ACCT 202 Principles of Managerial Accounting
Practice Exam - Chapter 8
Activity-Based Costing: A Tool to Aid Decision Making
Dr. Fred Barbee

1. Purchase order processing is an example of a
a.  Unit Level Activity.
b.  Batch-Level Activity.
c.  Product-Level Activity.
d.  Organization-Sustaining Activity.
2. A duration driver is:
a.  A simple count of the number of times an activity occurs.
b.  An activity measure that is used for the life of the company.
c.  A measure of the amount of time required to perform an activity.
d.  An activity measure that is used for the life of an activity-based costing system.
3. A transaction driver is:
a.  An event that causes a transaction to begin.
b.  A measure of the amount of time required to perform an activity.
c.  An event that causes a transaction to end.
d.  A simple count of the number of times an activity occurs.

Use the following information to answer questions 4 and 5:

Adams Company has two products: A and B. Annual production and sales are 500 units of Product A and 900 units of Product B. 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 0.5 direct labor hours per unit. The total estimated overhead for next period is $67,522.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools - Activity 1, Activity 2, and General Factory - with estimated overhead costs and expected activity as follows:

    Expected Activity
Activity Cost Pool Est MOH Product A Product B Total
Activity 1
$6,915
300
200
500
Activity 2
24,948
2,100
700
2,800
General Factory
35,659
200
450
650
Total
$67,522
 
 
 

(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.)

4. The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to:

a.  $23.05.
b.  $13.83.
c.  $34.58.
d.  $135.04.
5. The overhead cost per unit of Product A under the activity-based costing system is closest to:
a.  $67.66
b.  $21.94
c.  $48.23
d.  $41.55
Use the following information to answer questions 6 and 7.

Harrison Co. produces two products, AB and XY. Information about the current period's production is as follows:

 
AB
XY
Units Produced
50,000
65,000
Prime Cost
$750,000
$650,000
Machine Hours
30,000
60,000

Harrison uses a plantwide rate of $4.00 per machine hour to apply overhead to production. Budgeted overhead was $392,000 but actual overhead was $376,000.

6. How much of Harrison Company's overhead was applied to product AB?

a.  $130,000.
b.  $195,000.
c.  $120,000.
d.  $187,500.
7. What was Harrison Company's total cost to produce product XY?
a.  $650,000.
b.  $910,000.
c.  $900,000.
d.  $890,000.

Use the following information to answer questions 8 and 9.

Buchanan Manufacturing uses an activity-based cost system. The company produces Model A and Model D. Information relating to the two products is as follows:

 
Model A
Model D
Units Produced
20,000
40,000
Machine Hours
8,000
10,000
Direct Labor Hours
14,000
16,000
Engineering Labor (Hours)
1,000
1,400
Setups
40
60

The following costs are reported:

Engineering
$96,000
Setups
200,000
Machine-related Overhead
288,000

8. Buchanan Manufacturing's pool rate for engineering is

a.  $68.58.
b.  $57.00.
c.  $50.00.
d.  $40.00.
9. Buchanan Manufacturing's pool rate for setups is
a.  $2,240.
b.  $2,000.
c.  $1,760.
d.  $1,680.

10. Which of the following is not a limitation of activity-based costing?

a.  $10.00.
b.  $7.20.
c.  $7.83.
d.  $9.00.


Part II: Problems   (To see the answer, click on the solution button.)
Problem 1: Overhead Allocation

Ray Manufacturing has four categories of overhead. The four categories and expected overhead costs for each categoty for next year are as follows:

Maintenance
$510,000
Materials Handling
250,000
Setups
60,000
Inspection
210,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. One hundred thousand direct labor hours are budgeted for next year.

The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent.

Estimates for the proposed job are as follows:

Direct materials
$30,000
Direct labor (8,000 hours)
$24,000
Number of materials moves
100
Number of inspections
120
Number of setups
24
Number of machine hours
4,000

The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows:

Machine hours
60,000
Material moves
20,000
Setups
3,000
Quality inspections
12,000

Required:

1. Calculate the amount of overhead that should be allocated to the proposed job if Ray Manufacturing uses direct labor hours as the cost driver.












2. Assume Ray Manufacturing uses Activity-based cost drivers to assign overhead. Calculate the amount of overhead allocated to the proposed job.














Last Modified October 29, 2004