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Activity Based Costing (ABC) for Best Buy: identify two activities for ABC

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I need to know if a product or service of Best Buy Co., Inc could use Activity Based Costing (ABC). I need assistance in identifying at least two activities for ABC and the appropriate cost drivers for those activities. Estimate the application rates for each cost driver.

If the above can't be identified in specific actual amounts, then can you make a reasonable estimate and apply the tool as if the data were factual.

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Solution Preview

The response addresses the queries posted in 391 words with references.

//Before writing about the activity based costing; we have to understand about the business and its nature. So firstly we will discuss about the company. After this, we should know that what are the techniques of activity based costing and its importance in the financial analysis of an organization. For examples: //

Best Buy Co. was established in the year 1966 and situated in Richfield, Minnesota. Earlier, it was called by the name of Sound of Music, Inc. In the year 1983, its name was changed to Best Buy Co. This company together with its number of stores works as a largest retailer of the customers for electronic, entertainment software, Appliances, ...

Solution Summary

Activity based costing (ABC) for Best Buy is analyzed. he response addresses the queries posted in 285 Words and excel file, APA References.

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Problem 4

You are trying to determine whether machine hours or direct labor dollars would be the best cost driver for overhead costs. You run two regression analyses and obtain the following results:

Machine hours:
Multiple R .39429
R square .15547
Adjusted R square .14964
Standard error .44416

Direct labor dollars:
Multiple R .89429
R square .79547
Adjusted R square .28964
Standard error .44416

Which variable would be the best selection for a cost driver and why?

Problem 5
When comparing traditional product costing and activity-based costing (ABC), which kind(s) of costs are allocated to products in a similar manner and which kind(s) are allocated to products in a different manner? Explain your answers.

Problem 6
Thurman Brothers Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $600,000 in overhead costs when a total of 10,000 direct labor hours were incurred. After implementing activity-based costing (ABC), the company's accountant identified the following related information:

Activity Allocation Base Proportion of Overhead Cost
Material delivery and handling Number of deliveries 30%
Inspections Number of inspections 25%
Supervision Hours of supervisor time 20%
Purchasing Number of purchase orders 25%

The number of activities for standard and custom-made cabinets are as follows:
Standard Custom-made
Number of deliveries 500 700
Number of inspections 600 400
Hours of supervisor time 1,000 2,000
Number of purchase orders 800 400

During the past year, Thurman accepted a customer order for a set of custom-made cabinets that would require the following:

Direct labor hours -------------------------------------------- 45

Number of deliveries ----------------------------------------- 4
Number of inspections --------------------------------------- 5
Hours of supervisor time ------------------------------------ 2
Number of purchase orders --------------------------------- 4

Required:

A. How much overhead would be applied to the job if traditional costing using direct labor hours as the cost driver were used?

B. Using activity-based costing (ABC), what would be the overhead rate for each of the four activities?

C. Using activity-based costing (ABC), what would be the total overhead applied to the above job?

D. Compare the overhead applied using traditional costing to ABC costing and remark on the difference. Which one do you think is more accurate?

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