CHAPTER 17

Activity-Based COSTING

CHAPTER LEARNING OBJECTIVES

1. Discuss the difference between traditional costing and activity-based costing. A traditional costing system assigns overhead to products on the basis of predetermined plantwide or departmentwide rates such as direct labor or machine hours. An ABC system allocates overhead to identified activity cost pools and then assigns costs to products using related cost drivers that measure the activities (resources) consumed.

The development of an activity-based costing system involves the following four steps. (1) Identify and classify the major activities involved in the manufacture of specific products and allocate overhead to cost pools. (2) Identify the cost driver that has a strong correlation to the costs accumulated in each cost pool and total estimated annual cost driver usage. (3) Compute the activity-based overhead rate for each cost pool. (4) Assign overhead costs to products using the overhead rates determined for each cost pool and each product’s use of each cost driver.

2. Apply activity-based costing to a manufacturer. To identify activity cost pools, a company must perform an analysis of each operation or process, documenting and timing every task, action, or transaction. Cost drivers identified for assigning activity cost pools must (a) accurately measure the actual consumption of the activity by the various products and (b) have related data easily available. The overhead allocated to each activity cost pool is divided by the estimated use of cost drivers to determine the activity-based overhead rate for each pool. Overhead is assigned to products by multiplying a particular product’s use of a cost driver by the activity-based overhead rate. This is done for each activity cost pool and then summed.

3. Explain the benefits and limitations of activity-based costing. Features of ABC that make it a more accurate product costing system include (1) the increased number of cost pools used to assign overhead (including use of the activity-level hierarchy), (2) the enhanced control over overhead costs (including identification of non-value-added activities), and (3) the better management decisions it makes possible. The limitations of ABC are (1) the higher analysis and measurement costs that accompany multiple activity centers and cost drivers, and (2) the necessity still to assign some costs arbitrarily.

4. Apply activity-based costing to service industries. The overall objective of using ABC in service industries is no different than for manufacturing industries—that is, improved costing of services performed (by job, service, contract, or customer). The general approach to costing is the same: analyze operations, identify activities, accumulate overhead costs by activity cost pools, and identify and use cost drivers to assign the cost pools to the services.

^a5. Explain just-in-time (JIT) processing. JIT is a processing system dedicated to having on hand the right materials and products just at the time they are needed, thereby reducing the amount of inventory and the time inventory is held. One of the principal accounting effects is that one account, Raw and In-Process Inventory, replaces both the raw materials and work in process inventory accounts.

TRUE-FALSE STATEMENTS

1. Traditional costing systems use multiple predetermined overhead rates.

2. Traditionally, overhead has been assigned based on direct labor cost or direct labor hours.

3. Current trends in manufacturing include less direct labor and more overhead.

4. Activity-based costing allocates overhead to multiple activity cost pools and assigns the cost pools to products using cost drivers.

5. A cost driver does not generally have a direct cause-effect relationship with the resources consumed.

6. The first step in activity-based costing is to assign overhead costs to products using cost drivers.

7. To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the activity cost pool.

8. Low-volume products often require more special handling than high-volume products.

9. When overhead is properly assigned in ABC, it will usually decrease the unit cost of high-volume products.

10. ABC leads to enhanced control over overhead costs.

11. ABC usually results in less appropriate management decisions.

12. ABC is generally costlier to implement than traditional costing.

13. ABC eliminates all arbitrary cost allocations.

14. ABC is particularly useful when product lines differ greatly in volume and manufacturing complexity.

15. ABC is particularly useful when overhead costs are an insignificant portion of total costs.

16. Activity-based management focuses on reducing costs and improving processes.

17. Any activity that increases the cost of producing a product is an value-added activity.

18. Engineering design is an value-added activity.

19. Non-value-added activities increase the cost of a product but not its perceived value.

20. Machining is a non-value-added activity.

21. Not all activities labeled nonessential are totally wasteful nor can they be totally eliminated.

22. Plant management is a batch-level activity.

23. Painting is a product-level activity.

24. The overall objective of using ABC in a service firm is the same that it is in a manufacturer.

25. What sometimes makes implementation of activity-based costing difficult in service industries is that a smaller proportion of overhead costs are company-wide costs.

26. The same general approach to identifying activities, activity cost pools, and cost drivers is used by a service company as by a manufacturing company.

^a27. Just-in-time strives to eliminate inventories by using a pull approach.

^a28. Quality control is less important in just-in-time than in traditional manufacturing philosophies.

^a29. Inventory storage costs are reduced in just-in-time processing.

^a30. Rework costs typically increase in just-in-time processing.

MULTIPLE CHOICE QUESTIONS

31. Which of the following is not typical of traditional costing systems?

a. Use of a single predetermined overhead rate.

b. Use of direct labor hours or direct labor cost to assign overhead.

c. Assumption of correlation between direct labor and incurrence of overhead cost.

d. Use of multiple cost drivers to allocate overhead.

32. In traditional costing systems, overhead is generally applied based on

a. direct labor.

b. machine hours.

c. direct material dollars.

d. units of production.

33. An activity that has a direct cause-effect relationship with the resources consumed is a(n)

a. cost driver.

b. overhead rate.

c. cost pool.

d. product activity.

34. Which best describes the flow of overhead costs in an activity-based costing system?

a. Overhead costs  direct labor cost or hours  products

b. Overhead costs  products

c. Overhead costs  activity cost pools  cost drivers  products

d. Overhead costs  machine hours  products

35. The costs that are easiest to trace directly to products are

a. direct materials and direct labor.

b. direct labor and overhead.

c. direct materials and overhead.

d. none of the above; all three costs are equally easy to trace to the product.

36. Often the most difficult part of computing accurate unit costs is determining the proper amount of _________ to assign to each product, service, or job.

a. direct materials

b. direct labor

c. overhead

d. direct materials and direct labor

37. Predetermined overhead rates in traditional costing are often based on

a. direct labor cost for job order costing and machine hours for process costing.

b. machine hours for job order costing and direct labor cost for process costing.

c. multiple bases for job order costing and direct labor cost for process costing.

d. multiple bases for both job order costing and process costing.

38. Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It is appropriate to use direct labor when which of the following is true?

(1) Direct labor constitutes a significant part of total product cost.

(2) A high correlation exists between direct labor and changes in the amount of overhead costs.

a. (1) only

b. (2) only

c. Either (1) or (2)

d. Both (1) and (2)

39. Advances in computerized systems, technological innovation, global competition, and automation have changed the manufacturing environment drastically by

a. increasing direct labor costs and increasing overhead costs.

b. increasing direct labor costs and decreasing overhead costs.

c. decreasing direct labor costs and decreasing overhead costs.

d. decreasing direct labor costs and increasing overhead costs.

40. Activity-based costing

a. allocates overhead to activity cost pools and then assigns the activity cost pools to products and services by means of cost drivers.

b. accumulates overhead in one cost pool and then assigns the overhead to products and services by means of a cost driver.

c. assigns activity cost pools to products and services and then allocates overhead back to the activity cost pools.

d. allocates overhead directly to products and services based on activity levels.

41. The costs associated with ordering materials, setting up machines, assembling products, and inspecting products are examples of

a. cost drivers.

b. activity pools.

c. direct labor costs.

d. nonmanufacturing activities.

42. Which cost driver would an “Ordering and Receiving Materials” cost pool most likely have?

a. machine hours

b. number of setups

c. number of purchase orders

d. number of inspection tests

43. Hartley Company produces two products, Flower and Planter. Flower is a high-volume item totaling 20,000 units annually. Planter is a low-volume item totaling only 6,000 units per year. Flower requires one hour of direct labor for completion, while each unit of Planter requires 2 hours. Therefore, total annual direct labor hours are 32,000 (20,000 + 12,000). Estimated annual manufacturing overhead costs are $960,000. Hartley uses a traditional costing system and assigns overhead based on direct labor hours. Each unit of Planter would be assigned overhead of

a. $30.00.

b. $36.91.

c. $60.00.

d. need more information to compute.

44. Reynoso Corporation manufactures titanium and aluminum tennis racquets. Reynoso’s total overhead costs consist of assembly costs and inspection costs. The following information is available regarding activity cost pools, estimated use of activities per product, and total estimated overhead costs:

Activity Cost Pools Titanium Aluminum Total Cost

Assembly 500 mach. hrs. 500 mach. hrs. $60,000

Inspections 350 150 $100,000

2,100 labor hrs. 1,900 labor hrs.

Reynoso is considering switching from one overhead rate based on labor hours to activity-based costing.

Total overhead costs assigned to titanium racquets computed using a single overhead rate are

a. $80,000.

b. $84,000.

c. $100,000.

d. $112,000.

45. Reynoso Corporation manufactures titanium and aluminum tennis racquets. Reynoso’s total overhead costs consist of assembly costs and inspection costs. The following information is available regarding activity cost pools, estimated use of activities per product, and total estimated overhead costs:

Activity Cost Pools Titanium Aluminum Total Cost

Assembly 500 mach. hrs. 500 mach. hrs. $60,000

Inspections 350 150 $100,000

2,100 labor hrs. 1,900 labor hrs.

Reynoso is considering switching from one overhead rate based on labor hours to activity-based costing.

If activity-based costing is used, what amount of assembly cost is assigned to titanium racquets?

a. $21,000

b. $30,000

c. $31,500

d. $42,000

46. Reynoso Corporation manufactures titanium and aluminum tennis racquets. Reynoso’s total overhead costs consist of assembly costs and inspection costs. The following information is available regarding activity cost pools, estimated use of activities per product, and total estimated overhead costs:

Activity Cost Pools Titanium Aluminum Total Cost

Assembly 500 mach. hrs. 500 mach. hrs. $60,000

Inspections 350 150 $100,000

2,100 labor hrs. 1,900 labor hrs.

Reynoso is considering switching from one overhead rate based on labor hours to activity-based costing.

Using activity-based costing, what amount of inspections cost is assigned to titanium racquets?

a. $30,000

b. $37,500

c. $38,375

d. $52,500

47. Tidwell Industries has the following overhead costs and cost drivers. Direct labor hours are estimated at 100,000 for the year. The following information is available regarding activity cost pools, cost drivers, total estimated overhead costs, and estimated use of activities per product:

Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity

Ordering and Receiving Orders $ 120,000 500 orders

Machine Setup Setups 297,000 450 setups

Machining Machine hours 1,500,000 125,000 MH

Assembly Parts 1,200,000 1,000,000 parts

Inspection Inspections 300,000 500 inspections

If overhead is applied using traditional costing based on direct labor hours, the overhead application rate is

a. $9.60.

b. $12.00.

c. $15.00.

d. $34.17.

48. Tidwell Industries has the following overhead costs and cost drivers. Direct labor hours are estimated at 100,000 for the year. The following information is available regarding activity cost pools, cost drivers, total estimated overhead costs, and estimated use of activities per product:

Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity

Ordering and Receiving Orders $ 120,000 500 orders

Machine Setup Setups 297,000 450 setups

Machining Machine hours 1,500,000 125,000 MH

Assembly Parts 1,200,000 1,000,000 parts

Inspection Inspections 300,000 500 inspections

If overhead is applied using activity-based costing, the overhead application rate for ordering and receiving is

a. $1.20 per direct labor hour.

b. $240 per order.

c. $0.12 per part.

d. $6,834 per order.

49. The last step in activity-based costing is to

a. assign overhead costs to products using the overhead rate determined for each cost pool.

b. compute the activity-based overhead rate per cost driver.

c. identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools.

d. identify the cost driver that has a strong correlation to the activity cost pool.

50. The first step in activity-based costing is to

a. assign overhead costs to products using the overhead rate determined for each
cost pool.

b. compute the activity-based overhead rate per cost driver.

c. identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools.

d. identify the cost driver that has a strong correlation to the activity cost pool.

51. The process of creating a well-designed activity-based costing system starts with

a. identifying the activity-cost pools.

b. computing the activity-based overhead rate.

c. assigning overhead costs to products.

d. analyzing the activities performed to manufacture a product or perform a service.

