Question 1

An activity-based costing system improves the allocation of which of the following manufacturing costs?
A) Indirect manufacturing costs
B) Direct labor
C) Direct materials
D) Sales commissions

Accepted Answer

An activity-based costing system is designed to improve the allocation of indirect manufacturing costs. These costs, such as overhead expenses, are not easily traceable to specific products or services and may be distributed unfairly using traditional costing methods. Activity-based costing assigns these costs to specific activities or processes, which are then allocated to products based on the actual resources used.

Question 2

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:
Model A $28
Model B $32
Model C $40
Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline & \text { Total cost } &{ \text { Total units } } & \
\hline \text { Assembly } & \$ 780,000 & 120,000 & \text { Machine hours } \
\hline \text { Materials management } & \$ 120,000 & 80,000 & \text { Parts } \
\hline \text { Testing } & \$ 22,500 & 5,000 & \text { Units } \
\hline
\end{array}$$
-
The Model A radio requires 12 parts to construct, and also requires 16 machine hours of processing. What is the manufacturing cost to make one unit of Model A?
A) $150.00
B) $132.00
C) $126.50
D) $154.50

Accepted Answer

The manufacturing cost for Model A includes direct materials and overhead costs. Overhead costs are calculated using activity-based costing:  - Assembly cost per machine hour = $780,000 / 120,000 = $6.50  - Materials management cost per part = $120,000 / 80,000 = $1.50  - Testing cost per unit = $22,500 / 5,000 = $4.50  For Model A:  - Assembly cost = 16 machine hours * $6.50 = $104  - Materials management cost = 12 parts * $1.50 = $18  - Testing cost = $4.50  Total manufacturing cost = Direct materials ($28) + Assembly ($104) + Materials management ($18) + Testing ($4.50) = $154.50

Question 3

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:
Model A $28
Model B $32
Model C $40
Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline & \text { Total cost } & { \text { Total units } } & \
\hline \text { Assembly } & \$ 780,000 & 120,000 & \text { Machine hours } \
\hline \text { Materials management } & \$ 120,000 & 80,000 & \text { Parts } \
\hline \text { Testing } & \$ 22,500 & 5,000 & \text { Units } \
\hline
\end{array}$$
-
The Model B radio requires 15 parts to construct, and also requires 18 machine hours of processing. What is the manufacturing cost to make one unit of Model B?
A) $150.00
B) $176.00
C) $126.50
D) $144.00

Accepted Answer

To calculate the manufacturing cost of one unit of Model B, we need to allocate the overhead costs based on the activity drivers and add the direct materials cost. 1. **Assembly Cost per Unit**:    - Total assembly cost = $780,000   - Total machine hours = 120,000   - Cost per machine hour = $780,000 / 120,000 = $6.50   - Model B requires 18 machine hours, so assembly cost for Model B = 18 * $6.50 = $117.002. **Materials Management Cost per Unit**:   - Total materials management cost = $120,000   - Total parts = 80,000   - Cost per part = $120,000 / 80,000 = $1.50   - Model B requires 15 parts, so materials management cost for Model B = 15 * $1.50 = $22.503. **Testing Cost per Unit**:   - Total testing cost = $22,500   - Total units = 5,000   - Cost per unit = $22,500 / 5,000 = $4.504. **Direct Materials Cost for Model B** = $32Adding these costs gives the total manufacturing cost for one unit of Model B:$117.00 (assembly) + $22.50 (materials management) + $4.50 (testing) + $32 (direct materials) = $176.00

Question 4

Ace Plastics produces many different kinds of products all in one manufacturing facility. They have identified four activities for their costing system:
Materials management - allocated by number of purchase orders
Chemical processing - allocated on metric tons
Molding - allocated on direct labor hours
Packaging - allocated by number of units produced
The activity rates are as follows:
$$\begin{array} { | l | r| r | } 
\hline \text { Materials management } & \$ 12.00 & \text { Per purchase order } \
\hline \text { Chemical processing } & \$ 7.50 & \text { Per metric ton } \
\hline \text { Molding } & \$ 24.00& \text { Per direct labor hour } \
\hline \text { Packaging } & \$ 0.10 & \text { Per unit } \
\hline
\end{array}$$
Ace received an order for 3,000 plastic toys. The engineering design shows that the order will require $540 of direct material cost in total, $90 of direct labor cost, will require 4 purchase orders, will use 2 metric tons of chemical base, will need 8 direct labor hours, and will produce 3.000 units of product. What will the full production cost of the order be?
A) $630
B) $645
C) $1,095
D) $1,185

Accepted Answer

The full production cost includes direct material, direct labor, and allocated activity costs:  - Direct material cost: $540  - Direct labor cost: $90  - Materials management: 4 purchase orders x $12.00 = $48  - Chemical processing: 2 metric tons x $7.50 = $15  - Molding: 8 direct labor hours x $24.00 = $192  - Packaging: 3,000 units x $0.10 = $300  Total cost = $540 + $90 + $48 + $15 + $192 + $300 = $1,185.

