5GP.1 First-Stage Allocation
Candles, Inc. has two budgeted overhead resources (supervisor salaries, equipment lease) and three activities (dipping, packaging, and other). Supervisor salaries are consumed 50% by the “dipping” activity, 25% by the “packaging” activity, and 25% by the “other” activity. The equipment leases are consumed 35% by the “dipping” activity, 55% by the “packaging” activity, and 10% by the “other” activity.
Supervisor salaries are budgeted at $500,000 for the next period. Equipment leases are budgeted at $750,000.
How many dollars are in the “dipping” and “packaging” activity cost pools?
The dollars in an activity cost pool are the sum of budgeted amounts of the resources scaled by the percentage those resources are consumed by the activity.
The dipping activity consumes 50% of supervisor salaries, which are budgeted at $500,000. Thus the dipping activity consumes $250,000 of supervisor salaries (i.e. 500,000 * 0.5). The dipping activity consumes 35% of equipment lease, which are budgeted at $750,000. Thus the dipping activity consumes $262,500 of equipment lease (i.e. 750,000 * 0.35).
250,000 + 262,500 = 512,500 dipping activity cost pool
The packaging activity consumes 25% of supervisor salaries, which are budgeted at $500,000. Thus the packaging activity consumes $125,000 of supervisor salaries (i.e. 500,000 * 0.25). The packaging activity consumes 55% of equipment lease, which are budgeted at $750,000. Thus the packaging activity consumes $412,500 of equipment lease (i.e. 750,000 * 0.55).
125,000 + 412,500 = 537,500 packating activity cost pool
Use the same information for Candles Inc. from problem 5GP.1.E1. The “
“dipping” activity is driven by direct labor hours, which are budgeted at 15,000 units next period. The “packaging” activity is driven by machine hours, which are budgeted at 10,000 units next period.
(A) How much are the budgeted period costs next period?
(B) What are the activity rates for the “dipping” and “packaging” activities?
The “other” activity typically has no activity driver and is expensed as a period cost.
The other activity consumes 25% of supervisor salaries, which are budgeted at $500,000. Thus the other activity consumes $125,000 of supervisor salaries (i.e. 500,000 * 0.25). The other activity consumes 10% of equipment lease, which are budgeted at $750,000. Thus the other activity consumes $75,000 of equipment lease (i.e. 750,000 * 0.1).
125,000 + 75,000 = 200,000 other activity cost pool
Thus $200,000 are budgeted to be period costs next period.
Activity rates can be calculated by taking the activity cost pool dollar total from 5GP.1.E1 in the numerator divided by the budgeted activity driver in the denominator.
$512,500 / 15,000 = $34.17 per direct labor hour
$537,500 / 10,000 = $53.75 per machine hour
5GP.2 Second-Stage Allocation
A firm called The Ying Group has three activity cost pools: loading, preparing, and other. The loading activity cost pool is budgeted at $10,500,000. The preparing activity cost pool is budgeted at $2,650,000. The other activity cost pool is budgeted at $2,500,000.
The loading activity cost pool is driven by machine hours, which are budgeted at 50,000 units. The preparing activity cost pool is driven by batches, which are budgeted at 850 units.
(A) If a job has 16 units. The job consumes 50 machine hours and 2 batches. How much overhead is allocated to this job?
(B) If the job from part A consumes $15,000 of direct costs, what is the unit cost for this job?
First we have to calculate activity rates. Each activity rate is the quotient of the budgeted activity cost pool over budgeted driver.
$10,500,000 / 50,000 = $210 per machine hour
$2,650,000 / 850 = $3,117.65 per batch
The firm consumes 50 machine hours.
50 machine hours * $210 per machine hour = $10,500
The firm consumes 2 batches.
$3,117.65 per batch * 2 batches = 6,235.30
10,500 * 6,235.30 = 16,735.30 total overhead allocated to job
The total cost for the job is direct costs plus allocated overhead costs.
$15,000 direct cost + $16,735.30 overhead allocated = $31,735.30 total cost for job
Unit cost is the total cost divided by the number of units in the job.
