ABC Class Example
Problem 3: Activity-Based Costing
Simkins Corporation uses an activity-based costing system with three activity cost pools – Processing, Setting Up, and Other. The company’s overhead costs, which consist of salary expense, factory utilities, and indirect materials/labor, are allocated to the cost pools in proportion to the activity cost pools’ consumption of resources. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are organization sustaining costs. Details related to total overhead expenses, resource distribution across activity cost pools, and activity measure levels are provided below:
Overhead Expenses
Salary Expenses
$34,700
Factory Utilities
$15,100
Indirect Materials and Labor
$25,400
Distribution of Resources Consumption Across Activity Cost Pools Processing
Setting Up
Other
Salary Expenses
0.2
0.5
0.3
Factory Utilities
0.5
0.3
0.2
Indirect Materials and Labor
0.8
0.1
0.1
The company makes two different products, Product X7 and Product L4. Details regarding activity levels, sales revenue, and direct materials and labor costs are also provided:
MHs
Batches
Product X7
4824
1600
Product L4
9100
600
Total
13924
2200
Product X7
Product L4
Sales (Total)
$80,400
$99,600
Direct Materials
$25,600
$38,300
Direct Labor
$30,800
$43,200
Answer the following questions using activity-based costing methods:
a. Assign overhead costs to activity cost pools (provide a total for costs assigned to each pool).
b. Calculate activity rates for each activity cost pool.
c. Determine the amount of overhead cost that would be assigned to each product.
d. Determine the product margins for each product.
Simkins Corporation uses an activity-based costing system with three activity cost pools – Processing, Setting Up, and Other. The company’s overhead costs, which consist of salary expense, factory utilities, and indirect materials/labor, are allocated to the cost pools in proportion to the activity cost pools’ consumption of resources. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Setting Up cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are organization sustaining costs. Details related to total overhead expenses, resource distribution across activity cost pools, and activity measure levels are provided below:
Overhead Expenses
Salary Expenses
$34,700
Factory Utilities
$15,100
Indirect Materials and Labor
$25,400
Distribution of Resources Consumption Across Activity Cost Pools Processing
Setting Up
Other
Salary Expenses
0.2
0.5
0.3
Factory Utilities
0.5
0.3
0.2
Indirect Materials and Labor
0.8
0.1
0.1
The company makes two different products, Product X7 and Product L4. Details regarding activity levels, sales revenue, and direct materials and labor costs are also provided:
MHs
Batches
Product X7
4824
1600
Product L4
9100
600
Total
13924
2200
Product X7
Product L4
Sales (Total)
$80,400
$99,600
Direct Materials
$25,600
$38,300
Direct Labor
$30,800
$43,200
Answer the following questions using activity-based costing methods:
a. Assign overhead costs to activity cost pools (provide a total for costs assigned to each pool).
b. Calculate activity rates for each activity cost pool.
c. Determine the amount of overhead cost that would be assigned to each product.
d. Determine the product margins for each product.