ABC Costing
ABC Costing
ABC Costing
The above costs include all of the costs of the restaurant except for orga
such as rent, property taxes, and top-management salaries.
A group of diners who ask to sit at the same table are counted as a party
the costs of cleaning linen, are the same whether one person is at a tabl
costs, such as washing dishes, depend on the number of diners served.
Prior to the activity-based costing study, the owner knew very little abou
restaurant. She knew that the total cost for the month (including organiz
$240,000 and that 15,000 diners had been served. Therefore, the avera
Required:
1. According to the activity-based costing system, what is the total cost
following parties of diners?
a. A party of four diners who order three drinks in total.
b. A party of two diners who do not order any drinks.
c. A lone diner who orders two drinks.
2. Convert the total costs you computed in (1) above to costs per diner.
the average cost per diner for serving each of the following parties?
a. A party of four diners who order three drinks in total.
b. A party of two diners who do not order any drinks.
c. A lone diner who orders two drinks.
3. Why do the costs per diner for the three different parties differ from e
overall average cost of $16 per diner?
…………………………………………………………………………………
…………………………………………………………………………………
Required:
1. Compute the product margins for the Xtreme and the Pathfinder prod
traditional costing system.
Compute the product margins for the Xtreme and the Pathfinder product
…………………………………………………………………………………
Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit
at a price of $40 per unit. The company’s traditional cost system allocate
to products using a plantwide overhead rate and direct labor dollars as t
information relating to the company’s two product lines is shown below:
B300
Direct Materials $436,300
Direct Labor 200000
Manufacturing Overhead
Manufacturing
Activity Cost Pool (Activity Measure) Overhead
Machining (machine-hours) . . . . . . . . . $213,500
Setups (setup hours) . . . . . . . . . . . . . . 157500
Product-sustaining (number of products 120000
Other (organization-sustaining costs) . . 117000
Total manufacturing overhead cost . . . $608,000
Required:
1. Compute the product margins for the B300 and T500 under the comp
2.Compute the product margins for B300 and T500 under the activity-ba
…………………………………………………………………………………
The operations vice president of Security Home Bank has been intereste
efficiency of the bank’s operations. She has been particularly concerned
routine transactions at the bank and would like to compare these costs a
branches. If the branches with the most efficient operations can be ident
studied and then replicated elsewhere. While the bank maintains meticu
other costs, there has been no attempt thus far to show how those costs
services provided by the bank. The operations vice president has asked
activity-based costing study of bank operations. In particular, she would
opening an account, the cost of processing deposits and withdrawals, an
other customer transactions.
The Westfield branch of Security Home Bank has submitted the following
last year:
Teller wages . . . . . . . . . . . . . . . . . . . . . . .
Assistant branch manager salary . . . . . . . .
Branch manager salary . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In addition to the cost data above, the employees of the Westfield branc
concerning how their time was distributed last year across the activities
activity-based costing study. The results of those interviews appear belo
Req 01: Prepare the first-stage allocation for the activity-based costing
The manager of the Westfield branch of Security Home Bank has provide
data concerning the transactions of the branch during the past year:
Total Activity at
Activity the Westfield Branch
Opening accounts 500
Processing deposits and withdrawals 100000
Processing other customer transactio 5000
The lowest costs reported by other branches for these activities are disp
**********************************************
ID DECISION MAKING MRE
drinks in total.
any drinks.
………………………………………………
……………………………………………………………
Xtreme Pathfinder
$140.00 $99.00
72 53
24 12
2 DLHs 1 DLHs
20000 Units 80,000 Units
………………………………………………………
ing Inc.
ment
2100000
1600000
500000
550000
(50,000)
T500 Total
$251,700 $688,000
104000 304000
$608,000
###
………………………………………………..
