test bank chapter 8 abc for decision making

Chapter Activity-Based Costing: A Tool to Aid Decision-Making True/False T Easy When combining activities in an activitybased costing system, activities should be grouped together at the same level. For example, batchlevel activities should not be combined with unitlevel activities T Easy Unitlevel activities arise as a result of the total volume of production and are performed each time a unit is produced T Easy Unitlevel production activities are performed each time a unit is made T Easy Organizationsustaining activities are carried out regardless of how many units are made, how many batches are run, or how many different products are made F Easy Activitybased costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct laborhours F Medium The firststage allocation in activitybased costing is the process by which overhead costs are assigned to products before they are assigned to customers T Easy Activity rates in activitybased costing are computed by dividing costs from the firststage allocations by the activity measure for each activity cost pool T Medium In the secondstage allocation in activitybased costing, activity rates are used to apply costs to products, customers, and other cost objects T Medium In traditional costing systems, all manufacturing costs are assigned to productseven manufacturing costs that are not caused by the products 10 T Hard When there are batchlevel or productlevel costs, in comparison to a traditional cost system, an activitybased costing system ordinarily will shift costs from highvolume to lowvolume products Managerial Accounting, 9/e 18 11 F Medium An activitybased costing system is generally easier to set up and run than a traditional cost system 12 F Medium Activitybased costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect only variable costs 13 F Medium In activitybased costing, as in traditional costing systems, nonmanufacturing costs are not assigned to products 14 F Medium In activitybased costing, a plantwide overhead rate is used to apply overhead to products 15 F Medium Changing a cost accounting system is likely to meet with little resistance in an organization since it is a technical matter of little interest to individuals outside of the accounting department Multiple Choice 16 D Medium Which of the following levels of costs should not be allocated to products for decisionmaking purposes? a. Unitlevel activities b. Batchlevel activities c. Productlevel activities d. Organizationsustaining activities 17 C Easy Testing a prototype of a new product is an example of a: a. Unitlevel activity b. Batchlevel activity c. Productlevel activity d. Organizationsustaining activity 18 B Medium Setting up equipment is an example of a: a. Unitlevel activity b. Batchlevel activity c. Productlevel activity d. Organizationsustaining activity 19 B Hard The clerical activity associated with processing purchase orders to produce an order for a standard product is an example of a: a. Unitlevel activity b. Batchlevel activity c. Productlevel activity d. Organizationsustaining activity Managerial Accounting, 9/e 19 20 D Medium Worker recreational facilities is an example of a cost that would ordinarily be considered to be: a. Unitlevel b. Batchlevel c. Productlevel d. Organizationsustaining 21 B Medium Arranging for a shipment of a number of different products to a customer is an example of an activity at which of the following levels? a. Unitlevel activity b. Batchlevel activity c. Customerlevel activity d. Organizationsustaining activity 22 D Medium Human resource management is an example of an activity at which of the following levels? a. Unitlevel activity b. Productlevel activity c. Batchlevel activity d. Organizationsustaining activity 23 D Medium Which of the following would be classified as a productlevel activity? a. Machine setup for a batch of a standard product b. Cafeteria facilities available to and used by all employees c. Human resource management d. Advertising a product 24 C Hard Departmental overhead rates may not correctly assign overhead costs due to: a. the use of direct labor hours in allocating overhead costs to products rather than machine time or quantity of materials used b. the high correlation between direct laborhours and the incurrence of overhead costs. c. overreliance on volume as a basis for allocating overhead costs where products differ regarding the number of units produced, lot size, or complexity of production d. difficulties associated with identifying cost pools for the first stage of the allocation process 25 B Medium Overhead allocation based on volume alone: a. is a key aspect of the activitybased costing model b. will systematically overcost highvolume products and undercost lowvolume products c. will systematically overcost lowvolume products and undercost highvolume products d. must be used for external financial reporting Managerial Accounting, 9/e 20 26 C Medium Paul Company has two products: A and B. The company uses activitybased costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P22,000 400 100 500 Activity 2 P16,240 380 200 580 Activity 3 P14,600 500 250 750 The activity rate under the activitybased costing system for Activity 3 is closest to: a. P70.45 b. P28.87 c. P19.47 d. P58.40 27 B Medium Selena Company has two products: A and B. The company uses activitybased costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P17,600 800 300 1,100 Activity 2 P12,000 500 200 700 Activity 3 P26,000 800 400 1,200 The activity rate under the activitybased costing system for Activity 3 is closest to: a. P46.33 b. P21.67 c. P65.00 d. P18.53 Managerial Accounting, 9/e 21 28 D Hard Matt Company uses activitybased costing. The company has two products: A and B. The annual production and sales of Product A is 8,000 units and of Product B is 6,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P20,000 100 400 500 Activity 2 P37,000 800 200 1,000 Activity 3 P91,200 800 3,000 3,800 The cost per unit of Product A under activitybased costing is closest to: a. P2.40 b. P3.90 c. P10.59 d. P6.60 29 Bridget Company uses activitybased costing. The company has two products: A and B. The annual production and sales of Product A is 2,000 units and of Product B is 3,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 P9,000 400 350 750 Activity 2 P12,000 100 400 500 Activity 3 P48,000 400 1,200 1,600 The cost per unit of Product A under activitybased costing is closest to: a. P6.00 b. P9.60 c. P8.63 d. P13.80 Reference: 81 Note to the Instructor: Questions 30 to 32, 33 to 35, and 36 to 38 are different versions of the same questions Dideda Company uses an activitybased costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Managerial Accounting, 9/e 22 Costs: Manufacturing overhead P360,000 Selling and admin. expenses P240,000 Total P600,000 Distribution of resource consumption: Activity Cost Pools Order Customer Size Support Other Total Manufacturing overhead . 25% 65% 10% 100% Selling and admin. expenses 60% 20% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs You have been asked to complete the firststage allocation of costs to the activity cost pools 30 D Easy Refer To: 81 How much cost, in total, would be allocated in the firststage allocation to the Order Size activity cost pool? a. P150,000 b. P360,000 c. P255,000 d. P234,000 31 B Easy Refer To: 81 How much cost, in total, would be allocated in the firststage allocation to the Customer Support activity cost pool? a. P255,000 b. P282,000 c. P120,000 d. P390,000 32 C Medium Refer To: 81 How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activitybased costing system is used for internal decision making? a. P60,000 b. P0 c. P84,000 d. P120,000 Reference: 82 NOTE TO THE INSTRUCTOR: Questions 30 to 32, 33 to 35, and 36 to 38 are different versions of the same questions Diehl Company uses an activitybased costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Managerial Accounting, 9/e 23 Costs: Manufacturing overhead P480,000 Selling and admin. expenses P100,000 Total P580,000 Distribution of resource consumption: Activity Cost Pools Order Customer Size Support Other Total Manufacturing overhead 5% 85% 10% 100% Selling and admin. expenses 60% 20% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs You have been asked to complete the firststage allocation of costs to the activity cost pools 33 D Easy Refer To: 82 How much cost, in total, would be allocated in the firststage allocation to the Order Size activity cost pool? a. P348,000 b. P188,500 c. P29,000 d. P84,000 34 D Easy Refer To: 82 How much cost, in total, would be allocated in the firststage allocation to the Customer Support activity cost pool? a. P304,500 b. P493,000 c. P116,000 d. P428,000 35 A Medium Refer To: 82 How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activitybased costing system is used for internal decision making? a. P68,000 b. P0 c. P116,000 d. P58,000 Reference: 83 NOTE TO THE INSTRUCTOR: Questions 30 to 32, 33 to 35, and 36 to 38 are different versions of the same questions Dierich Company uses an activitybased costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Managerial Accounting, 9/e 24 Costs: Manufacturing overhead P600,000 Selling and admin. expenses P220,000 Total P820,000 Distribution of resource consumption: Activity Cost Pools Order Customer Size Support Other Total Manufacturing overhead 15% 75% 10% 100% Selling and admin. expenses 60% 20% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs You have been asked to complete the firststage allocation of costs to the activity cost pools 36 A Easy Refer To: 83 How much cost, in total, would be allocated in the firststage allocation to the Order Size activity cost pool? a. P222,000 b. P307,500 c. P123,000 d. P492,000 37 D Easy Refer To: 83 How much cost, in total, would be allocated in the firststage allocation to the Customer Support activity cost pool? a. P389,500 b. P615,000 c. P164,000 d. P494,000 38 B Medium Refer To: 83 How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activitybased costing system is used for internal decision making? a. P82,000 b. P104,000 c. P0 d. P164,000 Reference: 84 Davis Company uses an activitybased costing system in which there are three activity cost pools. The company has provided the following data concerning its costs and its activitybased costing system: Costs: Manufacturing overhead P400,000 Selling and admin. Expenses P200,000 Total . P600,000 Managerial Accounting, 9/e 25 Distribution of resource consumption: Activity Cost Pools Order Customer Size Support Other Total Manufacturing overhead 35% 55% 10% 100% Selling and admin. Expense . 50% 30% 20% 100% The "other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs You have been asked to complete the firststage allocation of the costs to the activity cost pools 39 B Easy Refer To: 84 How much cost, in total, would be allocated in the firststage allocation to the Order Size activity cost pool? a. P210,000 b. P240,000 c. P300,000 d. P255,000 40 D Easy Refer To: 84 How much cost, in total, would be allocated in the firststage allocation to the Customer Support activity cost pool? a. P255,000 b. P180,000 c. P330,000 d. P280,000 41 C Medium Refer To: 84 How much cost, in total should NOT be allocated to orders and products in the second stage of the allocation process if the activitybased costing system is used for internal decision making? a. P0 b. P60,000 c. P80,000 d. P120,000 Reference: 85 NOTE TO THE INSTRUCTOR: Questions 42 to 44, 45 to 47, and 48 to 50 are different versions of the same questions Escau Company is a wholesale distributor that uses activitybased costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Overhead costs: Wages and salaries P380,000 Other expenses P100,000 Total P480,000 Managerial Accounting, 9/e 26 Distribution of resource consumption: Activity Cost Pools Filling Customer Orders Support Other Total Wages and salaries 30% 60% 10% 100% Other expenses 35% 45% 20% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs The activity measures for the activity cost pools for the year are as follows: Activity Cost Pool Activity Filling orders 3,000 orders Customer support 20 customers 42 C Medium Refer To: 85 What would be the total overhead cost per order according to the activity based costing system? In other words, what would be the overall activity rate for the filling orders activity cost pool? (Round to the nearest whole cent.) a. P56.00 b. P48.00 c. P49.67 d. P52.00 43 A Medium Refer To: 85 What would be the total overhead cost per customer according to the activity based costing system? In other words, what would be the overall activity rate for the customer support activity cost pool? (Round to the nearest whole peso.) a. P13,650 b. P12,600 c. P14,400 d. P10,800 44 B Hard Refer To: 85 To the nearest whole peso, how much wages and salaries cost would be allocated to a customer who made 8 orders in a year? a. P14,784 b. P11,704 c. P7,392 d. P9,548 Reference: 86 NOTE TO THE INSTRUCTOR: Questions 42 to 44, 45 to 47, and 48 to 50 are different versions of the same questions Escalona Company is a wholesale distributor that uses activitybased costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system: Managerial Accounting, 9/e 27 Required: a. Prepare the firststage allocation of overhead costs to the activity cost pools by filling in the table below: Making Job Awnings Support Other Total Production overhead Office expense Total b. Compute the activity rates (i.e., cost per unit of activity) for the Making Awnings and Job Support activity cost pools by filling in the table below: Making Job Awnings Support