Cost Accounting
Chapter Activity-Based Costing and Activity-Based Management
1) Extreme Manufacturing Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry $320,000 16,000 hours
Account billing $200,000 4,000,000 lines
Account verification accounts $173,250 70,000 accounts
Correspondence letters $24,000 4,000 letters
Total costs $717,250
The above activities are used by Departments A and B as follows:
Department A Department B
Account inquiry hours 2,700 hours 4,200 hours
Account billing lines 900,000 lines 750,000 lines
Account verification accounts 8,000 accounts 6,000 accounts
Correspondence letters 1,400 letters 1,800 letters
How much of the account inquiry cost will be assigned to Department A?
A) $54,000
B) $320,000
C) $160,000
D) $84,000
Answer: A
Explanation: Account inquiry costs - Department A = ($320,000 ÷ 16,000) × 2,700 = $54,000
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2) Extreme Manufacturing Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry $320,000 16,000 hours
Account billing $220,000 4,000,000 lines
Account verification accounts $182,000 80,000 accounts
Correspondence letters $25,000 4,000 letters
Total costs $747,000
The above activities are used by Departments A and B as follows:
Department A Department B
Account inquiry hours 2,200 hours 3,700 hours
Account billing lines 600,000 lines 450,000 lines
Account verification accounts 5,000 accounts 3,000 accounts
Correspondence letters 1,000 letters 1,400 letters
How much of the account billing cost will be assigned to Department B?
A) $220,000
B) $110,000
C) $24,750
D) $33,000
Answer: C
Explanation: Billing costs - Department B = ($220,000 ÷ 4,000,000) × 450,000 = $24,750
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3) Extreme Manufacturing Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry $420,000 14,000 hours
Account billing $225,000 5,000,000 lines
Account verification accounts $95,000 40,000 accounts
Correspondence letters $46,000 8,000 letters
Total costs $786,000
The above activities are used by Departments A and B as follows:
Department A Department B
Account inquiry hours 2,900 hours 4,400 hours
Account billing lines 600,000 lines 450,000 lines
Account verification accounts 12,000 accounts 10,000 accounts
Correspondence letters 1,800 letters 2,200 letters
How much of account verification costs will be assigned to Department A?
A) $23,750
B) $28,500
C) $95,000
D) $47,500
Answer: B
Explanation: Account verification costs - Department A = ($95,000/ 40,000) × 12,000 = $28,500
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4) Extreme Manufacturing Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry $390,000 13,000 hours
Account billing $275,000 5,000,000 lines
Account verification accounts $130,500 60,000 accounts
Correspondence letters $22,000 4,000 letters
Total costs $817,500
The above activities are used by Departments A and B as follows:
Department A Department B
Account inquiry hours 2,500 hours 4,000 hours
Account billing lines 800,000 lines 650,000 lines
Account verification accounts 9,000 accounts 7,000 accounts
Correspondence letters 2,000 letters 2,400 letters
How much of correspondence costs will be assigned to Department A?
A) $22,000
B) $49,500
C) $11,000
D) $11,242
Answer: C
Explanation: Correspondence costs - Department A = ($22,000 ÷ 4,000) × 2,000 = $11,000
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5) Extreme Manufacturing Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry $280,000 14,000 hours
Account billing $350,000 7,000,000 lines
Account verification accounts $93,750 50,000 accounts
Correspondence letters $29,000 4,000 letters
Total costs $752,750
The above activities are used by Departments A and B as follows:
Department A Department B
Account inquiry hours 2,100 hours 3,600 hours
Account billing lines 500,000 lines 350,000 lines
Account verification accounts 7,000 accounts 5,000 accounts
Correspondence letters 1,200 letters 1,600 letters
How much of the total costs will be assigned to Department A?
A) $88,825
B) $118,825
C) $120,000
D) $85,075
Answer: A
Explanation: Account inquiry costs = ($280,000 ÷ 14,000) × 2,100 = $42,000
Billing costs = ($350,000 ÷ 7,000,000) × 500,000 = $25,000
Account verification costs = ($93,750 ÷ 50,000) × 7,000 = $13,125
Correspondence costs = ($29,000 ÷ 4,000) × 1,200 = $8,700
$88,825
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6) Extreme Manufacturing Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry $750,000 15,000 hours
Account billing $250,000 5,000,000 lines
Account verification accounts $173,250 70,000 accounts
Correspondence letters $42,000 7,000 letters
Total costs $1,215,250
The above activities are used by Departments A and B as follows:
Department A Department B
Account inquiry hours 2,000 hours 3,500 hours
Account billing lines 900,000 lines 750,000 lines
Account verification accounts 9,000 accounts 7,000 accounts
Correspondence letters 1,200 letters 1,600 letters
How much of the total costs will be assigned to Department B?
