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Activity based costing

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There are 3 problems.

I have attached 2 excel sheet which go with these problems and a txt file
which is the problems as shown below.

Problem 1. Borealis manufacturing has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by QC inspectors at the end of each major process, and the company's 10 QC inspectors were charged as direct labor to the operation or job.

In an effort to improve efficiency and quality, a computerized video QC system was purchsed for $250,000. The system consists of a minicompuer, 15 video cameras, other peripheral hardware, and software. The new system uses cameras stationed by QC engineers at key points in the production process. Each time an operation changes or there is a new operation, the cameras are moved, and a new master picture is loaded into the computer compares them to the picture of a "good" unit. Any differences are sent ot a QC engineer, who removes the bad units and discusses the flaws with the production supervisors. The new system has replaced the 10 QC inspectors with two QC engineers.

The operating costs of the new QC system, including the salaries of the QC engineers, have been included
as factory overhead in calculating the company's plantwide manufacturing-overhead rate, which is based on direct-labor
dollars. The company's president is confused. His vice president of production has told him how efficeint the new system
is. yet there is a large increase in the overhead rate. The computtion of the rate before and after automation is as follows:

Before After
Budgeted manufacturing overhead $1,900,000 $2,100,000
Budgeted direct-labor cost 1,000,000 700,000
Budgeted overhead rate 190% 300%

Three hundred percent, lamented the president. "How can we compete with such a high overhead rate?"

1. a. Define "manufacturing overhead" and cite three examples of typical cost that would be included in manufactucturing overhead.
b. Explain why companies develop predetermined overhead rates.
2. Explain why the increase in the overhead rate should not have a negative financial impact on Borealis Manufacturing.
3. Explain how Borealis Manufacturing could change its overhead application system to eliminate confusion over product costs.
4. Discuss how an activity-based costing system might benefit Borealis Manufacturing.

Problem 2. World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee.
The company buys coffee beans from around the world and roasts, blends, and packages them for resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominatly automated roasting and packing process. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If the prices for certain coffees are significantly higher than market, adjustments are made. The company completes primarily on the qualit of its products, but customers are price-conscious as well.

Data for the 20x1 budget includ manufacturing overhead of $3,000,000, which has been allocated on the basis of each produt's direct-labor cost. The budgeted direct-labor cost for 20x1 totals $600,000. Based on the sales budget and raw-material budget, purchases and use of raw materials(mostly coffee beans) will total $6,000,000.

The expected prime costs for one-pound bags of two of the company's products are as follows:

Kona Malaysian
Direct Material $3.20 $4.20
Direct labor .30 .30

WGCC's controller believes the traditonal product-costing system may be providing misleading cost information.
She has developed an analysis of the 20x1 budgeted manufacturing-overhead cost shown in the following chart.
Activity Cost Driver Budgeted Activity Budgeted Cost
Purchasing Purchase orders 1,158 $579,000
Material handling Setups 1,800 720,000
Quality control Batches 720 144,000
Roasting Roasting hours 96,100 961,000
Blending Blending hours 33,600 336,000
Packaging Packaging hours 26,000 260,000
total manufacturing-overhead cost...............................................................$3,000,000

Data regarding the 20x1 production of Kona and Malaysian coffee are shown in the following table.
There will be no raw-material inventory for either of these coffees at the beginning of the year.

Kona Malaysian
Budgeted sales 2,000 lb. 100,000 lb.
Batch size 500 lb. 10,000 lb.
Setups 3 per batch 3 per batch
Purchase order size 500 lb. 25,000 lb.
Roasting time 1 hr. per 100lb. 1 hr per 100 lb
Blending time .5 hr per 100 lb .5 hr per 100lb
Packaging time .1 hr per 100 lb .1 hr per 100 lb

1. Using WGCC's current roduct-costing system:
a. Determine the company's predetermined overhead rate using ldirect-labor cost as the single cost driver.
b. Determien the full product costs and selling prices of one pound of Kona coffee and one pound of malaysian coffee.

2. Develop a new product cost, using an activity-based costing approach, for one pound of Kona coffee and
one pound of Malaysian coffee.

3. What are the implications of the activity-based costing system wiht respect to
a. The use of direct labor as a basis for applying overhead to products?
b. The use of the existing product-costing system as the basis for pricing?

