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
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 3,840 hours of testing |
| Requires 960 hours of testing |
| Requires 5,040 units of computing power |
| Requires 2,160 units of computing power |
| Requires 20 developer hours to implement |
| Requires 80 developer hours to implement |
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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 | 20% |
| Percentage of developer hours | 80% |
| Testing cost | $fill in the blank 2a33d2fb7ff5005_1 |
| Testing cost | $fill in the blank 2a33d2fb7ff5005_2 |
| Computing cost | $fill in the blank 2a33d2fb7ff5005_3 |
| Computing cost | $fill in the blank 2a33d2fb7ff5005_4 |
| Developer cost | $fill in the blank 2a33d2fb7ff5005_5 |
| Developer cost | $fill in the blank 2a33d2fb7ff5005_6 |
| Total cost | $fill in the blank 2a33d2fb7ff5005_7 |
| Total cost | $fill in the blank 2a33d2fb7ff5005_8 |
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 | $fill in the blank f874bb01d01903e_1 |
| Testing cost | $fill in the blank f874bb01d01903e_2 |
| Computing cost | $fill in the blank f874bb01d01903e_3 |
| Computing cost | $fill in the blank f874bb01d01903e_4 |
| Developer cost | $fill in the blank f874bb01d01903e_5 |
| Developer cost | $fill in the blank f874bb01d01903e_6 |
| Total cost | $fill in the blank f874bb01d01903e_7 |
| Total cost | $fill in the blank f874bb01d01903e_8 |
Activity-based costing for varying batch production
A manufacturing company has the following two activities associated with completion of products:
1. The setting up of machines for running batches of products
2. The actual production of units produced
The company has annual manufacturing overhead costs of $2,000,000, of which $200,000 is directly involved in setting up machines for batch runs. During the year, the company expects to perform 400 machine setups, one setup per batch for a total of 400 batches of production. Assume that the batch sizes vary considerably, but the work involved in setting up the machines is not appreciably different from one job to the next.
If the company estimates that the $200,000 costs associated with setups will yield 400 setups this year, the cost associated directly with each setup will be $fill in the blank 9baae6fcf07403e_1 per setup. Because each job will require its own setup, setup costs are viewed as batch costs. Because $200,000 of the $2,000,000 are costs associated with setups, this means that costs associated directly with the production of units equal $fill in the blank 9baae6fcf07403e_2.
