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9

Activity-Based Costing

Solutions to Review Questions


9-1.
Common allocation bases are direct labor-hours, direct labor costs, and machine-hours.
Somewhat less common is direct material costs.
9-2.
False. Department allocation is a two-stage process, so the first-stage assignment of
costs and the choice of cost drivers affects the allocation of costs to products. The total
product costs are the same under either approach, but the individual product costs
differ. This can affect the decisions managers make regarding individual products.
9-3.
Most companies produce multiple products and simply adding them up does not
account for differences in complexity of the use of resources. As an extreme example,
suppose a company produced airplanes and staplers. Allocating overhead on the basis
of units would assign the same overhead cost to a stapler and a plane.
9-4.
The costs include the systems and the software, but the most important cost is
managers time. Managers need to make many decisions about the activities and the
cost drivers and managers need to make many of the first-stage allocations. The
benefits come from having better information about the use of resources and better
information for decisions.
9-5.
1.

Identify activities that consume resources.

2.

Identify the cost driver associated with each activity.

3.
Compute a cost rate per activity unit (e.g., rate per setup, rate per part, rate per
machine-hour).
4.
Allocate costs to products by multiplying the activity rate times the volume of
activity consumed by the product.

False. While the total cost allocated is the same, the reported costs for individual
products will differ. Because managers make decisions at the product level, it is
important that the reported costs reflect, to the extent possible, the use of resources by
the products.
9-7.
Activity-based costing will benefit most companies with high overhead costs and diverse
products and processes. If there is little overhead or if there is a single product, the
allocation process will not result in significantly different product costs. (Even if there are
only a few, relatively homogeneous products, activity-based costing may be useful for
cost management. See chapter 10 for a discussion.)
9-8.
A personnel department provides its services by completing a set of activities using
resources. In this way, implementing activity-based costing in an administrative function
is the same as implementing it in a manufacturing firm. However, the products and
activities may be much harder to define, making it less like a manufacturing
environment.

Solutions to Critical Analysis and Discussion Questions


9-9.
Direct labor is already measured, so no new data needs to be collected to use it as an
allocation base. In addition, direct labor historically was the most important resource in
manufacturing.
9-10.
Activity-based costing does not change the process for direct costs, so the statement is
false. For indirect cost, it is uncertain, because it depends on the cost drivers used and
the diversity in the processes. For processes that are used in the same way for all
products, the particular allocation process is not that important.
9-11.
False. The services in a business school, as in any service business, require activities
(preparing classrooms, organizing recruiting, etc.). The costs of the business school can
be assigned to these activities and then allocated to services (e.g., degree programs)
using appropriate cost drivers (e.g., number of students, number of classes, number of
faculty, etc.).
9-12.
False. Activity-based costing is most useful when the first-stage allocation is to
activities, not departments. Further, an activity-based costing system also uses cost
drivers that form a hierarchy of costs, as appropriate, whereas most department
allocation costing systems use volume-based cost drivers.
9-13.
There is no rule that the price charged for a product has to exceed its cost. There may
be important marketing or strategic reasons why a company wants to be in a particular
market. However, to ensure that this is a good decision, the firm should have the best
information on cost that it can get. Managing a company by fooling yourself into thinking
something costs less than it does is not smart.
9-14.
Activity-based costing is like any other information system; it has its benefits and its
costs. It is not appropriate in all situations and the benefits may not justify its costs in
others.

9-15.
False. The lesson learned from activity-based costing is that costs are a function not
only of output volume, but also of other factors such as complexity. For example, a
complex multiproduct operation will cost more than a simple single-product operation.
9-16.
False. activity-based costing breaks down the costs into cost pools according to the
activities that cause the costs. While several departments may have the same cost
drivers, each department should individually determine which activities cause their
costs.
9-17.
There are two important characteristics you should look for. Are the first-stage cost
pools activities? Second, do the cost drivers in the second stage form a cost hierarchy
(e.g., volume related, batch related, etc.) or are they all volume-related costs?
9-18.
Without information on the use of overhead resources by products, it is difficult for
managers to make decisions that appropriately account for the use of these resources
by the products. Although the specific allocation base to be used may not be clear,
products that require more handling, perhaps because of toxicity, use more overhead
resources. Allocating no overhead costs to a product is as likely to distort decision
making as allocating costs based on an arbitrary allocation base.
9-19.
Disagree. The cost of implementing activity-based costing for inventory valuation
generally is not worth the small benefits that might be realized. It is most worthwhile
when managers use product cost data to make decisions at the product level.
9-20.
Answers will vary. The function selected will determine the activities, but some
examples of activities are processing payments, processing job applications, checking
backgrounds, processing bills, answering customer questions, and so on. Some
examples of cost drivers are number of payments, number of applications, time spent,
number of questions, and so on. Example cost objects might be departments or
divisions, if the function provides support, or products or services, if the departments
provide service to customer activities.

