Chapter 10 Problem Set Mastery Problem: Activity-Based Costing (Advanced) Activity-Based Costing Traditionally, overhead costs are assigned based arbitrarily on the rate of either direct labor or direct materials associated with production. This makes sense when companies only make a few products, production processes are simple, and overhead costs are best pervasive. However, today production processes are more complex, companies make a wide array of products, and fewer costs are directly traceable to units of production. To address this, companies use activity-based costing (ABC). Specifically, activity-based costing identifies and traces costs and expenses to activities and then to specific products. ABC uses multiple factory overhead rates based on activities Activities are the types of work, or actions, involved in a manufacturing process or service activity. For example, assembly, inspection, and engineering design are activities The estimated activity costs are allocated to products using an activity rate. Activity rates are determined as follows: Activity Rate - Estimated Activity Cost / Estimated Activity Base Usage Illustrated Example of Activity-Based Costing Comparing Two Products under Traditional and Activity-Based Casting Compare two projects under development by the same company. The following are a few aspects of each product's development process relevant to costs Products Product Requires 3,360 hours of testing Requires 140 hours of testing Requires 4,900 units of computing power Requires 2.100 units of computing power Requires 25 developer hours to implement Requires 75 developer hours to implement Cost Items Testing: Computing power Developer hourly cost Cost of Each Activity $25,200 337,800 $10 per hour Chapter 10 Problem Set Traditional Casting Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing. In the following table. use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project. If required, round your answers to the nearest dollar Products Product Percentage of developer hours 25 Percentage of developer hours 755 Testing cost Testing cost Computing cost Computing cost Developer cost Developer cost Total cost Total cost Percentage of developer hours Percentage of developer hours for products (254) Allocation basis for Product S The amount of labor hours associated directly with Products, as a percentage of all developer hours worked (regardless of product). The amounts for Overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Products under the traditional costing method. 25 (2575) Percentage of developer hours for Product (754) Allocation basis for Product T: The amount of labor hours associated directly with Product as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product T under the traditional costing method 75 Chapter 10 Problem Set - Percentage of developer hours for Product (75%) Allocation basis for Product T: The amount of labor hours associated directly with Product as a percentage of all developer hours worked (regardiess of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product T under the traditional costing method. 75 (25.75) Review the resources each product (s and T) requires for production and compare that to the costs calculated above under traditional costing. Does traditional costing serve as an accurate gauge of costs? Activity-Based Costing Using the data above for products S and I, calculate the costs using activity-based costing. Alocate the costs of testing, computing, and development based on the rates of activity consumed by each product's development process of required in your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar Cost Activity Base Testing Computing COM Hours of testing Units of computing power Development hours Developer cost Products Testing cost Computing.com Developer cost Product Testing cost Computing.com Developer cost Total cost TO CON