Production overhead Office expense Total c. Prepare an action analysis report in good form of a job that involves making 80 yards of awnings and has direct materials and direct labor cost of P3,000. The sales revenue from this job is P4,000 For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost Answer: a. Firststage allocation Making Job Awnings Support Other Total Production overhead P67,500 P60,000 P22,500 P150,000 Office expense . P 8,000 P65,000 P27,000 P100,000 Total P75,500 P125,000 P49,500 P250,000 Activity 5,000 200 yards jobs b. Activity rates (costs divided by activity) Production overhead . P13.50 P300.00 Office expense P 1.60 P325.00 Total P15.10 P625.00 Managerial Accounting, 9/e 47 c Overhead cost of the job Making Job Awnings Support Total Activity 80 1 Production overhead P1,080.00 P300.00 P1,380.00 Office expense . P 128.00 P325.00 P 453.00 Total P1,208.00 P625.00 P1,833.00 Revenue . P4,000.00 Green costs: Direct materials and labor P3,000.00 Green margin P1,000.00 Yellow costs: Office expense . P 453.00 Yellow margin P 547.00 Red costs: Production overhead P1,380.00 Red margin P( 833.00) 87 Hard Phoenix Company makes custom covers for air conditioning units for homes and businesses. The company uses an activitybased costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity cost pools: Overhead costs: Production overhead P100,000 Office expense . P 50,000 Total P150,000 Distribution of resource consumption: Activity Cost Pools Making Job Covers Support Other Total Production overhead 40% 42% 18% 100% Office expense . 12% 60% 28% 100% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs The amount of activity for the year is as follows: Activity Cost Pool Annual Activity Making covers . 2,500 yards Job support . 200 jobs Other . Not applicable Managerial Accounting, 9/e 48 Required: a. Prepare the firststage allocation of overhead costs to the activity cost pools by filling in the table below: Making Job Covers Support Other Total Production overhead Office expense Total b. Compute the activity rates (i.e., cost per unit of activity) for the Making Covers and Job Support activity cost pools by filling in the table below: Making Job Covers Support Production overhead Office expense Total c. Prepare an action analysis report in good form of a job that involves making 50 yards of covers and has direct materials and direct labor cost of P1,500. The sales revenue from this job is P2,500 For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; production overhead as a Red cost; and office expense as a Yellow cost Answer: a. Firststage allocation Making Job Covers Support Other Total Production overhead P40,000 P42,000 P18,000 P100,000 Office expense . P 6,000 P30,000 P14,000 P 50,000 Total P46,000 P72,000 P32,000 P150,000 Activity 2,500 200 yards jobs b. Activity rates (costs divided by activity) Production overhead P16.00 P210.00 Office expense . P 2.40 P150.00 Total P18.40 P360.00 Managerial Accounting, 9/e 49 c Overhead cost of the job Making Job Covers Support Total Activity 50 1 Production overhead P 800.00 P210.00 P1,010.00 Office expense . P 120.00 P150.00 P 270.00 Total P 920.00 P360.00 P1,280.00 Revenue . P2,500.00 Green costs: Direct materials and labor P1,500.00 Green margin P1,000.00 Yellow costs: Office expense . P 270.00 Yellow margin P 730.00 Red costs: Production overhead P1,010.00 Red margin (P 280.00) 88 Medium Jackson Painting paints the interiors and exteriors of homes and commercial buildings. The company uses an activitybased costing system for its overhead costs. The company has provided the following data concerning its activitybased costing system Activity Cost Pool Activity Measure Annual Activity Painting overhead Square meters 10,000 square meters Job support . Jobs 320 jobs Other . None Not applicable The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs The company has already finished the first stage of the allocation process in which costs were allocated to the activity cost centers. The results are listed below: Job Painting Support Other Total Painting overhead P54,000 P42,000 P24,000 P120,000 Office expense P16,000 P96,000 P48,000 P160,000 Total P70,000 P138,000 P72,000 P280,000 Managerial Accounting, 9/e 50 Required: a. Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job Support activity cost pools by filling in the table below. Round off all calculations to the nearest whole cent Job Painting Support Painting overhead Office expense Total b. Prepare an action analysis report in good form of a job that involves painting 63 square meters and has direct materials and direct labor cost of P2,070. The sales revenue from this job is P2,500 For purposes of this action analysis report, direct materials and direct labor should be classified as a Green cost; painting overhead as a Red cost; and office expense as a Yellow cost Answer: a. Activity rates (costs divided by activity) Job Painting Support Painting overhead P5.40 P131.25 Office expense . P1.60 P300.00 Total P7.00 P431.25 b Overhead cost of the job Job Painting Support Total Activity 63 1 Painting overhead P340.20 P131.25 P471.45 Office expense . P100.80 P300.00 P400.80 Total P441.00 P431.25 P872.25 Sales P2,500.00 Green costs: Direct materials and labor P2,070.00 Green margin P430.00 Yellow costs: Office expense . P400.80 Yellow margin P29.20 Red costs: Painting overhead P471.45 Red margin (P442.25) Managerial Accounting, 9/e 51 89 Hard Cabanos Company manufactures two products, Product C and Product D. The company estimated it would incur P160,790 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period’s operations appear below: Product C Product D Estimated volume 3,400 units 4,800 units Direct labor hours per unit 1.40 hour 1.90 hours Direct materials cost per unit P 7.40 P12.70 Direct labor cost per unit P14.00 P19.00 Required: a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year b. The company is considering using an activitybased costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activitybased costing system would use three activity cost pools. Data relating to these activities for the current period are given below: Estimated Activity Overhead Expected Activity Cost Pool Costs Product C Product D Total Machine setups P12,190 80 150 230 Purchase orders 79,200 730 920 1,650 General factory 69,400 4,760 9,120 13,880 P160,790 Determine the unit product cost of each product for the current period using the activitybased costing approach Answer: a. The expected total direct labor hours during the period are computed as follows: Product C: 3,400 units x 1.4 hr. 4,760 hours Product D: 4,800 units x 1.9 hrs. 9,120 hours Total direct labor hours 13,880 hours Using these hours as a base, the predetermined overhead using direct labor hours would be: Estimated overhead cost, P160,790 ÷ Estimated direct labor hours, 13,880 = P11.58/DLH Managerial Accounting, 9/e 52 Using this overhead rate, the unit product costs are: Product C Product D Direct materials P 7.40 P12.70 Direct labor 14.00 19.00 Manufacturing overhead 16.22 22.01 Total unit product cost P37.62 P53.71 b. The overhead rates for each activity center are as follows: Estimated Overhead Expected Overhead Costs Activity Rate Machine setups P12,190 230 P53.00 Purchase orders P79,200 1,650 P48.00 General factory P69,400 13,880 P 5.00 The overhead cost charged to each product is: Product C Product D Activity Amount Activity Amount Machine setups 80 P 4,240 150 P 7,950 Purchase orders 730 35,040 920 44,160 General factory 4,760 23,800 9,120 45,600 Total overhead cost P63,080 P97,710 Overhead cost per unit: Product C: P63,080 ÷ 3,400 units = P18.55 per unit Product D: P97,710 ÷ 4,800 units = P20.36 per unit Using activity based costing, the unit product cost of each product would be: Product C Product D Direct materials P 7.40 P12.70 Direct labor 14.00 19.00 Manufacturing overhead 18.55 20.36 Total unit product cost P39.95 P52.06 Managerial Accounting, 9/e 53 90 Hard Lionel Corporation manufactures two products, Product B and Product H. Product H is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product B. Product H is the more complex of the two products, requiring two hours of direct labor time per unit to manufacture compared to one hour of direct labor time for Product B. Product H is produced on an automated production line Overhead is currently assigned to the products on the basis of directlabor hours. The company estimated it would incur P450,000 in manufacturing overhead costs and produce 7,500 units of Product H and 30,000 units of Product B during the current year. Unit costs for materials and direct labor are: Product B Product H Direct material P12 P25 Direct labor P10 P20 Required: 1. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year 2. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: Estimated Expected Activity Overhead Product Product Activity Cost Pools Costs B H Total Machine setups required P180,000 600 1,200 1,800 Purchase orders issued 38,382 500 100 600 Machinehours required 92,650 6,800 10,200 17,000 Maintenance requests issued 138,968 693 907 1,600 P450,000 Using the data above and an activitybased costing approach, determine the unit product cost of each product for the current year Answer: 1. The company expects to work 45,000 direct laborhours during the current year, computed as follows: Product B: 30,000 units x 1 hr. 30,000 hours Product H: 7,500 units x 2 hrs. 15,000 hours Total direct laborhours 45,000 hours Managerial Accounting, 9/e 54 Using these hours as a base, the predetermined overhead using direct laborhours would be: Pred. ovhd. rate = P450,000 ÷ 45,000 DLHs = P10.00/DLH Using this overhead rate, the unit product cost of each product would be: Product Product B _ H Direct materials P12 P25 Direct labor 10 20 Manufacturing overhead: Product Bone hour 10 Product Htwo hours _ 20 Total . P32 P 65 2. The overhead rates are computed as follows: Estimated Total Overhead Expected Activity Cost Pools Costs Activity Rate Machine setups . P180,000 1,800 P100.000/setup Purchase orders 38,382 600 63.970/order Machinehours 92,650 17,000 5.450/hour Maintenance requests . 138,968 1,600 86.855/request P450,000 The overhead cost attributable to each product is: Product B Product H Activity Amount Activity Amount Machine setups, P100.00/setup 600 P 60,000 1,200 P120,000 Purchase orders, P63.97/order . 500 31,985 100 6,397 Machinehours, P5.45/hour 6,800 37,060 10,200 55,590 Maintenance request, at P86.855/request 693 60,191 907 78,777 P189,236 P260,764 Overhead cost per unit: Product B: P189,236  30,000 units = P6.3079/unit Product H: P260,764  7,500 units = P34.7685/unit Managerial Accounting, 9/e 55 Using activitybased costing, the unit product cost of each product would be: Product B Product H Direct materials . P12.0000 P25.0000 Direct labor 10.0000 20.0000 Manufacturing overhead . 6.3079 34.7685 Total unit product cost P28.3079 P79.7685 91 Hard Flyer Corporation manufactures two products, Product A and Product B. Product B is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product A. Product B is the more complex of the two products, requiring three hours of direct labor time per unit to manufacture compared to one and onehalf hours of direct labor time for Product A. Product B is produced on an automated production line Overhead is currently assigned to the products on the basis of directlabor hours. The company estimated it would incur P396,000 in manufacturing overhead costs and produce 5,500 units of Product B and 22,000 units of Product A during the current year. Unit costs for materials and direct labor are: Product A Product B Direct material P9 P20 Direct labor . P7 P15 Required: 1. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year 2. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: Estimated Expected Activity Overhead Product Product Activity Cost Pools Costs A B Total Machine setups required P170,000 700 1,000 1,700 Purchase orders issued 37,000 300 200 500 Machinehours required 91,000 4,000 9,000 13,000 Maintenance requests issued 98,000 400 600 1,000 P396,000 Using the data above and an activitybased costing approach, determine the unit product cost of each product for the current year Managerial Accounting, 9/e 56 Answer: 1. The company expects to work 45,000 direct laborhours during the current year, computed as follows: Product A: 22,000 units x 1.5 hr. 33,000 hours Product B: 5,500 units x 3.0 hrs. 16,500 hours Total direct laborhours . 49,500 hours Using these hours as a base, the predetermined overhead using direct laborhours would be: Pred. ovhd. rate = P396,000 ÷ 49,500 DLHs = P8.00/DLH Using this overhead rate, the unit product cost of each product would be: Product Product A _ B Direct materials P 9 P20 Direct labor . 7 15 Manufacturing overhead: Product B1.5 hour . 12 Product Hthree hours 24 Total P28 P59 2. The overhead rates are computed as follows: Estimated Total Overhead Expected Activity Cost Pools Costs Activity Rate Machine setups . P170,000 1,700 P100/setup Purchase orders 37,000 500 74/order Machinehours 91,000 13,000 7/hour Maintenance requests . 98,000 1,000 98/request P396,000 The overhead cost attributable to each product is: Product B Product H Activity Amount Activity Amount Machine setups, P100.00/setup . 