Fill-in-the-Blank Equations. Exercises

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1 Chapter 26 Cost Allocation and Activity-Based Costing Study Guide Solutions Fill-in-the-Blank Equations 1. Total budgeted plantwide allocation base 2. Department factory overhead rate 3. Ratio of allocation base usage in a department 4. Total activity-base usage Exercises 1. Would each description relate to a single plantwide overhead rate method, multiple production department factory overhead rate method, or activity-based costing method? a. Activity-based costing method b. Plantwide overhead rate method c. Multiple production department factory overhead rate method 2. Determine if the overhead allocated to the product relates to a single plantwide overhead rate method, multiple production department factory overhead rate method, or activity-based costing method. a. Activity-based costing method b. Multiple production department factory overhead rate method c. Single plantwide overhead rate method 3. Would each relate to a single plantwide overhead rate method, multiple production department factory overhead rate method, or activity-based costing method? a. Multiple production department factory overhead rate method b. Single plantwide overhead rate method c. Activity-based costing 1

2 2 Chapter 26 Strategy: If a company uses a single plantwide overhead rate method, management will estimate the total factory overhead and total allocation base. The rate found will be allocated to all products based on the usage of the allocation base. Using a multiple production department factory overhead rate method, management must go through the same process, but make estimates for each department. Overhead is allocated to products based on the usage of the allocation base for each department. Activity-based costing requires that management determine the overhead costs and the activities associated with the costs. The rate is applied to the products by the usage of each activity throughout the production process. 4. Charleston Affair allocates factory overhead using a single plantwide overhead rate based on machine hours. At the beginning of the year, the company expects to incur $25,500 of overhead costs for 1,000 machine hours. Machine hours for Product K production total 490, while Product M requires 400 machine hours during the year. a. $25.50 per machine hour = $25,500/1,000 hours b. Product K: $12,495 = $25.50 per machine hour 490 machine hours Product M: $10,200 = $25.50 per machine hour 400 machine hours 5. Wake Coffee Co. allocates factory overhead using a single plantwide overhead rate based on direct labor hours. The company estimates that factory overhead costs will be $60,000 and direct labor costs to total $123,750. Employees are paid $8.25 an hour. To produce the 7,500 units of the Standard Coffee, the company requires 6,275 direct labor hours, while 10,200 units of Deluxe Coffee requires 8,400 direct labor hours. a. $4.00 per direct labor hour = $60,000/15,000 direct labor hours 15,000 direct labor hours = $123,750/$8.25 per direct labor hour b. Standard Coffee: $25,100 = $4.00 per direct labor hours 6,275 direct labor hours Deluxe Coffee: $33,600 = $4.00 per direct labor hours 8,400 direct labor hours c. Standard Coffee: $3.35= $25,100/7,500 units Deluxe Coffee: $3.29 = $33,600/10,200

3 Cost Allocation and Activity-Based Costing 3 6. Blair Designs estimates total factory overhead for the year to be $45,000, which is allocated based on a single plantwide overhead rate per machine hour. The Standard material requires 1.2 machine hours per yard, while the Print material requires 2.0 machine hours per yard. The company estimates to produce 10,000 yards of the Standard material and 6,500 yards of the Print material at the beginning of the year. During the year, the Standard material requires 9,000 machine hours, while the Print material requires 18,000 machine hours. a. $1.80 per machine hour= $45,000/25,000 machine hours 25,000 machine hours = (1.2 10,000) + (2 6,500) b. Standard material: $16,200 = $1.80 per machine hour 9,000 machine hours Print material: $32,400 = $1.80 per machine hour 18,000 machine hours Strategy: To determine the plantwide overhead rate, divide the total budgeted overhead for the period by the total budgeted allocation base. The rate is the amount of dollars to allocate to each product by the amount of time the product uses the allocation base. To determine the amount of overhead applied to a product, multiply the overhead rate by the usage of the allocation base for the product.

