Management Accounting and the Business Environment _ 65 g. Activity-based Costing and Management Activity analysis is used to develop a detailed description of the specific activities performed in the operation of the firm. Many firms have found that they can improve planning, product costing, operational control, and management control by using activity analysis to develop a detailed description of the specific activities performed in the firm’s operations. The activity analysis provides the basis for activity-based costing and activity-based management. Activity-based costing (ABC) is used to improve the accuracy of cost analysis by improving the tracing of costs to products or to individual customers. Activity-based management (ABM) uses activity analysis to improve operational control and management control. ABC and ABM are key strategic tools for many firms, especially those with complex operations, or great diversity of products.CHAPTER SYSTEMS DESIGN: ACTIVITY-BASED COSTING AND MANAGEMENT EXPECTED LEARNING OUTCOMES After studying this chapter, you should be able to.. 1 2. Define activity-based costing. State the advantages and limitations of activity-based costing Describe the steps in designing an activity-based costing system. Enumerate examples of activity centers, cost drivers, and traceable costs. Apply activity-based costing to a manufacturing company. Apply activity-based costing to a merchandising company. Discuss activity-based management. Describe the opportunity cost concept. aeate de dedCHAPTER 10 SYSTEMS DESIGN: ACTIVITY-BASED COSTING AND MANAGEMENT ACTIVITY-BAS| =D COSTING The most difficult task in computing accurate unit cost lies in determining the Proper amount of overhead cost to assign to each job, a unit of product or service activity Today. accountants recognize that manufacturing and providing services are related activities. Thus, they direct attention to the cost of these’ activities. The activity-based management system links resource consumption to the activities a Company performs and costs the activities to products or customers. Activity- based management uses activity-based costing (also called transaction-based costing) to measure and control these relationships. Activity-based costing (ABC) has been developed in response to the manager's need for more accurate product costs to make them more globally.competitive. ABC helps managers identify more clearly the costs involved in manufacturing a product or providing a service and thereby provides more accurate unit cost information on which to base pricing and other decisions, Activity-based costing (ABO) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs. ABC is ordinarily used as a supplement ‘o, rather than as a replacement for the company’s usual costing system, Most organizations that use activity-based costing have two costing systems - the official costing system that is used for preparing external financial reports and the activity-based costing system that is used for internal decision making and for managing activitiesSystems De' Advantages and Limitations of ABC Activity-based costing provides several benefits to the manager, namely 1, More accurate product costs Better data for decision making 3. Tighter cost control ABC has also several limitations, the chief of which is the difficulty and high costs involved with gathering data relating to activity centers and cost drivers. Design of an Activity-Based Costing System The steps or activities required in designing an ABC system are 1. Process Value Analysis (PVA) 2. Identifying Activity Centers 3. Assigning Costs to Activity Centers 4. Selecting Cost Drivers Step 1. Process Value Analysis involves the following steps. a) Analyze activities required to make the product or perform the service. This can be done through the preparation of a flowchart detailing each in the manufacturing process from the receiving of materials to the final inspection of the completed product. This requires walking through an operation and documenting every activity observed as well as the time involved. An activity is any event or transaction that is a cost driver - that is, it causes the incurrence of cost in an organization. b) Classify each activity as value-added or non-value-added. c) Identify ways to either reduce or eliminate the non-value-added activities.308 Chapier 10 Fxample, Suppose the production process looks like this, Activities Nature of Activit Receiving non-value-added activity | Store raw materials non-value-added activity Operation | Move a wait non-value-added activity Operation 2 value-added activity Store finished goods non-value-added activity Pack aiid Ship yalue-added-activity The goal is to reduce or eliminate the non-value added activities. Step 2. Identifying Activity Centers An activity center can be defined as a part of the production process for which management wants a separate reporting of the cost of the activity involved. Generally, the levels of activities can be classified. into four as