Gomez Company identifies three activities in its manufacturing process: machine setups, machining, and

inspections. Estimated annual overhead cost for each activity is $180,000, $325,000, and $87,500, respectively. The
cost driver for each activity and the expected annual usage are: number of setups 2,500, machine hours 25,000, and
number of inspections 1,750. Compute the overhead rate for each activity.

Machine Setups per setup

$ 72

Machining per machine hour

$ 13

Inspections per inspection

$ 50

Machine setups$180,000 ÷ 2,500=$72 per setupMachining$325,000 ÷

25,000=$13 per machine hourInspections$87,500 ÷ 1,750=$50 per
inspection

Quick Pix is a large film developing and processing center that serves 130 outlets in grocery stores, service stations,
camera and photo shops, and drug stores in 16 nearby towns. Quick Pix operates 24 hours a day, 6 days a week.
Classify each of the following activity costs of Quick Pix as either unit-level, batch-level, product-level, or
facility-level.

(a) Developing fluids batch or unit-level

(b) Photocopy paper unit-level

(c) Depreciation of machinery unit-level

(d) Setups for enlargements batch or unit-level

(e) Supervisor's salary facility-level

(f) Ordering materials batch or product-level

(g) Pickup and delivery batch or product-level

(h) Commission to dealers unit-level

(i) Insurance on building facility-level

(j) Loading developing machines batch-level

Elle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide
overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see
how the results would differ if this system were used. Two activity cost pools were developed: machining
and machine setup. Presented below is information related to the company's operations.

Standard Custom

$100,0
Direct labor costs $50,000
00

Machine hours 1,000 1,000

Setup hours 100 400

Total estimated overhead costs are $300,000. Overhead cost allocated to the machining activity cost pool is
$200,000, and $100,000 is allocated to the machine setup activity cost pool.

Correct.

Compute the overhead rate using the traditional (plantwide) approach.

200 % of direct labor cost

 Correct.

Compute the overhead rates using the activity-based costing approach.

Machining per machine hour

$ 100

Machine setup per setup hour

$ 200

Correct.

Determine the difference in allocation between the two approaches.

Traditional Costing

Standard
$ 100000

Custom
$ 200000

Activity Based Costing

Standard
$ 120000
 Custom $ 180000

Estimated overhead

= Predetermined overhead rateDirect labor costs

$300,000

= 200% of direct labor cost

Activity cost pools Cost drivers Estimated overhead

Machining Machine hours $200,000

Machine setup Set up hours 100,000

Activity-based overhead rates

Machining Machine setup:

$200,000 $100,000
= $100 per machine hour = $200 per setup hour

Traditional costing Standard Custom

$50,000 × 200% $100,000

$100,000 × 200% $200,000

$100,000 $200,000

Activity-based costing

Machining:

1,000 × $100 $100,000

1,000 × $100 $100,000

Machine setup:

100 × $200 20,000

400 × $200 80,000

$120,000 $180,000

Perdon Inc. has conducted the following analysis related to its product lines, using a traditional costing
system (volume-based) and an activity-based costing system. Both the traditional and the activity-based
costing systems include direct materials and direct labor costs.

Total Costs

Traditiona
Product Sales Revenue ABC
l
$50,0
Product 540X $200,000 $55,000
00
35,00
Product 137Y 160,000 50,000
0
35,00
Product 249S 80,000 15,000
0

Correct.

For each product line, compute operating income using the traditional costing system.

Product 540X
$ 145000

Product 137Y
$ 110000

Product 249S

$ 65000
 Correct.

For each product line, compute operating income using the activity-based costing system.

Product 540X
$ 150000

Product 137Y
$ 125000

Product 249S
$ 45000
 Correct.

Using the following formula, compute the percentage difference in operating income for each of the product
lines of Perdon. (Round the percentage to 2 decimal places, e.g. 2.35. For negative numbers use either a
negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).)

Operating Income (ABC) - Operating Income (traditional cost) ÷ Operating Income (traditional cost).

Product 540X
3.45 %

Product 137Y
13.64 %

Product 249S
-30.77 %

Wilkins Corporation manufactures safes—large mobile safes, and large walk-in stationary bank safes. As
part of its annual budgeting process, Wilkins is analyzing the profitability of its two products. Part of this
analysis involves estimating the amount of overhead to be allocated to each product line. The following
information relates to overhead.

