Activity Based Costing and Flexible Budget

M Company has two products: G and P. The company uses activity-based costing and has
prepared the following analysis showing the estimated total cost and expected activity for each
of its three activity cost pools:

Activity Estimated Expected Activity

Cost Pool Cost Product G Product P Total
Activity 1 P30,000 200 400 600
Activity 2 P24,000 600 900 1,500
Activity 3 P80,000 400 3,600 4,000

The annual production and sales of Product G is 10,640 units. The annual production and sales
of Product P is 26,600.

The activity rate under the activity-based costing system for Activity 2 is
D closest to:
a. P89.33.
b. P21.97.
c. P26.67.
d. P16.00.

A The cost per unit of Product P under activity-based costing is closest to:
a. P4.00.
b. P30.16.
c. P10.00.
d. P6.88.

F specializes in large floral bouquets for hotels and other commercial spaces. The company has
provided the following data concerning its annual overhead costs and its activity based costing
system:

Overhead costs:
Wages and salaries .. P80,000
Other expenses ...... P40,000
Total ............. P120,000

Distribution of resource consumption:

Activity Cost Pools
Making
Bouquets Delivery Other Total
Wages and salaries .. 60% 30% 10% 100%
Other expenses ...... 45% 25% 30% 100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-
sustaining costs.
The amount of activity for the year is as follows:
Activity Based Costing and Flexible Budget

Activity Cost Pool Activity

Making bouquets ...... 60,000 bouquets
Delivery ............. 5,000 deliveries

D What would be the total overhead cost per bouquet according to the activity
based costing system? In other words, what would be the overall activity rate
for the making bouquets activity cost pool? (Round to the nearest whole cent.)
a. P0.90
b. P1.05
c. P1.20
d. P1.10

D What would be the total overhead cost per delivery according to the activity
based costing system? In other words, what would be the overall activity rate
for the deliveries activity cost pool? (Round to the nearest whole cent.)
a. P6.00
b. P6.60
c. P7.20
d. P6.80

F Company uses a standard cost system in which manufacturing overhead is applied to units of
product on the basis of direct labor-hours. The company's total budgeted variable and fixed
manufacturing overhead costs at the denominator level of activity are $20,000 for variable
overhead and $30,000 for fixed overhead. The predetermined overhead rate, including both
fixed and variable components, is $2.50 per direct labor-hour. The standards call for two direct
labor-hours per unit of output produced. Last year, the company produced 11,500 units of
product and worked 22,000 direct labor-hours. Actual costs were $22,500 for variable overhead
and $31,000 for fixed overhead.

Required:

a. What is the denominator level of activity?

b. What were the standard hours allowed for the output last year?
c. What was the variable overhead spending variance?
d. What was the variable overhead efficiency variance?
e. What was the fixed overhead budget variance?
f. What was the fixed overhead volume variance?
Activity Based Costing and Flexible Budget

Answer:
a. Total overhead at the denominator
level of activity (a)....................... $50,000
Predetermined overhead rate (b)............... $2.50/DLH
Denominator level of activity (a)  (b)....... 20,000 DLHs

b. Actual output ........... 11,500 units

Standard DLH per unit ... x 2 DLH per unit
Standard DLHs allowed ... 23,000 DLHs

c. Computation of variable overhead spending variance:

Spending variance = (AH x AR) - (AH x SR)
= ($22,500) - (22,000 DLHs x $1.00*)
= $500 U
* $20,000 ÷ 20,000 DLHs = $1.00

d. Computation of variable overhead efficiency variance:

Spending variance = (AH x SR) - (SH x SR)
= (22,000 DLHs x $1.00) –
(23,000 DLHs* x $1.00)
= $1,000 F
* 2 DLHs per unit x 11,500 units = 23,000 DLHs

e. Computation of the fixed overhead budget variance:

Budget variance = Actual fixed overhead –
Flexible budget fixed overhead
= $31,000 - $30,000
= $1,000 U

f. Computation of the fixed overhead volume variance:

Volume variance = Fixed portion of predetermined overhead
rate x (Denominator hours – Standard
hours allowed)
= $1.50* (20,000 DLH - 23,000 DLH)
= $4,500 F
*$30,000 ÷ 20,000 DLH = $1.50

A manufacturer of playground equipment has a standard costing system based on machine-hours

(MHs) as the measure of activity. Data from the company's flexible budget for manufacturing
overhead are given below:

Denominator level of activity ................. 3,000 MHs

Fixed overhead cost ........................... $40,650
Activity Based Costing and Flexible Budget

The following data pertain to operations for the most recent period:

Actual hours .................................. 3,400 MHs

Standard hours allowed for the actual output .. 3,172 MHs
Actual total fixed overhead cost .............. $41,600

What is the predetermined fixed overhead rate to the nearest cent?

