Mastery Problem: Activity-Based Costing (Advanced) Activity-Based Costing Traditionally, overhead costs are assigned based arbitrarily on the rate of either direct labor or direct materials associated with production. This makes sense when companies only make a few products, production processes are simple, and overhead costs are less pervasive. However, today production processes are more complex, companies make a wider array of products, and fewer costs are directly traceable to units of production. To address this, companies use activity-based costing (ABC). Specifically, activity-based costing identifies and traces costs and expenses to activities and then to specific products. ABC uses multiple factory overhead rates based on activities. Activities are the types of work, or actions, involved in a manufacturing process or service activity. For example, assembly, inspection, and engineering design are activities. The estimated activity costs are allocated to products using an activity rate. Activity rates are determined as follows: Activity Rate = Estimated Activity Cost / Estimated Activity Base Usage Illustrated Example of Activity-Based Costing Comparing Two Products under Traditional and Activity-Based Costing Compare two projects under development by the same company. The following are a few aspects of each product’s development process relevant to costs. Product S Product T Requires 3,200 hours of testing Requires 800 hours of testing Requires 5,600 units of computing power Requires 2,400 units of computing power Requires 30 developer hours to implement Requires 70 developer hours to implement Cost Items Cost of Each Activity Testing: $29,600 Computing power: $44,400 Developer hourly cost: $15 per hour Traditional Costing Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing. In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project. If required, round your answers to the nearest dollar. Product S Product T Percentage of developer hours 30% Percentage of developer hours 70% Testing cost Testing cost Computing cost Computing cost Developer cost Developer cost Total cost Total cost Percentage of developer hours + Percentage of developer hours for Product S (30%) Allocation basis for Product S: The amount of labor hours associated directly with Product S, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product S under the traditional costing method. 30 (30+70) + Percentage of developer hours for Product T (70%) Allocation basis for Product T: The amount of labor hours associated directly with Product T, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product T under the traditional costing method. 70 (30+70) Review the resources each product (S and T) requires for production and compare that to the costs calculated above under traditional costing. Does traditional costing serve as an accurate gauge of costs? WHich one below? 1.yes 2.No 3. Not enoughb information Activity-Based Costing Using the data above for products S and T, calculate the costs using activity-based costing. Allocate the costs of testing, computing, and development based on the rates of activity consumed by each product's development process. If required in your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar. Cost Activity Base Testing Hours of testing Computing cost Units of computing power Developer cost Development hours Product S Product T Testing cost Testing cost Computing cost Computing cost Developer cost Developer cost Total cost Total cost

Mastery Problem: Activity-Based Costing (Advanced) Activity-Based Costing Traditionally, overhead costs are assigned based arbitrarily on the rate of either direct labor or direct materials associated with production. This makes sense when companies only make a few products, production processes are simple, and overhead costs are less pervasive. However, today production processes are more complex, companies make a wider array of products, and fewer costs are directly traceable to units of production. To address this, companies use activity-based costing (ABC). Specifically, activity-based costing identifies and traces costs and expenses to activities and then to specific products. ABC uses multiple factory overhead rates based on activities. Activities are the types of work, or actions, involved in a manufacturing process or service activity. For example, assembly, inspection, and engineering design are activities. The estimated activity costs are allocated to products using an activity rate. Activity rates are determined as follows: Activity Rate = Estimated Activity Cost / Estimated Activity Base Usage Illustrated Example of Activity-Based Costing Comparing Two Products under Traditional and Activity-Based Costing Compare two projects under development by the same company. The following are a few aspects of each product’s development process relevant to costs. Product S Product T Requires 3,200 hours of testing Requires 800 hours of testing Requires 5,600 units of computing power Requires 2,400 units of computing power Requires 30 developer hours to implement Requires 70 developer hours to implement Cost Items Cost of Each Activity Testing: $29,600 Computing power: $44,400 Developer hourly cost: $15 per hour Traditional Costing Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing. In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project. If required, round your answers to the nearest dollar. Product S Product T Percentage of developer hours 30% Percentage of developer hours 70% Testing cost Testing cost Computing cost Computing cost Developer cost Developer cost Total cost Total cost Percentage of developer hours + Percentage of developer hours for Product S (30%) Allocation basis for Product S: The amount of labor hours associated directly with Product S, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product S under the traditional costing method. 30 (30+70) + Percentage of developer hours for Product T (70%) Allocation basis for Product T: The amount of labor hours associated directly with Product T, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product T under the traditional costing method. 70 (30+70) Review the resources each product (S and T) requires for production and compare that to the costs calculated above under traditional costing. Does traditional costing serve as an accurate gauge of costs? WHich one below? 1.yes 2.No 3. Not enoughb information Activity-Based Costing Using the data above for products S and T, calculate the costs using activity-based costing. Allocate the costs of testing, computing, and development based on the rates of activity consumed by each product's development process. If required in your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar. Cost Activity Base Testing Hours of testing Computing cost Units of computing power Developer cost Development hours Product S Product T Testing cost Testing cost Computing cost Computing cost Developer cost Developer cost Total cost Total cost

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

See similar textbooks

Related questions

Question

Mastery Problem: Activity-Based Costing (Advanced)

Activity-Based Costing

Traditionally, overhead costs are assigned based arbitrarily on the rate of either direct labor or direct materials associated with production. This makes sense when companies only make a few products, production processes are simple, and overhead costs are less pervasive. However, today production processes are more complex, companies make a wider array of products, and fewer costs are directly traceable to units of production. To address this, companies use activity-based costing (ABC).

Specifically, activity-based costing identifies and traces costs and expenses to activities and then to specific products. ABC uses multiple factory overhead rates based on activities. Activities are the types of work, or actions, involved in a manufacturing process or service activity. For example, assembly, inspection, and engineering design are activities.

The estimated activity costs are allocated to products using an activity rate. Activity rates are determined as follows:
Activity Rate = Estimated Activity Cost / Estimated Activity Base Usage

Illustrated Example of Activity-Based Costing

Comparing Two Products under Traditional and Activity-Based Costing

Compare two projects under development by the same company. The following are a few aspects of each product’s development process relevant to costs.

Product S		Product T
Requires 3,200 hours of testing		Requires 800 hours of testing
Requires 5,600 units of computing power		Requires 2,400 units of computing power
Requires 30 developer hours to implement		Requires 70 developer hours to implement

Cost Items	Cost of Each Activity
Testing:	$29,600
Computing power:	$44,400
Developer hourly cost:	$15 per hour

Traditional Costing

Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing. In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project. If required, round your answers to the nearest dollar.

Product S		Product T
Percentage of developer hours	30%		Percentage of developer hours	70%
Testing cost			Testing cost
Computing cost			Computing cost
Developer cost			Developer cost
Total cost			Total cost

Percentage of developer hours

+ Percentage of developer hours for Product S (30%)

Allocation basis for Product S: The amount of labor hours associated directly with Product S, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product S under the traditional costing method.

(30+70)

+ Percentage of developer hours for Product T (70%)

Allocation basis for Product T: The amount of labor hours associated directly with Product T, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product T under the traditional costing method.

(30+70)

Review the resources each product (S and T) requires for production and compare that to the costs calculated above under traditional costing. Does traditional costing serve as an accurate gauge of costs?

WHich one below?

1.yes

2.No

3. Not enoughb information

Activity-Based Costing

Using the data above for products S and T, calculate the costs using activity-based costing. Allocate the costs of testing, computing, and development based on the rates of activity consumed by each product's development process. If required in your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar.