Activity Based Costing Test Bank Answers Farmer Ch.9

CHAPTER 9

Activity- Based Costing

CHAPTER LEARNING OBJECTIVES

1. Describe how activity- based costing addresses the limitations of traditional costing.

2. Detail a cost hierarchy, including the activities and cost drivers within it.

3. Demonstrate the calculations within ABC and its impacts on product costing.

4. Discuss activity- based costing outcomes, including the choice to implement time-driven activity-based costing (TDABC).

Current count is:

Knowledge: 29

Comprehension: 6

Application: 82

Analysis: 20

Evaluation: 4

Synthesis: 0

Total: 141

Number and percentage of questions:

Easy: 24 questions, 17 percent (target of 25%)

Medium: 106 questions, 75 percent (target of 65%)

Hard: 11 questions, 8 percent (target of 10%)

Question types:

Multiple Choice: 110

Short Answer: 6

Brief Exercises: 12

Exercises: 10

Problems: 3

Multiple-Choice Questions

1. Some companies choose to have more detailed Manufacturing Overhead (MOH) allocations and then calculate a MOH rate for each of their departments. What is the correct formula to calculate a departmental rate?
2. Total MOH costs in a department’s cost pool × Total quantity of department’s cost driver
3. Total MOH costs in a department’s cost pool/Total quantity of department’s cost driver
4. Total quantity of department’s cost driver + Total MOH costs in a department’s cost pool
5. Total quantity of department’s cost driver/Total MOH costs in a department’s cost pool

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: Choice B represents the correct formula used to calculate a departmental rate, making it the correct answer. Choices A, C, and D all contain the correct components but either have them in the wrong place or have multiplied or added the items when there should have been division.

1. Both traditional and activity-based costing have certain features that may make them unique in comparison. Which of the following traits is most closely aligned with activity-based costing?
2. It is used primarily for financial reporting for external users.
3. It separates total MOH into smaller activity pools and uses related cost drivers.
4. It uses a predetermined MOH rate along with one cost driver.
5. Its purpose is to systematically allocate a company’s Manufacturing Overhead (MOH) costs to each job.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to consider the differences between traditional job costing and activity-based costing. Choices A, C, and D all represent characteristics that could be attributed to traditional costing, and that makes them incorrect responses. Choice B represents a trait aligned with activity-based costing, and that makes it the correct selection.

1. If a company uses traditional costing and only one cost driver, what would be the correct order with which costs are considered in calculating overall product cost?
2. Manufacturing overhead applied with a cost driver + Direct Materials – Direct Labor
3. Manufacturing overhead applied with a cost driver + Direct Materials + Direct Labor
4. Total manufacturing overhead – Direct Materials – Direct Labor
5. Total Manufacturing Overhead (MOH) + Direct Materials + Direct Labor

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to consider the correct combination of costs to arrive at the overall cost of a product. In this question, it is specified that only one cost driver is used by the company. Choice B correctly notes that you must apply the cost driver to total MOH and then add both DM and DL to arrive at the correct total. Choice C and Choice D mistakenly use Total MOH without taking into account the application of a cost driver, and Choice C also subtracts DM and DL. Choice A is also incorrect as it subtracts DL despite accurately applying the cost driver to total MOH.

1. In comparing a traditional costing systems with an activity-based costing system, which of the following would be considered a feature of a traditional cost system?
2. Dividing a large cost pool into multiple and varied smaller cost pools
3. Using a generic cost driver to allocate costs
4. Using activities undertaken in the value chain to determine smaller cost pools
5. Using relevant cost drivers to allocate costs

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to consider the differences between traditional job costing system and activity-based costing system and to focus on the feature of a traditional costing system. Choices A, C, and D all represent advantages of using activity-based costing, so those responses are incorrect. Choice B represents a feature of using a traditional costing system and that makes it the correct selection.

1. In a traditional simple costing system, a plant-wide cost pool accumulates factory-wide Manufacturing Overhead (MOH). What is the correct formula to calculate the plant-wide rate?
2. Total MOH costs in a plant-wide cost pool × Total quantity of a single driver
3. Total MOH costs in a plant-wide cost pool/Total quantity of a single driver
4. Total quantity of a single driver + Total MOH costs in a plant-wide cost pool
5. Total quantity of a single driver/Total MOH costs in a plant-wide cost pool

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: Choice B represents the correct formula used to calculate the plant-wide rate, and that makes it the correct answer. Choices A, C, and D all contain the correct components but either have them in the wrong place or have multiplied or added items when there should have been division.

1. Roger has just been hired as an accountant and is in the process of performing some cost accounting calculations. The factory where he works produces tennis balls and uses a plant-wide cost pool under their simple costing system. The factory’s total Manufacturing Overhead (MOH) costs are budgeted for: rent for the factory, $72,000; factory utilities, $40,000; quality control salaries, $52,000; and janitorial salaries, $36,000 in addition to assembly line workers’ wages of $246,000, tennis ball coating costs of $10,000, and tennis ball core costs of $5,000. What is the budgeted MOH rate using one plant-wide pool based on Direct Labor (DL) cost?
   1. $0.33
   2. $0.81
   3. $3.57
   4. $4.35

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate the budgeted MOH rate using the formula of total budgeted MOH costs divided by the total budgeted quantity of the one cost driver. The first step includes adding together all of the applicable MOH costs. This calculation is ($72,000 + $40,000 + $52,000 + $36,000)/$246,000 = $200,000/$246,000 = $0.81 (Choice B).

1. John is currently working on assembling some cost accounting numbers for the upcoming year for a client who produces disposable utensils. The factory has the following costs: Factory Insurance, $55,000; Factory Supervisor’s Salary, $200,000; Direct Materials (Plastic), $30,000; Cardboard for Packaging, $12,000; Depreciation on Factory Equipment, $120,000; and Assembly Line Worker Wages, $36,000. The Direct Labor (DL) costs consisted of 10,000 DL hours and 4,000 machine hours. Management has decided to proceed using a simple costing system resulting in a plant-wide cost pool. What is the budgeted MOH rate using one plant-wide pool based on machine hours?
   1. $0.01
   2. $10.42
   3. $37.50
   4. $93.75

Ans: D, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate the budgeted MOH rate using the formula of total budgeted MOH costs divided by the total budgeted quantity of one cost driver. This company has chosen to use machine hours as their cost driver. This calculation is ($55,000 + $200,000 + $120,000)/4,000 machine hours = $375,000/4,000 machine hours = $93.75 (Choice D).

1. Monarch Inc. is a company that creates and distributes butterfly-themed home décor. You are attempting to calculate total product costs for Monarch by using traditional costing. They have the following costs: Direct Materials (DM) of Resin, $12,000; DM of Metal Backing, $9,000; Paint, $6,000; DM of Adhesive, $10,000; Cardboard for Packaging, $3,000; Assembly Line Wages, $55,750; Marketing, $36,000; and Sales Commissions, $60,000. Their Manufacturing Overhead (MOH) will be 85% of their Direct Labor (DL) cost. What are their total product costs?
   1. $143,137.50
   2. $151,500.00
   3. $209,737.50
   4. $320,737.50

Ans: A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate total product costs under traditional costing which entails ensuring that MOH uses the proper input. $143,137.50 (Choice A) correctly added together the DM of ($12,000 + $9,000 + $6,000 + $10,000 + $3,000) $40,000 plus the DL of $55,750 plus the MOH of $47,387.50 ($55,750 × 0.85).

1. Shinebright, Inc., a company that produces sunscreen has asked John to calculate their total product costs. Shinebright currently uses traditional costing and has reported the following costs: Janitorial Wages, $32,300; Factory Workers’ Wages, $60,000; Machine Operators’ Salaries, $34,616; Chemical Compounds, $51,000; Plastic Containers, $11,000; and their Manufacturing Overhead (MOH) will be 84% of their Direct Labor (DL) costs. What are their total product costs?
   1. $218,616.00
   2. $236,093.44
   3. $295,525.44
   4. $315,832.00

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate total product costs under traditional costing which entails ensuring that MOH uses the proper input. $236,093.44 (Choice B) correctly added together the DM of $62,000 ($51,000 + $11,000) plus the DL of $94,616.00 (would not include janitorial wages) plus the MOH of $79,477.44 ($94,616.00 × 0.84).

1. Artie, Inc. manufactures soy candles in the Southeast region of the United States. They have reported the following costs for their rose-scented line of candles: Glass Containers, $28,600; Cotton Wicks, $20,000; Candle Assembly Wages, $46,250; Shipping, $26,000; Package Assembly Wages, $6,000; and Candle Lids, $5,962. Their Manufacturing Overhead (MOH) will be 90% of their Direct Labor (DL) costs. You are reviewing the work of a fellow accountant and confirming calculations for their traditional costing numbers. What are the total product costs for the rose-scented line of candles?
   1. $132,812.00
   2. $153,837.00
   3. $181,917.80
   4. $211,062.00

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate total product costs under traditional costing which entails ensuring that MOH uses the proper input. $153,837.00 (Choice B) correctly added together the Direct Materials (DM) of ($28,600 + $20,000 + $5,962) $54,562.00 plus the DL of ($46,250 + $6,000) $52,250.00 plus the MOH of $47,025.00 ($52,250 × 0.90).

1. Your client, a factory that produces chips and salsa, uses traditional costing, and you are attempting to calculate total cost per unit. They have the following costs (same for each item): Direct Materials (DM), $56,280; Direct Labor (DL), $63,460; and their Manufacturing Overhead (MOH) will be 82% of their DL cost. They produced 33,470 units of glass salsa jars and 42,000 packets of chips during the period. What is their total cost per unit for salsa?
   1. $4.09
   2. $4.36
   3. $5.13
   4. $5.47

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate total cost per unit for salsa under traditional costing which entails first calculating total product costs correctly. $5.13 (Choice C) correctly added together the DM of $56,280, DL of $63,460, and MOH of $52,037.20 ($63,460 × 0.82) for a total product cost of $171,777.20. Then, this number is divided by the units of salsa (33,470) to arrive at the correct total cost per unit of salsa.

1. Susan is currently working on assembling some numbers for her client’s cost accounting practices for the current year. The client is a factory that produces condiments including ketchup and mustard. They use traditional costing, and Susan would like to calculate total cost per unit. They have the following costs (same for both condiments): Direct Materials (DM), $87,444; Direct Labor (DL), $96,782; and their Manufacturing Overhead (MOH) will be 88% of their DL cost. They produced 42,760 units of ketchup and 53,990 units of mustard during the period. What is their total cost per unit for mustard?
   1. $4.99
   2. $5.20
   3. $6.30
   4. $6.57

Ans: A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate total cost per unit for mustard under traditional costing which entails first calculating total product costs correctly. $4.99 (Choice A) correctly added together the DM of $87,444, DL of $96,782, and MOH of $85,168.16 ($96,782 × 0.88) for a total product cost of $269,394.16. Then, this number is divided by the total units of mustard (53,990) to arrive at the correct total cost per unit of mustard.

1. Tasty Sauce, Inc. is currently comparing their current use of traditional costing with what results would look like if they had instead implemented Activity-Based Costing (ABC). This company creates two products: regular soy sauce and sodium-free soy sauce. They will be producing 125,000 bottles of regular soy sauce and 108,000 bottles of sodium-free soy sauce. Under traditional costing, Manufacturing Overhead (MOH) is allocated at $43,760.80 to regular soy sauce and $16,482.20 to sodium-free soy sauce. In ABC, MOH is allocated at $39,802.62 to regular soy sauce and $20,440.38 to sodium-free soy sauce. Which of the following is true?
   1. Unit cost will be higher for regular soy sauce under ABC than traditional costing.
   2. Unit cost will be higher for regular soy sauce under traditional costing than ABC.
   3. Unit cost will be higher for sodium-free soy sauce under traditional costing than ABC.
   4. Unit cost will be lower for sodium-free sauce under ABC than traditional costing.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to consider how allocated MOH will impact other items under both traditional costing and ABC. Choice B is correct because after calculating the per unit costs for all items, traditional costing per unit cost would be higher for regular soy sauce than under ABC.

1. A company is currently using traditional costing and has arrived at the following unit costs for their two products: Caramel, $0.88 per unit; and Hot Fudge, $0.77 per unit. If they had instead used Activity-Based Costing (ABC), then it would have resulted in the following unit costs: Caramel, $0.83 per unit; and Hot Fudge, $0.82 per unit. Which of the following statements is correct?
   1. The higher unit cost of caramel under traditional costing will lead to a higher profit compared to ABC.
   2. The lower unit cost of hot fudge under traditional costing will lead to a lower profit compared to ABC.
   3. The profit of caramel will be understated under traditional costing compared to ABC.
   4. The profit of hot fudge will be overstated under ABC compared to traditional costing.

Ans: C, LO 1, Bloom: C, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to consider how per-unit cost will impact profit under each type of product costing. Choice C is accurate because traditional costing will lead to a higher unit cost for caramel and therefore lower or understated profit for caramel.

1. Sharon has decided to try and calculate her Manufacturing Overhead (MOH) allocation with a departmental rate rather than using a plant-wide rate. She works for Seashell, Inc., a factory that produces seashell-themed keychains. She is looking at the costs derived from the production department and the department’s total budgeted costs include: Factory Utilities, $66,000; Factory Supervisor Salaries, $100,000; Assembly Line Worker Wages, $284,000; Maintenance Wages, $32,000; Seashells, $15,000; Metal for Keychains, $7,000; and Factory Depreciation, $54,000. What is the budgeted departmental MOH rate based on Direct Labor (DL) cost?
   1. $0.21
   2. $0.89
   3. $4.67
   4. $11.45

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires that you calculate the budgeted MOH rate using the formula of total MOH costs in department’s cost pool divided by the total quantity of department’s cost driver. This calculation is ($66,000 + $100,000 + $32,000 + $54,000)/$284,000 = $252,000/$284,000 = $0.89 (Choice B).

1. Rose, Inc., a factory that produces two different fragrances, rose and lilac, is considering switching their suppliers, and you are attempting to calculate total Manufacturing Overhead (MOH) to get an accurate picture of their budget. Under their traditional costing system, they had the following costs: Rose Fragrance: Glass Bottles, $78,000; Fragrance, $28,540; Bottler Wages, $76,000; and Assembly Line Wages, $26,578; and Lilac Fragrance: Glass Bottles, $118,648; Fragrance, $33,620; Bottler Wages, $84,350; and Assembly Line Wages, $33,668. The manufacturing overhead for each fragrance will be 86% of their Direct Labor (DL) costs. They produced 28,400 glass bottles of rose fragrance and 43,200 glass bottles of lilac fragrance during the period. What is their total allocated MOH for the lilac fragrance?
   1. $88,217.08
   2. $101,495.48
   3. $118,018.00
   4. $130,950.48

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate the allocated MOH for the lilac fragrance. Before solving for MOH, identify what costs would be attributed to Direct Labor. Further, ensure that only the costs of the lilac fragrance are taken into consideration. $101,495.48 (Choice B) correctly takes 86% of DL ($84,350 + $33,668) to calculate MOH ($118,018 × 0.86).

1. During the current year, Mary is compiling figures for a cookie factory’s cost accounting, which is currently utilizing traditional costing. The factory produces two kinds of cookies: chocolate chip and oatmeal raisin. Mary would like to calculate the total cost per unit and notes the following costs for chocolate chip: Direct Materials (DM), $68,300; and Direct Labor (DL), $82,450; and the following costs for oatmeal raisin: Direct Materials, $57,890; and Direct Labor, $71,708. The Manufacturing Overhead (MOH) for each cookie will be 85% of their direct labor cost. They created 126,756 units of chocolate chip and 104,222 units of oatmeal raisin during the period. What is the factory’s total cost per unit for chocolate chip?
   1. $1.64
   2. $1.74
   3. $2.00
   4. $2.10

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate total product costs correctly as this question requires calculation of the total cost per unit under traditional costing. $1.74 (Choice B) correctly added together the DM of $68,300 plus the DL of $82,450 plus the MOH of $70,082.50 ($82,450 × 0.85) for a total product cost of $220,832.50. Then, divide this number by the units of chocolate chip cookies (126,756) to arrive at the correct total cost per unit of chocolate chip.

1. Bard Inc. is currently comparing a potential implementation of Activity-Based Costing (ABC) with their current use of traditional costing and comparing the results. Bard creates two products: Candy Bars, 60,000 units; and lollipops, 82,000 units. Under ABC, Manufacturing Overhead (MOH) is allocated at $43,877.44 to candy bars and $32,781.90 to lollipops. Under traditional costing, MOH is allocated at $46,707.87 to candy bars and $29,915.47 to lollipops. Which of the following statements is correct?
   1. Unit cost will be higher for lollipops under traditional costing than ABC.
   2. Unit cost will be lower for candy bars under ABC than traditional costing.
   3. Unit cost will be lower for candy bars under traditional costing than ABC.
   4. Unit cost will be lower for lollipops under ABC than traditional costing.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires consideration of how allocated MOH will impact other items under both traditional costing and ABC. Choice B is accurate because an understated unit cost would lead to a higher or overstated profit.

1. An organization currently employs traditional costing for its cost accounting functions. They have computed the following unit costs for two of their current products: Salt, $0.33 per unit; and Pepper, $0.40 per unit. If they were instead using Activity-Based Costing (ABC), then it would have resulted in the following unit costs: Salt, $0.36 per unit; and Pepper, $0.37 per unit. Which of the following statements is correct?
   1. As compared to ABC, the profit of pepper will be overstated under traditional costing.
   2. As compared to ABC, the profit of salt will be overstated under traditional costing.
   3. As compared to traditional costing, the profit of pepper will be understated under ABC.
   4. As compared to traditional costing, the profit of salt will be overstated under ABC.

Ans: B, LO 1, Bloom: C, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to consider how per-unit cost will impact profit under each type of product costing. Choice B is accurate because traditional costing will lead to a lower unit cost and therefore higher or overstated profit for salt.

1. Susan has gathered the following data about the tire factory she manages: the department’s total costs are budgeted as follows: Quality Control- $122,000, Property Tax- $18,000, Direct Wages and Salaries, $506,300; Rubber, $87,482; Fabrics, $62,500; Factory Supervisor Salaries, $166,200; and Factory Depreciation, $102,000 all of which have been derived from the production department. Rather than using a plant-wide rate, she will be calculating the Manufacturing Overhead (MOH) allocation with a departmental rate. What is the budgeted MOH rate using a departmental rate based on DL cost?
   1. $0.26
   2. $0.81
   3. $3.84
   4. $4.67

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires you to calculate the budgeted MOH rate using the formula for total MOH costs in department’s cost pool divided by the total quantity of that department’s cost driver. This calculation is ($122,000 + $18,000 + $166,200 + $102,000)/$506,300 = $408,200/$506,300 = $0.81 (Choice B).

1. Activity-Based Costing (ABC) requires that its users separate costs by the level and then by the type of activity. For a manufacturing business, this would entail separating activity costs into Manufacturing Overhead (MOH) and nonmanufacturing period costs. Which of the following would be considered MOH at the product/process-level?
   1. Design costs
   2. Factory utilities
   3. Marketing for a new product
   4. Research and development

Ans: B, LO 2, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires differentiation between nonmanufacturing period costs and MOH for a manufacturing business using ABC. Factory utilities (Choice B) is the correct choice as it is the only option given that would be considered MOH. Design costs (Choice A), marketing for a new product (Choice C), and research and development (Choice D) would all be considered nonmanufacturing period costs at the product/process-level.

1. When using Activity-Based Costing (ABC) a manufacturing business will have to differentiate between Manufacturing Overhead (MOH) and nonmanufacturing period costs. Which of the following would be considered a nonmanufacturing period cost at the facility-level?
   1. Depreciation on factory assets
   2. Factory rent
   3. Factory utilities
   4. Management salaries

Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires differentiation between MOH and nonmanufacturing period costs. Management salaries (Choice D) is the only choice of the four given that would be considered a nonmanufacturing period cost. Factory rent (Choice B), factory utilities (Choice C), and depreciation on factory assets (Choice A) would all be classified as MOH.

1. Two staff accountants, Michael and Anthony, are having a lively discussion about various costing procedures that are currently in place at the factory where they are employed. The production department has asked the accountants to determine the most effective way in which they can allocate their department costs. The production department has a total Manufacturing Overhead (MOH) cost of $3,660,500. Michael and Anthony have gathered the following cost driver information:

Budgeted machine setups 50,460 setups ($1,000,000)

Budgeted pounds of indirect material 124,800 pounds ($2,660,500)

A recent production run used 400 machine setups and 2,380 pounds of indirect material. How much of the department’s MOH cost will be allocated for the most recent run for the batch-level activity? (If required, round calculations to two decimal places.)

• 1. $7,928.00
  2. $29,016.00
  3. $1,000,000.00
  4. $3,660,500.00

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires determination of an activity-based rate while also making sure that the batch-level cost driver is selected. In this case, machine setups represent a batch-level cost, and the activity-based rate is calculated as follows: $1,000,000/50,460 budgeted setups = $19.82 per setup. To calculate the amount of costs allocated, multiply the activity-based rate against the number of setups used in this recent run: $19.82 per setup times 400 setups = $7,928.00 (Choice A).

1. Two staff accountants, Michael and Anthony, are having a lively discussion about various costing procedures that are currently in place at the factory where they are employed. The production department has asked the accountants to determine the most effective way in which they can allocate their department costs. The production department has a total Manufacturing Overhead (MOH) cost of $3,660,500. Michael and Anthony have gathered the following cost driver information:

Budgeted machine setups 50,460 setups ($1,000,000)

Budgeted pounds of indirect material 124,800 pounds ($2,660,500)

A recent production run used 400 machine setups and 2,380 pounds of indirect material. How much of the department’s MOH cost will be allocated for the most recent run for the unit-level activity? (If required, round calculations to two decimal places.)

1. $49,718.20
2. $50,741.60
3. $2,660,500.00
4. $3,660,500.00

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires the determination of an activity-based rate while also making sure that the unit-level cost driver is selected. In this case, indirect materials represent a unit-level cost, and the activity-based rate is calculated as follows: $2,660,500/124,800 budgeted pounds = $21.32 per pound. To calculate the amount of MOH costs allocated, multiply the activity-based rate against the number of pounds used in this recent run: $21.32 per pound times 2,380 pounds = $50,741.60 (Choice B).

1. Susan is the controller for Simply Devine Inc., a company that produces ice cream and specializes in dairy-free versions of the Cookie Dough and Rocky Road flavors. Susan has recommended that Simply Devine implement Activity-Based Costing (ABC) as they gear up to produce the following number of pints in the coming year: Cookie Dough, 98,700 pints; and Rocky Road, 88,430 pints. Susan believes that a traditional costing system has not been the most effective manner to allocate their Manufacturing Overhead (MOH) costs. She has compiled the following data about the usage of their company resources:

Their MOH is comprised of the following costs:

What is the ABC-based total MOH cost allocated per unit for Cookie Dough ice cream? (If required, round calculations to two decimal places.)

