ACC 410 Lecture : activity based costing.docx

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lavenderfox977

17 Mar 2013

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Traditionally, in a job order cost system and process cost system, overhead is allocated to a job or function based on direct labor hours, machine hours, or direct labor dollars. In such companies, activity-based costing (abc) is used to allocate overhead costs to jobs or functions. Activity-based costing assumes that the steps or activities that must be followed to manufacture a product are what determine the overhead costs incurred. Each overhead cost, whether variable or fixed, is assigned to a category of costs. These cost categories are called activity cost pools. Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase. The number of times materials are ordered, the number of production lines in a factory, and the number of shipments made to customers are all examples of activities that impact the costs a company incurs.

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Pete's PCs, Inc. budgeted manufacturing overhead costs for theyear are:

Type of Cost	Cost Pools
Electric Power	$2,500,000
Inspection	$1,500,000
Budgeted overhead costs	$4,000,000

Under a traditional cost system, the company estimated the budgetedcapacity for machine hours to be 40,000 hours. Bill is consideringchanging to an activity-based cost system. Thus, the followingestimates were provided:

Type of Cost	Activity-based cost drivers
Electric power	50,000 kilowatt hours
Inspection	10,000 inspections

The following information was provided concerning the production of1,000 units of model #1040:

Direct materials cost	$50,000
Direct labor costs	$75,000
Machine hours	10,000
Direct labor hours	5,000
Electric power - kilowatt hours	20,000
No. of inspections	1,000

REQUIRED:

a.	What are the manufacturing costs per PC under the traditionalcost system that applies manufacturing overhead costs based onmachine hours?
b.	What are the manufacturing costs per PC if the activity-basedcosting system is implemented?
c.	Explain the difference between activity-based costing andconventional costing methods, and how ABC might enhance thefinancial reporting of Pete's PCs, Inc.

copperdinosaur33

Which costing method assumes all products use overhead costs in the same proportions?

	All cost allocation methods
	Plantwide overhead rate method
	Activity-based costing
	Departmental overhead rate method

Which of the following would usually not be used in computing plantwide overhead rates?

	Direct labor dollars
	Number of quality inspections
	Machine hours
	Direct labor hours

With ABC, overhead costs should be traced to which cost object first?

	Departments
	Units of product
	Activities
	Product batches

bluewater-buffalo592

Smoky Mountain Corporation makes two types of hiking bootsâthe Xtreme and the Pathfinder. Data concerning these two product lines appear below:

	Xtreme			Pathfinder
Selling price per unit	$	120.00		$	92.00
Direct materials per unit	$	63.50		$	54.00
Direct labor per unit	$	13.50		$	9.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		24,000	units		71,000	units

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:


Estimated total manufacturing overhead	$	2,033,000
Estimated total direct labor-hours		107,000	DLHs

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the companyâs traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):

	Estimated Overhead Cost		Expected Activity
Activities and Activity Measures	Estimated Overhead Cost		Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	663,400	36,000	71,000	107,000
Batch setups (setups)		572,000	240	200	440
Product sustaining (number of products)		750,000	1	1	2
Other		47,600	NA	NA	NA
Total manufacturing overhead cost	$	2,033,000

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

amaranthimpala82

ACC 410 Lecture : activity based costing.docx

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