Question

Exercise 7-16 Comprehensive Activity-Based Costing Exercise (LO2, LO3, LO4] Cancico Communications has supplied the following data for use in its ABC system: Overhead Costs Wages and salaries Other overhead costs $ 280,000 157,000 Total overhead costs $437,000 Activity Cost Pool Direct labour support Order processing Customer support Other Activity Measure Number of direct labour-hours Number of orders Number of customers These costs are not allocated to products or customers Total Activity 7,955 DLHS 450 orders 200 customers NA Distribution of Resource Consumption across Activity Cost Pools Direct Labour Support 20% 15% Order Processing 35% 25% Customer Support 30% 25% Other 15% Wages and salaries Other overhead costs Total 100% 100% 35% During the year, Cancico Communications completed an order for special telephone equipment for a new customer, HurnTel. This customer did not order any other products during the year. Data concerning that order follow: Selling price Units ordered Direct materials Direct labour-hours Direct labour rate $ 221 per unit 150 units $ 195 per unit 0.6 DLH per unit $ 29 per DLH

Answer 1

Activity based costing uses the different cost drivers to allocate costs.

1. Allocation of overhead costs to activity cost pools

	Direct Labor support	Order processing	customer support	Other	Totals
Wages and salaries	$56,000($280,000*20%)	$98,000($280,000*35%)	$84,000($280,000*30%)	$42,000($280,000*15%)	$280,000
other overhead costs	$23,550($157,000*15%)	$39,250($157,000*25%)	$39,250($157,000*25%)	$54,950($157,000*35%)	$157,000
Total costs	$79,550 (56,000+23,550)	$137,250(98,000+39,250)	$123,250(84,000+39,250)	$96,950(42,000+54,950)	$437,000(280,000+157,000)

2.Activity rates for activity cost pools.

	Cost	Cost driver	Activity rate
Direct labor support	$79,550	7,955 direct labor hours	$10($79,550/7,955)	per DLH
Order processing	$137,250	450 orders	$305($137,250/450)	per order
customer support	$123,250	200 customers	$616.25($123,250/200)	per customer

3. overhead cost for Hurntel

Activity cost pool	activity rate	activity	ABC cost
Direct labor support	$10 per DLH	90 DLH (0.6dlh per unit*150units)	$900 (90DLH*$10)
order processing	$305 per order	1 ORDER	$305
customer support	$616.25 per customer	1 CUSTOMER	$616.25
TOTAL			$1821.25

4.CUSTOMER MARGIN FOR HURNTEL

		working
Sales	$33,150	($221*150 units)
costs:
Direct material	$29,250	($195*150units)
Direct labor	$2,610	($29*0.6 DLH per unit*150units)
Direct labor support overhead	$900
order processing overhead	$305
Customer support overhead	$616.25
Customer margin	-$531.25	[33,150-29,250-2,610-900-305-616.25]