Question

The following data regarding the activity-based costing system at the Company Co. is available:

Activity Pool	Base	Budgeted Activity	Budgeted Cost
Machine set up	# of setups	2867	$26651
Orders	# of orders	924	$80603
Shipping	Hours of shipping time	2081	$40657

In addition, prior to adopting an activity based costing system, Company Co. applied overhead based on direct labour hours. The budgeted total labour hours for the year was 50450. If one job required 427 direct labour hours, 41 setups, 47 orders, and 23 hours of shipping time what is the difference between the overhead assigned using the traditional method and ABC?

Select one:

a. $3211

b. $3679

c. $1252

d. $4930

Which of the following statements about activity based costing is not correct?

Select one:

a. Activity based costing is good to use when products differ in age.

b. Activity based costing is efficient to implement when there is not a large difference in volumes of each product produced.

c. A disadvantage of activity based costing is the cost needed to implement the system

d. An advantage of activity based costing is the increased accuracy in pricing.

Answer 1

Answers

• Question #1

--Working:
Allocation as per ABC method

	Overhead	Activity base	Overhead rate	Activity of Job	Overhead allocated
Machine Setup	$26,651	2,867	$                   9.30	41	$381
Order	$80,603	924	$                 87.23	47	$4,100
Shipping	$40,657	2,081	$                 19.54	23	$449
Total	$147,911				$4,930    (A)

Allocation as per Traditional Method

Total Overhead	$147,911
Total DLHs	50450
Overhead rate	$                     2.93
Direct labor hours used in Job	427
Overhead allocated	$1,252   (B)

Correct Answer = Option ‘b’ $ 3,679 [ A – B = 4930 – 1252 = $ 3679]

• Question #2

Correct Answer = Option ‘d’ An advantage of activity based costing is the increased accuracy in pricing.

because Activity Based Costing is NOT a pricing strategy.