Mobile
Walk-in Safes
Safes

Units planned for production 200 50

 Material moves per product line 300 200

Purchase orders per product line 450 350

1,70
Direct labor hours per product line 800
0

Correct.

The total estimated manufacturing overhead was $235,000. Under traditional costing (which assigns
overhead on the basis of direct-labor hours), what amount of manufacturing overhead costs are assigned to:

One mobile safe?

$ 376

One walk-in safe?

$ 3196
 Correct.

The total estimated manufacturing overhead of $235,000 was comprised of $150,000 for material-handling
costs and $85,000 for purchasing activity costs. Under activity-based costing (ABC):

What amount of material handling costs are assigned to:

One mobile safe?

$ 450

One walk-in safe?

$ 1200

What amount of purchasing activity costs are assigned to: (Round answers to 2 decimal places, e.g.
195.25.)

One mobile safe?

$ 239.06

One walk-in safe?

$ 743.75

Correct.

Compare the amount of overhead allocated to one mobile safe and to one walk-in safe under the traditional
costing approach versus under ABC.
 Total overhead allocated under traditional costing. (Round answers to 2 decimal places, e.g. 250.00)

One mobile safe?

$ 376

One walk-in safe?

$ 3196

Total overhead allocated under ABC. (Round answers to 2 decimal places, e.g. 250.00.)

One mobile safe?

$ 689.06

One walk-in safe? $ 1943.75

Traditional costing:$235,000 ÷ 2,500 (800 + 1,700) hours= $94 per direct

labor hour One mobile safe:800 hours × $94 = $75,200$75,200 ÷ 200 =
$376 each One walk-in safe:1,700 hours × $94 = $159,800$159,800 ÷ 50 =
$3,196 each

Activity-based costing:

Material handling costs

$150,000 ÷ 500 (300 + 200) moves = $300 per move

One mobile safe:

300 moves × $300 = $90,000

$90,000 ÷ 200 = $450 each

One walk-in safe:

200 moves × $300 = $60,000

$60,000 ÷ 50 =$1,200 each

Purchasing activity costs

$85,000 ÷ 800 (450 + 350) orders = $106.25 per order

One mobile safe:

 450 orders × $106.25 = $47,812.50

$47,812.50 ÷ 200 = $239.06 each

One walk-in safe:

350 orders × $106.25 = $37,187.50

$37,187.50 ÷ 50 = $743.75 each

The total amount of overhead allocated to each unit of the two products under the two allocation approaches is:

Traditional Costing Activity-Based Costing

Mobile safe $376.00 $689.06*

Walk in safe $3,196.00 $1,943.75**

*$450 + $239.06

**$1,200 + $743.75

The first step in activity-based costing is to assign overhead costs to products, using cost drivers.

False

True

Painting is a product-level activity.

False
 True

Vinnie Morelli Corporation has the following overhead costs and cost drivers. Direct labor hours are estimated at
100,000 for the year.
Activity Cost Pool Cost Driver Est. Overhead Cost Driver Activity
Ordering and Receiving Orders $120,000 500 orders
Machine Setup Setups 297,000 450 setups
Machining Machine hours 1,500,000 125,000 MH
Assembly Parts 1,200,000 1,000,000 parts
Inspection Inspections 300,000 500 inspections

If overhead is applied using traditional costing based on direct labor hours, the overhead application rate is
$9.60.

$34.17.

$12.00.

$15.00.

To assign overhead costs to each product, the company

assigns the cost of each activity cost pool in total to one product line.

multiplies the rate of cost drivers per estimated cost for the cost pool by the estimated cost for each cost pool.

multiplies the activity-based overhead rates per cost driver by the number of cost drivers expected to be used
per product.
 multiplies the overhead rate by the number of direct labor hours used on each product.