1. $0.74
2. $1.40
3. $1.41
4. $1.56

Ans: B, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires calculation of the activity rate for each of the MOH activities: Moving and Sorting Ingredients, $76,500/8,900 pounds = $8.60/pound; Cleaning/Maintenance Hours, $48,200/6,420 hours = $7.51/hour; Quality Control Inspections, $26,550/9,700 inspections = $2.74/inspection; and Supervisor Wages, $107,430/4,340 hours = $24.75 per hour. Next, calculate the total overall MOH cost for Cookie Dough ice cream pints: ($8.60 × 5,000 pounds) + ($7.51 × 3,850 hours) + ($2.74 × 6,100 inspections) + ($24.75 × 2,005 hours) = $43,000.00 + $28,913.50 + $16,714.00 + $49,623.75 = $138,251.25. Lastly, divide the total Cookie Dough MOH cost by the number of Cookie Dough pints to be produced: $138,251.25/98,700 = $1.40 per pint (Choice B).

1. Susan is the controller for Simply Devine Inc., a company that produces ice cream and specializes in dairy-free versions of the Cookie Dough and Rocky Road flavors. Susan has recommended that Simply implement Activity-Based Costing (ABC) as they gear up to produce the following number of pints in the coming year: Cookie Dough, 98,700 pints; and Rocky Road, 88,430 pints. Susan believes that a traditional costing system has not been the most effective manner to allocate their Manufacturing Overhead (MOH) costs. She has compiled the following data about the usage of their company resources:

Their MOH is comprised of the following costs:

What is the ABC-based total MOH cost allocated per unit for Rocky Road ice cream? (If required, round calculations to two decimal places.)

1. $0.64
2. $1.22
3. $1.36
4. $1.37

Ans: C, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires calculation of the activity rate for each of the MOH activities: Moving and Sorting Ingredients, $76,500/8,900 pounds = $8.60/pound; Cleaning/Maintenance Hours, $48,200/6,420 hours = $7.51/hour; Quality Control Inspections, $26,550/9,700 inspections = $2.74/inspection; and Supervisor Wages, $107,430/4,340 hours = $24.75 per hour. Next, calculate the total overall MOH cost for Rocky Road ice cream pints: ($8.60 × 3,900 pounds) + ($7.51 × 2,570 hours) + ($2.74 × 3,600 inspections) + ($24.75 × 2,335 hours) = $33,540.00 + $19,300.70 + $9,864.00 + $57,791.25 = $120,495.95. Lastly, divide the total Rocky Road MOH cost by the number of Rocky Road pints produced: $120,495.95/88,430 = $1.36 per pint (Choice C).

1. Fescue, Inc. is a company that produces grass seed that they sell to regional businesses. They are in the process of examining their facility-level costs. Which of the following lists is made up of costs that would be classified as facility-level?
2. Insurance, Factory Depreciation, Office Manager’s Salary
3. Insurance, Rent, Supervisor Salary
4. Rent, Plant Manager’s Salary, Income Taxes
5. Rent, Plant Manager’s Salary, Property Taxes

Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to evaluate which costs would be considered facility-level. Costs in this category typically include: Factory Depreciation, Factory Rent, Plant Manager’s Salary, Property Taxes, and Property Insurance. Choice D is the only choice of the four that only includes facility-level costs. Choices A, B, and C each have two facility-level costs, but supervisor salary, income taxes, and office manager’s salary would not be included here.

1. Daisy Company is a mid-sized organization that creates flower-themed home décor items that are sold to both large local and regional stores. They would like to become more organized and are dividing and segmenting their costs into different hierarchies. Which of the following would be considered something other than a product/process-level cost?
   1. The depreciation expense for their cutting machine that is used on the assembly-line
   2. The expense incurred to acquire personal protective equipment for employees
   3. The salary for John, the supervisor
   4. The salary for Susan, the plant manager

Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to evaluate which costs would be considered product/process-level. Costs in this category typically include: equipment depreciation, equipment maintenance, supervisor salary, and workers’ personal protective equipment. Choice D is the only choice of the four that is not a product/process-level cost and would be assigned to a different part of the hierarchy. Choices A, B, and C each contain a cost that would be categorized as product/process-level.

1. Alice is a new cost accountant working at a local factory in her hometown. She has been given the task of ensuring that costs for the company have been put into the correct cost hierarchies. She is currently evaluating a list and searching for batch-level costs. Which of the following is comprised of costs that would be included in her list of batch-level costs?
2. Cleaning/Maintenance, Machine Set-up, Movement of Materials
3. Indirect Materials, Supervisor Salary, Direct Labor
4. Movement of Materials, Cleaning/Maintenance, Equipment Maintenance
5. Property tax, Insurance, Machine Set-up

Ans: A, LO 2, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to evaluate which costs would be considered batch-level. Costs in this category typically include: movement of materials, machine set-up, and cleaning/maintenance. Choice A is the only choice of the four that only includes batch-level costs. Choices B, C, and D each contain one or two batch-level costs, but property tax, insurance, supervisory salary, indirect materials, direct labor, and equipment maintenance would not be included here.

1. John is evaluating costs incurred at the factory where he works and is thinking about which hierarchies would apply to certain costs. He has just started to think about unit-level costs. Which of the following is false as it pertains to unit-level costs?
2. Direct Labor (DL) costs are an example of unit-level costs.
3. Direct Materials (DM) costs are an example of unit-level costs.
4. Most Manufacturing Overhead (MOH) costs are unit-level costs.
5. Unit-level costs increase in total with each additional unit of a product made.

Ans: C, LO 2, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: Choices A, B, and D all present information that is true as it pertains to unit-level costs. Choice C is the correct answer because it indicates that most MOH costs are unit-level costs when it is actually true that most MOH costs are not unit-level costs.

1. A cost hierarchy is used by businesses and is divided into four layers. Each layer has various costs assigned to it and is given a rationale for its use. Which of the following best represents the rationale for product/process-level costs?
2. Costs enable an entire product line or individual type of service delivery
3. Costs enable the overall manufacturing process/delivery of services effort
4. Costs enable the production of each batch
5. Costs enable the production of each unit

Ans: A, LO 2, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: Choice A represents the correct rationale for product/process-level costs, making it the correct answer. Choice B represents the rationale for facility-level costs, Choice C represents the rationale for batch-level costs, and Choice D represents the rationale for unit-level costs.

1. Imagine that you are looking at the costs for a restaurant’s activities. Which of the following activities would be classified as Direct Labor (DL)?
   1. Cleaning and maintenance
   2. Moving and sorting ingredients
   3. Paying a chef’s salary
   4. Quality control

Ans: C, LO 3, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires differentiation between costs that could be considered Manufacturing Overhead (MOH), DL, or Direct Materials (DM). Choices A, B, and D are all costs that would be classified as MOH. Choice C is the only activity listed that would be classified as Direct Labor and not MOH, so that is the correct choice.

1. Premium Pizza, Inc. is in the process of documenting all their costs using Activity-Based Costing (ABC). Premium specializes in unique sauces, and they have assigned the following Manufacturing Overhead (MOH) costs to their key activities: Moving and Sorting (150 pounds moved), $32,000; Quality Control (800 inspections completed), $22,400; and Cleaning/Maintenance (2,050 cleaning/maintenance hours) $16,820.

They bottled a total of 440 red sauce units and 336 white sauce units during the year. How much of the quality control MOH would be allocated to red sauce units?

1. $10,917.50
2. $16,100.00
3. $19,199.70
4. $26,217.50

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate an activity-based rate for the activity needed: quality control. Quality control: $22,400/800 inspections = $28.00 per inspection. Lastly, allocate the costs to the red sauce units based on that activity’s level. Quality control: $28.00 × 575 inspections = $16,100.00 (Choice B).

1. Premium Pizza, Inc. is in the process of documenting all their costs using Activity-Based Costing (ABC). Premium specializes in unique sauces, and they have assigned the following Manufacturing Overhead (MOH) costs to their key activities: Moving and sorting (150 pounds moved), $32,000; quality control (800 inspections completed), $22,400; and Cleaning and Maintenance (2,050 cleaning/maintenance hours), $16,820.

How much of the Cleaning and Maintenance MOH would be allocated to the white sauce units? (If required, round calculations to two decimal places.)

• 1. $5,535.00
  2. $6,300.00
  3. $12,799.80
  4. $26,217.25

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate an activity-based rate for the activity needed: cleaning and maintenance. Cleaning and Maintenance: $16,820/2,050 hours = $8.20 per hour. Lastly, allocate the costs to the white sauce units based upon that activity’s level. Cleaning and Maintenance: $8.20 × 675 hours = $5,535.00 (Choice A).

1. Beacon Hill, Corp. manufactures balloons that it then packages and sells throughout the country. Beacon Hill would like to have a better understanding of their overall budgets, and they have decided to implement the use of Activity-Based Costing (ABC). They have decided upon four unique key activities that they would like to assign activity-based rates to the following Manufacturing Overhead (MOH) costs: quality Inspection, $32,400 (2,400 inspection hours); maintenance, $16,858 (2,000 maintenance hours); moving and sorting, $12,444 (662 pounds of materials); and factory supervisor wages, $58,784 (4,788 supervisor hours). Beacon Hill will be allocating MOH to two different products: red balloons and blue balloons. Each balloon used the following resources:

Red balloons: 1,400 inspection hours, 1,450 maintenance hours, 412 pounds of materials, and 2,448 supervisor hours

Blue balloons: 1,000 inspection hours, 550 maintenance hours, 250 pounds of materials, and 2,340 supervisor hours

How much of the Quality Inspection MOH will be allocated to the red balloons?

1. $23,142.86
2. $32,400.00
3. $13,500.00
4. $18,900.00

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate an activity-based rate for the quality inspection activity. Divide the quality inspection cost of $32,400 by the total quantity of the activity’s cost driver of 2,400 for an activity-based rate of $13.50 per hour. The red balloons will have $13.50 per hour times 1,400 inspection hours for a total allocated MOH of $18,900 (Choice D).

1. Beacon Hill, Corp. manufactures balloons that it then packages and sells throughout the country. Beacon Hill would like to have a better understanding of their overall budgets, and they have decided to implement the use of Activity-Based Costing (ABC). They have decided upon four unique key activities which they would like to assign activity-based rates to the following Manufacturing Overhead (MOH) costs: quality inspection, $32,400 (2,400 inspection hours); maintenance, $16,858 (2,000 maintenance hours); moving and sorting, $12,444 (662 pounds of materials); and factory supervisor wages, $58,784 (4,788 supervisor hours). Beacon Hill will be allocating MOH to two different products: red balloons and blue balloons. Each balloon used the following resources:

Red balloons: 1,400 inspection hours, 1,450 maintenance hours, 412 pounds of materials, and 2,448 supervisor hours

Blue balloons: 1,000 inspection hours, 550 maintenance hours, 250 pounds of materials, 2,340 supervisor hours

How much of the Moving and Sorting MOH will be allocated to the blue balloons? (Do not round intermediate calculation.)

1. $12,440.00
2. $7,746.60
3. $4,699.40
4. $10,340.00

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate an activity-based rate for the moving and sorting activity. Divide the moving and sorting cost of $12,444 by the total quantity of the activity’s cost driver of 662 for an activity-based rate of $18.80 per pound. The blue balloons will have $18.80 per pound times 250 pounds of materials for a total allocated MOH of $4,699.40 (Choice C).

1. Sarah is an accountant for Flowy, Inc., a small factory that manufactures disposable hospital gowns and slippers. Previously, Flowy had been utilizing a traditional costing system to account for their budgeted Manufacturing Overhead (MOH) costs. After a few years, Sarah recommended that they opt for Activity-Based Costing (ABC) as that would afford them the opportunity to better account for their costs. She has determined that Flowy had three key activities to use for MOH budgeted costs: Materials sorting, garment inspection, and materials management wages. She has collected the following data:

Materials sorting: $37,888 (3,678 sorting hours)

Garment inspection: $55,986 (4,770 inspection hours)

Materials management wages: $18,900 (13,000 management hours)

If gowns used 2,000 sorting hours, then what amount of material sorting MOH costs will be allocated to slippers? (Do not round intermediate calculation.)

1. $13,328.32
2. $17,285.50
3. $20,600.00
4. $37,888.00

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate an activity-based rate for the materials sorting activity. Then, divide the materials sorting cost of $37,888 by the total quantity of the activity’s cost driver of 3,678 for an activity-based rate of $10.30 per hour. The slippers will have $10.30 per hour times 1,678 sorting hours (3,678 sorting hours minus 2,000 used by gowns) for a total allocated MOH of $17,285.50 (Choice B).

1. Sarah is an accountant for Flowy, Inc., a small factory that manufactures disposable hospital gowns and slippers. Previously, Flowy had been utilizing a traditional costing system to account for their budgeted Manufacturing Overhead (MOH) costs. After a few years, Sarah recommended that they opt for Activity-Based Costing (ABC) as it would afford them the opportunity to better account for their costs. She determined that Flowy had three key activities to use for MOH budgeted costs: Material sorting, garment inspection, and materials management wages. She has collected the following data:

Material sorting: $37,888 (3,678 sorting hours)

Garment Inspection: $55,986 (4,770 inspection hours)

Materials Management wages: $18,900 (13,000 management hours)

If slippers used 2,862 inspection hours, what amount of the garment inspection MOH costs will be allocated to the gowns? (Do not round intermediate calculation.)

1. $22,394.40
2. $29,043.31
3. $33,599.88
4. $55,986.00

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate an activity-based rate for the garment inspection activity. Then, divide the garment inspection cost of $55,986 by the total quantity of the activity’s cost driver of 4,770 for an activity-based rate of $11.74 per hour. The gowns will have $11.74 per hour times 1,908 hours (4,770 inspection hours minus 2,862 inspection hours used by slippers) for a total allocated MOH of $22,394.40 (Choice A).

1. Stevie has been allocating Manufacturing Overhead (MOH) costs to her products using a single plant-wide rate of $14.00 per Direct Labor (DL) hour. A recent job required 347 DL hours, 42 production runs, 25 quality inspections, and 20 factory supervisor hours. Based on the increased activity, the accountants are suggesting a transition to Activity-Based Costing (ABC) and have suggested the following rates:

Materials Handling: $9.75 per direct labor hour

Production Setup: $18.50 per production run

Quality Inspections: $6.00 per inspection

Factory Supervisor: $12.30 per supervisor hour

Assuming that Stevie makes the switch to ABC, what are the total MOH costs allocated to the most recent production run?

1. $1,173.00
2. $1,388.00
3. $3,383.25
4. $4,556.25

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Calculate MOH costs based on the ABC method: ($9.75 × 347 DL hours) + ($18.50 × 42 production runs) + ($6.00 × 25 inspections) + ($12.30 × 20 supervisor hours) = $3,383.25 + $777.00 + $150.00 + $246.00 = $4,556.25 (Choice D).

1. Adopting Activity-Based Costing (ABC) involves four steps. Which of the following contains the four steps in the correct order?
2. Calculate cost driver rates and assign Manufacturing Overhead (MOH) to products, identify direct costs, identify activities and cost drivers for MOH, and record MOH costs
3. Identify activities and cost drivers for MOH, identify direct costs, calculate cost driver rates and assign MOH to products, and record MOH costs
4. Identify direct costs, identify activities and cost drivers for MOH, calculate cost driver rates and assign MOH to products, and record MOH costs
5. Record MOH costs, identify direct costs, identify activities and cost drivers for MOH, and calculate cost driver rates and assign MOH to products

Ans: C, LO 3, Bloom: C, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: The correct order of the four steps is Step 1) Identify direct costs, 2) Identify activities and cost drivers for MOH, 3) Calculate cost driver rates and assign MOH to products, and 4) Record MOH costs. Choice C is the only choice out of the four lists that presents all the correct steps in the correct order.

1. The Manufacturing Overhead (MOH) T-account for companies using Activity-Based Costing (ABC) will typically include which of the following items on the credit side?
2. Actual cost incurred for factory insurance
3. Actual cost incurred for indirect labor
4. Actual cost incurred for workers’ safety equipment
5. Budgeted MOH cost

Ans: D, LO 3, Bloom: C, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: In the MOH T-account for a company using ABC, the debit side will include actual MOH incurred items that would include factory insurance (Choice A), indirect labor (Choice B), and safety equipment for workers (Choice C). Budgeted MOH cost (Choice D) will be located on the credit side of the T-account where applied MOH is located.

1. In calculating the activity-based rate (cost driver rate), which of the following formulas is correct?
2. Total cost in activity cost pool × Total quantity of activity’s cost driver
3. Total cost in activity cost pool/Total quantity of activity’s cost driver
4. Total quantity of activity’s cost driver × Total cost in activity cost pool
5. Total quantity of activity’s cost driver/Total cost in activity cost pool

Ans: B, LO 3, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to determine what formula combines the correct items and correct order of operations for this formula. The formula for activity-based rate = Total cost in activity cost pool/Total quantity of activity’s cost driver. Choice B is the only choice that correctly identifies the formula. Choices, A, C, and D are all incorrect as they either multiply where they should divide, or swap the numerator and denominator.

1. After a company has successfully determined their activity-based rate, what steps must be taken to allocate Manufacturing Overhead (MOH) for an activity?
2. Divide the activity-based rate by the actual quantity of cost driver used
3. Divide the activity-based rate by the budgeted quantity of cost driver used
4. Multiply the activity-based rate by the actual quantity of cost driver used
5. Multiply the activity-based rate by the budgeted quantity of cost driver used

Ans: C, LO 3, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to consider how a company would complete Step 3 of implementing activity-based costing. In order to allocate the MOH for activity, you must multiply the activity-based rate by the actual quantity of cost driver used (Choice C). Choice D is incorrect as it includes the budgeted quantity of cost driver used rather than actual. Choice A is incorrect as it divides rather than multiplies the two numbers. Choice B is incorrect as it incorporates division rather than multiplication, and it uses the budgeted rather than the actual quantity of the cost drivers.

1. Denominator volume refers to the total occurrences of the cost driver within an activity. The availability of each activity’s capacity can be expressed in several ways. Which of the following ways would be considered inappropriate?
2. Absurd capacity
3. Normal capacity
4. Practical capacity
5. Theoretical capacity

Ans: A, LO 3, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: Choices B, C, and D all represent real ways that the denominator value can be expressed. Choice B is the quantity needed to satisfy the average customer demand over a period of time. Choice C reduces theoretical capacity by considering unavoidable interruptions. Choice D assumes no downtime and is considered unrealistic. Choice A is not a choice found within this text and is therefore the correct response as it would be an inappropriate selection.

1. Activity-based costing (ABC) will utilize cost drivers to allocate various costs. Which of the following would be an appropriate cost driver for an employee cafeteria?
2. Employee head count by department
3. Number of marketing campaigns
4. Number of meals purchased from the cafeteria
5. Square footage of facility

Ans: C, LO 3, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: Cost drivers can be subjective, and this question requires that you discern between the choices to determine which is most likely to be a cost driver used by an employee cafeteria. Employee head count by department (Choice A) is a cost driver that would most likely be used by information technology or first aid and wellness initiatives. Number of marketing campaigns (Choice B) would most likely be a cost driver used by marketing. Square footage of facility (Choice D) is a cost driver most likely used by grounds maintenance and security. Number of meals purchased from the cafeteria (Choice C) is the correct choice as it is the most sensible choice for an employee cafeteria since it is driven by food to be sold in the cafeteria.

1. Sparrow, Inc. produces birdseed that it sells to regional markets. Susan, the accountant at Sparrow, is evaluating the impact of Activity-Based Costing (ABC) on several activities for the factory. Sparrow has the following budgeted costs: Direct Materials, $150,000; and Direct Labor, $98,000. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $75,000 (1,000 setup hours); Production, $376,000 (50,000 machine hours); and Maintenance, $63,400 (12,000 maintenance hours). Allocate MOH costs to Setup activity using the budgeted activity-based rate considering the actual usages of 262 setup hours, 13,409 machine hours, and 3,432 maintenance hours.
   1. $19,650
   2. $25,676
   3. $39,300
   4. $75,000

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires the determination of the budgeted activity rate for Setup which would be $75,000/1,000 setup hours = $75.00 per setup hour. Sparrow used 262 hours so the MOH allocated to Setup would be $75.00 per setup hour × 262 setup hours = $19,650 (Choice A).

1. Sparrow, Inc. produces birdseed that it sells to regional markets. Susan, the accountant at Sparrow, is evaluating the impact of Activity-Based Costing (ABC) on several activities for the factory. Sparrow has the following budgeted costs: Direct Materials, $150,000; and Direct Labor, $98,000. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $75,000 (1,000 setup hours); Production, $376,000 (50,000 machine hours); and Maintenance, $63,400 (12,000 maintenance hours). Allocate MOH costs to production activity using the budgeted activity-based rate, considering the actual usages of 262 setup hours, 13,409 machine hours, and 3,432 maintenance hours.
   1. $25,808.64
   2. $40,227.00
   3. $90,240.00
   4. $100,835.68

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires the determination of the budgeted activity rate for production which would be $376,000/50,000 machine hours = $7.52 per machine hour. Sparrow used 13,409 machine hours so the MOH allocated to Production would be $7.52 per machine hour × 13,409 machine hours = $100,835.68 (Choice D).

1. Tiny Corp. has provided the following information about its budgeted Manufacturing Overhead (MOH) costs. They also reported Direct Labor (DL) of $126,780 and Direct Materials (DM) of $78,699. They have broken the MOH costs into three activities:

What is Tiny’s plant-wide MOH rate if allocations are based on machine hours?

1. $7.15
2. $11.53
3. $16.64
4. $20.33

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires familiarity with the formula for calculating a plant-wide MOH rate while disregarding the individual cost drivers as well as the totals for DM and DL. To calculate the plant-wide MOH rate you would take the total MOH budgeted cost of $183,000 and divide by total budgeted quantity of the cost driver of 11,000 machine hours. $183,000/11,000 machine hours = $16.64 (Choice C).

1. Tiny Corp. has provided the following information about its budgeted Manufacturing Overhead (MOH) costs. They also reported Direct Labor (DL) of $126,780 and Direct Materials (DM) of $78,699. They have broken the MOH costs into three activities:

What is Tiny’s activity rate for each activity?

1. Utilities, $1.00/square foot; Maintenance, $1.80/maintenance hour; and Machining, $3.30/machine hour
2. Utilities, $1.00/square foot; Maintenance, $6.00/maintenance hour; and Machining, $9.00/machine hour
3. Utilities, $1.00/square foot; Maintenance, $8.74/maintenance hour; and Machining, $9.00/machine hour
4. Utilities, $6.10/square foot; Maintenance, $20.33/maintenance hour; and Machining, $16.64/machine hour

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires that you calculate the activity rate for each of the key activities: Utilities, $30,000/30,000 square feet = $1.00 per square feet; Maintenance, $54,000/9,000 maintenance hours = $6.00 per maintenance hour; and Machining, $99,000/11,000 machine hours = $9.00 per machine hour (Choice B).

1. Yogi Inc. is a small company that produces yoga mats and assorted accessories. They have recently transitioned to Activity-Based Costing (ABC) and are in the process of creating a budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs which are divided into three key activities:

During the year, Yogi used 4,000 setup hours; 12,600 machine hours; and 2,300 inspection hours. If Yogi wants to use an activity rate that is tailored to each activity, then what rate would they use for each?

