Chapter 4: Activity-Based Costing ACC 560 WEEK 3 Chapter 4 Brief Exercises 7 and 12; Exercises 1, 6, and 14 BE4-7 Spud, Inc. a manufacturer of gourmet potato chips, employs activity-based costing. The budgeted data for each of the activity cost pools is provided below for the year 2017. Activity Cost Pools � � Estimated Overhead � � � � Expected Use of Cost Drivers per Activity Ordering and receiving � � � � � � $84,000 � � � � � � 12,000 orders Food processing � � � � � � 480,000 � � � � � � 60,000 machine hours Packaging � � � � � � � � 1,760,000 � � � � � � 440,000 labor hours For 2017, the company had 11,000 orders and used 50,000 machine hours, and labor hours totaled 500,000. What is the total overhead applied? BE4-12 Spin Cycle Architecture uses three activity pools to apply overhead to its projects. Each activity has a cost driver used to allocate the overhead costs to the projects. The activities and related overhead costs are as follows: initial concept formation $40,000, design $300,000, and construction oversight $100,000. The cost drivers and expected use are as follows. Activities � � � � � � Cost Drivers � � � � � Expected Use of Cost Drivers per Activity Initial concept formation � Number of project changes “�”�”� � � � 20 Design � � � � � � � Square feet � � � � � � � � � � 150,000 Construction oversight � � Number of months “�”� � � � � � � 100 (a) Compute the predetermined overhead rate for each activity. (b) Classify each of these activities as unit-level, batch-level, product-level, or facility-level. E4-1 Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plant wide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the company’s operations. � � � � � � � Standard � � � � Custom Direct labor costs � $50,000 � � � � $100,000 Machine hours � � � � 1,000 � � � � � 1,000 Setup hours � � � 100 � � � � � 400 Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool. Instructions: a. Compute the overhead rate using the traditional (plant wide) approach. b. Compute the overhead rates using the activity-based costing approach. c. Determine the difference in allocation between the two approaches. E4-6 Santana Corporation manufactures snowmobiles in its Blue Mountain, Wisconsin, plant. The following costs are budgeted for the first quarter’s operations. Machine setup, indirect materials � � � 4,000 Inspections � � � � � � � � � � 16,000 Tests � � � � � � � � � � � � 4,000 Insurance, plant � � � � � � � � � 110,000 Engineering design � � � � � � � 140,000 Depreciation, machinery � � � � � � 520,000 Machine setup, indirect labor � � � � 20,000 Property taxes � � � � � � � � � � � 29,000 Oil, heating � � � � � � � � � � 19,000 Electricity, plant lighting � � � � � � 21,000 Engineering prototypes � � � � � � 60,000 Depreciation, plant � � � � � � � � 210,000 Electricity, machinery � � � � � � � 36,000 Machine maintenance wages � � � � 19,000 Instructions Classify the above costs of Santana Corporation into activity cost pools using the following: engineering, machinery, machine setup, quality control, factory utilities, and maintenance. Next, identify a cost driver that may be used to assign each cost pool to each line of snowmobiles. E4-14 Venus Creations sells window treatments (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year. The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed: Activity Cost Pools � � Estimated Overhead � � � � Cost Drivers Scheduling and travel � � � � $85,000 � � � � � � Hours of travel Setup time � � � � � “�90,000 � � � � � � Number of setups Supervision � � � � � “�60,000 � � � � � � Direct labor cost Expected Use of Cost Drivers per Product � � � � � � � � � � � Commercial � � Residential Scheduling and travel � � � � � � � � � 750 � � � � � 500 Setup time � � � � � � � � � � 350 � � � � � 250 Instructions a. Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line. b. Compute the operating income for each product line, using the activity-based overhead rates. c. What do you believe Peggy Kingman should do?
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