# 6.E: Activity-Based, Variable, and Absorption Costing (Exercises)

## Multiple Choice

1. Active Frame, Inc., manufactures clear and tinted sport glasses. The manufacturing of clear glasses takes $$45,000$$ direct labor hours and involves $$1,700$$ parts and $$115$$ inspections. The manufacturing of tinted glasses takes $$115,000$$ direct labor hours and involves $$1,400$$ parts and $$450$$ inspections. The traditional method applies $$\560,000$$ of overhead on the basis of direct labor hours. What is the amount of overhead per direct labor hour applied to the clear glass products?
1. $$\933.33$$
2. $$\157,500$$
3. $$\322.500$$
4. $$\402,500$$

b

1. TyeDye Lights makes two products: Party and Holiday. It takes $$80,900$$ direct labor hours to manufacture the Party Line and $$93,500$$ direct labor hours to manufacture the Holiday Line. Overhead consists of $$\225,000$$ in the machine setup cost pool and $$\149,960$$ in the packaging cost pool. The machine setup pool has 52,000 setups for the Party product and $$98,000$$ setups for the Holiday product. The packaging cost pool has $$26,000$$ parts in the Party product and $$39,200$$ parts for the Holiday product. Using the traditional cost method of direct labor hours, what is the predetermined overhead rate?
1. $$\1.50$$ per direct labor hour
2. $$\2.15$$ per direct labor hour
3. $$\2.30$$ per direct labor hour
4. $$\3.80$$ per direct labor hour
2. Which is not a step in analyzing the cost driver for manufacturing overhead?
1. identify the cost
3. analyze the effect on manufacturing overhead
4. identify the correlation between the potential driver and manufacturing overhead

b

1. Overhead costs are assigned to each product based on ________.
1. the proportion of that product’s use of the cost driver
2. a predetermined overhead rate for a single cost driver
3. price of the product
4. machine hours per product
2. Which of the following is a reason a company would implement activity-based costing?
1. The cost of record keeping is high.
2. The additional data obtained through traditional allocation are not worth the cost.
3. They want to improve the data on which decisions are made.
4. A company only has one cost driver.

c

1. Which is the correct formula for computing the overhead rate?
1. estimated use of the cost driver for production/estimated overhead for the activity
2. estimated overhead for the product/estimated use of the cost driver for the activity
3. estimated use of the cost driver for production/estimated overhead for the activity
4. estimated overhead for the activity/estimated use of the cost driver for the activity
2. A company anticipates the cost to heat the building will be $$\21,000$$. Product A takes up $$500$$ square feet of space, while Product B takes up $$200$$ square feet. The activity rate per product using activity-based costing would be which of the following?
1. $$\30$$/square foot
2. $$\4.20$$/square foot
3. $$\11$$/square foot
4. $$\15.20$$/square foot

a

1. A company calculated the predetermined overhead based on an estimated overhead of $$\70,000$$, and the activity for the cost driver was estimated as $$2,500$$ hours. If product A utilized $$1,350$$ hours and product B utilized $$1,100$$ hours, what was the total amount of overhead assigned to the products?
1. $$\35,000$$
2. $$\30,800$$
3. $$\37,800$$
4. $$\68,600$$
2. Which is not a step in activity-based costing?
1. identify the activities performed by the organization
2. identify the cost driver(s) associated with each activity
3. compute a cost rate per production
4. assign costs to products by multiplying the cost driver rate by the volume of the cost driver units consumed by the product

c

1. What is the proper order of tasks in an ABC system?
1. identify the cost drivers, assign the costs to the products, calculate the overhead application rate for each cost pool, identify the cost pools
2. assign the costs to the products, identify the cost drivers, calculate the overhead application rate for each cost pool, identify the cost pools
3. identify the cost drivers, identify the cost pools, calculate the overhead application rate for each cost pool, assign the costs to the products
4. identify the cost pools, identify the cost drivers, calculate the overhead application rate for each cost pool, assign the costs to the products
2. Which is not a task typically associated with ABC systems?
1. calculating the overhead application rate for each cost pool
2. applying a single cost rate
3. identifying a cost driver
4. more correctly allocating overhead costs

