MBA 2015 MACS: Review Session - Questions

Traditional Costing

1. A company uses a predetermined overhead recovery rate based on machine hours. Budgeted factory
overhead for a year amounted to 720 000, but actual factory overhead incurred was 738 000. During the
year, the company absorbed 714 000 of factory overhead on 119 000 actual machine hours.

What was the company's budgeted level of machine hours for the year?

A 116098
B 119000
C 120000
D 123 000

2. A company absorbs overheads on machine hours which were budgeted at 11 250 with overheads of 258
750. Actual results were 10 980 hours with overheads of 254 692.
Overheads were:

A under-absorbed by 215 2
B over-absorbed by 4058
C under-absorbed by 4058
D over-absorbed by 215 2

3. The following data are to be used for sub-questions (i) and (ii) below:

Budgeted labour hours 8500
Budgeted overheads 148 750
Actual labour hours 7928
Actual overheads 146 200
(i) Based on the data given above, what is the labour hour overhead absorption rate?
A 17.50 per hour
B 17.20 per hour
C 18.44 per hour
D 18.76 per hour

(ii) Based on the data given above, what is the amount of overhead under/over-absorbed?
A 2550 under-absorbed
B 2529 over-absorbed
C 2550 over-absorbed
D 7460 under-absorbed

4. A firm makes special assemblies to customers' orders and uses job costing. The data for a period are:

J ob no. J ob no. J ob no.
AA10 BB15 CC20
() () ()

Opening WIP 26 800 42 790
Material added in period 17 275 18 500
Labour for period 14 500 3 500 24 600

The budgeted overheads for the period were 126 000.
(i) What overhead should be added to job number CC20 for the period?



A 24 600
B 65 157
C 72 761
D 126 000

(ii) Job no. BB15 was completed and delivered during the period and the firm wishes to earn 33'/
3
% profit on sales.

What is the selling price of job number BB 15?
A 69 435
B 75 521
C 84 963
D 138 870

(iii) What was the approximate value of closing work in progress at the end of the period?
A 58 575
B 101675
C 147 965
D 217 323

5. A company absorbs overheads on machine hours. In a period, actual machine hours were 17 285, actual
overheads were 496 500 and there was under-absorption of 12 520.

What was the budgeted level of overheads?
A 483 980
B 496 500
C 509 020
D It cannot be calculated from the"information provided.

6. Canberra has established the following information regarding fixed overheads for the coming month:
Budgeted information:
Fixed overheads 180 000
Labour hours 3 000
Machine hours 10 000
Units of production 5 000

Actual fixed costs for the last month were 160 000.
Canberra produces many different products using highly automated manufacturing processes and absorbs
overheads on the most appropriate basis.

What will be the pre-determined overhead absorption rate?
A 16
B 18
C 36
D 60

7. An engineering firm operates a job costing system. Production overhead is absorbed at the rate of $8.50 per
machine hour. In order to allow for non-production overhead costs and profit, a mark up of 60% of prime
cost is added to the production cost when preparing price estimates.
The estimated requirements of job number 808 are as follows:
Direct materials $10 650
Direct labour $3 260
Machine hours 140

The estimated price notified to the customer for job number 808 will be
A $22 256 B $22 851 C $23 446 D $24 160







Activity Based Costing
Q1 Identifying Cost hierarchies
Identify the cost hierarchies for the following activities of ABC Co which manufactures a variety of products:
a. Receive raw materials from suppliers: Batch-level
b. Manage parts inventories: Product-level
c. Issue purchase orders for a job: Batch-level
d. Interview and process new employees in the personnel department: Organization-sustaining
e. Design new products: Product-level
f. Perform periodic preventative maintenance on general-use equipment: Organization-sustaining
g. Use the general factory building: Organization-sustaining

Some of these classifications are debatable and depend on the specific circumstances found in particular companies.

Q2 Activity Classification and Measures
Identify the following activities as either unit level, batch level, product level or customer level and choose an
appropriate activity measure
Activity Activity Classification Examples of Activity Measures
a. Direct labor workers assemble a product. Unit level Hours of design time; Number of
new products designed
b. Products are designed by engineers. Product level Hours of setup time; Number of
setups
c. Equipment is set up. Batch-level Hours of setup time; Number of
setups
d. Machines are used to shape and cut materials. Unit-level Machine-hours; Number of units
processed
e. Monthly bills are sent out to regular customers. Customer-level Number of bills sent
f. Materials are moved from the receiving dock to
production lines.
Batch-level Number of loads transferred
g. All completed units are inspected for defects. Unit-level Hours of inspection time; Number
of units inspected

Q2 Activity Classification and Measures
Identify the following activities as either unit level, batch level, product level or customer level and choose an
appropriate activity measure





Q 3

Nissley Wedding Fantasy Company makes very elaborate wedding cakes to order. The owner of the company has
provided the following data concerning the activity rates in its activity-based costing system:

Activity Cost Pools Activity Rate
Size-related $1.13 per guest
Complexity-related $28.22 per tier
Order-related $74.72 per order

The measure of activity for the size-related activity cost pool is the number of planned guests at the wedding
reception. The greater the number of guests, the larger the cake. The measure of complexity is the number of tiers in
the cake. The activity measure for the order-related cost pool is the number of orders. (Each wedding involves one
order.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity
rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are
accounted for separately.
Data concerning two recent orders appear below:



Tijerina
Wedding
Twersky
Wedding
Number of reception guests 49 126
Number of tiers on the cake 2 4
Cost of purchased decorations for cake $28.60 $54.64

a. Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what
amount would the company have to charge for the Tijerina wedding cake to just break even?
a. $74.72
b. $215.13
c. $28.60
d. $260.31

Solution:

Total Cost for Tijerina Wedding Cake Order:


(a) (b) (a) (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Size-related $1.13 per guest 49 guests $ 55.37
Complexity-related $28.22 per tier 2 tiers 56.44
Order-related $74.72 per order 1 order 74.72
Cost of purchased decorations for cake 28.60
Total cost $215.13


b. Assuming that the company charges $465.39 for the Twersky wedding cake, what would be the overall
margin on the order?
a. $135.41
b. $80.77
c. $384.62
d. $155.49

Solution:

(a) (b) (a) (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Size-related $1.13 per guest 126 guests $142.38
Complexity-related $28.22 per tier 4 tiers 112.88
Order-related $74.72 per order 1 order 74.72
Cost of purchased decorations for cake 54.64
Total cost $384.62

Sales $465.39
Total cost 384.62
Margin on order $ 80.77

c. Suppose that the company decides that the present activity-based costing system is too complex and that all
costs (except for the costs of purchased decorations) should be allocated on the basis of the number of guests. In that
event, what would you expect to happen to the costs of cakes?
a. The costs of all cakes would go up.
b. The cost of cakes for receptions with fewer than the average number of guests would go
down.
c. The cost of cakes for receptions with more than the average number of guests would go down.
d. The costs of all cakes would go down.

Q4


ABC Bank is considering either a bank wide overhead rate or departmental overhead rates to allocate $2,000,000 of
indirect costs. The bank wide rate would be based on either direct labor hours or the number of loans processed. The
departmental rates would be based on direct labor time for Consumer Loans and a dual rate based on direct labor
time and the number of loans processed for Commercial Loans. The following information was gathered for the
upcoming period:





a. If a bank-wide rate is used based on direct labor time, what would be the indirect costs allocated to the
Consumer Department?
a. $800,000
B. $1,200,000
c. $1,600,000
d. $400,000
$2,000,000/20,000 DLH = $100 per DLH; 12,000 x $100 = $1,200,000
b. If the bank uses a bank wide rate based on the number of loans processed, what would be the indirect costs
assigned to the Commercial Department?
A. $400,000
b. $600,000
c. $800,000
d. $200,000
$2,000,000/2,000 Loans = $1,000 per loan
c. Management estimates that it now costs $2,000 to analyze and close a commercial loan. This amount has
been included in the $2,000,000 of indirect costs. If the remaining indirect costs are allocated based on the
number of loans processed, how much of the indirect costs should be allocated to the Consumer
Department?
A. $960,000
b. $1,040,000
c. $1,600,000
d. $400,000
$2,000 x 400 = $800,000.
d. The bank estimates that the Commercial Department will result in $3,000,000 of revenues in 2008. If the
indirect costs are allocated based on direct labor hours, what profit before tax will be generated by the
Commercial Department?
A. $1,900,000
b. $2,300,000
c. $2,800,000
d. $2,000,000
e. *** $2,000,000/20,000 = $100
($3,000,000 - 300,000 - 800,000***) = $1,900,000




Service department allocations

Use the following information to answer the questions below:
Rosehill Hospital has 5 departments: 3 are classified as service departments (S) and 2 are classified as producing
departments (P). All service centre costs are allocated to the producing departments. The percentage distribution of
actual services during a recent period is as follows:



The operating costs of the service departments are as follows:
S1 $10,000
S2 20,000
S3 5,000

The overhead costs of the producing departments are as follows:
P1 $20,000
P2 30,000

For questions 1 and 2, use the direct method of service department cost allocation:

1. Calculate the total overhead in producing department P1 after all service department costs have been allocated.

2. Calculate the total overhead in producing department P2 after all service department costs have been allocated.

For questions 3 to 5, use the sequential method of service department cost allocation. Assume the order of
allocation of the service department costs is S1, S2, S3:

3. Calculate the total overhead allocated from service department S2 to service department S1.

4. Calculate the total overhead in producing department P1 after all service department costs have been allocated.

5. Calculate the total overhead in producing department P2 after all service department costs have been allocated.