Problem 3. Marconi Manufacturing produces two items in its Trumbull Plant: Tuff Stuff an Ruff Stuff. Since inception,
Marconi has used only one manufacturing-overhead cost pool to accumulate costs. Overhead
has been allocated to products based on direct-abor hours. Until recently, Marconi was the sole
producer of Ruff Suff and was able to dictate the selling price. However, last year marvella Proucts began marketing a comparable
product at a price below the cost assigned by Marconi. Market share has declined rapidly, and Marconi must now
decide whether to meet the competitive price or to disontinue the product line. Recogniing that discountinuing the
product line wold place an additonal burden on its remaining product, Tuff Stuff, management is using
activity-based costing to determine if it would show a different cost structure for the two products.
The two major indirect costs for manufacturing the products are power usage and setup costs.
Most of the power is used in fabricating, while most of the setup costs are requiredin assembly. The setup
costs are predominately related to Tuff Stuff product line.
A decision was made to separate the Manufacturing Department costs into two activity cost pools as
Fabricating: machines hours will be the cost driver.
Assembly: number of setups will be the cost driver.

The controlller has gathered the following information.

Manufacturing Department
annual budget before separation of overhead
Product Line
Total Tuff Stuff Ruff Stuff
Number of units 20,000 20,000
Direct labor hours 2 hrs per unit 3 hours per unit
Total direct-labor cost $800,000
Direct material $5.00 per unit $3.00 per unit
Budgeted overhead:
Indirect labor $24,000
Fringe benefits 5,000
Indirect material 31,000
Power 180,000
Setup 75,000
Quality assurance 10,000
Other utilities 10,000
Depreciation 15,000

Manufacturing Department
Cost Structure after Separation of Overhead into Activity Cost Pools
Fabrication Assembly
Direct labor cost 75% 25%
Direct material (no change) 100% 0%
Indirect labor 75% 25%
Fringe benefits 80% 20%
Indirect material $20,000 $11,000
Power $160,000 $20,000
Setup $5,000 $70,000
Quality assurance 80% 20%
Other utilites 50% 50%
Depreciation 80% 80%

Cost driver Product Line
Tuff Stuff Ruff Stuff
Machine hrs per unit 4.4 6.0
Setups 1,000 272

1. Assigning overhead based on direct-labor hours, calculate the following:
a. Total budgeted cost of the Manufacturing Department.
b. Unit cost of Tuff Stuff and Ruff Stuff.
2. After separation of overhead into activity cost pools, compute the total budgeted cost of each department:
fabricating and assembly.
3. Using activity-based costing, calculate the unit costs for each product. ( In computing the pool
rates for th efabricating and assembly activity cost pools, round to the nearest cent. Then, in computing
unit product cost, round to the nearest cent).
4. Discuss how a ecisio regarding theproduction and pricing of Ruff Stuff will be affected by the
results of your calculations in the preceding requirements.

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Excel files and word file contains answers of 3 management accounting problems.

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Chapter 8: Activity-Based Costing: A Tool to Aid Decision Making

Please refer to the attached word document. The following exercises need to be addressed:

Exercise 8-10

Problem 8-14

Problem 8-18



Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
EXERCISE 8-10 Comprehensive Activity-Based Costing Exercise
Silicon Optics has supplied the following data for use in its activity-based costing system:
Overhead Costs
Wages and salaries .
Other overhead costs .
Total overhead costs .
$350,000 200,000
Activity Cost Pool
Volume .
Order processing .
Customer support .
Other .
Activity Measure
Number of direct labor-hours Number of orders
Number of customers
These costs are not allocated to products or customers
Total Activity 10,000 DLHs
500 orders 100 customers
Not applicable
Wages and salaries 30%
Other overhead costs 25%
Distribution of Resource Consumption Across Activity Cost Pools
Order Customer
Processing Support
35% 25%
15% 20%
Other 10% 40%
Total 100% 100%
During the year, Silicon Optics completed an order for a special optical switch for a new cus¬tomer, Indus Telecom. This customer did not order any other products during the year. Data con¬cerning that order follow:
Data Concerning the Indus Telecom Order
Selling price $295 per unit
Units ordered 100 units
Direct materials $264 per unit
Direct labor-hours 0.5 DLH per unit
Direct labor rate $25 per DLH
1. Using Exhibit 8-4 as a guide, prepare a report showing the first-stage allocations of overhead costs to the activity cost pools.
2. Using Exhibit 8-5 as a guide, compute the activity rates for the activity cost pools.
3. Using Exhibit 8-8 as a guide, prepare a report showing the overhead costs for the order from Indus Telecom. Do not include customer support costs at this point in the analysis.
4. Using Exhibit 8-9 as a guide, prepare a report showing the product margin for the order and the customer margin for Indus Telecom.

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
PROBLEM 8-14 Activity-Based Costing and Bidding on Jobs Denny Asbestos Removal Company is in the business of removing potentially toxic asbestos insu¬lation and related products from buildings. The company's estimator has been involved in a long¬simmering dispute with the on-site work supervisors. The on-site supervisors claim that the estimator does not take enough care in distinguishing 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 area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $4,000 per thou¬sand square feet to determine the bid price. Since our average cost is only $3,000 per thousand square feet, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tear¬ing things apart."
Partly 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
Job size .
Estimating and job setup .
Working on nonroutine jobs .
Other (costs of idle capacity and organization-
sustaining costs) .

