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Session:6 Activity-Based, Variable, and Absorption Costing

Problem Set B

Principles of Accounting, Volume 2: Managerial Accounting | Leadership Development – Micro-Learning Session

Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-managerial-accounting

PB 1. 

LO 6.1Bobcat uses a traditional cost system and estimates next year’s overhead will be $800,000, as driven by the estimated 25,000 direct labor hours. It manufactures three products and estimates the following costs:

The information for Bobcat, Jaguar, and Tiger, respectively. Units: 250,000, 80,000, 12,000. Direct Material Cost: $13, $22, $37. Direct Labor Hours per Unit 2, 3, 5.

If the labor rate is $30 per hour, what is the per-unit cost of each product?

PB 2. 

LO 6.1Five Card Draw manufactures and sells 10,000 units of Aces, which retails for $200, and 8,000 units of Kings, which retails for $170. The direct materials cost is $20 per unit of Aces and $15 per unit of Kings. The labor rate is $30 per hour, and Five Card Draw estimated 64,000 direct labor hours. It takes 4 direct labor hours to manufacture Aces and 3 hours for Kings. The total estimated overhead is $128,000. Five Card Draw uses the traditional allocation method based on direct labor hours.

  1. How much is the gross profit per unit for Aces and Kings?
  2. What is the total gross profit for the year?
PB 3. 

LO 6.2A local picnic table manufacturer has budgeted the following overhead costs:

Estimated Overhead for the following: Purchasing $80,000; Handling materials 45,00; Machine setups 55,000; Assembly 60,000; Utilities 90,000.

They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown:

Cost Drivers are: Orders, Material moves, Machine setups, Number of parts, and Square feet. Activities are, respectively: 10,000, 1,500, 5,000, 5,000, and 60,000.

Recent success has yielded an order for 1,500 tables. Determine how much the job would cost given the following activities, and assuming an hourly rate for direct labor of $25 per hour:

Activity for the following: Order (units) 1,500; Direct materials 75,900; Machine hours 3,310; Direct labor hours 4,590; Number of purchase orders 70; Number of material moves 750; Number of machine setups 85; Number of parts 290; Number of square feet occupied 3,000.

PB 4. 

LO 6.2Explain how each activity in this list can be associated with the corresponding unit or batch level provided.

  1. Assembling products: batch level
  2. Issuing raw materials: unit level
  3. Machine setup: unit level
  4. Inspection: batch level
  5. Loading the labeling machine: unit level
  6. Equipment maintenance: unit level
  7. Printing a banner: batch level
  8. Moving material: unit level
  9. Ordering a part: unit level
PB 5. 

LO 6.3Wrappers Tape makes two products: Simple and Removable. It estimates it will produce 369,991 units of Simple and 146,100 of Removable, and the overhead for each of its cost pools is as follows:

Cost Pools and Estimated Overhead are: Material receipts $249,975; Machine setups 150,000; Assembly 450,000; Machine maintenance 175,000; Total $1,024,975.

It has also estimated the activities for each cost driver as follows:

Driver, Simple, and Removable, respectively. Machine hours, 2,000, 1,500. Requisitions, 300, 450. Parts, 100, 200. Setups, 150, 50.

How much is the overhead allocated to each unit of Simple and Removable?

PB 6. 

LO 6.3Box Springs, Inc., makes two sizes of box springs: queen and king. The direct material for the queen is $35 per unit and $55 is used in direct labor, while the direct material for the king is $55 per unit, and the labor cost is $70 per unit. Box Springs estimates it will make 4,300 queens and 3,000 kings in the next year. It estimates the overhead for each cost pool and cost driver activities as follows:

Activity Cost Pools, Driver, Estimated Overhead, Use per Queen, Use per King, respectively. Framing, Square feet of pine, $150,000, 4,500, 3,000. Padding, Square feet of quilting, 156,000, 80,000, 40,000. Filling, Square feet of filling, 210,000, 150,000, 60,000. Labeling, Number of boxes, 190,000, 38,000, 38,000. Inspection, Number of inspections, 180,000, 120,000, 60,000.

How much does each unit cost to manufacture?

PB 7. 

LO 6.3Please use the information from this problem for these calculations. After grouping cost pools and estimating overhead and activities, Box Springs determined these rates:

Purchasing $21. Utilities 15. Machine setups 10. Supervision 3.

Box Springs estimates there will be four orders in the next year, and those jobs will involve:

Orders 4. Square feet 150. Machine hours 60. Direct labor hours 25. Direct materials 900. Direct labor rate 35

What is the total cost of the jobs?

PB 8. 

LO 6.4A company has traditionally allocated its overhead based on machine hours but collected this information to change to activity-based costing:

Estimated Activity by Activity Center for Product 1, Product 2, and Estimated Cost, respectively. Machine setups, 10, 15, $50,000. Assembly parts, 1,000 1,500, 75,000. Packaging units, 500, 300, 80,000. Machine hours per unit, 1, 1.5. Production volume 2,000, 2,000.

  1. How much overhead would be assigned to each unit under the traditional allocation method?
  2. How much overhead would be assigned to each unit under activity-based costing?

PB 9. 

LO 6.4Casey’s Kitchens makes two types of food smokers: Gas and Electric. The company expects to manufacture 20,000 units of Gas smokers, which have a per-unit direct material cost of $15 and a per-unit direct labor cost of $25. It also expects to manufacture 50,000 units of Electric smokers, which have a per-unit material cost of $20 and a per-unit direct labor cost of $45. Historically, it has used the traditional allocation method and applied overhead at a rate of $125 per machine hour. It was determined that there were three cost pools, and the overhead for each cost pool is as follows:

Machine setups $5,000; Machine processing 6,000,000; Material requisitions 25,000; Total overhead $6,030,000.

The cost driver for each cost pool and its expected activity is as follows:

For Gas, Electric, and Total, respectively. Machine setups, 100, 150, 250. Machine hours, 45,000, 105,000, 150,000. Parts requisitions, 360, 140, 500.

  1. What is the per-unit cost for each product under the traditional allocation method?
  2. What is the per-unit cost for each product under ABC costing?
PB 10. 

LO 6.4Casey’s Kitchens’ three cost pools and overhead estimates are as follows:

Activity Cost Pools, Cost Driver, Estimated Overhead, Use per Product A, Use per Product B, respectively. Machine setups, Setups, $250,000, 7,000, 3,000. Assembly, Number of parts, 300,000, 25,000, 35,000. Machine maintenance, Machine hours, 500,000, 10,000, 50,000.

Compare the overhead allocation using:

  1. The traditional allocation method
  2. The activity-based costing method

(Hint: the traditional method uses machine hours as the allocation base.)

PB 11. 

LO 6.4Lampierre makes silver and gold candlesticks. The company computed this information to decide whether to switch from the traditional allocation method to ABC.

Silver and Gold, respectively. Units planned 500, 250. Material moves 250, 750. Machine setups 5,600, 4,400. Direct labor hours 500, 1,500.

The estimated overhead for the material cost pool is estimated as $45,000, and the estimate for the machine setup pool is $55,000. Calculate the allocation rate per unit of silver and per unit of gold using:

  1. The traditional allocation method
  2. The activity-based costing method
PB 12. 

LO 6.4Portable Seats makes two chairs: folding and wooden. This information was obtained to review the decision to consider ABC:

Folding Chairs, Wooden Chairs, and Total Cost, respectively. Material requisitions 450 pounds, 250 pounds, $105,000. Inspections 250, 150, $30,000. Labor hours 1,300, 1,700.

Compute the overhead assigned to each product under:

  1. The traditional allocation method
  2. The activity-based costing method
PB 13. 

LO 6.5Submarine Company produces only one product and sells that product for $150 per unit. Cost information for the product is as follows:

Direct material $40 per unit. Direct labor $50 per unit. Variable overhead $10 per unit. Fixed overhead $40,000.

Selling expenses are $2 per unit and are all variable. Administrative expenses of $15,000 are all fixed, Submarine produced 2,000 units and sold 1,800. Grainger had no beginning inventory.

  1. Compute net income under
    1. absorption costing
    2. variable costing
  2. Reconcile the difference between the income under absorption and variable costing.
PB 14. 

LO 6.5Summarized data for Backdraft Co. for its first year of operations are as follows:

Sales (90,000 units) $3,500,000. Production costs (100,000 units): Direct material 1,100,000, Direct labor 400,000. Manufacturing overhead: variable 200,000, fixed 100,000. Selling and administrative expenses: variable 80,000, fixed 50,000.

  1. Prepare an income statement under absorption costing
  2. Prepare an income statement under variable costing
PB 15. 

LO 6.5Trail Outfitters has this information for its manufacturing:

Direct materials $15; Direct labor $15; Variable manufacturing overhead $3; Fixed manufacturing overhead $25; Units produced 30,000; Units sold 38,000.

Its income statement under absorption costing is as follows:

Sales $3,200,000. Less Cost of Goods Sold: Beginning Inventory 464,000 plus Cost of Goods Manufactured 1,740,000 equals Cost of Goods Available for Sale 2,204,000 less Ending Inventory 0 equals Cost of Goods Sold 2,204,000. Equals Gross Profit 996,000. Less Sales and Admin Expenses: Variable 266,000 and Fixed 300,000, Total Sales and Admin Expenses 566,000. Equals Net Operating Income $430,000.

Prepare an income statement with variable costing and a reconciliation statement between both methods.

PB 16. 

LO 6.5Wifi Apps has these costs associated with its production and sale of devices that allow visual communications between cell phones:

Beginning inventory $0. Units produced 33,000. Units sold 23,000. Selling price per unit $170. Variable sales and administration expenses $4. Fixed sales and administration expenses $895,000. Direct material cost per unit $23. Direct labor cost per Unit $15. Variable manufacturing overhead cost per unit $4. Fixed manufacturing overhead cost per month $858,000.

Prepare an income statement under both the absorption and variable costing methods along with a reconciliation between the two statements.

PB 17. 

LO 6.5This information was collected for the first year of manufacturing for Wifi Apps:

Direct materials per unit $1.75; Direct labor per unit $3.50; Variable manufacturing overhead per Unit $0.55; Variable Selling and administration expenses $1.25; Units produced 50,000; Units sold 40,000; Sales price $13; Fixed manufacturing expenses $120,000; Fixed selling and administration expenses $35,000.

Prepare an income statement under variable costing and prepare a reconciliation to the income under the absorption method.

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