b

1. Which statement is correct?
1. Activity-based cost systems are less costly than traditional cost systems.
2. Activity-based cost systems are easier to implement than traditional cost systems.
3. Activity-based cost systems are more accurate than traditional cost systems.
4. Activity-based cost systems provide the same data as traditional cost systems.
2. Activity-based costing systems:
1. use a single predetermined overhead rate based on machine hours instead of on direct labor
2. frequently increase the overhead allocation to at least one product while decreasing the overhead allocation to at least one other product
3. limit the number of cost pools
4. always result in an increase of at least one product’s selling price

b

1. Activity-based costing is preferable in a system:
1. when multiple products have similar product volumes and costs
2. with a large direct labor cost as a percentage of the total product cost
3. with multiple, diverse products
4. where management needs to support an increase in sales price
2. Absorption costing is also referred to as:
1. direct costing
2. marginal costing
3. full costing
4. variable costing

c

1. Under variable costing, a unit of product includes which costs?
1. direct material, direct labor, and manufacturing overhead
2. direct material, direct labor, and variable manufacturing overhead
3. direct material, direct labor, and fixed manufacturing overhead
4. direct material, direct labor, and all variable manufacturing overhead
2. Under absorption costing, a unit of product includes which costs?
1. direct material, direct labor, and manufacturing overhead
2. direct material, direct labor, and variable manufacturing overhead
3. direct material, direct labor, and fixed manufacturing overhead
4. direct material, direct labor, and all variable manufacturing overhead

a

1. A downside to absorption costing is:
1. not including fixed manufacturing overhead in the cost of the product
2. that it is not really useful for managerial decisions
3. that it is not allowable under GAAP
4. that it is not well designed for cost-volume-profit analysis
2. When the number of units in ending inventory increases through the year, which of the following is true?
1. Net income is the same for variable and absorption costing.
2. Net income is higher for variable costing than for absorption costing.
3. Net income is higher for absorption costing than for variable costing.
4. There is no relationship between net income and the costing method.

c

1. Product costs under variable costing are typically:
1. higher than under absorption costing
2. lower than under absorption costing
3. the same as with absorption costing
4. higher than absorption costing when inventory increases

## Questions

1. What is the predetermined overhead rate, and when is it typically estimated?

The predetermined overhead rate is the amount of manufacturing overhead that is estimated to be applied to each product or department depending on the cost system used (job order costing or process costing). It typically is estimated at the beginning of each period by dividing the estimated manufacturing overhead by an activity base. While it is most commonly a year, the period can be a year, quarter, or month as determined by management. In traditional allocation systems, that base is typically direct labor hours, direct labor dollars, or machine hours. In activity-based costing systems, the activity base is one or more cost drivers.

1. When is an activity-based costing system better than a traditional allocation system?

Non-value-added costs can often be eliminated since they are rarely essential, and identifying them helps managers reduce their costs.

1. What conditions are necessary to designate an activity as a cost driver?
2. For each cost pool, identify an appropriate cost driver.
1. order department
2. accounts receivable processing
3. catering
4. raw material inventory

Answers may vary but should be similar to the following:

1. number of orders
2. number of customers
3. number of meals
4. number of material requisitions received.
1. How is the primary focus of activity-based costing different from that of traditional allocation?
2. What are the primary differences between traditional and activity-based costing?

Activity-based costing has multiple cost drivers and focuses on the overhead-related activities performed during manufacturing. Traditional allocation has a single unit-level base for allocating overhead and focuses on the units of production.

1. How are service companies similar or different from manufacturing companies in using ABC costing?
2. How are costs allocated in an ABC system?

Estimated overhead costs are first allocated to activity cost pools. Then, an allocation rate is determined based on the estimated usage of the cost driver for that pool. Then the costs are allocated to each product based on that product’s cost driver usage.

1. In production, what has changed to allow ABC costing to become valuable?
2. Why is it important to know the true cost for a product or service?

The traditional method of applying overhead does not allocate overhead as precisely as with the ABC method. Management relies on the costing information when setting selling prices and bidding on service jobs. If the costing method is not accurate, some products may be considered profitable under traditional allocation, when those products are actually operating at a loss

1. What is the primary difference between variable costing and absorption costing?
2. Why would managers prefer variable costing over absorption costing?