1. Setup, $12.50/setup hour; Production, $16.67/machine hour; and Quality Inspection, $13.28/inspection hour
2. Setup, $31.25/setup hour; Production, $16.67/machine hour; and Quality Inspection, $13.28/inspection hour
3. Setup, $31.25/setup hour; Production, $26.46/machine hour; and Quality Inspection, $46.17/inspection hour
4. Setup, $56.47/setup hour; Production, $28.23/machine hour; and Quality Inspection, $70.58/inspection hour

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires calculation of the budgeted activity rate for each of the key activities while disregarding the actual usage: Setup, $125,000/10,000 setup hours = $12.50 per setup hour; Production, $333,450/20,000 machine hours = $16.67 per machine hour; and Quality Inspection, $106,200/8,000 inspection hours = $13.28 per inspection hour (Choice A).

1. Yogi Inc. is a small company that produces yoga mats and assorted accessories. They have recently transitioned to Activity-Based Costing (ABC) and are in the process of creating a budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs which are divided into three key activities:

During the year, Yogi used 4,000 setup hours; 12,600 machine hours; and 2,300 inspection hours. How much Production MOH will Yogi report for Product A, considering the actual usage of each of the three key activities? (Do not round the calculations.)

1. $66,680.00
2. $210,073.50
3. $355,729.50
4. $529,285.71

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires calculation of the budgeted activity rate for Production which is $333,450/20,000 machine hours = $16.67 per machine hour. Then, multiply the activity rate against the actual usage of 12,600 machine hours for a total of $210,073.50 (Choice B).

1. Melissa is the controller for Barker Inc., a factory that creates unique dog chew toys. Until now, Barker has been using a single plant-wide rate of $10.75 per direct labor hour to allocate Manufacturing Overhead (MOH) costs. Melissa has been debating a switch to activity-based costing and has derived the following activity-based rates:

$18.00 per machine hour

$11.00 per direct labor hour

$6.00 per inspection hour

A recent production run used 80 machine hours, 240 direct labor hours, and 10 inspection hours. How much MOH would be allocated using the newly derived activity-based rates?

1. $2,000.00
2. $2,700.00
3. $4,080.00
4. $4,140.00

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: To calculate the allocated MOH, multiply the activity rates against their respective actual usages. Machine hours, $18.00 per machine hour times 80 machine hours ($1,440.00) plus Direct labor hours, $11.00 per direct labor hour times 240 direct labor hours ($2,640.00) plus Inspection hours, $6.00 per inspection hour times 10 inspection hours ($60.00). The total MOH for all activities is $4,140.00 (Choice D).

1. Melissa is the controller for Barker Inc., a factory that creates unique dog chew toys. Until now, Barker has been using a single plant-wide rate of $10.75 per direct labor hour to allocate Manufacturing Overhead (MOH) costs. Melissa has been debating a switch to activity-based costing and has derived the following activity-based rates:

$18.00 per machine hour

$11.00 per direct labor hour

$6.00 per inspection hour

A recent production run used 65 machine hours, 186 direct labor hours, and 13 inspection hours. How much MOH would be allocated using the newly derived activity-based rates?

1. $2,821.00
2. $3,216.00
3. $3,294.00
4. $4,596.00

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: To calculate the allocated MOH, multiply the activity rates against their respective actual usage. Machine hours, $18.00 per machine hour times 65 machine hours ($1,170.00) plus Direct labor hours, $11.00 per direct labor hour times 186 direct labor hours ($2,046.00) plus Inspection hours, $6.00 per inspection hour times 13 inspection hours ($78.00). The total MOH for all activities is $3,294.00 (Choice C).

1. Trojan Corp. creates miniature wooden figurines that it sells to local stores around the state. Trojan is switching to Activity-Based Costing (ABC) and has arrived at the following activity-based rates for their Manufacturing Overhead (MOH) allocation: $22.00 per direct labor hour, $17.50 per packaging hour, and $8.60 per inspection hour. A recent job required the following:

600 direct labor hours

127 packaging hours

78 inspection hours

What is the amount of MOH that would be allocated to this most recent job based upon the pre-determined activity-based rates?

1. $13,393.30
2. $15,422.50
3. $16,093.30
4. $16,664.80

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires calculation of the MOH allocation for each activity based upon rates determined by Trojan Corp.: direct labor hours = $22.00 per direct labor hour times 600 direct labor hours = $13,200; packaging hours = $17.50 per packaging hour times 127 packaging hours = $2,222.50; and inspection hours = $8.60 per inspection hour times 78 inspection hours = $670.80. The total of all allocated MOH will be the total of the three activities or $16,093.30 (Choice C).

1. Trojan Corp. creates miniature wooden figurines that it sells to local stores around the state. Trojan is switching to Activity-Based Costing (ABC) and has arrived at the following activity-based rates for their Manufacturing Overhead (MOH) allocation: $22.00 per direct labor hour, $17.50 per packaging hour, and $8.60 per inspection hour. A recent job required the following:

780 direct labor hours

182 packaging hours

93 inspection hours

What is the amount of MOH that would be allocated to this most recent job based upon the predetermined activity-based rates?

1. $17,634.80
2. $20,345.00
3. $21,144.80
4. $21,963.80

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires that you calculate the MOH allocation for each activity based upon rates determined by Trojan Corp.: direct labor hours = $22.00 per direct labor times 780 direct labor hours = $17,160.00; packaging hours = $17.50 per packaging hour times 182 packaging hours = $3,185.00; inspection hours = $8.60 per inspection hour times 93 inspection hours = $799.80. The total of all allocated MOH will be the total of the three activities or $21,144.80 (Choice C).

1. Robert has been evaluating all costing data after he realized how small his margin for dinner plates had become. These plates have become the focal point for the organization so Robert has a vested interest in increasing the margin per plate. He has spent time aligning with beneficial suppliers and reducing his material cost and streamlined labor usage in a successful effort to minimize labor costs as well. The remaining task in this journey to improve margin is to evaluate the allocation of Manufacturing Overhead (MOH) costs that are estimated to be $563,559.00 for the year. Three main cost drivers and their related information are as follows:

How much of the MOH costs would be allocated to dinner plates if Robert chooses to continue using a single plant-wide rate based upon Direct Labor hours? (If required, round calculations to two decimal places.)

1. $122,533.70
2. $157,210.30
3. $206,430.12
4. $228,166.20

Ans: D, LO 1, 2, 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate the single plant-wide MOH rate. This can be done as follows: Total MOH costs/Budgeted direct labor hours: $563,559/35,990 = $15.66 per direct labor hour. Then, multiply the $15.66 per direct labor hour by the number of direct labor hours used in production of dinner plates: $15.66 × 14,570 hours = $228,166.20 (Choice D).

1. Robert has been evaluating all costing data after he realized how small his margin for dinner plates had become. These plates have become the focal point for the organization so Robert has a vested interest in increasing the margin per plate. He has spent time aligning with beneficial suppliers and reducing his material cost and streamlined labor usage in a successful effort to minimize labor costs as well. The remaining task in this journey to improve margin is to evaluate the allocation of manufacturing overhead (MOH) costs that are estimated to be $563,559.00 for the year. Three main cost drivers and their related information are as follows:

How much of the MOH costs would be allocated to dinner plates if Robert chooses to utilize an activity-based approach instead of a single plant-wide rate? (If required, round calculations to two decimal places.)

1. $220,873.34
2. $228,166.20
3. $231,434.32
4. $563,559.00

Ans: C, LO 1, 2, 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate an activity-base rate for each key activity before allocating. Setups, $95,489.00/17,450 setups = $5.47 per setup; Fabrication, $388,400.00/35,990 direct labor hours = $10.79 per direct labor hour; and Quality Inspection, $79,670/13,600 inspections = $5.86 per inspection. Now, allocate based upon usage: $5.47 × 7,750 setups = $42,392.50 + $10.79 × 14,570 hours = $157,210.30 + $5.86 × 5,432 inspections = $31,831.52. Total MOH allocated to dinner plates based on ABC = $231,434.32 (Choice C).

1. Roland’s company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year just as he had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems:

What is the total amount of MOH allocated to the silk scarves using ABC? (Do not round the calculations.)

1. $15,654.30
2. $18,695.70
3. $19,420.00
4. $21,500.00

Ans: A, LO 1, 2, 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires several steps in order to determine the MOH allocated to either of the scarves. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool divided by the total quantity of activity’s cost driver from both scarves. Folding, $19,420.00/(6,250 + 7,100) = $1.45 per DL hour; Cleaning/Maintenance, $10,330.00/(1,200 + 1,500) = $3.83 per cleaning/maintenance hour; and Quality Inspections, $4,600.00/(600 + 800) = $3.29 per inspection. Now, allocate based upon the silk scarf activity: ($1.45 x 6,250) + ($3.83 × 1,200) + ($3.29 × 600) = $15,654.30 total MOH allocated to the silk scarves (Choice A).

1. Roland’s company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year, just as had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality Inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems:

If Roland uses ABC, then what will the net operating income be for the cotton scarves? (Do not round the calculations.)

1. $140,964.30
2. $159,660.00
3. $164,624.30
4. $208,970.00

Ans: D, LO 1, 2, 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires several steps in order to determine the MOH allocated to either of the scarves. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool divided by the total quantity of activity’s cost driver from both scarves. Folding, $19,420.00/(6,250 + 7,100) = $1.45 per DL hour; Cleaning/Maintenance, $10,330.00/(1,200 + 1,500) = $3.83 per cleaning/maintenance hour; and Quality Inspections, $4,600.00/(600 + 800) = $3.29 per inspection. Now, allocate based upon the cotton scarf activity: ($1.45 × 7,100) + ($3.83 × 1,500) + ($3.29 × 800) = $18,695.70 total MOH allocated to the cotton scarves. Next, calculate net operating income: $208,970.00 – $23,660.00 – $25,650.00 – $18,695.70 = $140,964.30 (Choice A).

1. Josephine has been investigating a potential switch to Activity-Based Costing (ABC) for the cookie company where she works. She has decided to focus on their biggest seller, vanilla cookies, before moving forward with this decision. She has gathered the following pertinent financial data:

Josephine has determined that there are three key activities where Manufacturing Overhead (MOH) costs can be divided along with the total activity for the year: cutting, $34,500.00 (25,600 direct labor hours); washing cookie trays, $37,900.00 (15,780 trays washed); and wages for the supervisors, $24,600.00 (12,630 supervisor hours). Josephine would like to decide soon. If she uses ABC, then what will the net operating income per unit be for the vanilla cookies? (Do not round the calculations.)

• 1. $0.73
  2. $1.30
  3. $1.86
  4. $5.01

Ans: B, LO 1, 2, 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires several steps in order to determine the MOH allocated to vanilla cookies and eventually the net operating income per vanilla cookie. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool being divided by the total quantity of activity’s cost driver for the year. Cutting, $34,500.00/25,600 DL hours = $1.35 per DL hour; washing trays, $37,900.00/15,780 tray washed = $2.40 per tray washed; and supervisor wages, $24,600.00/12,630 supervisor hours = $1.95 per supervisor hour. Now, allocate based upon the vanilla cookie activity: ($1.35 × 14,300) + ($2.40 × 8,000) + ($1.95 × 8,450) = $54,944.11 total MOH allocated to the vanilla cookies. Next, calculate net operating income: $378,400.00 – $98,330.00 – $126,780.00 – $54,944.11 = $98,345.89. Lastly, divide by the number of vanilla cookies produced: $98,345.89/75,600 = $1.30 net operating income per vanilla cookie (Choice B).

1. Josephine has been investigating a potential switch to Activity-Based Costing (ABC) for the cookie company where she works. She has decided to focus on their biggest seller, vanilla cookies, before moving forward with this decision. She has gathered the following pertinent financial data:

Josephine determined that there are three key activities where Manufacturing Overhead (MOH) costs can be divided along with the total activity for the year: cutting, $34,500 (25,600 direct labor hours); washing cookie trays, $37,900 (15,780 trays washed); and wages for the supervisors, $24,600 (12,630 supervisor hours). Josephine would like to decide soon. What is the total amount of MOH allocated to the vanilla cookies using ABC? (Do not round the calculations.)

1. $54,944.11
2. $55,087.50
3. $97,000.00
4. $98,330.00

Ans: A, LO 1, 2, 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires several steps in order to determine the MOH allocated quantity of activity’s cost driver to vanilla cookies. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool being divided by the total activity for the year. Cutting, $34,500.00/25,600 DL hours = $1.35 per DL hour; washing trays, $37,900.00/15,780 tray washed = $2.40 per tray washed; and supervisor wages, $24,600.00/12,630 supervisor hours = $1.95 per supervisor hour. Now, allocate based upon the vanilla cookie activity: ($1.35 × 14,300) + ($2.40 × 8,000) + ($1.95 × 8,450) = $54,944.11 total MOH allocated to the vanilla cookies (Choice A).

1. Eagleton Inc. is a retail business that sells fedoras and other decorative hats. They are in the process of evaluating their costing systems and working towards an Activity-Based Costing (ABC) implementation. They have compiled the following data about their Manufacturing Overhead (MOH) costs:

The production department tallied the following amounts in a recent production run: 3,600 square feet; 2,009 supervisor hours; and 998 pounds of indirect materials. What is the total amount of facility-level MOH costs allocated to the production run?

1. $0.00
2. $4,320.00
3. $7,928.40
4. $24,588.00

Ans: B, LO 2, 3, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires the identification of which, if any, of the activities listed are at the facility level. In this case, the insurance on the factory would be considered a facility-level cost. Next, calculate the per-unit cost: $12,000/10,000 square feet = $1.20 per square foot. Lastly, multiply this by the square footage used: $1.20 per square foot times 3,600 square feet equals $4,320.00 allocated to facility-level activities (Choice B).

1. Eagleton Inc. is a retail business that sells fedoras and other decorative hats. They are in the process of evaluating their costing systems and working towards an Activity-Based Costing (ABC) implementation. They have compiled the following data about their Manufacturing Overhead (MOH) costs:

The production department tallied the following amounts in a recent production run: 3,600 square feet; 2,009 supervisor hours; and 998 pounds of material. What is the total amount of unit-level MOH costs allocated to the production run? (If required, round calculations to two decimal places.)

1. $0.00
2. $3,986.16
3. $9,940.08
4. $29,636.26

Ans: C, LO 2, 3, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires the identification of which, if any, of the activities listed are at the unit level. In this case, the indirect materials would be considered a unit-level cost. Next, calculate the per unit cost: $22,900/2,300 pounds = $9.96 per pound. Lastly, multiply this by the pounds of materials used: $9.96 per pound times 998 pounds of materials equals $9,940.08 allocated to unit-level activities (Choice C).

1. Samantha is the controller for Tasty Jerky, company that manufactures vegan jerky and currently has two flavors: Cajun and BBQ. Samantha believes that Tasty Jerky is in a great position to transition to Activity-Based Costing (ABC) from a traditional costing system. Tasty Jerky is planning to produce 77,670 bags of Cajun jerky and 81,400 bags of BBQ jerky. Management has asked Samantha to compile costing data using ABC. She has identified the following key activity information:

Moving and Sorting Ingredients $98,444 (146,800 pounds)

Quality Control $264,306 (14,500 inspections)

Each product will require the following amount of each key activity:

In addition, Cajun will need $99,430.00 of Direct Materials and $128,900.00 of Direct Labor while BBQ will need $103,220.00 of Direct Materials and $139,800.00 of Direct Labor. Determine the total production costs for Cajun jerky under the ABC system. (If required, round calculations to two decimal places.)

1. $282,568.50
2. $385,788.50
3. $388,942.50
4. $396,688.50

Ans: C, LO 2, 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires calculation of the activity rate for each of the manufacturing overhead (MOH) activities: Moving and Sorting Ingredients- $98,444/146,800 pounds = $0.67/pound and Quality Control- $264,306/14,500 inspections = $18.23/inspection. Next, calculate the total overall MOH costs for bags of Cajun jerky: ($0.67 × 87,350 pounds) + ($18.23 × 5,600 inspections) = $58,524.50 + $102,088.00 = $160,612.50. Lastly, add the total Cajun jerky MOH costs to the direct materials and direct labor costs used by the Cajun jerky: $160,612.50 + $99,430.00 + $128,900.00 = $388,942.50 (Choice C).

1. Samantha is the controller for Tasty Jerky., company that manufactures vegan jerky and currently has two flavors: Cajun and BBQ. Samantha believes that Tasty Jerky is in a great position to transition to Activity-Based Costing (ABC) from a traditional costing system. Tasty Jerky is planning to produce 77,670 bags of Cajun jerky and 81,400 bags of BBQ jerky. Management has asked Samantha to compile costing data using ABC. She has identified the following key activity information:

Moving and Sorting Ingredients $98,444 (146,800 pounds)

Quality Control $264,306 (14,500 inspections)

Each product will require the following amount of each key activity:

In addition, Cajun will need $99,430.00 of Direct Materials and $128,900.00 of Direct Labor while BBQ will need $103,220.00 of Direct Materials and $139,800.00 of Direct Labor. Determine the total production costs for BBQ jerky under the ABC system? (If required, round calculations to two decimal places.)

1. $243,020.00
2. $385,788.50
3. $419,372.50
4. $445,098.50

Ans: D, LO 2, 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires the calculation of the activity rate for each of the Manufacturing Overhead (MOH) activities: Moving and Sorting Ingredients- $98,444/146,800 pounds = $0.67/pound and Quality Control- $264,306/14,500 inspections = $18.23/inspection. Next, calculate the total overall MOH cost for bags of BBQ jerky: ($0.67 × 59,450 pounds) + ($18.23 × 8,900 inspections) = $39,831.50 + $162,247.00 = $202,078.50. Lastly, add the total BBQ jerky MOH cost to the direct materials and direct labor costs used by the BBQ jerky: $202,078.50 + $103,220.00 + $139,800.00 = $445,098.50 (Choice D).

1. If a business wants to use Time-Driven Activity-Based Costing (TDABC), then they will need to calculate the cost per transaction after determining their rate for supplying an activity. Which of the following represents the correct formula for calculating the cost per transaction?
   1. Cost per minute for supplying an activity (under TDABC) – Number of minutes per transaction
   2. Cost per minute for supplying an activity (under TDABC) / Number of minutes per transaction
   3. Cost per minute for supplying an activity (under TDABC) + Number of minutes per transaction
   4. Cost per minute for supplying an activity (under TDABC) × Number of minutes per transaction

Ans: D, LO 4, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: The formula to calculate cost per transaction is cost per minute for supplying an activity (under TDABC) × number of minutes per transaction. Choice D is the correct answer since that correctly multiplies the cost per minute for supplying an activity by the amount of time each transaction takes to get cost per transaction.

1. Cost drivers are used in Activity-Based Costing (ABC) to allocate various costs. Which of the following would be an appropriate cost driver for an area such as Marketing?
2. Number of invoices issued
3. Number of purchase orders filled
4. Number of reports requested
5. Number of marketing campaigns run

Ans: D, LO 4, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires discernment between the choices to determine which is most likely to be a cost driver used by Marketing. Number of invoices issued (Choice A), and Number of reports requested (Choice C) would be appropriate cost drivers to use for Accounting. Number of purchase orders filled (Choice B) would be an appropriate cost driver for the Purchasing/Supply chain. Number of marketing campaigns run (Choice D) is the correct choice as it is more likely to be used as a cost driver for a marketing department.

1. Peacock Inc. is a contracting business that creates one-of-a-kind murals for each individual client. They have been asked by a potential client to prepare an estimate for the creation of a floral mural for the client’s office waiting room. Turner, the main artist for Peacock would like the company to consider updating its billing methods from a flat rate of $370.00 per painting hour to an activity-based costing method that would include a markup of 29%. After visiting the client’s proposed site, Turner has put together the following estimate for the floral mural:

What is the final bid price that Peacock will present to the client as per new estimated rates?

1. $24,884.75
2. $31,820.00
3. $32,101.33
4. $41,047.80

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Determine the total cost for each activity as follows: Design, $150/hour × 3 hours = $450.00; Wall Prep, $3.65/square foot × 215 square feet = $784.75; and Painting, $275/hour × 86 hours = $23,650.00. The total cost of all activities can be found by summing the individual totals: $450.00 + $784.75 + $23,650.00 = $24,884.75. Lastly, add the markup- $24,884.75 × 1.29 = $32,101.33 final bid price (Choice C).

1. Peacock Inc. is a contracting business that creates one-of-a-kind murals for each individual client. They have been asked by a potential client to prepare an estimate for the creation of a floral mural for the client’s office waiting room. Turner, the main artist for Peacock would like the company to consider updating its billing methods from a flat rate of $370.00 per painting hour to an Activity-Based Costing (ABC) method that would include a markup of 29%. After visiting the client’s proposed site, Turner has put together the following estimate for the floral mural:

What is the difference in profit for Peacock between the flat rate and the new ABC method proposed by Turner?

1. $281.33 less profit under ABC
2. $281.33 more profit under ABC
3. $8,946.47 less profit under ABC
4. $8,946.47 more profit under ABC

Ans: B, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Determine the total cost for each activity as follows: Design, $150/hour × 3 hours = $450.00; Wall Prep, $3.65/square foot × 215 square feet = $784.75; and Painting, $275/hour × 86 hours = $23,650.00. The total cost of all activities can be found by summing the individual totals: $450.00 + $784.75 + $23,650.00 = $24,884.75. Next, add the markup: $24,884.75 × 1.29 = $32,101.33 will be the final bid price. Lastly, compare the marked-up cost of $32,101.33 against the flat bill price of $370.00 × 86 hours, or $31,820.00. Once you compare there is, $32,101.33 – $31,820.00 = $281.33 more profit under the ABC method (Choice B).

1. Curtis owns Mayflower Construction, a company that specializes in the design and construction of what they have promoted as a backyard oasis. Curtis is putting together an informational packet to distribute to potential clients that will include examples of projects and suggested pricing. The first project in the packet will be backyard oasis consisting of a large pergola and seating. Curtis would like to upgrade Mayflower’s costing to be in line with Activity-Based Costing (ABC) and has put together the following information about the first example project:

Curtis would like to add a 19% markup to the total cost of the project. This would be a big transition from his current method of billing at a flat rate of $194 per linear square foot. Should Curtis switch to the new ABC method?

• 1. No, Curtis will make $108.30 less using ABC
  2. No, Curtis will make $1,330.00 less using ABC
  3. Yes, Curtis will make $108.30 more using ABC
  4. Yes, Curtis will make $1,330.00 more using ABC

Ans: A, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Determine the total cost for each activity as follows: Pergola Construction, $125/linear foot × 40 linear feet = $5,000.00; Design, $142.00/hour × 5 hours = $710.00; Furniture Construction, $90/piece × 8 pieces = $720.00. The total cost of all activities can be found by summing the individual totals: $5,000.00 + $710.00 + $720.00 = $6,430.00. Next, add the markup: $6,430.00 × 1.19 = $7,651.70 is the final bid price. Lastly, compare the marked-up cost of $7,651.70 against the flat billed price of $194.00 × 40 linear square feet, or $7,760.00. This gives $7,651.70 – $7,760.00 = $108.30 less profit under the ABC method (Choice A). Hence, Curtis should not switch to the new ABC method.