follows: 1. Unit-level activities, which are performed each time a unit is produced; 2. Batch-level activities, which are performed each time a batch of goods is handled or processed; 3. Product-level activities, which are performed as needed to support the production of each different type of product; and 4. Facility-level activities which simply sustain a facility’s general manufacturing process.A waiting to be applied to products center should be as Assign Cost to Activity Centers en costs to the activity centers where they al s that are traceable to the activity signed directly to activity centers. Other costs shared Cost (ctivity-Based Costing and Management 309 | accumulated while by two or more activity centers should be assigned according to some cost driver that contro! Step 4. This involves assigning costs from the activity center to appropriate cost drivers. When selecting a cost driver, s the utili Select Cost Drivers the following factors: 1. The ease of obtaining data reiating to the cost driver The degree to which the cost driver measures actual products of the activity involved Figure 10.1 shows exan Costs. Figure 10.1 Activity Centers Machine-related activities, ‘such as milling, cutting, and maintenance Labor-related activities. including fringe benefits |. Unit-Level Activities Cost Drivers Machine-hours Labor-hours Number of units of output Batch-Level Acti ation of the costs involved. the product using one must consider | consumption by mples of Activity Centers, Cost Drivers, and Traceable Traceable Costs Power costs Maintenance costs Labor costs Factory supplies Depreciation of general-use machines and equipment Depreciation of maintenance equipment iS Cost Drivers Traceable Costs Activity Centers Purchase order processin Production order processing Equipment setups Material handling Quality inspection Number of material receipts Pounds of material handled Number of setups Hours of setup time Number of inspections Hours of inspection time 9 Number of orders processed Clerical costs Supplies consumed Labor setup costs Labor cost to handle material Depreciation of office, setup, and material-handling equipment Quality control costs310 Chapter 10 lil. Product-Level Activities Activity Centers Cost Drivers Product testing Number of tests Parts inventory * Hours of testing time management Number of part types Product design Hours of design time Number of engineering change orders IV. Facility-Level Activities Traceable Costs Testing facility costs Parts administration costs Parts carrying costs Product engineering costs Design costs Activity Centers Cost Drivers General factory Machine-hours Plant occupancy Labor-hours Personnel administration Number of employees and training * (head count) Hours of training time * The costs of some of these activities may be traceable in part to the facility level and in part to other activity centers at the unit level, product level, and batch level. Personnel administration and training may be such an activity Illustrative Problem 10.1. Manufacturing Applications of Activity-based Costing Luzon Company manufactures 4,000 units of Product X and 20,000 units of Product Y each year. The company currently uses direct labor hours to assign overhead costs to products. Product X requires 2.5 DLH and Product B requires 2.0 DLH to produce. Presently, Luzon Company uses a plantwide overhead method, the unit product cost is: Product A Direct material P36.00 Direct labor 175: Manufacturing overhead 2.5 DLH X P18/DLH 45.00 2.0 DLH X PI8/DLH __ Total unit product cost P98.50 —_—_—__ Traceable Costs Plant management salaries Plant depreciation Property taxes & insurance Personnel administration costs Employee training costs Work recreational facilities allocation rate. Using this Product B P30.00 14.00 36.00 36.00 P80.00.Systems Design: Activity-Based Costing and Management 344 Management at Luzon believes that overhead costs are actually caused by the following five activities: . Activity Traceable Cost Machine setups P255,000 Quality setups. 160,000, Production orders 81,000 Machine-hours worked 314,000 Material receipts ____ 90,000 Total P900,000 The following transaction data have been compiled by the management of Luzon: Activity Total Product A — Product B Machine setups. 