Problems in Activity Based Costing
Problem A
Bountiful Manufacturing Company manufactures two products. Following is a production and cost
analysis for each product for 2020
Cost component Product A Product B Both Products Cost
Units Produce 10,000 10,000 20,000
Raw Materials Used (in units)
X 50,000 50,000 100,000 P 800,000
Y 100,000 100,000 P 200,000
Labor Hours Used
Department 1 P 682,000
Direct Labor 20,000 5,000 25,000 P 375.000
Indirect Labor
Inspections 2,500 2,400 4,900
Machine operations 5,000 10,000 15,000
Setups 252 248 500
Department 2 P462,000
Direct Labor 5,000 5,000 10,000 P200,000
Indirect Labot
Inspections 2,680 5,000 7,680
Machine operations 1,000 3,860 4,860
Setups 250 310 560
Machine Hours Used
Department 1 5,000 10,000 15,000 P400,000
Department 2 5,000 20,000 25,000 P800,000
Power Used (KW hours) P400,000
Department 1 1,500,000
Department 2 8,500,000
Other Activity Data
Building Occupancy P1,000,000
Purchasing P 100,000
Number of purchase orders
Material X 200
Material Y 300
Square feet occupied
Purchasing 10,000
Power 40,000
Department 1 200,000
Department 2 250,000
The Company decides to analyze the costs incurred for Products A and B on an activity basis. The
following is the first and second stage allocation processes:
First Stage Allocations to Departments
Cost Pool Cost Object Activity Allocation Base
Power Departments Kilowatt hours
Purchasing Material Number of Purchase Orders
Building Occupancy Departments Square feet occupied
Second Stage Allocations to Products
Cost Pool Cost Object Activity Allocation Base
Departments
Indirect Labor Products Hours worked
Power Products Machine Hours
Machinery related Products Machine Hours
Building Occupancy Products Machine Hours
Material Purchasing Products Machine Hour
Required:
1. Determine the total overhead for Bountiful Manufacturing Co.
2. Determine the plantwide overhead rate for the company , assuming the use of direct labor
hours
3. Determine the cost per unit of Product A and Product B using the overhead rate computed in
number (2).
4. Determine the cost allocations to departments (first stage allocations). Allocate costs from the
departments in the following order: building occupancy, purchasing, and power. Finish the cost
allocations for one department to get an adjusted cost to allocate to the next department.
5. Using the allocation found in number (4), determine the cost allocations to products (second
stage allocations)
6. Determine the cost per unit of Product A and Product B using the overhead allocations found in
number (5)
PROBLEM B
Prosperity Manufacturing Company manufactures Productc A, B and C. The company uses a traditional
overhead allocation scheme and assigns overhead to products at the rate of P30 per direct labor hour.
The costs per unit for each product group in 2019 were as follows:
Product A Product B Product C
Direct Material P12 P120 P12
Direct Labor 18 135 45
Overhead 24 180 60
Total 54 435 117
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Because profitability has been lagging and competition has been getting more intense, Prosperity
Manufacturing Company is considering implementing an activity based costing system for 2020. In
analyzing the 2019 data, ,management determined that its P18,000,000 of factory overhead could be
assigned to four basic activities: quality control, setups, material handling, and equipment operation.
Data for 2019 costs associated with each of the four activities follow:
Quality Control Setups Material Handling Equipment Operation Total
P630,000 P600,000 P1,800,000 P14,970,000 P18,000,000
Management determined that the following allocation bases and total 2019 volumes for each allocation
base could have been used for ABC:
Activity Base
Quality Control Number of units produced
Setups Number of setups
Material Handling Pounds of material used
Equipment operation Number of machine hours
Volume measures for 2019 for each product and each allocation base were as follows:
Product A Product B Product C
Number of units 300,000 30,000 90,000
Number of setups 600 1,300 1,100
Pounds of Material 1,200,000 3,000,000 1,800,000
Number of Machine Hours 600,000 1,100,000 1,300,000
Required:
1. How much direct labor time is needed to produce Product A, Product B and Product C?
2. For 2019, determine he total overhead allocated to each product group using the traditional
allocation based on direct labor hours.
3. For 2019, determine the total overhead that would have been allocated to each product group if
activity-based costing were used. Compute the cost per unit for each product group.
4. The company has a policy of setting sales prices based on product costs. How would the sales
prices using activity-based costing differ from those obtained using the traditional overhead
allocation.
