Chapter 26
Cost Allocation and Activity-Based Costing
Study Guide
Do You Know…?
Learning Objective 1: Identify three methods used for allocating factory overhead
costs to products.
•
The three most common methods of allocating factory overhead, and characteristics of
each? (See exercises 1–3)
Learning Objective 2: Use a single plantwide factory overhead rate for product
costing.
•
How to calculate the single plantwide factory overhead rate and allocate factory
overhead costs to products? (See exercises 4–6)
Learning Objective 3: Use multiple production department factory overhead rates
for product costing.
•
How to calculate factory overhead rates by department and allocate factory overhead
costs to products? (See exercises 7–9)
Learning Objective 4: Use activity-based costing for product costing.
•
•
How to calculate an activity rate and allocate factory overhead to products using
activity-based costing? (See exercises 10–12)
The effect of product cost distortion on pricing of products? (See exercises 13–15)
Learning Objective 5: Use activity-based costing to allocate selling and
administrative expenses to products.
•
How to calculate and allocate selling and administrative expenses to products using
activity-based costing? (See exercises 16–18)
Learning Objective 6: Use activity-based costing in a service business.
•
How to determine an activity rate and allocate costs in a service business using activitybased costing? (See exercises 19–21)
1
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Chapter 26
Fill-in-the-Blank Equations
1. Single plantwide factory overhead rate = Total budgeted factory
overhead/_________________
2. __________________ = Budgeted department factory overhead/budgeted department
allocation base
3. ____________________ = Department allocation base usage for Product X/department
allocation base usage for Product Y
4. Activity rate = Budgeted activity cost/________________
Exercises
1. Would each description relate to a single plantwide overhead rate method, multiple
production department factory overhead rate method, or activity-based costing
method?
a. Before determining the rate for costs, managers must determine the activities
associated with costs.
b. Each department will be allocated overhead based upon direct labor hours.
c. Each department will be allocated overhead based upon a rate specific to that
department.
2. Determine if the overhead allocated to the product relates to a single plantwide
overhead rate method, multiple production department factory overhead rate method,
or activity-based costing method.
a. Product A: $210 allocated by number of setups, $325 allocated by number of
purchase orders, and $220 allocated by number of engineering hours
b. Product B: $284 allocated by direct labor in Department Z and $590 allocated by
machine hours in Department Y
c. Product C: $475 allocated by machine hours
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Cost Allocation and Activity-Based Costing
3
3. Would each relate to a single plantwide overhead rate method, multiple production
department factory overhead rate method, or activity-based costing method?
a. Management estimates overhead to be incurred in each department when
determining the department’s overhead rate.
b. As the number of machine hours a product uses increases, the total overhead
allocated to the product increases at the same rate, regardless of other activities,
or time spent in a department.
c. The amount of overhead allocated to a product depends on the number of times
the company must perform each activity throughout the production process.
4. Charleston Affair allocates factory overhead using a single plantwide overhead rate
based on machine hours. At the beginning of the year, the company expects to incur
$25,500 of overhead costs for 1,000 machine hours. Machine hours for Product K
production total 490, while Product M requires 400 machine hours during the year.
a. Calculate the plantwide overhead rate.
b. Determine the factory overhead allocated to each product line.
5. Wake Coffee Co. allocates factory overhead using a single plantwide overhead rate
based on direct labor hours. The company estimates that factory overhead costs will be
$60,000 and direct labor costs to total $123,750. Employees are paid $8.25 an hour. To
produce the 7,500 units of the Standard Coffee, the company requires 6,275 direct labor
hours, while 10,200 units of Deluxe Coffee requires 8,400 direct labor hours.
a. Calculate the plantwide overhead rate.
b. Determine the factory overhead allocated to each product line.
c. What is the factory overhead allocated to each unit of Standard Coffee and each
unit of Deluxe Coffee? Round answers to two decimal places.
6. Blair Designs estimates total factory overhead for the year to be $45,000, which is
allocated based on a single plantwide overhead rate per machine hour. The Standard
material requires 1.2 machine hours per yard, while the Print material requires 2.0
machine hours per yard. The company estimates to produce 10,000 yards of the
Standard material and 6,500 yards of the Print material at the beginning of the year.
During the year, the Standard material requires 9,000 machine hours, while the Print
material requires 18,000 machine hours.
a. Calculate the plantwide overhead rate.
b. Determine the factory overhead allocated to each product line.
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Chapter 26
7. Charleston Affair determines that a departmental overhead rate should be used to
allocate its $25,500 of estimated overhead costs, which can be broken down into
$18,000 estimated to be incurred in the Cutting Department and the remainder
estimated to be incurred in the Finishing Department. Use the following information for
the company.
Cutting (machine hours)
Finishing (direct labor hours)
Product K
10,000
5,000
Product M
14,000
7,500
a. Calculate the overhead rates for the Cutting and Finishing Departments.
b. Calculate the factory overhead allocated to each product line.
8. Wake Coffee Co. will allocate $60,000 of factory overhead based upon departmental
rates for its Roasting and Packaging Departments. The Roasting Department is expected
to incur $45,000 of costs, while the Packaging Department is expected to incur $15,000
of costs. Use the information below to calculate the overhead rates for each
department and the factory overhead to be allocated to each product line.
Roasting (machine hours)
Packaging (machine hours)
Standard
10,000
1,300
Deluxe
15,000
1,700
9. Blair Designs plans to allocate factory overhead based upon a departmental rate for the
Sewing and Packaging Departments. The company expects to incur total overhead costs
of $45,000, of which management expects 75% to be incurred by the Sewing
Department and 25% to be incurred by the Packaging Department. Use the information
shown to calculate the departmental overhead rates and the factory overhead to be
allocated to each product line.
