Question 1

The Manufacturing Overhead (MOH) T-account for companies using Activity-Based Costing (ABC) will typically include which of the following items on the credit side?

Accepted Answer

In the MOH T-account for a company using ABC, the debit side will include actual MOH incurred items that would include factory insurance (Choice A), indirect labor (Choice B), and safety equipment for workers (Choice C). Budgeted MOH cost (Choice D) will be located on the credit side of the T-account where applied MOH is located.

Question 2

In calculating the activity-based rate (cost driver rate), which of the following formulas is correct?

Accepted Answer

This question requires you to determine what formula combines the correct items and correct order of operations for this formula. The formula for activity-based rate = Total cost in activity cost pool/Total quantity of activity's cost driver. Choice B is the only choice that correctly identifies the formula. Choices, A, C, and D are all incorrect as they either multiply where they should divide, or swap the numerator and denominator.

Question 3

After a company has successfully determined their activity-based rate, what steps must be taken to allocate Manufacturing Overhead (MOH) for an activity?

Accepted Answer

This question requires you to consider how a company would complete Step 3 of implementing activity-based costing. In order to allocate the MOH for activity, you must multiply the activity-based rate by the actual quantity of cost driver used (Choice C). Choice D is incorrect as it includes the budgeted quantity of cost driver used rather than actual. Choice A is incorrect as it divides rather than multiplies the two numbers. Choice B is incorrect as it incorporates division rather than multiplication, and it uses the budgeted rather than the actual quantity of the cost drivers.

Question 4

Denominator volume refers to the total occurrences of the cost driver within an activity. The availability of each activity's capacity can be expressed in several ways. Which of the following ways would be considered inappropriate?

Accepted Answer

Choices B, C, and D all represent real ways that the denominator value can be expressed. Choice B is the quantity needed to satisfy the average customer demand over a period of time. Choice C reduces theoretical capacity by considering unavoidable interruptions. Choice D assumes no downtime and is considered unrealistic. Choice A is not a choice found within this text and is therefore the correct response as it would be an inappropriate selection.

Question 5

Activity-based costing (ABC) will utilize cost drivers to allocate various costs. Which of the following would be an appropriate cost driver for an employee cafeteria?

Accepted Answer

Cost drivers can be subjective, and this question requires that you discern between the choices to determine which is most likely to be a cost driver used by an employee cafeteria. Employee head count by department (Choice A) is a cost driver that would most likely be used by information technology or first aid and wellness initiatives. Number of marketing campaigns (Choice B) would most likely be a cost driver used by marketing. Square footage of facility (Choice D) is a cost driver most likely used by grounds maintenance and security. Number of meals purchased from the cafeteria (Choice C) is the correct choice as it is the most sensible choice for an employee cafeteria since it is driven by food to be sold in the cafeteria.
But this does not tell you who used the cafeteria. Just because they cooked the meals does not mean someone ate them.
I updated this to be number of meals purchased from the cafeteria. Of the choices provided, it would be the most sensible cost driver.

Question 6

Sparrow, Inc. produces birdseed that it sells to regional markets. Susan, the accountant at Sparrow, is evaluating the impact of Activity-Based Costing (ABC) on several activities for the factory. Sparrow has the following budgeted costs: Direct Materials, $150,000; and Direct Labor, $98,000. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $75,000 (1,000 setup hours); Production, $376,000 (50,000 machine hours); and Maintenance, $63,400 (12,000 maintenance hours). Allocate MOH costs to Setup activity using the budgeted activity-based rate considering the actual usages of 262 setup hours, 13,409 machine hours, and 3,432 maintenance hours.
I would replace with a product name. Allocating Setup costs to Setup activity is confusing.
This question is about allocating MOH costs for setup activity instead of allocating setup costs. And, if the activity is Setup, wouldn't it make sense to leave it named as Setup?

Accepted Answer

This question requires the determination of the budgeted activity rate for Setup which would be $75,000/1,000 setup hours = $75.00 per setup hour. Sparrow used 262 hours so the MOH allocated to Setup would be $75.00 per setup hour × 262 setup hours = $19,650 (Choice A).

Question 7

Sparrow, Inc. produces birdseed that it sells to regional markets. Susan, the accountant at Sparrow, is evaluating the impact of Activity-Based Costing (ABC) on several activities for the factory. Sparrow has the following budgeted costs: Direct Materials, $150,000; and Direct Labor, $98,000. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $75,000 (1,000 setup hours); Production, $376,000 (50,000 machine hours); and Maintenance, $63,400 (12,000 maintenance hours). Allocate MOH costs to production activity using the budgeted activity-based rate, considering the actual usages of 262 setup hours, 13,409 machine hours, and 3,432 maintenance hours.
I would change this to a product name. This is confusing allocating production costs to production.
This question is about allocating MOH costs for production activity instead of allocating production costs. And, if the activity is Production, wouldn't it make sense to leave it named as Production?

