Activity-Based Costing

Complete each of the following statements by circling the letter of the best answer.
1. The activities that are performed each time a batch is produced are:
a. batch-level activities.
b. facility-level activities.
c. process-level activities.
d. product-level activities.
e. unit-level activities.
2. In a functional-based cost accounting system, which of the following activity drivers is used
to assign fixed overhead costs to products?
a. batch-level activities
b. facility-level activities
c. process-level activities
d. product-level activities
e. unit-level activities

3.In a pure ABC system, which of the following would not be assigned to products?
a. batch-level activities
b. facility-level activities
c. process-level activities
d. product-level activities
e. unit-level activities
4. Which of the following would be classified as a product-level activity?
a. plant management
b. production scheduling
c. engineering changes
d. material handling
e. machine hours
5. Which of the following would be classified as a batch-level activity?
a. plant management
b. process engineering
c. engineering changes
d. material handling
e. machine hours
6. Which of the following is a true statement?
a. If nonunit-based overhead costs are a large proportion of overhead costs, the use of
nonunit-based drivers will cause large distortions in product costs.
b. If nonunit-based overhead costs are a small proportion of overhead costs, the use of
nonunit-based drivers will cause large distortions in product costs.
c. Nonunit-based activity drivers are factors that are proportional to the number of
units produced.
d. If products consume the nonunit overhead activities in the same proportion as unit
overhead activities, using a traditional overhead assignment method will cause costs
to be distorted.
e. If products consume the nonunit overhead activities in the same proportion as unit
overhead activities, using a traditional overhead assignment method will not cause
costs to be distorted.
7. Consumption ratios are:
a. the activities performed every time a batch is produced.
b. the proportion of each activity consumed by a product.
c. necessary for unit-level activities but not for batch- or product-level activities.
d. factors that cause costs to change as the level of activities change.
e. none of the above.
8. An activity-based costing system is one that:
a. traces costs to activities and then to products.
b. traces costs to resources and then to activities.
c. traces activities to costs and then to resources.
d. traces products to activities and then to resources.
e. uses a single plantwide rate for allocating overhead costs to products.
9. A homogeneous cost pool is one that:
a. does not change over time.
b. needs many activity drivers to be allocated to a cost object.
c. has only one type of material assigned to it.
d. can be explained with a single activity driver.
e. can be used only by the dairy industry.
10. Which of the following statements is incorrect regarding ABC and service industries?
a. Since service organizations do not have inventories, product costing (and thus ABC)
will not be necessary.
b. The output is more easily defined for a service organization than for a
manufacturing organization.
c. Activities in a service organization tend to be more standardized than activities in a
manufacturing organization.
d. Since the output of a service organization is consumed when produced, there will be
no batch-level activities.
e. None of the above statements are correct.
11. Inspection of the first unit produced is what type of activity?
a. batch-level
b. facility-level
c. process-level
d. product-level
e. unit-level
12. Extruding plastic parts is what type of activity?
a. batch-level
b. facility-level
c. process-level
d. product-level
e. unit-level

EXERCISE 1
XYZ Company has identified the following overhead activities, costs, and activity drivers for the
coming year:
Activity Expected Cost Activity Driver Activity Capacity
Material-handling costs ........ $45,000 Number of moves ............... 450
Machine costs ...................... 80,000 Machine hours .................... 20,000
Order costs........................... 15,000 Number of orders ............... 750
Receiving costs .................... 30,000 Number of parts .................. 50,000
Setup costs .......................... 50,000 Number of setups ............... 250
Assume that each activity corresponds to a process. XYZs normal activity is 5,000 direct labor hours.
The following two jobs were completed during March:
Job X-1 Job Y-4
Direct materials .................................... $1,500 $2,000
Direct labor ($15 per hour) ................... $750 $750
Units completed ................................... 200 200
Number of moves ................................. 3 6
Machine hours ...................................... 125 75
Number of orders ................................. 3 12
Number of parts ................................... 200 800
Number of setups ................................. 1 4
Required:
1. Determine the unit cost for each job using direct labor hours to apply overhead.
Total overhead = $45,000 + $80,000 + $15,000 + $30,000 + $50,000 = $220,000 / 5,000 DL hours = $44 per DL
hour
Job X-1 Job Y-4
Materials ............ $1,500 $2,000
Labor .................. 750 750
Overhead ........... 2,200 (50 $44) 2,200 (50 $44)
Total ................... $4,450 $4,950
Divided by units .. 200 200
Per unit ............... $22.25 $24.75
Materials handling $45,000 / 450 = $100 per move
Machine time $80,000 / 20,000 = $4 per machine hour
Ordering $15,000 / 750 = $20 per order
Receiving $30,000 / 50,000 = $0.60 per part
Setup $50,000 / 250 = $200 per setup

2. Determine the unit cost for each job using the Activity drivers to apply overhead
Job X-1 Job Y-4
Materials ........... $1,500 $2,000
Direct labor ....... 750 750
Moves ................ 300 (3 $100) 600 (6 $100)
Machine ............. 500 (125 $4) 300 (75 $4)
Orders ............... 60 (3 $20) 240 (12 $20)
Parts .................. 120 (200 $0.60) 480 (800 $0.60)
Setups ............... 200 (1 $200) 800 (4 $200)
Total .................. $3,430 $5,170
Divided by units 200 200
Per unit .............. $17.15 $25.85