A) $282,460
B) $246,925
C) $239,425
D) $256,825
Answer: C
Explanation: Account inquiry costs = ($750,000 ÷ 15,000) × 3,500 = $175,000
Billing costs = ($250,000 ÷ 5,000,000) × 750,000 = $37,500
Account verification costs = ($173,250 ÷ 70,000) × 7,000 = $17,325
Correspondence costs = ($42,000 ÷ 7,000) × 1,600 = $9,600
$239,425
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7) Columbus Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Labor $392,000 8,000 hours
Gas $30,000 5,000 gallons
Invoices $180,000 7,500 invoices
Total costs $602,000
The above activities used by their three departments are:
Lawn Department Bush Department Plowing Department
Labor 2,600 hours 1,300 hours 4,100 hours
Gas 1,800 gallons 1,000 gallons 2,200 gallons
Invoices 1,600 invoices 100 invoices 5,800 invoices
How much of the labor cost will be assigned to the Bush Department?
A) $127,400
B) $63,700
C) $200,900
D) $97,825
Answer: B
Explanation: Labor cost assigned = ($392,000 ÷ 8,000) × 1,300 = $63,700
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8) Columbus Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Labor $336,000 8,000 hours
Gas $84,000 7,000 gallons
Invoices $180,000 7,500 invoices
Total costs $600,000
The above activities used by their three departments are:
Lawn Department Bush Department Plowing Department
Labor 3,100 hours 1,500 hours 3,400 hours
Gas 1,900 gallons 900 gallons 4,200 gallons
Invoices 1,300 invoices 400 invoices 5,800 invoices
If labor hours are used to allocate the non-labor, overhead costs, what is the overhead allocation rate?
A) $75.00 per hour
B) $26.67 per hour
C) $42.00 per hour
D) $33.00 per hour
Answer: D
Explanation: Overhead allocation rate = ($84,000 + $180,000) ÷ 8,000 = $33.00
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9) Columbus Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Labor $384,000 8,000 hours
Gas $36,000 6,000 gallons
Invoices $180,000 7,500 invoices
Total costs $600,000
The above activities used by their three departments are:
Lawn Department Bush Department Plowing Department
Labor 2,500 hours 1,400 hours 4,100 hours
Gas 1,800 gallons 1,000 gallons 3,200 gallons
Invoices 1,300 invoices 300 invoices 5,900 invoices
How much of invoice cost will be assigned to the Bush Department?
A) $7,200
B) $141,600
C) $31,200
D) $180,000
Answer: A
Explanation: ($180,000 / 7,500 invoices) × 300 invoices = $7,200
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10) Columbus Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Labor $352,000 8,000 hours
Gas $8,000 4,000 gallons
Invoices $110,000 5,500 invoices
Total costs $470,000
The above activities used by their three departments are:
Lawn Department Bush Department Plowing Department
Labor 3,200 hours 1,200 hours 3,600 hours
Gas 1,900 gallons 900 gallons 1,200 gallons
Invoices 1,500 invoices 300 invoices 3,700 invoices
How much of the gas cost will be assigned to the Lawn Department?
A) $1,800
B) $3,800
C) $2,400
D) $8,000
Answer: B
Explanation: Gas cost = ($8,000 ÷ 4,000 gallons) × 1,900 gallons = $3,800
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11) Columbus Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Labor $490,000 10,000 hours
Gas $18,000 3,000 gallons
Invoices $56,000 3,500 invoices
Total costs $564,000
The above activities used by their three departments are:
Lawn Department Bush Department Plowing Department
Labor 2,800 hours 1,400 hours 5,800 hours
Gas 1,800 gallons 900 gallons 300 gallons
Invoices 1,600 invoices 300 invoices 1,600 invoices
How much of the total cost will be assigned to the Plowing Department?
A) $564,000
B) $311,600
C) $188,000
D) $173,600
Answer: B
Explanation: ($490,000 / 10,000) × 5,800 = $284,200
($18,000 / 3,000) × 300 = $1,800
($56,000 / 3,500) × 1,600 = $25,600
$311,600
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12) Milan Manufacturing Company has identified three cost pools to allocate overhead costs. The
following estimates are provided for the coming year:
Cost Pool Overhead Costs Cost driver Activity level
Supervision of direct labor $539,000 Direct labor-hours 920,000
Machine maintenance $120,000 Machine-hours 1,000,000
Facility rent $215,000 Square feet of area 160,000
Total overhead costs $874,000
The accounting records show the Mossman Job consumed the following resources:
Cost driver Actual level
Direct labor-hours 300
Machine-hours 1,675
Square feet of area 70
If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for
Milan?