52. Which of the following is not an example of an activity cost pool?

a. Setting up machines

b. Machining

c. Inspecting

d. Machine hours

53. An example of an activity cost pool is

a. machine hours.

b. setting up machines.

c. number of setups.

d. number of inspections.

54. Estimated costs for activity cost pools and other item(s) are as follows:

Machining $500,000

Assembling 200,000

Advertising 450,000

Inspecting and testing 175,000

Total estimated manufacturing overhead is

a. $700,000.

b. $875,000.

c. $1,150,000.

d. $1,325,000.

55. An example of a cost which would not be assigned to a manufacturing overhead activity cost pool is

a. indirect salaries.

b. freight-out.

c. depreciation on manufacturing equipment.

d. factory supplies.

56. One of Matheny Company’s activity cost pools is inspection which has estimated overhead costs of $200,000. Matheny produces throw rugs (700 inspections) and area rugs (1,300 inspections). What amount of the inspecting activity cost pool should be assigned to throw rugs?

a. $70,000.

b. $100,000.

c. $107,692.

d. $200,000.

57. Which of the following would be an appropriate cost driver for the machining activity cost pool?

a. Machine setups

b. Purchase orders

c. Machine hours

d. Inspections

58. Which of the following would be an appropriate cost driver for the purchasing activity cost pool?

a. Machine setups

b. Purchase orders

c. Machine hours

d. Inspections

59. An activity-based overhead rate is computed as follows:

a. actual overhead divided by actual use of cost drivers.

b. estimated overhead divided by actual use of cost drivers.

c. actual overhead divided by estimated use of cost drivers.

d. estimated overhead divided by estimated use of cost drivers.

60. Use of activity-based costing will result in the development of

a. one overhead rate based on direct labor hours.

b. one plantwide activity-based overhead rate.

c. multiple activity-based overhead rates.

d. no overhead rates; overhead rates are not used in activity-based costing.

61. To use activity-based costing, it is necessary to know the

a. cost driver for each activity cost pool.

b. estimated use of cost drivers per activity.

c. estimated use of cost drivers per product.

d. all of the above.

62. To assign overhead costs to each product, the company

a. multiplies the activity-based overhead rates per cost driver by the number of cost drivers used per product.

b. multiplies the overhead rate by the number of direct labor hours used on each product.

c. assigns the cost of each activity cost pool in total to one product line.

d. multiplies the rate of cost drivers per estimated cost for the cost pool by the estimated cost for each cost pool.

63. As compared to a low-volume product, a high-volume product

a. usually requires less special handling.

b. is usually responsible for more overhead costs per unit.

c. requires relatively more machine setups.

d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

64. Assigning overhead using ABC will usually

a. decrease the cost per unit for low volume products as compared to a traditional overhead allocation.

b. increase the cost per unit for low volume products as compared to a traditional overhead allocation.

c. provide less accurate cost per unit for low volume products than will traditional costing.

d. result in the same cost per unit for low volume products as does traditional costing.

65. Companies that switch to ABC often find that they have been

a. overpricing some products.

b. possibly losing market share to competitors.

c. sacrificing profitability by underpricing some products.

d. All of these answers are correct.

66. As compared to high-volume products, low-volume products

a. require more special handling.

b. require less machine setups.

c. are frequently responsible for less overhead costs.

d. None of these answers are correct.

67. For its inspecting cost pool, Ellsworth, Inc. Estimated overhead cost of $400,000 and 4,000 inspections. The actual overhead cost for that cost pool was $480,000 for 5,000 inspections. The activity-based overhead rate used to assign the costs of the inspecting cost pool to products is

a. $80 per inspection.

b. $96 per inspection.

c. $100 per inspection.

d. $120 per inspection.

68. Boswell Company manufactures two products, Regular and Supreme. Boswell’s estimated overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the estimated use of the cost driver by the two products is as follows:

Regular Supreme

Direct labor hours 10,000 15,000

Machine hours 10,000 30,000

Number of parts 90,000 160,000

Overhead applied to Regular using traditional costing using direct labor hours is

a. $1,290,000.

b. $1,800,000.

c. $1,620,000.

d. $2,250,000.

69. Boswell Company manufactures two products, Regular and Supreme. Boswell’s estimated overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. . Information on the estimated use of the cost driver by the two products is as follows:

Regular Supreme

Direct labor hours 10,000 15,000

Machine hours 10,000 30,000

Number of parts 90,000 160,000

Overhead applied to Supreme using traditional costing using direct labor hours is

a. $1,290,000.

b. $1,620,000.

c. $2,700,000.

d. $3,375,000.

70. Boswell Company manufactures two products, Regular and Supreme. Boswell’s estimated overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the estimated use of the cost driver by the two products is as follows:

Regular Supreme

Direct labor hours 10,000 15,000

Machine hours 10,000 30,000

Number of parts 90,000 160,000

Overhead applied to Regular using activity-based costing is

a. $1,290,000.

b. $1,800,000.

c. $2,700,000.

d. $3,210,000.

71. Boswell Company manufactures two products, Regular and Supreme. Boswell’s estimated overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the estimated use of the cost driver by the two products is as follows:

Regular Supreme

Direct labor hours 10,000 15,000

Machine hours 10,000 30,000

Number of parts 90,000 160,000

Overhead applied to Supreme using activity-based costing is

a. $1,290,000.

b. $1,800,000.

c. $2,700,000.

d. $3,210,000.

72. Peters, Inc. produces 3 products: P1, Q2, and R3. P1 requires 400 purchase orders, Q2 requires 600 purchase orders, and R3 requires 1,000 purchase orders. Peters has identified an ordering and receiving activity cost pool with allocated overhead of $240,000 for which the cost driver is purchase orders. Direct labor hours used on each product are 50,000 for P1, 40,000 for Q2, and 110,000 for R3. What amount of ordering and receiving overhead is assigned to each product if ABC is used?

