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Exam 9: Activity-Based Costing

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Question 21

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Markham Company makes two products: Basic Product and Deluxe Product. Annual production and sales are 1,700 units of Basic Product and 1,100 units of Deluxe Product. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Basic Product requires 0.3 direct labor hours per unit and Deluxe Product requires 0.6 direct labor 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: $\begin{array} { l c c c c } & \text { Estimated } & { \text { Expected Activity } } \\ & & \text { Basic } & & \\\text { Activity Cost Pool } & \text { Overhead Costs } & \text { Product } & \text { Deluxe Product } & \text { Total } \\\text { Activity 1 } & \$ 30,528 & 1,000 & 600 & 1,600 \\\text { Activity 2 } & 17,385 & 1,700 & 200 & 1,900 \\\text { General Factory } & 50,872 & 510 & 660 & 1,170 \\\text { Total } & \$ 98,785 & & &\end{array}$ - The overhead cost per unit of Deluxe Product under the traditional costing system is closest to:

A) $50.66.
B) $5.49.
C) $26.09.
D) $11.45.

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Question 22

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Before using activity-based costing (ABC), managers must apply the cost-benefit principle to the additional recordkeeping costs associated with ABC.

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Question 23

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Activity-based costing (ABC) is a two-stage cost allocation system that (1) allocates costs to activities and (2) then to products based on their use of the activities.

Companies that manufacture products that are similar and use the same resources should use the plantwide cost allocation method.

The manager of the Personnel Department at King Enterprises has been reading about time-driven ABC and wants to apply it to her department. She has identified four basic activities where her employees spend the most time: Interviewing; Hiring, Assessment, and Separation Processing. The Department employs five staff who perform these activities. The manager provides the following estimates for the amount of time it takes to complete each of these activities: ? Interviewing: 40 minutes; ? Hiring: 60 minutes; ? Assessment: 85 minutes; ? Separation processing: 95 minutes. Employees in Personnel work 35-hour weeks with four weeks for vacation. Of the 35 hours, five are reserved for administrative tasks, training, and so on. The costs of the personnel department, including any allocated costs from other staff functions is $1,404,000. During the year, Personnel conducted 1,200 interviews, made 405 hires, made 2,850 assessments, and had 235 separations. Required: a. What is the cost per minute for activities in Personnel? b. What is the cost of interviewing and hiring one employee? c. How many minutes of unused capacity did Personnel have for the year? d. What was the cost of the unused capacity in Personnel?

The basic difference between a first-stage cost allocation and a second-stage cost allocation is that cost pools are not used in first-stage cost allocations.

Predetermined overhead rates are not used in first-stage cost allocations but are used in second-stage cost allocations.

Which of the following statements is true regarding time equations used in time-driven activity-based costing?

A two-stage system first allocates costs to:

First stage cost objects do not include:

Which of the following would be least likely to be used as an allocation base in a company that applies a single plantwide rate?

Maxim Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products. $\begin{array} { l c c } \text { Activity Cost Pools } & { \text { Activity Rate } } \\\text { Batch Setup } & \$ 74.76 \text { per batch } \\\text { Processing customer orders } & \$ 55.40 \text { per customer order } \\\text { Assembling products } & \$ 1.36 \text { per assembly hour }\end{array}$ Last year, Product P involved 33 batches, 1 customer order, and 368 assembly hours. Required: How much overhead cost would be assigned to Product P using the company's activity-based costing system? Show your work.

In recent years, why has labor become such a small part of product costs and how can its use in overhead allocation perpetrate errors in decision-making?

Market Corporation has an activity-based costing system with three activity cost pools-Processing, Batch Setup, and Other. The company's overhead costs, which consist of factory utilities and indirect labor, are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Data concerning the company's costs and activity-based costing system appear below: $\begin{array}{ll}\text { Factory utilities } & \$ 39,000 \\\text { Indirect labor } & \$ 3,000\end{array}$ $\begin{array}{l}\text { Distributim of Resaure Cmsumption Acrass Activity Cast Paols }\\\begin{array} { | l | c | c | c | } \hline & \text { Processing } & \text { Batch Setup } & \text { Other } \\\hline \text { Factary utilities } & 0.10 & 0.60 & 0.30 \\\hline \text { Indirect labor } & 0.30 & 0.10 & 0.60 \\\hline\end{array}\end{array}$ Required: Assign overhead costs to activity cost pools using activity-based costing.

A basic assumption of activity-based costing (ABC) is that:

Direct labor cost (DLC) and direct labor hours (DLH) are examples of volume-related cost drivers in the cost hierarchy.

In an activity-based costing (ABC) system, what should be used to assign departmental manufacturing overhead costs to products produced in varying lot sizes?

Which one of the following accounts is not used in an activity-based costing (ABC) system?

The death spiral can occur even in firms with increasing demand.

Which of the following statements is true regarding time-driven activity-based costs?