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MAS 1 Activity Based Costing

The document discusses activity based costing and how to allocate overhead and other costs using both traditional costing based on direct labor hours and activity based costing based on various cost drivers and activity levels. It provides examples of applying both traditional and activity based costing to allocate manufacturing overhead, non-manufacturing expenses, and determine product and customer profitability.

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Roselle Cabañero
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71 views2 pages

MAS 1 Activity Based Costing

The document discusses activity based costing and how to allocate overhead and other costs using both traditional costing based on direct labor hours and activity based costing based on various cost drivers and activity levels. It provides examples of applying both traditional and activity based costing to allocate manufacturing overhead, non-manufacturing expenses, and determine product and customer profitability.

Uploaded by

Roselle Cabañero
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Activity Based Costing

1. Activity Levels - Determine the appropriate level for each of the following activities or costs. Indicate whether
the activity is unit-level (U), batch-level (B), product-level (P), facility-level (F):

a. Equipment setups
b. Plant supervision
c. Prime costs
d. Packing and shipping
e. Designing, changing and advertising
f. Heating, lighting and security
g. Product order processing

2. Puring Supermarkets found that its ABC analysis provided important insights. It extends the analysis to
cover three more product lines – breads & pastries, juices, and frozen delights. The revenues, cost of goods
sold, store support costs, and activity area usage of the three product lines is as follows:

Bread & Pastries Juices Frozen Delights


Financial data
Revenues P57,000 P63,000 P52,000
Cost of goods sold 38,000 47,000 35,000
Store support 11,400 14,100 10,500
Activity area usage
Ordering (purchase orders) 30 25 13
Delivery (deliveries) 98 36 28
Shelf-stocking (hours) 183 166 24
Customer support (items sold) 15,500 20,500 7,900

There are no bottle returns for any of these three product lines.

Required:
a) Use the previous costing system (support costs allocated to products at the rate of 30% of cost of goods
sold) to compute a product-line profitability report for Puring Supermarkets.
b) Use the ABC system (ordering at P100 per purchase order, deliver at P80 per delivery, shelf-stacking at
P20 per hour, and customer support at P0.20 per item sold) to compute a product-line profitability report
for Puring Supermarkets.

3. Arya Company incurs P800,000 in manufacturing overhead costs. The company has been allocating
overhead to individual product lines based on direct labor hours.

Cost Driver Amount in Cost Pool Amount of Activity


Direct labor hours P 300,000 40,000
Number of batches 300,000 1,000
Number of shipments 200,000 500
Total overhead costs P 800,000

Two products have the following characteristics:

Product X Product Y
Direct labor hours 2,000 1,000
Number of batches 20 100
Number of shipments 2 150
Required:
Determine the overhead costs to be allocated to each product (X and Y) usisng:
a) Traditional costing (based on direct labor hours)
b) Activity-based costing (ABC)

4. Samwell manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit
are as follows:

Price P 40,500 per unit


Cost of goods sold 25,500
Gross Profit P 15,000 per unit

In addition, the company incurs selling and administrative expenses of P160,400. The company wishes to
assign these costs to its three major customers, Citadel University, Dorne Arena, and Braavos Hospital.
These expenses are related to three major non-manufacturing activities: customer service, project bidding,
and engineering support. The engineering support is in the form of engineering changes that are placed by
the customer to change the design of a product. The activity cost pool and activity bases associated with
these are:

Activity Activity Cost Pool Activity Base


Customer service P 66,500 Number of service request
Project bidding 34,500 Number of bids
Engineering support 59,400 Number of customer design changes
Total P 160,400

Activity-base usage and unit volume information for the three customers is as follows:

Citadel Braavos
Dorne Arena Total
University Hospital
Number of service request 110 35 45 190
Number of bids 14 12 20 46
Number of customer design changes 75 25 35 135
Unit volume 5 10 15 30

Required:
1. Determine the activity rates for each of the three nonmanufacturing activity pools.
2. Determine the activity costs allocated to the three customers, using the activity rates in (1).
3. Construct customer profitability reports for the three customers, using the activity costs in (2). The
reports should disclose the gross profit and income from operations associated with each customer.
4. Construct customer profitability reports for the three customers, using the traditional costing system
where the company allocates non-manufacturing costs using the unit volume. The reports should
disclose the gross profit and income from operations associated with each customer.

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