AFM102 Lecture Notes - Lecture 7: Activity-Based Costing, Cost Driver, Total Absorption Costing

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azureturtle555

7 Apr 2017

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM102

Professor

Catherine Wong

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Document Summary

Chapter 7 activity based costing: a tool to aid decision making. Traditional absorption costing provides data for external financial reports. Abc products are assigned to all overhead costs non-manufacturing and manufacturing costs that they can be estimated to have caused. In traditional costing, all manufacturing costs are assigned to a product, even those that are not caused by the product. Abc systems only assign costs to product only if there is a good reason to believe that the cost would be affected by the decisions concerning the product. Overhead cost pools, allocation bases and activity based costing. Abc uses more cost pools and unique measures of activity to better understand the costs of managing and sustaining product diversity. In abc, an activity is an even that causes the consumption of overhead resources. Activity cost pool is where costs are accumulated but relate to a single activity measure. 2 most common types of activity measures are.

Related Questions

Morton Company has two divisions. Sales, direct materials cost,direct labor cost, and manufacturing overhead data for Mortonâs twodivisions are available below. Note: All of Morton Companyâsproducts are sold in competitive markets.

Missile Salt

Products Products

Sales $1,500,000 $1,000,000

Direct labor (800,000) (300,000)

Direct materials (100,000) (40,000)

Manufacturing overhead* (400,000) (150,000)

Gross profit $200,000 $510,000

*Manufacturing overhead is allocated to production based on theamount of direct labor cost. Morton has determined that its totalmanufacturing overhead cost of $550,000 is a mixture of batch-levelcosts and product line costs.

Morton has assembled the following information concerning themanufacturing overhead costs, the annual number of productionbatches, and the number of product lines in each division.

Total Manufacturing

Overhead Missile Salt

Costs Products Products

Batch-level overhead $250,000 10 batches 90 batches

Product line overhead 300,000 1 line 9 lines $550,000

Which ONE of the following statements is MOST CORRECT?

If the activity-based costing system had been used in the mostrecent year in place of the traditional overhead allocationtechnique, profit for the Missile Division would have decreased by$345,000.

If the activity-based costing system had been used in the mostrecent year in place of the traditional overhead allocationtechnique, profit for the Missile Division would have decreased by$25,000.

If the activity-based costing system had been used in the mostrecent year in place of the traditional overhead allocationtechnique, profit for the Missile Division would have increased by$345,000.

If the activity-based costing system had been used in the mostrecent year in place of the traditional overhead allocationtechnique, profit for the Salt Division would have decreased by$285,000.

If the activity-based costing system had been used in the mostrecent year in place of the traditional overhead allocationtechnique, profit for the Salt Division would have increased by$285,000.

If the activity-based costing system had been used in the mostrecent year in place of the traditional overhead allocationtechnique, profit for the Missile Division would have increased by$25,000.

grayporpoise399

Hi-Tek Manufacturing Inc. makes two types of industrial component partsâthe B300 and the T500. An absorption costing income statement for the most recent period is shown below:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,761,600
Cost of goods sold		1,249,034
Gross margin		512,566
Selling and administrative expenses		580,000
Net operating loss	$	(67,434)

Hi-Tek produced and sold 60,300 units of B300 at a price of $21 per unit and 12,700 units of T500 at a price of $39 per unit. The companyâs traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the companyâs two product lines is shown below:

	B300		T500		Total
Direct materials	$	400,500	$	162,200	$	562,700
Direct labor	$	120,000	$	42,700		162,700
Manufacturing overhead						523,634
Cost of goods sold					$	1,249,034

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tekâs ABC implementation team concluded that $55,000 and $101,000 of the companyâs advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the companyâs manufacturing overhead to four activities as shown below:

Manufacturing

Activity

Activity Cost Pool (and Activity Measure)

Machining (machine-hours)

Product-sustaining (number of products)

100,600

Other (organization-sustaining costs)

60,500

Total manufacturing overhead cost

523,634

1. Compute the product margins for the B300 and T500 under the companyâs traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number.)

	B300	T500	Total
Product margin

2. Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300	T500	Total
Product margin

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round your overhead rate. Round your other intermediate calculations and final answers to the nearest whole number. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

	B300			T500			Total
		% of			% of
	Amount	Total Amount		Amount	Total Amount		Amount
Traditional Cost System
			%			%
			%			%
			%			%
Total cost assigned to products	$			$

Total cost							$

	B300			T500			Total
		% of			% of
	Amount	Total Amount		Amount	Total Amount		Amount
Activity-Based Costing System
Direct costs:
			%			%
			%			%
			%			%
Indirect costs:
			%			%
			%			%
			%			%
Total cost assigned to products	$			$			$
Costs not assigned to products:


Total cost							$

cerisereindeer909

Hi-Tek Manufacturing Inc. makes two types of industrial component partsâthe B300 and the T500. An absorption costing income statement for the most recent period is shown below:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,751,700
Cost of goods sold		1,223,464

Gross margin		528,236
Selling and administrative expenses		560,000

Net operating loss	$	(31,764)

Hi-Tek produced and sold 60,200 units of B300 at a price of $21 per unit and 12,500 units of T500 at a price of $39 per unit. The companyâs traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the companyâs two product lines is shown below:

	B300		T500		Total
Direct materials	$	401,000	$	162,400	$	563,400
Direct labor	$	120,900	$	42,400		163,300
Manufacturing overhead						496,764

Cost of goods sold					$	1,223,464

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tekâs ABC implementation team concluded that $58,000 and $107,000 of the companyâs advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the companyâs manufacturing overhead to four activities as shown below:

Manufacturing

Activity

Activity Cost Pool (and Activity Measure)

Machining (machine-hours)

Product-sustaining (number of products)

100,800

Other (organization-sustaining costs)

60,500

Total manufacturing overhead cost

496,764

Required

Compute the product margins for the B300 and T500 under the companyâs traditional costing system. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollars.)

	B300	T500	Total
Product margin

Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300	T500	Total
Product margin

3.)

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3) and other answers to nearest whole dollar amounts.)

	B300		T500		Total
		% of		% of
	Amount	Total Amount	Amount	Total Amount	Amount
Traditional Cost System



Total cost assigned to products

Total cost

	B300		T500		Total
		% of		% of
	Amount	Total Amount	Amount	Total Amount	Amount
Activity-Based Costing System
Direct costs:



Indirect costs:



Total cost assigned to products
Costs not assigned to products:


Total cost

emeraldgrasshopper364

AFM102 Lecture Notes - Lecture 7: Activity-Based Costing, Cost Driver, Total Absorption Costing

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