Activity-Based Costing

You are to complete this assignment by the time class starts on the due date (indicated in the syllabus or during class).  You are free to use resources or talk with classmates, but all work turned in must be your own. You may type or write/scan and upload to Blackboard, but make sure that I can read everything written down. It is your responsibility to make sure that the correct images have been uploaded.

 

 

1. Green Thumb Gardening is a small gardening service that used activity-based costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the size of customer lawns, the size of customer garden beds, the distance to travel to customers, and the number of customers. In addition, the costs of maintaining garden beds depends on whether the beds are low maintenance beds (mainly ordinary trees and shrubs) or high maintenance beds (mainly flowers and exotic plants). Accordingly, the company uses the five activity cost pools listed below:

 

ACTIVITY COST POOL	ACTIVITY MEASURE (Cost Driver)
Caring for lawn	Square feet of lawn
Caring for garden beds – low maintenance	Square feet of low maintenance beds
Caring for garden beds – high maintenance	Square feet of high maintenance beds
Travel to jobs	Miles
Customer billing and service	Number of customers

 

The company has already completed its first stage allocations of costs (overhead costs to each activity cost pool) and has summarized its annual costs and activity as follows:

 

ACTIVITY COST POOL	ESTIMATED OVERHEAD COST	EXPECTED ACTIVITY
Caring for Lawn	$72,000	150,000 sq ft of lawn
Caring for garden beds – Low Maintenance	$26,400	20,000 sq ft of low maintenance beds
Caring for garden beds – High Maintenance	$41,400	15,000 sq ft of high maintenance beds
Travel to jobs	$3,250	12,500 miles
Customer billing and service	$8,750	25 customers

 

REQUIRED: Compute the activity rate for each of the activity cost pools.

 

 

 

 

 

2. Klumber Corporation is a diversified manufacturer of industrial goods. The company’s activity-based costing system contains the following six activity cost pools and activity rates:

 

ACTIVITY COST POOL	ACTIVITY RATES
Supporting Direct Labor	$6.00 per direct labor-hour
Machine Processing	$4.00 per machine-hour
Machine Setups	$50.00 per setup
Production Orders	$90.00 per order
Shipments	$14.00 per shipment
Product Sustaining	$840.00 per product

 

Activity data have been applied for the following two products:

 

 

	TOTAL ACTIVITY
	K425	M67
Number of units produced per year	200	2,000
Direct labor-hours	80	500
Machine-hours	100	1,500
Machine setups	1	4
Production orders	1	4
Shipments	1	10
Product sustaining	1	1

 

REQUIRED: Determine the total overhead cost that would be assigned to each of the products listed above in the activity-based costing system.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3. Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the compnay’s estimator and the work supervisors. The on-site supervisors claim that the estimators do not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and nonroutine work such as removing asbestos contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “My job is to measure the are to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.50 to determine the bid price. Since our average cost is only $2.175 per square foot, that leaves enough cushion to take care of nonroutine work that shows up.”

To shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based costing system follow:

 

Activity Cost Pool	Activity Measure (Cost Driver)	Total Activity
Removing Asbestos	Thousands of square feet	800,000 square feet
Estimating and Job Setup	Number of Jobs	500 Jobs
Working on Nonroutine Jobs	Number of Nonroutine Jobs	100 nonroutine jobs

 

Overhead Costs for the Year
Wages and salaries	$300,000
Disposal fees	$700,000
Equipment depreciation	$90,000
On-site supplies	$50,000
Office expenses	$200,000
Licensing and Insurance	400,000
TOTAL COST	$1,740,000

 

Distribution of Consumption Across Activities
	Removing Asbestos	Estimating and Job Setup	Working on Nonroutine Jobs	Other	Total
Wages and salaries	50%	10%	30%	10%	100%
Disposal fees	60%	0%	40%	0%	100%
Equipment depreciation	40%	5%	20%	35%	100%
On-site supplies	60%	30%	10%	0%	100%
Office expenses	10%	35%	25%	30%	100%
Licensing and Insurance	30%	0%	50%	20%	100%

 

*Other includes costs of idle capacity, etc. that is not allocated to any activity cost pool, but just “exists” regardless of the job on hand. Thus, you need the “other” to determine the distribution of overhead costs in each of the activity cost pools, but you do not need to compute an activity rate or take into consideration when determining the cost of a particular job.

REQUIRED (NEXT PAGE)

 

 

1. Perform the first-stage allocation of costs to the activity cost pools. (Hint: Find the overhead costs to be allocated to each of the activity cost pools. Create a table like the third table given but fill in the dollar amounts to replace the % distribution and sum up each column to get overhead costs allocated to each activity cost pool.)

 

1. Compute the activity rates for the activity cost pools.

 

1. Using the activity rates you have computed, determine the total cost and average cost per thousand square feet of each of the following jobs according to the activity-based costing system:

• A routine 1,000-square-foot asbestos removal job
• A routine 2,000-square-foot asbestos removal job
• A nonroutine 2,000-square-foot asbestos removal job

 

1. Given the results you obtained in c) above, do you agree with the estimator that the company’s present policy for bidding on jobs is adequate? Explain (you do not have to do any calculations and can explain in just words)

 

 

 

4. Classify the following activities into the appropriate cost hierarchies (unit, batch, product, customer, or org-sustaining):

 

1. A clothing store makes sales calls made to customers
2. Samsung conducting market research to understand and take into account when developing the new line of products at the company (e.g. the next generation of Galaxy phones)
3. Coca Cola setting up machinery for bottling
4. A law firm making trips to meet and talk with clients
5. A company preparing quarterly financial reports to be filed with the SEC
6. A CD production company placing CDs individually into protective cases
7. Lighting and heating at a company’s production facility
8. Paying property taxes for a manufacturing company’s corporate headquarters
9. Kraft Foods placing fifty containers into each box before sending the boxes to the warehouse
10. Hershey’s cutting chocolate into individual pieces before the pieces are sent to be wrapped
11. Deloitte recruiting and interviewing candidates to be the next group of entry-level auditors
12. Tesla making designs for its various brands of electric cars

 

 

 

 

 

5. Which of the following is NOT a reason why activity based costing should be used rather than traditional costing?

 

1. Today, indirect costs make up most of total manufacturing costs
2. Product diversity has increased, and more different products have to be costed
3. Inflation has made cost of direct materials higher
4. Product competition has made it more difficult to set prices however you want.

 

6. Which of the following is the best cost driver for an activity cost pool containing activities related to product development?

 

1. Machine hours
2. Number of parts in a product
3. Direct material cost
4. Number of different types of indirect materials

 

7. Wilson Company has two products: A and B. The company uses activity-based costing. The total overhead cost and activity for each of the company’s three activity cost pools are as follows:

 

The activity rate under the activity-based costing system for Activity 3 is closest to:

 

19. $19.22
20. $36.24
21. $38.44
22. $57.67