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    ABC-sample Problem

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    Lee Jap Oy
    1. The company allocates overhead costs to activity cost pools based on resource consumption interviews. 2. Activity rates are calculated for each pool by dividing the total costs by activity measures. 3. Overhead costs are allocated to 4 orders for a customer based on the activity rates, totaling $22,400 for assembling 80 units and $4,960 for processing the 4 orders.

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    ABC-sample Problem

    Uploaded by

    Lee Jap Oy
    803 views5 pages
    1. The company allocates overhead costs to activity cost pools based on resource consumption interviews. 2. Activity rates are calculated for each pool by dividing the total costs by activity measures. 3. Overhead costs are allocated to 4 orders for a customer based on the activity rates, totaling $22,400 for assembling 80 units and $4,960 for processing the 4 orders.

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    1. The company allocates overhead costs to activity cost pools based on resource consumption interviews. 2. Activity rates are calculated for each pool by dividing the total costs by activity measures. 3. Overhead costs are allocated to 4 orders for a customer based on the activity rates, totaling $22,400 for assembling 80 units and $4,960 for processing the 4 orders.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    803 views5 pages

    ABC-sample Problem

    Uploaded by

    Lee Jap Oy
    1. The company allocates overhead costs to activity cost pools based on resource consumption interviews. 2. Activity rates are calculated for each pool by dividing the total costs by activity measures. 3. Overhead costs are allocated to 4 orders for a customer based on the activity rates, totaling $22,400 for assembling 80 units and $4,960 for processing the 4 orders.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5
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    Activity-based costing allocates indirect costs to products based on their use of activities like setups and machine hours. This provides a more accurate product cost than traditional costing.

    Indirect manufacturing costs are first allocated to activity cost pools like setups and machine hours. Then the costs in each pool are assigned to products based on their consumption of the activities, like number of setups and machine hours used.

    Activity rates are calculated by taking the total cost in each activity cost pool and dividing it by the total activity units like number of setups or machine hours.

    ACTIVITY-BASED COSTING EXAMPLE/PROBLEM:

    Longview Corp. is considering the use of activity-based costing. The following


    information is provided for the production of two product lines:

    Activity Cost Cost Driver

    Setup $107,000 Number of setups


    Machine maintenance 50000 Number of hours
    Total indirect $157,000
    manufacturing costs

    Product A Product B Total


    Direct labor hours 7,000 3,000 10,000
    number of setups 30 70 100
    Number of machine hours 1200 3,800 5,000

    Longview plans to produce 350 units of Product A and 225 units of Product B. Compute
    the ABC indirect manufacturing cost per unit for each product.

    Solution:
    1. Calculate the rate:
    Setups:
    107,000/100setups = 1,070 per setups
    Maintenance:
    $50,000/5000 no. of machine hrs. = $10 per MH

    2. Allocate costs:
    Product A Product B

    Setups: 1,070 x 30 = $32,100 $1,070 x 70 = $74,900

    Maintenance: $10 x 1,200 = 12,000 $10 x 3,800 = 38,000

    $44,100/350 $112, 900/225

    = $126 per units = $501.78 units


    Monthly, Corp. makes two products: C and D. The following data have been summarized:

    Product C Product D
    Direct materials cost per unit $900 $2,100
    Direct labor cost per unit 400 200
    Indirect manufacturing cost per unit ? ?

    Activity Allocation rate Allocation Base units


    Product C Product D
    setups $1,000 37 77
    machine manufacturing cost per unit $11 1,350 3,850

    The company plans to manufacture 225 units of each product. Calculate the product cost per
    unit for Products C and D using activity-based costing.

    1. Allocate costs:
    Product C Product D

    Setup: $1,000 x 37 = $37,000 $1,000 x 77 = $77,000

    Maint: $11 x 1,350 = 14, 850 $11 x 3,850 = 42,350

    51,850/225 units $119,350/225 units

    = $230.44 = $530.44
    OBJECTIVES:

    1. Perform the first stage allocation of overhead costs to the activity cost pools.
    2. Compute activity rates the activity cost pools.
    3. Construct a table showing the overhead costs of units and four orders.

    Ferris Corporation makes a single product – a fire resistant commercial filing cabinet that it sells
    to office furniture distributors. The company has a single ABC system that it uses for internal
    decision making.

    The company has two overhead departments whose costs are listed below:

    Manufacturing overhead $500,000


    Selling administrative $300,000
    Total overhead costs $800,000

    The company’s activity based costing systems has the following activity cost pools and activity
    pools and activity measures:

    Activity Cost Pool Activity Measures


    Assembling units Number of units
    Processing orders Number of units
    Supporting customers Number of units
    other Not applicable

    Costs assigned to the “other” activity pool have no activity measure; they consist of the costs of
    unused capacity and organization sustaining cost- neither of which is assigned to products,
    orders or customers.

    Ferris Corporation distributes the costs of manufacturing overhead and of selling and
    administrative overhead the activity costs pools based on employee interviews, the results of
    which are reported below:

    Distribution of Resource Consumption Across Activity Cost Pools


    Assembling Processing Supporting Other Total
    Units Orders
    Manufacturing overhead 50% 35% 5% 10% 100%
    Selling and Administrative 10% 45% 25% 20% 100%
    overhead
    Total activity 1,000 units 250 orders 100 __ __
    customers

    Required:

    1. Perform the first stage allocation of overhead costs to the activity cost pools.

    2. Compute activity rates for the activity cost pools.

    3. Office Mart is one of the Ferris Corporation's customers. Last year Office Mart ordered
    filing cabinets four different times. Office Mart ordered a total of 80 cabinets during the
    year. Construct a table showing the overhead costs of these 80 units and four orders.

    Solution:

    1. The first stage allocation of costs to the activity cost pools appears below:

    Activity Cost Pools

    Assembling Processing Supporting Other Total


    Units Orders Customers

    Manufacturing overhead $250,000 $175,000 $25,000 $50,000 $500,000

    Selling and Administrative 30000 135000 75000 60000 300000


    overhead

    Total activity $280,000 $310,000 $100,000 $110,000 $800,000


    2. The activity rates for the activity cost pools are:

    Activity Cost Total Cost Total Activity Rate


    Pools Activity
    Assembling units $280,000 1000 units $280 per unit
    Processing $310,000 250 units $1240 per
    orders order
    Supporting $100,000 100 units $1000 per
    customers customer

    3. The overhead cost for the four orders of a total of 80filing cabinets would be computed
    as follows:

    Activity Cost Total Cost Total Activity Rate


    Pools Activity
    Assembling units $280 per 80 units $22,400
    unit
    Processing $1240 per 4 units $4,960
    orders order
    Supporting $1000 per Not
    customers customer applicable
    4. The product and customer margin can be computed as follows:

    Filing cabinet product margin:


    Sales ($595 per unit * 80 units) $47,600
    Cost:
    Direct materials ($180 per unit *80 units) $14,400
    Direct materials ($50 per unit *80 units) $4,000
    Volume related overhead (above) $22,400
    Order related overhead (above) $4,960 45,760
    $1,840
    Customer Profitability Analysis - OfficeMart
    Product margin (above) $1,840
    Less: customer support overhead (above) $1,000
    $840

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