Exercise 6-1 (Classification of Cost Drivers)

Classify the following cost drivers by writing on the blank space provided below only one of the
following:
UL for Unit Level or
BL for Batch Level or
PL for Product Level
1. Direct labor hours
2. Machine setups
3. Marketing promotions
4. Pounds of materials used
5. Purchase orders issued
6. Direct costs
7. Shipments to customers
8. Loads of materials moved
9. Total value added
10. Work orders
11. Number of products
12. Machine hours
13. Material moves
14. Number of batches
15. Units of output

Exercise 6-2 (True or False)

Indicate whether the statement is True by writing capital letter T or by writing capital letter F if the
statement is False, on the blank space provided below.

1. Direct materials are normally considered as batch level costs.

2. Material handling cost is normally considered as unit level cost.
3. Building depreciation is generally considered as plat or facility cost.
4. Activity based costing is appropriate for a company that manufactures a single product.
5. Activity based costing is appropriate for a company that has high overhead costs that are not
proportional to the volume of individual products.
6. The ABC system should be evaluated in terms of benefits it can provide to an organization
versus the costs of implementing it.
7. Costs that are associated with the production of a group of similar products at the same time
are batch level costs.
8. A segment of a production or service process for which management wants a separate report is
known as activity center.
9. Activity driver refers to the number of different processes through which a product flows.
10. When refining a costing system, a company should classify as many costs as possible as indirect
costs.
11. In a homogeneous cost pool, all costs have similar cause-and-effect relationships with a cost-
allocation base.
12. Traditional systems are likely to undercost complex products with lower production volume.
13. Unit level measures can distort product costing because he demand for overhead resources may
be driven by batch level or product level.
14. ABC systems attempt to trace more costs as direct costs.
15. For service organizations, activity based cost systems may be used to clarify appropriate cost
assignments.
 16. Simply because activity based costing systems employ more activity cost drivers, they provide
more accurate product costs than traditional systems.
17. The primary cost of an ABC system is the measurements necessary to implement the system.
18. Costing systems with multiple cost pools are considered ABC systems.
19. ABC system are useful in manufacturing, but not in the merchandising or service industries.
20. Using multiple unit-level cost drivers generally constitutes an effective activity-based costing
system.

Exercise 6-3 (Multiple Choice)

Encircle the letter corresponding to the best answer of your choice.

1. If products are alike, then for costing purposes

a. Varying demands will be placed on resources.
b. Multiple indirect cost rates should be used.
c. An activity based costing system should be used.
d. A simple costing will yield accurate cost number.

2. Undercosting a particular product may result in

a. Understating total product costs
b. Operating inefficiencies
c. Lower profits
d. Loss of market share

3. Overcosting a particular product may most likely result in

a. Understating total product cost
b. Undercosting another product
c. Overpricing the product
d. Misallocating direct labor costs

4. ABC system create

a. One large cost pool
b. Homogeneous activity-related cost pools
c. Activity cost pools with a broad focus.
d. Activity cost pools containing many direct costs.

5. Traditional cost system distort product costs because

a. They apply average support costs to each unit of product.
b. They emphasize financial accounting requirements.
c. Competitive pricing is ignored.
d. They do not know how to identify the appropriate units.

6. A base used to allocate the cost of a resource to the different activities using the resource is a(n):
a. Driver
b. Final cost object
c. Activity driver
d. Resource driver
7. A base used to allocate the cost of products, customers, or other final cost objects is a:
a. Driver
b. Final cost object
c. Activity driver
d. Resource driver

8. An example of product level of costs include:

a. Heating, lighting and security
b. Designing, changing and advertising
c. Scheduling, setting up and moving
d. Cutting, painting and packing

9. Examples of plant level costs include

a. Heating, lighting and security
b. Designing, changing and advertising
c. Scheduling, setting up and moving
d. Cutting, painting and packing

10. Unit-level drivers are:

a. Measures of activities that vary with the number of different products produced and sold.
b. Measures of activities that vary with the number of batches produced and sold.
c. Inversely proportional to the volume of output.
d. None of the above.