While variable costing is not acceptable for financial reporting purposes, some managers prefer variable costing because they believe fixed costs are period costs and do not change during the period. Variable costing separates variable and fixed manufacturing overhead, and using only variable costs allows them to make decisions based on the more reliable variations in unit costs.

1. Why is absorption costing the method allowable for GAAP?
2. Can a company gather information for both variable and absorption costing systems?

Yes, as long as the system computes the amount of fixed manufacturing overhead per unit. The total amount can be expensed under variable costing and assigned to overhead produced during absorption costing. This will allow a portion to be included in ending inventory for absorption costing and not included for variable costing.

## Exercise Set A

1. Steeler Towel Company estimates its overhead to be $$\250,000$$. It expects to have $$100,000$$ direct labor hours costing $$\2,500,000$$ in labor and utilizing $$12,500$$ machine hours. Calculate the predetermined overhead rate using:
1. Direct labor hours
2. Direct labor dollars
3. Machine hours
2. Crystal Pools estimates overhead will utilize $$250,000$$ machine hours and cost $$\750,000$$. It takes $$2$$ machine hours per unit, direct material cost of $$\14$$ per unit, and direct labor of $$\20$$ per unit. What is the cost of each unit produced?
3. A company estimated $$100,000$$ direct labor hours and $$\800,000$$ in overhead. The actual overhead was $$\805,100$$, and there were $$99,900$$ direct labor hours. What is the predetermined overhead rate, and how much was applied during the year?
4. Cozy, Inc., manufactures small and large blankets. It estimates $$\350,000$$ in overhead during the manufacturing of $$75,000$$ small blankets and $$25,000$$ large blankets. What is the predetermined overhead rate if a small blanket takes $$1$$ machine hour and a large blanket takes $$2$$ machine hours?
5. Identify appropriate cost drivers for these cost pools:
1. setup cost pools
2. assembly cost pool
3. supervising cost pool
4. testing cost pool
6. Match the activity with the most appropriate cost driver.
Table 6.E.1: Activities and Cost Drivers
Activity Cost Driver
Fringe benefits Square feet
Electricity Direct labor hours
Depreciation Machine hours
Machine maintenance
Heat and air conditioning
1. Rex Industries has two products. They manufactured $$12,539$$ units of product A and $$8,254$$ units of product B. The data are:

What is the activity rate for each cost pool?

1. Rex Industries has identified three different activities as cost drivers: machine setups, machine hours, and inspections. The overhead and estimated usage are:

Compute the overhead rate for each activity.

1. Custom’s makes two types of hats: polyester (poly) and silk. There are two cost pools: setup, with an estimated $$\100,000$$ in overhead, and inspection, with $$\25,000$$ in overhead. Poly is estimated to have $$750,000$$ setups and $$170,000$$ inspections, while silk has $$250,000$$ setups and $$80,000$$ inspections. How much overhead is applied to each product?
2. Custom’s has three cost pools and an associated cost driver to allocate the costs to the product. The cost pools, cost driver, estimated overhead, and estimated activity for the cost pool are:

What is the predetermined overhead rate for each activity?

1. Potterii sells its products to large box stores and recently added a retail line of products to sell directly to consumers. These estimates are to be used in determining the overhead allocation rate for ABC:

What would be the predetermined rate for each cost pool?

1. Assign each of the following expenses to either the machine setup cost pool or the factory cost pool:
1. indirect materials
2. factory insurance
3. machine depreciation
4. machine setup (indirect labor)
5. machine setup (indirect material)
2. Tri-bikes manufactures two different levels of bicycles: the Standard and the Extreme. The total overhead of $$\300,000$$ has traditionally been allocated by direct labor hours, with $$150,000$$ hours for the Standard and $$50,000$$ hours for the Extreme. After analyzing and assigning costs to two cost pools, it was determined that machine hours is estimated to have $$\200,000$$ of overhead, with $$4,000$$ hours used on the Standard product and $$1,000$$ hours used on the Extreme product. It was also estimated that the setup cost pool would have $$\100,000$$ of overhead, with $$1,000$$ hours for the Standard and $$1,500$$ hours for the Extreme. What is the overhead rate per product, under traditional and under ABC costing?
3. Cool Pool has these costs associated with production of $$20,000$$ units of accessory products: direct materials, $$\70$$; direct labor, $$\110$$; variable manufacturing overhead, $$\45$$; total fixed manufacturing overhead, $$\800,000$$. What is the cost per unit under both the variable and absorption methods?
4. Using this information from Planters, Inc., what is the cost per unit under both variable and absorption costing?

## Exercise Set B

1. Green Bay Cheese Company estimates its overhead to be $$\375,000$$. It expects to have $$125,000$$ direct labor hours costing $$\1,500,000$$ in labor and utilizing $$15,000$$ machine hours. Calculate the predetermined overhead rate using:
1. Direct labor hours
2. Direct labor dollars
3. Machine hours
2. Boarders estimates overhead will utilize $$160,000$$ machine hours and cost $$\80,000$$. It takes $$4$$ machine hours per unit, direct material cost of $$\5$$ per unit, and direct labor of $$\5$$ per unit. What is the cost of each unit produced?
3. A company estimated $$50,000$$ direct labor hours and $$\450,000$$ in overhead. The actual overhead was $$\445,000$$, and there were $$50,500$$ direct labor hours. What is the predetermined overhead rate, and how much was applied during the year?
4. Cozy, Inc., manufactures small and large blankets. It estimates $$\950,000$$ in overhead during the manufacturing of $$360,000$$ small blankets and $$120,000$$ large blankets. What is the predetermined overhead rate if a small blanket takes $$2$$ hours of direct labor and a large blanket takes $$3$$ hours of direct labor?
5. Identify appropriate cost drivers for these cost pools:
1. material cost pool
2. machine cost pool
3. painting cost pool
4. maintenance cost pool
6. Match the activity with the most appropriate cost driver.
Table 6.E.2: Activities and Cost Drivers
Activity Cost Driver
Factory maintenance Number of setups
Payroll tax Number of employees
Rent Square feet
Machine setups Direct labor hours
Factory supervision
1. Rocks Industries has two products. They manufactured $$12,539$$ units of product A and $$8,254$$ units of product B. The data are:

What is the activity rate for each cost pool?

1. Rocks Industries has identified three different activities as cost drivers: machine setups, machine hours, and inspections. The overhead and estimated usage are:

Compute the overhead rate for each activity.

1. Frenchy’s makes two types of scarves: polyester (poly) and silk. There are two cost pools: setup, with an estimated $$\120,000$$ in overhead, and inspection, with $$\30,000$$ in overhead. Poly is estimated to have $$800,000$$ setups and $$450,000$$ inspections, while silk has $$400,000$$ setups and $$150,000$$ inspections. How much overhead is applied to each product?
2. Frenchy’s has three cost pools and an associated cost driver to allocate the costs to the product. The cost pools, cost driver, estimated overhead, and estimated activity for the cost pool are:

What is the predetermined overhead rate for each activity?

1. Carboni recently added a carbon line in addition to its aluminum line. The following are estimates to be used in determining the overhead allocation rate for ABC.

What would be the predetermined rate for each cost pool?

1. Assign each of the following expenses to either the machine cost pool or the factory cost pool:
1. property taxes
2. heat and air-conditioning
3. electricity, machines
4. plant depreciation
5. electricity, plant
6. machine maintenance wages
2. Stacks manufactures two different levels of hockey sticks: the Standard and the Slap Shot. The total overhead of $$\600,000$$ has traditionally been allocated by direct labor hours, with $$400,000$$ hours for the Standard and $$200,000$$ hours for the Slap Shot. After analyzing and assigning costs to two cost pools, it was determined that machine hours is estimated to have $$\450,000$$ of overhead, with $$30,000$$ hours used on the Standard product and $$15,000$$ hours used on the Slap Shot product. It was also estimated that the inspection cost pool would have $$\150,000$$ of overhead, with $$25,000$$ hours for the Standard and $$5,000$$ hours for the Slap Shot. What is the overhead rate per product, under traditional and under ABC costing?
3. Crafts 4 All has these costs associated with production of $$12,000$$ units of accessory products: direct materials, $$\19$$; direct labor, $$\30$$; variable manufacturing overhead, $$\15$$; total fixed manufacturing overhead, $$\450,000$$. What is the cost per unit under both the variable and absorption methods?
4. Using this information from Outdoor Grills, what is the cost per unit under both variable and absorption costing?

