TriCo would like to institute an activity-based costing system to price products.

The companys
Purchasing Department incurs costs of $550,000 per year and has six employees.
Purchasing has determined the three major activities that occur during the year.

Allocation # of Total
Activity Measure People Cost
Issuing purchase orders # of purchase 1 $150,000
orders
Reviewing receiving # of receiving 2 $175,000
reports reports
Making phone calls # of phone calls 3 $225,000

During the year 50,000 phone calls were made in the department; 15,000 purchase orders
were issued; and 10,000 shipments were received. Product A required 200 phone calls,
150 receiving reports, and 50 purchase orders. Product B required 350 phone calls, 400
receiving reports, and 100 purchase orders.

a. Determine the amount of purchasing department cost that should be assigned to
each of these products.
b. Determine purchasing department cost per unit if 1,500 units of Product A and
3,000 units of Product B were manufactured during the year.

ANSWER:

a. $150,000/15,000 = $10 per purchase order
$175,000/10,000 = $17.50 per receiving report
$225,000/50,000 = $4.50 per phone call

Product A Product B
50 purchase orders $10 $ 500
100 purchase orders $10 $1,000
150 receiving reports $17.50 2,625
400 receiving reports $17.50 7,000
200 phone calls $4.50 900
350 phone calls $4.50 1,575
Total cost $4,025 $9,575

b. Product A= $4,025/1,500 = $2.68 per unit
Product B= $9,575/3,000 = $3.19 per unit
Ex. 87
All Wood Corporation manufactures dining chairs and tables. The following information is available:
Dining Chairs Tables Total Cost
Machine setups 200 600 $32,000
Inspections 250 500 $54,000
Labor hours 2,600 2,400

All Wood is considering switching from one overhead rate based on labor hours to activity-based costing.

Instructions
Perform the following analyses for these two components of overhead:
a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate.
b. Compute total machine setups and inspection costs assigned to each product, using activity-based costing.
c. Comment on your findings.


Solution 87 (812 min.)
a. Single overhead rate
($32,000 + $54,000) 5,000 = $17.20 per labor hour

Dining chairs: 2,600 $17.20 = $44,720
Tables: 2,400 x $17.20 = 41,280
$86,000

b. Activity-based costing
Machine setups: $32,000 800 = $40 per setup

Inspections: $54,000 750 = $72 per inspection

Dining chairs: (200 $40) + (250 $72) = $26,000
Tables: (600 $40) + (500 $72) = 60,000
$ 86,000

c. The use of activity-based costing resulted in the allocation of less cost to dining chairs and more cost to tables.
The change in cost allocation reflects a more accurate allocation based on cause and effect.


Ex. 88
Vid-saver, Inc. has five activity cost pools and two products (a budget tape rewinder and a deluxe tape rewinder).
Information is presented below:

Cost Drivers by Product
Activity Cost Pool Cost Driver Est. Overhead Budget Deluxe
Ordering and Receiving Orders $ 120,000 600 400
Machine Setup Setups 297,000 500 400
Machining Machine hours 1,500,000 150,000 100,000
Assembly Parts 1,200,000 1,200,000 800,000
Inspection Inspections 300,000 550 450

Instructions
Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and 200,000 units of
Deluxe. Round your answer to the nearest cent.



Solution 88 (1520 min.)
Activity Cost Pool Est. Overhead Total Est. Activity = Overhead Rate
Ordering & Receiving $ 120,000 1,000 orders $120/order
Machine Setup 297,000 900 setups $330/setup
Machining 1,500,000 250,000 mach. hours $6/machine hour
Assembly 1,200,000 2,000,000 parts $.60/part
Inspection 300,000 1,000 inspections $300/inspection

Budget Deluxe
Cost Cost Cost Cost
Activity Cost Pool Driver Rate = Assigned Driver Rate = Assigned
Ordering & Receiving 600 $120 $ 72,000 400 $120 $ 48,000
Machine Setup 500 330 165,000 400 330 132,000
Machining 150,000 6 900,000 100,000 6 600,000
Assembly 1,200,000 .60 720,000 800,000 .60 480,000
Inspection 550 300 165,000 450 300 135,000
$2,022,000 $1,395,000
700,000 200,000
$2.89 per unit $6.98 per unit

30. Vodopich Corporation has provided the following data from its activity-based costing
system:



Data concerning the company's product P58Z appear below:



According to the activity-based costing system, the unit product cost of product P58Z is closest
to:
A. $113.33 per unit
B. $58.30 per unit
C. $123.40 per unit
D. $118.30 per unit


Calculation of Overhead Costs:



Unit Cost of Product P58Z:


Lafayette Savings and Loan

Lafayette Savings and Loan had the following activities, traceable costs, and
physical flow of driver units:

Traceable Physical flow of
Activities Costs Driver Units

Open new accounts $50,000 1,000 accounts
Process deposits 36,000 400,000 deposits
Process withdrawals 15,000 200,000 withdrawals
Process loan applications 27,000 900 applications

The above activities are used by the Jennings branch and the Crowley branch:

Jennings Crowley

New accounts 200 400
Deposits 40,000 20,000
Withdrawals 15,000 18,000
Loan applications 100 160

80. Refer to Lafayette Savings and Loan. What is the cost per driver unit for new account activity?
a. $0.09 c. $30.00
b. $0.075 d. $50.00

ANS: D
$50,000 / 1,000 = $50.00 per account

DIF: Easy OBJ: 5-4


81. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the deposit activity?

a. $0.09 c. $30.00
b. $0.075 d. $50.00

ANS: A
$36,000/400,000 = $0.09

DIF: Easy OBJ: 5-4

82. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the withdrawal activity?

a. $0.09 c. $30.00
b. $0.075 d. $50.00

ANS: B
$15,000/200,000 = $0.075

DIF: Easy OBJ: 5-4

83. Refer to Lafayette Savings and Loan. What is the cost per driver unit for the loan application activity?

a. $0.09 c. $30.00
b. $0.075 d. $50.00

ANS: C
$27,000/900 = $30.00

DIF: Easy OBJ: 5-4

84. Refer to Lafayette Savings and Loan. How much of the loan application cost will be assigned to the
Jennings branch?
a. $3,000 c. $ 7,800
b. $4,800 d. $27,000

ANS: A
$30.00 x 100 = $3,000

DIF: Easy OBJ: 5-4

85. Refer to Lafayette Savings and Loan. How much of the deposit cost will be assigned to the Crowley
branch?
a. $1,800 c. $ 5,400
b. $3,600 d. $36,000

ANS: A
$0.09 * 20,000 = $1,800

DIF: Easy OBJ: 5-4

86. Refer to Lafayette Savings and Loan. How much of the new account cost will be assigned to the Crowley
branch?
a. $10,000 c. $30,000
b. $20,000 d. $50,000

ANS: B
400 * $50 = $20,000