11. Traditional costing systems are characterized by their use of which of the following measurement
bases for allocating overhead to output:
a. Plant level drivers
b. Product level drivers
c. Batch level drivers
d. Unit level drivers

12. An activity driver is used

a. To measure resources consumed only
b. To measure demands only
c. To measure resources consumed and demands
d. None of the above

13. The term cost driver refers to

a. Any activity that causes cost to be incurred.
b. The person who gathers and transfers cost data to the accountant
c. The attempt to control expenses at a reasonable level
d. Any activity that can be used to predict cost changes.

14. Relative to traditional product costing, activity based costing differs in the way costs are
a. Incurred
b. Benchmarked
c. Allocated
d. Processed
15. In an activity based costing, final cost allocations assign costs to:
a. Activities
b. Products
c. Processes
d. Departments

16. Of the following, which is the best reason for using activity based costing?
a. To assign indirect service overhead costs to direct cost pools
b. To better assign overhead cost to products,
c. To more accurately assign overhead costs to cost pools so that these costs are better controlled.
d. To keep better track of overhead costs.

17. ABC should be used in which of the following situations

a. In all manufacturing firms
b. Multiple product firms with multiple processing steps
c. Multiple product firms with only a single process
d. Single product firms with multiple steps

18. Activity based management (ABM) is

a. A base used to allocate the cost of an activity to products and customers.
b. The use of information obtained from ABC to make improvements in the firm.
c. A base used to allocate the cost of a resource to the different activities using it
d. A costing system in which multiple overhead cost pools are allocated using bases that include
one or more non-volume related factors

19. ABC systems

a. Generally undercost complex products
b. Allocate costs based on the overall level of activity
c. Limit cost drivers to units of output
d. Highlight the different levels of activities.

20. The following items are used in tracing costs in an ABC system. In which order are they used?
a. Cost object, cost driver, activity driver, cost pool
b. Cost driver, activity driver, cost pool, cost object
c. Cost pool, activity driver, cost object, cost driver
d. Cost driver, cost pool, activity driver, cost object

Exercise 6-4 (Multiple Choice)

Encircle the letter corresponding to the best answer of your choice.

For items 1 – 3, use the 2012 information below:

Cost Pool Manufacturing Overhead Activity Cost Driver

Machine maintenance P300,000 200,000 machine hours
Setups P200,000 1,000 setups
Total overhead costs P500,000

1. Assume a traditional costing system is used and machine hours are used as the only overhead
allocation base. The 2012 overhead allocation rate is
a. P2.50 per machine hour
b. P1.50 per machine hour
 c. P2.49 per machine hour (rounded)
d. P200 per machine hour

2. Assume an ABC system is used and both machine hours and setups are used as cost drivers. The
2012 overhead allocation rate for machine maintenance is
a. P2.50 per machine hour
b. P1.50 per machine hour
c. P2.49 per machine hour (rounded)
d. P200 per machine hour

3. Assume an activity-based costing system is used and both machine hours and setups are used as
cost drivers. Job #835 uses 10,000 machine hours and 5 setups. The amount of overhead allocated
to Job #835 totaled
a. P1,000
b. P15,000
c. P16,000
d. P24,888 (rounded)

4. Buko Co. uses ABC to compute product costs for external reports. The company has three activity
cost pools and applies overhead using predetermined overhead rates for each activity cost pool.
Estimated costs and activities for the current year are presented below for the three activity cost
pools.