5,000 3,000 2,000 Quality inspections 8.000 5,000 3,000 Production orders 600 200 400 Machine-hours worked 40,000 12,000 28,000 Material receipts 750 150 600 These data can be used to develop overhead rates for each of the five activities: Product Activity Total Product A B Machine setups P255,000 5,000 P51.00_ per setup Quality inspections 160,000 8,000 20.00 per inspection Production orders 81,000 600 135.00 per order Machine-hours worked 314,000 40,000 7.85 per hour Material receipts 90,000 750 120.00 _ per receipt The activity based overhead rates that were just calculated can be used to assign overhead costs to Luzon’s two products. Product A Activity ABC Rate Transactions. Amount Machine setups P51.00 3,000 P153,000 Quality inspections 20.00 5,000 100,000 Production orders 135.00 200 27,000 Machine-hours worked 8.00 12,000 94,200 Material receipts 120.00 150 18,000 Total overhead assigned Number of units produced acon Overhead per unit Poi P98.05Product B Activity ABC Rate Transactions Amount Machine setups PS1.00 2,000 P102,000 Quality inspections 20.00 3,000, 60,000. Production orders 135.00 400 54,000 Machine-hours worked 7.85 28,00 219,800 Material receipts 120.00 600 72,000_ Total overhead assigned P507,800 Number of units produced = 20,000_ Overhead per unit P2 Now compare the unit product costs using the old costing system and our ABC system. Costing Method Product A Product B Activity-based costing PISI.SS P69.39 Old costing system 98.50 80.00 ACTIVITY-BASED MANAGEMENT Activity-based management (ABM) is a management tool that involves analyzing and costing activities with the goal of improving efficiency and effectiveness. Basically, this management approach aims to improve the value of products or services to customers and increase the firm’s profit. ABM draws on ABC as its major source of information and focuses on the efficiency and effectiveness of key business processes and activities. Using ABM enhances management's ability to pinpoint avenues for improving operations, reducing costs, or increasing values to customer. By identifying the resources spent on customers, products and activities, ABM improves, management's focus on the firm's critical success factors and enhances its competitive advantage. ABM is closely related to ABC, but the two schemes differ in their primary goals. To clarify the difference, consider activities involved in setting up machinery for a production user. ABC seeks to measure the cost of setups and then assign a cost to products based on how many setups each product requires. The objective of ABM. on the other hand, is to improve the efficiency and effectiveness of these activities. Therefore, ABM would focus on ways to improve the setup process and ways to eliminate the demand for set-up activity (thus reducing setup cost). In otherSusiems Design: Based Costing and Management _313 words, one ne costs of activities before one can do a good job of managing them s to know the There are basically two categories of ABM applications, namely a. Operational ABM, and b. Strategic ABM. ition and lowers Operational ABM enhances operation efficiency and asset utili cost. It focuses on doing things right and performing activities more efficiently. Among the management techniques that are applied in operational ABM are activity management, business process reengineering, total quality management and performance management. the other hand, attempts to alter the demand for activities and increase profitability at the current or improved activity efficiency. It focuses on choosing the activities for the operations, Strategic ABM applications use management techniques such as process design, product-line and customer mix, supplier relationships; customer relationship (delivery, pricing, order size, packaging, etc.) market segmentation and distribution channel. Strategic ABM. Frequently, ABM uses cost-driver analysis, activity analysis and performance measurement, to improve operations. A brief explanation of these techniques follows: Cost-driver analysis This technique examines, quantifies, and explains the effects of the cost driver on the cost of an activity. Its purpose is to search for the root cause of activity costs. Among the tools used in cost driver analysis include benchmarking, cause-and-effect diagrams, and Pareto analysis. Benchmarking involves the search for the best practices anywhere to identify ways to improve the operation for a task, activity, or process. A cause-and-effect diagram maps out causes that affect an activity, process. stated problem or desired outcome. ‘A Pareto analysis is a histogram of the cost drivers that contribute to the total cost. Most analyses under this technique show that 20 percent of the cost drivers are responsible for 80 percent of the total cost incurred314 Chapter 10 Activity analy: To be competitive a firm must as each of its activities ee ona rand the product or customer, its efficiency, and its value content. pi an activity because it is: i ficati f Pl ervice or * Required to meet the specification of the product or service satisfy customer demand; Required to sustain the organization; or * Deemed beneficial to the firm. Activity analysis identifies and describes the activities in an organization. Through — interviews, questionnaires, observation, and a _ review of documentation, an activity analysis collects information. Performance measurement This involves the identification of the work performed and the results achieved by an activity process, or organizational unit. Performance measures include both financial and nonfinancial. Examples of financial performance measures are the cost per unit of output, return on sales, and cost of every department’s high-value-added and low-valued-added activities, Nonfinancial