Accepted Answer

This question requires the determination of the budgeted activity rate for production which would be $376,000/50,000 machine hours = $7.52 per machine hour. Sparrow used 13,409 machine hours so the MOH allocated to Production would be $7.52 per machine hour × 13,409 machine hours = $100,835.68 (Choice D).

Question 8

Tiny Corp. has provided the following information about its budgeted Manufacturing Overhead (MOH) costs. They also reported Direct Labor (DL) of $126,780 and Direct Materials (DM) of $78,699. They have broken the MOH costs into three activities:
 What is Tiny's plant-wide MOH rate if allocations are based on machine hours?

Accepted Answer

This question requires familiarity with the formula for calculating a plant-wide MOH rate while disregarding the individual cost drivers as well as the totals for DM and DL. To calculate the plant-wide MOH rate you would take the total MOH budgeted cost of $183,000 and divide by total budgeted quantity of the cost driver of 11,000 machine hours. $183,000/11,000 machine hours = $16.64 (Choice C).

Question 9

Tiny Corp. has provided the following information about its budgeted Manufacturing Overhead (MOH) costs. They also reported Direct Labor (DL) of $126,780 and Direct Materials (DM) of $78,699. They have broken the MOH costs into three activities:
 What is Tiny's activity rate for each activity?

Accepted Answer

This question requires that you calculate the activity rate for each of the key activities: Utilities, $30,000/30,000 square feet = $1.00 per square feet; Maintenance, $54,000/9,000 maintenance hours = $6.00 per maintenance hour; and Machining, $99,000/11,000 machine hours = $9.00 per machine hour (Choice B).

Question 10

Yogi Inc. is a small company that produces yoga mats and assorted accessories. They have recently transitioned to Activity-Based Costing (ABC) and are in the process of creating a budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs which are divided into three key activities:
 During the year, Yogi used 4,000 setup hours; 12,600 machine hours; and 2,300 inspection hours. If Yogi wants to use an activity rate that is tailored to each activity, then what rate would they use for each?

Accepted Answer

This question requires calculation of the budgeted activity rate for each of the key activities while disregarding the actual usage: Setup, $125,000/10,000 setup hours = $12.50 per setup hour; Production, $333,450/20,000 machine hours = $16.67 per machine hour; and Quality Inspection, $106,200/8,000 inspection hours = $13.28 per inspection hour (Choice A).

Question 11

Yogi Inc. is a small company that produces yoga mats and assorted accessories. They have recently transitioned to Activity-Based Costing (ABC) and are in the process of creating a budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs which are divided into three key activities:
 During the year, Yogi used 4,000 setup hours; 12,600 machine hours; and 2,300 inspection hours. How much Production MOH will Yogi report for Product A, considering the actual usage of each of the three key activities? (Do not round the calculations.)

Accepted Answer

This question requires calculation of the budgeted activity rate for Production which is $333,450/20,000 machine hours = $16.67 per machine hour. Then, multiply the activity rate against the actual usage of 12,600 machine hours for a total of $210,073.50 (Choice B).

Question 12

Melissa is the controller for Barker Inc., a factory that creates unique dog chew toys. Until now, Barker has been using a single plant-wide rate of $10.75 per direct labor hour to allocate Manufacturing Overhead (MOH) costs. Melissa has been debating a switch to activity-based costing and has derived the following activity-based rates:
$18)00 per machine hour
$11)00 per direct labor hour
$6)00 per inspection hour
A recent production run used 80 machine hours, 240 direct labor hours, and 10 inspection hours. How much MOH would be allocated using the newly derived activity-based rates?

Accepted Answer

To calculate the allocated MOH, multiply the activity rates against their respective actual usages. Machine hours, $18.00 per machine hour times 80 machine hours ($1,440.00) plus Direct labor hours, $11.00 per direct labor hour times 240 direct labor hours ($2,640.00) plus Inspection hours, $6.00 per inspection hour times 10 inspection hours ($60.00). The total MOH for all activities is $4,140.00 (Choice D).

Question 13

Melissa is the controller for Barker Inc., a factory that creates unique dog chew toys. Until now, Barker has been using a single plant-wide rate of $10.75 per direct labor hour to allocate Manufacturing Overhead (MOH) costs. Melissa has been debating a switch to activity-based costing and has derived the following activity-based rates:
$18)00 per machine hour
$11)00 per direct labor hour
$6)00 per inspection hour
A recent production run used 65 machine hours, 186 direct labor hours, and 13 inspection hours. How much MOH would be allocated using the newly derived activity-based rates?