160000
75000
80000 Distribution of Res
315000
Processing
Other
Customer Other
Transactions Activities Total
Teller wages
20% 10% 100% Assistant branch m
30% 50% 100% Branch manager s
10% 85% 100% Total Costs
a 49.5 ÷ 4
b 23.9 ÷ 2
c 19.5 ÷ 1
3. The average cost per diner differs from the overall average cost of $16 per diner for se
One: the average cost of $16 per diner includes organization-sustaining costs that are ex
costing system.
Two: the $16 per diner figure does not recognize differences in the diners’ demands on r
more drinks than others nor does it recognize the economies of scale in serving larger pa
Problem 7-17
$1,980,000
= =
120,000
*20,000 units of Xtreme @ 2.00 DLH per unit + 80,000 units of the Pathfinder@
= 40,000 DLHs + 80,000 DLHs = 120,000 DLHs.
Xtreme Pathfinder
Sales $ 2,800,000 $ 7,920,000
Direct materials 1440000.00 4240000.00
Direct labor 480000.00 960000.00
Manufacturing overhead 660000.00 1320000.00
(Applied @ $16.50 per DLH)
Total manufacturing cost 2580000.00 6520000.00
Product margin 220000.00 1400000.00
Note that all of the manufacturing overhead cost is applied to the products unde
the company’s traditional costing system.
Requirement 02:
Calculation of the activity rate:
*The Other activity cost pool is not shown above because it includes organization-sustai
and idle capacity costs that should not be assigned to products under activity ba
system.
Xtreme Pathfinder
Sales $ 2,800,000 $ 7,920,000
Direct materials 1440000.00 4240000.00
Direct labor 480000.00 960000.00
Supporting direct labor 261,200 522,400
Batch setups 330,000 165,000
Product sustaining 301,200 301,200
Total cost 2,812,400 6,188,600
Product margin (12,400) 1,731,400
Requirement 3:
The traditional and activity-based cost assignments differ for two reasons.
Second, the traditional system uses one unit-level activity measure, direct labo
overhead to the Xtreme product line and Pathfinder product line. The ABC syste
costs to products based on the several allocation bases such as direct labor hou
and number of products.
……………………………………………………………………………………………………
$608,000
= =
304,000
The product margins using the traditional approach would be computed as fol
B300 T500
Sales $1,400,000 $700,000
Direct materials 436,300 251,700
Direct labor 200,000 104,000
Manufacturing
overhead applied @
400,000 208,000
$2.00 per direct labor-
dollar
Total manufacturing
1,036,300 563,700
cost
Product margin $ 363,700 $136,300
Note that all of the manufacturing overhead cost is applied to the products unde
company’s traditional costing system.
(a) (b)
Activity Cost Pools Total Cost Total Activity
Machining $213,500 152,500 MHR
Setups $157,500 375 setup hrs.
Product sustaining $120,000 2 products
The Other activity cost pool is not shown above because it includes organization
that should not be assigned to products.
B300 T500
Sales $1,400,000 $700,000
Direct materials 436,300 251,700
Direct labor 200,000 104,000
Advertising expense 50,000 100,000
Machining 126,000 87,500
Setups 31,500 126,000
Product sustaining 60000 60000
Total cost 903,800 729,200
Product margin $496,200 -$29,200
Req 03:
The traditional and activity-based cost assignments differ for three reasons. Firs
of manufacturing overhead to products. The ABC system assigns only $491,000
ABC system does not assign the $117,000 of Other activity costs to products be
Second, the traditional system uses one unit-level activity measure, direct labor
costs to different products. On the other hand activity based costing applies mu
overhead costs objects.
Third: Third, the traditional system does not trace any advertising expenses to t
$50,000 of advertising to the B300 and $100,000 of advertising to the T500 pro
…………………………………………………………………………
Solutions
Req : 02
Computations of the activitiy rates :
Req : 03
The cost of opening an account at the Westfield branch is much higher than at the
versus $26.75). On the other hand, the cost of processing deposits and withdrawal
cost branch ($1.08 versus $1.24). And the cost of processing other customer trans
Westfield branch ($12.50 versus $11.86). The other branches may have something
concerning processing deposits and withdrawals and Westfield may benefit from lea
of the other branches open accounts and process other transactions. It may be part
compare the details of the activity rates. For example, is the cost of opening accoun
because of the involvement of the assistant branch manager in this activity? Perhap
accounts at other branches.
