This Assignment Will Allow You To Practice Applying Activity Based Cos
This assignment will allow you to practice applying activity-based costing (ABC), which includes classifying activities on a unit level, batch level, product level, or facility level; computing activity overhead rates using ABC; and determining overhead cost per unit based on given information. Use a Word document to complete the following in your Financial and Managerial Accounting textbook:
• Exercise 17-1, "Computing Plantwide Overhead Rates," page 789 (bottom of the page).
• Exercise 17-3, "Assigning Costs Using ABC," page 790.
• Exercise 17-4, "Plantwide Overhead Rate," page 790.
Exercise 17-1 Computing plantwide overhead rates
P1 Xie Company identified the following activities, costs, and activity drivers for 2017. The company manufactures two types of go-karts: deluxe and basic.
Required 1. Compute a single plantwide overhead rate, assuming that the company assigns overhead based on 125,000 budgeted direct labor hours.
2. In January 2017, the deluxe model required 2,500 direct labor hours and the basic model required 6,000 direct labor hours. Assign overhead costs to each model using the single plantwide overhead rate.
Exercise 17-3 Assigning costs using ABC
P3 Refer to the information in Exercise 17-1. Assume that the following information is available for the company’s two products for the first quarter of 2017.
Required Compute activity rates for each activity and assign overhead costs to each product model using activity-based costing (ABC). What is the overhead cost per unit of each model?
Exercise 17-4 Plantwide overhead rate
P1 Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for 2017 follow. Data for two special order parts to be manufactured by the company in 2017 follow.
Required 1. Compute the plantwide overhead rate using direct labor hours as the base.
2. Determine the overhead cost assigned to each product line using the plantwide rate computed in requirement 1.
Paper For Above instruction
This comprehensive exercise focuses on applying activity-based costing (ABC) and comparing it with traditional plantwide overhead rate methods. Through analyzing different scenarios involving manufacturing companies such as Xie Company, Textra Plastics, and Ryan Foods, the goal is to understand how overhead costs can be accurately allocated to products and activities, leading to better managerial decision-making and cost control.
Activity-Based Costing (ABC) is a sophisticated costing method that assigns overhead costs to products based on their consumption of activities, providing a more precise view of product costs compared to traditional methods. Implementing ABC involves classifying activities into levels—unit, batch, product, and facility—and calculating activity rates to allocate costs proportionally based on actual usage. This approach enhances the accuracy of product costing by revealing the true drivers of overhead expenses, enabling managers to identify cost-saving opportunities and improve pricing strategies.
In scenario one, Xie Company’s task is to compute a single plantwide overhead rate based on budgeted direct labor hours. Traditional overhead rate calculations involve summing total estimated overhead costs and dividing by total direct labor hours, offering a straightforward allocation basis. Using this rate, overhead costs are assigned to different models, highlighting the potential distortions if certain products consume activities disproportionately. For instance, a model requiring more complex operations might incur higher costs that are not adequately captured by a single rate, leading to overcosting or undercosting.
Scenario two advances this concept by applying activity-based costing to the company’s products. Here, activities such as machine setup, inspection, or packaging are identified and classified at different levels. Computing activity rates entails dividing estimated activity costs by expected activity quantities. These rates then serve to assign overhead costs to each product based on actual activity consumption, resulting in a more accurate per-unit cost. This method is particularly valuable when products vary significantly in their activity requirements, such as deluxe versus basic go-karts, as it captures the nuances of their respective resource usage.
The third scenario involves Textra Plastics, which produces parts through molding and trimming processes. Calculating a plantwide overhead rate based on direct labor hours simplifies cost allocation but
may obscure differences in activity consumption between parts. Alternatively, by using ABC, the company can identify specific costs attributable to each activity and assign them more precisely, thereby improving cost control and pricing accuracy for custom or special order parts.
Finally, Ryan Foods’ case emphasizes classifying activities into their respective levels—unit, batch, product, or facility—and calculating activity rates for overhead allocation. The exercise demonstrates the importance of combining activities such as assembling and inspection into a single pool when appropriate, and contrasting costs derived from ABC with those from traditional plantwide rates. The comparison illustrates the potential inaccuracies of single-rate methods, especially when activity consumption varies widely among products like Holiday and Executive Baskets.
Overall, these exercises underscore the importance of understanding different cost allocation methods, recognizing the appropriate level of activity classification, and applying activity-based costing principles for more precise product costing. Accurate costing not only enhances profitability analysis but also informs strategic decisions such as product pricing, process improvements, and cost management initiatives. Effective implementation of ABC, coupled with insightful analysis, enables companies to allocate overhead costs more precisely, leading to improved operational efficiency and competitive advantage.
References
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