PROGRAM LEARNING 2 MANAGEMENT ACCOUNTING

ACTIVITY BASED COSTING AND BUDGETING

1. Donkey Company manufactures two products, Standard and DeLuxe. Donkeys overhead
costs consist of machining, $2,000,000; and assembling, $1,000,000. Information on the two
products is:
Standard
DeLuxe
Direct labor hours
10,000
15,000
Machine hours
10,000
30,000
Number of parts
90,000
160,000
A.

Overhead applied to Standard using traditional costing using direct labor hours is
a. $860,000.
b. $1,200,000.*
c. $1,800,000.
d. $2,140,000.

B.

Overhead applied to DeLuxe using traditional costing using direct labor hours is
a. $860,000.
b. $1,200,000.
c. $1,800,000.*
d. $2,140,000.

C..

Overhead applied to Standard using activity-based costing is

a. $860,000.*
b. $1,200,000.
c. $1,800,000.
d. $2,140,000.

D.

Overhead applied to DeLuxe using activity-based costing is

a. $860,000.
b. $1,200,000.
c. $1,800,000.
d. $2,140,000.*

Qn 2
Stereo City Co. manufacturers speakers and receivers and uses activity-based costing. The
following information is available:
Activity Cost Pool
Ordering
Soldering

Estimated Overhead
$180,000
192,000

Expected Use of
Cost Driver per Activity
24,000 orders
64,000 machine hours

Inspecting
Packing

930,000
840,000

120,000 labor hours

56,000 boxes

Instructions
Compute the activity-based overhead rates.
Solution
Activity Cost Pool
Ordering
Soldering
hour
Inspecting
Packing

Estimated
Overhead
$180,000
192,000
930,000
840,000

Expected Use of
Cost Driver per Activity
24,000 orders
64,000 machine hours
120,000 labor hours
56,000 boxes

Activity-Based
Overhead Rates
$ 7.50 per order
$ 3.00 per machine
$ 7.75 per labor hour
$15.00 per box

Qn 2
All Wood Corporation manufactures dining chairs and tables. The following information is
available:
Dining Chairs
Tables
Total Cost
Machine setups
200
600
$36,000
Inspections
250
470
$54,000
Labor hours
2,600
2,400
All Wood is considering switching from one overhead rate based on labor hours to activitybased costing.
Instructions
Perform the following analyses for these two components of overhead:
a. Compute total machine setups and inspection costs assigned to each product, using a
single overhead rate.
b. Compute total machine setups and inspection costs assigned to each product, using
activity-based costing.
c. Comment on your findings.

Solution
a. Single overhead rate
($36,000 + $54,000) 5,000 = $18 per labor hour
Dining chairs:
Tables:

2,600 $18 = $46,800

2,400 $18 = 43,200
$90,000

b. Activity-based costing
Machine setups: $36,000 800 = $45 per setup
Inspections:

$54,000 720 = $75 per inspection

Dining chairs: (200 $45) + (250 $75) = $27,750

Tables: (600 $45) + (470 $75) =
62,250
$90,000
c. The use of activity-based costing resulted in the allocation of less cost to dining chairs and
more cost to tables. The change in cost allocation reflects a more accurate allocation based
on cause and effect.

4. .If there were 70,000 pounds of raw materials on hand on January 1, 140,000 pounds are
desired for inventory at January 31, and 420,000 pounds are required for January
production, how many pounds of raw materials should be purchased in January?
a. 350,000 pounds
b. 560,000 pounds
c. 280,000 pounds
d. 490,000 pounds*
5. .
Tripod Exports, Inc. budgets on an annual basis for its fiscal year. The following
beginning and ending inventory levels are planned for the fiscal year of July 1, 2008 to
June 30, 2009:
Raw Materials

June 30, 2009

3,000 kilos

June 30, 2008

2,000 kilos

Three kilos of raw materials are needed to produce each unit of finished product. If
Tripod Exports plans to produce 280,000 units during the 2008-2009 fiscal year, how
many kilos of materials will the company need to purchase for its production during the
year?
a. 841,000*
b. 843,000
c. 840,000
d. 839,000
6.