4 4 Chapter Charleston Affair determines that a departmental overhead rate should be used to allocate its $25,500 of estimated overhead costs, which can be broken down into $18,000 estimated to be incurred in the Cutting Department and the remainder estimated to be incurred in the Finishing Department. Use the following information for the company. Product K Product M Cutting (machine hours) 10,000 14,000 Finishing (direct labor hours) 5,000 7,500 a. Cutting Department: $0.75 per machine hour = $18,000/(10, ,000) machine hours b. Finishing Department: $0.60 per DLH = $7,500/(5, ,500) DLH Allocation Base Usage Department Factory Allocated Factory Product K Cutting Department 10,000 $0.75 = $ 7,500 Finishing Department 5,000 $0.60 = 3,000 Total $10,500 Product M Cutting Department 14,000 $0.75 = $10,500 Finishing Department 7,500 $0.60 = 4,500 Total $15,000

5 Cost Allocation and Activity-Based Costing 5 8. Wake Coffee Co. will allocate $60,000 of factory overhead based upon departmental rates for its Roasting and Packaging Departments. The Roasting Department is expected to incur $45,000 of costs, while the Packaging Department is expected to incur $15,000 of costs. Use the information below to calculate the overhead rates for each department and the factory overhead to be allocated to each product line. Standard Deluxe Roasting (machine hours) 10,000 15,000 Packaging (machine hours) 1,300 1,700 Roasting Department: $1.80 per machine hour = $45,000/(10, ,000) machine hours Packaging Department: $5.00 per machine hour = $15,000/(1, ,700) machine hours Allocation Base Usage Department Factory Allocated Factory Standard Roasting Department 10,000 $1.80 = $18,000 Packaging Department 1,300 $5.00 = 6,500 Total $24,500 Deluxe Roasting Department 15,000 $1.80 = $27,000 Packaging Department 1,700 $5.00 = 8,500 Total $35, Blair Designs plans to allocate factory overhead based upon a departmental rate for the Sewing and Packaging Departments. The company expects to incur total overhead costs of $45,000, of which management expects 75% to be incurred by the Sewing Department and 25% to be incurred by the Packaging Department. Use the information shown to calculate the departmental overhead rates and the factory overhead to be allocated to each product line. Solid Print Sewing (direct labor hours) 2,150 5,350 Packaging (machine hours) Sewing Department: $4.50 per direct labor hour = $33,750/(2, ,350) direct labor hours Packaging Department: $9.00 per machine hour = $11,250/( ) machine hours

6 6 Chapter 26 Allocation Base Usage Department Factory Allocated Factory Solid Sewing Department 2,150 $4.50 = $ 9,675 Packaging Department 500 $9.00 = 4,500 Total $14,175 Print Sewing Department 5,350 $4.50 = $24,075 Packaging Department 750 $9.00 = 6,750 Total $30,825 Strategy: To calculate a departmental overhead rate, divide the budgeted factory overhead by the budgeted department allocation base. Each product should receive factory overhead related to the allocation base usage in each department. Calculate the allocated factory overhead to a product by multiplying the department s rate by the usage of the allocation base in the department, which should be done for each department. The sum of the allocated factory overhead from each department is the product s total overhead allocated. 10. Charleston Affair uses activity-based costing to allocate factory overhead and has divided estimated costs into: Repairs, $7,500; Assembly, $10,000; and Cleaning, $8,000. Use the activity-base usage quantities for Product K and Product M to allocate the overhead. Also, determine the amount of factory overhead allocated to each product. Repairs (Number of repairs) Assembly (Number of machine setups) Cleaning (Number of machine cleanings) Product K Product M Total (Per repair) (Per machine setup) (Per machine cleaning) Activity rate $15 $200 $200 Activity cost: Product K $2,250 $ 5,600 $3,600 Product M 5,250 4,400 4,400 Total $7,500 $10,000 $8,000 Product K: $11,450 Product M: $14,050