1. Curtis owns Mayflower Construction, a company that specializes in the design and construction of what they have promoted as a backyard oasis. Curtis is putting together an informational packet to distribute to potential clients that will include examples of projects and suggested pricing. The first project in the packet will be backyard oasis consisting of a large pergola and seating. Curtis would like to upgrade Mayflower’s costing to be in line with Activity-Based Costing (ABC) and has put together the following information about the first example project:

Curtis would like to add a 21% markup to the total cost of the project. This would be a big transition from his current method of billing at a flat rate of $198 per linear square foot. How much is final price that Curtis will include in the packet?

1. $6,430.00
2. $7,651.70
3. $7,780.30
4. $7,920.00

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Determine the total cost for each activity as follows: Pergola Construction, $125/linear foot × 40 linear feet = $5,000.00; Design, $142.00/hour × 5 hours = $710.00; Furniture Construction, $90/piece × 8 pieces = $720.00. The total cost of all activities can be found by summing the individual totals: $5,000.00 + $710.00 + $720.00 = $6,430.00. Next, add the markup: $6,430.00 × 1.21 = $7,780.30, and this is the final bid price (Choice C).

1. David owns a small boutique that sells products created by local vendors and artisans. He would very much like to update his store and will be hiring a contractor to complete the work. The contractor has informed him that the project will entail the following activities: Store design, 15 hours at $137 per hour; Carpet installation, 1,250 square feet at $10.80 per square foot; Fixture construction, $112 per piece with a total of 22 pieces; and SG&A expenses, 20 hours at $40.75 per hour. This estimate will also include a 26% additional markup based on the total of the estimated job costs for the entire project. A competing bid has been returned with a flat rate of $18.50 per square foot of carpet installation that would cover the whole project. Using Activity-Based Costing (ABC), what is the final bid price for the first bid? 
2. $18,824.00
3. $23,125.00
4. $23,730.84
5. $29,137.50

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Before determining the final bid price, determine the total cost for each activity as follows: Store design, $137/hour × 15 hours = $2,055.00; Carpet installation, $10.80/square foot × 1,250 square feet = $13,500.00; Fixture construction, $112/piece × 22 pieces = $2,464.00; and SG&A expenses, = $40.75/hour × 20 hours = $815.00. The total cost of all activities can be found by summing the individual totals: $2,055.00 + $13,500.00 + $2,464.00 + $815.00 = $18,834.00. Next, add the additional markup $18,834.00 × 1.26 = $23,730.84, and that is the final bid price (Choice C).

1. David owns a small boutique that sells products created by local vendors and artisans. He would very much like to update his store and will be hiring a contractor to complete the work. The contractor has informed him that the project will entail the following activities: Store design, 15 hours at $137 per hour; Carpet installation, 1,250 square feet at $10.80 per square foot; Fixture construction, $112 per piece with a total of 22 pieces; and SG&A expenses, 20 hours at $40.75 per hour. This estimate will also include a 26% additional markup based on the total of the estimated job costs for the entire project. A competing bid has been returned with a flat rate of $18.50 per square foot of carpet installation that would cover the whole project. Which estimate would save David the most money?
2. ABC rate, since it will cost David $4,291.00 less than the flat-billed rate
3. ABC rate, since it will cost David $605.84 less than the flat-billed rate
4. Flat-billed rate, since it will cost David $4,291.00 less than the ABC rate
5. Flat-billed rate, since it will cost David $605.84 less than the ABC rate

Ans: D, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Before determining the final bid price, determine the total cost for each activity under ABC as follows: Store design, $137/hour × 15 hours = $2,055.00; Carpet Installation, $10.80/square foot × 1,250 square feet = $13,500.00; Fixture Construction, $112/piece × 22 pieces = $2,464.00; and SG&A expenses, = $40.75/hour × 20 hours = $815.00. The total cost of all activities can be found by summing the individual totals: $2,055.00 + $13,500.00 + $2,464.00 + $815.00 = $18,834.00. Next, add the additional markup $18,834.00 × 1.26 = $23,730.84, and that is the final bid price. Lastly, compare the marked-up cost of $23,730.84 against the flat-billed price of $18.50 × 1,250 square feet of carpet installation, or $23,125.00. Comparison shows $23,730.84 – $23,125.00 = $605.84 of savings under the flat-billed method (Choice D).

1. Charles has been compiling year-end financial data for the painting business where he works. The company specializes in the painting of both residential and commercial properties. Charles would like to determine what division is more profitable for the company so that they can shift costs appropriately. Charles used activity-based costing based on support costs to allocate the Manufacturing Overhead (MOH) costs. He performed calculations and allocations and determined the following division information:

Based upon the information provided by Charles, use vertical analysis to determine which division is using support costs more effectively as a percentage of sales.

1. The residential division, as it is using 0.97% less support cost than the commercial division.
2. The residential division, as it is using 0.97% more support cost than the commercial division.
3. The residential division, as it is using 2.35% less support cost than the commercial division.
4. The residential division, as it is using 2.35% more support cost than the commercial division.

Ans: C, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Draw on analytics learned throughout the text. For each division, calculate total support costs, and divide by sales to arrive at the percentage of sales that is being used to cover those costs. Residential: ($30,000 + $22,000)/$175,000 = 0.2971 or 29.71%. Commercial: ($50,000 + $32,400)/$257,000 = 0.3206 or 32.06%. This means that the residential division is using 2.35% less of their sales to cover their support costs than the commercial division (Choice C).

1. Charles has been compiling year-end financial data for the painting business where he works. The company specializes in the painting of both residential and commercial properties. Charles would like to determine which division is more profitable for the company so that they can shift costs appropriately. Charles used activity-based costing based on support costs to allocate the Manufacturing Overhead (MOH) costs. He performed calculations and allocations and determined the following division information:

Based upon the information provided by Charles, use vertical analysis to determine the profitability of each division using percentage of sales as the indicator.

1. Residential, 7.53%; Commercial, 20.86%
2. Residential, 11.06%; Commercial, 14.20%
3. Residential, 14.20%; Commercial, 11.06%
4. Residential, 20.86%; Commercial, 7.53%

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Draw on analytics learned throughout the text. For each division, calculate net operating income, and divide by sales to arrive at the percentage of sales that is left over after all expenses have been covered. Residential: ($175,000 – $70,000 – $10,000 – $30,000 – $22,000 – $6,500) = $36,500/$175,000 = 0.2086 or 20.86%. Commercial, ($257,000 – $126,000 – $22,000 – $50,000 – $32,400 – $7,250) = $19,350/$257,000 = 0.0753 or 7.53%. This means that the residential division is more profitable than the commercial division (Choice D).

1. Eugene is the manager for Levy Corp, an HVAC company, and he is debating the implementation of Time-Driven Activity-Based Costing (TDABC). After meeting with management, he realized that the company may not be fully utilizing their available capacity, and he believes this method will shed some light on their current state of affairs. Eugene will begin his analysis with the customer service center. This department stays very busy, and handled the following volume of activities: cold sales calls, 7,490 calls; repeat service calls, 5,806 calls; and customer concerns and complaints calls, 1,300 calls. They incurred $65,000.00 last year to operate these activities. Eugene has performed an analysis and determined the following:

How much total cost would be allocated to these key activities? (If required, round calculations to two decimal places.)

1. $57,148.92
2. $65,000.00
3. $66,404.92
4. $69,325.80

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question has provided the rate for supplying an activity so the first step needed would be to calculate the cost per transaction. Cold sales calls would be $0.89 per minute times 4.5 minutes or $4.01 per call. Repeat service calls would be $0.89 per minute times 5.25 minutes or $4.67 per call. Customer concerns/complaints calls would be $0.89 per minute times 8 minutes or $7.12 per call. Next, multiply each per-call amount by the number of calls of that type completed throughout the year. $4.01 × 7,490 calls = $30,034.90; $4.67 × 5,806 calls = $27,114.02; and $7.12 × 1,300 calls = $9,256.00. The total cost allocated will be the sum of the values from the previous step = $30,034.90 + $27,114.02 + $9,256.00 = $66,404.92 (Choice C).

1. Eugene is the manager for Levy Corp, an HVAC company, and he is debating the implementation of Time-Driven Activity-Based Costing (TDABC). After meeting with management, he has realized that the company may not be fully utilizing their available capacity, and he believes this method will better shed some light on their current state of affairs. Eugene will begin his analysis with the customer service center. This department stays very busy and handled the following volume of activities: cold sales calls, 7,490 calls; repeat service calls, 5,806 calls; and customer concerns and complaints calls, 1,300 calls. They spent $65,000.00 last year to operate these activities. Eugene has performed an analysis and determined the following:

When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference, and is that amount therefore over- or underallocated? (If required, round calculations to two decimal places.)

1. $1,404.92, overallocated
2. $1,404.92, underallocated
3. $4,325.80, overallocated
4. $4,325.80, underallocated

Ans: A, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question has provided the rate for supplying an activity so the first step needed would be to calculate the cost per transaction. Cold sales calls would equal $0.89 per minute times 4.5 minutes or $4.01 per call. Repeat service calls would be $0.89 per minute times 5.25 minutes or $4.67 per call. Customer concerns/complaints calls would be $0.89 per minute times 8 minutes or $7.12 per call. Next, multiply each per-call amount by the number of calls of that type completed throughout the year. $4.01 × 7,490 calls = $30,034.90; $4.67 × 5,806 calls = $27,114.02; and $7.12 × 1,300 calls = $9,256.00. The total cost allocated will be the sum of the values calculated in the previous step = $30,034.90 + $27,114.02 + $9,256.00 = $66,404.92. Lastly, subtract $65,000 from $66,404.92, so $1,404.92 was overallocated (Choice A).

1. As a company is determining which costing system they wish to implement, they will have a variety of methods from which to choose including Activity-Based Costing (ABC) and traditional costing. Which of the following would be considered a characteristic of a traditional costing system and not of ABC?
2. Being able to calculate the total cost driver for each activity through estimation
3. Being able to determine the departmental rate that the product or service passes through
4. Being able to serve customers by organizing costs into key activities
5. Being able to use each customer as a means to allocate customer service

Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires considering the implementation of traditional costing and how ABC could specifically affect service-based businesses upon its successful implementation. Choice B is correct as it indicates that they would be able to determine the Manufacturing Overhead (MOH) rate for each department that the product or service passes through, which is a characteristic of traditional costing system other than ABC.

1. Stevie has been allocating Manufacturing Overhead (MOH) costs to her products using a single plant-wide rate of $14.00 per Direct Labor (DL) hour. A recent job required 347 DL hours, 42 production runs, 25 quality inspections, and 20 factory supervisor hours. Based on the increased activity, the accountants are suggesting a transition to Activity-Based Costing (ABC) and have suggested the following rates:

Materials Handling: $9.75 per direct labor hour

Production Setup: $18.50 per production run

Quality Inspections: $6 per inspection

Factory Supervisor Wages: $12.30 per supervisor hour

Assuming that Stevie makes the switch to ABC, what is the difference in MOH costs that would be reported under the previous plant-wide rate compared to the ABC rates?

1. $301.75 less costs allocated under ABC
2. $301.75 more costs allocated under ABC
3. $2,210.25 less costs allocated under ABC
4. $2,210.25 more costs allocated under ABC

Ans: A, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question first requires calculation of the MOH cost based on the single plant-wide rate: ($14.00 × 347 DL hours) = $4,858.00. Now, calculate the MOH cost under suggested ABC rates: ($9.75 × 347 DL hours) + ($18.50 × 42 production runs) + ($6.00 × 25 inspections) + ($12.30 × 20 supervisor hours) = $3,383.25 + $777.00 + $150.00 + $246.00 = $4,556.25. Next, compare the two MOH cost: $4,858.00 – $4,556.25 = $301.75. The difference of $301.75 represents the underallocated costs under the ABC (Choice A).

1. In order to operate its customer support activity, Lucky’s Amusement Park incurred $325,000 in annual costs (spread evenly amongst the four quarters of the year). Due to the large number of visitors to the park each year, Lucky has been debating whether or not they can afford to bring on additional customer support staff members. While having an annual capacity of 525,000 minutes, Lucky is going to be utilizing Time-Driven Activity-Based Costing (TDABC). They have identified the following as their key activities within the customer support function: ticket sales, park admittance, customers assistance (once they enter the park), and processing customer refunds. Management has compiled information pertaining to the first two quarters of the year:

Using TDABC, what are the total costs allocated to the first quarter? Also, what was the over or underallocation of costs? (If required, round calculations to two decimal places.)

1. $74,579.80 in total costs allocated; with $6,670.20 overallocated
2. $74,579.80 in total costs allocated; with $6,670.20 underallocated
3. $81,250.00 in total costs allocated; with $6,670.20 overallocated
4. $81,250.00 in total costs allocated; with $6,670.20 underallocated

Ans: B, LO 4, Bloom: E, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question first requires calculation of the rate for supplying an activity and the cost per transaction. To calculate the rate for supplying an activity, divide the total cost of activity by the practical capacity available expressed in time: $325,000/525,000 minutes = $0.62/minute. Next, to calculate the cost per transaction, multiply the rate for supplying the activity by the number of minutes per transaction: Ticket Sales, $0.62 × 4 minutes = $2.48/ticket sale; Park Admittance, $0.62 × 1 minute = $0.62/admittance; Customer In-Park Assistance, $0.62 × 3.5 minutes = $2.17/customer assisted; and Customer Refunds, $0.62 × 6 minutes = $3.72/refund. To obtain the total costs, multiply the cost of each transaction by its respective activity and sum these values: ($2.48 × 22,000 ticket sales) + ($0.62 × 11,700 admittances) + ($2.17 × 3,788 customers assisted) + ($3.72 × 1,222 refunds) = $54,560.00 + $7,254.00 + $8,219.96 + $4,545.84 = $74,579.80. Lastly, to determine if it was over or underallocated, divide the $325,000.00 costs incurred by four to determine the allocation per quarter: $325,000.00/4 = $81,250.00 costs were incurred during the quarter. This means that the first quarter is underallocated by ($81,250.00 – $74,579.80) = $6,670.20 (Choice B).

1. In order to operate its customer support activity, Lucky’s Amusement Park incurred $325,000 in annual costs (spread evenly amongst the four quarters of the year). Due to the large number of visitors to the park each year, Lucky has been debating whether or not they can afford to bring on additional customer support staff members. While having an annual capacity of 525,000 minutes, Lucky is going to be utilizing Time-Driven Activity-Based Costing (TDABC). They have identified the following as their key activities within the customer support function: ticket sales, park admittance, assisting customers once they enter the park, and processing customer refunds. Management has compiled information pertaining to the first two quarters of the year:

Using TDABC, what are the total costs allocated to quarter two? Also, what was the over- or underallocation of costs? (If required, round calculations to two decimal places.)

1. $80,549.78 in total costs allocated; with $700.22 overallocated
2. $80,549.78 in total costs allocated; with $700.22 underallocated
3. $81,250.00 in total costs allocated; with $700.22 overallocated
4. $81,250.00 in total costs allocated; with $700.22 underallocated

Ans: B, LO 4, Bloom: E, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question first requires calculation of the rate for supplying an activity and the cost per transaction. To calculate the rate for supplying an activity, divide the total cost of activity by the practical capacity available expressed in time: $325,000/525,000 minutes = $0.62/minute. Next, to calculate the cost per transaction, multiply the rate for supplying the activity by the number of minutes per transaction: Ticket Sales, $0.62 × 4 minutes = $2.48/ticket sale; Park Admittance, $0.62 × 1 minute = $0.62/admittance; Customer In-Park assistance, $0.62 × 3.5 minutes = $2.17/customer assisted; and Customer Refunds, $0.62 × 6 minutes = $3.72/refund. To obtain the total costs, multiply the cost of each transaction by its respective activity and sum the values: ($2.48 × 23,400 ticket sales) + ($0.62 × 13,600 admittances) + ($2.17 × 3,906 customers assisted) + ($3.72 × 1,508 refunds) = $58,032.00 + $8,432.00 + $8,476.02 + $5,609.76 = $80,549.78. Lastly, to determine if it was over- or underallocated, divide the $325,000.00 costs incurred by four to determine the allocation per quarter: $325,000.00/4 = $81,250.00 costs were incurred during the quarter. This means that quarter two is underallocated by ($81,250.00 – $80,549.78) = $700.22 (Choice B).

1. Rosie Riveters is a home inspection company that specializes in pre-closing home inspections for single-family homes. Alexis, the owner, has tasked the accountant with addressing her budget concerns by finding an alternate way to cost aside from their current use of traditional costing. The accountant has determined that the advertising department may be first in line for analysis. The department handled the following volume during the year: responding to social media messages, 7,402 responses (1.5 minutes per response); responding to phone inquiries, 5,633 responses (3 minutes per response); and responding to mailed flyers, 1,340 responses (2 minutes per response). Rosie Riveters spent $167,900 to operate the advertising department, and these resources created a capacity of 35,000 minutes for Rosie Riveters. Using Time-Driven Activity-Based Costing (TDABC), how much cost will be allocated to responding to social media? (If required, round calculations to two decimal places.)
   1. $27,038.40
   2. $53,294.40
   3. $167,900.00
   4. $168,000.00

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires multiple steps in order to be able to calculate the cost that will be allocated under TDABC. First, calculate the rate for supplying the activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $167,900/35,000 minutes = $4.80 per response. Next, multiply the per-minute rate by the number of minutes per response: $4.80 × 1.5 minutes = $7.20. Lastly, multiply the cost per response by the number of times activity was performed: $7.20 × 7,402 responses = $53,294.40 (Choice B).

1. Rosie Riveters is a home inspection company that specializes in pre-closing home inspections for single-family homes. Alexis, the owner, has tasked the accountant with addressing her budget concerns by finding an alternate way to cost aside from their current use of traditional costing. The accountant has determined that the advertising department may be first in line for analysis. The department handled the following volume during the year: responding to social media messages, 7,402 responses (1.5 minutes per response); responding to phone inquiries, 5,633 responses (3 minutes per response); and responding to mailed flyers, 1,340 responses (2 minutes per response). Rosie Riveters spent $167,900 to operate the advertising department, and these resources created a capacity of 35,000 minutes for Rosie Riveters. Using Time-Driven Activity-Based Costing (TDABC), how much total cost will be allocated to key activities? (If required, round calculations to two decimal places.)
   1. $41,961.60
   2. $62,568.00
   3. $147,273.60
   4. $167,900.00

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires multiple steps in order to calculate the cost that will be allocated under TDABC. First, calculate the rate for supplying an activity by taking the total cost of that activity and dividing it by the practical capacity available expressed in time: $167,900/35,000 minutes = $4.80 per response. Next, determine the cost per response by multiplying per-minute rate by the number of minutes per response for each activity: $4.80 × 1.5 minutes = $7.20; $4.80 × 3 minutes = $14.40; and $4.80 × 2 minutes = $9.60. Now, multiply the cost per response by the number of times each activity was performed: $7.20 × 7,402 social media responses = $53,294.40; $14.40 × 5,633 phone inquiry responses = $81,115.20; and $9.60 × 1,340 mailed flyer responses = $12,864.00. Lastly, combine all individual totals to arrive at the total cost allocated: $53,294.40 + $81,115.20 + $12,864.00 = $147,273.60 (Choice C).

1. The Concrete Rose has been a staple of their community for several decades. As the owner retires and promotes his daughter Moira to CEO of this successful music venue, the management staff has prepared suggestions for improvements. At the top of their list is the implementation of Time-Driven Activity-Based Costing (TDABC) instead of their current traditional costing methods. With this new change, the management team believes they can optimize their earnings. They compiled the following data about their identified key activities:

The Concrete Rose spent $389,500 to operate the ticketing department, and these resources created a capacity of 495,000 minutes. If actual costs incurred to operate the activities are compared to the allocated costs, what is the difference, and is it over- or underallocated? (If required, round calculations to two decimal places.)

• 1. $47.96 overallocated
  2. $47.96 underallocated
  3. $1,502.04 overallocated
  4. $1,502.04 underallocated

Ans: A, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires the calculation of the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $389,500/495,000 minutes = $0.79 per minute. Next, multiply the per-minute rate by the time to complete each activity: $0.79 × 4 minutes per ticket sale = $3.16 per ticket sale; $0.79 × 1.50 minutes per ticket admittance = $1.19 per ticket admittance; and $0.79 × 8 minutes per ticket refund = $6.32 per ticket refund. Next, multiply each activity rate by the number of tickets handled per year, and sum those totals: ($3.16 × 84,620) + ($1.19 × 77,844) + ($6.32 × 4,670) = $267,399.20 + $92,634.36 + $29,514.40 = $389,547.96. Lastly, compare the total allocated costs to the actual costs, so the difference, $389,547.96 – $389,500 = $47.96, is overallocated (Choice A).

1. The Concrete Rose has been a staple of their community for several decades. As the owner retires and promotes his daughter Moira to CEO of this successful music venue, the management staff has prepared suggestions for improvements. At the top of their list is the implementation of Time-Driven Activity-Based Costing (TDABC) over their current traditional costing methods. With this new change, the management team believes they can optimize their earnings. They compiled the following data about their identified key activities:

The Concrete Rose spent $389,500 to operate the ticketing department, and these resources created a capacity of 495,000 minutes. How much total cost would be allocated to the key activities? (If required, round calculations to two decimal places.)

• 1. $326,428.00
  2. $389,500.00
  3. $389,547.96
  4. $391,050.00

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires the calculation of the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $389,500/495,000 minutes = $0.79 per minute. Next, multiply the per-minute rate by the time to complete each activity: $0.79 × 4 minutes per ticket sale = $3.16 per ticket sale; $0.79 × 1.5 minutes per ticket admittance = $1.19 per ticket admittance; and $0.79 × 8 minutes per ticket refund = $6.32 per ticket refund. Next, multiply each activity rate by the number of tickets handled per year, and then sum their totals: ($3.16 × 84,620) + ($1.19 × 77,844) + ($6.32 × 4,670) = $267,399.20 + $92,634.36 + $29,514.40 = $389,547.96 (Choice C).

1. When considering implementing activity-based costing, management should consider all advantages and disadvantages. Which of the following would be considered a disadvantage?
2. Better pricing decisions.
3. Employee pushback
4. More precise profit planning
5. Sound make-or-buy decisions

Ans: B, LO 4, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires that you determine what would be considered advantages of activity-based costing. Advantages include better pricing decisions (Choice A), more precise profit planning (Choice C), and sound make-or-buy decisions (Choice D). Employee pushback (Choice B) is the correct choice as it is considered to be a disadvantage of activity-based costing.

