Chapter 3 Handout Homework Problems (answers on class website)

True/False Questions 1. When a company changes from a traditional costing system to an activity-based costing system, the unit product costs of low volume products typically decrease more than the unit product costs of high volume products increase. 2. Under activity-based costing, the flow of costs through the inventory and other accounts and the journal entries to record this flow are the same as under traditional costing except that under activity-based costing several predetermined overhead rates are used rather than just one. Multiple Choice Questions 3. When applying overhead to products in an activity-based costing system: A) Cash is debited (increased) and Manuf. Overhead is credited (decreased). B) Manuf. Overhead is debited (increased) and Cash is credited (decreased). C) Manuf. Overhead is debited (increased) and Work In Process is credited (decreased). D) Work In Process is debited (increased) and Manuf. Overhead is credited (decreased). 4. Angela Company uses activity-based costing to compute product costs for external reports. The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and activities for the current year are presented below for the three activity cost pools: Estimated Overhead Cost $21,753 $23,475 $38,519 Expected Activity 900 2,500 1,300

Activity 1......... Activity 2......... Activity 3.........

Actual activity for the current year was as follows: Activity 1......... Activity 2......... Activity 3......... Actual Activity 895 2,495 1,340

The amount of overhead applied for Activity 3 during the year was closest to: A) $38,519.00. B) $39,704.20. C) $38,564.00.

D) $23,876.80. 5. 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: Expected Activity Product Product Activity Cost Pool Estimated Cost A 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.

6. Khalika 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: Expected Activity Product Product Activity Cost Pool Estimated Cost A B Total Activity 1.................. $16,800 100 700 800 Activity 2.................. $22,000 200 800 1,000 Activity 3.................. $34,300 500 600 1,100 The activity rate under the activity-based costing system for Activity 3 is closest to: A) $31.18. B) $25.21. C) $57.17. D) $66.45.

7. Lindsey Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 5,000 units and of Product B is 2,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows: Expected Activity Product Product Activity Cost Pool Estimated Cost A B Total Activity 1.................. $24,000 200 800 1,000 Activity 2.................. $36,900 750 150 900 Activity 3.................. $63,000 1,000 800 1,800 The overhead cost per unit of Product A under activity-based costing is closest to:

A) $14.11. B) $13.77. C) $7.00. D) $17.70. 8. Pat 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 2,000 units. There are three activity cost pools, with estimated total cost and expected activity as follows: Expected Activity Product Product Activity Cost Pool Estimated Cost A B Total Activity 1.................. $12,000 750 250 1,000 Activity 2.................. $16,000 400 100 500 Activity 3.................. $36,000 2,000 1,000 3,000 The overhead cost per unit of Product B under activity-based costing is closest to: A) $10.67. B) $6.40. C) $6.00. D) $9.10.

Use the following to answer questions 9-12: Adams Company has two products: A and B. The annual production and sales of Product A is 500 units and of Product B is 900 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 0.5 direct labor-hours per unit. The total estimated overhead for next period is $67,522. 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: Estimate d Overhea d

Activity Cost Pool Activity 1................. Activity 2................. General Factory....... Total........................

Expected Activity Product Costs Product A B Total $ 6,915 300 200 500 24,948 2,100 700 2,800 35,659 200 450 650 $67,522

(Note: The General Factory activity cost pool's costs are allocated on the basis of direct laborhours.)

9. The predetermined overhead rate under the traditional costing system is closest to: A) $103.88. B) $13.83. C) $54.86. D) $8.91. 10. The overhead cost per unit of Product A under the traditional costing system is closest to: A) $21.94. B) $3.56. C) $5.53. D) $41.55. 11. The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activitybased costing system is closest to: A) $23.05. B) $13.83. C) $34.58. D) $135.04. 12. The overhead cost per unit of Product A under the activity-based costing system is closest to: A) $67.66. B) $21.94. C) $48.23. D) $41.55.

Essay Questions 13. Swagg Jewelry Corporation manufactures custom jewelry. In the past, Swagg has been using a traditional overhead allocation system based solely on direct labor-hours. Sensing that this system was distorting costs and selling prices, Swagg has decided to switch to an activity-based costing system using three activity cost pools. Information on these activity cost pools are as follows: Activity Cost Pool Activity Measure Labor Related............ Direct labor-hours Machine Related....... Machine hours Quality Control......... Number of inspections Estimated Activity 8,000 12,500 800 Estimated Overhead Cost $40,000 $50,000 $12,000

Job #309 incurred $900 of direct material, 30 hours of direct labor at $40 per hour, 80 machine hours, and 5 inspections.

Required: a. What is the cost of the job under the activity-based costing system? b. Relative to the activity-based costing system, would Job #309 have been overcosted or undercosted under the traditional system and by how much? Answers 1. False 2. True 3. D 4. B 5. B 6. A 7. A 8. D 9. A 10. D 11. B 12. A 13. Answer: a. LR = $40,000/8,000 = $5/DLH MR = $50,000/12,500 = $4/MH QC = $12,000/800 = $15/inspection $900 + ($40 30) + ($5 30) + ($4 80) + ($15 5) = $2,645 b. Undercosted by $162.50. Total OH = $40,000 + $50,000 + $12,000 = $102,000; Traditional Overhead Rate = $102,000/8,000 = $12.75/DLH Traditional Overhead Allocated to Job #309 = $12.75 30 = $382.50; Activity-based Overhead Allocate to Job #309 = $150 + $320 + $75 = $545 Difference = $545 - $382.50 = $162.50 Therefore, Traditional costing would have undercosted Job #309 relative to Activity-based costing.