P1 Q2 R3

a. $80,000 $80,000 $80,000

b. $60,000 $48,000 $132,000

c. $48,000 $72,000 $120,000

d. $54,000 $60,000 $126,000

73. Kiner Co. computed an activity-based overhead rate for machining costs ($500,000) of $5 per machine hour. Machining costs are driven by machine hours. If computed based on direct labor hours, the activity-based overhead rate for machining costs would be $10 per direct labor hour. The company produces two products, Cape and Chap. Cape requires 60,000 machine hours and 20,000 direct labor hours, while Chap requires 40,000 machine hours and 30,000 direct labor hours. Using activity-based costing, the machining overhead cost assigned to each product is

Cape Chap

a. $200,000 $300,000

b. $750,000 $250,000

c. $266,667 $233,333

d. $300,000 $200,000

74. Noland Company manufactures two models of its banjo, the Basic and the Luxury. The Basic model requires 10,000 direct labor hours and the Luxury requires 30,000 direct labor hours. The company produces 3,400 units of the Basic model and 600 units of the Luxury model each year. The company inspects one Basic for every 100 produced, and inspects one Luxury for every 10 produced. The company expects to incur $112,800 of total inspecting overhead costs this year. What amount of the inspecting costs should be allocated to the Basic model using ABC?

a. $28,200

b. $40,800

c. $56,400

d. $95,880

75. Ben Gordon, Inc. manufactures two products, wheels and seats. The company has estimated its overhead in the assembling department to be $660,000. The company produces 300,000 wheels and 600,000 seats each year. Each wheel uses 2 parts, and each seat uses 3 parts. What amount of the assembly overhead cost should be allocated to wheels?

a. $165,000

b. $220,000

c. $264,000

d. $282,856

76. Windsor Co. estimates that it will incur $1,050,000 of overhead costs each year in its three main departments, machining ($600,000), inspections ($300,000), and packing ($150,000). The machining department works 4,000 hours per year, there are 600 inspections per year, and the packing department packs 1,000 orders per year. Information about Windsor’s two products and their estimated use of cost drivers is as follows:

Product X Product Y

Machining hours 1,000 3,000

Inspections 100 500

Orders packed 350 650

Direct labor hours 1,700 1,800

If traditional costing based on direct labor hours is used, how much overhead will be assigned to Product X?

a. $252,501

b. $363,462

c. $510,000

d. $525,000

77. Windsor Co. estimates that it will incur $1,050,000 of overhead costs each year in its three main departments, machining ($600,000), inspections ($300,000) and packing ($150,000). The machining department works 4,000 hours per year, there are 600 inspections per year, and the packing department packs 1,000 orders per year. Information about Windsor’s two products and their estimated use of cost drivers is as follows:

Product X Product Y

Machining hours 1,000 3,000

Inspections 100 500

Orders packed 350 650

Direct labor hours 1,700 1,800

If ABC is used, how much overhead will be assigned to Product X?

a. $252,500

b. $363,462

c. $510,000

d. $525,000

78. A company incurs $4,050,000 of overhead each year across three departments: Ordering and Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works 50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of product Goo and 600,000 drums of product Slime. The following data are available:

Activity Cost Pools Estimated Use of Driver Cost

Ordering and Receiving 2,000 $1,200,000

Mixing 50,000 1,500,000

Testing 1,500 1,350,000

Production information product Goo is as follows:

Activity Cost Pools Estimated Use of Driver

Ordering and Receiving 400

Mixing 20,000

Testing 500

If ABC is used, what amount of overhead will be assigned to Goo?

a. $1,012,500

b. $1,290,000

c. $1,582,146

d. $2,025,000

79. A company incurs $4,050,000 of overhead each year across three departments: Ordering and Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works 50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of product Goo and 600,000 drums of product Slime. The following data are available:

Activity Cost Pools Estimated Use of Driver Cost

Ordering and Receiving 2,000 $1,200,000

Mixing 50,000 1,500,000

Testing 1,500 1,350,000

Production information product Slime is as follows:

Activity Cost Pools Estimated Use of Driver

Department Use of Driver

Ordering and Receiving 1,600

Mixing 30,000

Testing 1,000

If ABC is used, what amount of overhead will be assigned to Slime?

a. $2,025,000

b. $2,467,851

c. $2,760,000

d. $3,037,500

80. One of Stine Company’s activity cost pools is machine setups with estimated overhead of $360,000. Stine produces sparklers (400 setups) and lighters (600 setups). How much of the machine setup cost pool should be assigned to sparklers?

a. $360,000

b. $144,000

c. $180,000

d. $216,000

81. Which would be an appropriate cost driver for the ordering and receiving activity cost pool?

a. Machine setups

b. Purchase orders

c. Machine hours

d. Inspections

82. As compared to a high-volume product, a low-volume product

a. usually requires less special handling.

b. is usually responsible for more overhead costs per unit.

c. requires relatively fewer machine setups.

d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

83. Identifying and classifying activities is the

a. last step under ABC.

b. first step under ABC.

c. second step under ABC.

d. None of these answers is correct.

84. Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman’s overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products and their estimated use of cost drivers is as follows:

Board 12 Case 165

Direct labor hours 15,000 25,000

Machine setups 600 400

Machine hours 24,000 26,000

Inspections 800 700

Overhead assigned to Board 12 using traditional costing using direct labor hours is

a. $3,600,000.

b. $4,800,000.

c. $5,010,000.

d. $5,760,000.

85. Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman’s overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products and their estimated use of cost drivers is as follows

Board 12 Case 165

Direct labor hours 15,000 25,000

Machine setups 600 400

Machine hours 24,000 26,000

Inspections 800 700

Overhead assigned to Case 165 using traditional costing using direct labor hours is

a. $3,840,000.

b. $4,800,000.

c. $5,010,000.

d. $6,000,000.

86. Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman’s overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products and their estimated use of cost drivers is as follows:

Board 12 Case 165

Direct labor hours 15,000 25,000

Machine setups 600 400

Machine hours 24,000 26,000

Inspections 800 700

Overhead assigned to Board 12 using activity-based costing is

a. $3,600,000.

b. $4,800,000.

c. $4,992,000.

d. $5,760,000.

87. Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman’s overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products and their estimated use of cost drivers is as follows:

Board 12 Case 165

Direct labor hours 15,000 25,000

Machine setups 600 400

Machine hours 24,000 26,000

Inspections 800 700

Overhead assigned to Case 165 using activity-based costing is

a. $3,840,000.

b. $4,800,000.

c. $4,992,000.

d. $6,000,000.

88. Thomsen Computer Company produces three products: Earth, Wind, and Fire. Earth requires 80 machine setups, Wind requires 60 setups, and Fire requires 180 setups. Thomsen has identified an activity cost pool with estimated overhead of $960,000 for which the cost driver is machine setups. How much overhead is assigned to each product?

Earth Wind Fire

a. $320,000 $320,000 $320,000

b. $200,000 $150,000 $450,000

c. $240,000 $180,000 $540,000

d. $180,000 $320,000 $460,000

89. Hale Company manufactures two models of its couch, the Mini and the Maxi. The Mini model requires 10,000 direct labor hours and the Maxi model requires 40,000 direct labor hours. The company produces 4,000 units of the Mini model and 1,000 units of the Maxi model each year. The company produces the Mini model in batch sizes of 200, while it produces the Maxi model in batch sizes of 100. The company estimated that it will incur $360,000 of total setup costs this year. What amount of the setup costs are assigned to the Mini model using ABC?

a. $240,000

b. $180,000

c. $72,000

d. $300,000

90. Nott Company manufactures two products, pillows and comforters. The company has estimated its overhead in the order-processing department to be $600,000. The company produces 50,000 pillows and 80,000 comforters each year. Pillow production requires 25,000 machine hours, comforter production requires 50,000 machine hours. The company places raw materials orders 10 times per month (2 times for raw materials for pillows and the remainder for raw materials for comforters). What amount of the order processing overhead should be assigned to comforters using ABC?

a. $300,000

b. $400,000

c. $369,232

d. $480,000

91. Foxx Company estimates that it will incur $480,000 overhead costs each year in its three main departments, setup ($30,000), machining ($330,000), and packing ($120,000). The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year. Information about Foxx’s two products and their estimated use of cost drivers is as follows:

Product A1 Product B1

Number of setups 20 20

Machining hours 1,000 4,000

Orders packed 150 350

Number of products manufactured 600 400

If machining hours are used as a base under traditional costing, what amount of overhead is assigned to Product A1 each year?

a. $96,000

b. $240,000

c. $165,000

d. $144,000

92. Foxx Company estimates that it will incur $480,000 overhead costs each year in its three main departments, setup ($30,000), machining ($330,000), and packing ($120,000). The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year. Information about Foxx’s two products and their estimated use of cost drivers is as follows:

Product A1 Product B1

Number of setups 20 20

Machining hours 1,000 4,000

Orders packed 150 350

Number of products manufactured 600 400

Using ABC, how much overhead is assigned to Product A1 each year?

a. $240,000

b. $363,000

c. $ 96,000

d. $117,000

93. Foxx Company estimated that it will incur $480,000 overhead costs each year in its three main departments, setup ($30,000), machining ($330,000), and packing ($120,000). The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year. Information about Foxx’s two products and their estimated use of cost drivers is as follows:

Product A1 Product B1

Number of setups 20 20

Machining hours 1,000 4,000

Orders packed 150 350

Number of products manufactured 600 400

Using ABC, how much overhead is assigned to Product B1 each year?

a. $240,000

b. $192,000

c. $363,000

d. $384,000

94. A company estimates that it will incur $3,600,000 of overhead each year in three departments: Processing, Packaging, and Testing. The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of product Oil and 600,000 drums of product Sludge. The following data are available:

Activity Cost Pool Estimated Use of Driver Estimated Overhead

Processing 800 $1,500,000

Packaging 200,000 1,500,000

Testing 2,000 600,000

Production information for the two products is as follows:

Activity Oil Sludge

Cost Pool Estimated Use of Driver Estimated Use of Driver

Processing 300 500

Packaging 120,000 80,000

Testing 1,600 400

The amount of overhead assigned to Oil using ABC is

a. $1,800,000.

b. $1,942,500.

c. $1,657,500.

d. $1,380,000.

95. A company estimates that it will incur $3,600,000 of overhead each year in three departments: Processing, Packaging, and Testing. The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of product Oil and 600,000 drums of product Sludge. The following data are available:

Activity Cost Pool Estimated Use of Driver Estimated Overhead

Processing 800 $1,500,000

Packaging 200,000 1,500,000

Testing 2,000 600,000

Production information for the two products is as follows:

Activity Oil Sludge

Cost Pool Estimated Use of Driver Estimated Use of Driver

Processing 300 500

Packaging 120,000 80,000

Testing 1,600 400

The amount of overhead assigned to Sludge using ABC is

a. $1,800,000.

b. $1,657,500.

c. $1,942,500.

d. $1,380,000.

96. Younger, Inc. manufactures recliners for the hotel industry. It has two products, the Heater and the Massager. Total overhead is estimated to be $3,160,000. The company plans to manufacture 400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company performs 600 material moves for the Heater and 400 for the Massager; it processes 900 purchase orders for the Heater and 700 for the Massager; and the company’s employees work 1,400 direct labor hours on the Heater product and 3,400 on the Massager. Younger’s total estimated material handling costs are $2,000,000 and its total estimated processing costs are $1,160,000. Using ABC, how much overhead would be assigned to the Heater product?

a. $1,580,000

b. $1,852,500

c. $1,307,500

d. $2,238,332

97. Which of the following is a limitation of activity-based costing?

a. More cost pools

b. Less control over overhead costs

c. Poorer management decisions

d. Some arbitrary allocations continue

98. Which of the following factors would suggest that a should company should consider switching to activity-based costing?

a. Product lines similar in volume and manufacturing complexity.

b. Overhead costs constitute a significant portion of total costs.

c. The manufacturing process has been stable.

d. Production managers use data provided by the existing system.

99. Which of the following is true of activity-based costing?

a. More cost pools

b. Same base as traditional costing

c. Less costly to use

d. Eliminates arbitrary allocations

100. The primary benefits of ABC include that it provides

a. better management decisions.

b. enhanced control over overhead costs.

c. more accurate product costing.

d. all of these are primary benefits of ABC.