A) $1.05 per direct labor-hour
B) $0.59 per direct labor-hour
C) $0.95 per direct labor-hour
D) $1.71 per direct labor-hour
Answer: C
Explanation: Cost driver rate = $874,000 ÷ 920,000 = 0.95 per dlh
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13) Milan Company has identified three cost pools to allocate overhead costs. The following estimates are
provided for the coming year:
Cost Pool Overhead Costs Cost driver Activity level
Supervision of direct labor $624,000 Direct labor-hours 940,000
Machine maintenance $100,000 Machine-hours 840,000
Facility rent $216,000 Square feet of area 140,000
Total overhead costs $940,000
The accounting records show the Mossman Job consumed the following resources:
Cost driver Actual level
Direct labor-hours 290
Machine-hours 1,681.68
Square feet of area 50
Under activity-based costing, what is the amount of machine maintenance costs allocated to the Mossman
Job? (Do not round any intermediary calculations.)
A) $1,881.88
B) $200.20
C) $1,681.68
D) $210.45
Answer: B
Explanation: Machine maintenance costs = 1,681.68 mh × ($100,000 ÷ 840,000) = $200.20
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14) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the
year 2018, manufacturing overhead cost estimates total $1,500,000 for an annual production capacity of 10
million pages.
For 2018 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing
manufacturing overhead costs, it was determined that number of design changes, setups, and inspections
are the primary manufacturing overhead cost drivers. The following information was gathered during
the analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $100,000 400 design changes
Setups 1,300,000 3,000 setups
Inspections 100,000 10,000 inspections
Total manufacturing overhead costs $1,500,000
During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following
printing services:
Activity Money Managers Hospital Systems
Pages 90,000 106,000
Design changes 13 0
Setups 18 8
Inspections 30 38
What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are
assigned based on 10 million pages of production capacity?
A) $0.01 per page
B) $0.15 per page
C) $0.14 per page
D) $0.13 per page
Answer: B
Explanation: $0.15 per page = ($1,500,000 / 10,000,000 pages)
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15) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the
year 2018, manufacturing overhead cost estimates total $600,000 for an annual production capacity of 12
million pages.
For 2018 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing
manufacturing overhead costs, it was determined that number of design changes, setups, and inspections
are the primary manufacturing overhead cost drivers. The following information was gathered during
the analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $120,000 500 design changes
Setups 380,000 4,000 setups
Inspections 100,000 9,000 inspections
Total manufacturing overhead costs $600,000
During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following
printing services:
Activity Money Managers Hospital Systems
Pages 70,000 86,000
Design changes 12 0
Setups 17 7
Inspections 26 34
Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate
for Money Managers during 2018?
A) $4,300
B) $2,800
C) $3,500
D) $4,784
Answer: C
Explanation: $3,500 = [70,000 pages × ($600,000 / 12,000,000)]
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16) Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the
year 2018, manufacturing overhead cost estimates total $940,000 for an annual production capacity of 10
million pages.
For 2018, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing
overhead costs, it was determined that number of design changes, setups, and inspections are the
primary manufacturing overhead cost drivers. The following information was gathered during the
analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $160,000 500 design changes
Setups 692,000 2,000 setups
Inspections 88,000 8,000 inspections
Total manufacturing overhead costs $940,000
During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following
printing services:
Activity Money Managers Hospital Systems
Pages 70,000 86,000
Design changes 11 3
Setups 19 9
Inspections 26 64
Under ABC costing, what is the inspection cost allocated to Hospital Systems?
A) $704
B) $80
C) $286
D) $6,574
Answer: A
Explanation: Inspection cost = ($88,000 ÷ 8,000 inspections) × 64 = $704
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17) Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The
following activity and cost information has been compiled:
Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 18 6 265
Deluxe 29 12 200
Overhead costs $61,100 $64,800
Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the
total amount of overhead costs assigned to the standard model? (Do not round interim calculations.
Round the final answer to the nearest whole dollar.)
A) $62,950
B) $54,151
C) $71,749
D) $36,929
Answer: C
Explanation: Total amount of overhead costs = [($61,100 + $64,800) ÷ (265 + 200)] × 265 = $71,749
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18) North Street Corporation manufactures two models of motorized go-carts, a standard and a deluxe
model. The following activity and cost information has been compiled:
Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 17 7 720
Deluxe 33 12 410
Overhead costs $16,000 $18,050
Number of setups and number of components are identified as activity-cost drivers for overhead.
Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to
the deluxe model?
A) $21,960
B) $17,025
C) $16,840
D) $17,210
Answer: A
Explanation: Setups: 16,000 ÷ (17 + 33) = $320
Components: $18,050 ÷ (7 + 12) = $950
Total amount of overhead cost = ($320 × 33) + ($950 × 12) = $21,960
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19) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the
year 2018, manufacturing overhead cost estimates total $1,760,000 for an annual production capacity of 16
million pages.