7 Cost Allocation and Activity-Based Costing Wake Coffee Co. manufactures two products, Standard Coffee and Deluxe Coffee. The company estimates total factory overhead of $60,000 for the year, which has been divided into: Assembly, $20,000; Inspection, $28,000; and Engineering Design, $12,000. Use activity-based costing and the usage quantities below to determine how much overhead should be assigned to each product. Also, determine the amount of factory overhead allocated to each product. Assembly (Number of machine setups) Inspection (Number of inspections) Engineering Design (Number of engineering redesigns) Standard Deluxe Total (Per setup) (Per inspection) (Per redesign) Activity rate $25 $70 $400 Activity cost: Standard $ 9,000 $15,400 $ 4,800 Deluxe 11,000 12,600 7,200 Total $20,000 $28,000 $12,000 Standard: $29,200 Deluxe: $30, Blair Designs estimated total factory overhead of $45,000 for the year, which can be divided into: Inspections, $18,000; Research, $12,000; and Supervising, $15,000. Use the activity-base usage quantities for the company s two products, Solid and Print, to allocate the overhead. Also, determine the amount of factory overhead allocated to each product. Inspection (Number of inspections) Research (Number of research hours) Supervisor (Number of direct labor hours) Solid Print Total ,000 (Per inspection) (Per research hour) (Per direct labor hour) Activity rate $28.80 $40 $15 Activity cost: Solid $ 9,360 $ 7,000 $10,500 Print: 8,640 5,000 4,500 Total $18,000 $12,000 $15,000 Solid: $26,860 Print: $18,140

8 8 Chapter 26 Strategy: First, determine the activity rate by dividing the cost of the activity by the total activity-base usage. The rate is how much the company will incur each time the activity occurs. Next, allocate the cost of the activity to each product by multiplying the activity rate by the number of times the activity occurs for the product. Since activity-base costing categorizes costs further, it provides companies with a more precise applied factory overhead cost. 13. Compare the overhead allocated to the products from Exercises 4 and 7 for Charleston Affair. If the company used a single plantwide rate rather than departmental rates for each product, what would be the effect on pricing of the products? Plantwide Rate Departmental Rates Product K $12,495 $10,500 Product M 10,200 15,000 Using a plantwide rate would cause Product K to be overpriced and Product M to be underpriced compared to the departmental rates. 14. Compare the overhead allocated to the products from Exercises 5 and 11 for Wake Coffee Co. If the company used a single plantwide rate rather than activity-based costing for each product, what would be the effect on pricing of the products? Plantwide Rate Activity-Based Costing Standard Coffee $25,100 $29,200 Deluxe Coffee 33,600 30,800 Using a plantwide rate rather than activity-based costing would cause the Standard Coffee to be underpriced and the Deluxe Coffee to be overpriced. 15. Compare the overhead allocated to the products from Exercises 9 and 12 for Blair Designs. If the company used a departmental rates rather than activity-based costing for each product, what would be the effect on pricing of the products? Departmental Rates Activity-Based Costing Solid Pattern $14,175 $26,860 Print Pattern 30,825 18,140 Using departmental rates rather than activity-based costing would cause Solid Pattern to be underpriced and the Print Pattern to be overpriced.

9 Cost Allocation and Activity-Based Costing 9 Strategy: When using a plantwide overhead rate, the company allocates all overhead based upon one rate. Using a departmental overhead rate or activity-based overhead rate will create a more precise allocation of overhead because different products may require more time in certain departments, which have different factory overhead rates. Products may also require certain activities, which cannot be shown using a single plantwide rate. 16. When determining the amount of selling and administrative expense to each product, Charleston Affair uses activity-based costing. Two activities related to the selling and administrative expense are order entry, with expected costs of $7,000, and promotional support, with expected costs of $5,200. The company expects to receive 400 total orders and spend 650 hours promoting products. a. Order entries: $17.50 per order = $7,000/400 orders Promotional support: $8.00 per hour = $5,200/650 hours b. Order entries: $3, = $17.50 per order 175 orders Promotional support: $2,480 = $8.00 per hour 310 hours 17. To determine selling and administrative expenses to allocate to products, Wake Coffee Co. uses activity-based costing. The company breaks this expense into customer return processing and shipping and handling, with total estimated costs of $6,000 and $7,000, respectively. The company expects to receive 200 returns and prepare 350 special shipments. a. Return processing: $30 per return = $6,000/200 returns Shipping and handling: $20 per special shipment = $7,000/350 special shipments b. Return processing: $1,710 = $30 per return 57 returns Shipping and handling: $4,200 = $20 per special shipment 210 special shipments