101. Which of the following is not a benefit of activity-based costing?

a. More accurate product costing

b. Enhanced control over overhead costs

c. Better management decisions

d. Less costly to use

102. Each of the following is a limitation of activity-based costing except that

a. it can be expensive to use.

b. it is more complex than traditional costing.

c. more cost pools are used.

d. some arbitrary allocations continue.

103. The presence of any of the following factors would suggest a switch to ABC except when

a. product lines differ greatly in volume.

b. overhead costs constitute a minor portion of total costs.

c. the manufacturing process has changed significantly.

d. production managers are ignoring data provided by the existing system.

104. Which of the following is a limitation of activity-based costing?

a. More cost pools

b. Less control over overhead costs

c. ABC can be expensive to implement

d. Poorer management decisions

105. Which of the following is true about activity-based costing?

a. Less cost pools

b. Same base as traditional costing

c. More costly to use

d. Eliminates arbitrary allocations

106. Each of the following is a limitation of activity-based costing except that

a. it can be expensive to use.

b. it decreases control over overhead costs

c. it is complex and can be difficult to understand

d. some arbitrary allocations continue.

107. The presence of any of the following factors would suggest a switch to ABC except when

a. product lines differ greatly in volume.

b. overhead costs constitute a major portion of total costs.

c. the manufacturing process has changed significantly.

d. production managers are using data provided by the existing system

108. Activity-based costing uses

a. one plantwide pool and a single cost driver.

b. departmental pools and a single cost driver.

c. numerous cost pools and numerous cost drivers.

d. one plantwide pool and numerous cost drivers

109. Which of the following statements is false?

a. ABC can weaken control over overhead costs.

b. Under ABC, companies can trace many overhead costs directly to activities.

c. ABC allows some indirect costs to be identified as direct costs.

d. managers become more aware of their responsibility to control the activities that generate costs.

110. Which of the following is a value-added activity?

a. Inventory storage

b. Machining

c. Building maintenance

d. Bookkeeping

111. Which of the following is a value-added activity?

a. Inventory control

b. Inspections

c. Packaging

d. Repair of machines

112. Which of the following is a non-value-added activity?

a. Inventory control

b. Machining

c. Assembly

d. Painting

113. Which of the following is a non-value-added activity?

a. Painting

b. Finishing

c. Packaging

d. Building maintenance

114. An example of a non-value-added activity in a service enterprise is

a. providing legal research.

b. delivering packages.

c. consulting.

d. bookkeeping.

115. An example of a value-added activity in a service enterprise is

a. performing landscaping services.

b. reception.

c. billing.

d. ordering supplies.

116. Non-value-added activities

a. should be minimized or eliminated.

b. involve those activities that are essential to a company’s operations.

c. increase both the cost and perceived value of a product.

d. cannot be differentiated from value-added activities.

117. Value-added activities

a. increase the perceived worth of a product or service to customers.

b. involve those activities that are essential to a company’s operations.

c. include engineering design, machining, and assembly.

d. all of the above.

118. Which of the following is a value-added activity?

a. Engineering design

b. Machinery repair

c. Inventory storage

d. Inspections

119. Which of the following is a non-value-added activity?

a. Engineering design

b. Machining

c. Inspection

d. Packaging

120. An example of a non-value-added activity in a service enterprise is

a. taking appointments.

b. traveling.

c. advertising.

d. all of these are non-value-added activities.

121. Value-added activities

a. should be minimized or eliminated.

b. involve those activities that are necessary to a company’s operations.

c. add cost to a product without affecting selling price.

d. cannot be differentiated from non-value-added activities.

122. All of the following are examples of value-added activities in a service company except

a. delivering packages by a delivery service.

b. ordering supplies.

c. performing surgery.

d. providing legal research for legal services.

123. Which of the following is not a facility-level activity?

a. Plant management

b. Product design

c. Personnel administration

d. Training

124. Which of the following is not a product-level activity?

a. Product design

b. Engineering changes

c. Inventory management

d. Equipment setups

125. Which of the following is not a batch-level activity?

a. Engineering changes

b. Equipment setups

c. Inspection

d. Materials handling

126. Which of the following is not a unit-level activity?

a. Purchase ordering

b. Assembling

c. Painting

d. Sewing

127. Which of the following is a batch-level activity?

a. Plant management

b. Product design

c. Equipment setups

d. Assembling

128. Which of the following is not a facility-level activity?

a. Plant depreciation

b. Property taxes

c. Engineering changes

d. Utilities

129. Which of the following is not a product-level activity?

a. Product design

b. Engineering changes

c. Material handling

d. Inventory management

130. Which of the following is not a batch-level activity?

a. Purchase ordering

b. Equipment setups

c. Inspection

d. Assembling

131. Which of the following is not a unit-level activity?

a. Drilling

b. Cutting

c. Sanding

d. Inspecting

132. Which of the following is a unit-level activity?

a. Painting

b. Purchase ordering

c. Inspection

d. Material handling

133. Which of the following is a batch-level activity?

a. Assembling

b. Product design

c. Engineering changes

d. Purchase ordering

134. Which of the following is a product-level activity?

a. Equipment setups

b. Product design

c. Property taxes

d. Utilities

135. Which of the following is a facility-level activity?

a. Engineering changes

b. Product design

c. Property taxes

d. Inspection

136. Activities required to support or sustain an entire production process are called

a. unit-level activities.

b. batch-level activities.

c. product-level activities.

d. facility-level activities.

137. Which would be a cost driver for a facility-level activity?

a. Number of setups

b. Number of product designs

c. Square footage

d. Number of purchase orders

138. Activity-based costing has been found to be useful in each of the following service industries except

a. airlines.

b. railroads.

c. hotels.

d. ABC has been useful in all of these industries.

139. Activity-based costing is used in

Service industries Manufacturing industries

a. Yes No

b. Yes Yes

c. No Yes

d. No No

140. In service industries

a. activities cannot be labeled as value-added or non-value-added.

b. the overall objective of ABC is different than in manufacturing industries.

c. a larger proportion of overhead costs are company-wide costs.

d. activity cost pools cannot be identified.