For 2018 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing
manufacturing overhead costs, it was determined that number of design changes, setups, and inspections
are the primary manufacturing overhead cost drivers. The following information was gathered during
the analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $160,000 200 design changes
Setups 1,530,000 5,000 setups
Inspections 70,000 7,000 inspections
Total manufacturing overhead costs $1,760,000
During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following
printing services:
Activity Money Managers Hospital Systems
Pages 60,000 76,000
Design changes 14 0
Setups 16 6
Inspections 25 33
Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups,
and inspections cost pools?
A) $800.00 per change, $306.00 per setup, $10.00 per inspection
B) $800.00 per change, $14.00 per setup, $218.57 per inspection
C) $32.00 per change, $10.00 per setup, $306.00 per inspection
D) $22.86 per change, $306.00 per setup, $350 per inspection
Answer: A
Explanation: Design changes: $800.00 per change = ($160,000 / 200 design changes)
Setups: $306.00 per setup = ($1,530,000 / 5,000 setups)
Inspections: $10.00 per inspection = ($70,000 / 7,000 inspections)
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20) High Traffic Products Corporation has two departments, Small and Large. Central costs could be
allocated to the two departments in various ways.
Small Department Large Department
Square footage 6,850 17,750
Number of employees 1,120 500
Sales $320,000 $1,740,000
If advertising expense of $432,600 is allocated on the basis of sales, the cost per cost driver rate would be
________.
A) $0.2 per dollar of sales
B) $0.21 per dollar of sales
C) $0.23 per dollar of sales
D) $0.22 per dollar of sales
Answer: B
Explanation: Cost per cost driver rate = $432,600 ÷ ($320,000 + $1,740,000) = $0.21
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21) Pilot Bank uses activity-based costing. Pilot Bank has the following activities, traceable costs, and cost
drivers:
Activities Traceable Costs Cost Drivers
Open new accounts $40,000 1,000 accounts
Process deposits $72,000 360,000 deposits
Process withdrawals $100,000 200,000 withdrawals
The above activities are used by Downtown branch and North branch as follows:
Activities Downtown North
Open new accounts 200 400
Process deposits 40,000 20,000
Process withdrawals 15,000 18,000
Required:
A) Compute the new account cost assigned to the North branch.
B) Compute the deposit processing cost assigned to the Downtown branch.
C) Compute the withdrawal processing cost assigned to the Downtown branch.
Answer:
A) $16,000 = ($40,000/1,000) × 400 accounts
B) $8,000 = ($72,000/360,000) × 40,000
C) $7,500 = ($100,000/200,000) × 15,000
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22) The manufacturing division of an electronics company uses activity-based costing. The company has
identified three activities and the related cost drivers for indirect production costs.
Activity Cost Driver
Activity 1 Direct materials cost
Activity 2 Direct labor cost
Activity 3 Kilowatt hours
Three types of products are produced. Direct costs and cost-driver activity for each product for a month
are as follows:
Product A Product B Product C
Direct materials cost $75,000 $50,000 $125,000
Direct labor cost $6,000 $1,000 $3,000
Direct labor hours 2,000 1,000 2,000
Kilowatt hours 150,000 200,000 150,000
Indirect production costs for the month are as follows:
Activity 1 $30,000
Activity 2 20,000
Activity 3 16,000
Total $66,000
Required:
A) Compute the indirect production costs allocated to each product using the ABC system.
B) Compute the indirect production costs allocated to each product using a traditional costing system.
Assume indirect production costs are allocated to each product using the cost driver: direct labor hours.
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Answer:
A)
Product A:
Activity 1: ($75,000/$250,000) × $30,000 = $9,000
Activity 2: ($6,000/$10,000) × $20,000 = $12,000
Activity 3: (150,000/500,000) × $16,000 = $4,800
Total $25,800
Product B:
Activity 1: ($50,000/$250,000) × $30,000 = $6,000
Activity 2: ($1,000/$10,000) × $20,000 = $2,000
Activity 3: (200,000/500,000) × $16,000 = $6,400
Total $14,400
Product C:
Activity 1: ($125,000/$250,000) × $30,000 = $15,000
Activity 2: ($3,000/$10,000) × $20,000 = $6,000
Activity 3: (150,000/500,000) × $16,000 = $4,800
Total $25,800
B)
Product A: (2,000/5,000) × $66,000 = $26,400
Product B: (1,000/5,000) × $66,000 = $13,200
Product C: (2,000/5000) × $66,000 = $26,400
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