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 $825 $1,125
Raw Materials (per 1,000 gallons) ..................... 800 500 600
150 a
Overhead ........................................................... 165 b 225 c
Total cost (per 1,000 gallons) ............................
$1,700 $1,490 $1,950
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
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 Vanilla Chocolate

Direct Labor (per 1,000 gallons) ........................
$750 $825 $1,125
Raw Materials (per 1,000 gallons) ..................... 800 500 600
210 a
Overhead ........................................................... 231 b 99 c
Total cost (per 1,000 gallons) ............................
$1,760 $1,556 $1,824
a$210 = 50 machine-hours x $4.20 per machine-hour
b$231 = 55 machine-hours x $4.20 per machine-hour
c$99 = 75 labor-hours x $1.32 per labor-hour

d. Charlene was correct in her belief that she was being allocated some of Department
SV’s 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 $ 900,000
Setting up machine (@$900/setup-hour)a ............... 27,000 270,000
Handling material (@$3,000/run) ............................ 24,000 120,000
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
a75% of the amounts in Exhibit 9.16. ($27,000 = .75  $36,000; $270,000 = .75 
$360,000)
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 machine-
hours.
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 ABC’s 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.) Activity-Based Costing: Cathy’s Catering.
a. & b.
a. b.
Activities Afternoon Formal
Picnic Dinner
Advertising (parties) ............................... $ 80 $ 80
Planning (parties) ................................... 60 100
Equipment rental (parties, guests) ......... 200 a 380 b
Insurance (parties) ................................. 160 320
Server cost (parties) ............................... 160 c 240 d
Food (guests) ......................................... 320 e 480 f
Total .......................................................... $980 $1,600
a $200 = $40 + ($8 x 20 guests).
b $380 = $60 + ($16 x 20 guests).
c $160 = $40 x 4 servers.
d $240 = $60 x 4 servers.
e $320 = $16 x 20 guests.
f $480 = $24 x 20 guests.

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.) Activity-Based versus Traditional Costing: Rodent Corporation.
a. Rate Wired Wireless Total
Direct labora .......................................................
$261,000 $ 99,000 $360,000
Direct materialsb ................................................
$187,500 $ 171,000 $358,500
Overhead costs
$6,000 c $ 120,000 f
Prod. runs ....................................................... $ 30,000 $ 150,000
9,000 d 54,000 g
Quality tests .................................................... 81,000 135,000
600 e 30,000 h
Ship. orders .................................................... 15,000 45,000
Total overhead ...............................................
$ 204,000 $ 126,000 $330,000
Total costs..........................................................
$652,500 $396,000 $1,048,500
$4.08 i
Total unit cost..................................................... $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 Wireless Total

Direct labora .......................................................
$261,000 $ 99,000 $360,000
b
Direct materials ................................................
187,500 171,000 358,500
c d
Total overhead ...................................................
$.917 239,250 90,750 330,000
Total costs..........................................................
$687,750 $360,750 $1,048,500
$4.30 e
Total unit cost..................................................... $7.22
aData given in the first table in the exercise
bData given in the first table in the exercise
c91.7% = $330,000 total overhead ÷ $360,000 total direct labor
d$239,250 = $261,000  .9166667
e$4.30 = $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.) Activity-Based versus Traditional Costing: Doaktown Products.
a. Rate M-008 M-123 Total
Direct materialsa ................................................
$100,000 $ 80,000 $180,000
Direct laborb .......................................................
$ 100,000 $ 40,000 $140,000
Overhead costs
$ 15 c $ 75,000 f
Machine-hours ................................................ $ 45,000 $ 120,000
3,500 d 35,000 g
Production runs .............................................. 35,000 70,000
1,500 e 30,000 h
Inspections ..................................................... 60,000 90,000
Total overhead ...............................................
$ 140,000 $ 140,000 $280,000
Total costs..........................................................
$340,000 $260,000 $600,000
$28.33 i
Total unit cost..................................................... $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 = $340,000 total costs for M-008 ÷ 12,000 units produced (rounded).
j$130 = $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 M-123 Total

Direct materialsa ................................................
$100,000 $ 80,000 $180,000
b
Direct labor .......................................................
100,000 40,000 140,000
c d
Total overhead ...................................................
200% 200,000 80,000 280,000
Total costs..........................................................
$400,000 $200,000 $600,000
$33.33 e
Total unit cost..................................................... $100.00
aData given in the first table in the exercise
bData given in the first table in the exercise
c200% = $280,000 total overhead ÷ $140,000 total direct labor
d$200,000 = $100,000  2.0
e$33.33 = $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 M-
123.
9-27. (30 min.) Activity-Based Costing in a Service Environment: We-Clean, Inc.
Note: Answers may vary slightly due to rounding.