## Problem Set A

1. Colonels uses a traditional cost system and estimates next year’s overhead will be $$\480,000$$, with the estimated cost driver of $$240,000$$ direct labor hours. It manufactures three products and estimates these costs:

If the labor rate is $$\25$$ per hour, what is the per-unit cost of each product?

1. Five Card Draw manufactures and sells $$24,000$$ units of Diamonds, which retails for $$\180$$, and $$27,000$$ units of Clubs, which retails for $$\190$$. The direct materials cost is $$\25$$ per unit of Diamonds and $$\30$$ per unit of Clubs. The labor rate is $$\25$$ per hour, and Five Card Draw estimated $$180,000$$ direct labor hours. It takes $$3$$ direct labor hours to manufacture Diamonds and $$4$$ hours for Clubs. The total estimated overhead is $$\720,000$$. Five Card Draw uses the traditional allocation method based on direct labor hours.
1. What is the gross profit per unit for Diamonds and Clubs?
2. What is the total gross profit for the year?
2. A local picnic table manufacturer has budgeted these overhead costs:

They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown:

Recent success has yielded an order for $$1,000$$ tables. Assume direct labor costs per hour of $$\20$$. Determine how much the job would cost given the following activities:

1. Explain how each activity in this list can be associated with the corresponding unit or batch level provided.
1. Assembling products: unit level
2. Issuing raw materials: batch level
3. Machine setup: batch level
4. Inspection: unit level
6. Equipment maintenance: batch level
7. Printing a banner: unit level
8. Moving material: batch level
9. Ordering a part: batch level
2. Medical Tape makes two products: Generic and Label. It estimates it will produce $$423,694$$ units of Generic and $$652,200$$ of Label, and the overhead for each of its cost pools is as follows:

It has also estimated the activities for each cost driver as follows:

How much is the overhead allocated to each unit of Generic and Label?

1. Box Springs, Inc., makes two sizes of box springs: twin and double. The direct material for the twin is $$\25$$ per unit and $$\40$$ is used in direct labor, while the direct material for the double is $$\40$$ per unit, and the labor cost is $$\50$$ per unit. Box Springs estimates it will make $$5,000$$ twins and $$9,000$$ doubles in the next year. It estimates the overhead for each cost pool and cost driver activities as follows:

How much does each unit cost to manufacture?

1. Please use the information from problem 6 above for these calculations. After grouping cost pools and estimating overhead and activities, Box Springs determined these rates:

It estimates there will be five orders in the next year, and those jobs will involve:

What is the total cost of the jobs?

1. A company has traditionally allocated its overhead based on machine hours but had collected this information to change to activity-based costing:
1. How much overhead would be allocated to each unit under the traditional allocation method?
2. How much overhead would be allocated to each unit under activity-based costing?
1. Carlton’s Kitchens makes two types of pasta makers: Strands and Shapes. The company expects to manufacture $$70,000$$ units of Strands, which has a per-unit direct material cost of $$\10$$ and a per-unit direct labor cost of $$\60$$. It also expects to manufacture $$30,000$$ units of Shapes, which has a per-unit material cost of $$\15$$ and a per-unit direct labor cost of $$\40$$. It is estimated that Strands will use $$140,000$$ machine hours and Shapes will require $$60,000$$ machine hours. Historically, the company has used the traditional allocation method and applied overhead at a rate of $$\21$$ per machine hour. It was determined that there were three cost pools, and the overhead for each cost pool is shown:

The cost driver for each cost pool and its expected activity is shown:

1. What is the per-unit cost for each product under the traditional allocation method?
2. What is the per-unit cost for each product under ABC costing?
3. Compared to ABC costing, was each product’s overhead under- or overapplied?
4. How much was overhead under- or overapplied for each product?
1. Carlton’s Kitchen’s three cost pools and overhead estimates are as follows:

2. The activity-based costing method

(Hint: the traditional method uses machine hours as the allocation base.)

