ACCT 210 Lecture Notes - Lecture 5: New Approach, The Need, Bookkeeping

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mauvecricket694

4 Feb 2017

School

University of Arizona

Department

Accounting

Course

ACCT 210

Professor

Heather Altman

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Document Summary

Job order costing: direct labor costs may be the relevant activity base. Process costing: machine hours may be the relevant activity base. Inappropriate to use plantwide predetermined overhead rates when a lack of correlation exists. Complex manufacturing processes may require multiple allocation bases; this approach is called activity-based costing (abc) Assigns the activity cost pools to products or services by means of cost drivers. Activity: an event, action, transaction, or work sequence that incurs cots when producing a product or performing a service. Activity cost pool: the overhead cost attributed to a distinct activity (e. g. , ordering materials or setting up machines) Cost driver: any factor or activity that has a direct cause-effect relationship with the resources consumed. Identify and classify the activities involved in the manufacture of specific products and assign overhead to cost pools. Stage 1: overhead costs are assigned to activity costs pools (step 1)

Related Questions

PROBLEM 6-12. Activity-Based Costing [LO 5] The CheesecakeShoppe is a national bakery that is known for its strawberrycheesecake.It makes 12 different kinds of cheesecake as well asmany other types of bakery items. It has recently adopted anactivity-based costing system to assign manufacturing overhead toproducts.The following data relate to its strawberry cheesecake andthe ABC cost pools:

Strawberry Cheesecake:

Annualproduction 19,500 units

Direct materials perunit $10

Direct labor perunit $2

CostPool Cost Cost Driver

Materialsordering $72,000 Number of purchase orders

Materialsinspection 75,000 Number of receiving reports

Equipmentsetup 105,000 Number of setups

Qualitycontrol 69,000 Number of inspections

Other 100,000 Direct labor cost

Total manufacturing overhead $421,000

Annual activity information related to cost drivers:

CostPool AllProducts Strawberry Cheesecake

Materialsordering 8,000orders 100

Materials inspection 375 receivingreports 60

Equipmentsetup 3,000setups 30

Qualitycontrol 3,000inspections 150

Other $2,000,000 directlabor $39,000

Required

a. Calculate the overhead rate per unit of activity for each ofthe ï¬ve cost pools.

b. Calculate the total overhead assigned to the production ofthe strawberry cheesecake.

c. Calculate the overhead cost per unit for the strawberrycheesecake.Round to three decimal places.

d. Calculate the total unit cost for the strawberry cheesecake.Round to three decimal places.

e. Suppose that the Cheesecake Shoppe allocates overhead by atraditional production volume-based method using direct labordollars as the allocation base and one cost pool. Determine theoverhead rate per direct labor dollar and the per unit overheadassigned to the strawberry cheesecake.Discuss the difference incost allocations between the traditional method and theactivity-based costing approach. Round to three decimal places.

blackhare277

Maryville Manufacturing designs and builds custom mudroomstorage benches. All of the mudroom storage benches are constructedwith rustic hickory. Its budgeted manufacturing costs for the 2018year are as follows.

Overhead Cost Pools	Amount
Purchasing	$ 45,000
Handling materials	50,000
Production (cutting, milling, finishing)	130,000
Setting up machines	85,000
Inspecting	60,000
Inventory control (raw materials and finished goods)	80,000
Utilities	100,000
Total budgeted overhead costs	$550,000

For the last 5 years, Maryville Manufacturing has been chargingoverhead to products on the basis of materials cost. For the year2018, materials cost of $500,000 were budgeted.

Jim Johnson, owner-manager of Maryville Manufacturing, recentlydirected his accountant, Ledger Kaufman, to implement theactivity-based costing system that he has repeatedly proposed. AtJimâs request, Ledger and the production foreman identify thefollowing cost drivers and their usage for the previously budgetedoverhead cost pools.

Overhead Cost Pools	Activity Cost Drivers	Expected Use of Cost Drivers
Purchasing	Number of orders	500
Handling materials	Number of moves	5,000
Production (cutting, milling, finishing)	Direct labor hours	65,000
Setting up machines	Number of setups	1,000
Inspecting	Number of inspections	4,000
Inventory control (raw materials and finished goods)	Number of components	40,000
Utilities	Square feet occupied	50,000

Doug Russell, sales manager, has received an order for 12 custommudroom storage benches from Homes by Kathy. At Dougâs request,Ledger prepares costs estimates for producing 12 mudroom storagebenches so Doug can submit a contract price per mudroom storagebench to Homes by Kathy. He accumulates the following data for theproduction of 12 mudroom storage benches.

Direct materials	$5,200
Direct labor	$3,500
Direct labor hours	200
Number of purchase orders	3
Number of material moves	32
Number of machine setups	4
Number of inspections	20
Number of components	640
Number of square feet occupied	320

Required:

Compute the predetermined overhead rate using traditionalcosting with direct materials cost as the allocation base.

Compute the total cost of manufacturing one mudroom storagebench using direct materials cost as the allocation base formanufacturing overhead.

Compute the predetermined overhead rate using traditionalcosting with direct labor hours as the allocation base.

Compute the total cost of manufacturing one mudroom storagebench using direct labor hours as the allocation for manufacturingoverhead.

Compute the predetermined overhead rate per cost driver for eachof the overhead cost pools using the proposed activity-basedcosting system.

Compute the total cost of manufacturing one mudroom storagebench using the proposed activity-based costing system.

Which allocation base is preferable under traditional costingand why?

Which costing system (traditional or activity-based) ispreferable in pricing decisions and why?

chocolateporpoise891

Sydney Dandons manufactures Motor Skate Boards in two distinct models, Easy and Sharp. Sydney Dandons 2016 books reveal the following pieces of cost and activity information:

Number of Number of

Product Assembly activity Tuning activity Direct Labour Hours

Easy 31 301 6501

Sharp 71 501 1501

Indirect costs pertaining to âAssemblyâ are $201,000 and âTuningâ are $601,000.

Your manager, Joe, is interested in making a comparison between the Simple/Peanut Butter/Traditional costing system and the advanced Activity-Based costing (ABC) system. Joe asks you to work out âaâ and âbâ below under the Simple/Traditional costing system, applying all the $802,000 indirect/overhead costs using direct labour hours as the indirect cost allocation base.

Then, Joe asks you to work out âcâ and âdâ below under the advanced activity-based costing (ABC) system and using the number of âAssembly activityâ and the number of âTuning activityâ as the cost drivers (i.e. cost allocation bases) for allocating the given overhead/indirect costs:

the amount of indirect/overhead costs assigned to the Easy model?

the amount of indirect/overhead costs assigned to the Sharp model?

the amount of indirect/overhead costs assigned to the Easy model?

the amount of indirect/overhead costs assigned to the Sharp model?

Round off all calculations to 2 decimal places.

Finally, Joe, asks you to:

e. Evaluate/interpret the difference you observe in the costs worked out under âaâ and âbâ (i.e. the Simple/Traditional costing system) and the costs worked out under âbâ and âcâ (i.e. under the ABC system), and conclude which of the two costing systems is a better reflection of the allocation of the indirect/overhead costs, and why?

bronzehorse943

ACCT 210 Lecture Notes - Lecture 5: New Approach, The Need, Bookkeeping

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