1. Activity-based costing (ABC) is often chosen in lieu of using a traditional costing system. While it does have many advantages, it also has some disadvantages. Of the following, which would be considered a disadvantage of ABC?
2. Improved product-mix decisions
3. Initial costs
4. Manufacturing efficiency
5. Sound make-or-buy decisions

Ans: B, LO 4, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires that you determine what would be considered disadvantages of activity-based costing. Disadvantages include initial costs (Choice B) in addition to its being time-consuming, employee pushback, and the need for two costing systems. Improved product-mix decisions (Choice A), Manufacturing efficiency (Choice C), and Sound make-or-buy decisions (Choice D) are all considered advantages of ABC, and that makes them incorrect selections.

1. Time-Driven Activity-Based Costing (TDABC) requires its users to calculate the rate for supplying an activity. The correct formula for doing so would be
2. Add the total cost of activity to the practical capacity available expressed in time
3. Divide the practical capacity available expressed in time by the total cost of activity
4. Divide the total cost of activity by the practical capacity available expressed in time
5. Multiply the total cost of activity by the practical capacity available expressed in time

Ans: C, LO 4, Bloom: C, Difficulty: Easy, AACSB: Communication, AICPA: FC: Reporting, Solution: This question requires you to recall the correct way to calculate the rate for supplying an activity. The formula is Total cost of activity/Practical capacity available expressed in time (Choice C). Choice A is incorrect as it adds the two numbers together. Choice B is incorrect as it swaps the numerator and denominator. Choice D is incorrect as it multiplies the two figures.

1. Fashion Express, Inc. is a clothing retail vendor that specializes in modern women’s clothing. They incurred costs of $146,000 last year to facilitate their staff performing customer service and sales activities. These resources create a capacity of 210,000 minutes for Fashion Express within their customer service and sales activity per year. On average, servicing all customers requires the following transactions throughout the year: processing sales orders, 105,000 minutes; restocking merchandise, 44,500 minutes; cash register, 50,450 minutes; and issuing returns, 10,050 minutes. Using Time-Driven Activity-Based Costing (TDABC), how much cost will be allocated to the cash register transactions? (If required, round calculations to two decimal places.)
   1. $31,350.00
   2. $35,315.00
   3. $72,565.07
   4. $73,500.00

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires multiple steps in order to be able to calculate the cost that will be allocated under TDABC. First, calculate the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $146,000/210,000 = $0.70 per minute. Next, multiply the per-unit rate by the activity: $0.70 × 50,450 minutes = $35,315.00 (Choice B).

1. Fashion Express, Inc. is a clothing retail vendor that specializes in modern women’s clothing. They incurred costs of $164,000 last year to facilitate their staff performing customer service and sales activities. These resources create a capacity of 222,000 minutes for Fashion Express within their customer service and sales activity per year. On average, servicing all customers requires the following transactions throughout the year: processing sales order, 117,000 minutes; restocking merchandise, 44,500 minutes; cash register, 50,450 minutes; and issuing returns, 10,050 minutes. Using Time-Driven Activity-Based Costing (TDABC), how much cost will be allocated to the restocking merchandise transactions? (If required, round calculations to two decimal places.)
   1. $32,930.00
   2. $37,333.00
   3. $60,237.80
   4. $77,700.00

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires multiple steps in order to be able to calculate the cost that will be allocated under TDABC. First, calculate the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $164,000/222,000 = $0.74 per minute. Next, multiply the per unit rate by the activity: $0.74 × 44,500 minutes = $32,930.00 (Choice A).

1. Stevens Services is a call center that specializes in several customer- and order-related activities. They are in the process of implementing Time-Driven Activity-Based Costing (TDABC) and have identified the following pertinent information:

They incurred $155,000 last year to operate the aforementioned activities. Assume that employees handled the following number of calls during the year: Initial Orders, 23,400 calls; Service Requests, 11,480 calls; and Customer Complaints, 9,872 calls. How much total cost would be allocated to the key activities?

1. $48,310.08
2. $117,566.40
3. $146,590.08
4. $155,000.00

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question provided the rate for supplying an activity, so the first step needed would be to calculate the cost per transaction. The initial order call costs would equal $0.42 times 10 minutes or $4.20 per call. Service request calls would be $0.42 times 4 minutes or $1.68 per call. Customer complaint calls would be $0.42 times 7 minutes or $2.94 per call. Next, multiply each per-call cost by the number of calls of that type completed for the year: $4.20 × 23,400 = $98,280; $1.68 × 11,480 = $19,286.40; and $2.94 × 9,872 = $29,023.68. The total cost allocated will be the sum of the previously calculated values = $98,280.00 + $19,286.40 + $29,023.68 = $146,590.08 (Choice C).

1. Stevens Services is a call center that specializes in several customer- and order-related activities. They are in the process of implementing Time-Driven Activity-Based Costing (TDABC) and have identified the following pertinent information:

They incurred $155,000 last year to operate the aforementioned activities. Assume that employees handled the following number of calls during the year: Initial Orders, 23,400 calls; Service Requests, 11,480 calls; and Customer Complaints, 9,872 calls. When comparing actual costs incurred to operate the activities to the allocated costs, what is the difference, and is it overallocated or underallocated?

1. $8,409.32 overallocated
2. $8,409.92 underallocated
3. $27,696.32 overallocated
4. $27,696.32 underallocated

Ans: B, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question provided the rate for supplying an activity, so the first step needed would be to calculate the cost per transaction. Initial order calls would equal $0.42 times 10 minutes or $4.20 per call. Service request calls would be $0.42 times 4 minutes or $1.68 per call. Customer complaint calls would be $0.42 times 7 minutes or $2.94 per call. Next, multiply each per-call cost by the number of calls of that type completed for the year. $4.20 × 23,400 = $98,280; $1.68 × 11,480 = $19,286.40; and $2.94 × 9,872 = $29,023.68. The total cost allocated will be the sum of the previously calculated values = $98,280.00 + $19,286.40 + $29,023.68 = $146,590.08. Lastly, compare the total costs incurred ($155,000) to the total allocated costs ($146,590.08) and get the difference of $8,409.92 that represents the underallocated cost (Choice B).

1. Susan is an accountant for Spruce, Inc., a small lawn care business, and she is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Spruce has several customer-centric activities including: Initial Phone Consultation, Appointment Setting, and Sales Follow-Up. Supporting these activities, Spruce has incurred costs of $198,800 last year, and Spruce has 605,800 minutes per year within their capacity. Susan has gathered the following information:

How much total cost would be allocated to Sales Follow-Up? (If required, round calculations to two decimal places.)

1. $63,096.00
2. $66,528.50
3. $70,432.00
4. $200,056.00

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, this question requires that the calculation of the rate for supplying an activity: $198,800/605,800 minutes = $0.33 per minute. Next, calculate the cost per transaction for each sales follow-up call: $0.33 per minute times 8 minutes equals $2.64 per sales follow-up call. This leads to total sales follow-up costs of $63,096.00: Choice A (23,900 sales follow-up calls times $2.64 per call).

1. Susan is an accountant for Spruce, Inc., a small lawn care business, and she is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Spruce has several customer-centric activities including: Initial Phone Consultation, Appointment Setting, and Sales Follow-Up. Supporting these activities cost Spruce $198,800 last year, and Spruce has 605,800 minutes within their capacity. Susan has gathered the following information:

How much total cost would be allocated to the key activities? (Do not round calculations.)

1. $118,624
2. $125,960
3. $193,600
4. $198,800

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, this question requires the calculation of the rate for supplying an activity: $198,800/605,800 minutes = $0.33 per minute. Next, calculate the cost per transaction for each type of call: initial phone consultation call, $0.33 per minute times 6 minutes equals $1.97 per call; appointment setting call, $0.33 per minute times 7.5 minutes equals $2.46 per call; and sales follow-up call, $0.33 per minute times 8 minutes equals $2.63 per call. Lastly, find the total cost for each call type, and add them for a total overall cost: ($1.97 × 33,600 calls) + ($2.46 × 28,400 calls) + ($2.63 × 23,900 calls) = $66,157.28 + $69,898.32 + $62,744.40 = $198,800.00 (Choice D).

1. John is a carpenter who specializes in bathroom renovations for single-owner homes. He believes that he has been underbidding his projects and losing out on potential profit that could make all of the difference for his business’s continued viability. He is putting together an estimate for a potential client and has determined the following activities:

Previously, John was billing at a flat rate of $6 per square foot with no additional markups. John would like to add a 25% markup to the cost to arrive at a final bid price that will be given to the customer. Using Activity-Based Costing (ABC), what is the final bid price that will be presented to the customer?

1. $2,400.00
2. $2,554.04
3. $3,064.85
4. $3,192.55

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: To answer this question, first determine the estimated cost for each activity. Demo, $2.25 × 400 square feet = $900; Cabinets, $176 × 4 hours = $704; and Tile, $0.78 × 1,218 tiles = $950.04. Once they are totaled, the initial price is $2,554.04. The last step is to add the markup: $2,554.04 × 1.25 = $3,192.55 (Choice D).

1. John is a carpenter who specializes in bathroom renovations for single-owner homes. He believes that he has been underbidding his projects and losing out on potential profit that could make all of the difference for his business’s continued viability. He is putting together an estimate for a potential client and has determined the following activities:

Previously, John was billing at a flat rate of $6 per square foot with no additional markups. John would like to add a 25% markup to the cost to arrive at the final bid price that will be given to the customer. Using Activity-Based Costing (ABC), how much additional profit will John make from this prospective client?

1. ($445.96)
2. $154.04
3. $192.55
4. $792.55

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: To answer this question, first determine the estimated cost for each activity. Demo, $2.25 × 400 square feet = $900; Cabinets, $176 × 4 hours = $704; and Tile, $0.78 × 1,218 tiles = $950.04. Once they are totaled, the initial price is $2,554.04. Next, add the markup: $2,554.04 × 1.25 = $3,192.55. Lastly, subtract the amount John would have received under his previous method ($6 × 400 square feet) = $2,400. John will make an additional profit of $792.55 (Choice D).

1. Sunflower, Inc. is a service-based business that provides landscaping architecture services to their clients. Management has been investigating whether a change to Activity-Based Costing (ABC) would benefit the company and help them achieve their goal of having the costs in their bids more closely mirror the actual costs while maximizing their profit. Currently, Sunflower bills at a flat rate of $9 per square foot of yard prep and had been adding a 15% markup to their bids. After analyzing their key tasks, they are going to use ABC for an upcoming customer bid:

Sunflower would like to increase their markup to 18% for all jobs using ABC. What would Sunflower’s bid price be if they chose to utilize ABC?

1. $5,297.40
2. $5,808.43
3. $6,092.01
4. $6,250.93

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: To answer this question, first determine the estimated cost for each activity. Design, $100 × 20 hours = $2,000; Yard Prep, $1.78 × 600 square feet = $1,068; Planting, $48.80 × 38 plants = $1,854.40; and SG&A, $75 × 5 hours = $375. Once they are totaled, the initial price is $5,297.40. The last step is to add the markup- $5,297.40 × 1.18 = $6,250.93 (Choice D).

1. Sunflower, Inc. is a service-based business that provides landscaping architecture services to their clients. Management has been investigating whether a change to Activity-Based Costing (ABC) would benefit the company and help them achieve their goal of having the costs in their bids more closely mirror the actual costs while maximizing their profit. Currently, Sunflower bills at a flat rate of $9 per square foot of yard prep and had been adding a 15% markup to their bids. After analyzing their key tasks, they are going to use ABC for an upcoming customer bid:

Sunflower would like to increase their markup to 18% for all jobs using ABC. What would Sunflower’s difference in bid price be if they chose to utilize ABC?

1. ($117.99)
2. $0.00
3. $40.93
4. $121.07

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: To answer this question, first determine the estimated cost for each activity. Design, $100 × 20 hours = $2,000; Yard Prep, $1.78 × 600 square feet = $1,068; Planting, $48.80 × 38 plants = $1,854.40; and SG&A, $75 × 5 hours = $375. Once they are totaled, the initial price is $5,297.40. Next, add the markup: $5,297.40 × 1.18 = $6,250.93 to arrive at the bid price for ABC. Then, calculate the cost that Sunflower would have billed at flat rate: ($9/square foot times 600 square feet) × 1.15 = $6,210.00. Lastly, subtract the older method bid price from the ABC method ($6,250.93 – $6,210.00) and you will see that Sunflower is able to bill an additional $40.93 (Choice C).

1. Swanson Corp. manufactures and sells decorative bird feeders and birdhouses to local vendors. As a new business, they are trying to determine how to appropriately cost their items and have narrowed the choices to a traditional costing system and Activity-Based Costing (ABC). Their Direct Materials (DM) include (same for both products): Concrete, $12,500; and wood, $23,620. Their Direct Labor (DL) includes (same for both products): Wages (assembly line worker), $58,900; and Wages (painter), $42,850. Under a traditional costing system, their Manufacturing Overhead (MOH) would be 88% of their direct labor costs. If they decide to go with ABC, then they have identified the following key activities and costs: Property tax, $18,400 ($1.50 per square foot); Wages, supervisor, $56,800 ($7.10 per hour); and Cleaning, $24,700 ($3.81 per hour). Swanson intends to stick to the following production schedule:

Bird feeders: 18,640 units; 8,100 square feet; 5,230 supervisor hours; and 3,900 cleaning hours.

Birdhouses: 12,307 units; 4,150 square feet; 2,770 supervisor hours; and 2,580 cleaning hours.

If Swanson chooses to use a traditional costing system instead of ABC, then what is the difference in total product costs for bird feeders?

1. Traditional costing is $25,398.00 higher than ABC.
2. Traditional costing is $25,398.00 lower than ABC.
3. Traditional costing is $54,439.00 higher than ABC.
4. Traditional costing is $54,439.00 lower than ABC.

Ans: A, LO 1, 3, 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Under a traditional costing system, the total product costs would equal: DM [$12,500 + $23,620] + DL [$58,900 + $42,850] + MOH (($58,900 + $42,850) × 88%) = $36,120.00 + $101,750.00 + $89,540 = $227,410.00. Under ABC, DM and DL will be the same as under the traditional costing system, but the MOH must be calculated based on activity. Property tax: $1.50 × 8,100 square feet = $12,150.00; supervisor wages: $7.10 × 5,230 supervisor hours = $37,133.00; and cleaning: $3.81 × 3,900 cleaning hours = $14,859.00. MOH costs = $12,150.00 + $37,133.00 + $14,859.00 = $64,142.00. The total product costs will equal $36,120.00 + $101,750.00 + $64,142.00 = $202,012.00. The difference between the two costing systems is $227,410.00 – $202,012.00 = $25,398.00 higher under traditional costing (Choice A).

1. Swanson Corp. manufactures and sells decorative bird feeders and birdhouses to local vendors. As a new business, they are trying to determine how to appropriately cost their items and have narrowed the choices to a traditional costing system and Activity-Based Costing (ABC) system. Their Direct Materials (DM) include (same for both products): Concrete, $12,500 and wood, $23,620. Their Direct Labor (DL) includes (same for both products): Wages (assembly line worker), $58,900, and Wages (painter), $42,850. Under a traditional costing system, their Manufacturing Overhead (MOH) would be 88% of their direct labor costs. If they decide to go with ABC, then they have identified the following key activities and costs: property tax, $18,400 ($1.50 per square foot); wages (supervisor), $56,800 ($7.10 per hour); and cleaning, $24,700 ($3.81 per hour). Swanson intends to stick to the following production schedule:

Bird feeders: 18,640 units; 8,100 square feet; 5,230 supervisor hours; and 3,900 cleaning hours.

Birdhouses: 12,307 units; 4,150 square feet; 2,770 supervisor hours; and 2,580 cleaning hours.

Under traditional costing, the total product cost for a birdhouse is $18.48. If Swanson chooses to use an ABC system instead of traditional costing system, then what is the difference in total cost per unit for the birdhouses?

1. Total cost in Traditional costing is $1.38 higher than ABC.
2. Total cost in Traditional costing is $1.38 lower than ABC.
3. Total cost in Traditional costing is $4.37 higher than ABC.
4. Total cost in Traditional costing is $4.37 lower than ABC.

Ans: C, LO 1, 3, 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Under ABC, the total product costs would equal DM + DL + MOH. DM = $12,500 + $23,620 = $36,120.00; DL = $58,900 + $42,850 = $101,750.00; MOH = Property tax: $1.50 × 4,150 square feet = $6,225; Wages (supervisor) $7.10 × 2,770 hours = $19,667.00; Cleaning, $3.81 × 2,580 hours = $9,829.80. MOH costs = $6,225 + $19,667.00 + $9,829.80 = $35,721.80. The total product costs will equal $36,120.00 + $101,750.00 + $35,721.80 = $173,591.80. The total cost per unit will equal $173,591.80/12,307 units = $14.11 per birdhouse. The difference between the two costing systems is $18.48 – $14.11 = $4.37 higher under traditional costing (Choice C).

1. Lumins, Inc. is a manufacturer of fine quality lamps and currently offers two kinds: floor lamps and desk lamps. Each floor lamp needs 2 direct labor hours and 3 pounds of direct materials while each desk lamp needs 1.5 direct labor hours and 1.75 pounds of direct materials. They currently utilize a traditional costing system, but management has recently established an exploratory committee to investigate whether a switch to Activity-Based Costing (ABC) might be beneficial. Their key activities are as follows: Machining, $22.78 per machining hour; Factory Utilities, $3.77 per square foot; and Supervisor Wages, $13.42 per hour. Lumins has gathered the following information about production and related costs:

Under a traditional costing system, Manufacturing Overhead (MOH) is estimated at 90% of the Direct Labor (DL) cost. What is the per-unit cost for floor lamps under a traditional costing system? What is the per-unit cost for floor lamps under ABC? (Do not round intermediate calculations.)

1. Traditional, $4.91; ABC, $24.57
2. Traditional, $12.71; ABC, $32.37
3. Traditional, $24.57; ABC, $4.91
4. Traditional, $32.37; ABC, $12.71

Ans: B, LO 1, 3, 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires several steps before arriving at a per-unit cost for both the traditional costing system and ABC. The Direct Materials and Direct Labor will be the same under both methods, so one calculation will satisfy this requirement for both costing systems. Direct Materials = $0.78 per pound × 3 pounds needed per lamp = $2.34. Direct Labor = $2.73 per hour × 2 hours needed per lamp = $5.46. For traditional costing, MOH will be calculated by multiplying the DL cost of $5.46 by 90% = $4.91. To arrive at the per-unit cost, combine DM, DL, and MOH = $12.71 total cost per floor lamp. Under ABC, calculate the cost per key activity: ($22.78 × 10,400 machining hours) + ($3.77 × 2,770 square feet) + ($13.42 × 4,160 hours) = $236,912.00 + $10,442.90 + $55,827.20 = $303,182.10 MOH. Next, calculate MOH per unit by dividing by the number of floor lamps produced = $303,182.10/12,338 = $24.57. To arrive at the total cost per floor lamp, combine DM, DL, and MOH = $2.34 + $5.46 + $24.57 = $32.37. This corresponds to Choice B.

1. Lumins, Inc. is a manufacturer of fine quality lamps and currently offers two kinds: floor lamps and desk lamps. Each floor lamp needs 2 direct labor hours and 3 pounds of direct materials while each desk lamp needs 1.5 direct labor hours and 1.75 pounds of direct materials. They currently utilize a traditional costing system, but management has recently established an exploratory committee to investigate whether a switch to Activity-Based Costing (ABC) might be beneficial. Their key activities are as follows: Machining, $22.78 per machining hour; Factory Utilities, $3.77 per square foot; and Supervisor Wages, $13.42 per hour. Lumins has gathered the following information about production and related costs:

Under a traditional costing system, Manufacturing Overhead (MOH) is estimated at 90% of the direct labor costs. What is the per-unit cost for desk lamps under a traditional costing system? What is the per-unit cost for desk lamps under ABC? (Do not round intermediate calculations.)

1. Traditional, $9.15; ABC, $19.05
2. Traditional, $13.59; ABC, $17.28
3. Traditional, $17.28; ABC, $13.59
4. Traditional, $19.05; ABC, $9.15

Ans: A, LO 1, 3, 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires several steps before arriving at a per-unit cost for both the traditional costing system and ABC. The Direct Materials (DM) and Direct Labor (DL) costs will be the same under both methods, so one calculation will satisfy this requirement under both costing systems. Direct Materials = $0.78 per pound × 1.75 pounds needed per lamp = $1.37. Direct Labor = $2.73 per hour × 1.5 hours needed per lamp = $4.10. For traditional costing, MOH will be calculated by multiplying the DL of $4.10 by 90% = $3.69. To arrive at the per-unit cost, combine DM, DL, and MOH = $9.15 total cost per desk lamp. Under ABC, calculate the cost per key activity: ($22.78 × 8,780 machining hours) + ($3.77 × 1,890 square feet) + ($13.42 × 3,786 hours) = $200,008.40 + $7,125.30 + $50,808.12 = $257,941.82 MOH. Next, calculate MOH per unit by dividing the number of desk lamps produced = $257,941.82/18,980 = $13.59. To arrive at the total cost per desk lamp, combine DM, DL, and MOH = $4.10 + $1.37 + $13.59 = $19.05. This corresponds to Choice A.

1. Pawnee Inc. is an outdoor sporting goods company that produces tents and sleeping bags that it sells online. Pawnee has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs:

Setups $120,000 (28,000 setups)

Quality inspections $98,000 (20,000 inspections)

Assembly supervisor wages $160,000 (40,000 hours)

Pawnee anticipates the production of 10,000 tents and 14,000 sleeping bags. Each product is projected to use company resources in the following manner:

What is the ABC-based total MOH cost allocated per unit for the tents? (If required, round calculations to two decimal places.)

1. $6.59
2. $11.31
3. $15.75
4. $15.83

Ans: D, LO 3, 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate the activity-based rate for each of the total MOH activities: Setups, $120,000/28,000 setups = $4.29/setup; quality inspections, $98,000/20,000 inspections = $4.90/inspection; and assembly supervisor wages, $160,000/40,000 hours = $4.00/hour. Next, calculate the total MOH cost for the tents: ($4.29 × 11,500 setups) ($4.90 × 8,600 inspections) + ($4.00 × 16,700 hours) = $49,335.00 + $42,140.00 + $66,800.00 = $158,275.00. Lastly, divide the total tent MOH cost by the number of tents produced: $158,275/10,000 tents = $15.83 per tent (Choice D).

1. Pawnee Inc. is an outdoor sporting goods company that produces tents and sleeping bags that it sells online. Pawnee has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs:

Setups $120,000 (28,000 setups)

Quality inspections 98,000 (20,000 inspections)

Assembly supervisor wages 160,000 (40,000 hours)

Pawnee anticipates the production of 10,000 tents and 14,000 sleeping bags. Each product is projected to use company resources in the following manner:

What is the ABC-based total MOH cost allocated per unit for the sleeping bags? (If required, round calculations to two decimal places.)

