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Additional Problems in ABC

1. Ace Company currently allocates overhead to products based on machine hours, direct material costs, and direct labor hours. However, a study found machine setup costs are related to number of setups, material handling costs to pounds of materials, and materials administration to number of purchase orders. The ABC system would create cost pools for these activities and allocate them using the related drivers. 2. Best Company currently allocates overhead to products based on direct labor hours. A study found setup and design activities driving significant overhead costs. The ABC system would create cost pools for setups and design and allocate them using the related activities of number of setups and design hours. Direct labor hours would still allocate the remaining overhead. 3.

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Maviel Suaverdez
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75 views

Additional Problems in ABC

1. Ace Company currently allocates overhead to products based on machine hours, direct material costs, and direct labor hours. However, a study found machine setup costs are related to number of setups, material handling costs to pounds of materials, and materials administration to number of purchase orders. The ABC system would create cost pools for these activities and allocate them using the related drivers. 2. Best Company currently allocates overhead to products based on direct labor hours. A study found setup and design activities driving significant overhead costs. The ABC system would create cost pools for setups and design and allocate them using the related activities of number of setups and design hours. Direct labor hours would still allocate the remaining overhead. 3.

Uploaded by

Maviel Suaverdez
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Additional Problems – Activity Based Costing

1.Ace Company manufactures a variety of both high-and low- volume products. The following
information is for the company’s most recent year of operation:

Direct Material cost…………………………………………………………………..P1,000,000


Direct Labor cost……………………………………………………………………… 2,000,000
Overhead Cost:
Machine-related:
Machine operation……………………………………………………… 500,000
Machine setuo………………………………………………………….. 200,000
Materials related:
Material Handling……………………………………………………. 310,000
Materials Administration………………………………………… 500,000
Freight in…………………………………………………………………. 150,000
Other Overhead…………………………………………………………………. 2,500,000

Machine Hours……………………………………………..40,000
Pounds of Materials……………………………………200,000
Setups…………………………………………………………... 500
Purchase Orders…………………………………………...10,000

Ace Company’s existing costing system allocates all machine-related overhead based on machine hours,
all materials-related overhead based on direct material cost, and all remaining overhead based on direct
labor cost. However, a recent study determined that machine setup costs and material handling costs
are primarily related to the number of setups performed; materials administration cost is primarily
related to the number of purchase orders issued, and freight-in is primarily related to pounds of
materials. Ace Company does not keep significant materials inventories on hand.

Required:
(a) Calculate the three overhead rates in Ace Company’s existing costing system for the most recent
year.
(b) Create an ABC system for Ace Company, making only the changes suggested by the results of
the recent study. Give your answer in the form of a list of cost pools. Beside the name of each
pool, list the driver to be used to allocate that cost pool to products.
(c) Calculate the overhead rates that the ABC system should use for the most recent year.

2. Best Company produces two products, Fancy and Plain and uses a costing system in which all
overhead is accumulated in a single cost pool and allocated based on direct labor hours Best Company
has decided to implement ABC, because a cost study has revealed significant amounts of overhead cost
related to setup activity ad design activity. The number of setups and the number of design hours will
be the activity drivers for the two new cost pools, and direct labor hours will continue as the base for
allocating all remaining overhead. Selected information for Best company’s most recent year of
operations is as follows:
Fancy Plain Total
Units Produced 200 16,000 16,200
Direct Material Cost
Per Unit P300 P10
Total P60,000 P160,000 P220,000
Direct Labor
Hours 2,800 27,200 30,000
Cost P 28,000 P272,000 P300,000
Setups 45 45 90
Design Hours 3,000 5,000 8,000

Overhead
Setup related P135,000
Design related 240,000
Other 825,000

Required:
(a). calculate the total and per unit costs reported for the 2 products by the existing costing system.
(b). calculate the total and per unit costs reported for the products by the ABC system

3. True Manufacturing Company makes two products, Regular and Large, using the same equipment.
Large is simply a bigger version of Regular. One production run of each product is scheduled
approximately each week. The company uses a costing system that accumulates all overhead in a single
cost pool and allocates it based on direct labor hours. True’s management has decided to implement
ABC and has just finished a study that revealed significant amounts of costs related to the number of
setups. Direct labor hours will still be used as the allocation base for all remaining overhead cost.
Information concerning True Manufacturing Company’s most recent year of operation is as follows:

Regular Large Total


Units Produced 10,000 10,000 20,000
Direct Material Cost
Per Unit P1.00 P4.00
Total P10,000 P40,000 P50,000
Direct Labor
Hours per unit 1 4
Total Hours 10,000 40,000 50,000
Total Cost P120,000 P480,000 P600,000
Setups 51 52 103
Overhead:
Setup related P515,000
Other P985,000

Required:
(1) Calculate the total and per-unit costs reported for the two products by the existing costing
system.
(2) Calculate the total and per-unit costs reported for the two products by the ABC system

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