performance measures evaluate o manufacturing process and measures of or fee personnel. Examples of nonfi perating characteristics of dbacks from customers or nancial performance measures are the: (a) number of customer complaints (b) customer satisfaction (c) number of defective parts or output (d) number of output unit (e) cycle-time (f) on-time delivery rate (g) number of employee suggestions (h) scores on employee morale,Systems Design: Activity-Based Costing and Management 318 Opportunity Costing Concepts One significant factor that managers should include in their decision process information is the capacity usage of the plant and the other resources of the entity. Capacity usage information is a critical signal of the potential relevance of opportunity costs, the benefit lost when one chosen option precludes the benefits from an alternative option. When a firm has excess capacity, that is, it is able to produce the current demand as well as handle a special order or new product, no opportunity cost is present. When the plant is operating at full capacity, opportunity costs are an important consideration because the decision to produce a special order or add a new product line can cause the reduction, deiay, or loss of sales of products and services currently offered. When opportunity costs are relevant, the manager must consider the value of lost sales as well as the contribution from the new order or new product. Managers can never be sure whether their decisions were wise or unwise because 1. Unexpected events can influence subsequent results, and 2. What would have happened had the decision been different can never be known. Before making a decision; managers must gain a thorough understanding of the cost information that is relevant. In previous chapters, we have examined various issues involving costs: determining the costs of products and services using job order and process costing systems, activity-based costing, and variable costing. In the course of those discussions, we considered examples of how cost information is used in decision making. The basic approach to decision making is to compare decision alternatives in terms of costs and revenues that are incremental. Costs that can be avoided by taking a particular course of action are always incremental costs and, therefore, relevant to the analysis of a decision. Costs that are sunk (i.e., already incurred and not reversible) are never incremental costs, because they do not differ among the decision alternatives. Therefore, they are not relevant in making a decision. Students of managerial accounting often assume that fixed costs are equivalent to Sunk costs and are thus irrelevant (i-e., are not incremental costs), but this is not always the case. Fixed costs may be sunk and, therefore, irrelevant. Fixed costs36 Chapt may not be sunk but still irrelevant. Finally, fixed costs may not be sunk and may be relevant Finally, opportunity costs represent the benefit foregone by selecting a particular decision alternative over another. By their nature. they are always incremental costs, and they must be considered when making a decision To illustrate opportunity costs, consider this example. The company is considering dropping the garden supplies product line. Suppose that if garden supplies are dropped, more space can be devoted to selling tools, sales of tools will increase and the contribution margin associated with tools will increase by P20,000. In this case, there is a P20,000 opportunity cost associated with the decision to keep the garden supplies product line. Considering this opportunity cost would make dropping the product line desirable rather than undesirable if the contribution margin of the garden supplies is lesser. If a resource can be used in more than one way, it has an opportunity cost. An opportunity cost is the benefit lost by taking one action as opposed to another. The “other” action is the best alternative available other than the one being contemplated. Illustrative Problem 10.2. Opportunity Costs The Rainbow Corporation is working at full production capacity producing 10,000 units of a unique product, Spectrum. Manufacturing costs pr unit for Spectrum are as follows: Direct materials P2 Direct manufacturing labor 3 Manufacturing overhead a Total manufacturing costs 10 Manufacturing overhead costs per unit are based on variable costs per unit of P2 and fixed costs of P30,000 (at full capacity of 10,000 units). Selling costs, all variable, are P4 per.unit, and the selling price is P20, ( A customer, the Summer Company, has asked Rainbow to produce 2,000 units of Kaleidoscope, a modification of Spectrum. Kaleidoscope would require the same manufacturing processes as Spectrum, Summer has offered to pa Ral bi - PIs for a unit of Kaleidoscope and half the selling costs per unit, ene ni___ Systems Design: Activity-Based Costing and Management _317 REQUIRED: 1. What is the opportunity cost to Rainbow of producing the 2,000 units of Kaleidoscope? (Assume that no overtime is worked.) 