FUNDAMENTALS OF COST ACCOUNTING BUNDLE
6th Edition
ISBN: 9781260858525
Author: LANEN
Publisher: MCG
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Chapter 9, Problem 58P
Activity-Based Costing and Predetermined Overhead Rates
College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for year 5 for each activity center.
In addition, management estimated 2,000 direct labor-hours for year 5.
Assume that the following cost driver volumes occurred in February, year 5:
Direct labor costs were $30 per hour.
Required
- a. Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base.
- b. Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed in requirement (a).
- c. Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement (a). (Note: Do not assume that total overhead applied to products in February will be the same for activity-based costing as it was for the labor-hour-based allocation.)
- d. Management has seen your numbers and wants an explanation for the discrepancy between the product costs using direct labor-hours as the allocation base and the product costs using activity-based costing. Write a brief response to management.
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College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a
predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based
costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity
center.
Recommended
Estimated
Estimated Cost
Activity
Setting up production
Cost Driver
Cost
Driver Units
Number of production runs
$ 33,600
120 runs
Processing orders
Handling materials
Using machines
Providing quality management
Packing and shipping
Number of orders
52,000
200 orders
Pounds of materials
14,000
7,000 pounds
Machine-hours
45,000
9,000 hours
Number of inspections
Units shipped
48,000
40 inspections
38,000
19,000 units
$230,600
In addition, management estimated 2,000 direct labor-hours for year 5.
Assume that the following cost driver volumes occurred in February, year 5.
Short…
Fisher Fixtures manufactures three types of lighting fixtures, with model names of Silver, Gold, and Platinum. It applies all indirect costs according to an annual predetermined rate based on direct labor-hours. The plant controller has recommended that the company switch to an activity-based costing system. The controller's staff prepared the following cost estimates for next year (year 2) for the recommended cost drivers.
Activity
Recommended Cost Driver
Estimated Cost
Estimated Cost Driver Activity
Purchasing material
Number of purchase orders
$ 121,200
240
purchase orders
Receiving material
Direct materials cost
225,600
$ 2,820,000
Setting up equipment
Number of production runs
219,360
120
runs
Machine depreciation and maintenance
Machine-hours
75,540
15,108
hours
Ensuring regulatory compliance
Number of inspections
437,400
54
inspections
Shipping
Number of units shipped
1,058,400
588,000
units
Total estimated cost
$ 2,137,500
In addition, management…
Fisher Fixtures manufactures three types of lighting fixtures, with model names of Silver, Gold, and Platinum. It applies all indirect costs according to an annual predetermined rate based on direct labor-hours. The plant controller has recommended that the company switch to an activity-based costing system. The controller's staff prepared the following cost estimates for next year (year 2) for the recommended cost drivers.
Activity
Recommended Cost Driver
Estimated Cost
Estimated Cost Driver Activity
Purchasing material
Number of purchase orders
$ 138,000
240
purchase orders
Receiving material
Direct materials cost
248,000
$ 3,100,000
Setting up equipment
Number of production runs
241,200
120
runs
Machine depreciation and maintenance
Machine-hours
83,800
16,760
hours
Ensuring regulatory compliance
Number of inspections
475,200
54
inspections
Shipping
Number of units shipped
1,108,800
616,000
units
Total estimated cost
$ 2,295,000
In addition, management…
Chapter 9 Solutions
FUNDAMENTALS OF COST ACCOUNTING BUNDLE
Ch. 9 - Give examples of cost drivers commonly used to...Ch. 9 - What is the death spiral? How is it related to the...Ch. 9 - The product costs reported using either plantwide...Ch. 9 - Why do companies commonly use direct labor-hours...Ch. 9 - What are the costs of moving to an activity-based...Ch. 9 - What are the basic steps in computing costs using...Ch. 9 - Prob. 7RQCh. 9 - Prob. 8RQCh. 9 - What type of organization is most likely to...Ch. 9 - Prob. 10RQ
Ch. 9 - How does complexity lead to higher costs? Why is...Ch. 9 - Prob. 12RQCh. 9 - Prob. 13RQCh. 9 - Why are cost drivers based on direct labor widely...Ch. 9 - Prob. 15CADQCh. 9 - Activity-based costing could not be applied in a...Ch. 9 - Activity-based costing is the same as department...Ch. 9 - Prob. 18CADQCh. 9 - It is clear after reading this chapter that...Ch. 9 - Prob. 20CADQCh. 9 - Prob. 21CADQCh. 9 - Prob. 22CADQCh. 9 - Prob. 23CADQCh. 9 - Activity-based costing is just another inventory...Ch. 9 - Prob. 25CADQCh. 9 - Prob. 26CADQCh. 9 - Prob. 27CADQCh. 9 - One of the issues we identified with traditional...Ch. 9 - The cost accounting manager at your business says...Ch. 9 - Prob. 30CADQCh. 9 - Prob. 31ECh. 9 - Reported Costs and Decisions Kima Company...Ch. 9 - Plantwide versus Department Allocation Munoz...Ch. 9 - Plantwide versus Department Allocation Main Street...Ch. 9 - Unitwide versus Department...Ch. 9 - Prob. 36ECh. 9 - Prob. 37ECh. 9 - Upriver currently applies overhead on the basis of...Ch. 9 - Compute the unit costs for the two products, V-1...Ch. 9 - Prob. 40ECh. 9 - Prob. 41ECh. 9 - Activity-Based Costing in a Nonmanufacturing...Ch. 9 - Activity-Based versus Traditional Costing Maglie...Ch. 9 - Activity-Based Costing versus Traditional Costing...Ch. 9 - Activity-Based Costing in a Service Environment...Ch. 9 - Activity-Based versus Traditional Costing Isadores...Ch. 9 - Prob. 47ECh. 9 - Activity-Based Costing: Cost Flows through...Ch. 9 - Prob. 49ECh. 9 - Activity-Based Costing for an Administrative...Ch. 9 - Prob. 51ECh. 9 - Time-Driven Activity-Based Costing Kim...Ch. 9 - Time-Driven ABC for an Administrative Service The...Ch. 9 - Comparative Income Statements and Management...Ch. 9 - Comparative Income Statements and Management...Ch. 9 - Prob. 56PCh. 9 - Activity-Based Costing and Predetermined Overhead...Ch. 9 - Activity-Based Costing and Predetermined Overhead...Ch. 9 - Choosing an Activity-Based Costing System Pickle...Ch. 9 - Churchill Products is considering updating its...Ch. 9 - Utica Manufacturing (UM) was recently acquired by...Ch. 9 - Cain Components manufactures and distributes...Ch. 9 - Prob. 63PCh. 9 - Prob. 64PCh. 9 - Prob. 65PCh. 9 - Cawker Products has two manufacturing...Ch. 9 - MTI makes three types of lawn tractors: M3100,...Ch. 9 - Prob. 68PCh. 9 - Prob. 69PCh. 9 - Prob. 72IC
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