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ACC 560- WEEK 3 Chapter 4 Brief Exercises 7 and 12; Exercises 1, 6, and 14

BE4-7 Spud, Inc. a manufacturer of gourmet potato chips, employs activity-based costing. The budgeted data for each of the activity cost pools is provided below for the year 2017.

Activity Cost Pools                               Estimated Overhead                           Expected Use of Cost Drivers per Activity

Ordering and receiving                                  $84,000                                 12,000 orders

Food processing                                               480,000                                 60,000 machine hours

Packaging                                                            1,760,000                                             440,000 labor hours

For 2017, the company had 11,000 orders and used 50,000 machine hours, and labor hours totaled 500,000. What is the total overhead applied?

BE4-12 Spin Cycle Architecture uses three activity pools to apply overhead to its projects. Each activity has a cost driver used to allocate the overhead costs to the projects. The activities and related overhead costs are as follows: initial concept formation $40,000, design $300,000, and construction oversight $100,000. The cost drivers and expected use are as follows.

Activities                                               Cost Drivers                                          Expected Use of Cost Drivers per Activity

Initial concept formation              Number of project changes                                   20

Design                                                  Square feet                                                                        150,000

Construction oversight                  Number of months                                                      100

Compute the predetermined overhead rate for each activity. Classify each of these activities as unit-level, batch-level, product-level, or facility-level.

E4-1 Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plant wide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the company's operations.

                                                Standard                              Custom

Direct labor costs             $50,000                 $100,000

Machine hours                  1,000                                     1,000

Setup hours                       100                                         400

Total estimated overhead costs are $240,000. Overhead cost allocated to the machining activity cost pool is $140,000, and $100,000 is allocated to the machine setup activity cost pool.


Compute the overhead rate using the traditional (plant wide) approach. Compute the overhead rates using the activity-based costing approach. Determine the difference in allocation between the two approaches.

E4-6 Santana Corporation manufactures snowmobiles in its Blue Mountain, Wisconsin, plant. The following costs are budgeted for the first quarter's operations.

Machine setup, indirect materials                         $              4,000

Inspections                                                                              16,000

Tests                                                                                       4,000

Insurance, plant                                                                      110,000

Engineering design                                                                                 140,000

Depreciation, machinery                                                        520,000

Machine setup, indirect labor                                                20,000

Property taxes                                                                         29,000

Oil, heating                                                                             19,000

Electricity, plant lighting                                                        21,000

Engineering prototypes                                                          60,000

Depreciation, plant                                                                 210,000

Electricity, machinery                                                             36,000

Machine maintenance wages                                                19,000


Classify the above costs of Santana Corporation into activity cost pools using the following: engineering, machinery, machine setup, quality control, factory utilities, and maintenance. Next, identify a cost driver that may be used to assign each cost pool to each line of snowmobiles.

E4-14 Venus Creations sells window treatments (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year.

                                                                Commercial                                          Residential

Revenues                                                              $300,000                                               $480,000 

Direct materials costs          $ 30,000                                                                $  50,000

Direct labor costs                     100,000                                                 300,000

Overhead costs                        85,000               215,000                     150,000             500,000 

Operating income (loss)                                     $85,000                                                 ($ 20,000)

The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:

Activity Cost Pools                          Estimated Overhead                      Cost Drivers

Scheduling and travel                     $85,000                                                 Hours of travel

Setup time                                           90,000                                                Number of setups

Supervision                                         60,000                                                Direct labor cost

Expected Use of Cost Drivers per Product

                                                                                Commercial                       Residential

Scheduling and travel                                                     750                                         500

Setup time                                                                          350                                         250


Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line. Compute the operating income for each product line, using the activity-based overhead rates. What do you believe Peggy Kingman should do?


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