141. Activity-based costing can be used by

a. accounting firms.

b. law firms.

c. consulting firms.

d. all of the above.

142. Baxter Accounting Services estimates for next year revenues of $3,000,000, direct labor of $600,000, and overhead of $1,050,000. Under traditional costing, overhead is applied to audit jobs using the rate of

a. 35% of revenues.

b. 20% of revenues.

c. 56% of direct labor.

d. 175% of direct labor.

143. Gant Accounting performs two types of services, Audit and Tax. Gant’s estimated overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services and their estimated use of cost drivers is as follows:

Audit Tax

Direct labor cost $50,000 $100,000

CPU minutes 40,000 10,000

Legal hours used 200 800

Overhead assigned to audit services using traditional costing using direct labor cost as the base is

a. $150,000.

b. $180,000.

c. $270,000.

d. $300,000.

144. Gant Accounting performs two types of services, Audit and Tax. Gant’s estimated overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services and their estimated use of cost drivers is as follows:

Audit Tax

Direct labor cost $50,000 $100,000

CPU minutes 40,000 10,000

Legal hours used 200 800

Overhead assigned to tax services using traditional costing using direct labor cost as the base is

a. $150,000.

b. $180,000.

c. $270,000.

d. $300,000.

145. Gant Accounting performs two types of services, Audit and Tax. Gant’s estimated overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services and their estimated use of cost drivers is as follows:

Audit Tax

Direct labor cost $50,000 $100,000

CPU minutes 40,000 10,000

Legal hours used 200 800

Overhead assigned to audit services using activity-based costing is

a. $150,000.

b. $180,000.

c. $270,000.

d. $300,000.

146. Gant Accounting performs two types of services, Audit and Tax. Gant’s estimated overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services and their estimated use of cost drivers is as follows:

Audit Tax

Direct labor cost $50,000 $100,000

CPU minutes 40,000 10,000

Legal hours used 200 800

Overhead assigned to tax services using activity-based costing is

a. $150,000.

b. $180,000.

c. $270,000.

d. $300,000.

147. Gant Accounting performs two types of services, Audit and Tax. Gant’s estimated overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services and their estimated use of cost drivers is as follows:

Audit Tax

Direct labor cost $50,000 $100,000

CPU minutes 40,000 10,000

Legal hours used 200 800

Gant Accounting performs tax services for Cathy Lane. Direct labor cost is $1,200; 600 CPU minutes were used; and 1 legal hour was used. What is the total cost of the Lane job using ABC?

a. $3,600

b. $3,750

c. $5,400

d. $4,950

148. Activity-based costing has been found to be useful in each of the following service industries except

a. banks.

b. hospitals.

c. telephone companies.

d. ABC has been useful in any of these industries.

149. What sometimes makes implementation of ABC difficult in service industries?

a. the labeling of activities as value-added

b. identifying activities, activity cost plus, and cost drivers

c. that a larger proportion of overhead costs are company-wide costs

d. attempting to reduce or eliminate non-value-added activities

150. All of the following statements are correct except that

a. activity-based costing has been widely adopted in service industries.

b. the objective of ABC in service firms is different than it is in a manufacturing firm.

c. a larger proportion of overhead costs are company-wide costs in service industries.

d. the general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company.

151. The use of activity-based costing in service industries

a. has the same objective as in manufacturing.

b. results in improved costing of services provided.

c. uses cost pools to assign overhead.

d. all of these.

^a152. Just-in-time processing

a. requires a less-skilled workforce.

b. results in a push approach.

c. minimizes inventory storage and waiting time.

d. all of these.

^a153. An element of just-in-time processing is

a. dependable suppliers who are willing to deliver on short notice.

b. a multi-skilled workforce.

c. a total quality control system.

d. all of these.

^a154. Which of the following is not a benefit of just-in-time processing?

a. Control of significant inventory balances

b. Enhanced product quality

c. Reduction of rework costs

d. Production cost savings

^a155. Which account is used in just-in-time processing?

a. Raw Materials Inventory

b. Work-in-Process Inventory

c. Merchandise Inventory

d. Raw and In-Process Inventory

^a156. Under just-in-time processing, all of the following are received or completed “just in time” except

a. finished goods.

b. raw materials.

c. subassembly parts.

d. supplies.

^a157. Just-in-time processing

a. requires a less-skilled workforce.

b. results in higher inventory amounts.

c. eliminates the push approach.

d. all of the above.

^a158. Just-in-time processing

a. results in the opposite of a just-in-case philosophy.

b. results in a pull approach.

c. minimizes inventory storage and waiting time.

d. all of the above.

^a159. An important element of just-in-time processing is

a. dependable suppliers who are willing to deliver on short notice.

b. a specialized workforce.

c. less emphasis on a quality control system.

d. all of the above.

^a160. Which of the following is a limitation of just-in-time processing?

a. Significant reduction of manufacturing inventories

b. Less emphasis on product quality

c. Higher production costs

d. None of the above

^a161. Which of the following accounts is not used in just-in-time processing?

a. Accounts Payable

b. Work-in-Process Inventory

c. Finished Goods Inventory

d. Raw and In-Process Inventory

^a162. In the pull approach associated with JIT,

a. subassembly parts are manufactured and stored just in case they are needed later in the manufacturing process.

b. Finished goods are completed and stored in case rush customer orders are received.

c. the manufacturing process begins with a customer placing an order.

d. None of the above.

BRIEF Exercises

BE 163

Speedy Access Services Inc. leases access to high-speed computers to small businesses. It provides the following information for the year:

Estimated Actual

Overhead cost $2,200,000 $2,100,000

Computer hours 100,000 90,000

Direct labor hours 200,000 180,000

Overhead is applied on the basis of computer hours.

Instructions

a. Compute the predetermined overhead rate.

b. Determine the amount of overhead applied for the year.

Ex. 172

Hayward Industries manufactures dining chairs and tables. The following information is available regarding the two products and their estimated use of cost drivers:

Dining Chairs Tables Estimated Cost

Machine setups 200 600 $48,000

Inspections 250 470 $72,000

Labor hours 2,600 2,400

Hayward is considering switching from one overhead rate based on labor hours to ABC.