Sewing (direct labor hours)
Packaging (machine hours)
Solid
2,150
500
Print
5,350
750
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Cost Allocation and Activity-Based Costing
5
10. Charleston Affair uses activity-based costing to allocate factory overhead and has
divided estimated costs into: Repairs, $7,500; Assembly, $10,000; and Cleaning, $8,000.
Use the activity-base usage quantities for Product K and Product M to allocate the
overhead. Also, determine the amount of factory overhead allocated to each product.
Repairs
(Number of
repairs)
150
350
Product K
Product M
Total
500
Assembly
(Number of
machine setups)
28
22
Cleaning
(Number of machine
cleanings)
18
22
50
40
11. Wake Coffee Co. manufactures two products, Standard Coffee and Deluxe Coffee. The
company estimates total factory overhead of $60,000 for the year, which has been
divided into: Assembly, $20,000; Inspection, $28,000; and Engineering Design, $12,000.
Use activity-based costing and the usage quantities below to determine how much
overhead should be assigned to each product. Also, determine the amount of factory
overhead allocated to each product.
Assembly
(Number of machine
setups)
360
440
800
Standard
Deluxe
Total
Inspection
(Number of
inspections)
220
180
400
Engineering Design
(Number of engineering
redesigns)
12
18
30
12. Blair Designs estimated total factory overhead of $45,000 for the year, which can be
divided into: Inspections, $18,000; Research, $12,000; and Supervising, $15,000. Use the
activity-base usage quantities for the company’s two products, Solid and Print, to
allocate the overhead. Also, determine the amount of factory overhead allocated to
each product.
Inspection
(Number of
inspections)
Research
(Number of research
hours)
Supervisor
(Number of direct
labor hours)
Solid
325
175
700
Print
300
125
300
625
300
1,000
Total
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Chapter 26
13. Compare the overhead allocated to the products from Exercises 4 and 7 for Charleston
Affair. If the company used a single plantwide rate rather than departmental rates for
each product, what would be the effect on pricing of the products?
14. Compare the overhead allocated to the products from Exercises 5 and 11 for Wake
Coffee Co. If the company used a single plantwide rate rather than activity-based
costing for each product, what would be the effect on pricing of the products?
15. Compare the overhead allocated to the products from Exercises 9 and 12 for Blair
Designs. If the company used a departmental rates rather than activity-based costing for
each product, what would be the effect on pricing of the products?
16. When determining the amount of selling and administrative expense to each product,
Charleston Affair uses activity-based costing. Two activities related to the selling and
administrative expense are order entry, with expected costs of $7,000, and promotional
support, with expected costs of $5,200. The company expects to receive 400 total
orders and spend 650 hours promoting products.
a. Calculate the activity rate for order entries and promotional support.
b. If Product K receives 175 orders and requires 310 hours of promotional support,
what amount of selling and administrative expenses related to these activities
will be allocated to the product?
17. To determine selling and administrative expenses to allocate to products, Wake Coffee
Co. uses activity-based costing. The company breaks this expense into customer return
processing and shipping and handling, with total estimated costs of $6,000 and $7,000,
respectively. The company expects to receive 200 returns and prepare 350 special
shipments.
a. Calculate the activity rate for customer return processing and shipping and
handling.
b. The Deluxe Coffee receives 57 returns and requires 210 special shipments.
Determine the amount of selling and administrative expenses related to these
activities that will be allocated to the product.
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Cost Allocation and Activity-Based Costing
7
18. Blair Designs allocates selling and administrative costs using activity-based costing.
Promotional support and customer return processing are two activities related to the
expenses, with estimated costs for the year totaling $10,000 and $7,200, respectively.
The company expects to send 40 advertisements to promote the products and receive
500 returns for the upcoming year.
a. Calculate the activity rate for promotional support and customer return
processing.
b. If the company sends 12 advertisements and receives 200 returns for the Solid
Pattern, how much selling and administrative expenses relating to these
activities will be allocated to the product?
19. A realtor determines that overhead should be allocated to houses using activity-based
costing. Two identified activities include indirect open house expenses and advertising
expenses, which are estimated to have total costs of $4,500 and $25,000. The realtor
estimates to host 300 open houses and send 500 advertisements.
a. Calculate the activity rate for the indirect open house expenses and advertising
expenses.
b. If the Winston house requires 5 open houses and will appear in 20
advertisements, what amount of overhead related to these activities will be
allocated to the house?
20. A painter allocates overhead to clients using activity-based costing. One activity
identified as overhead is the painter’s subscription expense, which is estimated to total
$400 for the upcoming month and will be allocated based on the number of clients.
Another activity is the indirect supplies expenses, which are estimated to total $750 in
the upcoming month and are allocated based on number of rooms painted. The
company expects to service 20 clients and paint 60 rooms.
a. Calculate the activity rate for the painter’s subscription expense and indirect
supplies expenses.
b. The company will paint 3 rooms for Tom Jones and 2 rooms for Ellie Libertino.
Calculate the overhead related to these activities the company should allocate to
each client.
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Chapter 26
21. A veterinarian uses activity-based costing to allocate overhead to patients. Two
identified activities include the operating room expenses and cleaning expenses.
Operating room expenses of $20,000 for the upcoming quarter will be allocated based
on the hours spent in the operating room, which the veterinarian expects to total 100
hours. Estimated cleaning expenses of $14,000 for the upcoming quarter will be
allocated based on the number of nights the patient spends in the office. The
veterinarian expects to have patients spend a total of 1,120 nights.
a. Calculate the activity rate for the operating room expenses and the cleaning
expenses.
b. If Fluffy Smith spends 5 hours in the operating room and 3 nights in the office,
how much overhead will be allocated to the patient?
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part.