Question 5

Which of the following would most likely be treated as an activity in an activity-based costing system?
A) Direct labor cost
B) Machine processing
C) Direct materials cost
D) Sales revenues

Accepted Answer

An activity-based costing system focuses on activities that consume resources and drive costs, such as machine processing. Direct labor cost and direct materials cost may also be tracked as separate activities, but sales revenues are not an activity that consumes resources and drives costs.

Question 6

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline  { \text { Activity } } & { \text { Cost } } &{ \text { Volume } } & \
\hline \text { Casting } & \$ 2,000,000 & 800,000.00 & \text { Machine hours } \
\hline \text { Material Handling } & \$ 400,000 & 500,000.00 & \text { Kilograms } \
\hline \text { Milling } & \$ 1,120,000 & 140,000.00 & \text { Direct labor hours } \
\hline
\end{array}$$
One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours.
-
What is the activity rate for the material handling activity?
A) $1.25 per kg
B) $4.40 per kg
C) $2.50 per kg
D) $0.80 per kg

Accepted Answer

The answer of Formosa Steel Products makes steel building materials...

Question 7

Traditional costing systems can distort unit manufacturing costs and product profitability when many products are produced and the various products have significantly different production processes.

Accepted Answer

Traditional costing systems typically allocate overhead costs based on direct labor hours or machine hours, which may not accurately reflect the actual amount of overhead resources consumed by each product. This can result in distorted unit manufacturing costs and profitability, particularly when different products have significantly different production processes and resource consumption patterns.

Question 8

Ace Plastics produces many different kinds of products all in one manufacturing facility. They have identified four activities for their costing system:
Materials management - allocated by number of purchase orders
Chemical processing - allocated on metric tons
Molding - allocated on direct labor hours
Packaging - allocated by number of units produced
The activity rates are as follows:
$$\begin{array} { | l | r| r | } 
\hline \text { terials management } & \$ 12.00 & \text { Per purchase order } \
\hline \text { Chemical processing } & \$ 7.50& \text { Per metric ton } \
\hline \text { Molding } & \$ 24.00& \text { Per direct labor hour } \
\hline \text { Packaging } & \$ 0.10& \text { Per unit } \
\hline
\end{array}$$
Ace received an order for 3,000 plastic toys. The engineering design shows that the order will require $540 of direct material cost in total, $90 of direct labor cost, will require 4 purchase orders, will use 2 metric tons of chemical base, will need 8 direct labor hours, and will produce 3.000 units of product. How much is the manufacturing cost for one unit of product? (Please round to the nearest tenth of a cent.)
A) $0.630
B) $0.365
C) $0.395
D) $0.185

Accepted Answer

The total manufacturing cost is calculated by summing the costs from each activity:  Materials management: 4 purchase orders x $12.00 = $48.00  Chemical processing: 2 metric tons x $7.50 = $15.00  Molding: 8 direct labor hours x $24.00 = $192.00  Packaging: 3,000 units x $0.10 = $300.00  Total activity cost = $48.00 + $15.00 + $192.00 + $300.00 = $555.00  Add direct material and labor costs: $540 + $90 = $630.00  Total manufacturing cost = $555.00 + $630.00 = $1,185.00  Cost per unit = $1,185.00 / 3,000 units = $0.395 per unit.