Estimated Overhead Cost Expected Activity

Activity 1 P58,656 2,400
Activity 2 P60,048 4,800
Activity 3 P130,324 4,400

Actual costs and activities for the current year were as follows:

Actual Overhead Cost Actual Activity

Activity 1 P58,656 2,400
Activity 2 P60,048 4,800
Activity 3 P130,324 4,400

The total credits to the FOC account during the year were closest to:
a. P248,508
b. P248,988
c. P250,151
d. P251,334

5. Use the same data as in the previous number, the total debits to the FOC account during the year
were closest to:
a. P248,508
b. P248,988
c. P251,110
d. P250,334

6. Paparo Corp. has provided the following data from its ABC system:

Activity Cost Pool Total Cost Total Activity

Assembly P846,040 52,000 machine-hours
Processing orders 64,056 1,700 orders
Inspection 102,408 1,360 inspection-hours
 Data concerning the company’s product Q79Y appear below:

Annual unit production and sales 450

Annual machine-hours 1,080
Annual number of orders 70
Annual inspection hours 20
Direct materials cost P44.00 per unit
Direct labor cost P41.03 per unit

According to the ABC system, the average cost of product Q79Y is closest to:
a. P133.29 per unit
b. P129.94 per unit
c. P127.43 per unit
d. P85.03 per unit

7. Sinao Corp. has provided the following data from its ABC system:

Activity Cost Pool Total Cost Total Activity

Assembly P1,137,360 84,000 machine-hours
Processing orders 28,479 1,100 orders
Inspection 97,155 1,270 inspection-hours

The company makes 470 units of product W26B a year, requiring a total of 660 machine-hours, 50
orders, and 40 inspection-hours per year. The product’s direct materials cost is P40.30 per unit and
its direct labor cost is P42.22 per unit. The product sells for P118.00 per unit. The product margin for
product W26B is:
a. P6,444.70 per unit
b. P4,679.20 per unit
c. P3,384.70 per unit
d. P16,675.60 per unit

8. Factory Company makes two products, X and Z. X is being introduced in this period, and Z has been
in production for 2 years. For the period about to begin, 1,000 units of each product are to be
manufactured. Assume that the only relevant overhead item is the cost of engineering change
orders; that X and Z are expected to require 2 and 3 machine hours, respectively; and that the cost
of a change order is P600. If Factory applies engineering change order costs on the basis of machine
hours, the cross-subsidy per unit arising from this peanut-butter costing approach is
a. P1.20
b. P2.40
c. P3.60
d. P4.80

9. Uniformly assigning the costs of resources to cost objects when those resources are actually used in
a non-uniform way is called:
a. Overcosting
b. Undercosting
c. Peanut-butter costing
d. Department costing

For Items 10-14:

Jad’s Clothing has 2 product lines that it manufactures: Jeans and Shorts. Data are as follows:

Jeans Shorts Overhead Total

 Units 900,000 160,000
Selling price per unit P28 P25
DL hours (P10 per hour) 360,000 64,000
Direct materials P6,750,000 P800,000
Machine setups 1,200 800
Machine utility P500,000
Machine maintenance 900,000
Quality Control 300,000
Materials Handling 1,750,000
Product Engineering 3,700,000
Rent of Manufacturing Space 3,000,000
Security 750,000
Miscellaneous Production Expense 4,000,000

10. Which of the following is considered to be a unit-level cost?

a. Machine set-ups
b. Machine maintenance
c. Materials handling
d. Product engineering

11. Which of the following is considered to be a product-level cost?

a. Machine maintenance
b. Rent of manufacturing facility
c. Materials handling
d. Product engineering

12. If batch-level costs were allocated based on machine set-ups, how much would be allocates to
Jeans?
a. P700,000
b. P1,050,000
c. P1,230,000
d. P1,750,000
13. If unit-level costs were allocated based on direct labor hours, how much would be allocated to
Shorts?
a. P1,700,000
b. P1,695,000
c. P471,000
d. P255,000

14. If facility-level costs were allocated based on the number of units produced, how much would be
allocated to Shorts?
a. P1,169,811
b. P3,100,000
c. P7,750,000
d. P22,686,500

15. Franz Co. uses ABC and provides this information:

Manufacturing Cost driver used as Conversion cost per

Activity Area application base unit of base
Material handling # of parts P0.45
Machinery machine hours 51.00
Assembly # of parts 2.85
 Inspection # of finished units 30.00

Assume that 75 units of a component for packaging machines have been produced. Each unit
required 105 parts and 3 machine hours. Direct material costs P600 per finished unit. All other
manufacturing costs are classified into one category, conversion costs. The total manufacturing cost
is:
a. P87,412.50
b. P84,712.50
c. P82,712.50
d. P78,412.50

Exercise 6-5 (Multiple Choice)

Encircle the letter of the BEST answer you have chosen for each number.

