Managerial Accounting
Managerial Accounting
7th Edition
ISBN: 9781260247886
Author: Wild
Publisher: MCG
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Chapter 4, Problem 5E
To determine

Activity Based Costing:

Method of recognizing activities in the organization and allotment of cost of each activity thereto is known as activity based costing.

To compute:Activity rates for given activities related to deluxe model and basic model of the company.

Expert Solution & Answer
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Explanation of Solution

Activity rates shown in below table:

Activity Budget cost ($) Deluxe model Basic model Total of deluxe and basic Activity rate ($)
Parts required 625,000 20,000 parts 30,000 parts 50,000 parts 12.5/ part
Batches made 900,000 250 batches 100 batches 350 batches 2571.4/ batch
Purchase orders 105,000 50 order 20 order 70 orders 1500/ order
Invoices 175,000 50invoices 10invoices 60 invoices 2,917/ invoice
Space occupied 300,000 10,000 square foot 7,000 square foot 17000 square foot 17.6/ square feet
Models 75,000 1 model 1 model 2 models 37,500/ model
Table(1)

Hence,an activity rate of each single activity is now ascertained.

Working notes:

Formula to calculate activity rate is,

   Activityrate= Totaloverheadcostapportioned to pool Totalestimatedactivitylevel

Calculation of activity rate for parts required,

   Activityrate= $625,000 50,000 parts =$12.5

Calculation of activity rate for batches made,

   Activityrate= $900,000 350/batch =$2571.4

Calculation of activity rate for purchase orders,

   Activityrate= $105,000 70 orders =$1500

Calculation of activity rate for invoices,

   Activityrate= $175,000 60 invoices =$2,917

Calculation of activity rate for space occupied,

   Activityrate= $300,000 17,000 square feet =$17.6

Calculation of activity rate for models,

   Activityrate= $75,000 2 models =$37,500

Assignment of cost to deluxe model and basic model is shown in below table,

Activity Deluxe model Basic model Cost of deluxe model ($) Cost of deluxe model ($)
Parts required 20,000 parts 30,000 parts 250,000 375,000
Batches made 250 batches 100 batches 642,850 257,140
Purchase orders 50 order 20 order 75,000 30,000
Invoices 50invoices 10invoices 145,850 29,170
Space occupied 10,000 square foot 7,000 square foot 176,000 123,200
Models 1 model 1 model 37,500 37,500
Table(2)

Hence,cost to each activity related to deluxe model and basic model is now determined.

Working notes:

Formula to calculate overhead cost per unit of each model is,

   Permodelcost=Activitylevel×Activityrate

Deluxe model

Calculation of overhead cost for parts required,

   Permodelcost=$20,000×12.5 =$250,000

Calculation of overhead cost for batches made,

   Permodelcost=$250×2571.4 =$642,850

Calculation of overhead cost for purchase orders,

   Permodelcost=$50×1500 =$75,000

Calculation of overhead cost for invoices,

   Permodelcost=$50×2917 =$145,850

Calculation of overhead cost for space occupied,

   Permodelcost=$10,000×17.6 =$176,000

Calculation of overhead cost for models,

   Permodelcost=$37,500×1 =$37,500

Basic model

Calculation of overhead cost for parts required,

   Permodelcost=$30,000×12.5 =$375,000

Calculation of overhead cost for batches made,

   Permodelcost=$100×2571.4 =$257,140

Calculation of overhead cost for purchase orders,

   Permodelcost=$20×1500 =$30,000

Calculation of overhead cost for invoices,

   Permodelcost=$10×2917 =$29,170

Calculation of overhead cost for space occupied,

   Permodelcost=$7,000×17.6 =$123,200

Calculation of overhead cost for models,

   Permodelcost=$37,500×1 =$37,500

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Chapter 4 Solutions

Managerial Accounting

Ch. 4 - What is a cost object?Ch. 4 - Explain why a single plantwide overhead rate can...Ch. 4 - Why are multiple departmental overhead rates more...Ch. 4 - Prob. 9DQCh. 4 - Prob. 10DQCh. 4 - Prob. 11DQCh. 4 - Prob. 12DQCh. 4 - Prob. 13DQCh. 4 - Prob. 14DQCh. 4 - 15. What are the four activity levels associated...Ch. 4 - Prob. 16DQCh. 4 - Prob. 17DQCh. 4 - Prob. 18DQCh. 4 - Prob. 1QSCh. 4 - Prob. 2QSCh. 4 - Prob. 3QSCh. 4 - Prob. 4QSCh. 4 - Prob. 5QSCh. 4 - Prob. 6QSCh. 4 - Prob. 7QSCh. 4 - Prob. 8QSCh. 4 - Plant wide rate method P1 A manufacturer uses...Ch. 4 - Prob. 10QSCh. 4 - Prob. 11QSCh. 4 - Prob. 12QSCh. 4 - Prob. 13QSCh. 4 - Prob. 14QSCh. 4 - Prob. 15QSCh. 4 - Prob. 16QSCh. 4 - Exercise 17-17 Identifying activity levels C3...Ch. 4 - Prob. 2ECh. 4 - Exercise 17-1 Computing Plantwide overhead rates...Ch. 4 - Prob. 4ECh. 4 - Prob. 5ECh. 4 - Prob. 6ECh. 4 - Exercise 17-5 Departmental overhead rates P2 Refer...Ch. 4 - Prob. 8ECh. 4 - Prob. 9ECh. 4 - Prob. 10ECh. 4 - Prob. 11ECh. 4 - Prob. 12ECh. 4 - Prob. 13ECh. 4 - Prob. 14ECh. 4 - Prob. 15ECh. 4 - Prob. 16ECh. 4 - Exerciser 17-14 Activity-based costing P3 A2...Ch. 4 - Prob. 18ECh. 4 - Problem 17-1A Comparing costs using ABC with the...Ch. 4 - Prob. 2PSACh. 4 - Prob. 3PSACh. 4 - Prob. 4PSACh. 4 - Prob. 5PSACh. 4 - Prob. 1PSBCh. 4 - Prob. 2PSBCh. 4 - Prob. 3PSBCh. 4 - Prob. 4PSBCh. 4 - Prob. 5PSBCh. 4 - Prob. 4SPCh. 4 - Prob. 1AACh. 4 - Prob. 2AACh. 4 - Prob. 3AACh. 4 - Prob. 1BTNCh. 4 - Prob. 2BTNCh. 4 - Accounting professionals who for private companies...Ch. 4 - Prob. 4BTNCh. 4 - Prob. 5BTNCh. 4 - Visit and observe the processes of three different...
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