Question 9

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate) and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plantwide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows:
 $$\begin{array} { | l | r | r | } 
\hline \text { Per unit } & { \text { Standard } } & { \text { Heavy } } \
\hline \text { Direct materials cost } & \$ 200.00 & \$ 245.00 \
\hline \text { Direct labor cost } & \$ 0.00 & \$ 0.00 \
\hline \text { Manuf overhead cost } & \$ 124.00 & \$ 93.00 \
\hline \text { Total manuf cost } & \$ 324.00 & \$ 338.00 \
\hline & & \
\hline \text { Price per unit } & \$ 350.00 & \$ 370.00 \
\hline \text { Gross profit per unit } & \$ 26.00 & \$ 32.00 \
\hline
\end{array}$$ 
Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity based costing approach.
Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown:
 $$\begin{array} { | l | r | } 
\hline \text { Activities: } & \text { Estimated Cost } \
\hline \text { Metal fabrication } & \$ 420,000 \
\hline \text { Machine processing } & \$ 152,000 \
\hline \text { Packaging } & \$ 17,000 \
\hline & \$ 589,000 \
\hline
\end{array}$$ 
Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows:
 $$\begin{array} { | l | r | r | } 
\hline &  { \text { Standard } } & { \text { Heavy } } \
\hline \text { Silos per unit } & 2.00 & 4.00 \
\hline \text { Nechine hours per urit } & 80.00 & 60.00 \
\hline
\end{array}$$ 
Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of heavy bearings, using the format below:
 $$\begin{array} { | l | l | l | } 
\hline  { \text { Standard Bearings } } & \
\hline \text { Per Unit } & \text { Activity rate } & \text { Amountper unit } \
\hline \text { Direct materials}\
\hline \text { Metal fabrication } & & \
\hline \text { Machine processing } & & \
\hline \text { Packaging } & & \
\hline \text { Total mfg cost } & & \
\hline & & \
\hline \text { Price } & & \
\hline \text { Gross profit } & & \
\hline
\end{array}$$

Accepted Answer

The answer of AAA Metal Bearings produces two sizes of...

Question 10

Activity-based costing systems and traditional costing systems will produce the same results for product cost and profitability, although they use different methods of calculation.

Accepted Answer

Activity-based costing (ABC) focuses on identifying and assigning costs to specific activities and then allocating those costs to products based on the amount of activity they require. Traditional costing systems, on the other hand, allocate costs to products based on a predetermined, unit-based cost driver. This can lead to differences in product costs and profitability between the two methods, especially when products have different levels of complexity and require different amounts of resources to produce. ABC also allows for more accurate cost analysis and identification of cost drivers, which can help in making better business decisions.

Question 11

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline { \text { Activity } } &  { \text { Cost } } & { \text { Volume } } & \
\hline \text { Casting } & \$ 2,000,000 & 800,000.00 & \text { Machine hours } \
\hline \text { Material Handling } & \$ 400,000 & 500,000.00 & \text { Kilograms } \
\hline \text { Milling } & \$ 1,120,000 & 140,000.00 & \text { Direct labor hours } \
\hline
\end{array}$$
One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours.
A) $8.00 per direct labor hr
B) $4.40 per direct labor hr
C) $0.13 per direct labor hr
D) $0.80 per direct labor hr

Accepted Answer

The answer of Formosa Steel Products makes steel building materials...

Question 12

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:
Model A $28
Model B $32
Model C $40
Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline & \text { Total cost } & { \text { Total units } } & \
\hline \text { Assembly } & \$ 780,000 & 120,000 & \text { Machine hours } \
\hline \text { Materials management } & \$ 120,000 & 80,000 & \text { Parts } \
\hline \text { Testing } & \$ 22,500 & 5,000 & \text { Units } \
\hline
\end{array}$$
-
The Model C radio requires 19 parts to construct, and also requires 20.5 machine hours of processing. What is the manufacturing cost to make one unit of Model C?
A) $206.25
B) $176.00
C) $126.50
D) $166.25

Accepted Answer

The manufacturing cost for Model C includes direct materials and overhead costs. Direct materials cost is $40. For overhead: Assembly cost per machine hour is $780,000/120,000 = $6.50. Materials management cost per part is $120,000/80,000 = $1.50. Testing cost per unit is $22,500/5,000 = $4.50. Total cost for Model C = $40 + (20.5 * $6.50) + (19 * $1.50) + $4.50 = $206.25.

