor cost is often used for the assignment of all
____________________.

182. A __________________ is any activity that has a direct cause-effect relationship with the
resources consumed.

183. In activity-based costing, overhead costs are allocated to ____________________, then

assigned to products.

184. The number of ___________________ is an appropriate cost driver for the ordering and
receiving activity cost pool.

185. The primary benefit of activity-based costing is ___________________ product costing.

186. When product lines differ greatly in volume and manufacturing complexity, a switch from
traditional costing to ___________________ is indicated.

187. ______________________ increase the worth of a product or service to customers.

188. In the hierarchy of activity levels, the four levels are __________, ___________,
____________, and _____________.

189. Equipment setups are a ______________-level activity.

a
190. A primary objective of __________________ processing is to eliminate all manufacturing
inventories.
a
191. Dependable suppliers, a multi-skilled workforce, and a __________________________
are necessary elements of just-in-time processing.

Answers to Completion Statements

181. overhead costs
182. cost driver
183. activity cost pools
184. purchase orders
185. more accurate
186. activity-based costing
187. value-added activities
188. unit, batch, product, facility
189. batch
a
190. just-in-time
a
191. total quality control system
4 - 12 Test Bank for ISV Managerial Accounting, Fourth Edition

MATCHING
192. Match the items in the two columns below by entering the appropriate code letter in the
space provided.

A. Pull approach F. Just-in-time processing

B. Cost driver G. Batch-level activity
C. Facility-level activity H. Product-level activity
D. Unit-level activity I. Non-value-added activity
E. Activity-based costing J. Value-added activity

_____ 1. Allocates overhead to multiple activity cost pools, then assigns the activity cost pools
to products.

_____ 2. An activity that has a direct cause-effect relationship with the resources consumed.

_____ 3. Increases the worth of a product or service to customers.

_____ 4. Should be eliminated or reduced.

_____ 5. Plant management.

_____ 6. Engineering changes.

_____ 7. Equipment setups.

_____ 8. Assembling.

_____ 9. Primary objective is to eliminate all manufacturing inventories.

_____ 10. Used to initiate manufacturing under JIT processing.

Answers to Matching
1. E 6. H
2. B 7. G
3. J 8. D
4. I 9. F
5. C 10. A
 Activity-Based Costing 4 - 13

SHORT-ANSWER ESSAY QUESTIONS

S-A E 193
Borg Corporation uses a traditional costing system. Management is considering switching to an
activity-based costing system. What steps must Borg take in initiating an activity-based costing
system?

Solution 193
Borg Corporation must first identify the major activities that pertain to the manufacture of specific
products, then allocate manufacturing overhead to activity cost pools. Next, Borg must identify the
cost drivers that accurately measure each activity's contribution to the finished product and
compute activity-level overhead rates for each pool. Finally, the manufacturing overhead costs for
each activity pool must be allocated to products, using the activity-based overhead rates.

S-A E 194
Seven Company produces phasers (sales of 200,000 units per year) and force field enhancers
(sales of 25,000 units per year). If Seven switches from traditional costing to activity-based
costing, what is the likely effect on overhead assigned to the two products?

Solution 194
When overhead is properly assigned in ABC, it will usually increase the unit cost of low-volume
products like the force field enhancers. This is because low-volume products often require more
special handling, such as machine setups and inspections, than high-volume products. Also,
overhead costs incurred by low-volume products often are disproportionate to a traditional
allocation base.

S-A E 195
What are the conditions that would indicate to the management of a firm that they should switch
from traditional costing to activity-based costing?

Solution 195
The presence of one or more of the following conditions indicates ABC as the superior costing
system:
1) Product lines differ greatly in volume and manufacturing complexity.
2) Product lines are numerous and diverse, and they require differing degrees of support
services.
3) Overhead costs constitute a significant portion of total costs.
4) The manufacturing process or the number of products has changed significantly.
5) Production or marketing managers are ignoring data provided by the existing system and are
instead using alternative data in decision-making.