a. Commercial Residential Total

Revenuea...........................................................
$378,000 $910,000 $1,288,000
b
Direct Labor .....................................................
210,000 390,000 600,000
c
Overhead .........................................................
43,400 80,600 124,000
Profit ..................................................................
$ 124,600 $439,400 $ 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 Total

Revenue ............................................................
$378,000 $910,000 $1,288,000
Direct Labor .......................................................
210,000 390,000 600,000
Overhead
$250.00 a $ 4,250 b
Traveling ........................................................ $ 11,750 c $ 16,000
6.00 d 22,500 e
Equipment ...................................................... 13,500 f 36,000
0.36 g 46,800 h
Supplies ......................................................... 25,200 i 72,000
Total Overhead ..................................................
$ 73,550 $ 50,450 $ 124,000
Profit ..................................................................
$ 94,450 $469,550 $ 564,000
a $250 per client = $16,000 ÷ 64 clients served.
b $4,250 = 17 clients x $250 per client.
c $11,750 = 47 clients x $250 per client.
d $6.00 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 per square yard = $72,000/200,000 square yards.
h $46,800 = 130,000 square yards x $0.36 per square yard.
i $25,200 = 70,000 square yards x $0.36 per square yard.
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: Isadore’s
Implements.

a. Cost Driver Rate Pencils Pens

$1,600 a
Setting up........................................................... $32,000 d $ 48,000
2,400 b
Inspecting .......................................................... 9,600 e 14,400
0.40 c
Packaging and Shipping .................................... 18,000 f 30,000
Total Overhead .................................................. $59,600 $92,400
a $1,600 per setup = $80,000 ÷ 50 setups.
b $2,400 per part = $24,000 ÷ 10 parts.
c $0.40 per unit shipped = $48,000 ÷ 120,000 boxes shipped.
d $32,000 = $1,600 x 20 setups.
e $9,600 = $2,400 x 4 parts.
f $18,000 = $0.40 x 45,000 boxes shipped.

b. Pencils Pens Total

4,500 a
Direct Labor Hours .............................................
15,000 19,500
$35,077 b
Overhead ...........................................................
$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 Costing—Ethical Issues:
Windy City Coaching.
a. Teen Executive
Account Rate Counseling Coaching Total
Revenue ............................................................
$66,000 $135,000 $201,000
Expenses:
$4,000 a
Administrative support .................................... 24,000 d 16,000 40,000
144 b
Transportation ................................................ 14,400 e 21,600 36,000
12.50 c
Equipment. .....................................................11,250 f 8,750 20,000
Profit ..................................................................
$ 16,350 $88,650 $105,000

a $4,000 per client = $40,000 ÷ 10 clients.

b $144 per visit = $36,000 ÷ 250 visits.
c $12.50 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.

b. Teen Executive
Account Rate Counseling Coaching Total
Revenue.............................................................
$66,000 $135,000 $201,000
$143.2836 a
Expenses ...........................................................31,522 b 64,478 96,000
Profit...................................................................
$34,478 $ 70,522 $105,000
a
$201,000 revenue ÷ $300 per hour = 670 hours of labor
$143.2836 per labor hour = $96,000 of expenses ÷ 670 hours.
b
$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 Wendy’s 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 Costing—Cost 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 Costing—Cost 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 $27,500 c $137,500
a $1,100 per employee = $137,500 Personnel cost ÷ 125 average employees.
b $110,000 = $1,100 x 100 employees for LaidBack.
c $27,500 = $1,100 per employee x 25 employees for StressedOut

b. Rate LaidBack StressOut Total

Employee maintenancea ....................................
$6,000 $30,000 b $ 90,000 c $120,000
Payrolld ..............................................................
$140 14,000 e 3,500 f 17,500
Total allocated costs ..........................................
$44,000 $93,500 $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 = $140  100 employees (average).
f $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: John’s
Custom Computer Shop.
a. Rate Personal Business Total
Allocated costsa .................................................
$84 $50,400 b $33,600 c $84,000
a $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 Business Total

Billinga ................................................................
$48 $28,800 b $19,200 c $48,000
Dispute resolutiond.............................................
$500 30,000 e 6,000 f 36,000
Total allocated costs ..........................................
$58,800 $25,200 $84,000
a $48 = $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 = $500  60 disputes.
f $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.