Solutions to Exercises
9-21. (30 min.) Plantwide versus Department Allocation: Munoz Sporting
Equipment.
Baseball
Tennis
Bats
rackets
a. Revenue ............................................................
$1,350,000
$900,000
Direct Labor .......................................................
250,000
125,000
Direct Materials ..................................................
550,000
275,000
a
Overhead ...........................................................
500,000
250,000 b
Profit ..................................................................
$50,000
$ 250,000
a $500,000

= $250,000 direct labor x 200%.

b $250,000

= $125,000 direct labor x 200%.

b. Maria was wrong; Baseball bats were more profitable.


Baseball
Tennis
Bats
rackets
Revenue ............................................................
$1,350,000
$900,000
Direct Labor .......................................................
250,000
125,000
Direct Materials ..................................................
550,000
275,000
a
Overhead ...........................................................
375,000
375,000 b
Profit ..................................................................
$175,000
$ 125,000
a $375,000

= $250,000 direct labor x 150%.

b $375,000

= $125,000 direct labor x 300%.

c.
The plantwide allocation method allocates overhead at 200% of direct labor for
both types of equipment. While this is the simplest method, it is usually not very
accurate. It assumes that overhead in both departments has the same rate. When
overhead costs are broken down into department cost pools, we see that Department B
is allocated a smaller share of the overhead. Each department should try to assess
what causes its overhead, and use that as its allocation base.

9-22. (35 min.)

Plantwide versus Department Allocation: Main Street Ice Cream.


Strawberry
Vanilla
Chocolate

a. Direct Labor (per 1,000 gallons) ........................


$750
Raw Materials (per 1,000 gallons) .....................
800
Overhead ...........................................................
150 a
Total cost (per 1,000 gallons) ............................
$1,700
a$150

= 50 labor-hours x $3 per hour

b$165

= 55 labor-hours x $3 per hour

c$225

= 75 labor-hours x $3 per hour

$825
500
165 b
$1,490

$1,125
600
225 c
$1,950

b. Department SV has an overhead allocation rate of $4.20 per machine-hour


($105,840 25,200 machine hours). Department C has an overhead allocation rate
of $1.32 per labor-hour ($23,760 18,000 labor-hours).
c.
Strawberry
Direct Labor (per 1,000 gallons) ........................
$750
Raw Materials (per 1,000 gallons) .....................
800
Overhead ...........................................................
210 a
Total cost (per 1,000 gallons) ............................
$1,760
a$210

= 50 machine-hours x $4.20 per machine-hour

b$231

= 55 machine-hours x $4.20 per machine-hour

c$99

Vanilla
$825
500
231 b
$1,556

Chocolate
$1,125
600
99 c
$1,824

= 75 labor-hours x $1.32 per labor-hour

d. Charlene was correct in her belief that she was being allocated some of Department
SVs overhead. Plantwide allocation does not correctly allocate the overhead by
department; it simply uses one allocation rate for all products in all departments.
Under plantwide allocation, 1,000 gallons of chocolate cost $1,950. Once the
overhead was reallocated into department cost pools, the cost of chocolate fell to
$1,824. Although it requires more time and skill to collect and process the
information, department allocation generally yields more accurate product cost
information.

9-23. (30 min.)

Activity-Based Costing: Joplin Industries.

a.
J25P

J40X

Direct material .............................................................. $1,500,000 $2,400,000


Direct labor
Assembly ................................................................. $ 750,000 $ 600,000
Packaging ...............................................................
990,000
360,000
Total direct labor.................................................. $1,740,000
$960,000
Direct costs .................................................................. $3,240,000 $3,360,000
Overhead
Assembly building
Assembling (@ $30/mh) .......................................... $ 180,000 $
Setting up machine (@$900/setup-hour)a ...............
27,000
Handling material (@$3,000/run) ............................
24,000