2. ‘The Colours Corporation has offered to produce 2,000 units of Spectrum for Rainbow so that Rainbow may accept the Kaleidoscope offer. That is, if Rainbow accepts the Colours offer, Rainbow would manufacture 8,000 units of Spectrum and 2,000 units of Kaleidoscope and purchase 2,000 units of Spectrum from Colours, Colours would charge Rainbow P14 per unit to manufacture Spectrum. Should Rainbow accept the Colours offer? Show your calculations. 3. Suppose Rainbow had been working at less than full capacity, producing 8,000 units of Spectrum at the time the Kaleidoscope offer was made. Calculated the minimum price Rainbow should accept for Kaleidoscope under these conditions. (Ignore the previous P15 unit price.) Solution: 1... The opportunity cost to Rainbow of producing the 2,900 units of Kaleidoscope is the contribution margin lost on the 2,000 units of Spectrum that would have to be forgone, as computed below: Selling price: P20 Variable costs per unit Direct materials p2 _ Direct manufacturing labor 3 Variable manufacturing overhead 2 Variable nonmanufacturing costs 4 tl Contribution margin per unit TR eApoe Contribution margin for 2,000 units “Pis.000" The opportunity cost is P18,000. Opportunity cost is the maximum contribution to operating income that is foregone (rejected) by not usin; limited resource in its next-best alternative use, ee 2. Contribution margin from manufacturing 2,000 units of _ =)! units alei purchasing 2,000 units of Spectrum from Colours is P6000: 96 foe a 000, ws:318 Chapter 10 Manufacturing Purchase Total Kaleidoscope — Spectrum Selling price PIs P20 Variable costs per unit: Purchase costs - 4 Direct mater 2 Direct manufacturing labor 3 Variable manufacturing, overhead 2 Variable nonmanufacturing overhead 2 4 Variable costs per unit _9 18 Contribution margin per unit P6 P2 Contribution margin from selling 2,000 units of Kaleidoscope and 2,000 units of Spectrum P12,000 P4,000 P16,000 As calculated in requirement 1, Rainbow's contribution margin from continuing to manufacture 2,000 units of Spectrum is P18,000. Accepting the Summer Company and Colours offer will cost Rainbow P2,000 (P16,000 - P18.000). Hence, Rainbow should refuse the Summer Company and Colours Corporation’s offers. 3. The minimum price would be P9, the sum of the incremental costs as computed in requirement 2. This follows because, if Rainbow has surplus capacity, the Opportunity cost = PO. For the short-run decision of whether to accept Kaleidoscope’s offer, fixed costs of Rainbow are irrelevant. Only the incremental costs need to be covered for it to be worthwhile for Rainbow to accept the Kaleidoscope offer.L IL. Systems Design: Activity-Based Costing and Management __ 319 REVIEW QUESTIONS AND PROBLEMS Questions 1, What three levels of overhead cost application are available to a company? v Why are new approaches to overhead cost application, such as activity Based costing, needed in many companies today? 3. Why are departmental overhead rates sometimes not accurate in assigning overhead cost to products? 4. When designing an activity-based costing system, why should PVA (process value analysis) always be the starting point? ow What four general levels of activity can be identified in a company? system 6. In what three ways does activity-based costing improve the costin; of an organization? 7. What are the two chief limitations of activity-based costing? 8. Can activity-based costing be used in service organizations? 9. What is a resource driver? 10. What is an activity driver? True or False 1. In activity-based costing, facility-level costs should not be included in product costs for internal management reports that are used for decision- making. However, companies frequently include facility-level costs in product costs in order to meet external reporting requirements. 2. Batch-level activities are performed each time a batch of goods is handled or processed. 3. When there is automation, product diversity, and little correlation between overhead cost and direct labor, a plantwide overhead rate based on direct labor is most appropriate. ased costing, a separate overhead rate is computed for each er by dividing the estimated overhead cost in the activity d activity for the activity center. 4, In activity-b: activity cent center by the total expecte n activity-based costing system there is no overhead over or under 5. Inat : system is much more accurate. applied because the costing s320 Chapter 10 320_ Cha 6. Activity-based costing involves a two-stage allocation in which overhead costs are first assigned to departments and then to jobs on the basis of direct labor hours 7. When a company shifts from a traditional cost system in which overhead is applied based on direct labor-hours to an activity-based costing system in which there are batch-level and product-level costs, the unit product costs of high-volume products typically decrease whereas the unit product costs of low-volume prodicts typically increase. 