10 10 Chapter Blair Designs allocates selling and administrative costs using activity-based costing. Promotional support and customer return processing are two activities related to the expenses, with estimated costs for the year totaling $10,000 and $7,200, respectively. The company expects to send 40 advertisements to promote the products and receive 500 returns for the upcoming year. a. Promotional support: $250 per advertisement = $10,000/40 advertisements Customer return processing: $14.40 per return = $7,200/500 returns b. Promotional support: $3,000 = $250 per advertisement 12 advertisements Customer return processing: $2,880 = $14.40 per return 200 returns Strategy: Activity-based costing for selling and administrative expenses is prepared the same as activity-based costing for factory overhead. First, determine the activity-based rate for each activity that is considered a selling and administrative expense. Next, determine the amount of selling and administrative expenses allocated to the product by multiplying the activity-based rate by the number of times the activity must be completed for the product. 19. A realtor determines that overhead should be allocated to houses using activity-based costing. Two identified activities include indirect open house expenses and advertising expenses, which are estimated to have total costs of $4,500 and $25,000. The realtor estimates to host 300 open houses and send 500 advertisements. a. Indirect open house expense: $15 per open house = $4,500/300 open houses Advertising expense: $50 per advertisement = $25,000/500 advertisements b. Indirect open house expense: $75 = $15 per open house 5 open houses Advertising expense: $1,000 = $50 per advertisement 20 advertisements

11 Cost Allocation and Activity-Based Costing A painter allocates overhead to clients using activity-based costing. One activity identified as overhead is the painter s subscription expense, which is estimated to total $400 for the upcoming month and will be allocated based on the number of clients. Another activity is the indirect supplies expenses, which are estimated to total $750 in the upcoming month and are allocated based on number of rooms painted. The company expects to service 20 clients and paint 60 rooms. a. Painter s subscription expense: $20 per client = $400/20 clients Indirect supplies expense: $12.50 per room = $750/60 rooms b. Tom Jones: $57.50 = $20 + ($12.50 per room 3 rooms) Ellie Libertino: $45.00 = $20 + (12.50 per room 2 rooms) 21. A veterinarian uses activity-based costing to allocate overhead to patients. Two identified activities include the operating room expenses and cleaning expenses. Operating room expenses of $20,000 for the upcoming quarter will be allocated based on the hours spent in the operating room, which the veterinarian expects to total 100 hours. Estimated cleaning expenses of $14,000 for the upcoming quarter will be allocated based on the number of nights the patient spends in the office. The veterinarian expects to have patients spend a total of 1,120 nights. a. Operating room expense: $200 per hour = $20,000/100 hours Cleaning expense: $12.50 per night = $14,000/1,120 nights b. Operating room expense: $1,000 = $200 per hour 5 hours Cleaning expense: $37.50 = $12.50 per night 3 nights Total overhead allocated to Fluffy Smith: $1, = $1,000 + $37.50 Strategy: Activity-based costing for a service organization s overhead is prepared the same as activity-based costing for a manufacturer s factory overhead, but rather than allocating overhead to products, the organization must allocate overhead to clients or customers. First, determine the activity-based rate for each activity that is considered overhead related to each client. Next, determine the amount of overhead allocated to the client by multiplying the activity-based rate by the number of times the activity must be completed for the client.

ACTIVITY BASE COSTING

ACTIVITY BASE COSTING Key Terms and Concepts to Know Single Plantwide Rate vs. Multiple Department Rates Job order costing relied on a single plantwide overhead rate to apply overhead to work-in-process.