900,000
270,000
120,000

Packaging building
Inspecting and Packaging (@$5/direct labor-hour) .
300,000
114,000
Shipping (@$1,320/shipment) .................................
132,000
264,000
Total ABC O/H...................................................... $ 663,000 $1,668,000
Total ABC cost ............................................................. $3,903,000 $5,028,000
Number of units ............................................................
100,000
40,000
Unit cost .......................................................................
$39.03
$125.70
75% of the amounts in Exhibit 9.16. ($27,000 = .75 $36,000; $270,000 = .75
$360,000)
a

9-23. (continued)
b. Kris could have made the reductions he planned, but the effect on the product costs
would have been different. The $99,000 reduction in setup costs (25% of $396,000),
would have been spread between the two products based on labor or machinehours.
ABC provides more detailed measures of costs than do plantwide or department
allocation methods. In this case, ABC shows the costs of machining, setting up
equipment, handling materials, inspecting, packaging products, and shipping. The
plantwide and department allocation methods did not reveal any of these detailed
cost drivers. With ABCs more detailed information, management has an opportunity
to manage costs by managing cost drivers. For example, are there less costly ways
to inspect and package products? Or perhaps spending additional resources to
improve quality would more than pay for itself with reduced inspections.
ABC also provides better measures of product costs than plantwide and department
allocation methods, which leads to better decisions about product pricing and
whether to keep or drop products.
ABC requires more record keeping than plantwide or department allocation
methods. ABC also requires more teamwork among accountants, production people,
marketing, and management, which can be both costly and beneficial. In the end,
management must decide whether the benefits of ABC, outlined above, are worth
these costs.

9-24. (30 min.)


a. & b.

Activity-Based Costing: Cathys Catering.

Advertising (parties) ...............................


Planning (parties) ...................................
Equipment rental (parties, guests) .........
Insurance (parties) .................................

a.
Afternoon
Picnic
$ 80
60
200 a
160

b.
Formal
Dinner
$ 80
100
380 b
320

Server cost (parties) ...............................

160 c

240 d

Food (guests) .........................................

320 e

480 f

Activities

Total ..........................................................
a

$200 = $40 + ($8 x 20 guests).

$380 = $60 + ($16 x 20 guests).

$160 = $40 x 4 servers.

$240 = $60 x 4 servers.

$320 = $16 x 20 guests.

$480 = $24 x 20 guests.

$980

$1,600

c. If Cathy wants to cover her costs she should charge $49 per guest for the picnic
($980 20 guests), and $80.00 per guest for the formal dinner ($1,600 20 guests).

9-25. (35 min.)


a.

Activity-Based versus Traditional Costing: Rodent Corporation.


Rate
Wired
Wireless
Total

Direct labora .......................................................


$261,000
$ 99,000
$360,000
Direct materialsb ................................................
$187,500
$ 171,000
$358,500
Overhead costs
Prod. runs .......................................................
$6,000 c $ 120,000 f
$ 30,000 $ 150,000
Quality tests ....................................................
9,000 d
54,000 g
81,000
135,000
Ship. orders ....................................................
600 e
30,000 h
15,000
45,000
Total overhead ...............................................
$ 204,000
$ 126,000
$330,000
Total costs..........................................................
$652,500
$396,000 $1,048,500
Total unit cost.....................................................
$4.08 i
$7.92 j
aData

given in the first table of the exercise in the text.

bData

given in the first table of the exercise in the text.

c$6,000

per run = $150,000 in production run costs 25 total runs.

d$9,000

per test = $135,000 in quality costs 15 total tests.

e$600

per order = $45,000 in shipping costs 75 processed orders.

f$120,000

= $6,000 per production run x 20 runs for Wired.

g$54,000

= $9,000 per quality test x 6 tests for Wired.

h$30,000

= $600 per order shipped x 50 orders shipped for Wired.

i$4.08

= $652,500 total costs for Wired 160,000 units produced (rounded).

j$7.92

= $396,000 50,000 units produced.

Reading from the table above, we can see that the total overhead assigned is $204,000
and $126,000 for Wired and Wireless, respectively. The total cost per unit is the total
cost per product divided by the total units produced; $4.08 per Wired mouse and $7.92
per Wireless mouse.

9-25. (continued)
b.

Rate

Wired

Direct labora .......................................................


$261,000
b
Direct materials ................................................
187,500
d
c
Total overhead ...................................................
$.917
239,250
Total costs..........................................................
$687,750
Total unit cost.....................................................
$4.30 e
aData

given in the first table in the exercise

bData

given in the first table in the exercise

c91.7%

$ 99,000
171,000
90,750
$360,750
$7.22

Total
$360,000
358,500
330,000
$1,048,500

= $330,000 total overhead $360,000 total direct labor

d$239,250
e$4.30

Wireless

= $261,000 .9166667

= $687,750 160,000 units produced (rounded).