Instructions

Perform the following analyses for these two components of overhead:

a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate.

b. Compute total machine setups and inspection costs assigned to each product, using activity-based costing.

c. Comment on your findings.

Ex. 173

Randel Manufacturing has five activity cost pools and two products (a budget tape vacuum and a deluxe tape vacuum). Information is presented below:

Est. Use of Cost Drivers

Activity Cost Pools Cost Driver Est. Overhead Budget Deluxe

Ordering and Receiving Orders $ 130,000 600 400

Machine Setup Setups 297,000 500 400

Machining Machine hours 1,000,000 150,000 100,000

Assembly Parts 1,600,000 1,200,000 800,000

Inspection Inspections 300,000 550 450

Instructions

Ex. 174

Horton, Reiser, and Associates, a law firm, employs ABC. The following Estimated data for each of the activity cost pools is provided for 2022:

Estimated Estimated Use of

Activity Cost Pools Overhead Cost Drivers per Activity

Researching legal issues $ 31,500 900 research hours

Preparing legal documents 480,000 30,000 pages

Meeting with clients 1,760,000 8,800 professional hours

During 2022, the firm worked 660 research hours, 10,000 professional hours, and prepared 25,000 document pages.

Instructions

Compute the total overhead applied during the year 2022.

Ex. 175

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

Instructions

Determine a cost driver for each of the activities listed below.

Cost Pool Cost Driver

a. Placing orders ______________________________

b. Stocking merchandise ______________________________

c. Waiting on customers ______________________________

d. Janitorial and maintenance ______________________________

e. Training employees ______________________________

f. Administrative ______________________________

g. Advertising and Marketing ______________________________

h. Accounting and Legal Services ______________________________

i. Wrapping packages ______________________________

Ex. 176

A list of possible cost drivers is presented below:

Code Code

A Engineering hours D Number of subassemblies

B Setups E Boxes

C Machine hours F Orders

Instructions

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

Code Cost Pool

_____ 1. Machine setup

_____ 2. Ordering and receiving

_____ 3. Packaging and shipping

_____ 4. Engineering design

_____ 5. Machining

_____ 6. Assembly

Ex. 177

Identify appropriate cost drivers for the following activity cost pools:

1. Human resources

2. Security

3. Receiving

4. Data processing

Ex. 178

Two of the activity cost pools for Molina Company are (a) machining ($325,000) and (b) inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours (12,500), square footage (2,000), and number of inspections (200).

Instructions

Compute the overhead rate for each activity using the most relevant cost driver.

Ex. 179

Sutton Industries produces two models of televisions, Standard and Luxury. It sells 100,000 Standard televisions and 15,000 Luxury televisions annually. Sutton switched from traditional costing to activity-based costing and discovered that the cost assigned to Luxury televisions increased so dramatically that the Luxury was now only marginally profitable.

Instructions

Give a probable explanation for this shift.

Ex. 180

Compute activity-based cost rates from the following Estimated data for Upton Golf Co.:

Activity Cost Pool Estimated Overhead Estimated Cost Driver

Designing $2,550,000 75,000 designer hours

Machining 525,000 21,000 machine hours

Packing 620,000 31,000 labor hours

EX. 181

We Store It Company rents storage units of various sizes to individuals and companies. The following activities have been identified as activity cost pools for accumulating overhead and assigning it to rental services provided. (a) repairs, (b) customer setups, (c) employee training, (d) supplies ordering, (e) temperature/humidity control, (f) security, and (g) cleaning.

Instructions

For each activity, identify a cost driver that might be used to assign overhead costs.

Ex. 182

American Delights manufactures a wide variety of holiday and seasonal decorative items. American’s activity-based costing overhead rates are:

Purchasing $380 per order

Storing $2 per square foot/days

Machining $100 per machine hour

Supervision $5 per direct labor hour

The Snow Man project involved 3 purchase orders, 4,000 square feet/days, 60 machine hours, and 40 direct labor hours. The cost of direct materials on the job was $19,000 and the direct labor rate is $30 per hour.

Instructions

Determine the total cost of the Snow Man project.

Ex. 183

Label the following costs as value-added (VA) or non-value-added (NVA):

____ 1. Engineering design

____ 2. Machine repair

____ 3. Inventory storage

____ 4. Machining

____ 5. Assembly

____ 6. Painting

____ 7. Inspections

____ 8. Packaging

Ex. 184

The Parton and Sons law firm uses activity-based costing. Classify these activities as value-added or non-value-added:

1. Taking appointments

2. Reception

3. Meeting with clients

4. Bookkeeping

5. Court time

6. Meeting with opposing attorneys

7. Billing

8. Advertising

Ex. 185

Merando Manufacturing Company manufactures small tools. Classify each of the following activity costs of the tool company as either unit-level, batch-level, product-level, or facility-level:

1. Plant management

2. Drilling

3. Painting

4. Machine setups

5. Product design

6. Cutting

7. Inspection

8. Inventory management

Ex. 186

Castleman, Inc. designs, prints, and delivers advertising copy for companies throughout the tri-state area. Sometimes this entails designing and printing a single copy and other times multiple copies of the same advertisement. Listed below are typical activity costs:

1. Printer ink.
2. Paper
3. Depreciation on equipment
4. Machine setup costs
5. Designing
6. Supervisory salaries
7. Ordering materials
8. Delivery
9. Building insurance
10. Printing

Instructions

Classify each of these activities as either unit-level, batch-level, product-level, or facility-level.

Ex. 187

Jayson Woods, PSC is an architectural firm that uses activity-based costing. The three activity cost pools used by Jayson Woods are: Salaries and Wages, Travel Expense, and Plan Reproduction Expense. The firm has provided the following information concerning activity and costs:

Salaries and wages $430,000

Travel expense 100,000

Plan reproduction expense 120,000

Total $650,000

Estimated Use of Cost Driver per Service

Project Business

Assignment Development Other

Salaries and wages 60% 30% 10%

Travel expense 40% 40% 20%

Plan reproduction expense 35% 40% 25%

Instructions

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