Calvin Co. produces 3 products: A1, B2, and C3. A1 requires 400 purchase orders, B2 requires 600 purchase orders,
and C3 requires 1,000 purchase orders. Calvin has identified an ordering and receiving activity cost pool with
allocated overhead of $120,000 for which the cost driver is purchase orders. Direct labor hours used on each product
are 50,000 for A1, 40,000 for B2, and 110,000 for C3. How much ordering and receiving overhead is assigned to
each product?
A1 B2 C3

$30,000 $24,000 $66,000

$27,000 $30,000 $63,000

$24,000 $36,000 $60,000

$40,000 $40,000 $40,000

A company incurs $1,350,000 of overhead each year in three departments: Ordering and Receiving, Mixing, and
Testing. The company prepares 2,000 purchase orders, works 50,000 mixing hours, and performs 1,500 tests per
year in producing 200,000 drums of Goo and 600,000 drums of Slime. The following data are available:

Department Expected use of Driver Cost

Ordering and Receiving 2,000 $400,000

Mixing 50,000 500,000

Testing 1,500 450,000

Production information for Goo is as follows:

Department Expected use of Driver

 Ordering and Receiving 400

Mixing 20,000

Testing 500

Compute the amount of overhead assigned to Goo.

$675,000

$337,500

$430,000

$527,382

Top of Form

Bottom of Form

E17-5 (a,b)
Shady Lady sells window coverings to both commercial and residential customers. The following
information relates to its budgeted operations for the current year.

Commercial Residential

$300,00 $480,
Revenues
0 000

50,00
Direct material costs 30,000
0

300,0
Direct labor costs 100,000
00

150,0 500,0
Overhead costs 50,000 180,000
00 00

($
$120,00
20,00
Operating income (loss) 0
0)

The controller, Wanda Lewis, is concerned about the residential product line. She cannot understand why
this line is not more profitable given that the installations of window coverings are less complex to install
for residential customers. In addition, the residential client base resides in close proximity to the company
office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she
has decided to take a closer look at the overhead costs assigned to the two product lines to determine
whether a more accurate product costing model can be developed. Below are the three activity cost pools
and related information she developed:

Estimated
Activity Cost Pools Cost Drivers
Overhead

Scheduling and travel $90,000 Hours of travel

Setup time 70,000 Number of setups

Supervision 40,000 Direct labor cost

Expected Use of Cost Drivers per Product

Commercia
Residential
l
Scheduling and travel 1,000 500
Setup time 450 250
 Correct.

Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost
assigned to each product line. (Round overhead rates to 2 decimal places, e.g. 20.00. Round overhead
assigned to 0 decimal places, e.g. 15,000.)

Activity-based overhead rates

Scheduling and travel

$ 60.00

Setup time
$ 100.00

Supervision
$ .10

Commercial Overhead assigned

Scheduling and travel

$ 60000

Setup time
$ 45000

Supervision
$ 10000

Total
$ 115000

Residential Overhead assigned

Scheduling and travel

$ 30000

Setup time
$ 25000
 Supervision
$ 30000

Total
$ 85000

E17-5 (a,b)

Expected use
Estimated of Cost ABC
Activity Cost Pools Overhead ÷ Drivers = Overhead Rates

Scheduling and travel $$90,000 1,500 $60.00

Setup time $70,000 700 $100.00

Supervision $40,000 $400,000* $0.10

*$100,000 + $300,000

Commercial

Expected use of ABC

Cost Drivers per Overhead
Activity Cost Pools Product × Rates = Cost Assigned
$60,
Scheduling and travel 1,000 $60.00
000
45,0
Setup time 450 $100.00
00
10,0
Supervision $100,000 $0.10 00

$115
Total assigned costs ,000
 Residential

ABC
Expected use of Cost Overhead
Activity Cost Pools Drivers per Product × Rates = Cost Assigned
$30,
Scheduling and travel 500 $60.00
000
25,0
Setup time 250 $100.00
00
30,0
Supervision $300,000 $0.10 00

$85,
Total assigned costs 000

Compute the operating income for the each product line, using the activity-based overhead rates.

Commercial $55,000

Residential $45,000

E17-5 (a,b)

Commercial Residential

$480,
Revenues $300,000
000

Direct material costs $30,000 50,000

300,00
Direct labor costs 100,000
0

435,0
Overhead costs 115,000 245,000 85,000
00

$45,0
$55,000
Operating income (loss) 00