From the table above, total overhead allocated to Wired and Wireless is
$239,250 and $90,750 respectively. The unit cost for Wired and Wireless is $4.30 and
$7.22 respectively.

c. By allocating overhead on the basis of direct labor, Rodent has been understating
the cost to manufacture Wireless mice thereby overstating the profits on the
Wireless model.

9-26. (35 min.)


a.

Activity-Based versus Traditional Costing: Doaktown Products.


Rate
M-008
M-123
Total

Direct materialsa ................................................


$100,000
$ 80,000
$180,000
Direct laborb .......................................................
$ 100,000
$ 40,000
$140,000
Overhead costs
Machine-hours ................................................
$ 15 c $ 75,000 f
$ 45,000 $ 120,000
Production runs ..............................................
3,500 d
35,000 g
35,000
70,000
Inspections .....................................................
1,500 e
30,000 h
60,000
90,000
Total overhead ...............................................
$ 140,000
$ 140,000
$280,000
Total costs..........................................................
$340,000
$260,000
$600,000
Total unit cost.....................................................
$28.33 i
$130.00 j
aData

given in the first table of the exercise in the text.

bData

given in the first table of the exercise in the text.

c$15

per machine-hour = $120,000 in production run costs 8,000 machine-hours.

d$3,500

per run = $70,000 in quality costs 20 total runs.

e$1,500

per inspection = $90,000 in shipping costs 60 inspections.

f$75,000

= $15 per machine-hour x 5,000 machine-hours for M-008.

g$35,000

= $3,500 per run x 10 runs for M-008.

h$30,000

= $1,500 per inspection x 20 inspections for M-008.

i$28.33
j$130

= $340,000 total costs for M-008 12,000 units produced (rounded).

= $260,000 2,000 units produced.

Reading from the table above, we can see that the total overhead assigned is $140,000
for both M-008 and M-123. The total cost per unit is the total cost per product divided by
the total units produced; $28.33 per M-008 and $130 per M-123.

9-26. (continued)
b.

Rate

M-008

Direct materialsa ................................................


$100,000
b
Direct labor .......................................................
100,000
d
c
Total overhead ...................................................
200%
200,000
Total costs..........................................................
$400,000
Total unit cost.....................................................
$33.33 e
aData

given in the first table in the exercise

bData

given in the first table in the exercise

c200%

M-123
$ 80,000
40,000
80,000
$200,000
$100.00

Total
$180,000
140,000
280,000
$600,000

= $280,000 total overhead $140,000 total direct labor

d$200,000
e$33.33

= $100,000 2.0

= $400,000 12,000 units produced (rounded).

From the table above, total overhead allocated to M-008 and M-123 is $200,000
and $80,000 respectively. The unit cost for M-008 and M-123 is $33.33 and $100.00
respectively.

c. By allocating overhead on the basis of direct labor, Doaktown Products has been
understating the cost to manufacture M-123 thereby overstating the profits on M123.

9-27. (30 min.)

Activity-Based Costing in a Service Environment: We-Clean, Inc.

Note: Answers may vary slightly due to rounding.


a.

Commercial
Revenuea...........................................................
$378,000
b
Direct Labor .....................................................
210,000
c
Overhead .........................................................
43,400
Profit ..................................................................
$ 124,600

Residential

Total

$910,000
390,000
80,600
$439,400

$1,288,000
600,000
124,000
$ 564,000

a$378,000

= 14,000 hours x $27 per hour; $910,000 = 26,000 hours x $35 per hour.

b$210,000

= 14,000 hours x $15 per hour; $390,000 = 26,000 hours x $15 per hour.

c$43,400

= ($124,000 40,000 hours) x 14,000 hours;


$80,600 = ($124,000 40,000 hours) x 26,000 hours.

b.

Rate
Commercial
Residential
Revenue ............................................................
$378,000
$910,000
Direct Labor .......................................................
210,000
390,000
Overhead
Traveling ........................................................
$250.00 a
$ 4,250 b
$ 11,750 c
Equipment ......................................................
6.00 d
22,500 e
13,500 f
Supplies .........................................................
0.36 g
46,800 h
25,200 i
Total Overhead ..................................................
$ 73,550
$ 50,450
Profit ..................................................................
$ 94,450
$469,550

a $250

per client = $16,000 64 clients served.

b $4,250

= 17 clients x $250 per client.

c $11,750
d $6.00

= 47 clients x $250 per client.

per hour = $36,000 6,000 equipment hours.

e $22,500

= 3,750 equipment-hours x $6 per equipment-hour.

f $13,500

= 2,250 equipment-hours x $6 per equipment-hour.

g $0.36
h
i

per square yard = $72,000/200,000 square yards.

