a.) Gant Accounting performs two types of services, Audit and Tax. Gant's overhead costs consist of computer support, $300,000 (with a cost driver of CPU minutes); and legal support, $150,000 (with a cost driver of Legal hours used). Information on the two services is:
Audit |
Tax |
Direct labor cost |
$50,000 |
$100,000 |
CPU minutes |
30,000 |
20,000 |
Legal hours used |
300 |
700 |
Overhead applied to audit services using activity-based costing
is
b.) Edmiston Company reported the following year-end information: beginning work in process inventory, $75,000; cost of goods manufactured, $750,000; beginning finished goods inventory, $40,000; ending work in process inventory, $55,000; and ending finished goods inventory, $50,000. How much is Edmiston's cost of goods sold for the year?
Answer a)
Calculation of overheads applied to Audit Services under Activity Based Costing
Overheads applied to audit services = (Number of CPU minutes used by Audit services X activity rate per CPU minute) + (number of legal hours used by Audit services X activity rate per legal hour)
= (30,000 CPU minutes X $ 6.00 per CPU minute) + (300 legal hours X $ 150 per legal hour)
= $ 180,000 + $ 45,000
= $ 225,000
Therefore overheads applied to Audit services under activity based costing is $ 225,000.
Working Note:
Calculation of Activity rate for each Activity Centre:
Activity Centre |
Cost Driver |
Activity Consumed by Audit Services |
Activity Consumed by Tax Services |
Total Activity Consumed |
Amount of overheads |
Activity Rate (Total Overhead Costs/ Total Activity Consumed) |
Computer Support |
CPU Minutes |
30,000 |
20,000 |
50,000 |
$ 300,000 |
$ 6.00 |
Legal Support |
Legal Hours |
300 |
700 |
1,000 |
$ 150,000 |
$ 150.00 |
Total |
$ 450,000 |
Therefore activity rate for computer support is $ 6.00 per CPU minute and activity rate for legal support is $ 150.00 per legal hour.
Answer b)
Calculation of Cost of goods sold for the year
Cost of goods sold = Beginning Inventory of Finished goods + Cost of goods manufactured – Ending inventory of finished goods
= $ 40,000 + $ 750,000 - $ 50,000
= $ 740,000
Therefore cost of goods sold for the year is $ 740,000.
a.) Gant Accounting performs two types of services, Audit and Tax. Gant's overhead costs consist of...
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