Activity Measure Thousands of square feet Number of jobs
Number of nonroutine jobs Not applicable; these
costs are not allocated to jobs

Total Activity
500 thousand square feet 200 jobs*
25 nonroutine jobs

*The total number of jobs includes non routine jobs as well as routine jobs. Nonroutine jobs as well as routine jobs require estimating and setup work.

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making


Wages and salaries .
Disposal fees , .
Equipment depreciation .
On-site supplies .
Office expenses .
Licensing and insurance .
Total cost. .

$ 200,000 600,000 80,000 60,000 190,000 370,000

Other 15%
0% 10% 10% 20% 10%
Job Size
Wages and salaries 40%
Disposal fees 70%
Equipment depreciation 50%
On-site supplies 55%
Office expenses 10%
Licensing and insurance 50%

Distribution of Resource Consumption Across Activity Cost Pools
Estimating Working on
and Nonroutine
Job Setup Jobs
10% 35%
0% 30%
0% 40%
15% 20%
40% 30%
0% 40%

Total 100% 100% 100% 100% 100% 100%

1. Using Exhibit 8-4 as a guide, perform the first-stage allocation of costs to the activity cost pools.
2. Using Exhibit 8-5 as a guide, compute the activity rates for the activity cost pools.
3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square feet of each of the following jobs according to the activity-based costing system.
a. A routine 2,000-square-foot asbestos removal job. b. A routine 4,000-square-foot asbestos removal job.
e. A nonroutine 2,000-square-foot asbestos removal job.
4. Given the results you obtained in (3) above, do you agree with the estimator that the com¬pany's present policy for bidding on jobs is adequate?
PROBLEM 8-18 (Appendix 8A) Activity Rates and Activity-Based Management
Chefs de Vitesse SA is a French company that provides passenger and crew meals to airlines oper¬ating out of the two international airports of Paris-Orly and Charles de Gaulle (CDG). The oper¬ations at Orly and CDG are managed separately, and top management believes that greater sharing information between the two operations should lead to improvements in operations.
To better compare the two operations, an activity-based costing system has been designed with the active participation of the managers at both Orly and CDG. The activity-based costing system is based on the following activity cost pools and activity measures:

Activity Cost Pool
Meal preparation .
Flight-related activities .
Customer service .
Other (costs of idle capacity and
organization-sustaining costs) .

Activity Measure Number of meals Number of flights Number of customers
Not applicable

Meal Prep. Customer Related Customer Service
Cooks and delivery personnel wages â?¬2.63 â?¬ 135.50 â?¬ 0
Kitchen supplies . 0.19 0.00 0
Chef salaries 0.18 12.00 10,500
Equipment depreciation . 0.05 0.00 0
Administrative wages and salaries . 0.00 9.65 8,765
Building costs , . 0.00 0.00 0
Total cost . â?¬ 3.05 â?¬157.15 â?¬19,265

Chapter 8 Activity-Based Costing: A Tool to Aid Decision Making
The operation at CDG airport serves 500,000 meals annually on 4,000 flights for 8 different airlines. (Each airline is considered one customer.) The annual cost of running the CDG airport op¬eration, excluding only the costs of raw materials for meals, totals â?¬2,650,000. (The currency in France is the euro, denoted here by â?¬.)
Annual Cost of the COG Operation
Cooks and delivery personnel wages .
Kitchen supplies .
Chef salaries .
Equipment depreciation .
Administrative wages and salaries .
Building costs .
Total cost .
â?¬ 1,800,000 100,000 200,000 50,000 180,000 320,000
â?¬ 2,650,000
To help determine the activity rates, employees were interviewed and asked how they divided their time among the four major activities. The results of the interviews at CDG are displayed below:
Distribution of Resource Consumption Across Activity Cost Pools
at the COG Operation
Flight Customer Related Service
25% 0%
0% 0%
15% 40%
0% 0%
25% 45%
0% 0%
Cooks and delivery personnel wages
Kitchen supplies .
Chef salaries .
Equipment depreciation .
Administrative wages and salaries .
Building costs .
Preparation 70% 90% 35% 70%
0% 0%
5% 10% 10% 30% 30%
Total 100% 100% 100% 100% 100% 100%
1. Using Exhibit 8A-I as a guide, perform the first-stage allocation of costs to the activity cost pools.
2. Using Exhibit 8A-2 as a guide, compute the activity rates for the activity cost pools.
3. The Orly operation has already concluded its activity-based costing study and has reported the following costs of carrying out activities at Orly:

Comparing the activity rates for the CDG operation you computed in (2) above to the activity rates for Orly, do you have any suggestions for the top management of Chefs de Vitesse SA?

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