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    Companies Activity Based Costing to Compute Costs

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    Question 1) A Company uses activity-based costing to compute the costs of her catered parties.
    Each party is limited to 20 guests and requires four people to serve and clean up.
    The company offers two types of parties,an afternoon picnic and an evening formal dinner.
    The break-down of the costs follows:

    Activities (and cost drivers) Afternoon Picnic Formal Dinner
    Advertising (parties) $80 per party $80 per party
    Planning (parties) $60 per party $100 per party
    Renting equipment $40 per party plus $60 per party plus
    (parties,guests) $8 per guest $16 per guest
    Obtaining insurance (parties) $160 per party $320 per party
    Serving (parties,servers) $40 per server per party $60 per server per party
    Preparing food (guests) $16 per guest $24 per guest

    Per Party costs do not vary with the number of guests.
    a) Compute the cost of a 20-guest afternoon picnic
    b)Compute the cost of a 20-guest evening formal dinner.
    c)How much should the company charge for each guest for each type of party if the comany wants to cover it costs.?

    Question 2) Management has asked you to investigate the cost allocation problem.You find that manufacturing overhead
    is currently assigned to products based on their diredct labor costs.For your investigation,you have data from last year.
    Manufacturing overhead was $330,000 based on production of 160,000 wired mice and 50,000 wireless mice.Direct labor and
    direct materials costs were as follows:
    Wired Wireless Total
    Direct labor $261,000 $99,000 $360,000
    Materials 187,500 171,000 358,500

    Management has determined that overhead costs are caused by three cost drivers.These drivers and their costs for last
    year are as follows:
    Activity Level
    Cost Driver Costs Assigned Wired Wireless Total

    Number of production runs $150,000 20 5 25
    Quality tests performed 135,000 6 9 15
    Shipping orders processed 45,000 50 25 75
    Total overhead 330,000

    a)How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead?
    What is the total cost per unit produced for each product?

    b) How much overhead will be assigned to each product if direct labor cost is used to allocate overhead ?
    What is the total cost per unit produced for each product?

    c) How might the results from using activity-based costing in requirement (a)help management understand Rodent's
    declining profits?

    Question 3) A company manufacures pens and mechanical pencils often used for gifts.
    Overhead costs are currently allocated using direct labor-hours,but the controller has recommended an
    activity-based costing system using the following data:
    Cost Driver Volume
    Activity Cost Driver Cost Pencils Pens

    Setting up .......... Number of setups $80,000 20 30
    Inspecting.......... Number of parts 24,000 4 6
    Packing and shipping Number of boxes shipped 48,000 45,000 75,000
    a)Compute the amount of overhead to be allocated to each product under activity-based costing
    b)Compute the amount of overhead to be allocated to each product using labour hours as the allocation base.
    Assume that the number of labor-hours required to assemble each box 0.1 for pencils and 0.2 for pens and that 45,000 boxes
    and 75,000 boxes of pens were produced during the period.
    c)Should the company follow the controller's recommendations?

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    Solution Summary

    The expert examines companies activity based costing to compute costs.