Question 13

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate) and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plantwide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows:
 $$\begin{array} { | l | r | r | } 
\hline \text { Per unit } &  { \text { Standard } } &  { \text { Heavy } } \
\hline \text { Direct materials cost } & \$ 200.00& \$ 245.00 \
\hline \text { Direct labor cost } & \$ 0.00& \$ 0.00 \
\hline \text { Manuf overhead cost } & \$ 124.00& \$ 93.00 \
\hline \text { Total manuf cost } & \$ 324.00 & \$ 338.00 \
\hline & &  \
\hline \text { Price per unit } & \$ 350.00& \$ 370.00 \
\hline \text { Gross profit per unit } &\$26.00 &\$32.00 \
\hline
\end{array}$$ 
Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach.
Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown:
 $$\begin{array} { | l | r | } 
\hline \text { Activities: } & \text { Estimated Cost } \
\hline \text { Metal fab } & \$ 420,000 \
\hline \text { Machine processing } & \$ 152,000 \
\hline \text { Packaging } & \$ 17,000 \
\hline & \$ 589,000 \
\hline
\end{array}$$ 
Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows:
 $\begin{array}{|l|r|r|}
\hline &\text { Standard}&  \text {Heavy}\
\hline \text { Kilos per unit } & 2.00 & 4.00 \
\hline \text { Machine hours per unit } & 80.00 & 60.00\
\hline
\end{array}$ 
Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for both product types, using the format below:
 $$\begin{array} { | l | l | l | } 
\hline \text { Per Unit } & \text { Standard } & \text { Heavy } \
\hline \text { Direct materials } & & \
\hline \text { Metal fabrication } & & \
\hline \text { Machine processing } & & \
\hline \text { Packaging } & & \
\hline \text { Total mfg cost } & & \
\hline & & \
\hline \text { Price } & & \
\hline \text { Gross profit } & & \
\hline
\end{array}$$

Accepted Answer

The answer of AAA Metal Bearings produces two sizes of...

Question 14

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:
Model A $28
Model B $32
Model C $40
Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline & \text { Total cost } &  { \text { Total units } } & \
\hline \text { Assembly } & \$ 780,000 & 120,000 & \text { Machine hours } \
\hline \text { Materials management } & \$ 120,000 & 80,000 & \text { Parts } \
\hline \text { Testing } & \$ 22,500 & 5,000 & \text { Units } \
\hline
\end{array}$$
-
What is the allocation rate for the testing activity? (Please round to the nearest cent.)
A) $0.67 per unit
B) $4.50 per unit
C) $0.22 per part
D) $1.50 per part

Accepted Answer

The allocation rate for the testing activity is calculated by dividing the total cost of testing by the total number of units. $22,500 / 5,000 units = $4.50 per unit.

Question 15

Target cost is the price that customers are willing to pay and target price is the desired cost to produce the product.

Accepted Answer

The statements are reversed. Target cost is the desired cost to produce the product, while target price is the price that customers are willing to pay.

Question 16

Orlando Avionics makes three types of radios for small aircraft-model A, model B, and model C. The manufacturing operations are mechanized and there is no direct labor. Manufacturing overhead costs are significant, and Orlando has adopted an activity-based costing system. Direct materials costs per unit for each model are as follows:
Model A $28
Model B $32
Model C $40
Orlando has three activities-assembly, materials management, and testing. The cost driver for assembly is machine hours. The cost driver for materials management is number of parts, and the cost driver for testing is the number of units of product. Total costs and production volumes for the year 2012 were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline & \text { Total cost } &  { \text { Total units } } & \
\hline \text { Assembly } & \$ 780,000 & 120,000 & \text { Machine hours } \
\hline \text { Materials management } & \$ 120,000 & 80,000 & \text { Parts } \
\hline \text { Testing } & \$ 22,500 & 5,000 & \text { Units } \
\hline
\end{array}$$
-
What is the allocation rate for the materials management activity? (Please round to the nearest cent.)
A) $0.67 per part
B) $1.50 per part
C) $0.15 per part
D) $6.00 per part

Accepted Answer

The allocation rate for materials management is calculated by dividing the total cost of materials management by the total number of parts: $120,000 / 80,000 parts = $1.50 per part.

Question 17

Which of the following would NOT be considered an activity for the purposes of an activity-based costing system?
A) Materials handling
B) Machine processing
C) Direct materials cost
D) Packaging

Accepted Answer

Direct materials cost is a cost element, not an activity. Activities are the tasks and processes involved in producing a product or service. Materials handling, machine processing, and packaging are all activities.

Question 18

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline  { \text { Activity } } & { \text { Cost } } &{ \text { Volume } } & \
\hline \text { Casting } & \$ 2,000,000 & 800,000.00 & \text { Machine hours } \
\hline \text { Material Handling } & \$ 400,000 & 500,000.00 & \text { Kilograms } \
\hline \text { Milling } & \$ 1,120,000 & 140,000.00 & \text { Direct labor hours } \
\hline
\end{array}$$
One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours.
-
What is the full manufacturing cost for one metric ton of steel reinforcement rods? (Please round to the nearest whole dollar.)
A) $1,130
B) $980
C) $1,030
D) $975

Accepted Answer

The full manufacturing cost for one metric ton of steel reinforcement rods is the sum of the direct materials cost, direct labor cost, and indirect manufacturing costs. The direct materials cost is $100, the direct labor cost is $50, and the indirect manufacturing costs are $240 (24 machine hours * $10 per machine hour for casting + 1,000 kilograms * $0.80 per kilogram for materials handling + 15 direct labor hours * $8 per direct labor hour for milling). Therefore, the full manufacturing cost for one metric ton of steel reinforcement rods is $100 + $50 + $240 = $390.