$46,800 = 130,000 square yards x $0.36 per square yard.


$25,200 = 70,000 square yards x $0.36 per square yard.

Total
$1,288,000
600,000
$

16,000
36,000
72,000
$ 124,000
$ 564,000

9-27. (continued)
c. The recommendation to Ms. Lodge is that she should reconsider dropping
residential services in favor of the commercial business. From the table in part b of
the solution, we can show Ms. Lodge that commercial work has a profit margin of
25%, while the residential business has a profit margin of greater than 50%. We can
explain the differences in profits under the two cost methods by showing Ms. Lodge
that there is little correlation in costs between direct labor and the overhead costs.

9-28. (35 min.) Activity-Based versus Traditional Costing: Isadores


Implements.
a. Cost Driver

Rate

Pencils

Pens

Setting up...........................................................
$1,600 a
$32,000 d
Inspecting ..........................................................
2,400 b
9,600 e
Packaging and Shipping ....................................
0.40 c
18,000 f
Total Overhead .................................................. $59,600
a $1,600

per setup = $80,000 50 setups.

b $2,400

per part = $24,000 10 parts.

c $0.40

$ 48,000
14,400
30,000
$92,400

per unit shipped = $48,000 120,000 boxes shipped.

d $32,000
e $9,600

= $1,600 x 20 setups.

= $2,400 x 4 parts.

f $18,000

b.

= $0.40 x 45,000 boxes shipped.


Pencils

Pens

Total

Direct Labor Hours .............................................


4,500 a
15,000

19,500

Overhead ...........................................................
$35,077 b
$116,923

$ 152,000

a 4,500

hours = 0.1 hours per box of pencils x 45,000 boxes produced.

b $35,077

= ($152,000 OH 19,500 hours) x 4,500 hours (rounded).

c. Not necessarily. Activity-based costing provides a more accurate allocation of


overhead costs. However, the more accurate method is also more expensive. The
ABC system should be adopted if the benefits from improved information exceed the
additional costs required to obtain the information.

9-29. (35 min.) Activity-Based versus Traditional CostingEthical Issues:


Windy City Coaching.
Teen
Executive
a.
Account
Rate
Counseling
Coaching
Total
Revenue ............................................................
$66,000
$135,000 $201,000
Expenses:
Administrative support ....................................
$4,000 a
24,000 d
Transportation ................................................
144 b
14,400 e
Equipment. .....................................................
12.50 c
11,250 f
Profit ..................................................................
$ 16,350
a $4,000
b $144

per client = $40,000 10 clients.


per computer hour = $20,000 1,600 hours.

d $24,000

= $4,000 per client x 6 clients.

e $14,400

= $144 per hour x 100 visits.

f $11,250

= $12.50 per computer hour x 900 hours.


Teen
Counseling

Account
Rate
Revenue.............................................................
$66,000
a
Expenses ...........................................................
$143.2836
31,522 b
Profit...................................................................
$34,478
a

40,000
36,000
20,000
$105,000

per visit = $36,000 250 visits.

c $12.50

b.

16,000
21,600
8,750
$88,650

Executive
Coaching
$135,000
64,478
$ 70,522

Total
$201,000
96,000
$105,000

$201,000 revenue $300 per hour = 670 hours of labor


$143.2836 per labor hour = $96,000 of expenses 670 hours.

$31,522 = $143.28 per labor hour x 220 hours of labor.

c. Under labor-based costing, teen counseling and executive coaching appear equally
profitable (relative to revenues), so Wendy will not emphasize one or the other.
However, using ABC, executive coaching appears to be much more profitable.
d. ABC and traditional costing systems generally yield comparable product-line profits
when overhead is a small portion of costs, or when cost drivers are highly correlated
with the volume-related allocation base. In this case, labor-hours were distributed
32.8% to Teen Counseling and 67.2% to Executive Coaching. If Wendys three cost
drivers were each also distributed 32.8% to Teen Counseling and 67.2% to
Executive Coaching, the labor-hour allocation and ABC would have been identical.