$31,735.30 total job costs / 16 units = $1,983.46 unit cost
A firm has four activity cost pools: prepping, cooking, cooling, and
If this period consumes are 20 setups, 700 machine hours, and 30 batches and if there are $20,000 of direct costs, what are the total costs for this period (assume there are no units left in WIP inventory or finished goods inventory and all budgeted amounts are equal to actuals)?
Given no WIP and finished goods inventory, the total costs for the period will simply be the sum of product costs and period costs. Product costs, furthermore, will be direct costs plus allocated overhead. Allocated overhead is the sum of activity rates multiplied by the units consumed.
$150 * 20 setups = $3,000 total prepping costs
$15 * 700 machine hours = $10,500 total cooking costs
$80 * 30 batches = $2,400 total cooling costs
$20,000 direct costs + $3,000 prepping costs + $10,500 cooking costs + $2,400 cooling costs = $35,900 total product costs
The firm also has $27,000 in period costs from the other activity.
$35,900 + $27,000 = $62,900
The total costs for the period are $62,900
5GP.3 Activity-Based Management
A firm has two customers: Y and Z. These two customers both seem profitable under the firm’s old job-order costing system. However, the firm has adopted activity-based costing and now wishes to determine if the two customers are still profitable.
Customer Y consumes $1,000 of direct materials, $1,500 of direct labor (at $12 per hour), and 100 machine hours per period. The firm charges customer Y $7,000 per period.
Customer Z consumes $500 of direct materials, $2,000 of direct labor (at $12 per hour), and 80 machine hours per period. The firm charges customer Z $6,750 per period.
The firm’s activity-based costing system uses an activity rate of $15 per labor hour and an activity rate of $20 per machine hour.
Are both customers still profitable for the firm, using the new activity-based costing system?
Customer Y costs the firm the following.
1,000 DM + 1,500 DL + (1,500 DL / 12 DH per hour * 15 OH per DL hour) + (100 * 20 per machine hour) = $6,375
Since this cost is less than the $7,000 that the firm charges customer Y, that customer is still profitable.
Customer Z costs the firm the following.
500 DM + 2,000 DL + (2,000 DL / 12 DH per hour * 15 OH per DL hour) + (80 * 20 per machine hour) = $6,600
Since this cost is less than the $6,750 that the firm is charging customer Z, that customer us still profitable. Just barely.
A firm has two possible improvements it can make. First, it could reduce the number of direct labor hours per unit of output. Second, it could increase the number of units it produces per batch. Both improvements would cost the same amount and do not affect other aspects of the firm’s production activities or market demand.
The firm has the following information.
Activity rate #1 = $15 per direct labor hour
Activity rate #2 = $100 per batch
The direct labor hour improvement would decrease the number of direct labor hours to 1.5 direct labor hours (currently 2 direct labor hours are required). The batch improvement would allow 100 units to be produced per batch (85 units are produced per batch currently).
The average job for this firm includes 1.9 batches and 12 direct labor hours. (Assume that a variety of jobs’ work can be included in each batch).
Which of these two possible improvements is more profitable for the firm?
This problem is phrased a little differently than the example problem in the main text because we don’t have information on how many overall units or jobs are produced. But we can still compare the rates at which the firm accumulates costs per job between the two improvements.
If every job consumes 2 batches and 12 direct labor hours, then the average job incurs the following costs.
1.9 batches * $100 per batch = $190 activity #2 cost
12 direct labor hours * $15 per DL hour = $180 activity #1 cost
200 + 180 = 370 total overhead cost per job
If the firm reduces the number of direct labor hours required per unit by 25% (i.e. (2 – 1.5) / 2 = 0.25), then only 8 direct labor hours would be incurred per job.
190 + (8 * 15) = $310 total overhead cost per job
Thus the first improvement leads to a $60 per job cost savings
If the firm increases the number of units that can be produced per batch, then the number of batches required per job, on average, should decrease.
(100 – 85) / 85 = 0.1765 or a 17.65 increase in the number of units per batch. Thus, instead of 1.9 average batches per job, the firm will have an average of 1.9 * (1 – 0.1765), i.e. 1.56465 batches.
1.56465 * 100 + 180 = 281.56 (rounded) total overhead cost per job.
Thus the second improvement leads to
The second, batch-related improvement is more profitable because it saves the firm more per job.