1. Lampierre makes brass and gold frames. The company computed this information to decide whether to switch from the traditional allocation method to ABC:

The estimated overhead for the material cost pool is estimated as $$\12,500$$, and the estimate for the machine setup pool is $$\35,000$$. Calculate the allocation rate per unit of brass and per unit of gold using:

2. The activity-based costing method
1. Portable Seats makes two chairs: folding and wooden. This information was obtained to review the decision to consider ABC:

Compute the overhead assigned to each product under:

2. The activity-based costing method
1. Grainger Company produces only one product and sells that product for $$\100$$ per unit. Cost information for the product is:
 Direct Material $15 per Unit Direct Labor$25 per Unit Variable Overhead $5 per Unit Fixed Overhead$34,000

Selling expenses are $$\4$$ per unit and are all variable. Administrative expenses of $$\20,000$$ are all fixed. Grainger produced $$5,000$$ units; sold $$4,000$$; and had no beginning inventory.

1. Compute net income under
1. absorption costing
2. variable costing
2. Reconcile the difference between the income under absorption and variable costing.
1. Summarized data for Walrus Co. for its first year of operations are:
1. Prepare an income statement under absorption costing
2. Prepare an income statement under variable costing
1. Happy Trails has this information for its manufacturing:

Its income statement under absorption costing is:

Prepare an income statement with variable costing and a reconciliation statement between both methods.

1. Appliance Apps has the following costs associated with its production and sale of devices that allow appliances to receive commands from cell phones.

Prepare an income statement under both the absorption and variable costing methods along with a reconciliation between the two statements.

1. This information was collected for the first year of manufacturing for Appliance Apps:

Prepare an income statement under variable costing, and prepare a reconciliation to the income under the absorption method.

## Problem Set B

1. Bobcat uses a traditional cost system and estimates next year’s overhead will be $$\800,000$$, as driven by the estimated $$25,000$$ direct labor hours. It manufactures three products and estimates the following costs:

If the labor rate is $$\30$$ per hour, what is the per-unit cost of each product?

1. Five Card Draw manufactures and sells $$10,000$$ units of Aces, which retails for $$\200$$, and $$8,000$$ units of Kings, which retails for $$\170$$. The direct materials cost is $$\20$$ per unit of Aces and $$\15$$ per unit of Kings. The labor rate is $$\30$$ per hour, and Five Card Draw estimated $$64,000$$ direct labor hours. It takes $$4$$ direct labor hours to manufacture Aces and $$3$$ hours for Kings. The total estimated overhead is \$128,000. Five Card Draw uses the traditional allocation method based on direct labor hours.
1. How much is the gross profit per unit for Aces and Kings?
2. What is the total gross profit for the year?
2. A local picnic table manufacturer has budgeted the following overhead costs:

They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown:

Recent success has yielded an order for $$1,500$$ tables. Determine how much the job would cost given the following activities, and assuming an hourly rate for direct labor of $$\25$$ per hour:

1. Explain how each activity in this list can be associated with the corresponding unit or batch level provided.
1. Assembling products: batch level
2. Issuing raw materials: unit level
3. Machine setup: unit level
4. Inspection: batch level
6. Equipment maintenance: unit level
7. Printing a banner: batch level
8. Moving material: unit level
9. Ordering a part: unit level
2. Wrappers Tape makes two products: Simple and Removable. It estimates it will produce $$369,991$$ units of Simple and $$146,100$$ of Removable, and the overhead for each of its cost pools is as follows:

It has also estimated the activities for each cost driver as follows:

How much is the overhead allocated to each unit of Simple and Removable?

1. Box Springs, Inc., makes two sizes of box springs: queen and king. The direct material for the queen is $$\35$$ per unit and $$\55$$is used in direct labor, while the direct material for the king is $$\55$$ per unit, and the labor cost is $$\70$$ per unit. Box Springs estimates it will make $$4,300$$ queens and $$3,000$$ kings in the next year. It estimates the overhead for each cost pool and cost driver activities as follows:

How much does each unit cost to manufacture?