The following information is taken from the production budget for the first quarter:
Beginning inventory in units
Sales budgeted for the quarter
Production capacity in units

600
228,000
236,000

How many finished goods units should be produced during the quarter if the company
desires 1,600 units available to start the next quarter?
a. 229,000*
b. 227,000
c. 237,000
d. 229,600
7.

Secret Prizes, Inc. is planning to sell 200 buckets and produce 190 buckets during
March. Each bucket requires 500 grams of plastic and one-half hour of direct labor.
Plastic costs $10 per 500 grams and employees of the company are paid $15.00 per
hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Secret
Prizes has 300 kilos of plastic in beginning inventory and wants to have 200 kilos in
ending inventory. How much is the total amount of budgeted direct labor for March?
a. $1,500
b. $3,000

c. $1,425*
d. $2,850

8
Seas, Inc. makes and sells buckets. Each bucket uses 3/4 pound of plastic. Budgeted
production of buckets in units for the next three months is as follows:
Budgeted production

April
21,000

May
20,000

June
24,000

The company wants to maintain monthly ending inventories of plastic equal to 25% of the
following month's budgeted production needs. The cost of plastic is $2.12 per pound.
Instructions
Prepare a direct materials purchases budget for the month of May.
Solution
Buckets to be produced during May
Pounds of plastic needed for each bucket
Total pounds of plastic needed for production
Add ending inventory, pounds of plastic desired (25% 24,000 3/4)
Less beginning inventory, pounds of plastic (25% 20,000 3/4)
Pounds of plastic needed to purchase
Cost per pound
Estimated cost of purchases for May

20,000
3/4
15,000
4,500
(3,750)
15,750
$2.12
$33,390

Qn 9
The budget components for McLeod Company for the quarter ended June 30 appear below.
McLeod sells trash cans for $12 each. Budgeted sales and production for the next three months
are:
Sales
Production
April
20,000 units
26,000 units
May
50,000 units
46,000 units
June
30,000 units
29,000 units
McLeod desires to have trash cans on hand at the end of each month equal to 20 percent of the
following months budgeted sales in units. On March 31, McLeod had 4,000 completed units on
hand. Seven pounds of plastic are required for each trash can. At the end of each month,
McLeod desires to have 10 percent of the following months production material needs on hand.
At March 31, McLeod had 18,200 pounds of plastic on hand. The materials used in production
cost $0.60 per pound. Each trash can produced requires 0.10 hours of direct labor.
Instructions
Determine how much the materials purchases budget will be for the month ending April 30.

Solution
Production of trash cans expected during April (given)
Pounds of plastic per trash can
Total pounds of plastic needed for sales production
Add ending plastic inventory desired (10% 46,000 7)
Total pounds of plastic needed
Less beginning inventory of plastic on hand (given)
Pounds of plastic to be purchased
Cost per pound of plastic
Cost of direct materials purchases

26,000
7
182,000
32,200
214,200
(18,200)
196,000
$0.60
$117,600

Qn 10
Kelso Company manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to
be produced are as follows:
Units of Product
2008
Regular
Deluxe
Total
July
10,000
15,000
25,000
August
6,000
10,000
16,000
September
9,000
14,000
23,000
October
8,000
12,000
20,000
It takes 3 pounds of direct materials to produce the Regular product and 5 pounds of direct
materials to produce the Deluxe product. It is the company's policy to maintain an inventory of
direct materials on hand at the end of each month equal to 30% of the next month's production
needs for the Regular product and 20% of the next month's production needs for the Deluxe
product. Direct materials inventory on hand at June 30 were 9,000 pounds for the Regular
product and 15,000 pounds for the Deluxe product. The cost per pound of materials is $5
Regular and $7 Deluxe.
Instructions
Prepare separate direct materials budgets for each product for the third quarter of 2008.
Solution
KELSO COMPANY
Direct Materials BudgetRegular
For the Quarter Ended September 30, 2008
July
Units to be produced
10,000
Direct materials per unit
3
Total pounds needed for production
30,000
Add: Desired ending direct materials (pounds)
5,400
Total materials required
35,400
Less: Beginning direct materials (pounds)
9,000
Direct materials purchases
26,400
Cost per pound
$5
Total cost of direct materials purchases
$132,000

