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Exam 26: Cost Allocation and Activity-Based Costing

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Question 51

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Bugaboo Co. manufactures three types of cookies: Fluffs, Crinkles, and Snaps. The production process is relatively simple, and factory overhead costs are allocated to products using a single plantwide factory rate based on direct labor hours. Information for the month of May, Bugaboo's first month of operations, follows: Bugaboo has budgeted direct labor costs for May at $8.50 per hour. Budgeted direct materials costs for May are: Fluffs, $0.75/unit; Crinkles $0.40/unit; and Snaps $0.30/unit. Bugaboo's budgeted overhead costs for May are: $\begin{array} { l r } \text { Indirect labor } & \$ 280,000 \\\text { Utilities } & 65,000 \\\text { Supplies } & 45,000 \\\text { Depreciation } & 30,000 \\\text { Total } & \$ 420,000\end{array}$ Assume that Bugaboo sells all the boxes it produces in May. a) Compute Bugaboo's plantwide factory overhead rate for May. b) Compute the product cost in May for each type of cookie. c) Does Bugaboo's use of a plantwide factory overhead rate in any way distort the product costs for May?

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Question 52

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Product costing consists of only direct materials and direct labor.

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Question 53

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Panamint Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base data by product are provided below. $\begin{array}{lrl}&\text { Activity }\\&\text { Cost }&\text { Activity Base }\\\hline\text { Frocurement } & \$ 370,000 & \text { Number of purchase orders } \\\text { Scheduling } & 250,000 & \text { Number of production orders } \\\text { Materials handling } & 500,000 & \text { Number of moves } \\\text { Product devel opment } & 730,000 & \text { Number of engineering changes } \\\text { Production } & 1,500,000 & \text { Machine hours }\end{array}$ -Determine the activity rate per production order for scheduling.

The Beauty Beyond Words Salon uses an activity-based costing system in its beauty salon to determine the cost of services. The salon has determined the costs of services by activity as follows: $\begin{array} { | l | c | } \hline \text { Activity } & \text { Activity Rate } \\\hline \text { Hair washing } & \$ 4.00 \\\hline \text { Conditioning } & \$ 3.50 \\\hline \text { Chemical treatment } & \$ 25.00 \\\hline \text { Styling } & \$ 10.00 \\\hline\end{array}$ $\begin{array} { | l | c | c | c | c | } \hline & \text { Hair } & \text { Conditioning } & \begin{array} { c } \text { Chemical } \\\text { Treatment }\end{array} & \text { Styling } \\\hline \text { Haircut } & 1 & 1 & 0 & 0 \\\hline \text { Complete style } & 1 & 1 & 0 & 1 \\\hline \text { Perm } & 2 & 3 & 1 & 1 \\\hline \text { Highlights } & 3 & 4 & 2 & 1 \\\hline\end{array}$ -Calculate the cost of services for a haircut.

Service companies can effectively use single facility-wide overhead costing to compute product service) costs.

The Pikes Peak Leather Company manufactures leather handbags and moccasins. The company has been using the factory overhead rate method but has decided to evaluate activity based costing to allocate factory overhead. The factory overhead estimated per unit together with direct materials and direct labor will help determine selling prices. Total budgeted factory overhead cost = $360,000 Calculate the amount of factory overhead to be allocated to each unit using activity based costing. The factory plans to produce 60,000 handbags and 40,000 moccasins.

Explain why it is imperative that proper factory overhead be allocated in factories that produce multiple products.

The Aleutian Company produces two products, Rings and Dings. They are manufactured in two departments-Fabrication and Assembly. Data for the products and departments are listed below. $\begin{array}{llll}&&\text { Pabor Hours } & \text { Machine Hours } \\\text { Product } & \text { Number of Units } & \text { Per Unit } & \text { Per Unit }\\\text { Rings } & 1,000 & 4 & 6 \\\text { Dings } & 2,000 & 3 & 9\end{array}$ All of the machine hours take place in the Fabrication Department, which has an estimated overhead of $90,000. All of the labor hours take place in the Assembly Department, which has an estimated total overhead of $105,000. The Aleutian Company uses departmental overhead rates. The Fabrication Department uses machine hours for an allocation base, and the Assembly Department uses labor hours. -What is the overhead cost per unit for Rings?

Shanghai Company sells glasses, fine china, and everyday dinnerware. They use activity-based costing to determine the cost of the shipping and handling activity. The shipping and handling activity has an activity rate of $14 per pound. A box of glasses weighs 2 lbs., the box of china weighs 4 lbs., and a box of everyday dinnerware weighs 6 lbs. a) Determine the shipping and handling activity for each product and b) determine the total shipping and receiving costs for the china if 3,500 boxes are shipped.

Use of a plantwide factory overhead rate does not distort product costs when there are differences in the factory overhead rates across different production departments.

When production departments differ significantly in their manufacturing process, it is recommended that the single plantwide factory overhead rate be used for allocating factory overhead.

The Klamath Corp. produces two products, saws and drills. Three activities are used in their manufacture. These activities and their associated costs and bases are as follows: a) Determine the activity rate for each activity. b) Determine the overhead cost per unit for each product.

Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will Blackwelder Factory allocate to desk lamp production if actual direct hours for the period is 118,000?

Use of a plantwide factory overhead rate distorts product costs when there are differences in the factory overhead rates across different production departments and when products require different ratios of allocation-base usage in each production department.

Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will Blackwelder Factory allocate to small lamp production if actual direct hours for the period is 285,000?

Multiple production department factory overhead rates are most useful when production departments are very similar in their manufacturing processes.

Activity rates are computed by dividing the cost budgeted for each activity pool by the estimated activity base for that pool.

Shubelik Company is changing to an activity-based costing method. They have determined that they will use three cost pools: setups, inspections, and assembly. Which of the following would not be used as the activity base for any of these three activities?

Multiple production department factory overhead rates are more accurate than are plantwide factory overhead rates.

The Dawson Company manufactures small lamps and desk lamps. The following shows the activities per product and the total overhead information: $\begin{array}{|l|r|c|c|}\hline & \text { Setups } & \text { Insp ections } & \text { Assembly dlh) } \\\hline \text { Small Lamps-3,000 units } & 8,000 & 9,000 & 16,000 \\\hline \text { Desk Lamps-6,000 units } & 16,000 & 15,000 & 12,000 \\\hline & & & \\\hline\end{array}$ $\begin{array}{|l|c|c|}\hline \text { Activity Pool } & \text { Activity Base } & \text { Budgeted Amount } \\\hline \text { Setups } & 24,000 & \$ 60,000 \\\hline \text { Inspections } & 24,000 & \$ 120,000 \\\hline \text { Assembly dlh) } & 28,000 & \$ 280,000 \\\hline\end{array}$ -Calculate the overhead per unit to be charged to small lamps.