1. $9.16
2. $15.70
3. $15.75
4. $21.98

Ans: B, LO 3, 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: First, calculate the activity-based rate for each of the MOH activities: Setups, $120,000/28,000 setups = $4.29/setup; quality inspections, $98,000/20,000 inspections = $4.90/inspection; and assembly supervisor wages, $160,000/40,000 hours = $4.00/hour. Next, calculate the total MOH cost for the sleeping bags: ($4.29 × 16,500 setups) + ($4.90 × 11,400 inspections) + ($4.00 × 23,300 hours) = $70,785.00 + $55,860.00 + $93,200.00 = $219,845.00. Lastly, divide the total sleeping bag MOH cost by the number of sleeping bags to be produced: $219,845/14,000 sleeping bags = $15.70 per sleeping bag (Choice B).

1. Leslie is the new controller for Toasties, a coffee bean roaster, and she has decided to introduce some changes that she believes will assist management in making more informed cost decisions. At her previous job, Leslie implemented activity-based costing, and the management was thrilled to be able to better allocate their Manufacturing Overhead (MOH) costs to their products. Leslie is optimistic that Toasties will benefit in the same manner and has identified the following key activities:

Machining $48,400 (8,000 machine hours)

Cleaning/Maintenance $36,700 (6,850 cleaning/maintenance hours)

Roaster supervisor wages $84,330 (16,800 supervisor hours)

Leslie anticipates that Toasties will roast 12,400 pounds of light beans and 18,990 pounds of dark beans. The light beans will use the following: Machining, 3,200 machine hours; Cleaning/Maintenance, 2,980 cleaning/maintenance hours; and 7,100 Roaster Supervisor Hours. The dark beans will use the following: Machining, 4,800 machine hours; Cleaning/Maintenance, 3,870 cleaning/maintenance hours, and 9,700 Roaster Supervisor Hours. What is the total amount of MOH costs that will be allocated to the light beans based upon ABC? (If required, round calculations to two decimal places.)

1. $67,587.60
2. $70,974.80
3. $74,362.00
4. $181,404.80

Ans: B, LO 3, 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Calculate the activity-based rate for each of the key MOH activities: Machining, $48,400/8,000 machine hours = $6.05/machine hour; Cleaning/Maintenance, $36,700/6,850 cleaning/maintenance hours = $5.36 per cleaning/maintenance hour; Roaster Supervisor Wages, $84,330/16,800 supervision hours = $5.02/supervision hour. Lastly, calculate the total overall MOH cost allocated to the light beans: ($6.05 × 3,200 machine hours) + ($5.36 × 2,980 cleaning/maintenance hours) + ($5.02 × 7,100 supervisor hours) = $19,360.00 + $15,972.80 + $35,642.00 = $70,974.80 (Choice B).

1. Leslie is the new controller for Toasties, a coffee bean roaster, and she has decided to introduce some changes that she believes will assist management in making more informed cost decisions. At her previous job, Leslie implemented activity-based costing, and the management was thrilled to be able to better allocate their Manufacturing Overhead (MOH) costs to their products. Leslie is optimistic that Toasties will benefit in the same manner and has identified the following key activities:

Machining $48,400 (8,000 machine hours)

Cleaning/Maintenance $36,700 (6,850 cleaning/maintenance hours)

Roaster supervisor wages $84,330 (16,800 supervisor hours)

Leslie anticipates that Toasties will roast 12,400 pounds of light beans and 18,990 pounds of dark beans. The light beans will use the following: Machining, 3,200 machine hours; Cleaning/Maintenance, 2,980 cleaning/maintenance hours; and 7,100 Roaster Supervisor Hours. The dark beans will use the following: Machining, 4,800 machine hours; Cleaning/Maintenance, 3,870 cleaning/maintenance hours; and 9,700 Roaster Supervisor Hours. What is the total amount of MOH costs that will be allocated to the dark beans based upon ABC? (If required, round calculations to two decimal places.)

1. $70,974.80
2. $78,823.20
3. $98,477.20
4. $106,774.00

Ans: C, LO 3, 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: Calculate the activity-based rate for each of the key MOH activities: Machining, $48,400/8,000 machine hours = $6.05/machine hour; Cleaning/Maintenance, $36,700/6,850 cleaning/maintenance hours = $5.36 per cleaning/maintenance hour; and Roaster Supervisor Wages, $84,330/16,800 supervision hours = $5.02/supervisor hour. Lastly, calculate the total overall MOH cost allocated to the dark beans: ($6.05 × 4,800 machine hours) + ($5.36 × 3,870 cleaning/maintenance hours) + ($5.02 × 9,700 supervisor hours) = $29,040.00 + $20,743.20 + $48,694.00 = $98,477.20 (Choice C).

1. The management team at Diamondz, Inc., a manufacturer of fine jewelry, is gearing up for their new fiscal year. Part of their yearly process includes analyzing the past year’s performance and seeking ways to improve upon existing processes. Diamondz specializes in two products: diamond rings and diamond necklaces. Management has decided that they would like to begin using Activity-Based Costing (ABC) for budgeting their Manufacturing Overhead (MOH) costs. They have narrowed their key activities to the following:

Diamondz has determined that the 18,900 rings they produce will use the following: $130,000 of direct materials, $52,600 of direct labor, 6,200 setups, 12,400 inspections, 26,350 machine hours, and 12,444 square feet. The 15,680 necklaces they produce will use the following: $227,400 of direct materials, $86,700 of direct labor, 3,800 setups, 9,060 inspections, 16,350 machine hours, and 7,556 square feet.

What is the total manufacturing cost for diamond rings? (If required, round calculations to two decimal places.)

1. $105,099.28
2. $169,259.00
3. $179,199.28
4. $287,699.28

Ans: D, LO 3, 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires a number of steps to obtain the final answer of the total manufacturing cost. First, calculate the activity rate for each of the key MOH activities: Setups, $36,200/10,000 setups = $3.62/setup; Quality Inspection, $49,820/21,460 inspections = $2.32/inspection; Machining, $54,808/42,700 machine hours = $1.28/hour; and Factory Utilities, $32,490/20,000 square feet = $1.62/square foot. Next, calculate the total overall MOH cost allocated to diamond rings: ($3.62 × 6,200 setups) + ($2.32 × 12,400 inspections) + ($1.28 × 26,350 hours) + ($1.62 × 12,444 square feet) = $22,444.00 + $28,768.00 + $33,728.00 + $20,159.28 = $105,099.28. Lastly, add the direct materials and direct labor costs to the total allocated MOH costs: $105,099.28 + $130,000.00 + $52,600.00 = $287,699.28 (Choice D).

1. The management team at Diamondz, Inc., a manufacturer of fine jewelry, is gearing up for their new fiscal year. Part of their yearly process includes analyzing the past year’s performance and seeking ways to improve upon existing processes. Diamondz specializes in two products: diamond rings and diamond necklaces. Management has decided that they would like to begin using Activity-Based Costing (ABC) for budgeting their Manufacturing Overhead (MOH) costs. They have narrowed their key activities to the following:

Diamondz has determined that the 18,900 rings they produce will use the following: $130,000 of direct materials, $52,600 of direct labor, 6,200 setups, 12,400 inspections, 26,350 machine hours, and 12,444 square feet. The 15,680 necklaces they produce will use the following: $227,400 of direct materials, $86,700 of direct labor, 3,800 setups, 9,060 inspections, 16,350 machine hours, and 7,556 square feet.

What is the total per-unit cost for the diamond necklaces? (If required, round calculations to two decimal places.)

1. $4.41
2. $7.58
3. $10.25
4. $24.37

Ans: D, LO 3, 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires a number of steps to obtain the final answer of the total product costs. First, calculate the activity rate for each of the key MOH activities: Setups, $36,200/10,000 setups = $3.62/setup; Quality Inspection, $49,820/21,460 inspections = $2.32/inspection; Machining, $54,808/42,700 machine hours = $1.28/hour; and Factory Utilities, $32,490/20,000 square feet = $1.62/square foot. Next, calculate the total overall MOH cost allocated to diamond necklaces: ($3.62 × 3,800 setups) + ($2.32 × 9,060 inspections) + ($1.28 × 16,350 hours) + ($1.62 × 7,556 square feet) = $13,756.00 + $21,019.20 + $20,928.00 + $12,240.72 = $67,943.92. Next, add the direct materials and direct labor costs to the total allocated MOH costs: $67,943.92 + $227,400.00 + $86,700.00 = $382,043.92. Lastly, divide the total manufacturing costs by the number of diamond necklaces they intend to manufacture: $382,043.92/15,680 = $24.37/necklace (Choice D).

1. Pazzo’s Pizza utilizes Activity-Based Costing (ABC) to account for its Manufacturing Overhead (MOH) costs, and they have determined that they have three key activities: Property tax ($88.77 per square foot), Floor supervisor wages ($18.00 per hour), and Cleaning ($8.98 per hour). Pazzo’s Pizza anticipates that they will sell the following quantities of three different kinds of pizza: Cheese, 68,392 pizzas; Pepperoni, 49,708 pizzas; and Veggie, 26,909 pizzas. Each pizza will need to use the following resources:

Assuming that their estimates are final, what is the total product cost for the cheese pizzas? (Do not round intermediate calculations.)

1. $108,172.25
2. $182,697.31
3. $207,911.68
4. $219,818.92

Ans: D, LO 3, 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question will require multiple steps in order to arrive at the correct total cost for the cheese pizzas. First, calculate the total direct materials cost for cheese pizzas by taking $0.48 per pizza times 68,392 cheese pizzas to be produced: $0.48 × 68,392 = $32,828.16. Next, calculate the total direct labor cost for cheese pizzas by taking $1.28 per pizza times 68,392 cheese pizzas to be produced: $1.28 × 68,392 = $87,541.76. Then, calculate how much MOH will be allocated to cheese pizzas by multiplying the per-activity rate by the quantity of each activity: ($88.77 × 300 square feet) + ($18.00 × 2,000 supervisor hours) + ($8.98 × 4,100 cleaning hours) = $26,631.00 + $36,000.00 + $36,818.00 = $99,449.00. Lastly, combine direct materials cost, direct labor cost, and MOH cost. $32,828.16 + 87,541.76 + $99,449.00 = $219,818.92 (Choice D).

1. Pazzo’s Pizza utilizes Activity-Based Costing (ABC) to account for its Manufacturing Overhead (MOH) costs, and they have determined that they have three key activities: Property tax ($88.77 per square foot), Floor supervisor wages ($18.00 per hour), and Cleaning ($8.98 per hour). Pazzo’s Pizza anticipates that it will sell the following quantities of three different kinds of pizza: Cheese, 68,392 pizzas; Pepperoni, 49,708 pizzas; and Veggie, 26,909 pizzas. Each pizza will need to use the following resources:

Assuming that their estimates are final, what is the total cost per unit for the veggie pizzas? (Do not round intermediate calculations.)

1. $2.18
2. $3.21
3. $3.68
4. $4.02

Ans: D, LO 3, 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC: Measurement Analysis and Interpretation, Solution: This question requires multiple steps in order to arrive at the correct total cost per unit for the veggie pizzas. First, calculate the total Direct Materials (DM) cost for veggie pizzas by taking $0.58 per pizza times 26,909 veggie pizzas to be produced: $0.58 × 26,909 = $15,607.22. Next, calculate the total Direct Labor (DL) cost for veggie pizzas by taking $1.57 per pizza times 26,909 veggie pizzas to be produced: $1.57 × 26,909 = $42,247.13. Then, calculate how much MOH will be allocated to the veggie pizzas by multiplying the per-activity rate by the quantity of each activity: ($88.77 × 250 square feet) + ($18.00 × 899 supervisor hours) + ($8.98 × 1,330 cleaning hours) = $22,192.50 + $16,182.00 + $11,943.40 = $50,317.90. Next, combine the DM, DL, and MOH costs. $15,607.22 + $42,247.13 + $50,317.90 = $108,172.25. Lastly, divide the total product cost by the number of veggie pizzas to be produced: $108,172.25/26,909 veggie pizzas = $4.02 per pizza (Choice D).

Short Answers

1. What is the purpose of traditional job costing, and how is it used for reporting purposes? Why would management consider switching to Activity-Based Costing (ABC)?

Ans: N/A, LO 1, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: The purpose of traditional job costing is to systematically allocate a company’s Manufacturing Overhead (MOH) costs to each job. This method of costing is used primarily for financial reporting purposes and is GAAP-approved. Traditional job costing uses a rational and systematic movement of product costs to its financial statements, making it a popular choice amongst management. A switch to ABC may be considered if management is seeking a way to better optimize pricing decisions and product-mix decisions as more products are added. Another reason could be that it will yield better product costs since it moves the costing away from averaging, and that is what traditional job costing employs.

1. Briefly describe what a cost driver is, and name a few examples. What goals should management keep in mind as they decide upon what to use as a cost driver?

Ans: N/A, LO 1, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: A cost driver is a task, effort, or other usage of a resource that causes a particular cost with common examples including square footage occupied by a department, number of employees, number of times a task is completed, and/or the number of items produced (this answer could include additional items). Management should strive to ensure that a cost driver is easy to understand, directly related to the activity being performed, and useful for performance measurement purposes.

1. What is the cost hierarchy, and what are the different layers? What is its function amongst the tools that management can use for budgeting?

Ans: N/A, LO 2, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: The cost hierarchy is a ranking of four layers of costs that may be incurred in a business. It includes the following layers: facility-level costs, such as property tax and insurance; product/process-level costs, such as supervisor salary and equipment depreciation; batch-level costs, such as machine set-up and movement of materials; and unit level costs, such as direct material and direct labor. Management can use cost drivers to best identify the best cause-and-effect relationships between activities and cost drivers by assigning them to these layers.

1. How many steps are involved in implementing activity-based costing? Please discuss each in addition to describing what each step will entail.

Ans: N/A, LO 3, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: Implementing activity-based costing involves four steps: 1) identify direct costs, 2) identify activities and cost drivers for MOH, 3) calculate cost driver rates and assign MOH to products, and 4) record MOH costs. Step 1 involves identifying all direct costs that can be deemed as the best part of the entire process since direct costs are easily traced to the final product. Step 2 involves using techniques from cost behavior and cost estimation to create realistic cost drivers. Step 3 involves determining the denominator value for each activity and then calculating how much each product uses of that activity’s available capacity. Step 4 involves applying overhead and recording the associated MOH costs.

1. Please list some advantages of Activity-Based Costing (ABC). Does ABC have any disadvantages, and if so, what are they?

Ans: N/A, LO 4, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: ABC comes along with some advantages that could include more precise profit planning, better pricing decisions, improved product-mix decisions, sound make-or-buy decisions, and manufacturing efficiency decision points (keep vs. drop). ABC does have disadvantages that could potentially include initial costs to implement, time-consuming accounting nature, employee pushback, and the need for two costing systems. All advantages and disadvantages should be considered by management before implementing any changes.

1. What industries are capable of utilizing activity-based costing, and in what manner would they do so? What are some additional non-manufacturing activity cost pools and associated cost drivers?

Ans: N/A, LO 4, Bloom: K, Difficulty: Medium, AACSB: Communication, AICPA: FC: Reporting, Solution: Manufacturing firms, merchandising firms, service businesses, and nonprofit entities are all capable of using activity-based costing. All can use activity-based costing to help to better predict product costs and can use the system to allocate SG&A costs to sub-units based on cost drivers. Some additional non-manufacturing activity cost pools and their associated cost drivers include: Employee cafeteria, number of cafeteria customers and number of meals cooked; Accounting, number of invoices issued, percentage of sales or assets per division/department, and number of reports requested; Marketing, percentage of sales and number of marketing campaigns; Information Technology, employee head count by department; Purchasing/Supply Chain, number of purchase orders, dollar value of supplies purchased, and number of vendors; First Aid and Wellness Initiatives, employee head count by department; Grounds Maintenance and Security, square footage of facility or division or department; and Utilities, sum total amount of utilities usage, based on meters in different areas assigned to different functional areas.

Brief Exercises

1. Chocorageous Corp. is a factory that manufactures two varieties of candy bars: Milk Chocolate and Dark Chocolate. They are in the process of evaluating all of their budgeting needs for the year and will be utilizing a traditional costing system. The Milk Chocolate bars use the following resources: Milk Chocolate, $48,900; Wrapping Paper, $10,110; Assembly Line Wages, $84,600; and Machine operators Wages, $46,200. The Dark Chocolate bars use the following resources: Dark Chocolate, $37,400; Paper Wrappers, $8,222; Assembly Line Wages, $72,400; and Machine operators Wages, $33,600. Chocorageous assigns Manufacturing Overhead (MOH) costs based on 86% of Direct Labor (DL) costs. What is the total cost per unit for the Milk Chocolate bars if Chocorageous will produce 134,680 Milk Chocolate bars this year? (Round your answer to two decimal places.)

Ans: NA, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $2.24 per Milk Chocolate bar

The first step in solving for the total cost per unit will be to determine the total product costs for the Milk Chocolate bars. This will be comprised of direct materials plus direct labor plus MOH. It is calculated as follows:

= ($48,900 + $10,110) + ($84,600 + $46,200) + (86% × ($84,600 + $46,200))

= $59,010 + $130,800 + $112,488 = $302,298

Lastly, divide the total product costs by the number of Milk Chocolate bars to be produced:

$302,298/134,680 = $2.24 per Milk Chocolate bar

1. Fancy Bags, Inc. is a company that manufactures decorative gift bags, and they currently use a traditional costing system. Fancy has been focusing on its two main products: Metallic gift bags and Polka Dot gift bags. Fancy allocates Manufacturing Overhead (MOH) costs based on 90% of the Direct Labor (DL) costs for each product. The Metallic gift bags use the following resources: Assembly Line Wages, $133,600; Packaging Wages, $92,400; Metallic Paper, $246,700; and Plastic Handles, $97,450. The Polka Dot gift bags use the following resources: Assembly Line Wages, $125,400; Packaging Wages, $86,450; Special Paper, $222,800; and Plastic Handles, $83,706. Fancy anticipates production of 468,000 Metallic bags and 333,400 Polka Dot bags. What is the total cost per unit for each type of bag? (Round your answers to two decimal places.)

Ans: NA, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $1.65 per Metallic bag and $2.13 per Polka Dot bag

The first step in solving for the total cost per unit will be to determine the total product costs for the Metallic bags. This will be comprised of direct materials plus direct labor plus MOH. It is calculated as follows:

= ($246,700 + $97,450) + ($133,600 + $92,400) + (90% × ($133,600 + $92,400))

= $344,150 + $226,000 + $203,400 = $773,550

Lastly, divide the total product costs by the number of Metallic bags to be produced:

$773,550/468,000 = $1.65 per Metallic bag

Now, calculate the per-unit cost for the Polka Dot bags:

= ($222,800 + $83,706) + ($125,400 + $86,450) + (90% × ($125,400 + $86,450))

= $306,506 + $211,850 + $190,665 = $709,021

Lastly, divide the total product costs by the number of Polka Dot bags to be produced:

$709,021/333,400 = $2.13 per Polka Dot bag

1. Rosebud Inc. is a retail company that specializes in the sale of wooden sleds. The accountants for the company are in the process of identifying appropriate cost drivers for the organization. Their current focus is upon ensuring that each activity and its related cost driver are placed at the appropriate level of the cost hierarchy.

The most recent production run resulted in the creation of 450 wooden sleds and tallied the following totals: 3,000 square feet; 1,420 supervisor hours; and 1,997 inspection hours. How much facility-level cost should be allocated to the production department of Rosebud?

Ans: NA, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $26,520.00

First, identify which of the costs incurred by Rosebud would be facility-level. In this case, it would be the utility costs incurred. Before allocating, calculate a per-unit rate based upon the identified cost driver:

$88,400/10,000 square feet = $8.84 per square foot

Next, use the per-unit rate and multiply it against the applicable amount of the overall square footage used by the production department:

$8.84 per square foot × 3,000 square feet = $26,520.00

1. Fluffy Corp. is a factory that produces cloud-shaped home décor, and their most successful product to date has been a small cloud pillow. Fluffy is considering a switch to Activity-Based Costing (ABC) and has finally identified the key activities they would like to use to allocate their manufacturing overhead costs. Management would like some additional information about how this method would allocate a recent production run of cloud pillows.

The production department had a recent run of cloud pillows that used the following: 1,300 square feet; 2,420 machine setups; and 1,997 pounds of material. How much unit-level cost should be allocated to the production department of Fluffy? (If required, round calculations to two decimal places.)

Ans: NA, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $10,763.83

First, identify which of the costs incurred by Fluffy would be unit-level. In this case, it would be indirect material costs. Before allocating, calculate a per-unit rate based upon the identified cost driver:

$44,750/8,300 pounds of material = $5.39 per pound of material

Next, use the per-unit rate, and multiply it by the applicable amount of the pounds of material used by the production department:

$5.39 per pound × 1,997 pounds of material = $10,763.83

1. Mallard, Corp. produces duck-friendly pellets that it sells to a local marina that fully stocks its vending machines for local tourists. Mark, the accountant at Mallard, would like to suggest the implementation of Activity-Based Costing (ABC) and has identified several activities for the factory. Mallard has the following budgeted costs: Direct Materials (DM), $322,600.00; and Direct Labor (DL), $167,980.00. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $89,550.00 (7,700 setup hours); Production, $498,020.00 (105,200 machine hours); and Maintenance, $52,804.00 (10,300 maintenance hours). How much of the MOH costs will be allocated during the year using activity-based rates considering the actual usage of 807 setup hours, 14,709 machine hours, and 2,600 maintenance hours. (If required, round calculations to two decimal places.)

Ans: NA, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $92,296.98

First, determine the activity rates for the key activities:

Setup, $89,550/7,700 = $11.63 per setup hour; Production, $498,020/105,200 = $4.73 per machine hour; and Maintenance, $52,804/10,300 = $5.13 per maintenance hour.

Next, allocate all MOH costs using the ABC rates that were just calculated:

($11.63 × 807 setup hours) + ($4.73 × 14,709 machine hours) + ($5.13 × 2,600 maintenance hours) = $9,385.41 + $69,573.57 + $13,338.00 = $92,296.98 MOH applied.

1. Tara is a contractor, and she owns a small home renovation company that specializes in kitchen renovations. Tara fears she has been underbidding her projects, and that translates into lost profits that could help sustain her through slow periods. She is putting together an estimate for a potential client and has determined the following activities:

Previously, Tara was billing at a flat rate of $13 per square foot of the demo space with no additional markup. Tara would like to add a 20% markup to the cost to arrive at the final bid price. Using Activity-Based Costing (ABC), what is the final bid price for her potential customer? (If required, round calculations to two decimal places.)

Ans: NA, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $6,997.13 Final Bid Price

To answer this question, you must first determine the estimated cost for each activity. Demo of existing space, $3.15 × 500 = $1,575.00; Cabinet installation, $203 × 5 = $1,015.00; and Countertop Installation, $12.37 × 262 = $3,240.94. Once they are totaled, the initial price is $1,575.00 + $1,015.00 + $3,240.94 = $5,830.94. The final step is to add the markup to arrive at the actual bid price: $5,830.94 × 1.20 = $6,997.13.

