ABC Costing – Problem 1

Surya Hotel uses activity-based costing to determine the cost of servicing customers. There are three activity
pools: Guest check-in, Room cleaning, and Meal service. The activity rates associated with each activity pool
are Rs 6.90 per Guest check-in, Rs 16.40 per Room cleaning, and Rs 3.10 per served Meal (not including
food). Sonali visited the hotel for a 4-night stay. Sonali had three meals in the hotel during her visit. 
Determine the total Activity-based cost for servicing Sonali for this visit.

ABC Costing – Problem 2

The total factory overhead for continental styles is budgeted for the year at Rs 3,60,000. Continental
manufactures two types of men’s pants: Jeans and Khakis. The Jeans and Khakis each require 0.15 direct
labor hours for manufacture. Each product is budgeted for 20,000 units of production for the year.

Determine:
(a) The total number of budgeted direct labor hours for the year
(b) The single plantwide factory overhead rate
(c) The factory overhead allocated per unit for each product using
      the single plantwide factory overhead rate.

ABC Costing – Problem 3

Ratna Food Company manufactures three types of snack foods; tortilla chips, potato chips, and pretzels. The
company has budgeted the following costs for the upcoming period:
Factory depreciation 12,900
Indirect labor 30,200
Factory electricity   3,500
Indirect materials   6,650
Selling expenses       17,025
Administrative expenses   9,600
Total costs          79,875
Factory overhead is allocated to the three products based on processing hours. The products had the following
production budget and processing hours per case:

BUDGETED PROCESSING PRODUCTION

VOLUME (CASES) HOURS PER CASE

TORTILLA CHIPS 3000 0.12

POTATO CHIPS 48000 0.10

PRETZELS 1500 0.15

TOTAL 9300
Required:
(a) Determine the single plantwide factory overhead rate:
(b) Use the factory overhead rate in (a) to determine the amount of
total and per-case factory overhead allocated to each of the three
products under generally accepted accounting principles.

BUDGETED PROCESSING PRODUCTION

VOLUME (CASES) HOURS PER CASE

TORTILLA CHIPS 3000 0.12

POTATO CHIPS 48000 0.10

PRETZELS 1500 0.15

TOTAL 9300

ABC Costing – Problem 4

Bharti Company produces two types of stereo units: deluxe and regular. Activity data follow:

Required :
(i) Calculate the consumption ratios for each activity.
(ii) Group activities based on the consumption ratios and activity level
(iii) Calculate a rate for each pooled group of activities.
(iv) Using the pool rates, Calculate unit product costs.
ABC Costing – Problem 5
S.Chand & Co., a leading publisher, publishes two versions of a textbook. One is paperback, and the other is
hardbound. Management is considering publishing only the higher quality book. The firm assigns its Rs
500,000 of overhead to the two types of books. The overhead comprises Rs 200,000 for utilities and Rs
300,000 for quality control inspectors’ salaries. Some additional data follow:

Required:
(i) Compute the overhead cost that should be allocated to each type of textbook using cost drivers appropriate
for each type of overhead cost.
(ii) The firm has used machine hours to allocate overhead in the past. Should the publisher stop producing
paperback books? Explain why management was considering this action and what its decision should be.

ABC Costing – Problem 6

Kapoor & Associates provides consulting and tax preparation services to its clients. It charges a Rs 100 fee
per hour for each service. The firm’s revenues and costs for March 2014 are shown in the following income
statement:

9
Required:
(i) Complete the income statement using activity-based costing and the firm’s three cost drivers.
(ii) Recompute the income statement using direct-labor hours as the only allocation base: 1,300 hours for tax;
2,700 hours for consulting.
(iii) How might the firm’s decisions be altered if it were to allocate all overhead costs using direct labor
hours?
(iv) Under what circumstances would the about-based allocation and activity-based costing (using the three
cost drivers) result in similar profit results?
ABC Costing – Problem 7
Jetlite produces headlamps for campers, hikers, and other people who want the convenience of light at night
without carrying a flashlight. It currently allocated overhead costs using direct labor hours, but the controller
has recommended an activity-based costing system using the following data.

Required:
(i) Compute the amount of overhead allocated to each product under activity-based costing.
(ii) Compute the amount of overhead to be allocated to each product using direct-labour hour as the allocation
base. Assume that number of direct-labour hours required to assemble each unit is 0.5 per unit of product A
and 1.0 per unit of product B. The company produced 45000 units of product A and 75000 units of product B.
(iii) Should the company follow the controller’s recommendation?

ABC Costing – Problem 8

New India insurance company carries three major lines of insurance: auto, workers’ compensation, and
homeowners. The company has prepared the following report for 2014: Production profitability report. For the
year ended December 31, 2014

Management is concerned that the administrative expenses may make some of the insurance lines
unprofitable. However, the administrative expenses have not been allocated to the insurance line. The
controller has suggested that the administrative expenses could be assigned to the insurance lines using ABC.
The administrative expenses are comprised of five activities. The activities and their rates are as follows:
Activity-based usage data for each line of insurance was retrieved from the corporate records and shown
below.

AA AUTO WORKER’S HOMEOWNERS

COMPENSATION

NO. NO. OF NEW POLICIES 11001100 1250 3200 3200

NO. NO. OF CANCELED POLICIES 450 200 200 1600 1600

NO. NO. OF AUDIT CLAIMS 320 320 100 100 700 700

NO. NO. OF CLAIMS DISBURSEMENT

400 400 180 180 750 750

NO. NO. OF PREMIUMS COLLECTED7500 7500 1500 1500 1200 12000

Required:

(a) Complete the product profitability report through administrative activities. Determine the operating income
as a percent of premium revenue, rounded to the nearest whole percent.
(b) Interpret the report.
 ABC Costing – Problem 9
The company produces two types of calculators; scientific and business. Both products pass through two
producing departments. The business calculator is by far the most popular. The following data has been
gathered for these two products. 
Production-related Data

Department data

i. Compute the overhead cost per unit for each product using a plantwide, unit-based rate.
ii. Compute each product’s overhead cost per unit using department rates. In calculating departmental rates, use
machine hours for department one and direct labor hours for department 2. Repeat using direct labor hours for
department one and machine hours for department 2.
iii. Compute the overhead cost per unit for each product using ABC. (Use overhead pools where possible.)
iv. Comment on the ability of departmental rates to improve the accuracy of product costing.