6 Acct2112 Week 6 Tute Qns ABC s2 2023

ACCT2112 Week 6 Tutorial Questions ABC S2 2023
Question 1
The job costing system at Alpha Company has five indirect-cost pools (purchasing, material
handling, machine maintenance, product inspection, and packaging). The company is in the
process of bidding on two jobs: Job 111, an order of 15 intricate personalized frames, and Job
222, an order of 6 standard personalized frames. The controller wants you to compare
overhead allocated under the current simple job-costing system and a newly designed
activity-based job-costing system. Total budgeted costs in each indirect-cost pool and the
budgeted quantity of activity driver are as follows:
Budgeted Activity Driver Budgeted Quantity of

Overhead Activity Driver
Purchasing $35,000 Purchase orders processed 2,000
Material handling 43,750 Material moves 5,000
Machine maintenance 118,650 Machine-hours 10,500
Product inspection 9,450 Inspections 1,200
Packaging 19,950 Units produced 3,800
$226,800
Information related to Job 111 and Job 222 follows. Job 111 incurs more batch-level costs
because it uses more types of materials that need to be purchased, moved, and inspected
relative to Job 222.
Job 111 Job 222
Number of purchase orders 25 8
Number of materials moves 10 4
Machine-hours 40 60
Number of inspections 9 3
Units produced 15 6
Required:
a. Compute the total overhead allocated to each job under a simple costing system, where
overhead is allocated based on machine-hours.
b. Compute the total overhead allocated to each job under an activity-based costing (ABC)
system using the appropriate activity drivers.
c. Explain why Alpha Company might favour the ABC job-costing system over the simple
job-costing system, especially in its bidding process.
1
Question 2
Alpha Company produces mathematical and financial calculators and operates at capacity.
Data related to the two products are presented here:
Mathematica
Financial
l
Annual production in units 60,000 120,000
Direct material costs $240,000 $480,000
Direct manufacturing labour costs $75,000 $150,000
Direct manufacturing labour-hours 5,000 10,000

Machine-hours 40,000 80,000
Number of production runs 60 60
Inspection hours 1,500 750
Total manufacturing overhead costs are as follows:

Total
Machining costs $720,000
Setup costs 150,000
Inspection costs 135,000
Required:
a. Choose a cost driver for each overhead cost pool and calculate the manufacturing
overhead cost per unit for each product.
b. Compute the manufacturing cost per unit for each product.
c. How might Alpha’s managers use the new cost information from its activity-based
costing system to better manage its business?
2
Question 3
Automotive Products (AP) designs and produces automotive parts. In 2022, actual variable
manufacturing overhead is $308,600. AP’s simple costing system allocates variable
manufacturing overhead to its three customers based on machine-hours and prices its
contracts based on full costs. One of its customers has regularly complained of being charged
noncompetitive prices, so AP’s controller Devon Smith realizes that it is time to examine the
consumption of overhead resources more closely. He knows that there are three main
departments that consume overhead resources: design, production, and engineering.
Interviews with the department personnel and examination of time records yield the
following detailed information:
Usage of Cost Drivers by

Customer Contract
Manufacturing
Overhead in United Holden Leland
Department Cost Driver
2021 Motors Motors Auto
Design CAD-design hours $ 39,000 110 200 80
Production Engineering hours $ 29,600 70 60 240
Engineering Machine hours $240,000 120 2,800 1,080
Total $308,600
Required:
a. Compute the manufacturing overhead allocated to each customer in 2022 using the
simple costing system that uses machine-hours as the allocation base.
b. Compute the manufacturing overhead allocated to each customer in 2022 using
department-based manufacturing overhead rates.
c. Comment on your answers in requirements a and b. Which customer do you think was
complaining about being overcharged in the simple system? If the new department-
based rates are used to price contracts, which customer(s) will be unhappy? How
would you respond to these concerns?
d. How else might AP use the information available from its department-by-department
analysis of manufacturing overhead costs?
e. AP’s managers are wondering if they should further refine the department-by-
department costing system into an ABC system by identifying different activities
within each department. Under what conditions would it not be worthwhile to further
refine the department costing system into an ABC system?
3
Question 4 (Additional practice question for students)
Beta Company is an architectural firm that designs and builds buildings. It prices each job on
a cost plus 20% basis. Overhead costs in 2022 are $4,011,780. Beta’s simple costing system
allocates overhead costs to its jobs based on number of jobs. There were three jobs in 2022.
One customer, Petz, has complained that the cost of its building in Perth was not competitive.
As a result, the controller has initiated a detailed review of the overhead allocation to
determine if overhead costs are charged to jobs in proportion to consumption of overhead
resources by jobs. She gathers the following information:
Department Cost driver Overhead Quantity of cost drivers

costs in 2022 used by:
Petz Betz Cetz
Design Design of department hours $1,500,000 1,000 5,000 4,000
Engineering Number of engineering hours $ 500,030 2,000 2,000 2,200
Construction Labour hours $2,011,750 20,800 21,500 19,600
$4,011,780
Required:
a. Compute the overhead allocated to each project in 2022 using the simple costing system.
b. Compute the overhead allocated to each project in 2022 using department overhead cost
rates.
c. Do you think Petz had a valid reason for dissatisfaction with the cost? How does the
allocation, based on department rates, change costs for each project?
d. What value, if any, would Beta get by allocating costs of each department based on the
activities done in that department?

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ACCT2112 Week 6 Tutorial Questions ABC S2 2023

Budgeted Activity Driver Budgeted Quantity of

Direct manufacturing labour-hours 5,000 10,000

Total manufacturing overhead costs are as follows:

Usage of Cost Drivers by

Department Cost driver Overhead Quantity of cost drivers

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