Cost Accounting “ACCT 3120”

Midterm Revision [Part 2] – Model Answer

Week Five – Activity Based Costing

Question [1]: Choose the correct answers and show your calculations:
1. If products are different, then for costing purposes _________________.
a. An ABC costing system will yield more accurate cost numbers
b. A simple costing system will yield more accurate cost numbers
c. A single indirect cost rate should be used
d. None of the above
2. Over-costing a particular product may result in __________.
a. Loss of market share
b. Pricing the product too low
c. Operating efficiencies
d. Understanding total product cos
3. Misleading cost numbers are most likely the result of misallocating ______________.
a. Direct material costs
b. Direct manufacturing labor costs
c. Indirect costs
d. All these answers are correct
4. ABC systems ___________.
a. Highlight the different levels of activities
b. Limit cost drivers to unit of output
c. Allocate costs based on the overall level of activity
d. Generally under cost complex products
6. Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of
inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is
40,000. What is the budgeted indirect cost allocation rate for this activity?
a. $0.50
b. $1.00
c. $1.50
d. $2.00
Steps:
 Rate = Budgeted MOH/ Allocation Base
 Rate = 80,000/ 40,000 = $2
5. The most likely example of a batch-level cost is _______________.
a. Utility cost
b. Setup cost
c. Machine repairs
d. Product designing costs
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 Cost Accounting “ACCT 3120”

Question [2]: Radhika’s Radiology Centre (RRC) performs X-rays, ultrasounds, CT scans, and
MRIs. RRC has developed a reputation as a top radiology center in the area. RRC has
achieved this status because it constantly re-examines its processes and procedures. RRC
has been using a single, facility-wide overhead allocation rate. The VP of Finance believes
that RRC can make better process improvements if it uses more disaggregated cost
information. She says, “We have state-of-the-art medical imaging technology. Can’t we
have state-of-the-art accounting technology?”
The following budgeted information is available:
Radhika’s Radiology Centre
Budgeted Information
For the Year Ended May 30
X-Ray Ultrasound CT scan MRI Total
Technician Hour $61,440 $105,600 $96,000 $105,000 $368,040
Depreciation 32,240 268,000 439,000 897,500 1,636,740
Materials 22,080 16,500 24,000 31,250 93,830
Administration 20,610
Maintenance 247,320
Sanitation 196,180
Utilities 134,350
Totals $115,760 $390,100 $559,000 $1,033,750 $2,697,070
Number of procedures 3,840 4,400 3,000 2,500
Cleaning Minutes 19,200 22,000 45,000 87,500
Procedure Minutes 19,200 66,000 60,000 112,500

RRC operates at capacity. The proposed allocation bases for overhead are as follows:

Administration Number of procedures

Maintenance (including parts) Capital cost of equipment (depreciation)
Sanitation Total cleaning minutes
Utilities Total procedure minutes

Required:
1. Calculate the budgeted cost per service for X-rays, ultrasounds, CT scans, & MRIs using
the traditional costing system where the direct technician labor is the allocation base.
2. Calculate the budgeted cost per service for x-rays, ultrasounds, CT scans, & MRIs
allocated overhead costs using ABC.

Solution [1]: Traditional Costing System:

 Step [1]: Calculate the Allocation Rate:

Allocated MOH Rate = All budgeted Indirect Costs/ Budgeted Allocation Base = $ X / allocation base
Allocation Base -----> direct technician labor
Total Overhead Cost = 20,610 + 247,320 + 196,000 + 134,350 = 598,460
Allocated MOH Rate = 598,460/ 368,040 = $1.626/ DL
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 Cost Accounting “ACCT 3120”

 Step [2]: Allocation of the Manufacturing Overhead:

X-Ray Ultrasound CT scan MRI Total

$99,901 $171,706 $156,096 $170,730

Overhead Costs $598,433
[1.626 X 61,440] [1.626 X 105,600] [1.626 X 96,000] [1.626 X 105,00]

 Step [3]: Cost per service calculations:

X-Ray Ultrasound CT scan MRI Total

Technician Hour $61,440 $105,600 $96,000 $105,000 $368,040

Depreciation 32,240 268,000 439,000 897,500 1,636740

Materials 22,080 16,500 24,000 31,250 93,830

Allocated Overhead 99,901 171,706 156,096 170,730 20,610

Total Budgeted Costs $215,661 $561,806 $715,096 $1,204,480 $2,697,043

Number of Procedures 3,840 4,400 3,000 2,500

Cost per Service $56.16 $127.68 $238.37 $481.79

Solution [2]: ABC Costing System:

 Step [1]: Calculate the Allocation Rate:

Allocated MOH Rate = All budgeted Indirect Costs/ Budgeted Allocation Base = $ X / allocation base

Administration Maintenance Sanitation Utilities

Total procedure
Allocation Base Number of procedures Depreciation Total cleaning minutes
minutes

134,350/ 257,700*** =
20,610/ 13,740* = $1.5/ 247,320/ 1,636740 = 196,180/ 173,700** =
Allocated MOH Rate 0.52/ Procedure
Procedure $0.15/ Depreciation 1.13/ cleaning minute
minute

*Total Number of Procedures = 3,840 + 4,400 + 3,000 + 2,500 = 13,740

**Total cleaning minutes = 19,200 + 22,000 + 45,000 + 87,500 = 173,700
***Total Procedure minutes = 19,200 + 66,000 + 60,000 + 112,500 = 257,700

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 Cost Accounting “ACCT 3120”

 Step [2]: Allocation of the Manufacturing Overhead:

X-Ray Ultrasound CT scan MRI Total

$5,760 $6,600 $4,500 $3,750

Administration $20,610
[1.5 X 3,840] [1.5 X 4,400] [1.5 X 3,000] [1.5 X 2,500]

$4,872 $40,496 $66,355 $135,617

Maintenance $247,320
[0.15 X 32,240] [0.15 X 268,000] [0.15 X 439,000] [0.15 X 897,500]

$21,685 $24,847 $50,824 $98,824

Sanitation $196,180
[1.13 X 19,200] [1.13 X 22,000] [1.13 X 45,000] [1.13 X 87,500]

$10,010 $34,408 $31,280 $58,651

Utilities $134,350
[0.52 X 19,200] [0.52 X 66,000] [0.52 X 60,000] [0.52 X 112,500]

Total Overhead $42,327 $106,351 $152,959 $296,842 $598,479

 Step [3]: Cost per service calculations:

X-Ray Ultrasound CT scan MRI Total

Technician Hour $61,440 $105,600 $96,000 $105,000 $368,040

Depreciation 32,240 268,000 439,000 897,500 1,636740

Materials 22,080 16,500 24,000 31,250 93,830

Allocated Overhead 42,327 106,351 152,959 296,842 598,479

Total Budgeted Costs $158,087 $496,451 $711,939 $1,330,592 $2,697,070

Number of Procedures 3,840 4,400 3,000 2,500

Cost per Service $41.17 $112.83 $237.31 $532.24

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