8. Process value analysis (PVA) consists of systematically analyzing the activities required to make a product or perform a service. PVA identifies ali resource-consuming activities and labels these activities as either value- added or non-value-added. Il. Exercises Exercise 1 The following activities occur at Lua Corporation, a company that manufactures a variety of products. a. Various individuals manage the parts inventories. b. Acclerk in the factory issues purchase order for a job. c. The personnel department trains new production workers. d. The factory’s general manager meets with other department heads such as marketing to coordinate plans. - €. Direct labor workers assemble products. f. Engineers design new products. 8. The materials storekeeper issues raw materials to be used in jobs. h. The maintenance department performs periodic preventive maintenance on general-use equipment. Required: Classify each of the activities above as either a unit-level, batch-level, product- level, or organization-sustaining activity. Exercise 2 seen Inc. makes paragliders for sale through specialty sporting goods designed © company has a standard paraglider model, but also makes custom- with th Paragliders, Management has designed an activity-based costing system the following activity cost pools and activity rates:Systems Design: Activity-Based Costing and Management _ 321. Activity Cost Pool Activity Rate Supporting manufacturing, P18 per direct labor-hour Order processing P192_ per order Custom designing, P261 per custom design Custom service P426 per customer Management would like an analysis of the profitability of a particular customer, Fly High, which has ordered the following, products over the last 12 months: Standard Model Custom Design Number of gliders 10 2 Number of orders 1 2 Number of custom designs 0 2 Direct labor-hours per glider 28.5 32.0 Selling price per glider P1,650 P2,300 Direct materia st per glider P462 PS76 The company’s direct labor rate is P19 per hour. Required: Using the company’s activity-based costing system, compute the customer margin of Fly High. Exercise 3 JHLR Corporation makes ultra-lightweight backpacking tents. Data concerning the company’s two product lines appear below: Special Regular Direct materials per unit P60.00 P45.00 Direct Jabor per unit P9.60 P7.20. Direct labor-hours per unit 0.8 DLHs 0.6 LHs Estimated annual production 10,000 units 70,000 units The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below: Estimated total manufacturing overhead P290,000 Estimated total direct labor-hours. 50,000 DLHS322. Chapter 10 Required. 1. Determine the unit product costs of the Special and Regu! company’s traditional costing system. - 2. The company is considering replacing its traditional determining, unit product costs for external reports wi : fi A . e followin costing system. The activity based-costing system would have thi 8 three activity cost pools: jar products under the costing system for ‘th an activity-based Expected Activil Estimated Activities and Activity Measures Overhead Cost Special Regular Total Supporting direct labor (direct Tabor-hours) ‘ 150,000 8,000 47.000 0.900 Batch setups (setups) 60,000 200 20 100 Safety testing (1 80,000 80 Total manufacturing overhead cost 290,000 Determine the unit product cost of the Special and Regular products under the activity-based costing system. IV. Problems Problem 1 Peejay Autoparts, Inc., previously used a cost system that allocated all factory overhead costs to products based on 350 percent of direct labor cost. The company has just implemented an ABC system that traces indirect costs to products based on consumption of major activities as indicated below. Compare the total annual costs of Product X using both the traditional volume-based and the new ABC systems. Annual Cost Driver Product X Cost Activity Quantity Cost Driver Consumption Labor P300,000 P 30,000 P10,000 Machining 20,000 hours P500,000 800 hours Setup 10,000 hours P100,000 100 hours Production order 2,000 orders P200,000 12 orders Material handling 1,000 requisitions — P- 20,000 5 requisitions Parts administration 12,000 parts P480,000 18 partsSystems Design: Activity-Based Costing and Management _ 323 Problem 2 Zash Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are listed below: Maintenance P200,000 Material handling 32,000 Setups 100,000 Inspection 120,000 Currently, overhead is applied using a predetermined overhead rate, based on budgeted direct labor hours. Fifty thousand direct labor hours are budgeted for next year. The company has been asked to submit a bid for a proposed job. The plant manager feels that getting this job would result in new business in future years. Bids are based on full manufacturing cost plus 20 percent. Estimates for the proposed job are as follows: Direct materials P 6,000 Direct labor (1,000 hours) P10,000 Number of material moves 12 Number of inspections 10 ‘Number of setups 2 Number of machine hours 500 In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver, direct labor hours. The plant