9-29. (continued)
e. Activity-based costing assigns higher costs to teen counseling than the traditional
method does, so using this would increase the chances of receiving the grant. If teen
counseling uses more activities and these activities generate higher costs, there is
nothing unethical about using and reporting ABC costs. Choosing to use ABC simply
to increase the chances of receiving the grant, if there is no reason to believe these
activities actually increase the costs, could be unethical.

9-30. (30 min.) Activity-Based CostingCost Flows Through T-accounts: Delta


Parts, Inc.
Materials Inventory
$300,000
Wages Payable
$150,000
Overhead Applied:
Materials Handling
3,750 pounds x
$18.00 per pound =
$67,500 to WIP

Overhead Applied:
Quality Inspections
750 inspections x
$225 per inspection
= $168,750 to WIP

Overhead Applied:
Machine Setups
40 setups x $2,700
per setup =
$108,000 to WIP

Overhead Applied:
Running Machines
15,000 hours x
$22.50 per hour =
$337,500 to WIP

9-30. (continued)

Work in Process (WIP) Inventory


Fabrication Department
Direct Materials
300,000
Direct Labor
150,000
Material Handling OH
67,500
Quality Inspect. OH
168,750
Machine Setup OH
108,000
Running Machines OH 337,500 1,131,750

Finished Goods Inventory


1,131,750

9-31. (30 min.) Activity-Based CostingCost Flows Through T-accounts:


Carolina Fashions.
Materials Inventory
$200,000 to WIP
Wages Payable
$100,000 to WIP
Overhead Applied:
Materials Handling
40,000 yards x $1
per yard = $40,000
to WIP

Overhead Applied:
Quality Inspections
800 inspections x
$100 per inspection
= $80,000 to WIP

Overhead Applied:
Machine Setups
100 setups x $800
per setup = $80,000
to WIP

Overhead Applied:
Running Machines
20,000 hours x $10
per hour = $200,000
to WIP

9-31. (continued)

Work in Process (WIP) Inventory


Building S
Direct Materials
200,000
Direct Labor
100,000
Material Handling
40,000
Quality Inspect.
80,000
Machine Setup
80,000
Running Machines
200,000 700,000

Finished Goods Inventory


700,000

9-32. (20 min.) Activity-Based Costing for an Administrative Service: LastCall


Enterprises.
a.
Rate
LaidBack
StressedOut
Total
Allocated costsa .................................................
$1,100
$110,000 b
a

$27,500 c

$137,500

$1,100 per employee = $137,500 Personnel cost 125 average employees.

b $110,000
c $27,500

b.

= $1,100 x 100 employees for LaidBack.

= $1,100 per employee x 25 employees for StressedOut


Rate

LaidBack

Employee maintenancea ....................................


$6,000
$30,000 b
Payrolld ..............................................................
$140
14,000 e
Total allocated costs ..........................................
$44,000

StressOut
$ 90,000 c
3,500 f
$93,500

Total
$120,000
17,500
$137,500

a $6,000

= $120,000 Employee maintenance costs 20 employees hired/leaving.

b 30,000

= $6,000 5 employees hired/leaving.

c 90,000

= $6,000 15 employees hired/leaving.

d $140

= $17,500 Payroll costs 125 employees (average).

e $14,000
f

= $140 100 employees (average).

$3,500 = $140 25 employees (average).


Allocating Personnel costs solely on number of employees understates the costs of
employee turnover, which is much higher in StressedOut.

9-33. (20 min.) Activity-Based Costing for an Administrative Service: Johns


Custom Computer Shop.
a.
Rate
Personal
Business
Total
Allocated costsa .................................................
$84
$50,400 b
a

$84,000

$84 per bill = $84,000 Accounts receivable cost 1,000 bills prepared.

b $50,400

= $84 x 600 bills prepared for Personal.

c $33,600

= $84 x 400 bills prepared for Business.

b.

Rate

Personal

Billinga ................................................................
$48
$28,800 b
Dispute resolutiond.............................................
$500
30,000 e
Total allocated costs ..........................................
$58,800
a $48

Business
$19,200 c
6,000 f
$25,200

Total
$48,000
36,000
$84,000

= $48,000 Billing costs 1,000 bills prepared.

b 28,800

= $48 600 bills prepared.

c 19,200

= $48 400 bills prepared.

d $500

= $36,000 Dispute resolution costs 72 disputes.

e $30,000
f

$33,600 c

= $500 60 disputes.

$6,000 = $500 12 disputes.


Allocating Accounts Receivable costs solely on number of bills prepared understates
the costs of billing disputes, which is much higher in Personal.