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Exam 5: Activity-Based Costing

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Question 21

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Testing a prototype of a new product is an example of a:

A) product-level activity.
B) unit-level activity.
C) facility-level activity.
D) batch-level activity.

E) C) and D)
F) A) and B)

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Question 22

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Reference: 05-09 Aujla Corporation uses activity-based costing to determine product costs for external financial reports. The company has provided the following data concerning its activity-based costing system: $\begin{array} { | l | l | } \hline \text { Activity Cost Pools (and Activity Measures) } & \text { Estimated Overhead Cost } \\\hline \text { Machine related (machine-hours) } & \$ 239,000 \\\hline \text { Batch setup (setups) } & \$ 234,900 \\\hline \text { General factory (direct labour-hours) } & \$ 159,300 \\\hline\end{array}$ $\text { Expected Activity }$ $\begin{array}{llll}\text { Activity Cost } & \text { Total } & \text { Product } X & \text { Product } Y\\\text { Pools }\\\text { Machine related } & 10,000 & 4,000 & 6,000 \\\text { Batch setup } & 9,000 & 8,000 & 1,000 \\\text { General factory } & 9,000 & 3,000 & 6,000\end{array}$ -Assuming that actual activity turns out to be the same as expected activity, the total amount of overhead cost allocated to Product X would be closest to:

A) $357,500.
B) $235,000.
C) $316,600.
D) $563,000.

E) A) and B)
F) All of the above

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Question 23

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Reference: 05-11 Andruschack Corporation uses activity-based costing to determine product costs for external financial reports. Overapplied or underapplied overhead is closed to the Cost of Goods Sold account at the end of each year. The company has provided the following data concerning its activity-based costing system: $\begin{array}{l}\begin{array} { | l | l | } \hline \begin{array} { l } \text { Activity Cost Pools (and Activity } \\\text { Measures) }\end{array} & \text { Estimated Overhead Cost } \\\hline \text { Machine related (machine-hours) } & \$ 213,000 \\\hline \text { Batch setup (setups) } & \$ 339,000 \\\hline \text { General factory (direct labour-hours) } & \$ 193,200 \\\hline\end{array}\\\\\begin{array} { | l | l | l | l | } \hline & & { \text { Expected Activity } } \\\hline \text { Activity Cost Pools } & \text { Total } & \text { Product } X & \text { Product } Y \\\hline \text { Machine related } & 10,000 & 3,000 & 7,000 \\\hline \text { Batch setup } & 10,000 & 4,000 & 6,000 \\\hline \text { General factory } & 14,000 & 7,000 & 7,000 \\\hline\end{array}\end{array}$ -The activity rate for the batch setup activity cost pool is closest to:

Reference: 05-07 Alam Company uses activity-based costing to compute product costs for external reports. The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Overapplied or underapplied overhead is closed to the Cost of Goods Sold account at the end of each year. Estimated costs and activities for the current year are presented below for the three activity cost pools: $\begin{array}{l}\begin{array} { | l | l | l | } \hline & \text { Estimated Overhead Cost } & \text { Expected Activity } \\\hline \text { Activity 1 } & \$ 29,328 & 1,200 \\\hline \text { Activity 2 } & \$ 30,024 & 2,400 \\\hline \text { Activity 3 } & \$ 65,142 & 2,200 \\\hline\end{array}\\\text { Actual costs and activities for the current year were as follows: }\\\begin{array} { | l | l | l | } \hline & \text { Actual Overhead Cost } & \text { Actual Activity } \\\hline \text { Activity 1 } & \$ 29,238 & 1,185 \\\hline \text { Activity 2 } & \$ 29,899 & 2,415 \\\hline \text { Activity 3 } & \$ 65,117 & 2,225 \\\hline\end{array}\end{array}$ -The total debits to the Manufacturing Overhead account during the year were closest to:

Reference 05-16 Washie manufactures two types of products for washing vehicles: the washing mitt, and the polishing cloth. Up to this point, Washie has been utilizing traditional costing with one plant-wide overhead rate using machine hours as the allocation base. The company has been receiving complaints that the polishing mitt seems over-priced. Management is wondering if there's merit to this claim since the washing mitt is a more complex product compared to the polishing cloth. As such, management has gathered information on the potential activity areas to be used. $\begin{array}{|l|l|l|}\hline \text { Activity } & \text { Activity Measure } & \begin{array}{l}\text { Estimated } \\\text { Manufacturing } \\\text { Overhead Cost }\end{array} \\\hline \text { Design } & \text { Design hours } & \$ 12,000 \\\hline \text { Setups } & \text { Number of set-ups } & 40,000 \\\hline \text { Materials Handling } & \text { Meters of fabric } & 30,000 \\\hline \text { Production } & \text { Machine Hours } & 250,000 \\\hline\end{array}$ The company expected has determined the expected activity for each of the product lines: During the year, the company sold 100,000 washing mitts and 50,000 polishing cloths. Direct costs are $\$ 8.00$ for washing mitts and $\$ 2.00$ for polishing costs. $\begin{array}{|l|l|l|}\hline \text { Activity Measure } & \text { Washing Mitt } & \text { Polishing Cloth } \\\hline \# \text { of design hours } & 50 & 5 \\\hline \# \text { of setups } & 30 & 20 \\\hline \# \text { of meters of fabric } & 4,000 & 1,000 \\\hline \# \text { of machine hours } & 40,000 & 10,000 \\\hline\end{array}$ -Compute the activity rate for Materials Handling using activity based costing.