1. Consider the following statements regarding traditional costing systems:

I. Overhead costs are applied to products on the basis of volume-related measures.
II. All manufacturing costs are easily traceable to the goods produced.
III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are
made that have widely varying production requirements.

Which of the above statements is (are) true?

a. I only
b. II only
c. III only
d. I and III
e. II and III

2. Many traditional costing systems:

a. Trace manufacturing overhead to individual activities and require the development of numerous
activity-costing rates.
b. Write off manufacturing overhead as an expense of the current period.
c. Combine widely varying elements of overhead into a single cost pool.
d. Use a host of different cost drivers (e.g., number of production setups, inspection hours, orders
processed) to improve the accuracy of product costing.
e. Produce results far superior to those achieved with activity-based costing.

3. The following tasks are associated with an activity-based costing system:

1- Calculation of cost application rates

2 – Identification of cost drivers
3 – Assignment of cost to products
4 – Identification of cost pools

Which of the following choices correctly expresses the proper order of the preceding tasks?
a. 1, 2, 3, 4.
b. 2, 4, 1, 3.
c. 3, 4, 2, 1.
d. 4, 2, 1, 3.
e. 4, 2, 3, 1.

4. Which of the following is the proper sequence of events in an activity-based costing system?
 a. Identification of cost drivers, identification of cost pools, calculation of cost application rates,
assignment of cost to products.
b. Identification of cost pools, identification of cost drivers, calculation of cost application rates,
assignment of cost to products.
c. Assignment of cost to products, identification of cost pools, identification of cost drivers,
calculation of cost application rates.
d. Calculation of cost application rates, identification of cost drivers, identification of cost pools,
assignment of cost to products.
e. Some other sequence of the four activities listed above.

5. Which of the following tasks is not normally associated with an ABC system?
a. Calculation of cost application rates.
b. Identification of cost pools.
c. Preparation of allocation matrices.
d. Identification of cost drivers.
e. Assignment of cost to products.

6. Which of the following is not a broad, cost classification category typically used in ABC
a. Unit-level
b. Batch-level
c. Product level
d. Plant level
e. Management-level

7. In an activity-based costing system, direct materials used would typically be classified as:
a. Unit-level cost
b. Batch-level cost
c. Product level cost
d. Plant level cost
e. Matrix-level cost

8. Which of the following is least likely to be classified as a batch-level activity in an ABC system?
a. Shipping.
b. Receiving and inspection.
c. Production setup.
d. Property taxes.
e. Quality assurance.

9. In an ABC system, materials receiving would typically be classified as a:

a. Unit-level activity.
b. Batch-level activity.
c. Product level activity.
d. Plant level activity.
e. Period-level activity.

10. Kamagayan, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-
laser technology. The research and testing costs associated with the new ovens is said to arise from
a:
a. Unit-level activity.
b. Batch-level activity.
c. Product level activity.
 d. Plant level activity.
e. Competitive-level activity.

11. Consider the following statements about product level activities:

I. They must be done for each batch of product that is made.
II. They must be done for each unit of product that is made.
III. They are needed to support an entire product line.

Which of those statements is/are true?

a. I only.
b. II only.
c. III only.
d. I and II.
e. II and III.

12. Which of the following is least likely to be classified as a plant level activity in an ABC system?
a. Plant maintenance.
b. Property taxes.
c. Machine processing cost.
d. Plant depreciation.
e. Plant management salaries.

13. The salaries of a manufacturing plant’s management are said to arise from:
a. Unit-level activities.
b. Batch-level activities.
c. Product level activities.
d. Plant level activities.
e. Direct-cost activities.

