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    Managerial Accounting: Activity-Based Costing

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    E4-10 Anna Bellatorre, Inc. manufactures five models of kitchen appliances at its Mesa
    plant. The company is installing activity-based costing and has identified the following
    activities performed at its Mesa plant.
    1. Designing new models.
    2. Purchasing raw materials and parts.
    3. Storing and managing inventory.
    4. Receiving and inspecting raw materials and parts.
    5. Interviewing and hiring new personnel.
    6. Machine forming sheet steel into appliance parts.
    7. Manually assembling parts into appliances.
    8. Training all employees of the company.
    9. Insuring all tangible fixed assets.
    10. Supervising production.
    11. Maintaining and repairing machinery and equipment.
    12. Painting and packaging finished appliances.
    Having analyzed its Mesa plant operations for purposes of installing activity-based costing,
    Anna Bellatorre, Inc. identified its activity cost centers. It now needs to identify relevant
    activity cost drivers in order to assign overhead costs to its products.
    Using the activities listed above, identify for each activity one or more cost drivers that
    might be used to assign overhead to Anna Bellatorre's five products.
    E4-11 Fontillas Instrument, Inc. manufactures two products: missile range instruments
    and space pressure gauges. During April, 50 range instruments and 300 pressure gauges
    were produced, and overhead costs of $89,500 were estimated. An analysis of estimated
    overhead costs reveals the following activities.
    Activities Cost Drivers Total Cost
    1. Materials handling Number of req's $35,000
    2. Machine setups Number of set ups 27,500
    3. Quality inspections Number of Inspections 27,000

    The cost driver volume for each product was as follows.
    Cost Drivers Instruments Gauges Total
    Number of requisitions 400 600 1,000
    Number of setups 200 300 500
    Number of inspections 200 400 600

    (a) Determine the overhead rate for each activity.
    (b) Assign the manufacturing overhead costs for April to the two products using activity based costing.
    (c) Write a memorandum to the president of Fontillas Instrument explaining the benefits of activity-based costing.

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    Solution Preview

    The two attached MS Word documents will help to understand the exercises posted. Chapter reading should reinforce the importance of activity-based costing. The memo is an example of what information should be included. Students may want to make changes to the content as they see fit. Be sure to include your student name as the person the memo is from.

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    Possible cost drivers that might be used to assign overhead to Anna Bellatorre's five products.

    1. The number of hours of designing and ...

    Solution Summary

    This solution is comprised of two managerial accounting problems which deal with how to identify activity-based cost drivers and how to compute overhead rates and assign overhead using ABC.
    The problems shown here are taken from Managerial Accounting, 4th ed., Wiley Publishing, however, the detail information will help any business student to understand these concepts.