manager has heard of anew way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are: Machine hours 20,000 Material moves 1,600 Setups 2,500 Quality inspections 41,000 Required: 1. (@) Determine the amount of overhead that would be allocated to the proposed job if direct labor hours is used as the volume-based cost driver. (b) Determine the total cost of the proposed job.pataGhapten 0 (©) Determine the company’s bid if the bid is based on ful manufacturing cost plus 20 percent t would be applied to the proposed (a) Determine the amount of overhead the project if activity-based cost drivers are used (b) Determine the total cost of the proposed job if used, (©) Determine the company’s bid if activ is based on full manufacturing cost plus 20 percent activity-based costing is ity-based costing is used and the bid V. Multiple Choice 10 are based on the following information Annual Sales in Units Wonders uses @ traditional volume-based costing system in applying factory overhead using direct labor pesos. The unit prime costs of each product were as follows: Starry Polka P38.00 P25.40 Direct materials Direct labor: 1.2 x P14.60 = 52 0.9 x P14,60 = 13.14 ‘The predetermined overhead rate was 350% (P1,349,040 = 385,440). Direct labor budget per annual sales: Starry radio 10,000 x P17.52 P175,200 Polka radio 16,000 x PI3.14 0 Total __P385,440_ —e Factory overhead: Engineering, P Crliy Control 269.808 Machinery 539.616 Miscellaneous Overhead 134.904 Total PL34Systems Design: Activity-Based Costing and Management _ 325 Wonders’ controller had been re ; ching activity-based costing and decided to switch to it, A’ special study determined Wonders’ two radio models were responsible for the following proportions of each cost driver: Starry Polka Engineering and Design 40% 60% Quality Control 45% 55% Machinery 60% 40% Miscellaneous Overhead 35% 65% 1, Using traditional costing, applied factory overhead per unit for the Starry model is calculated to be: a. P61.32. c, P43.42. b. POS.43 d, P45.99. Polka model is calculated to be: Using traditional costing. applied factory overhead per unit for the a. c. P4342. b. d. P45,99. 3. Using, activity-based costing, applied factory overhead per unit for the Starry model, based on Engineering and Design, is calculated to be: a. P32.38 c. P1619 b. P1214. d. 4.72, 4, model, based on Quality Control, is calculated to be: Using activity- based costing, applied factory overhead per unit for the a, P32.38 c. P16.19, b. P12.14. d. P 4,72. 5. Starry model, based on Machinery, is calculated to be: Using activity-based costing, applied factory overhead per unit for the a. P32.38. c. P1619, b. P 4.72. d. P1214, 6. Using activity-based costing, applied factory overhead per unit for the Starry model, based on Miscellaneous Overhead, is calculated to be: a, P32.38. c. P1619, b. P1214. d. P 4,72.326 Chapter 10 7. Using activity-based costing, applied factory overhead per unit for the Polka model, based on Engineering and Design, is calculated to be: a. PIS.18. c. P 5.48. & Pyar d. P13.49. 8. Using activity-based costing, applied factory overhead per unit for the Polka model, based on Quality Control, is calculated to be: a. PIS.18 c. P 5.48. b. P.9.27. d. P13.49, 9. Using activity-based costing, applied factory overhead per unit for the Polka model, based on Machinery, is calculated to be: a. PIS.18. c. P 5.48. b. P9.27. d. P13.49. 10. Using activity-based costing, applied factory overhead per unit for the Starry model, based on Miscellaneous Overhead, is calculated to be: a. P15.18. c. P5S.48. b. P 9.27. d. P13.49. Items 11 through 14 are based on the following information. Shine Co. manufactures laser printers. It has outlined the following overhead cost drivers: Budgeted Budgeted Overhead Overhead Level for Cost — Overhead Cost Pool _ _Cost Driver Cost Driver Rate Quality Inspections a control P 64,800 1,080 P 60 Machine Repetitions repetitions 132,000 1,100 120 Accounts Invoices receivable 900 30 30 Other Direct labor overhead hours cost 48,000 4,000 2 Shine Co. had an order for 700 laser printers. Following is a list of production requirements for the order: Number of inspections 175 Number of repetitions 180 Number of invoices processed 5 Direct labor hours 650. Using activity-based costing, applied Systems Design: Activity-Based Costing and Management _327 tory overhead for the 700 laser printer order based on the number of inspections is calculated to be a. P7,800. ereg b. P10,500. d. P21,600 . Using activity-based costing, applied factory overhead for the 700 laser printer order based on the number of repetitions is calculated to be: a. P7,800. c. P 150. b. P10,500. d. P21,600. . Using activity-based costing, applied factory overhead for the 700 laser printer order based on the number of invoices is calculated to be: a. P 7,800. c. P 150. b. P10,500. d. P21,600. . Using activity-based costing, applied factory overhead for the 700 laser printer order based on direct labor hours is calculated to be: a. P 7,800. c, P 150. b. P10,500. : d. P21,600.