Accepted Answer

To calculate the allocated MOH, multiply the activity rates against their respective actual usage. Machine hours, $18.00 per machine hour times 65 machine hours ($1,170.00) plus Direct labor hours, $11.00 per direct labor hour times 186 direct labor hours ($2,046.00) plus Inspection hours, $6.00 per inspection hour times 13 inspection hours ($78.00). The total MOH for all activities is $3,294.00 (Choice C).

Question 14

Trojan Corp. creates miniature wooden figurines that it sells to local stores around the state. Trojan is switching to Activity-Based Costing (ABC) and has arrived at the following activity-based rates for their Manufacturing Overhead (MOH) allocation: $22.00 per direct labor hour, $17.50 per packaging hour, and $8.60 per inspection hour. A recent job required the following:
600 direct labor hours
127 packaging hours
78 inspection hours
What is the amount of MOH that would be allocated to this most recent job based upon the pre-determined activity-based rates?

Accepted Answer

This question requires calculation of the MOH allocation for each activity based upon rates determined by Trojan Corp.: direct labor hours = $22.00 per direct labor hour times 600 direct labor hours = $13,200; packaging hours = $17.50 per packaging hour times 127 packaging hours = $2,222.50; and inspection hours = $8.60 per inspection hour times 78 inspection hours = $670.80. The total of all allocated MOH will be the total of the three activities or $16,093.30 (Choice C).

Question 15

Trojan Corp. creates miniature wooden figurines that it sells to local stores around the state. Trojan is switching to Activity-Based Costing (ABC) and has arrived at the following activity-based rates for their Manufacturing Overhead (MOH) allocation: $22.00 per direct labor hour, $17.50 per packaging hour, and $8.60 per inspection hour. A recent job required the following:
780 direct labor hours
182 packaging hours
93 inspection hours
What is the amount of MOH that would be allocated to this most recent job based upon the predetermined activity-based rates?

Accepted Answer

This question requires that you calculate the MOH allocation for each activity based upon rates determined by Trojan Corp.: direct labor hours = $22.00 per direct labor times 780 direct labor hours = $17,160.00; packaging hours = $17.50 per packaging hour times 182 packaging hours = $3,185.00; inspection hours = $8.60 per inspection hour times 93 inspection hours = $799.80. The total of all allocated MOH will be the total of the three activities or $21,144.80 (Choice C).

Question 16

Robert has been evaluating all costing data after he realized how small his margin for dinner plates had become. These plates have become the focal point for the organization so Robert has a vested interest in increasing the margin per plate. He has spent time aligning with beneficial suppliers and reducing his material cost and streamlined labor usage in a successful effort to minimize labor costs as well. The remaining task in this journey to improve margin is to evaluate the allocation of Manufacturing Overhead (MOH) costs that are estimated to be $563,559.00 for the year. Three main cost drivers and their related information are as follows:
 How much of the MOH costs would be allocated to dinner plates if Robert chooses to continue using a single plant-wide rate based upon Direct Labor hours? (If required, round calculations to two decimal places.)

Accepted Answer

First, calculate the single plant-wide MOH rate. This can be done as follows: Total MOH costs/Budgeted direct labor hours: $563,559/35,990 = $15.66 per direct labor hour. Then, multiply the $15.66 per direct labor hour by the number of direct labor hours used in production of dinner plates: $15.66 × 14,570 hours = $228,166.20 (Choice D).

Question 17

Robert has been evaluating all costing data after he realized how small his margin for dinner plates had become. These plates have become the focal point for the organization so Robert has a vested interest in increasing the margin per plate. He has spent time aligning with beneficial suppliers and reducing his material cost and streamlined labor usage in a successful effort to minimize labor costs as well. The remaining task in this journey to improve margin is to evaluate the allocation of manufacturing overhead (MOH) costs that are estimated to be $563,559.00 for the year. Three main cost drivers and their related information are as follows:
 How much of the MOH costs would be allocated to dinner plates if Robert chooses to utilize an activity-based approach instead of a single plant-wide rate? (If required, round calculations to two decimal places.)

Accepted Answer

First, calculate an activity-base rate for each key activity before allocating. Setups, $95,489.00/17,450 setups = $5.47 per setup; Fabrication, $388,400.00/35,990 direct labor hours = $10.79 per direct labor hour; and Quality Inspection, $79,670/13,600 inspections = $5.86 per inspection. Now, allocate based upon usage: $5.47 × 7,750 setups = $42,392.50 + $10.79 × 14,570 hours = $157,210.30 + $5.86 × 5,432 inspections = $31,831.52. Total MOH allocated to dinner plates based on ABC = $231,434.32 (Choice C).

Question 18

Roland's company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year just as he had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems:
 What is the total amount of MOH allocated to the silk scarves using ABC? (Do not round the calculations.)

Accepted Answer

This question requires several steps in order to determine the MOH allocated to either of the scarves. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool divided by the total quantity of activity's cost driver from both scarves. Folding, $19,420.00/(6,250 + 7,100) = $1.45 per DL hour; Cleaning/Maintenance, $10,330.00/(1,200 + 1,500) = $3.83 per cleaning/maintenance hour; and Quality Inspections, $4,600.00/(600 + 800) = $3.29 per inspection. Now, allocate based upon the silk scarf activity: ($1.45 x 6,250) + ($3.83 × 1,200) + ($3.29 × 600) = $15,654.30 total MOH allocated to the silk scarves (Choice A).

Question 19

Roland's company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year, just as had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality Inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems:
 If Roland uses ABC, then what will the net operating income be for the cotton scarves? (Do not round the calculations.)
This more of a problem than an multiply choice question.
I have updated the question to ask for the net operating income, which cut down on the amount of work being completed by the student.

Accepted Answer

This question requires several steps in order to determine the MOH allocated to either of the scarves. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool divided by the total quantity of activity's cost driver from both scarves. Folding, $19,420.00/(6,250 + 7,100) = $1.45 per DL hour; Cleaning/Maintenance, $10,330.00/(1,200 + 1,500) = $3.83 per cleaning/maintenance hour; and Quality Inspections, $4,600.00/(600 + 800) = $3.29 per inspection. Now, allocate based upon the cotton scarf activity: ($1.45 × 7,100) + ($3.83 × 1,500) + ($3.29 × 800) = $18,695.70 total MOH allocated to the cotton scarves. Next, calculate net operating income: $208,970.00 - $23,660.00 - $25,650.00 - $18,695.70 = $140,964.30 (Choice A).

Question 20

Josephine has been investigating a potential switch to Activity-Based Costing (ABC) for the cookie company where she works. She has decided to focus on their biggest seller, vanilla cookies, before moving forward with this decision. She has gathered the following pertinent financial data:
 Josephine has determined that there are three key activities where Manufacturing Overhead (MOH) costs can be divided along with the total activity for the year: cutting, $34,500.00 (25,600 direct labor hours); washing cookie trays, $37,900.00 (15,780 trays washed); and wages for the supervisors, $24,600.00 (12,630 supervisor hours). Josephine would like to decide soon. If she uses ABC, then what will the net operating income per unit be for the vanilla cookies? (Do not round the calculations.)

Accepted Answer

This question requires several steps in order to determine the MOH allocated to vanilla cookies and eventually the net operating income per vanilla cookie. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool being divided by the total quantity of activity's cost driver for the year. Cutting, $34,500.00/25,600 DL hours = $1.35 per DL hour; washing trays, $37,900.00/15,780 tray washed = $2.40 per tray washed; and supervisor wages, $24,600.00/12,630 supervisor hours = $1.95 per supervisor hour. Now, allocate based upon the vanilla cookie activity: ($1.35 × 14,300) + ($2.40 × 8,000) + ($1.95 × 8,450) = $54,944.11 total MOH allocated to the vanilla cookies. Next, calculate net operating income: $378,400.00 - $98,330.00 - $126,780.00 - $54,944.11 = $98,345.89. Lastly, divide by the number of vanilla cookies produced: $98,345.89/75,600 = $1.30 net operating income per vanilla cookie (Choice B).

Quiz 9: Activity- Based Costing

The Manufacturing Overhead (MOH) T-account for companies using Activity-Based Costing (ABC) will typically include which of the following items on the credit side?

In calculating the activity-based rate (cost driver rate) , which of the following formulas is correct?

After a company has successfully determined their activity-based rate, what steps must be taken to allocate Manufacturing Overhead (MOH) for an activity?

Denominator volume refers to the total occurrences of the cost driver within an activity. The availability of each activity's capacity can be expressed in several ways. Which of the following ways would be considered inappropriate?

Activity-based costing (ABC) will utilize cost drivers to allocate various costs. Which of the following would be an appropriate cost driver for an employee cafeteria?

Tiny Corp. has provided the following information about its budgeted Manufacturing Overhead (MOH) costs. They also reported Direct Labor (DL) of $126,780 and Direct Materials (DM) of $78,699. They have broken the MOH costs into three activities: What is Tiny's activity rate for each activity?