Question 19

Formosa Steel Products makes steel building materials for export, and uses an activity-based costing system to account for the indirect manufacturing costs of its various products. Indirect costs for the whole factory are broken down into three activities-casting, materials handling, and milling. The cost driver for casting is machine hours; the cost driver for material handling is kilograms, and the cost driver for milling is direct labor hours. Activity costs and volumes for the year were estimated as follows:
$$\begin{array} { | l | r | r | r | } 
\hline  { \text { Activity } } & { \text { Cost } } &  { \text { Volume } } & \
\hline \text { Casting } & \$ 2,000,000 & 800,000.00 & \text { Machine hours } \
\hline \text { Material Handling } & \$ 400,000 & 500,000.00 & \text { Kilograms } \
\hline \text { Milling } & \$ 1,120,000 & 140,000.00 & \text { Direct labor hours } \
\hline
\end{array}$$
One product is steel reinforcement rods, sold by the metric ton. Engineering reports show that one metric ton of steel reinforcement rods requires $100 of direct materials cost plus $50 of direct labor cost. Producing one metric ton of steel rods also requires 24 machine hours for casting, weighs 1,000 kilograms, and requires 15 direct labor hours.
-
What is the activity rate for the casting activity?
A) $0.40 per machine hour
B) $4.40 per machine hour
C) $2.50 per machine hour
D) $1.25 per machine hour

Accepted Answer

The answer of Formosa Steel Products makes steel building materials...

Question 20

AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy. The standard bearings require $200 of direct materials per unit (per crate) and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plant-wide allocation rate for manufacturing overhead, which was $1.55 per machine hour. Based on the single rate, gross profit data were as follows:
 $$\begin{array} { | l | r | r | } 
\hline \text { Per unit } & { \text { Standard } } &{ \text { Heavy } } \
\hline \text { Direct materials cost } & \$ 200.00 & \$ 245.00 \
\hline \text { Direct labor cost } & \$ 0.00 & \$ 0.00 \
\hline \text { Manuf overhead cost } & \$ 124.00 & \$ 93.00 \
\hline \text { Total manuf cost } & \$ 324.00 & \$ 338.00 \
\hline & & \
\hline \text { Price per unit } & \$ 350.00 & \$ 370.00 \
\hline \text { Gross profit per unit } & \$ 26.00 & \$ 32.00 \
\hline
\end{array}$$ 
Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach.
Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown:
 $$\begin{array} { | l | r | } 
\hline \text { Activities: } & \text { Estimated Cost } \
\hline \text { Metal fabrication } & \$ 420,000 \
\hline \text { Machine processing } & \$ 152,000 \
\hline \text { Packaging } & \$ 17,000 \
\hline & \$ 589,000 \
\hline
\end{array}$$ 
Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis are as follows:
 $$\begin{array} { | l | r | r | } 
\hline & { \text { Standard } } & { \text { Heavy } } \
\hline \text { Kilos per unit } & 2.00 & 4.00 \
\hline \text {Machine hours per unit } & 80.00 & 60.00 \
\hline
\end{array}$$ 
Using the data above, please calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of standard bearings, using the format below:
 $$\begin{array} { | l | l | l | } 
\hline  { \text { Standard Bearings } } & \
\hline \text { Per Unit } & \text { Activity rate } & \text { Amountper unit } \
\hline \text { Direct materials}\
\hline \text { Metal fabrication } & & \
\hline \text { Machine processing } & & \
\hline \text { Packaging } & & \
\hline \text { Total mfg cost } & & \
\hline & & \
\hline \text { Price } & & \
\hline \text { Gross profit } & & \
\hline
\end{array}$$

Accepted Answer

The answer of AAA Metal Bearings produces two sizes of...

Quiz 18: Activity-Based Costing and Other Cost Management Tools

An activity-based costing system improves the allocation of which of the following manufacturing costs?

Which of the following would most likely be treated as an activity in an activity-based costing system?

Traditional costing systems can distort unit manufacturing costs and product profitability when many products are produced and the various products have significantly different production processes.

Activity-based costing systems and traditional costing systems will produce the same results for product cost and profitability, although they use different methods of calculation.

Target cost is the price that customers are willing to pay and target price is the desired cost to produce the product.

Which of the following would NOT be considered an activity for the purposes of an activity-based costing system?