Question

Ferris Corporation makes a single product—a fire-resistant commercial filing cabinet—that it sells to office

furniture distributors. The company has a simple ABC system that it uses for internal decision making. The

company has two overhead departments whose costs are listed on the following page:

Manufacturing overhead .................................. $500,000

Selling and administrative overhead ................ 300,000

Total overhead costs ........................................ $800,000

The company’s ABC system has the following activity cost pools and activity measures:

Activity Cost Pool Activity Measure

Assembling units ..................... Number of units

Processing orders .................... Number of orders

Supporting customers ............. Number of customers

Other ........................................ Not applicable

Costs assigned to the “Other” activity cost pool have no activity measure; they consist of the costs of

unused capacity and organization-sustaining costs—neither of which are assigned to orders, customers, or

the product.

Ferris Corporation distributes the costs of manufacturing overhead and of selling and administrative

overhead to the activity cost pools based on employee interviews, the results of which are reported below:

Distribution of Resource Consumption Across Activity Cost Pools
	Assembling units	Processing Orders	Supporting Customers	Other	Total
Manufacturing overhead	50%	35%	5%	10%	100%
Selling and administrative	10%	45%	25%	20%	100%
Total activity	1,000 units	250 orders	100 customers

Question 1

1. Perform the first-stage allocation of overhead costs to the activity cost pools and find manufacturing overhead for Assembling units.

Question 2

Compute activity rates for the activity cost pools and find the activity rate for processing orders

Question 3

Compute activity rates for the activity cost pools and find the activity rate for supporting customers

Question 4

Office Mart is one of Ferris Corporation’s customers. Last year, Office Mart ordered filing cabinets four different times. Office Mart ordered a total of 80 filing cabinets during the year. What is the ABC cost for Assembeling unit?

Question 5

Office Mart is one of Ferris Corporation’s customers. Last year, Office Mart ordered filing cabinets four different times. Office Mart ordered a total of 80 filing cabinets during the year. What is the ABC cost for Processing orders?

Answer 1

COST ALLOCATION

	Assembling Units	Processing Units	Supporting Customer	Other
Manufacturing Overhead	250,000	175,000	25,000	50,000
Selling and Administrative	30,000	135,000	75,000	60,000

Answer 1

$250,000 ($500,000 * 50%)

Answer 2 and 3

	Assembling Units	Processing Units	Supporting Customer	Other
Manufacturing Overhead	2,50,000	1,75,000	25,000	50,000
Selling and Administrative	30,000	1,35,000	75,000	60,000
Activity Cost	2,80,000	3,10,000	1,00,000	1,10,000
Total Activity	1,000	250	100
	Per Unit	Per Order	Per Customer
Activity Rate	280	1,240	1,000

Activity Rate for Processing One Order is $1,240

Activity Rate for Supporting One Customer is $1,000

Answer 4 & 5

Number of Filing Cabinets [A]	80
Number of Orders [B]	4
ABC Rate for Assembling Unit [C]	280
ABC Rate for Processing Unit [D]	1,240
Total Cost for Assembling Unit [A*C]	22,400
Total Cost for Processing Unit [B*D]	4,960