August
6,000
3
18,000
8,100
26,100
5,400
20,700
$5
$103,500

September
Total
9,000
3
27,000
7,200*
34,200
8,100
26,100
$5
$130,500 $366,000

*30% (8,000 3)
Solution
KELSO COMPANY
Direct Materials BudgetDeluxe
For the Quarter Ended September 30, 2008
July
Units to be produced
15,000
Direct materials per unit
5
Total pounds needed for production
75,000
Add: Desired ending direct materials (pounds)
10,000
Total materials required
85,000
Less: Beginning direct materials (pounds)
15,000
Direct materials purchases
70,000
Cost per pound
$7
Total cost of direct materials purchases
$490,000
*20% (12,000 5)

August
10,000
5
50,000
14,000
64,000
10,000
54,000
$7
$378,000

September
Total
14,000
5
70,000
12,000*
82,000
14,000
68,000
$7
$476,000
$1,344,000

Qn 11
Yount Company has budgeted the following unit sales:
2009
January
February
March
April
May

Units
10,000
8,000
9,000
11,000
15,000

The finished goods units on hand on December 31, 2008, was 1,000 units. Each unit requires 2
pounds of raw materials that are estimated to cost an average of $4 per pound. It is the
company's policy to maintain a finished goods inventory at the end of each month equal to 10%
of next month's anticipated sales. They also have a policy of maintaining a raw materials
inventory at the end of each month equal to 20% of the pounds needed for the following month's
production. There were 3,920 pounds of raw materials on hand at December 31, 2008.
Instructions
For the first quarter of 2009, prepare (1) a production budget and (2) a direct materials budget.

Solution
(1)

YOUNT COMPANY
Production Budget
For the Quarter Ended March 31, 2009

Expected unit sales

Desired ending finished goods units
Total required units

January
10,000
800
10,800

February
8,000
900
8,900

March
9,000
1,100*
10,100

Total

Less: Beginning finished goods units

Required production units

1,000
9,800

800
8,100

900
9,200

27,100

*April units: 11,000 10%.

Solution (cont.)
(2)

YOUNT COMPANY
Direct Materials Budget
For the Quarter Ended March 31, 2009

Units to be produced
Direct materials per unit
Total pounds needed for production
Desired ending direct materials (pounds)
Total materials required
Less: Beginning direct materials (pounds)
Direct materials purchases
Cost per pound
Total cost of direct materials purchases

January
9,800
2
19,600
3,240
22,840
3,920
18,920
$4
$75,680

February
8,100
2
16,200
3,680
19,880
3,240
16,640
$4
$66,560

March
9,200
2
18,400
4,560**
22,960
3,680
19,280
$4
$77,120

Total

$219,360

**April units: 11,400 2 = 22,800 20%.

Qn 12
Payton Company is preparing its direct labor budget for 2008 from the following production
budget based on a calendar year:
Quarter
1
2
3
4

Units
40,000
20,000
30,000
50,000

Each unit requires 1.5 hours of direct labor. The union contract provides for a 10% increase in
wage rate to $11 per hour on October 1.
Instructions
Prepare a direct labor budget for 2008.

Solution
PAYTON COMPANY
Direct Labor Budget
For the Year Ended December 31, 2008
Quarter
Units to be produced
Direct labor time (hours) per unit

1
40,000
1.5

2
20,000
1.5

3
30,000
1.5

4
50,000
1.5

Total

Total required direct labor hours

Direct labor cost per hour
Total direct labor cost

60,000
30,000
$10*
$10
$600,000 $300,000

45,000
$10
$450,000

75,000
$11
$825,000

$2,175,000

*$11 110% = $10.

Qn 13
Hease Company is preparing its master budget for 2008. Relevant data pertaining to its sales
budget are as follows:
Sales for the year are expected to total 6,000,000 units. Quarterly sales are 25%, 30%, 15%,
and 30%, respectively. The sales price is expected to be $2.00 per unit for the first quarter and
then be increased to $2.30 per unit in the second quarter.
Instructions
Prepare a sales budget for 2008 for Hease Company.

Solution
HEASE COMPANY
Sales Budget
For the Year Ended December 31, 2008
Quarter
Unit sales
Unit selling price
Total sales

1
1,500,000
$2.00
$3,000,000

2
1,800,000
$2.30
$4,140,000

3
900,000
$2.30
$2,070,000

4
1,800,000
$2.30
$4,140,000

Year
6,000,000
Var.
$13,350,000