The apparent differences in the costs of the activities at the various branches may
reports of the amount of time they devote to the activities. The differences in costs
For example, the Westfield branch may purposely spend more time with new custo
The higher cost of opening new accounts at the Westfield branch may be justified b
satisfied customers. Nevertheless, comparative studies of the costs of activities ma
identifying best practices within a company and where improvements can be made
********************************************************
MRE
of diners
ning costs that are excluded from the computations in the activity-based
diners’ demands on resources. It does not recognize that some diners order
e in serving larger parties.
MRE
d costing system,
determined overhead
$16.50
$ 9,100,000
1620000.00
Activity Rate
6.53
1650.00
301200.00
s organization-sustaining
ts under activity based costing
Total
$ 10,720,000
$ 5,680,000
$ 1,440,000
$ 783,600
$ 495,000
$ 602,400
$ 9,001,000
1,719,000
two reasons.
$2.00
be computed as follows:
Total
$2,100,000
688,000
304,000
608,000
1,600,000
$ 500,000
(a) ÷ (b)
Activity Rate
$1.40 per MHR
$420 per setup hr.
$60,000 per product
Total
$2,100,000
688,000
304,000
150,000
213,500
157,500
120,000
1,633,000
$ 467,000
three reasons. First, the traditional system assigns all $608,000
gns only $491,000 of manufacturing overhead to products. The
osts to products because they represent organization-sustaining costs.
……………………………………………………………
Other
Activities Total
10% 100%
50% 100%
85% 100%
Other
Activities Total
16000.00 160000.00
37500.00 75000.00
68000.00 80000.00
121500.00 315000.00
Activity Rate
46.5
1.0775
12.5
**************************
ACTIVITY-BASED COSTING: A TOOL TO AID DECISION MAKING
The above costs include all of the costs of the restaurant except for orga
such as rent, property taxes, and top-management salaries.
A group of diners who ask to sit at the same table are counted as a party
the costs of cleaning linen, are the same whether one person is at a tabl
costs, such as washing dishes, depend on the number of diners served.
Prior to the activity-based costing study, the owner knew very little abou
restaurant. She knew that the total cost for the month (including organiz
$240,000 and that 15,000 diners had been served. Therefore, the avera
Required:
1. According to the activity-based costing system, what is the total cost
following parties of diners?
a. A party of four diners who order three drinks in total.
b. A party of two diners who do not order any drinks.
c. A lone diner who orders two drinks.
2. Convert the total costs you computed in (1) above to costs per diner.
the average cost per diner for serving each of the following parties?
a. A party of four diners who order three drinks in total.
b. A party of two diners who do not order any drinks.
c. A lone diner who orders two drinks.
3. Why do the costs per diner for the three different parties differ from e
overall average cost of $16 per diner?
…………………………………………………………………………………
…………………………………………………………………………………
Required:
1. Compute the product margins for the Xtreme and the Pathfinder prod
traditional costing system.
Compute the product margins for the Xtreme and the Pathfinder product
…………………………………………………………………………………
Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit
at a price of $40 per unit. The company’s traditional cost system allocate
to products using a plantwide overhead rate and direct labor dollars as t
information relating to the company’s two product lines is shown below:
B300
Direct Materials $436,300
Direct Labor 200000
Manufacturing Overhead
Manufacturing
Activity Cost Pool (Activity Measure) Overhead
Machining (machine-hours) . . . . . . . . . $213,500
Setups (setup hours) . . . . . . . . . . . . . . 157500
Product-sustaining (number of products 120000
Other (organization-sustaining costs) . . 117000
Total manufacturing overhead cost . . . $608,000
Required:
1. Compute the product margins for the B300 and T500 under the comp
2.Compute the product margins for B300 and T500 under the activity-ba
…………………………………………………………………………………
The operations vice president of Security Home Bank has been intereste
efficiency of the bank’s operations. She has been particularly concerned
routine transactions at the bank and would like to compare these costs a
branches. If the branches with the most efficient operations can be ident
studied and then replicated elsewhere. While the bank maintains meticu
other costs, there has been no attempt thus far to show how those costs
services provided by the bank. The operations vice president has asked
activity-based costing study of bank operations. In particular, she would
opening an account, the cost of processing deposits and withdrawals, an
other customer transactions.
