Quiz Chapter 8 - Solutions 1. Jennifer Company has two products: A and B. The company uses -Based Costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows: Estimated Expected Cost Pool Cost Product A Product B Total 1... $23,500 400 100 500 2... $18,000 500 200 700 3... $34,600 600 300 900 The activity rate under the -Based Costing system for 3 is closest to: A) $36.24. B) $38.44. C) $84.56. D) $115.33. The correct answer is B. To calculate the activity rate for activity 3, you would divide: Estimated Cost / Estimated Driver $34,600 / 900 $38.44 2. Reach Consulting Corporation has its headquarters in Chicago and operates from three branch offices in Portland, Dallas, and Miami. Reach's headquarter activities are assigned to two activity cost pools: General Service and Research Service. These costs are then allocated to the three branch offices. Information for next year related to this -Based Costing system is as follows: Cost Pool Measure Estimated Overhead Cost General service... % of time devoted to branch $700,000 Research service... Computer time $140,000 Estimated branch data for next year is as follows: % of time devoted to branch Computer Time Portland 30% 200,000 minutes Dallas 60% 150,000 minutes Miami 10% 50,000 minutes Page 1
How much of the headquarters cost allocation should Dallas expect to receive next year? A) $280,000 B) $409,500 C) $472,500 D) $504,000 C is correct. You don t have to do this with this problem, but I like to calculate an activity rate (application rate) for each activity: Portland Dallas Miami Total General Service $700,000 30% 60% 10% 100% Research Service $140,000 200K mins 150K mins 50K mins 400K mins General Service = $7,000 per percentage point ($700,000/100%). Research Service = 35 cents per minute ($140,000/ 400,000). Dallas would receive: Cost Allocated to Dallas General Service $420,000 $7,000 x 60(% points) Research Service 52,500.35 x 150,000 Total Cost $472,500 3. Matt Company uses -Based Costing. The company has two products: A and B. The annual production and sales of Product A is 8,000 units and of Product B is 6,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows: Estimated Expected Cost Pool Cost Product A Product B Total 1... $20,000 100 400 500 2... $37,000 800 200 1,000 3... $91,200 800 3,000 3,800 The cost per unit of Product A under -Based Costing is closest to: A) $2.40. B) $3.90. C) $10.59. D) $6.60. Page 2
D is correct. First, calculate an activity rate (application rate) for each activity: A B Total 1 $20,000 100 400 500 2 $37,000 800 200 1000 3 $91,200 800 3000 3800 1 = $40 per driver unit ($20,000/500). 2 = $37 per driver unit ($37,000/1,000). 3 = $24 per driver unit ($91,200/3800). Product A would receive: Cost Allocated to Product A 1 $4,000 $40 x 100 2 $29,600 $37 x 800 3 19,200 $24 x 800 Total Cost $52,800 The cost per unit of Product A is $6.60 ($52,800/8,000). Use the following to answer questions 4-7: Adelberg Company has two products: A and B. The annual production and sales of Product A is 500 units and of Product B is 1,000 units. The company has traditionally used Direct Labor Hours as the basis for applying all Manufacturing Overhead to products. Product A requires 0.4 Direct Labor Hours per unit and Product B requires 0.2 Direct Labor Hours per unit. The total estimated overhead for next period is $68,756. The company is considering switching to an -Based Costing system for the purpose of computing unit product costs for external reports. The new -Based Costing system would have three overhead activity cost pools-- 1, 2, and General Factory--with estimated overhead costs and expected activity as follows: Estimated Overhead Expected Cost Pool Costs Product A Product B Total 1... $31,031 1,000 300 1,300 2... $22,249 1,600 300 1,900 General Factory... $15,476 200 200 400 Total... $68,756 (Note: The General Factory activity cost pool's costs are allocated on the basis of Direct Labor Hours.) Page 3
4. The Predetermined Overhead Rate under the traditional costing system is closest to: A) $11.71. B) $38.69. C) $171.89. D) $23.87. C is correct. The traditional approach would have a single plant-wide predetermined application rate. The rate is calculated as follows: Estimated Overhead/ Estimated Driver You are told that the estimated overhead is $68,756 and that the driver for General Factory is direct labor hours. $68,756/400 = $171.89 5. The overhead cost per unit of Product B under the traditional costing system is closest to: A) $2.34. B) $7.74. C) $4.77. D) $34.38. D is correct. You are told that Product B take.2 direct labor hours per unit. So, you would calculate the overhead cost per unit as follows:.2 x $171.89 = $34.378 Page 4
6. The Predetermined Overhead Rate (i.e., activity rate) for 2 under the -Based Costing system is closest to: A) $13.91. B) $11.71. C) $74.16. D) $36.19. B is correct. First, calculate an activity rate (application rate) for each activity: A B Total 1 $31,031 1000 300 1300 2 $22,249 1600 300 1900 General Factory $15,476 200 200 400 1 = $23.87 per driver unit ($31,031/1300). 2 = $11.71 per driver unit ($22,249/1900). General Factory = $38.69 per driver unit ($15,476/400). 7. The overhead cost per unit of Product B under the -Based Costing system is closest to: A) $45.84. B) $7.74. C) $34.38. D) $18.41. D is correct. Product B would receive: Cost Allocated to Product B 1 $7,161 $23.87 x 300 2 $3,513 $11.71 x 300 3 7,738 $38.69 x 200 Total Cost $18,412 The cost per unit of Product B is $18.41 ($18,412/1,000). Page 5