FACULTY OF ECONOMICS AND BUSINESS

Accounting, Finance, and Insurance

Cost Allocation 2
Assignment 8: Activity Based Costing (20 points)
ANGELS N.V. is a manufacturer of wooden windows that executes orders for local
construction companies. Frank Edwards, the manager of ANGELS, recently took a
"Management Accounting" course where he was introduced to the principles of Activity
Based Costing.
The total indirect production costs over the past 12 months amount to € 930,000. These
costs include indirect labor costs, depreciation costs of machines and other indirect
production costs. Until now, all indirect costs at ANGELS have been allocated on the
basis of direct working hours. However, based on the course, Frank made the following
analysis for his company. Both the activity costs and the activity driver volume relate
to the past 12 months.

Activity Activity Driver Activity Costs Activity Driver Volume

Producing windows # DLH 414,000 € 100,000 hours
Processing orders # orders 232,000 € 2,000 orders
Maintaining customer
relationships # customers 284,000 € 100 customers

Frank Edwards wants to use the ABC system to assess customer profitability. The two
customers that interest him most are VILLA and TOWER. The following data was
collected over the past 12 months:

VILLA TOWER
# of orders 2 orders 3 orders
# DLH 300 hours 2,000 hours
Turnover 12,500 € 68,000 €
DMC 4,200 € 18,500 €
DLC 5,400 € 36,000 €

Questions:
1. Determine the profitability of the customers VILLA and TOWER based on the
ABC system as drawn up by the manager. (11 points)
2. Determine the profitability of both customers based on the traditional distribution
of indirect costs using the number of direct labor hours as the distribution key.
(5 points)
3. What new insights does the ABC system provide to Frank Edwards? (4 points)
Assignment 9: Activity Based Costing – Solve for missing values (20 points)

A company manufactures four products P1-P2-P3-P4, using the same equipment

and identical processes.
P1 P2 P3 P4 Total
No. of production runs 2 3 6 20 31
No. of set-ups 2 4 6 8 20
Output (units) 10 20 50 200 280
Labour hours/unit 1 2 1 2 6
Labour hours A1 A2 A3 A4 A5
Machine hours/unit 1 3 2 1 7

A B C D
Direct Material Cost/unit in € B1 B2 B3 B4
Direct Labour cost/hour in € 5 5 5 5
Overhead costs relating 4 major activities:
Support department costs Cost pool in € Possible Cost Driver
Set-up costs C1 # of set-ups
Production scheduling C2 # of production runs
Short run variable costs C3 Labour hours
Material handling C4 # of production runs
Total C5

Cost Driver Rate

1,000 €/set up
500 €/production run
15 €/labour hour
600 €/production run

Questions
1) The total material costs amount to 200 €, 1,200 €, 2,000 €, and 16,000 €. Calculate
the labour hours per product and the total labour hours across all products (A1 to
A5), as well as the material costs per unit for each product (B1 to B4). (9 points)
2) Assume that the Cost Driver Rates are as tabulated above for the four cost pools “Set
Ups”, “Production Scheduling”, “Short run variable costs”, and Material Handling”.
Determine the overhead costs per cost pool and the total overhead costs (C1 to C5). (5
points)
3) Calculate the total overhead costs per product. Calculate the overhead for each cost
pool per product separately first. (6 points)
Assignment 10: Multiple Choice Examples (6 points)

ONLY ONE OF THE FOLLOWING STATEMENTS IS CORRECT

1) Product-cost cross-subsidization ________.
A) exists when one overcosted product results in more than one other product being
overcosted
B) means that if a company undercosts more than one of its products, it will overcost
more than one of its other products
C) means that if a company undercosts one of its products, it will overcost at least
one of its other products
D) exists only when one overcosted product results in all other products being
overcosted

2) An accelerated need for refined cost systems is due to ________.

A) global monopolies
B) rising prices
C) intense competition
D) a shift toward increased direct costs

3) Which of the following is true of refinement of a costing system?

A) While refining a costing system, companies should identify as many indirect costs
as is economically feasible.
B) A homogeneous cost pool will use multiple cost drivers to allocate costs.
C) It reduces the use of broad averages for assigning the cost of resources to cost
objects.
D) It is likely to yield the most decision-making benefits when direct costs are a high
percentage of total costs.

4) Which of the following is a reason that has accelerated the demand for refinements
to the costing system?
A) The declining demand for customized products has led managers to decrease the
variety of products and services their companies offer.
B) The use of product and process technology has led to an increase in indirect costs
and a decrease in direct costs.
C) The increase of automated processes has led to the increase in direct
manufacturing cost leading to a decrease in breakeven point.
D) The increasing competition in product markets has led to an increase in
contribution margin resulting in a decrease of breakeven point.
Premium Company provides the following ABC costing information:
Activities Total Overhead Costs Activity-cost drivers
Account inquiry $200,000 10,000 hours 20
Account billing $140,000 4,000,000 lines 0,035
Account verification accounts $75,000 40,000 accounts 1,875
Correspondence letters $25,000 4,000 letters 6,25
Total costs $440,000

The above activities are used by Departments A and B as follows:

Activities Department A Department B
Account inquiry hours 2,500 hours 4,000 hours
Account billing lines 400,000 lines 250,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,200 letters 1,600 letters

How much of the total overhead costs will be assigned to Department A?

A) $90,250
B) $90,650
C) $90,350
D) $90,750
Assignment 11: Job Costing (13 points)

Stellar Sound Inc. uses a job-order costing system. The company had two jobs in
process at the start of 20x5. Job 64 currently has a cost of $84,000 assigned to it
(past production process). Job 65 currently has a cost of $53,500 assigned to it. The
following additional information is available:
▪ The company applies manufacturing overhead on the basis of machine
hours (MH). Budgeted overhead and machine activity for the year were
anticipated to be $856,000 and 16,000 hours respectively.
▪ The company worked on 4 jobs during the year (first quarter):
JOB DMC DLC MH
64 $21,000 $35,000 1,200
65 $22,000 700
66 $44,000 $65,000 2,000
67 $15,000 $8,800 500

▪ Manufacturing overhead during the first quarter included charges for

depreciation ($34,000), indirect labor ($60,000), indirect materials
($5,000), and other factory costs ($139,500).
▪ The company completed job 64 and job 65. Job 65 was sold in Q1,
resulting in a profit of $34,700 for the company.

Questions:
1. Determine the company’s overhead allocation rate based on its budgeted
values. (1 point)
2. Determine the costs of the jobs still in production as of March 31st. (4 points)
3. Determine the costs of the ending inventory of finished products as of March
31st. (4 points)
4. Was manufacturing overhead over- or underabsorbed for the first quarter of the
year? By how much? (4 points)