# Chapter 5 Guided Practice

Back to Chapter 5 in Textbook

## 5GP.1 First-Stage Allocation

### 5GP.1.E1

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.

Required

How many dollars are in the “dipping” and “packaging” activity cost pools?

### 5GP.1.M1

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.

Required

(A) How much are the budgeted period costs next period?

(B) What are the activity rates for the “dipping” and “packaging” activities?

## 5GP.2 Second-Stage Allocation

### 5GP.2.E1

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.

Required

(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?

### 5GP.2.M1

A firm has four activity cost pools: prepping, cooking, cooling, and other. Prepping has an activity rate of \$150 per setup. Cooking has an activity rate of \$15 per machine hour. Cooling has an activity rate of \$80 per batch. The other activity cost pool includes \$27,000 (actual and budgeted).

Required

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)?

## 5GP.3 Activity-Based Management

### 5GP.3.E1

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.

Required

Are both customers still profitable for the firm, using the new activity-based costing system?

### 5GP.3.M1

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 required per unit to 1.5 direct labor hours (currently 2 direct labor hours are required per unit of output). The batch improvement would allow 100 units to be produced per batch (currently 85 units of output are produced per batch).

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).

Required

Which of these two possible improvements is more profitable for the firm?

## 5GP.4 ABC Simplifications

### 5GP.4.M1

A firm uses time-driven activity-based costing (TDABC). For your department, management has determined there are three activities driven by three separate activity drivers. Below are the budgeted activity drivers for these three activities, as well as how much department time each activity driver consumes.

• Activity #1: 5,000 batches; 0.05 department hours per batch.
• Activity #2: 100 machine hours; 0.5 department hours per machine hour.
• Activity #3: 1,500 supervisor hours; 0.2 department hours per supervisor hour.

The department has five sources of overhead cost and 2,500 department hours of practical capacity. Below are the sources of overhead.

• \$400,000 supervisor salaries
• \$500,000 maintenance costs
• \$150,000 information technology costs
• \$225,000 facility and utility costs
• 75,000 miscellaneous overhead costs

Required

What are the firm’s rates for its three activities?

### 5GP.4.M2

After conducting a full ABC cost study (including first-stage allocation), a firm has nine cost pools as follows (in parentheses are budgeted cost driver for each cost pool for the period).

• Sourcing: \$150,000 (125 purchase orders)
• Prepping: \$1,750,000 (1,500 batches)
• Polishing: \$250,000 (1,000 sander hours)
• Machining: \$1,350,000 (2,000 machine hours)
• Painting: \$100,000 (2,000 painter hours)
• Transportation: \$125,000 (20,000 inter-department transfers)
• Customer Management: \$50,000 (10,000 new customers)
• Returns Processing: \$115,000 (100 returns)
• Maintenance: \$2,000,000 (1,750 maintenance tickets)

The firm prefers to approximate its ABC system by applying costs to jobs based on only three of these activities.

Required

Using an approximated ABC system (with three activities), what is the cost of a job that consumes the following?

• 5 purchase orders
• 70 batches
• 10 sander hours
• 58 machine hours
• 75 painter hours
• 150 inter-department transfers
• 1 new customer
• 2 returns
• 30 maintenance tickets