14. Which of the following choices correctly depicts a cost that arises from a batch-level activity and one
that arises from a plant level activity?

Batch-Level Activity Plant level Activity

a. Direct materials Plant depreciation
b. Inspection Property taxes
c. Quality assurance Shipping
d. Plant maintenance Insurance
e. Management salaries Material handling

15. The division of activities into unit-level, batch-level, product-level, and plant level categories is
commonly known as a cost:
a. Object.
b. Application method.
c. Hierarchy.
d. Estimation method.
e. Classification scheme that is useful in traditional, volume-based systems.

16. Alamo’s customer service department follows up on customer complaints by telephone inquiry.
During a recent period, the department initiated 7,000 calls and incurred costs of P203,000. If 2,940
of these calls were for the company’s wholesale operation (the remainder were for the retail
division), costs allocated to the retail division should amount to:
a. P-0-
 b. P29
c. P85,260
d. P117,740
e. P203,000

17. Activity based costing systems:

a. Use a single, volume-based cost driver.
b. Assign overhead to products based on the products’ relative usage of direct labor.
c. Often reveal products that were under- or overcosted by traditional costing systems.
d. Typically use fewer cost drivers than more traditional costing systems.
e. Have a tendency to distort product costs.

18. 507 Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A
recent study of product no. 519 revealed a traditionally-derived total cost of P1,019, a selling price
of P1,850 based on that figure, and a newly computed activity-based total cost of P1,215. Which of
the following statements is true?
a. All other things being equal, the company should consider a drop in its sales price.
b. The company may have been extremely competitive in the marketplace from a price
perspective.
c. Product no. 519 could be labeled as being overcosted by the firm’s traditional costing
procedures
d. If product no. 519 is undercosted by traditional accounting procedurs, then all of the
company’sother products must be undercosted as well.
e. Generally speaking, the activity-based cost figure is “less accurate” than the traditionally-
derived cost figure.

19. JANJO combines all manufacturing overhead into a single cost pool and allocates this overhead to
products by using machine hours Activity-based costing would likely show that with Vanguard’s
current procedures,
a. All of the company’s products are undercosted.
b. The company’s high-volume products are undercosted.
c. All of the company’s products are overcosted.
d. The company’s high-volume products are overcosted.
e. The company’s low-volume products are overcosted.

20. Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-
volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is
both a high-volume product and relatively simplistic in nature. What would an activity-based costing
system likely disclose about products X and Y as a result of Jackson’s current accounting procedures?

X Y
a. Undercosted Undercosted
b. Undercosted Overcosted
c. Overcosted Undercosted
d. Overcosted Overcosted
e. Costed correctly Costed correctly

21. Koski manufactures product J and K, applying overhead on the basis of labor hours. J, a low-volume
product, requires a variety of coplex manufacturing procedures. K, on the other hand, is both a high-
volume product and relatively simplistic in nature. What would an activity-based costing system
likely disclose about products J and K as a result of Koski’s current accounting procedures?
 Undercosted Overcosted
a. J,K
b. J,K
c. J K
d. K J
e. None of the above, as both products are costed correctly

22. Consider the following statements:

I. Product diversity creates costing problems because diverse products tend to utilize
manufacturing activities in different ways.
II. Overhead costs that are not incurred at the unit level create costing problems because such
costs do not vary with traditional application bases such as direct labor hours or machine hours.
III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different
colors.

Which of the above statements is (are) true?

a. I only
b. II only
c. I and II
d. I and III
e. II and III

23. Consumption ratios are useful in determining:

a. The existence of product-lie diversity.
b. Overhead that is incurred at the unit level.
c. If overhead-producing activities are being utilized effectively.
d. If overhead costs are being applied to products.
e. If overhead-producing activities are being utilized efficiently.

24. Widely varying consumption ratios:

a. Are reflective of product line diversity.
b. Indicate an out-of-control production environment.
c. Dictate a need for traditional costing systems.
d. Work against the implementation f activity-based costing.
e. Create an unsolvable product-costing problem.