Which of the following is not a limitation of activity-based costing

Reference 05-16 Washie manufactures two types of products for washing vehicles: the washing mitt, and the polishing cloth. Up to this point, Washie has been utilizing traditional costing with one plant-wide overhead rate using machine hours as the allocation base. The company has been receiving complaints that the polishing mitt seems over-priced. Management is wondering if there's merit to this claim since the washing mitt is a more complex product compared to the polishing cloth. As such, management has gathered information on the potential activity areas to be used. $\begin{array}{|l|l|l|}\hline \text { Activity } & \text { Activity Measure } & \begin{array}{l}\text { Estimated } \\\text { Manufacturing } \\\text { Overhead Cost }\end{array} \\\hline \text { Design } & \text { Design hours } & \$ 12,000 \\\hline \text { Setups } & \text { Number of set-ups } & 40,000 \\\hline \text { Materials Handling } & \text { Meters of fabric } & 30,000 \\\hline \text { Production } & \text { Machine Hours } & 250,000 \\\hline\end{array}$ The company expected has determined the expected activity for each of the product lines: During the year, the company sold 100,000 washing mitts and 50,000 polishing cloths. Direct costs are $\$ 8.00$ for washing mitts and $\$ 2.00$ for polishing costs. $\begin{array}{|l|l|l|}\hline \text { Activity Measure } & \text { Washing Mitt } & \text { Polishing Cloth } \\\hline \text { \# of design hours } & 50 & 5 \\\hline \text { \# of setups } & 30 & 20 \\\hline \text { \# of meters of fabric } & 4,000 & 1,000 \\\hline \text { \# of machine hours } & 40,000 & 10,000 \\\hline\end{array}$ -What is the allocation rate for Setups using activity based Costing?

Reference: 05-01 Acton Company has two products: A and B. The annual production and sales of Product A are 800 units and of Product B are 500 units. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour-hours per unit and Product B requires 0.2 direct labour-hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & & { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated } \\\text { Overhead } \\\text { Costs }\end{array} & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 14,487 & 500 & 600 & 1,100 \\\hline \text { Activity 2 } & \$ 64,800 & 2,500 & 500 & 3,000 \\\hline \text { General Factory } & \$ 12,736 & 240 & 100 & 340 \\\hline \text { Total } & \$ 92,023 & & & \\\hline\end{array}$ (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour-hours.) -The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to:

Reference: 05-14 Brooke Corporation uses activity-based costing to determine product costs for external financial reports. Activity rates computed at the beginning of the year are used to apply manufacturing overhead costs to products. The company has provided the following data concerning its activity-based costing system. The data used to develop activity rates were: $\begin{array} { | l | l | l | l | } \hline \text { Activity Cost Pools } & \begin{array} { l } \text { Estimated } \\\text { Overhead Cost }\end{array} &{ \text { Expected Activity } } \\\hline \text { Machine related (machine-hours) } & \$ 777,400 & 26,000 & \text { MHs } \\\hline \text { Batch setup (setups) } & \$ 1,814,400 & 28,000 & \text { setups } \\\hline \begin{array} { l } \text { General factory (direct } \\\text { labour-hours) }\end{array} & \$ 478,800 & 18,000 & \text { DLHs } \\\hline \begin{array} { l } \text { The actual activity for the year } \\\text { was: }\end{array} & & & \\\hline & & \text { Actual Activity for the Year } \\\hline \text { Activity Cost Pools } & \text { Total } & \text { Product X } & \text { Product Y } \\\hline \text { Machine related (machine-hours) } & 28,000 & 17,000 & 11,000 \\\hline \text { Batch setup (setups) } & 28,000 & 7,000 & 21,000 \\\hline \begin{array} { l } \text { General factory (direct } \\\text { labour-hours) }\end{array} & 18,000 & 9,000 & 9,000 \\\hline\end{array}$ Estimated The actual total manufacturing overhead cost incurred for the year was $3,064,400. -The credits to the Manufacturing Overhead control account during the year (prior to closing out the balance) would have totalled:

$\begin{array}{l}\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Estimated } \\\text { Overhead } \\\text { Cost }\end{array} & \begin{array} { l } \text { Expected } \\\text { Activity }\end{array} \\\hline \text { Activity 1 } & \$ 11,916 & 900 \\\hline \text { Activity 2 } & \$ 12,360 & 1,200 \\\hline \text { Activity 3 } & \$ 19,950 & 1,000 \\\hline\end{array}\\\text { Actual activity for the current year was as follows: }\\\begin{array} { | l | c | } \hline & \begin{array} { l } \text { Actual } \\\text { Activity }\end{array} \\\hline \text { Activity 1 } & 915 \\\hline \text { Activity 2 } & 1,185 \\\hline \text { Activity 3 } & 965 \\\hline\end{array}\end{array}$ The amount of overhead applied for Activity 2 during the year was closest to:

Reference: 05-02 Addy Company has two products: A and B. The annual production and sales of Product A are 1,700 units and of Product B are 1,100 units. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour-hours per unit and Product B requires 0.6 direct labour-hours per unit. The total estimated overhead for next period is $98,785. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated } \\\text { Overhead Costs }\end{array} & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \\\hline \text { Activity 2 } & \$ 17,385 & 1,700 & 200 & 1,900 \\\hline \text { General Factory } & \$ 50,872 & 510 & 660 & 1,170 \\\hline \text { Total } & \$ 98,785 & & & \\\hline\end{array}$ (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour-hours.) -The overhead cost per unit of Product B under the activity-based costing system is closest to

Reference: 05-14 Brooke Corporation uses activity-based costing to determine product costs for external financial reports. Activity rates computed at the beginning of the year are used to apply manufacturing overhead costs to products. The company has provided the following data concerning its activity-based costing system. The data used to develop activity rates were: $\begin{array} { | l | l | l | l | } \hline \text { Actrilty Cost Pools } & \begin{array} { l } \text { Estimated } \\\text { Overhead Cost }\end{array} & { \text { Expected Activity } } \\\hline \text { Machine related (machine-hours) } & \$ 777,400 & 26,000 & \text { MHs } \\\hline \text { Batch setup (setups) } & \$ 1,814,400 & 28,000 & \text { setups } \\\hline \begin{array} { l } \text { General factory (direct } \\\text { labour-hours) }\end{array} & \$ 478,800 & 18,000 & \text { DLHs } \\\hline \begin{array} { l } \text { The actual activity for the year } \\\text { was: }\end{array} & & & \\\hline & & \text { Actual Activity for the Year } \\\hline \text { Actrvity Cost Pools } & \text { Total } & \text { Product } X & \text { Product } Y \\\hline \text { Machine related (machine-hours) } & 28,000 & 17,000 & 11,000 \\\hline \text { Batch setup (setups) } & 28,000 & 7,000 & 21,000 \\\hline \begin{array} { l } \text { General factory (direct } \\\text { labour-hours) }\end{array} & 18,000 & 9,000 & 9,000 \\\hline\end{array}$ The actual total manufacturing overhead cost incurred for the year was $3,064,400. -If total overapplied or underapplied overhead is closed to the Cost of Goods Sol? account at the end of each year, the entry to Cost of Goods Sold would have been:

Unit-level activities are performed each time a unit is made.

Reference: 05-05 Abel Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A are 200 units and of Product B are 400 units. There are three activity cost pools, with estimated costs and expected activity as follows: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & & \text { Expected Activity } \\\hline \text { Cost Pool } & \text { Estimated Cost } & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 16,660 & 600 & 100 & 700 \\\hline \text { Activity 2 } & \$ 18,450 & 1,100 & 700 & 1,800 \\\hline \text { Activity 3 } & \$ 9,731 & 60 & 160 & 220 \\\hline\end{array}$ -The overhead cost per unit of Product B is closest to:

Activity-based costing is only useful in allocating manufacturing overhead costs.

In activity-based costing, a plantwide overhead rate is used to apply overhead to products.

Human resource management is an example of an activity at which of the following levels?

Reference: 05-03 Arthur Company has two products: S and D. The company uses activity-based costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & & { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated Ovhd. } \\\text { Cost }\end{array} & \text { Product S } & \text { Product D } & \text { Total } \\\hline \text { Activity 1 } & \$ 20,000 & 100 & 400 & 500 \\\hline \text { Activity 2 } & \$ 14,600 & 500 & 250 & 750 \\\hline \text { Activity 3 } & \$ 90,000 & 300 & 2,700 & 3,000 \\\hline\end{array}$ The annual production and sales of Product S is 4,547 units. The annual production and sales of Product D is 7,913. -The activity rate under the activity-based costing system for Activity 3 is closest to:

The cost of worker recreational facilities is an example of a cost that would ordinarily be considered to be

Reference: 05-01 Acton Company has two products: A and B. The annual production and sales of Product A are 800 units and of Product B are 500 units. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour-hours per unit and Product B requires 0.2 direct labour-hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows: $\begin{array} { | l | l | l | l | l | } \hline \text { Activity } & & { \text { Expected Activity } } \\\hline \text { Cost Pool } & \begin{array} { l } \text { Estimated } \\\text { Overhead } \\\text { Costs }\end{array} & \text { Product A } & \text { Product B } & \text { Total } \\\hline \text { Activity 1 } & \$ 14,487 & 500 & 600 & 1,100 \\\hline \text { Activity 2 } & \$ 64,800 & 2,500 & 500 & 3,000 \\\hline \text { General Factory } & \$ 12,736 & 240 & 100 & 340 \\\hline \text { Total } & \$ 92,023 & & & \\\hline\end{array}$ (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour-hours.) -The overhead cost per unit of Product A under the activity-based costing system is closest to: