A company has identified the following overhead costs and cost drivers for the coming year.

Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level

Machine setup No. of setups $ 20,000 200
Inspection No. of inspections $130,000 6,500
Material handling No. of material moves $ 80,000 8,000
Engineering Engineering hours $ 50,000 1,000
    $280,000  
The following information was collected on three jobs that were completed during the year:
  Job 101 Job 102 Job 103
Direct materials $5,000 $12,000 $8,000
Direct labor $2,000 $ 2,000 $4,000
Units completed 100 50 200
Number of setups 1 2 4
Number of inspections 20 10 30
Number of material moves 30 10 50
Engineering hours 10 50 10
Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000.
1. If the company uses traditional costing, how much overhead cost should be allocable to all jobs?
2. If the company uses activity-based costing, how much overhead cost should be allocable to Job 101?
3. If the company uses activity-based costing, compute the cost of each unit of Job 102.
4. The company prices its products at 140% of cost. If the company uses activity-based costing, the price of each
unit of Job 103 would be.
1. Traditional Costing Overhead Items (rate)
Overhead rate = Budgeted OH / Budgeted DLC x 100% Budgeted Cost / Budgeted Activity Level
280,000 / 100,000 x 100%
280% 20,000 / 200 = 100/set-up
130,000 / 6,500 = 20/inspection
Applied Overhead 80,000 / 8,000 = 10/material moves
Job 101 = 2000 x 280% = 5,600 50,000 / 1,000 = 50/engineering hrs
Job 102 = 2000 x 280% = 5,600
Job 103 = 4000 x 280% = 11,200

2. Job 101
Set up = 100 x 1 = 100
Inspection = 20 x 20 = 400
Material Handling = 10 x 30 = 300
Engineering = 50 x 10 = 500
TOTAL OVERHEAD = 1,300

3. Job 102 (cost per unit) Direct Material 12,000

Set up = 100 x 2 = 200 Direct Labor 2,000
Inspection = 20 x 10 = 200 Factory OH 3,000
Material Handling = 10 x 10 = 100 TMC 17,000
Engineering = 50 x 50 = 2500 / 50 units
TOTAL OVERHEAD = 3,000 Cost per unit 340/unit
4. Job 103 Direct Material 8,000
Set up = 100 x 4 = 400 Direct Labor 4,000
Inspection = 20 x 30 = 600 Factory OH 2,000
Material Handling = 10 x 50 = 500 TMC 14,000
Engineering = 50 x 10 = 500 / 200 units
TOTAL OVERHEAD = 2,000 Cost per unit 70/unit
x 140% (selling price)
Selling Price 98/unit
Lafayette Savings and Loan had the following activities, traceable costs, and physical flow of driver units:
Traceable Physical flow of
Activities Costs Driver Units
 
Open new accounts $50,000 1,000 accounts
Process deposits 36,000 400,000 deposits
Process withdrawals 15,000 200,000 withdrawals
Process loan applications 27,000 900 applications
 
The above activities are used by the Jennings branch and the Crowley branch:
 
Jennings Crowley
 
New accounts 200 400
Deposits 40,000 20,000
Withdrawals 15,000 18,000
Loan applications 100 160

1. Identify the overhead rate per activity cost pool.

2. How much overhead should be applied for each type of product?
1. Overhead rate per activity cost pool

50,000 / 10,000 accounts = 50/accounts

36,000 / 400,000 deposits = 0.09/deposits
15,000 / 200,000 withdrawals = 0.07/withdrawals
27,000 / 900 applications = 30/applications

2. Jennings Crowley
200 x 50 = 10,000 400 x 50 = 20,000
40,000 x 0.09 = 3,600 20,000 x 0.09 = 1,800
15,000 x 0.07 = 1,050 18,000 x 0.07 = 1,200
100 x 30 = 3,000 160 x 30 = 4,800
17,650 27,860
Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours.
Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours,
respectively. Information about the company's products follows.
Regular— Deluxe—
Estimated production volume: 3,000 units Estimated production volume: 4,000 units
Direct materials cost: $28 per unit Direct materials cost: $42 per unit
Direct labor per unit: 3 hours at $15 per hour Direct labor per unit: 4 hours at $15 per hour
 Scott's overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine
processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed,
machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.
  Orders Machine Hours Inspection
Processed Worked Hours
Regular 320 16,000 4,000
Deluxe 180 24,000 6,000
Total 500 40,000 10,000
Required:
1. Compute the application rates that would be used for order processing, machine processing, and product inspection in
an activity-based costing system.
2. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular and Deluxe if the expected
manufacturing volume is attained.
3. How much overhead would be applied to a unit of Regular and Deluxe if the company used traditional costing and
applied overhead solely on the basis of direct labor hours? Which of the two products would be under-costed by this
procedure? Over-costed?
1. Overhead Cost / Budgeted Activity Level

Order Processing = 250,000 / 500 = 500/order processed

Machine Processing = 1,200,000 / 40,000 = 30/machine hours
Inspection = 150,000 / 10,000 = 15/inspection hours

2. Total Manufacturing Cost per unit

Regular Deluxe
Order 500 x 320 = 160,000 Order 500 x 180 = 90,000
Machine 30 x 16,000 = 480,000 Machine 30 x 24,000 = 720,000
Inspection 15 x 4000 = 60,000 Inspection 15 x 6,000 = 90,000
Applied Overhead 700,000 Applied Overhead 900,000
/ 3,000 (units) / 4,000
OH rate/unit 233.33 OH rate/unit 225
Direct Material 28 Direct Material 42
Direct Labor (3x15) 45 Direct Labor (4x5) 60
TMC per unit 306.33 TMC per unit 327

3. Traditional Costing Applied overhead

Overhead rate = 1,600,000 Regular (3 x 3,000 x 64) = 576,000 under-costed
25,000 Deluxe (4 x 4,000 x 64) = 1,024,000 over-costed
= 64
Lennox Industries manufactures two products: A and B. A review of the company's accounting records
revealed the following per-unit costs and production volumes:

  A   B
Production volume (units) 2,500   5,000
Direct material $ 40   $ 60
Direct labor:      
2 hours at $12 24    
3 hours at $12     36
Manufacturing overhead:      
2 hours at $93 186    
3 hours at $93     279
Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor
hours. Management is considering a shift to activity-based costing in an effort to improve the firm's
accounting procedures, and the following data are available:
          Cost Driver Volume
Cost Pool   Cost   Cost Driver A B Total
Setups   $ 240,000   Number of setups 100 20 120  
General factory   1,500,000   Direct labor hours 5,000 15,000 20,000  
Machine processing   120,000   Machine hours 2,200 800 3,000  
    $1,860,000           
Required:
1. Compute the per-unit cost and selling price of product B by using Lennox's current costing procedures.
2. Compute B's per-unit overhead cost of product B if the company switches to activity-based costing.
3. Compute the total per-unit cost and selling price under activity-based costing.
4. Lennox has recently encountered significant international competition for product B, with considerable
business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more
competitive with product B from a price perspective? Briefly explain.
5. Will the cost and selling price of product A likely increase or decrease if Lennox changes to activity-based
costing? Why? Hint: No calculations are necessary.
1. Product B
Overhead = 1,860,000
20,000
= 93/direct labor hour

Direct material 60
Direct labor 36
Manufacturing overhead 279
Per-unit cost 375

2.
Setups 240,000 ÷ 120 setups = 2,000/ setup
General factory 1,500,000 ÷ 20,000 direct labor hours = 75/direct labor hour
Machine processing 120,000 ÷ 3,000 machine hours = 40/machine hour

Overhead cost for product B

Setups 20 setups x 2,000 = 40,000
General factory 15,000 labor hours x $75 = 1,125,000
Machine processing 800 machine hours x $40 = 32,000
Total = 1,197,000

Overhead per unit: 1,197,000 ÷ 5,000 units = 239.40

3.
Direct material 60
Direct labor 36
Manufacturing overhead 239.40
Per-unit cost 335.40

4. Yes. The switch to activity-based costing results in a lower cost being assigned to product B ($335.40 vs. $375) and
thus a lower selling price.

5. Because less overhead cost is assigned to product B under activity-based costing, more will be assigned to product A.
A higher cost translates into a higher selling price.
McMahon Company would like to institute an activity-based costing system to price products. The
company's Purchasing Department incurs costs of $550,000 per year and has six employees. Purchasing has
determined the three major activities that occur during the year.
Allocation # of Total
Activity Measure People Cost
Issuing purchase orders # of purchase orders 1 $150,000
Reviewing receiving reports # of receiving 2 $175,000
reports
Making phone calls # of phone calls 3 $225,000
During the year, 50,000 phone calls were made in the department; 15,000 purchase orders were issued; and
10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50
purchase orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.
 
a. Determine the amount of purchasing department cost that should be assigned to each of these
products.
b. Determine purchasing department cost per unit if 1,500 units of Product A and 3,000 units of
Product B were manufactured during the year.
Purchase Order 150,000 / 15,000 = 10/order
Receiving Reports 175,000 / 10,000 = 17.50/report
Phone Call 225,000 / 50,000 = 4.50/phone call

1. A B
PO 10 x 50 = 500 PO 10 x 100 = 1,000
RR 17.50 x 150 = 2,625 RR 17.50 x 400 = 7,000
PC 4.50 x 200 = 900 PC 4.50 x 350 = 1,575
= 4,025 = 9,575

2. Unit Cost (Purchase Order)

A = 4,025
1,500
= 2.68/unit

B = 9,575
3,000
= 3.19/unit