1. Paul runs the call center for Igloo Corp., a company that specializes in handling customer calls for other businesses. Igloo is currently using a traditional costing system, but Paul feels that management would be better served by implementing Time-Driven Activity-Based Costing (TDABC) and has identified the following pertinent information:

They incurred $198,000.00 last year to complete these key activities. Assume that employees handled the following number of calls during the year: Tech Issue Resolution, 19,700 calls; Customer Product Return, 7,650 calls; and Customer Complaints, 10,850 calls. When comparing actual costs incurred to operate the activities to the allocated costs, what is the difference and is it over- or underallocated? (If required, round calculations to two decimal places.)

Ans: NA, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $2,415.00, underallocated

This question has provided the rate for supplying an activity, so the first step needed would be to calculate the cost per transaction. A tech issue resolution call would be $0.52 times 12 minutes or $6.24 per call. A customer product return call would be $0.52 times 5.5 minutes or $2.86 per call. A customer complaint call would be $0.52 times 9 minutes or $4.68 per call. Next, multiply each per-call amount by the number of calls of that type completed during the year. $6.24 × 19,700 = $122,928.00, $2.86 × 7,650 = $21,879.00, $4.68 × 10,850 = $50,778.00. The total cost allocated will be the sum of the values from the previous step = $122,928.00 + $21,879.00 + $50,778.00 = $195,585.00 total allocated to key activities. Lastly, compare the total cost allocated to the total cost actually incurred: $198,000.00 - $195,585.00 = $2,415.00. This $2,415.00 difference represents the total underapplied cost.

1. Benjamin is the controller for the Dual Star call center, a small customer service company. Benjamin has been looking into their costing practices and questions whether traditional costing should continue to be used. He is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Benjamin has several customer service activities including: service calls, job proposal follow-up, and “thank you” calls. Benjamin has compiled the following information:

Supporting these activities cost Dual Star $99,700 last year, and they had 19,500 minutes within their capacity. How much total cost would be allocated to the key activities? (If required, round calculations to two decimal places.)

Ans: NA, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $98,283.53 total cost allocated to the key activities

This question requires calculation of the rate for supplying an activity: $99,700/19,500 = $5.11 per minute. Next, calculate the cost per transaction for each type of call: Service call, $5.11 per minute times 6 minutes equals $30.66 per call; Job Proposal Follow-Up call, $5.11 per minute times 5 minutes equals $25.55 per call; and “Thank You” call, $5.11 per minute times 3.5 minutes equals $17.89 per call. Lastly, find the total cost for each call type, and sum them for a total overall cost: ($30.66 × 1,540 calls) + ($25.55 × 877 calls) + ($17.89 × 1,602 calls) = $47,216.40 + $22,407.35 + $28,659.78 = $98,283.53.

1. Shawn is a general contractor who has decided to expand his offerings to include living room remodels. In his other projects, Shawn would estimate jobs using a flat rate of $12.50 per square foot of flooring to be replaced. He now believes that the flat rate of billing creates an opportunity to underbid. At the suggestion of his accountant, Shawn would like to explore the use of Activity-Based Costing (ABC). An upcoming bid for a client would include the following:

Shawn would like to add a 25% markup to the initial cost to arrive at a final bid price. Using ABC, what is the difference in profit compared to keeping the flat billing rate?

Ans: NA, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $114.06 additional profit with the markup included.

To answer this question, first determine the estimated cost for each activity: Refinishing floors, $5.62 × 650 square feet = $3,653.00; Bookshelves installation, $189 × 7.25 hours = $1,370.25; and Drywall installation, $98 × 16 pieces = $1,568.00. Once they are totaled, the initial cost is $3,653.00 + $1,370.25 + $1,568.00 = $6,591.25. The next step is to add the markup- $6,591.25 × 1.25 = $8,239.06. Lastly, calculate what Shawn would have billed under his current system: $12.50 per square foot × 650 square feet = $8,125.00. Subtract this from the markup rate to solve for the increase or decrease in his profit- $8,239.06 – $8,125.00 = $114.06 additional profit.

1. Carol is the controller for Stormy Corp., a company that manufactures lightweight jackets. Their most popular product is currently a storm cloud patterned rain jacket. Carol would like management to consider implementing Activity-Based Costing (ABC) so that they can better account for the costs associated with this rain jacket. She has gathered the following information pertaining to the rain jacket:

Allocate Manufacturing Overhead (MOH) costs to the storm cloud patterned rain jacket using the activity-based cost drivers above (If required, round calculations to two decimal places.)

The actual usage of the drivers is as follows:

1,480 supervisor hours

13,600 machine hours

2,850 cleaning hours

Ans: NA, LO 1, 3, 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $212,920.80 MOH Allocated

The first step for applying the MOH costs is calculation of the activity-based rate for each key activity:

Supervisor Wages = $90,400/3,442 hours = $26.26 per supervisor hour

Production = $256,808/22,540 machine hours = $11.39 per machine hour

Cleaning/Maintenance = $42,604/6,342 cleaning hours = $6.72 per cleaning hour

Now, allocate MOH to each key activity, and sum the total allocations:

Supervisor Wages: 1,480 supervisor hours × $26.26 per supervisor hour = $38,864.80

Production: 13,600 machine hours × $11.39 per machine hour = $154,904.00

Cleaning/Maintenance: 2,850 inspection hours × $6.72 per cleaning hour = $19,152

Total MOH allocated: $38,864.80 + $154,904.00 + $19,152.00 = $212,920.80

1. Paisley Corp. is a clothing company that produces blouses and pencil skirts that it sells online. Paisley has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs:

Paisley anticipates the production of 9,400 blouses and 12,250 pencil skirts. Each product is projected to use company resources in the following manner:

What is the ABC-based total MOH cost allocated per unit for the pencil skirts? (If required, round calculations to two decimal places.)

Ans: NA, LO 3, 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $16.15 per pencil skirt

First, calculate the activity rate for each of the MOH activities: Machining, $128,500/12,300 setups = $10.45/setup; Quality Inspections, $102,369/18,700 inspections = $5.47/inspection; Cleaning and Maintenance, $87,600/6,480 hours = $13.52/hour. Next, calculate the total overall MOH cost for the pencil skirts: ($10.45 × 6,800 setups) + ($5.47 × 12,800 inspections) + ($13.52 × 4,200 hours) = $71,060.00 + $70,016.00 + $56,784.00 = $197,860.00. Lastly, divide the total MOH cost by the number of pencil skirts to be produced: $197,860.00/12,250 = $16.15 per pencil skirt.

1. Flamingo Inc. is an organization that produces pool floats and other pool accessories. They are in the process of transitioning to Activity-Based Costing (ABC) and creating their budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs that are divided into three key activities:

During the current year, Flamingo’s pool floats used 4,250 setup hours, 9,600 machine hours, and 2,150 inspection hours. How much of the MOH costs will be allocated to the pool floats this year? (If required, round calculations to two decimal places.)

Ans: NA, LO 3, 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: $143,067.00

First, calculate the activity rate for each of the key activities: Setup, $90,000/9,000 setup hours = $10.00 per setup hour; Production, $123,650/18,000 machine hours = $6.87 per machine hour; and Quality Inspection, $99,800/6,200 inspection hours = $16.10 per inspection hour. Now, allocate the MOH based upon the actual usage: Setup, $10.00 per setup hour × 4,250 setup hours = $42,500.00; Production, $6.87 per machine hour × 9,600 machine hours = $65,952.00; and Quality Inspection, $16.10 × 2,150 inspection hours = $34,615.00. The total amount of MOH allocated will be the sum of these individual activities = $42,500.00 + $65,952.00 + $34,615.00 = $143,067.00.

Exercises

1. Delightful Desserts manufactures gluten-free desserts, including their three most popular items: Cheesecake, Brownies, and Cherry Pie. Their controller, Jennifer, has been compiling data for their yearly budget planning strategy meeting and the recommendation will be to continue using a traditional costing system as they have since inception. Delightful Desserts assigns their Manufacturing Overhead (MOH) costs based on 89% of their Direct Labor (DL) costs. Jennifer has gathered the following cost information to assist budget makers with the appropriate cost allocations for each dessert type:

(If required, round calculations to two decimal places.)

• 1. What are the total product costs for each of the three desserts?
  2. What is the total cost per unit for each of the three desserts?
  3. Are there any additional recommendations that Jennifer could make to management about the evaluation of their manufacturing overhead cost allocations?

Ans: NA, LO 1, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

• 1. Cheesecake, $230,452.45; Brownies, $292,506.83; and Cherry pie, $157,685.84.

Total costs are comprised of direct materials plus direct labor plus MOH. It is calculated as follows for each dessert type.

Cheesecake:

= ($69,820 + $9,990) + ($46,500 + $23,005 + $10,200) + (89% × ($46,500 + $23,005 + $10,200))

= $79,810.00 + $79,705.00 + $70,937.45 = $230,452.45

Brownies:

= ($60,440 + $12,360) + ($59,430 + $37,908 + $18,909) + (89% × ($59,430 + $37,908 + $18,909))

= $72,800.00 + $116,247.00 + $103,459.83 = $292,506.83

Cherry Pie:

= ($43,908 + $6,320) + ($31,606 + $16,550 + $8,700) + (89% × ($31,606 + $16,550 + $8,700))

= $50,228.00 + $56,856.00 + $50,601.84 = $157,685.84

• 1. Cheesecake, $5.79 per cheesecake; Brownies, $4.34 per tray; and Cherry Pie, $5.46 per pie.

Next, divide the total product costs by the number of units produced to calculate the total cost per unit for each of the three desserts.

Cheesecakes:

$230,452.45/39,800 = $5.79 per Cheesecake

Brownies:

$292,506.83/67,425 = $4.34 per Brownie Tray

Cherry Pie:

$157,685.84/28,900 = $5.46 per Cherry Pie

• 1. Jennifer may also encourage management to consider using Activity-Based Costing (ABC). Rather than using a single cost driver, such as Direct Labor costs, ABC would identify key activities and assign a specific activity-based rate to each one. This would allow management to identify more specifically how manufacturing overhead costs are being used based on the usage by various pertinent activities.

1. Candy is having a meeting with Sharon, a member of the management team at the retail company where they are both employed. They are currently discussing the way that the purchasing department’s costs are being handled. Candy believes that these costs should be considered a unit-level cost and allocated based upon the number of units needed as that dictates what the department purchases. Sharon believes that the costs should be allocated on a batch level based on the number of purchase orders used for each area. Candy has compiled some data on both cost drivers and the total costs for the purchasing department.

Their one product line requires 62 purchase orders this year in order to purchase 27,400 units.

(If required, round calculations to two decimal places.)

1. How much of the purchasing cost would be allocated under Candy’s unit-level assumption?
2. How much of the purchasing cost would be allocated under Sharon’s batch-level assumption?
3. Which method would you recommend that Candy and Sharon use for this retail company?

Ans: NA, LO 2, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. $355,378.00

The first step would be to calculate the unit-level rate:

$19,450,500/1,500,000 budgeted units = $12.97 per unit

For the unit-level calculation, use this per-unit rate, and allocate it based upon the number of units to be purchased for the year:

$12.97 per unit × 27,400 units = $355,378.00 allocated

1. $45,165.76

For the batch-level calculation, calculate the batch-level rate:

$19,450,500/26,700 purchase orders = $728.48 per purchase order

Next, use this per-batch rate, and allocate it based upon the number of purchase orders for the year:

$728.48 per purchase orders × 62 purchase orders = $45,165.76 allocated

1. While both methods allocate costs in a logical way, it will be important for Candy and Sharon to determine whether they feel that their chosen method best represents the way that the costs should be allocated. Unit-level costs are often very useful for factories needing to account for costs on a unit-by-unit basis while batch-level costs are useful for groupings of items. In this case, the unit-level may prove most helpful as it allocates based upon the actual units rather than the number of purchase orders. Candy and Sharon may also choose to discuss this with the rest of the management team before arriving at a final decision.
2. Trivium Inc. is a retail business that produces energy drinks and assorted flavored waters. They are in the process of evaluating their costing systems and are working towards an Activity-Based Costing (ABC) implementation. One of the roadblocks up to this point has been a lack of consensus on what key activities make the most sense to track. Their accountant has compiled the following data about their Manufacturing Overhead (MOH) costs:

The production department used the following amounts in a recent production run: 2,300 square feet, 2,909 maintenance hours, and 1,230 machine setups.

(If required, round calculations to two decimal places.)

• 1. What is the total amount of MOH cost allocated to facility-level activities?
  2. What is the total amount of MOH cost allocated to product/process-level activities?
  3. What is the total amount of MOH cost allocated to batch-level activities?

Ans: NA, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. $4,738.00

Prior to calculating the allocation, identify which of the costs are facility-level. In this case, property taxes are considered facility-level. Next, calculate the activity rate:

$18,500/9,000 square feet = $2.06 per square foot

Now, allocate this cost to the facility-level activity based on recent activities:

$2.06 per square foot times 2,300 square feet = $4,738.00

1. $44,682.24

Prior to calculating the allocation, identify which of the costs are product/process-level. In this case, factory equipment maintenance is considered product/process-level. Next, calculate the activity rate:

$128,990/8,400 maintenance hours = $15.36 per maintenance hour

Now, allocate this cost to the product/process-level activity based on recent activities:

$15.36 per maintenance hour times 2,909 maintenance hours = $44,682.24

1. $9,544.80

Prior to calculating the allocation, identify which of the costs are batch-level. In this case, machine setups are considered batch-level. Next, calculate the activity rate:

$77,600/10,000 machine setups = $7.76 per machine setup

Now, allocate this cost to the batch-level activity based on the recent activities:

$7.76 per machine setup times 1,230 machine setups = $9,544.80

1. Santana is a staff accountant for Tapestry, a factory that manufactures decorative wall hangings. Tapestry is gearing up to have their busiest year yet, and they anticipate the production of 147,800 units. Santana has been analyzing some cost data and is going to recommend to management that they switch from a traditional costing system to an Activity-Based Costing (ABC) system. Santana believes that management will benefit overall from having the costing allocated by activity rather than a single cost driver. Tapestry has the following budgeted costs: Direct Materials (DM), $283,706.00; and Direct Labor (DL), $186,540.00. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following:

Materials Sorting: $88,700 (10,000 yards of fabric)

Setups: $56,400 (7,600 setups)

Supervisor Wages: $103,540 (8,430 hours)

The actual usage of resources this year includes 9,680 yards of fabric, 7,400 setups, and 8,133 supervisor hours.

(If required, round calculations to two decimal places.)

1. How much MOH is allocated for the year based upon the ABC rates?
2. How much is the total product cost for the wall hanging units produced this year?
3. What is the total cost per unit for each wall hanging?

Ans: NA, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. $240,642.84
2. Before being able to allocate the MOH, you will need to calculate an ABC rate for each of the key activities. This can be done as follows:

Materials Sorting: $88,700/10,000 yards of fabric = $8.87 per yard

Setups: $56,400/7,600 setups = $7.42 per setup

Supervisor Wages: $103,540/8,430 hours = $12.28 per hour

Now, allocate based on actual usage as follows:

Materials sorting: $8.87 per yard × 9,680 yards used = $85,861.60

Setups: $7.42 per setup × 7,400 setups = $54,908.00

Supervisor Wages: $12.28 per hour × 8,133 hours worked by supervisors = $99,873.24

Total = $85,861.60 + $54,908.00 + $99,873.24 = $240,642.84

1. $710,888.84

To arrive at the total product costs, combine Direct Materials, Direct Labor, and MOH as follows:

$283,706.00 + $186,540.00 + $240,642.84 = $710,888.84

1. $4.81 per wall hanging

The total cost per unit involves taking the total product cost calculated in part (b) and dividing it by the number of units produced as follows:

$710,888.84/147,800 units = $4.81 per wall hanging

1. Bill owns Owens Construction, a small general contractor organization that specializes in high-end bathroom renovations. Currently Bill is billing at a flat rate of $30.00 per square foot of the space being demolished. Bill is concerned that his current method results in underbidding his projects and missing out on additional profit. He is putting together an estimate for Leslie, a potential bathroom remodel client, and has determined the following activities are needed to complete the job:

Bill would like to add a 30% markup to the cost to arrive at the final bid price. Use Activity-Based Costing (ABC) to answer the following questions.

1. What is the initial pre-markup price for all of the estimated work?
2. What is the final bid price that Bill will present to the customer?
3. How much profit will Bill make and/or lose if he chooses to use ABC rather than his current flat rate?

Ans: NA, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. $15,642.28 Subtotal for the estimated work

To answer this question, determine the estimated cost for each activity. Demo of existing space, $4.80 × 670 square feet = $3,216.00; Cabinet installation, $204 × 4.5 hours = $918.00; Tile installation, $2.38 × 3,806 pieces = $9,058.28; and Drywall installation, $98 × 25 = $2,450.00. Once they are totaled, the initial pre-markup price is $15,642.28.

1. $20,334.96 Final Bid Price

To calculate the final bid price, add the markup as follows:

$15,642.28 × 1.30 = $20,334.96.

1. $234.96 of profit

If Bill were to use his current flat billing rate of $30.00 per square foot, then his final bid price would be:

$30.00 per square foot × 670 square feet = $20,100.00

Bill would generate an additional ($20,334.96 – $20,100.00) = $234.96 of profit under ABC.

1. Aubrey is an accountant for Arbor Town, Inc., a tree preservation and removal company. They currently utilize a traditional costing system, and she is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Arbor Town has several customer-centric activities including: initial phone consultation, appointment setting, follow-up, and service calls. Supporting these activities cost Arbor Town $126,500 last year, and Arbor Town has 75,000 minutes within their capacity. Aubrey has compiled the following data:

Arbor Town is wondering whether they are utilizing their capacity to its fullest potential and are hopeful that TDABC will help shed some light on the best way they can proceed.

(If required, round calculations to two decimal places.)

1. What is the cost per transaction for each of the key activities?
2. Using the TDABC rates, calculate the total cost of transactions.
3. When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference and is it over- or underallocated?

Ans: NA, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. Initial Consultation, $13.52 per call; Appointment Setting, $9.30 per call; Follow-Up, $16.90 per call; and Service Calls, $7.61 per call.

This question requires multiple steps in order to be able to calculate the cost per transaction under TDABC. First, calculate the rate for supplying an activity by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $126,500/75,000 minutes = $1.69 per minute. Next, multiply the cost per minute by the amount of time it takes to complete each activity as follows: Initial Consultation, $1.69 × 8 minutes = $13.52 per call; Appointment Setting, $1.69 × 5.5 minutes = $9.30 per call; Follow-Up, $1.69 × 10 minutes = $16.90 per call; and Service Calls, $1.69 × 4.5 minutes = $7.61 per call.

1. $93,604.66 total cost of transactions.

Multiply each per-call amount calculated in part (a) by the number of calls of that type completed during the year. Initial Consultation, $13.52 × 2,678 calls = $36,206.56; Appointment Setting, $9.30 × 1,453 calls = $13,512.90; Follow-Up, $16.90 × 1,444 calls = $24,403.60; and Service Calls, $7.61 × 2,560 calls = $19,481.60. The total cost allocated will be the sum of the values from the previous step: $36,206.56 + $13,512.90 + $24,403.60 + $19,481.60 = $93,604.66 is the total cost of transactions.

1. $32,895.34 underallocated

To determine whether the costs have been under or overallocated, compare the total product costs calculated in part (b) to the actual cost. This is calculated as follows: $126,500 – $93,604.66 = $32,895.34 is the amount that is underallocated. Arbor Town allocated less to these activities than they actually spent, and that means they have some unused capacity.

1. Tech Squad is a regional call center that handles customer service calls from people who are experiencing technical issues with their personal devices. Management feels as though they never have an accurate picture of how well they are utilizing their available resources. Their controller has suggested that they consider switching to Time-Driven Activity-Based Costing (TDABC). The controller has identified the following information about their identified key activities:

Supporting these activities cost Tech Squad $266,800.00 last year, and they had 375,000 minutes within their capacity.

(If required, round calculations to two decimal places.)

1. Using TDABC, what is the rate for supplying an activity?
2. Using the TDABC rates, what is the total amount allocated to the key activities?
3. When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference, and is it over- or underallocated?

Ans: NA, LO 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. $0.71 per minute

The rate for supplying an activity using TDABC is calculated by taking the total cost of the activity and dividing it by the practical capacity available expressed in time: $266,800.00/375,000 minutes = $0.71 per minute.

1. $262,980.67 total cost of transactions

First, multiply the cost per minute by the amount of time it takes to complete each activity as follows: Browser issues, $0.71 × 3.5 minutes = $2.49 per call; Hardware issues, $0.71 × 11 minutes = $7.81 per call; and Software issues, $0.71 × 13 minutes = $9.23 per call. Next, multiply each per-call amount calculated by the number of calls of that type completed for the year. Browser issues, $2.49 × 22,480 calls = $55,975.20; Hardware issues, $7.81 × 11,606 calls = $90,642.86; and Software issues, $9.23 × 12,607 calls = $116,362.61. The total cost allocated will be the sum of the values from the previous step: $55,975.20 + $90,642.86 + $116,362.61= $262,980.67 is the total cost of transactions.

1. $3,819.33 underallocated

To determine whether the costs have been under or overallocated, compare the total product costs calculated in part (b) to the actual cost. This is calculated as follows: $266,800 – $262,980.67 = $3,819.33 is the amount that is underallocated. Tech Squad allocated less to these activities than they actually spent, and that means they have some unused capacity.

1. Lilly Corp. manufactures office supplies that it specifically creates for recent college graduates. One of their most popular items in recent years is an annual planner that is accompanied by accessories such as stickers and highlighters. Lilly currently uses a single plant-wide rate of $14 per Direct Labor (DL) hour to allocate their Manufacturing Overhead (MOH) costs. Sarah, the controller, would like to determine whether a switch to Activity-Based Costing (ABC) would prove to be a beneficial planning tool for Lilly Corp. moving forward. Sarah has identified three key activities that would be used for ABC: Production, Supervisor Wages, and Quality Inspections. Sarah has compiled the following budgeted MOH cost data for the annual planner:

The actual usage of resources for manufacturing the annual planner includes $27,360 in DM costs; 37,000 DL hours; 28,500 machine hours; 4,500 supervisor hours; and 9,800 inspection hours.

1. Allocate MOH costs to the production of the annual planner using the previous plant-wide rate.
2. How will MOH costs be allocated to the production of the annual planner using ABC rates?
3. What could account for the difference between these two different allocations? Which should Sarah advise Lilly Corp. to use moving forward?

Ans: NA, LO 1, 3, 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. $518,000.00

To calculate Lilly’s budgeted manufacturing overhead cost using one plant-wide rate, multiply the plant-wide rate by the specified cost driver:

$14.00 × 37,000 DL hours = $518,000.00

1. $491,627.00

Calculate the activity-based rates as follows:

1. The largest difference between the single plant-wide rate and using the more specific activity-based rates with ABC is that the single plant-wide rate assumes that everything should use the same cost driver. This can often paint a somewhat inaccurate picture as it can conceal where the spending is happening compared to where it was budgeted. Sarah should highly encourage Lilly to use ABC moving forward so that they can have a more transparent and accurate way in which to track their costs by specific tasks.
2. Fly Ball Inc. is a sporting goods company that produces baseballs and baseball mitts that it sells online. Fly Ball has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs:

Setups $98,500 (18,000 setups)

Quality Inspections $104,620 (29,300 inspections)

Factory Supervisor Wages $122,480 (8,600 hours)

Fly Ball anticipates the production of 15,482 baseballs and 9,877 baseball mitts. Each product is projected to use company resources in the following manner:

(If required, round calculations to two decimal places.)