3. Which method produces the more accurate cost assignment? Why?

Costs determined using the activity drivers are more accurate. The consumption ratios of
the resources differ greatly between the two products. The direct labor approach to apply
overhead implicitly assumes the two products consume the overhead resources in the same
pattern as direct labor (50%-50%).
EXERCISE 3
Acme Enterprises is a custom manufacturer of specialty circuit boards. The boards are produced in
batches in a single manufacturing facility. Each board requires an engineer to prepare the specifications
and schematic drawings. Once this design is complete, the equipment is set up for the batch
production. As each batch is completed, a sample of the units is inspected for quality and tolerances.
Costs have been assigned as follows:
Engineering .............................. $75,000
Setups ...................................... 60,000
Labor ........................................ 50,000
Inspection ................................. 75,000
Factory lease ............................ 30,000
Factory utilities ......................... 12,000
The following activity drivers have been identified and their capacities determined:
Activity Driver Practical Capacity
Labor hours .............................. 5,000
Setup hours .............................. 2,000
Engineering hours .................... 2,500
Inspection hours ....................... 6,000
Machine hours .......................... 10,000
The cost of the facility-level activities are assigned using machine hours.
Required:
1. Identify each activity as unit-level, batch-level, product-level or facility-level
....... Engineering Batch-level
Setups ............... Batch-level
Labor ....................... Unit-level
Inspection .......... Batch-level
..... Factory lease Facility-level
... Factory utilities Facility-level

2. Create homogenous pool
At most, there will be five cost pools. It is possible that the three batch-level
activities could be combined into a single pool. If this were the case, the driver could
be setup hours, engineering hours, or inspection hours.
Pool Activity Driver Rate
1 Engineering Engineering hours$30.00 ($75,000 / 2,500)
2 Setups Setup hours 30.00 ($60,000 / 2,000)
3 Inspection Inspection hours 12.50 ($75,000 / 6,000)
4 Labor Labor hours 10.00 ($50,000 / 5,000)
5 Lease and utilities Machine hours 4.20 [($30,000 + $12,000) / 10,000]


3. Compute the pool rate for each pool you have


EXERCISE 4
Alcatraz Company makes two models of an antitheft device. The portable model is relatively small and is
primarily for use in automobiles. The standard model is much larger and is designed for houses and
buildings. The Fabricating Department cuts, bends, and welds sheet metal to produce the external box
of the device. The box is also painted in this department. The Assembly Department uses purchased
parts to produce the internal workings and fits them into the prepared metal boxes.
Alcatraz has conducted a special study to determine if an activity-based costing system would be
beneficial in determining the costs of the two products. The Fabricating Department is a more complex
department than the Assembly Department and has been chosen for a pilot test of an ABC system.
The following activities have been identified, along with their associated costs:
Depreciation ......................................... $250,000
Factory lease ........................................ 125,000
Inspection ............................................. 75,000
Factory maintenance ............................ 150,000
Materials handling ................................ 100,000
Power ................................................... 50,000
Product engineering changes ............... 25,000
Setups .................................................. 125,000
Department manager salaries .............. 60,000
The analysts have identified the following potential activity drivers and the capacity of each:
Portable Standard
Direct labor ($10 per hour) .................. $75,000 $90,000
Machine hours ...................................... 4,000 6,000
Materials .............................................. $450,000 $650,000
Number of moves ................................. 1,500 1,500
Number of products .............................. 1 1
Number of setups ................................. 150 350
Units produced ..................................... 15,000 17,500
Required:
1. Classify each activity according to activity level and identify an appropriate driver for each.

ActivityLevel Driver
Depreciation Facility Machine hours
Factory lease Facility Machine hours
Inspection Batch Number of setups
Factory maintenance Facility Machine hours
Materials handling Batch Number of moves
Power Unit Machine hours
Product engineering changes Product Number of products
Setups Batch Number of setups
Department manager salaries Facility Machine hours

2. Create homogeneous cost pools and calculate pool rates. (Use the number of setups as the
activity driver for both inspection and setups costs. Machine hours serve as the activity driver
Pool Activities Costs Driver Quantity Rate
1 Inspection $ 75,000
Setups 125,000
$200,000 Number of setups 500 $400.00
2 Materials handling $100,000 Number of moves 3,000 $33.33
3 Product engineering changes$ 25,000 Number of products 2 $12,500.00
4 Depreciation $250,000
Factory lease 125,000
Factory maintenance 150,000
Power 50,000
Department manager salaries 60,000
$635,000 Machine hours 10,000 $63.50

3. Use the pool rates to compute per unit overhead costs for the two products.

Pool Portable Standard
Setups ................. $ 60,000 (150 $400) $140,000 (350 $400)
Moves .................. 50,000* (1,500 $33.33) 50,000* (1,500 $33.33)
Products .............. 12,500 (1 $12,500) 12,500 (1 $12,500)
Machine hours ..... 254,000 (4,000 $63.50) 381,000 (6,000 $63.50)
Total .................... $376,500 $583,500
Divided by units ... 15,000 17,500
Per unit ................ $ 25.10 $ 33.34

*rounded