Quiz Chapter 8 - Solutions

1. Jennifer Company has two products: A and B. The company uses Activity-Based
Costing. The estimated total cost and expected activity for each of the company's
three activity cost pools are as follows:

Estimated Expected Activity

Activity Cost Pool Cost Product A Product B Total
Activity 1................ $23,500 400 100 500
Activity 2................ $18,000 500 200 700
Activity 3................ $34,600 600 300 900
The activity rate under the Activity-Based Costing system for Activity 3 is closest
to:
A) $36.24.
B) $38.44.
C) $84.56.
D) $115.33.

The correct answer is B. To calculate the activity rate for activity 3, you would divide:

Estimated Cost / Estimated Driver

$34,600 / 900
$38.44

2. Reach Consulting Corporation has its headquarters in Chicago and operates

from three branch offices in Portland, Dallas, and Miami. Reach's headquarter
activities are assigned to two activity cost pools: General Service and Research
Service. These costs are then allocated to the three branch offices. Information
for next year related to this Activity-Based Costing system is as follows:

Estimated
Activity Cost Pool Activity Measure Overhead Cost
General service......... % of time devoted to branch $700,000
Research service....... Computer time $140,000

Estimated branch data for next year is as follows:

% of time
devoted to
branch Computer Time
Portland 30% 200,000 minutes
Dallas 60% 150,000 minutes
Miami 10% 50,000 minutes

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 How much of the headquarters cost allocation should Dallas expect to receive
next year?
A) $280,000
B) $409,500
C) $472,500
D) $504,000

C is correct. You dont have to do this with this problem, but I like to calculate an
activity rate (application rate) for each activity:

Activity Cost Driver Information

Portland Dallas Miami Total
General Service $700,000 30% 60% 10% 100%
Research Service $140,000 200K mins 150K mins 50K mins 400K mins

General Service = $7,000 per percentage point ($700,000/100%).

Research Service = 35 cents per minute ($140,000/ 400,000).

Dallas would receive:

Activity Cost Allocated to Dallas

General Service $420,000 $7,000 x 60(% points)
Research Service 52,500 .35 x 150,000
Total Cost $472,500

3. Matt Company uses Activity-Based Costing. The company has two products: A
and B. The annual production and sales of Product A is 8,000 units and of
Product B is 6,000 units. There are three activity cost pools, with estimated total
cost and expected activity as follows:

Estimated Expected Activity

Activity Cost Pool Cost Product A Product B Total
Activity 1................ $20,000 100 400 500
Activity 2................ $37,000 800 200 1,000
Activity 3................ $91,200 800 3,000 3,800
The cost per unit of Product A under Activity-Based Costing is closest to:
A) $2.40.
B) $3.90.
C) $10.59.
D) $6.60.

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D is correct. First, calculate an activity rate (application rate) for each activity:

Activity Cost Driver Information

A B Total
Activity 1 $20,000 100 400 500
Activity 2 $37,000 800 200 1000
Activity 3 $91,200 800 3000 3800

Activity 1 = $40 per driver unit ($20,000/500).

Activity 2 = $37 per driver unit ($37,000/1,000).
Activity 3 = $24 per driver unit ($91,200/3800).

Product A would receive:

Activity Cost Allocated to Product A

Activity 1 $4,000 $40 x 100
Activity 2 $29,600 $37 x 800
Activity 3 19,200 $24 x 800
Total Cost $52,800

The cost per unit of Product A is $6.60 ($52,800/8,000).

Use the following to answer questions 4-7:

Adelberg Company has two products: A and B. The annual production and sales of
Product A is 500 units and of Product B is 1,000 units. The company has traditionally
used Direct Labor Hours as the basis for applying all Manufacturing Overhead to
products. Product A requires 0.4 Direct Labor Hours per unit and Product B requires 0.2
Direct Labor Hours per unit. The total estimated overhead for next period is $68,756.

The company is considering switching to an Activity-Based Costing system for the

purpose of computing unit product costs for external reports. The new Activity-Based
Costing system would have three overhead activity cost pools--Activity 1, Activity 2, and
General Factory--with estimated overhead costs and expected activity as follows:

Estimated
Overhead Expected Activity
Activity Cost Pool Costs Product A Product B Total
Activity 1 ................ $31,031 1,000 300 1,300
Activity 2 ................ $22,249 1,600 300 1,900
General Factory....... $15,476 200 200 400
Total ........................ $68,756
(Note: The General Factory activity cost pool's costs are allocated on the basis of Direct
Labor Hours.)

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 4. The Predetermined Overhead Rate under the traditional costing system is
closest to:
A) $11.71.
B) $38.69.
C) $171.89.
D) $23.87.

C is correct. The traditional approach would have a single plant-wide predetermined

application rate. The rate is calculated as follows:

Estimated Overhead/ Estimated Driver

You are told that the estimated overhead is $68,756 and that the driver for General
Factory is direct labor hours.

$68,756/400 = $171.89

5. The overhead cost per unit of Product B under the traditional costing system is
closest to:
A) $2.34.
B) $7.74.
C) $4.77.
D) $34.38.

D is correct. You are told that Product B take .2 direct labor hours per unit. So, you
would calculate the overhead cost per unit as follows:

.2 x $171.89 = $34.378

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 6. The Predetermined Overhead Rate (i.e., activity rate) for Activity 2 under the
Activity-Based Costing system is closest to:
A) $13.91.
B) $11.71.
C) $74.16.
D) $36.19.

B is correct. First, calculate an activity rate (application rate) for each activity:

Activity Cost Driver Information

A B Total
Activity 1 $31,031 1000 300 1300
Activity 2 $22,249 1600 300 1900
General Factory $15,476 200 200 400

Activity 1 = $23.87 per driver unit ($31,031/1300).

Activity 2 = $11.71 per driver unit ($22,249/1900).
General Factory = $38.69 per driver unit ($15,476/400).

7. The overhead cost per unit of Product B under the Activity-Based Costing system
is closest to:
A) $45.84.
B) $7.74.
C) $34.38.
D) $18.41.

D is correct. Product B would receive:

Activity Cost Allocated to Product B

Activity 1 $7,161 $23.87 x 300
Activity 2 $3,513 $11.71 x 300
Activity 3 7,738 $38.69 x 200
Total Cost $18,412

The cost per unit of Product B is $18.41 ($18,412/1,000).

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