1. Please use the information from problem 6 above for these calculations. After grouping cost pools and estimating overhead and activities, Box Springs determined these rates:

Box Springs estimates there will be four orders in the next year, and those jobs will involve:

What is the total cost of the jobs?

1. A company has traditionally allocated its overhead based on machine hours but collected this information to change to activity-based costing:
1. How much overhead would be assigned to each unit under the traditional allocation method?
2. How much overhead would be assigned to each unit under activity-based costing?
1. Casey’s Kitchens makes two types of food smokers: Gas and Electric. The company expects to manufacture $$20,000$$ units of Gas smokers, which have a per-unit direct material cost of $$\15$$ and a per-unit direct labor cost of $$\25$$. It also expects to manufacture $$50,000$$ units of Electric smokers, which have a per-unit material cost of $$\20$$ and a per-unit direct labor cost of $$\45$$. Historically, it has used the traditional allocation method and applied overhead at a rate of $$\125$$ per machine hour. It was determined that there were three cost pools, and the overhead for each cost pool is as follows:

The cost driver for each cost pool and its expected activity is as follows:

1. What is the per-unit cost for each product under the traditional allocation method?
2. What is the per-unit cost for each product under ABC costing?
1. Casey’s Kitchens’ three cost pools and overhead estimates are as follows:

2. The activity-based costing method

(Hint: the traditional method uses machine hours as the allocation base.)

1. Lampierre makes silver and gold candlesticks. The company computed this information to decide whether to switch from the traditional allocation method to ABC.

The estimated overhead for the material cost pool is estimated as $$\45,000$$, and the estimate for the machine setup pool is $$\55,000$$. Calculate the allocation rate per unit of silver and per unit of gold using:

2. The activity-based costing method
1. Portable Seats makes two chairs: folding and wooden. This information was obtained to review the decision to consider ABC:

Compute the overhead assigned to each product under:

2. The activity-based costing method
1. Submarine Company produces only one product and sells that product for $$\150$$ per unit. Cost information for the product is as follows:

Selling expenses are $$\2$$ per unit and are all variable. Administrative expenses of $$\15,000$$ are all fixed, Submarine produced $$2,000$$ units and sold $$1,800$$. Grainger had no beginning inventory.

1. Compute net income under
1. absorption costing
2. variable costing
2. Reconcile the difference between the income under absorption and variable costing.
1. Summarized data for Backdraft Co. for its first year of operations are as follows:
1. Prepare an income statement under absorption costing
2. Prepare an income statement under variable costing
1. Trail Outfitters has this information for its manufacturing:

Its income statement under absorption costing is as follows:

Prepare an income statement with variable costing and a reconciliation statement between both methods.

1. Wifi Apps has these costs associated with its production and sale of devices that allow visual communications between cell phones:

Prepare an income statement under both the absorption and variable costing methods along with a reconciliation between the two statements.

1. This information was collected for the first year of manufacturing for Wifi Apps:

Prepare an income statement under variable costing and prepare a reconciliation to the income under the absorption method.

## Thought Provokers

1. What conditions are optimal for using traditional allocation? Is the allocation more effective when there is high-volume production?
2. College Cases sells cases for electronic devices such as phones, computers, and tablets. These cases have college logos or mascots on them and can be customized by adding such things as the customer’s name, initials, sport, or fraternity letters. The company buys the cases in various colors and then uses laser technology to do the customization of the letters and to add school names, logos, mascots, and so on. What are potential activity-based costing pools for College Cases, and what would be appropriate cost drivers?
3. How would a service industry apply activity-based costing?
4. Cape Cod Adventures makes foam noodles with sales of $$3,000,000$$ units per year and retractable boat oars with sales of $$50,000$$ pairs per year. What information would Cape Cod Adventures need in order to change from traditional to ABC costing? What are the limitations to activity-based costing?
5. In designing a bonus structure to reward your production managers, one of the options is to reward the managers based on reaching annual income targets. What are the differences between a reward system for a company that uses absorption costing and one for a company that uses variable costing?