1. What is the total MOH cost for the baseballs?
2. What is the total amount of MOH allocated per unit to the baseballs?
3. What is the total MOH cost for the baseball mitts?
4. What is the total amount of MOH allocated per unit to the baseball mitts?
5. Why should Fly Ball seriously consider implementing ABC instead of their current traditional costing system?

Ans: NA, LO 3, 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. $141,793.00

This question requires calculation of the activity rate for each of the activities: Setups, $98,500/18,000 setups = $5.47/setup; Quality Inspections, $104,620/29,300 inspections = $3.57/inspection; and Factory Supervisor Wages, $122,480/8,600 hours = $14.24/hour. Next, allocate the MOH based on the actual usage: Setups, $5.47 per setup × 9,500 setups = $51,965.00; Quality Inspections, $3.57 per inspection × 11,600 inspections = $41,412.00; Factory Supervisor Wages, $14.24 per hour × 3,400 hours = $48,416.00. The total amount of MOH allocated will be the sum of these individual activities = $51,965.00 + $41,412.00 + $48,416.00 = $141,793.00.

1. $9.16 per baseball

To calculate the per-unit amount of MOH allocated to baseballs, use the total amount calculated in part (a) and divide it by the number of baseballs that Fly Ball anticipates producing. This is calculated as follows: $141,793.00/15,482 baseballs = $9.16 per baseball

1. $183,732.00

This question requires calculation of the activity rate for each of the MOH activities: Setups, $98,500/18,000 setups = $5.47/setup; Quality Inspections, $104,620/29,300 inspections = $3.57/inspection; and Factory Supervisor Wages, $122,480/8,600 hours = $14.24/hour. Next, allocate the MOH based on the actual usage: Setups, $5.47 per setup × 8,500 setups = $46,495.00; Quality Inspections, $3.57 per inspection × 17,700 inspections = $63,189.00; Factory Supervisor Wages, $14.24 per hour × 5,200 hours = $74,048.00. The total amount of MOH allocated will be the sum of these individual activities = $46,495.00 + $63,189.00 + $74,048.00 = $183,732.00.

1. $18.60 per baseball mitt

To calculate the per-unit amount of MOH allocated to baseball mitts, use the total amount calculated in part (c) and divide it by the number of baseball mitts that Fly Ball anticipates producing. This is calculated as follows:

$183,732.00/9,877 baseball mitts = $18.60 per baseball mitt

1. ABC is an effective way for a company to assign costs based on actual usage rather than a single cost driver. This can often lead to more informed decision-making and more accurate allocation of available resources. Fly Ball makes two products, so they would benefit from ABC as a means to better understand how each product uses available resources to be produced.
2. Garden Variety is an organization that manufactures lawn gnomes and other decorative yard items. David, the senior accountant, is creating a budget for the New Year while simultaneously implementing a transition into Activity-Based Costing (ABC). The lawn gnomes had Direct Labor (DL) costs of $147,890.00 and Direct Materials (DM) costs of $90,707.00. David has gathered the following budgeted Manufacturing Overhead (MOH) costs information and divided it into four key activities:

During the current year, Garden Variety produced 19,480 lawn gnomes and used 6,230 setups, 3,440 inspections, 4,160 supervisor hours, and 1,880 cleaning/maintenance hours.

1. What are the activity rates of each of the four key activities? (If required, round calculations to two decimal places.)
2. What is the total amount of MOH allocated to the lawn gnomes?
3. What is the total cost per lawn gnome?

Ans: NA, LO 3, 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. Machine Setup, $6.26 per setup; Quality Inspection, $10.55 per inspection; Supervisor Wages, $11.99 per supervisor hour; and Cleaning/Maintenance, $8.35 per cleaning/maintenance hour.

To calculate the activity rate for each of the key activities, divide the budgeted cost by the budgeted cost driver: Machine Setup, $77,650/12,400 setups = $6.26 per setup; Quality Inspection, $92,340/8,750 inspections = $10.55 per inspection; Supervisor Wages, $104,300/8,700 supervisor hours = $11.99 per supervisor hour; and Cleaning/Maintenance, $56,806/6,800 cleaning/maintenance hours = $8.35 per cleaning/maintenance hour.

1. $140,868.20 MOH allocated to the lawn gnomes

Now, allocate the MOH based on the actual usage: Machine Setup, $6.26 per setup × 6,230 per setups = $38,999.80; Quality Inspection, $10.55 per inspection × 3,440 inspections = $36,292.00; Supervisor Wages, $11.99 per hour × 4,160 supervisor hours = $49,878.40; and Cleaning/Maintenance, $8.35 × 1,880 cleaning/maintenance hours = $15,698.00. The total amount of MOH allocated will be the sum of these individual activities = $38,999.80 + $36,292.00 + $49,878.40 + $15,698.00 = $140,868.20.

1. $19.48 per lawn gnome

To calculate the total cost per lawn gnome, combine the direct labor, direct materials, and MOH costs, and divide by the total number of lawn gnomes produced.

$147,890.00 + $90,707.00 + $140,868.20 = $379,465.20

$379,465.20/19,480 lawn gnomes = $19.48 per lawn gnome

Problems

1. Magic Golf is a small putt putt golf attraction that services a seasonally busy tourist season each summer. Sarah, the Controller, feels that Magic Golf would benefit from adding additional staff to their customer service line. A chief complaint of patrons is that it often takes too long to be checked in upon arrival and to be checked out upon departure. The management of Magic Golf has come to Sarah and asked her to put together some data that will assist them in assessing their strengths and weaknesses. Their business is cyclical, so it is imperative that they are able to determine whether or not they are best using their available resources regardless of the time of year. Sarah has decided to use Time-Driven Activity-Based Costing (TDABC) to assist with any future hiring plans in this area. The costs of assets and personnel in their customer service-based activities are $62,000, and the company has 101,000 minutes of capacity during the most recent year. The key activities for their customer service department and related time per transaction are as follows:

The cost incurred of assets and personnel of $62,000 is spread between the quarters in the following way: Quarter 1- 15%, Quarter 2- 35%, Quarter 3 - 45%, and Quarter 4- 5%. Sarah has compiled data and determined that Magic Golf had the following numbers of activities for each quarter:

Sarah is hopeful that she can complete her analysis in enough time for management to integrate her findings and suggestions into the next calendar year. Using TDABC, please answer the following questions.

(If required, round calculations to two decimal places.) 

1. With costs assigned to each activity cost pool, calculate the cost per minute to supply an activity.
2. Calculate the cost per transaction for each key transaction that Sarah will then use to calculate her cost allocations. Based upon this information, is there an activity that Sarah may want to devote extra attention to while performing her analysis?
3. Using Sarah’s compiled data, how much total cost was allocated to the customer service area during each quarter? How much was allocated to the customer service area for the year in total?
4. Using the percentages noted in the problem (Q1: 15%, Q2: 35%, Q3: 45%, and Q4: 5%), compare the actual costs incurred to the allocation amount calculated in part (c) for each quarter. How do you explain the difference, and which quarter has done the most efficient job of managing its resources?
5. Based on Sarah’s estimate, do you believe that Magic Golf will need to hire another service employee? Are there any other suggestions or advice that Sarah could give?

Ans: NA, LO 4, Bloom: E, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. $0.61 per minute

To calculate the cost per minute to supply an activity, use the following formula:

Total Cost of Activity/Practical Capacity Available (expressed in time).

$62,000/101,000 minutes = $0.61 per minute

1. Using the rate calculated in part (a), apply this to the time it takes to complete each key transaction:

Ticket sales, $3.66 per minute; Club and ball distribution, $2.44 per minute; Customer greeting, $0.61 per minute; Customer complaints, $4.88 per minute; and Customer refunds, $2.14 per minute.

Due to the high cost of handling customer complaints, Sarah may focus some of her attention and analysis here to determine if any actions could aid in improving this area leading to greater overall customer satisfaction.

1. Multiply each cost per transaction by the amount of that key activity during each quarter:

Total Costs by Quarter: Q1, $6,595.75; Q2, $17,240.02; Q3, $20,737.38; and Q4, $5,949.09. Total cost for all four quarters = $50,522.24 (sum of all four quarters).

1. The first step in completing this comparison includes determining how much of the $62,000 of the costs incurred belong to each quarter:

Q1 = $62,000 × 15% = $9,300.00

Q2 = $62,000 × 35% = $21,700.00

Q3 = $62,000 × 45% = $27,900.00

Q4 = $62,000 × 5% = $3,100.00

Now, compare the costs incurred to the allocated costs by quarter:

Quarter 1 costs incurred for customer service line $9,300.00

Quarter 1 applied costs 6,595.75

Difference $2,704.25

Quarter 2 costs incurred for customer service line $21,700.00

Quarter 2 allocated costs 17,240.02

Difference $4,459.98

Quarter 3 costs incurred for customer service line $27,900.00

Quarter 3 allocated costs 20,737.38

Difference $7,162.62

Quarter 4 costs incurred for customer service line $3,100.00

Quarter 4 allocated costs 5,949.09

Difference ($2,849.09)

Due to the cyclical and seasonal nature of the business, it would be a sensible decision to allocate the majority of costs to Quarter 2 and Quarter 3. Quarter 4 is the only quarter that has an overallocated amount. This indicates that management would have initially suspected that more resources would be needed during this quarter than were actually used. At an initial look, Quarter 4 appears to be doing the best job of managing the resources that it does have.

The difference between the costs incurred and the allocated costs for the year is an underallocated cost and represents the cost of unused capacity or idle time. Management will want to look into these differences further. Based on Sarah’s data, it appears that the company has enough capacity in its current state without hiring another employee. Rather than bringing on additional employees, they will want to ensure that all available time is being fully utilized. Sarah would likely recommend that management consider a reallocation of available resources to ensure that the busier quarters have what they need in order to be successful.

1. Lately Twisty Noodles, a regional factory that manufactures various kinds of pasta, has been delighted to experience growth in what has been a challenging economic time for others. They have recently added penne pasta to their current offering of angel hair pasta. As part of their continued efforts to improve their internal processes, management has asked Tom, their accountant, to assist with some analysis. Currently Twisty Noodles utilizes a traditional costing system, but they would like to explore the use of Activity-Based Costing (ABC) since they have expanded their offerings. Tom has identified that they have the following key activities:

Pertinent cost information related to their pasta offerings are as follows:

Under their traditional costing system, Manufacturing Overhead (MOH) is currently assigned to products based on 87% of direct labor costs. Management is very interested to learn whether a switch to ABC will produce more accurate results, and they would like to have some solid numbers to back up their decision. Tom would like to be able to present management with a solid recommendation in the very near future. With this in mind, please complete the following questions.

(If required, round calculations to two decimal places.)

1. What is the cost per unit for each of the identified key activities that would be used under the proposed ABC? How do these values compare to the current calculation using traditional costing?
2. Calculate the total cost per unit for angel hair using both a traditional costing system and ABC.
3. Calculate the total cost per unit for penne using both a traditional costing system and ABC.
4. Why do the two costing systems produce such different results? If you were Tom, which costing system would you encourage Twisty to utilize, and why?
5. The management of Twisty Noodles believes that they may see a 10% increase in production of their products next year. They would also like to consider bringing a new spaghetti pasta to market. How would these events impact the decision which Tom made in part (d)?

Ans: NA, LO 1, 3, 4, Bloom: E, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

1. ABC requires that MOH be allocated based upon a per-unit cost and quantity of each activity. To calculate the per unit cost, take the cost of each key activity/cost driver, and divide it by the amount of that activity/driver. These costs will be calculated as follows:

Machining: $40,710/22,444 hours = $1.81 per hour

Moving and Sorting: $44,928/18,428 hours = $2.44 per hour

Cleaning wages: $18,228/7,084 hours = $2.57 per hour

Factory utilities: $62,829/14,479 square feet = $4.34 per square foot

Under traditional costing, the manufacturing overhead costs are divided by a single cost driver, such as direct labor hours or a percentage of direct labor costs. Both methods incur the same direct materials and direct labor costs, so it is the MOH allocation that varies. ABC costing is often considered when management believes that it will do a more efficient and transparent job of allocating costs based upon activity rather than assuming that overhead is incurred proportionally with volume.

1. $3.98 per box of angel hair pasta under traditional, $4.86 per box of angel hair pasta under ABC

Under both ABC and traditional costing, calculate the overall Direct Materials costs:

Wheat Pasta

48,990 boxes × ($0.33 per pound × 0.50 pounds per box) = $8,083.35

Cardboard

48,990 boxes × $0.10 per box = $4,899.00

Total Direct Materials =

$8,083.35 + $4,899.00 = $12,982.35

Next, calculate the Direct Labor cost:

Assembly Line Wages 

48,990 boxes × ($8.25 per hour × 0.10 hours per box) = $40,416.75

Machine Operators Wages 

48,990 boxes × ($7.75 per hour × 0.15 hours per box) = $56,950.88

Total Direct Labor =

$40,416.75 + $56,950.88 = $97,367.63

Next, calculate the MOH under traditional:

$97,367.63 × 87% = $84,709.84

Now, combine the Direct Materials, Direct Labor, and the MOH to arrive at the total product costs for traditional costing.

$12,982.35 + $97,367.63 + $84,709.84 = $195,059.82

Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit:

$195,059.82/48,990 boxes = $3.98 per box of angel hair pasta under traditional

Next, calculate the MOH under ABC:

($1.81 × 13,742 machining hours) + ($2.44 × 14,650 moving and sorting hours) + ($2.57 × 8,778 cleaning hours) + ($4.34 × 10,266 square feet) = $24,873.02 + $35,746.00 + $22,559.46 + $44,554.44 = $127,732.92

Now, combine the Direct Materials, Direct Labor, and MOH to arrive at the total product costs using ABC.

$12,982.35 + $97,367.63 + $127,732.92 = $238,082.90

Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit:

$238,082.90/48,990 boxes = $4.86 per box of angel hair pasta under ABC

1. $5.52 per box of penne pasta under traditional, $6.07 per box of penne pasta under ABC

Under both ABC and traditional costing, calculate the overall Direct Materials costs:

Wheat Pasta

33,806 boxes × $0.16 per pound × 1 pounds per box = $5,408.96

Cardboard

33,806 boxes × $0.15 per box = $5,070.90

Total Direct Materials =

$5,408.96 + $5,070.90 = $10,479.86

Next, calculate the Direct Labor costs:

Assembly Line Wages 

33,806 boxes × ($8.25 per hour × 0.15 hours per box) = $41,834.93

Machine Operators Wages 

33,806 boxes × ($7.75 per hour × 0.20 hours per box) = $52,399.30

Total Direct Labor =

$41,834.93 + $52,399.30 = $94,234.23

Next, calculate the MOH using traditional costing:

$94,234.23 × 87% = $81,983.78

Now, combine the Direct Materials, Direct Labor, and the MOH to arrive at the total product costs for traditional costing.

$10,479.86 + $94,234.23 + $81,983.78 = $186,697.87

Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit:

$186,697.87/33,806 boxes = $5.52 per box of penne pasta under traditional

Next, calculate the MOH using ABC:

($1.81 × 11,702 machining hours) + ($2.44 × 11,778 moving and sorting hours) + ($2.57 × 5,804 cleaning hours) + ($4.34 × 8,213 square feet) = $21,180.62 + $28,738.32 + $14,916.28 + $35,644.42 = $100,479.64

Now, combine the Direct Materials, Direct Labor, and MOH to arrive at the total product costs using ABC.

$10,479.86 + $94,234.23 + $100,479.64 = $205,193.73

Lastly, divide the total product costs by the total number of boxes produced to arrive at a total cost per unit:

$205,193.73/33,806 boxes = $6.07 per box of penne pasta under ABC

1. Traditional costing uses a single cost driver to allocate the manufacturing overhead costs of an organization. ABC uses multiple cost drivers as determined by the key activities identified by those in charge of making budgeting and financial decisions. Traditional costing assumes that all overhead costs are primarily driven by one cost driver, even if this does not accurately depict the way that the business operates. Tom will likely suggest the use of ABC as it does a more accurate job of assessing how costs are being used amongst the various activities employed by Twisty Noodles.
2. If production were to increase by 10% in the following years, this would directly impact direct materials costs, direct labor costs, and MOH whether they use traditional costing or ABC. As the production of products increases, the overall costs will also increase. Tom could begin to conduct a more thorough analysis if he was able to determine the overall cost and quantity of each cost driver for the following year. In regards to the new product offering, Tom would need to gather information pertaining to costing involved in the direct materials and direct labor and then to determine this new product’s impact on MOH costs. Once this is completed, Tom could begin to allocate the MOH costs under ABC and compare them to what a traditional costing system would yield. It is likely that these changes would not provoke a different response than was arrived at in part (d). As more product lines are offered, ABC becomes a more appealing costing method.

1. Primrose Inc. manufactures high quality hair care products. Their most recent success has been a rose-scented conditioner for fine hair to accompany their best-selling rose-scented shampoo. This has been a great year for Primrose with sales of shampoo reaching 105,600 bottles and sales of their new conditioner reaching 86,420 bottles. Their controller, Jeff, has compiled the following information pertaining to their materials and labor usage for both the shampoo and conditioner:

Primrose has chosen to allocate their Manufacturing Overhead (MOH) costs by using a single plant-wide MOH rate that is based upon Total Direct Labor (DL) costs. Primrose has been looking into ways that it can improve how it allocates and tracks costs. Jeff has suggested the use of Activity-Based Costing (ABC) and has identified the following common key activities, associated cost information, and quantity of each driver:

Jeff would like to assist management by their next meeting. While keeping all of his data and compilations in mind, please provide some insight into the following questions. (If required, round calculations to two decimal places.)

1. What is Primrose’s budgeted manufacturing overhead rate in percentage form using one plant-wide pool? What are Primrose’s activity-based rates using the identified key activities and respective cost drivers? (Round percentage figure to two decimal places.)
2. Allocate manufacturing overhead costs to the rose-scented shampoo using the activity-based rates calculated in part (a), and present one total number, and do the same for the rose-scented conditioner.
3. What are the total costs per unit for the rose-scented shampoo using both costing methods?
4. What are the total costs per unit for the rose-scented conditioner using both costing methods?
5. Why are the allocated MOH costs different between using a single plant-wide rate and using ABC? How might these differences impact Primrose’s costing decisions in the future? Which method do you think Jeff will encourage Primrose to use?

Ans: NA, LO 1, 3, 4, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution:

• 1. Traditional Costing: 16.79%; ABC rates: $9.91 per setup, $1.39 per order fulfilled, $4.34 per inspection hour, $2.82 per square foot of facility, and $2.98 per cleaning hour.

The first step to calculating their single plant-wide pool is to determine how much the direct labor costs will be as this is the denominator needed for the equation. For the shampoo and conditioner, we would add assembly line wages and packaging wages for each product and then sum their totals as follows:

($62,300 + $43,450) + ($51,566 + $38,763) = $105,750 + $90,329 = $196,079 total DL costs

To calculate Primrose’s budgeted manufacturing overhead rate using one plant-wide pool, divide the total budgeted MOH costs by specified cost driver of DL costs:

($32,920/$196,079) × 100 = 16.79%

Prior to being able to calculate the ABC rates, figure out the total cost driver for each activity. To do so, add the total amount of each driver for shampoo, and then add that to each driver for conditioner. Then, calculate the activity-based rates as follows:

• 1. Shampoo- $19,644.42, Conditioner- $13,264.59

Calculate the activity-based MOH costs as follows:

• 1. Traditional- $2.07 per bottle, and ABC- $2.09 per bottle

Before allocating any MOH to the shampoo products, calculate the Direct Materials and Direct Labor costs as these totals will be the same for both methods. Look at the list of product costs for Plastic Bottles, Product Mixture, Assembly Line Wages, and Packaging Wages, and determine what cost category applies. It will be the following:

Direct Materials: Plastic Bottles and Product Mixture

$41,444 + $53,560 = $95,004

Direct Labor: Assembly Line Wages and Packaging Wages

$62,300 + $43,450 = $105,750

Traditional

Now, calculate the MOH allocation using traditional costing by using the direct labor costs and plant-wide rate from Part a:

$105,750 × $16.79% = $17,754.53

Now, determine the Total Product Cost using Direct Materials, Direct Labor, and Manufacturing Overhead:

$95,004 + $105,750 + $17,754.53 = $218,508.53

Lastly, to arrive at the total cost per unit, divide the total product cost by the number of shampoo bottles produced:

$218,509/105,600 bottles = $2.07 per bottle

ABC

Now, determine the Total Product Cost using Direct Materials, Direct Labor, and Manufacturing Overhead (costs allocated from part b):

$95,004 + $105,750 + $19,644.42 = $220,398.42

Lastly, to arrive at the total cost per unit, divide the total product cost by the number of shampoo bottles produced:

$220,398.42/105,600 bottles = $2.09 per bottle

• 1. Traditional is $2.14 per bottle, and ABC is $2.12 per bottle

Before allocating any MOH to the conditioner products, calculate the Direct Materials and Direct Labor costs as these totals will be the same for both methods. Look at the list of product costs for Plastic Bottles, Product Mixture, Assembly Line Wages, and Packaging Wages, and determine what cost category applies. It will be the following:

Direct Materials: Plastic Bottles and Product Mixture

$36,787 + $42,899 = $79,686

Direct Labor: Assembly Line Wages and Packaging Wages

$51,566 + $38,763 = $90,329

Traditional

Now, calculate the MOH allocation using traditional costing by using the direct labor costs and plant-wide rate from Part a:

$90,329 × 16.79% = $15,165.47

Now, determine the Total Product Cost using Direct Materials, Direct Labor, and Manufacturing Overhead:

$79,686 + $90,329 + $15,165.47 = $185,180.47

Lastly, to arrive at the total cost per unit, divide the total product cost by the number of conditioner bottles produced:

$185,180.47/86,420 bottles = $2.14 per bottle

ABC

Now, determine the Total Product Cost using Direct Materials, Direct Labor, and Manufacturing Overhead (costs allocated from part b):

$79,686 + $90,329 + $13,264.59 = $183,279.59

Lastly, to arrive at the total cost per unit, you would divide the total product cost by the number of conditioner bottles produced:

$183,279.59/86,420 bottles = $2.12 per bottle

1. The largest difference between what is seen when applying a single plant-wide rate versus using ABC to derive unique activity-based rates is that each method uses different drivers and ultimately, different rates. Management may want to consider that ABC tends to provide a more transparent and timelier picture of how costs are being used by an organization. Assuming the key activities were not chosen at random and represent the most useful activities that drive costs, management will have a better understanding of how costs are spent using ABC versus the single rate. Jeff is likely to recommend ABC as it does a more accurate and transparent job of calculating costs based upon actual usage rather than a single, smoothed-out rate. This will become even more useful if the company decides to offer additional products in the future.