25. Moon Bay Manufacturing uses machine hours to apply manufacturing overhead to products. This
method of costing would likely be acceptable if the company has:
a. A large proportion of unit-level activities.
b. A large proportion of unit-level activities and fairly identical consumption ratios among product
lines.
c. A large proportion of unit-level activities and widely varying consumption ratios among product
lines.
d. A large proportion of non unit-level activities.
e. A large proportion of non unit-level activities and fairly identical consumption ratios among
product lines.

26. In comparison with a system that uses a single, volume-based cost driver, a activity-based costing
system is preferred when a company has:
a. A large proportion of non unit-level activities.
b. Product-line diversity or a large proportion of non unit-level activities.
 c. Minimal product-line diversity and a small proportion of non unit-level activities.
d. Existing variances from budgeted amounts.
e. A situation other than those noted above.

27. Consider the following factors:

I. The degree of correlation between consumption of an activity and consumption of a particular
cost driver.
II. The likelihood that a particular cost driver will induce a desired behavioral effect.
III. The likelihood that a particular cost driver will cause an increase in the cost of measurement.

Which of these factors should be considered in the selection of a cost driver?

a. I only.
b. I and II.
c. I and III.
d. II and III.
e. I, II, and III.

28. Which of the following activity cost pools and activity measures likely has the lowest degree of
correlation?

Activity Cost Pool Activity Measure

a. Order department Number of orders processed
b. Sales management Time spent by managers in each
sales territory
c. Accounts receivable processing Number of customers
d. Catering Number of meals served
e. Employee travel to job sites Number of employees
(sites are within 100-mile radius
of company headquarters)

29. Grossman Enterprises is converting to an activity-based costing system and needs to depict the
various activities in its manufacturing process along with the activities’ relationships. Which of the
following is a possible tool that the company can use to accomplish this task?
a. Storyboards.
b. Activity relationship charts (ARCs).
c. Decision trees.
d. Simulation games.
e. Process organizers.

30. A hospital administrator is in the process of implementing an activity-based costing system. Which
of the following tasks would not be part of this process?
a. Identification of cost pools.
b. Calculation of cost application rates.
c. Assignment of cost to services provided.
d. Identification of cost drivers.
e. None of the above, as all these tasks would be part of the process.
Exercise 6-6 (Traditional vs. ABC)

Abel Company manufactures two models of office tables, a standard and a deluxe model. The following
activity and cost data has been compiled.

Product No. of Set Ups No. of Components No. of DL hours

Standard 11 4 188
Deluxe 14 6 112
Overhead cost P20,000 P40,000

Required:

a. Using traditional costing, compute the overhead assigned to standard if the overhead cost is
based on direct labor hours.
b. Using traditional costing, compute the overhead assigned to deluxe if the overhead cost is based
on direct labor hours.
c. Using ABC, compute the overhead cost assigned to standard.
d. Using ABC, compute the overhead cost assigned to deluxe.

Exercise 6-7 (Traditional vs ABC)

Cain Company incurs about P1,720,000 in overhead costs each month which had been allocated to
individual product lines based on direct labor hours. The company works about 100,000 DLH per month.
The company is concerned that DLH is inappropriate because some costs are driven by other activities.
The following information regarding cost pools and drivers has been developed:

Cost Driver Amount in Pool Amount of Activity

Direct labor hours P1,040,000 100,000
Number of batches 560,000 500
Engineering/design changes 120,000 120

The following data regarding two product lines if the company are presented:

Product CA Product IN
Direct labor hours 1,600 200
Number of batches 4 12
Engineering/design changes 2 24

Product CA are produced in large batches, while Product IN is a specialty line that only few customers
will buy.

Required:

a. Under traditional costing using DLH for the allocation of overhead, compute the overhead costs
for each product line.
b. Under ABC compute the overhead costs for each product line.

Exercise 6-8 (Batch Level Distortion)

Kitam Company uses a single, company wide cost allocation based on machine hours. Last 2011, the
overhead costs totaled to P5,250,00 and Product A used 1,500 of the 30,000 total machine hours. Using
ABC, information revealed that the total overhead cost of last year, P250,000, represented batch-level
costs and these are driven by work orders. It is also determined that 1,000 work orders were issued last
year and only 30 were of Product A. Calculate the batch level cost of distortion for Product A.
Exercise 6-9 (Product Level Distortion)

An ABC study by Andam Company revealed that, of the last year’s total overhead cost, P125,000,
represented the cost of maintain supplies of purchased subassemblies. The activity driver chosen for
these costs is the number of different subassemblies available from vendors. A total of 200
subassemblies were available last year, of which 6 are used exclusively in Product AD.

The company’s existing cost system accumulates all overhead costs in a single pool using direct labor
cost. Last year, overhead totaled to P2,000,000, direct labor totaled P500,000 and Product AD used
P100,000 of direct labor. Calculate the product level cost distortion for Product AD.

Exercises 6-10 (ABC per unit cost computation)

ABC Company uses activity-based costing. The company produces two products: computers and PDA’s.
The annual production and sales volume of computers is 8,000 units and of PDA’s id 6,000 units. There
are three activity cost pools with the following expected activities and estimated total costs:

Expected Expected
Activity Estimated Activity Activity
Cost Pool Cost Computers PDA’s 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

Using ABC, the cost per unit of computer is approximately: __________

Using ABC, the cost per unit of PDA is approximately: __________

Product 6-A (Calculating Overhead Cost per Unit under ABC)

Kinza Co. uses Activity-Based Costing (ABC) to compute unit product costs for external financial reports.
The company manufactures 2 products: the Regular Model and the Super Model. During the coming
year, the company expects to produce 20,000 units of the Regular Model and 5,000 units of the Super
Model. Listed below are the selected data relating to the coming year. Compute the overhead cost per
unit for each product by filling in the missing data in the schedules provided below.

Basic Data:

Activity Center Estimated Overhead Expected Activity

(and Cost Driver) Costs Total Regular Super
Labor related (DLH) P80,000 10,000 8,000 2,000
Machine setups (# of setups) 420,000 1,400 500 900
Product testing (# of tests) 600,000 8,000 6,400 1,600
General factory (MH) 900,000 45,000 30,000 15,000
Total Cost P2,000,000

Overhead Rates by Activity Center:

(a) (b) a/b

Estimated Expected Activity-Based
ACTIVITY CENTER Overhead Costs Activity Overhead Rate
Labor related P80,000 10,000 =
Machine setups P420,000 1,400 =
Product testing P600,000 8,000 =
General factory P900,000 45,000 =
Overhead Cost per Unit:

Regular Model Super Model

Activity Amount Activity Amount
Labor related, @
Machine setups, @
Product testing, @
General factory, @
Total OH cost assigned
Divided by # of units produced
OH cost per unit

Product 6-B (Activity-Based Costing, Traditional Costing)

The controller for San Miguel Machining has established the following overhead cost pools and cost
drivers:

Overhead Cost Pool Budgeted Overhead Cost Cost Driver

Machine setups P240,000 Number of setups
Material handling 90,000 Units f raw material
Quality control inspection 48,000 Number of inspections
Other overhead costs 160,000 Machine hours
Total P538,000

Overhead Cost Pool Budgeted Level for Cost Driver Overhead Rate
Machine setups 200 setups P1,200 per setup
Material handling 60,000 units P1.50 per unit
Quality control 1,200 inspections P40 per inspection
Other overhead 20,000 machine hours P8 per machine hour

Order no. 715 has the following production requirements:

Machine setups: 7
Raw material: 11,200 units
Inspections: 16
Machine hours: 850

Required:

a. Compute the total overhead that should be assigned to order no. 715 by using activity-based
costing.
b. Suppose that San Miguel were to use a single, predetermined overhead rate based on machine
hours. Compute the rate per hour and the total overhead assigned to order no. 715.
c. Discuss the merits of an activity-based costing system in comparison with a traditional costing
system.

Problem 6-C (Activity-Based Costing: Service Application)

Queen City Bank & Trust Co. operates in a very competitive marketplace, using a traditional labor-hour-
based system to determine the cost of processing its mortgage loans. Recently, the firm explored a
switch to activity-based costing to determine the accuracy of its previous ways. The following
information is available:
Activity Cost Driver Driver Units
Application processing P 900,000 Applications 4,000
Loan underwriting 800,000 Underwriting hours 16,000
Loan closure 880,000 Legal hours 8,000
Total P2,580,000

Two loan applications were originated and closed during the year. No. 7439 consumed 3.5 hours in loan
underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of
time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure.

Required:

a. Use an activity-based costing system and determine the cost of processing, underwriting, and
closing the two loan applications.
b. Determine the cost of processing the two loans if Queen City Bank and Trust Co. uses the
traditional labor-hour-based system. Conversation with management found that, on the
average, each application took nine labor hours of processing time, excluding underwriting and
closure.
c. Is Queen City Bank & Trust Co. making a mistake by continuing to use a traditional system that is
based on an average labor cost per hour? Why?

Problem 6-D (Activity-Based and Traditional Costing; Price Change)

Whitney Corp. manufactures two types of transponders – no. 156 and no. 157 – and applies
manufacturing overhead to all units at the rate of P76.50 per machine hour. Production information
follows.

No. 156 No. 157

Anticipated volume (units) 6,000 14,000
Direct material cost P40 P65
Direct labor cost 25 25

The controller, who is studying the use of activity-based costing, has determined that the firm’s
overhead can be identified with three activities: manufacturing setups, machine processing, and product
shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities’
three respective cost drivers, follow.

No. 156 No. 157 Total

Setups 60 40 100
Machine hours worked 15,000 25,000 40,000
Outgoing shipments 120 80 200

The firm’s total overhead of P3,060,000 is subdivided as follows: manufacturing setups, P260,000;
machine processing, P2,400,000; and product shipping, P400,000.

Required:

a. Compute the application rates that would be used for manufacturing setups, machine
processing, and product shipping in an activity-based costing system.
b. Assuming use of activity-based costing system, compute the unit overhead costs of product nos.
156 and 157 if the expected manufacturing volume is attained.
c. Assuming use of activity-based costing, compute the total cost per unit of product no. 156.
 d. If the company’s selling price is based heavily on cost, would a switch to activity-based costing
from the current traditional system result in a price increase or decrease for product no. 156?
Show computations.

Problem 6-E (Reconciliation of ABC and TCA)

Noah Company manufactures a variety of high and low volume products, including Product Exodus, in
Canaan Plant. The following information pertains to 2011 data:

Total for Product Exodus Total for Canaan Plant

Unit Level Overhead P500,000
Batch Level Overhead 750,000
Product Level Overhead 1,250,000
Plant Level Overhead 1,000,000

Units produced 100 5,000

Direct labor hours 200 20,000
Machine hours 90 10,000
Setups 6 120
Setup hours 30 500
Design changes 4 40
Design hours 280 4,000

Required:

a. If Noah Company uses machine hours under Traditional Cost Accounting, compute the total
overhead and per unit cost to be allocated to Product Exodus.
b. If Noah Company uses ABC setups as the driver for batch-level, design hours for product level,
and machine hours for unit level and plant level. Compute the total overhead and per unit cost
allocated to Product Exodus.
c. Make a reconciliation of TCA and ABC using assumption (a) and (b).
d. If Noah Company uses direct labor hours under Traditional Cost Accounting, compute the total
overhead and per unit cost to be allocated to Product Exodus.
e. If Noah Company uses ABC with setup hours as the driver for batch-level, design changes for
product level and direct labor hours for unit and plant level. Compute the total overhead and
per unit cost allocated to Product Exodus.
f. Make a reconciliation of TCA and ABC assuming assumption (d) and (e).