700 P 70,000 1,000 P100,000 Purchase orders, P74.00/order 300 22,200 200 14,800 Machinehours, P7.00/hour 4,000 28,000 9,000 63,000 Maintenance request, at P98.00/request 400 39,200 600 58,800 P159,400 P236,600 Managerial Accounting, 9/e 57 Overhead cost per unit: Product A: P159,400  22,000 units = P7.2455/unit Product B: P236,600  5,500 units = P43.0182/unit. Using activitybased costing, the unit product cost of each product would be: Product A Product B Direct materials P 9.0000 P20.0000 Direct labor 7.0000 15.0000 Manufacturing overhead 7.2455 43.0182 Total unit product cost P23.2455 P78.0182 92 Hard EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product W. Product W is the more complex of the two products, requiring one hour of direct labor time per unit to manufacture compared to onehalf hour of direct labor time for Product S. Product W is produced on an automated production line Overhead is currently assigned to the products on the basis of directlabor hours. The company estimated it would incur P500,000 in manufacturing overhead costs and produce 10,000 units of Product W and 60,000 units of Product S during the current year. Unit cost for materials and direct labor are: Product S Product W Direct material P10 P24 Direct labor . P 8 P12 Required: 1. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year Managerial Accounting, 9/e 58 2. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: Estimated Expected Activity Overhead Product Product Activity Cost Pools Costs S W Total Machine setups required P200,000 800 1,200 2,000 Purchase orders issued 43,500 500 100 600 Machinehours required 104,000 3,000 10,000 13,000 Maintenance requests issued 152,500 860 1,140 2,000 P500,000 Using the data above and an activitybased costing approach, determine the unit product cost of each product for the current year Answer: 1. The company expects to work 40,000 direct laborhours during the current year, computed as follows: Product S: 60,000 units x 0.5 hr. 30,000 hours Product W: 10,000 units x 1.0 hrs. 10,000 hours Total direct laborhours 40,000 hours Using these hours as a base, the predetermined overhead using direct laborhours would be: Pred. ovhd. rate = P500,000 ÷ 40,000 DLHs = P12.50/DLH Using this overhead rate, the unit product cost of each product would be: Product Product S W Direct materials P10.00 P24.00 Direct labor 8.00 12.00 Manufacturing overhead: Product Bhalf hour 6.25 Product Hone hour 12.50 Total . P24.25 P48.50 Managerial Accounting, 9/e 59 2. The overhead rates are computed as follows: Estimated Total Overhead Expected Activity Cost Pools Costs Activity Rate Machine setups P200,000 2,000 P100.00/setup Purchase orders 43,500 600 72.50/order Machinehours 104,000 13,000 8.00/hour Maintenance requests 152,500 2,000 76.25/request P500,000 The overhead cost attributable to each product is: Product S Product W Activity Amount Activity Amount Machine setups, P100.00/setup 800 P 80,000 1,200 P120,000 Purchase orders, P72.50/order . 500 36,250 100 7,250 Machinehours, P8.00/hour . 3,000 24,000 10,000 80,000 Maintenance request, at P76.25/request 860 65,575 1,140 86,925 P205,825 P294,175 Overhead cost per unit: Product S: P205,825  60,000 units = P3.4304/unit Product W: P294,175  10,000 units = P29.4175/unit Using activitybased costing, the unit product cost of each product would be: Product S Product W Direct materials P10.0000 P24.0000 Direct labor 8.0000 12.0000 Manufacturing overhead 3.4304 29.4175 Total unit product cost P21.4304 P65.4175 Managerial Accounting, 9/e 60 93 Medium Daba Company manufactures two products, Product F and Product G. The company expects to produce and sell 1,400 units of Product F and 1,800 units of Product G during the current year The company uses activitybased costing to compute unit product costs for external reports. Data relating to the company’s three activity cost pools are given below for the current year: Estimated Activity Overhead Expected Activity Cost Pool Costs Product F Product G Total Machine setups P10,800 80 100 180 Purchase orders P77,520 510 1,010 1,520 General factory P75,920 2,240 3,600 5,840 Required: Using the activitybased costing approach, determine the overhead cost per unit for each product Answer: The overhead rates for each activity center are as follows: Estimated Activity Overhead Expected Overhead Cost Pool Costs Activity Rate Machine setups P10,800 180 P60.00 Purchase orders P77,520 1,520 P51.00 General factory P75,920 5,840 P13.00 The overhead cost charged to each product is: Product F Product G Activity Amount Activity Amount Machine setups 80 P 4,800 100 P 6,000 Purchase orders 510 26,010 1,010 51,510 General factory 2,240 29,120 3,600 46,800 Total overhead cost P59,930 P104,310 Overhead cost per unit: Product F: P59,930 ÷ 1,400 units = P42.81 per unit Product G: P104,310 ÷ 1,800 units = P57.95 per unit Managerial Accounting, 9/e 61

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