The Westfield branch of Security Home Bank has submitted the following
last year:
Teller wages . . . . . . . . . . . . . . . . . . . . . . .
Assistant branch manager salary . . . . . . . .
Branch manager salary . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In addition to the cost data above, the employees of the Westfield branc
concerning how their time was distributed last year across the activities
activity-based costing study. The results of those interviews appear belo
Req 01: Prepare the first-stage allocation for the activity-based costing
The manager of the Westfield branch of Security Home Bank has provide
data concerning the transactions of the branch during the past year:
Total Activity at
Activity the Westfield Branch
Opening accounts 500
Processing deposits and withdrawals 100000
Processing other customer transactio 5000
The lowest costs reported by other branches for these activities are disp
**********************************************
ID DECISION MAKING MRE
drinks in total.
any drinks.
………………………………………………
……………………………………………………………
Xtreme Pathfinder
$140.00 $99.00
72 53
24 12
2.5 DLHs 1.5 DLHs
20000 Units 80,000 Units
………………………………………………………
ing Inc.
ment
2100000
1600000
500000
550000
(50,000)
T500 Total
$251,700 $688,000
104000 304000
$608,000
###
………………………………………………..
160000
75000
80000 Distribution of Res
315000
Processing
Other
Customer Other
Transactions Activities Total
Teller wages
20% 10% 100% Assistant branch m
30% 50% 100% Branch manager s
10% 85% 100% Total Costs
a 49.5 ÷ 4
b 23.9 ÷ 2
c 19.5 ÷ 1
3. The average cost per diner differs from the overall average cost of $16 per diner for se
One: the average cost of $16 per diner includes organization-sustaining costs that are ex
costing system.
Two: the $16 per diner figure does not recognize differences in the diners’ demands on r
more drinks than others nor does it recognize the economies of scale in serving larger pa
Problem 7-17
$2,050,000
= =
170,000
*20,000 units of Xtreme @ 2.00 DLH per unit + 80,000 units of the Pathfinder@
= 40,000 DLHs + 80,000 DLHs = 120,000 DLHs.
Xtreme Pathfinder
Sales $ 2,800,000 $ 7,920,000
Direct materials 1440000.00 4240000.00
Direct labor 480000.00 960000.00
Manufacturing overhead 602941.18 1447058.82
(Applied @ $16.50 per DLH)
Total manufacturing cost 2522941.18 6647058.82
Product margin 277058.82 1272941.18
Note that all of the manufacturing overhead cost is applied to the products unde
the company’s traditional costing system.
Requirement 02:
Calculation of the activity rate:
*The Other activity cost pool is not shown above because it includes organization-sustai
and idle capacity costs that should not be assigned to products under activity ba
system.
Xtreme Pathfinder
Sales $ 2,800,000 $ 7,920,000
Direct materials 1440000.00 4240000.00
Direct labor 480000.00 960000.00
Supporting direct labor 232,941 559,059
Batch setups 336,667 168,333
Product sustaining 301,500 301,500
Total cost 2,791,108 6,228,892
Product margin 8,892 1,691,108
Requirement 3:
The traditional and activity-based cost assignments differ for two reasons.
Second, the traditional system uses one unit-level activity measure, direct labo
overhead to the Xtreme product line and Pathfinder product line. The ABC syste
costs to products based on the several allocation bases such as direct labor hou
and number of products.