B a. $12.24
b. $13.55
c. $13.87
d. $11.96

How much fixed overhead was applied to products during the period to the
B nearest dollar?
a. $40,650
b. $42,981
c. $41,600
d. $46,070

What was the fixed overhead budget variance for the period to the nearest dollar?
B a. $4,470 U
b. $950 U
c. $2,790 F
d. $1,381 U

B What was the fixed overhead volume variance for the period to the nearest
dollar?
a. $2,256 F
b. $2,331 F
c. $3,089 U
d. $5,420 F

Gr Catering uses activity-based costing for its overhead costs. The company has provided the
following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools

Preparing Arranging
Meals Functions
Wages ............ P1.15 P110.00
Supplies ......... P0.35 P380.00
Other expenses ... P0.25 P70.00
Activity Based Costing and Flexible Budget

The number of meals served is the measure of activity for the Preparing Meals activity cost
pool. The number of functions catered is used as the activity measure for the Arranging
Functions activity cost pool.
Management would like to know whether the company made any money on a recent
function at which 100 meals were served. The company catered the function for a fixed price
of P21.00 per meal. The cost of the raw ingredients for the meals was P8.25 per meal. This cost
is in addition to the costs of wages, supplies, and other expenses detailed above.
For the purposes of preparing action analyses, management has assigned ease of adjustment
codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw
ingredients as a Green cost; and other expenses as a Red cost.

According to the activity-based costing system, what was the total cost
A (including the costs of raw ingredients) of the function mentioned above?
(Round to the nearest whole peso.)
a. P1,560
b. P1,760
c. P1,060
d. P910

Suppose an action analysis report is prepared for the function mentioned

D above. What would be the "red margin" in the action analysis report? (Round
to the nearest whole peso.)
a. P690
b. P440
c. P390
d. P540

Suppose an action analysis report is prepared for the function mentioned

A above. What would be the "yellow margin" in the action analysis report?
(Round to the nearest whole peso.)
a. P635
b. P815
c. P710
d. P760
Activity Based Costing and Flexible Budget

Grodt Catering uses activity-based costing for its overhead costs. The company has provided
the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools

Preparing Arranging
Meals Functions
Wages ............ P0.85 P110.00
Supplies ......... P0.50 P310.00
Other expenses ... P0.30 P120.00

The number of meals served is the measure of activity for the Preparing Meals activity cost
pool. The number of functions catered is used as the activity measure for the Arranging
Functions activity cost pool.
Management would like to know whether the company made any money on a recent
function at which 60 meals were served. The company catered the function for a fixed price of
P19.00 per meal. The cost of the raw ingredients for the meals was P8.60 per meal. This cost is
in addition to the costs of wages, supplies, and other expenses detailed above.
For the purposes of preparing action analyses, management has assigned ease of adjustment
codes to the costs as follows: wages are classified as a Yellow cost; supplies and raw
ingredients as a Green cost; and other expenses as a Red cost.

B According to the activity-based costing system, what was the total cost
(including the costs of raw ingredients) of the function mentioned above?
(Round to the nearest whole peso.)
a. P655
b. P1,155
c. P505
d. P1,355

D Suppose an action analysis report is prepared for the function mentioned

above. What would be the "red margin" in the action analysis report? (Round
to the nearest whole peso.)
a. P135
b. (P165)
c. (P115)
d. (P15)
Activity Based Costing and Flexible Budget

D Suppose an action analysis report is prepared for the function mentioned

above. What would be the "yellow margin" in the action analysis report?
(Round to the nearest whole peso.)
a. P248
b. P198
c. P303
d. P123