MANAGEMENT ACCOUNTING
CONCEPTS AND TECHNIQUES
By Dennis Caplan, University
at Albany (State University of New York)
CHAPTER
11: Activity-Based Costing
Exercises
and Problems
Discussion Question 11-1: Colorado Airlines is operating at capacity on its Denver to New York route, offering three flights each day on this route, using Boeing 737’s, each with a capacity of 120 passengers. Airline management wants to determine the least expensive way to increase daily capacity from 360 passengers to 480 passengers. One possibility is to add one more Boeing 737 per day. The other possibility is to replace the current equipment with Boeing 727’s, which hold 160 passengers each. In either case, management believes the planes will continue to operate at capacity.
To ascertain the least expensive
way to increase passenger capacity on the
Required:
Consider the following cost drivers:
a) Number of flights per day
b) Number of miles flown per day
c) Number of passengers served per day
d) Number of passenger miles (miles flown per day multiplied by number of passengers)
For each of the following costs, identify the most appropriate cost driver from the above list.
1. Passenger meals
2. Airplane fuel
3. Ground personnel who refuel the plane, and mechanics on the ground
4. Ground personnel who serve passengers at the ticket counter and at the gate.
5. Cockpit crew salaries (Federal Aviation Administration regulations limit pilots to fly no more than a certain number of hours per month).
6. Flight attendant salaries (assume that Federal Aviation Administration regulations limit flight attendants to fly no more than a certain number of hours per month, and require one flight attendant for every 40 passengers).
7. Economic depreciation of the airplane (i.e., without regard to the depreciation method chosen for accounting purposes, choose the cost driver that best captures the wear and tear on the equipment, and determines the economic life of the plane).
8. Personnel who handle baggage
11-2: You are the Chief Financial Officer of a large
(A) Patient
occupancy rates (i.e., patient days) in each ward.
(B) The
number of washing machines in the Laundry and Linen Department
(C) The
number of Medicare patients in each ward.
(D) The number
of patient admissions to each ward.
11-3: In which of the following situations are the
techniques of activity-based costing most likely to lead to improved production
or marketing decisions.
(I) The All-Direct Company, which incurs significant direct
costs, but no overhead costs, to manufacture its extensive and ever-changing
product line.
(II) The
One-Size-Fits-All Hat Company, which makes a single product that is sold to many different kinds of retailers, in varying volumes,
through various marketing channels, in many different geographic regions.
(III) The
Iowa Wind Turbine Electric Cooperative, which has direct costs and fixed
overhead, but no variable overhead.
(A) (I) and (II), but not (III)
(B) (I) and (III), but not (II)
(C) (I) only
(D) (II) only
11-4: For a generic manufacturing facility (i.e., without being told what the factory makes):
A) Give two examples of overhead expenses for which direct labor hours is a more appropriate allocation base than machine time.
B) Give two examples of overhead expenses for which machine time is a more appropriate allocation base than direct labor hours.
11-5: The Silver City Mining Company mines copper and aluminum in
The company switched to activity-based costing, using
multiple cost pools, and allocating each cost pool using an allocation base
that more accurately captures the cause and effect relationship between the
mining operations and overhead costs. Also, several overhead cost categories
were reclassified as direct costs. The company had used an Actual Costing
system prior to implementing ABC (i.e., overhead rates were calculated at the
end of the year, when actual amounts were known), and continued to use Actual
Costing after implementation of ABC. To study the effect of the new ABC system,
it was retroactively applied to 2005, in order to compare the results to the
old method. Which of the following outcomes under the new system suggests that
an error was made in the calculation of overhead rates?
(A) The new
overhead rates were $45 per ton of aluminum and $62 per ton of copper.
(B) The new
overhead rates were $45 per ton of aluminum and $58 per ton of copper.
(C) The new
overhead rates were $55 per ton of aluminum and $58 per ton of copper.
(D) The new
overhead rates were $55 per ton of aluminum and $62 per ton of copper.
11-6: The Santa Cruz Candy Company makes five types of candies in its sole factory, including chocolate truffles and chocolate mints. Truffles are hand-dipped, so making truffles is labor-intensive, and furthermore, only the most experienced (and highest paid) employees can make truffles. Production of mints is highly automated: they don’t require much labor, but the machine operators are also highly-skilled and highly-paid. The manager of truffles production (Candy Lowenski) and the manager of mints production (Coco Hernandez) are discussing their preferences for how factory overhead should be allocated to their products. The three choices are direct labor dollars, direct labor hours, and machine hours. Of course, each manager would like to report the highest profits possible from her product line.
Required: In one, two or three (no more than three) complete
sentences (each sentence must have a verb and a period, among other grammatical
components), predict what position each manager will take with respect to her
preferred allocation base, and explain your reasoning.
11-7: The Braintree Furniture Company manufactures two lines of
furniture: an upscale, handcrafted line called Richleau,
which is produced in small quantities; and a mass-produced, inexpensive line
called Particleboard. Both lines are made in the same factory. Richleau is very labor intensive relative to Particleboard.
(A) higher than under the traditional costing method.
(B) lower than under the traditional costing method.
(C) either higher or lower than under the traditional costing method, depending on the underlying economics of the business.
(D) lower than under traditional costing, as long as activity-based costing is implemented in a way that provides more accurate cost information.
11-8: The not-for-profit health clinic Shots-Я-Us provides various types of vaccinations and other shots, especially flu shots, to the public for free or for a nominal fee. The clinic is funded by several local governmental agencies as well as by a number of charitable organizations. Since different donors wish to fund different types of shots, the clinic determines the full cost of each type of shot, by adding overhead to the direct costs, and then provides this information to current and prospective donors.
Following are actual and budgeted costs for Shots-Я-Us for 2003:
|
|
Actual |
Budgeted |
|
Number of patient visits Number of shots administered Fixed overhead: salaries, rent for the facility, insurance, depreciation. Variable overhead: nursing staff hoursly wages, utilities, disposable supplies. Cost of hypodermics (a direct cost) Cost of medications (a direct cost) |
5,000 6,000 $94,000 $66,000 $1,000 $30,000 |
4,000 4,500 $110,000 $40,500 $750 $20,000 |
Which of the following is probably not a significant cost driver for variable overhead, and hence, would probably be a poor choice as the cost allocation base for allocating variable overhead?
(A) The number of shots administered
(B) The dollar value of the medication administered
(C) The number of patient visits
(D) The amount of nursing staff time spent administering each type of shot
11-9: Pink Ink, Inc. has two products and two overhead cost
pools:
|
|
Product A |
Product B |
In Total |
Units
produced
Direct Costs (per unit): Materials Labor (paid $20 per hour) Materials Handling cost pool
Everything Else cost pool |
200 $10 $20 |
50 $20 $40 |
$24,000 $76,000 |
Required:
11-10: Following is information about Aztech Industries:
|
|
Model A |
Model B |
Model C |
Total |
|
Units produced Direct materials (per unit) Direct labor (per unit) Cost driver information: number of parts (per unit) direct labor hours (per unit) square feet (in total for all units) Overhead costs: Labor Support Materials Support Facility Cost Total overhead |
300 $50 $20 20 3 400 |
500 $75 $50 42 4.60 600 |
200 $100 $40 30 4 1,000 |
1,000 $22,000 $33,000 $90,000 $145,000 |
Use activity-based costing to calculate the total cost for each Model C heater. Allocate Labor Support using direct labor hours, Materials Support using number of parts, and Facility Cost using square feet.
11-11: The Crouse Travel Company applies overhead to its international camping tours using activity-based costing. Following is information about the three overhead cost pools:
|
|
Total Costs |
Allocation Base |
Total Quantity of the
Allocation Base Incurred |
|
Administration Operations Marketing |
$200,000 600,000 180,000 |
Number of tours Tourist travel days* Number of tourists |
40 6,000 600 |
* For any given tour, the number of tourist travel days is the number of
tourists multiplied by the number of days in the tour. For example, 10 tourists
on a seven-day tour would constitute 70 tourist travel days.
Required:
A) Calculate
the overhead rates.
B) Five of
the 40 tours were 10-day trips to
11-12 (A continuation of 6-15): Sister Rachel recently attended a
seminar on activity-based costing held in
Costs vary with the age of the children. The number and ages of children were as follows:
|
|
2000 |
2001 |
|
Pre-school (ages 0 - 5) |
30 |
15 |
|
Pre-teen (ages 6 – 12) |
30 |
32 |
|
Teenagers (ages 13 - 18) Total |
20 80 |
25 72 |
Everyone agrees that 2000 was a very successful year for the Orphanage, so the 2001 budget was based on 2000 actual costs. The following information pertains to 2000:
- Food costs per meal were $4 for pre-schoolers, $5 for pre-teens, and $6.50 for teenagers. 3 meals are served per day, 365 days per year.
- The cost of clothing is twice as much (per child) for teenagers as for the other two age groups.
- Laundry and linen costs per child do not vary with the age of the child. However, this category also includes the cost of a diaper service. 1/3 of pre-school children are in diapers, and the cost is $15 per week, 52 weeks per year.
- Educational costs do not apply to pre-school children.
- Only teenagers receive an allowance. The allowance is $20 per week, 50 weeks per year.
Required:
A) Identify the cost drivers for the following expenses:
(A) Diaper service
(B) Educational costs
(C) Allowances
B) Prepare a flexible budget for 2001, making use of the information compiled by Sister Rachel, as well as information about fixed costs from the original 2001 budget.
C) Should Sister Sarah be satisfied with the orphanage’s financial results and efforts to control costs in 2001? Briefly explain.
11-13: The 601 Blue Jean Company has decided to allocate the cost
of its Warehouse and
|
Overhead Cost Pool |
Cost Driver (Allocation Base) |
|
Order Processing Department Order Filling Department Quality Control Department Shipping Department |
Number of individual orders processed for that customer Number of line items on all pull-tickets for that customer Number of cartons shipped to that customer Number of cartons shipped to that customer |
Following are relevant data for each overhead cost pool:
|
Order Processing Department Total costs for this department Total number of orders processed Order Filling Department Total costs for this department Total number of line-items on all pull tickets
Total costs for this department Total number of cartons shipped Shipping Department Total costs for this department Total number of cartons shipped |
$3,000,000 200,000 $4,000,000 4,000,000 $500,000 2,000,000 $7,500,000 2,000,000 |
Following is
information pertaining to two customers:
|
7-9-11 Stores: Sales revenue for the year Number of orders Number of pull ticket line-items Number of cartons Outbound freight costs Men’s Large and Big Stores: Sales revenue for the year Number of orders Number of pull ticket line-items Number of cartons Outbound freight costs |
$2,400,000 500 100,000 50,000 $75,000 $1,500,000 250 20,000 40,000 $56,000 |
Required:
A) Compute the overhead rates for each of the four overhead cost pools.
B) Calculate the amount of overhead that would be applied
to 7-9-11 Stores
C) Calculate the amount of overhead that would be applied
to Men’s Large & Big Stores
D) Explain
(in one or two sentences) or show (by calculation) how your answers to Parts
(B) and (C) would change if the company combined Quality Control and Shipping
into one overhead cost pool, and allocated overhead for this cost pool to
customers based on the number of cartons shipped to that customer.
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Management
Accounting Concepts and Techniques; copyright 2006; most recent update:
November 2010
For a printer-friendly version, contact Dennis Caplan at dcaplan@uamail.albany.edu