……………………………………………………………………………………………………
$750,000
= =
152,500
The product margins using the traditional approach would be computed as fol
B300 T500
Sales $1,500,000 $700,000
Direct materials 436,300 251,700
Direct labor 195,000 104,000
Manufacturing
overhead applied @
442,623 307,377
$2.00 per direct labor-
dollar
Total manufacturing
1,073,923 663,077
cost
Product margin $426,077 $36,923
Note that all of the manufacturing overhead cost is applied to the products unde
company’s traditional costing system.
(a) (b)
Activity Cost Pools Total Cost Total Activity
Machining $394,500 152,500 MHR
Setups $157,500 375 setup hrs.
Product sustaining $120,000 2 products
The Other activity cost pool is not shown above because it includes organization
that should not be assigned to products.
B300 T500
Sales $1,500,000 $700,000
Direct materials $436,300 $251,700
Direct labor $195,000 $104,000
Advertising expense 75,000 100,000
Machining 232,820 161,680
Setups 31,500 126,000
Product sustaining $60,000.00 $60,000.00
Total cost 1,030,620 803,380
Product margin $469,380 -$103,380
Req 03:
The traditional and activity-based cost assignments differ for three reasons. Firs
of manufacturing overhead to products. The ABC system assigns only $491,000
ABC system does not assign the $117,000 of Other activity costs to products be
Second, the traditional system uses one unit-level activity measure, direct labor
costs to different products. On the other hand activity based costing applies mu
overhead costs objects.
Third: Third, the traditional system does not trace any advertising expenses to t
$50,000 of advertising to the B300 and $100,000 of advertising to the T500 pro
…………………………………………………………………………
Solutions
Req : 02
Computations of the activitiy rates :
Req : 03
The cost of opening an account at the Westfield branch is much higher than at the
versus $26.75). On the other hand, the cost of processing deposits and withdrawal
cost branch ($1.08 versus $1.24). And the cost of processing other customer trans
Westfield branch ($12.50 versus $11.86). The other branches may have something
concerning processing deposits and withdrawals and Westfield may benefit from lea
of the other branches open accounts and process other transactions. It may be part
compare the details of the activity rates. For example, is the cost of opening accoun
because of the involvement of the assistant branch manager in this activity? Perhap
accounts at other branches.
The apparent differences in the costs of the activities at the various branches may
reports of the amount of time they devote to the activities. The differences in costs
For example, the Westfield branch may purposely spend more time with new custo
The higher cost of opening new accounts at the Westfield branch may be justified b
satisfied customers. Nevertheless, comparative studies of the costs of activities ma
identifying best practices within a company and where improvements can be made
********************************************************
MRE
of diners
ning costs that are excluded from the computations in the activity-based
diners’ demands on resources. It does not recognize that some diners order
e in serving larger parties.
MRE
d costing system,
determined overhead
$12.06
$ 9,170,000
1550000.00
Activity Rate
4.66
1683.33
301500.00
s organization-sustaining
ts under activity based costing
Total
$ 10,720,000
$ 5,680,000
$ 1,440,000
$ 792,000
$ 505,000
$ 603,000
$ 9,020,000
1,700,000
two reasons.
$4.92
be computed as follows:
Total
$2,200,000
$688,000
$299,000
$750,000
$1,737,000
$463,000
(a) ÷ (b)
Activity Rate
$2.59 per MHR
$420.00 per setup hr.
$60,000.00 per product
Total
$2,200,000
$688,000
$299,000
$175,000
$394,500
$157,500
$120,000
$1,834,000
$366,000
three reasons. First, the traditional system assigns all $608,000
gns only $491,000 of manufacturing overhead to products. The
osts to products because they represent organization-sustaining costs.
……………………………………………………………
Other
Activities Total
10% 100%
50% 100%
85% 100%
Other
Activities Total
16000.00 160000.00
37500.00 75000.00
68000.00 80000.00
121500.00 315000.00
Activity Rate
46.5
1.0775
12.5
**************************