San Beda University

College of Arts and Sciences

Department of Accountancy
Managerial Accounting – Part 2

ACTIVITY-BASED COSTING AND MANAGEMENT M. B. GUIA

Illustrative Problem 1: Abra Corporation is a manufacturing company that applies overhead using total
direct labor hours. Total budgeted overhead for the period amounted to P 660,000 and expected direct
labor hours to be utilized are 15,000 hours. The following transactions were recorded for the year:
a. Raw materials were purchased on account, P 340,000.
b. Raw materials were withdrawn from the storeroom for use in production, P 300,000 (P190,000
direct and P 110,000 indirect).
c. The following costs were incurred for employee services: direct labor, P 250,000; indirect labor,
P 190,000; sales commissions, P 15,000; and administrative salaries, P 86,000. Actual direct
labor hours utilized during the period is 14,700 hours.
d. Sales travel costs were incurred, P 10,000.
e. Various factory overhead costs were incurred, P 156,000.
f. Advertising costs were incurred, P 30,000.
g. Depreciation was recorded for the year, P 270,000 (P 150,000 related to factory operations and
P 120,000 related to selling and administrative activities).
h. Manufacturing overhead was applied to products.
i. All 40,000 units of goods started were completed and transferred to the finished goods
warehouse.
j. 35,000 units of goods were sold on account to customers during the year at 150% of its costs.
Required
1. Prepare journal entries to record transactions (a) through (j) above.
2. Post the entries in part (2) above to T-accounts.
3. Compute the underapplied or overapplied manufacturing overhead cost. Prepare a journal entry
to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. Post the
entry to the appropriate T-accounts.
4. The company is planning to use activity-based costing for its external financial reports. The
company’s activity cost pools and associated data for the coming year appear below:
Activity Cost Pool Activity Measure Estimated Overhead Cost Expected Activity
Machining Machine-hours P 330,000 6,000 MHs
Purchase orders Number of orders 140,000 2,000orders
Parts management Number of part types 25,000 500 part types
Testing Number of tests 15,000 800 tests
General factory Direct labor-hours 150,000 15,000 DLHs
Compute the pre-determined rate for each cost pool.
5. Actual activity for the year was as follows:
Activity Cost Pool Actual Activity
Machining 5,800 MHs
Purchase orders 1,900 Orders
Parts management 550 part types
Testing 900 Tests
General factory 14,700 DLHs
 Apply overhead using activity based costing and determine the amount of under or over applied
overhead and the amount of cost of goods sold for the period.

Illustrative Problem 2: Otto Boutique, a garment business, uses activity based costing and accumulates
overhead costs in the following cost pools:
1. Power
2. Machining
3. Direct Labor
4. Materials Handling
5. Ordering
6. Machine Set-ups
7. Product inspections
8. Product Design Changes
9. Testing Routines
10. Plant Supervision
11. Personnel administration
12. Security
13. Engineering Design Changes
14. Receiving of Supplies purchased
15. Assembly
Required: For each of the activities, determine whether the cost pool would be unit-level, batch-level,
product-level or facility level.

Illustrative Problem 3: Bart Incurs about P 860,000 in manufacturing overhead. The company works
about 100,000 direct labor hours per month to which the previous controller has allocated overhead
costs, so the overhead rate on the average is P8.60. The following information is provided to you:
Cost Driver Amount in Pool Amount of Activity
Direct Labor Hours P 520,000 100,000
Number of Batches 160,000 360
Engineering Changes 60,000 120
Number of Parts 120,000 3,200
Total Overhead Costs P 860,000
The controller asks you to analyze two product lines using the existing method of allocating overhead
based on DLH, and using activity-based rates. She gives you the following data regarding two product
lines. Blue is a bread and butter line that the company makes in large batches, while White is a specialty
line that only a few customer buy.
Blue White
Direct Labor Hours 1,600 200
Number of Batches 4 12
Engineering Changes 2 14
Number of Parts 22 88
Required:
1. Determine the overhead to be allocated to each line using DLH as the only cost driver.
2. Determine the overhead to be allocated to each line using the four drivers identified above.
Illustrative Problem 4: In the past, Casiopia Hospital allocated all of its overhead costs to patients based
on nursing time. Casiopia has decided to switch to an activity based costing system using three activity
cost pools. Information related to the new system is as follows:
Activity Cost Pool Activity Measure Estimated Overhead Cost Estimated Activity
Registration Number of patients P 75,000 1,000 patients
Patient care Nursing time P 900,000 150,000 hours
Billing Number of bills P 120,000 2,500 bills
Data concerning two patients follows:
Patient Nursing Time Number of Bills
Mr. Wells 100 hours 2
Mr. Muncie 60 hours 3
Required:
1. Under the traditional costing system, how much overhead cost would be assigned to each
patient?
2. Under the new activity-based costing system, how much overhead cost would be assigned to
each patient?

Illustrative Problem 5: HiTech Products manufactures three types of remote-control devices: Economy,
Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and
related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
Activity Cost Cost Driver
Material Handling P 225,000 Number of parts
Material Insertion 2,475,000 Number of parts
Automated Machinery 840,000 Machine Hours
Finishing 170,000 Direct Labor Hours
Packaging 170,000 Orders Shipped
Total P 3,880,000
The following information pertains to the three product lines for next year:
Economy Standard Deluxe
Units produced 10,000 5,000 2,000
Orders Shipped 1,000 500 200
Number of parts per unit 10 15 25
Machine Hours per unit 1 3 5
Labor hours per unit 2 2 2
Required:
1. Under the traditional costing system, how much will be the overhead cost per unit of each
product?
2. Under the new activity-based costing system, how much will be the overhead cost per unit of
each product?

Illustrative Problem 6: Riverside Florists uses an activity-based costing system to compute the cost of
making floral bouquets and delivering the bouquets to its commercial customers. Company personnel
who earn P180,000 typically perform both tasks; other firm-wide overhead is expected to total P70,000.
These costs are allocated as follows:
Bouquet Production Delivery Others
Wages and salaries 60% 30% 10%
Other overhead 50% 35% 15%
Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.
Required:
1. The cost of wages and salaries and other overhead that would be charged to each bouquet made is:
2. The cost of wages and salaries and other overhead that would be charged to each delivery is closest
to:

Illustrative Problem 7: Consider the activities that follow.

1. Microsoft: Developing computer coding for a new spreadsheet package.
2. General Mills: Painting the office of a maintenance supervisor at a plant that produces cereal.
3. Mayo Clinic: Examining a new patient.
4. American Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between flights.
5. Office Depot: Moving cases of paper from one location to another in the same warehouse.
6. Rolex: Attaching a watch band to the watch's face.
7. United States Postal Service: Reprocessing mail that had been sorted incorrectly on a
malfunctioning sorting machine.
8. Fidelity Investments: Correcting errors made by company personnel in customer accounts.
9. Marriott: Upgrading the quality of bedding used at hotels in very competitive marketplaces.
10. Shoemart: Arrangement of the grocery cart at the entrance of the supermarket.
Required: Categorize each of the activities as either value-added or non-value-added for the companies
noted.