Question

SecuriCorp operates a fleet of armored cars that make scheduled pickups and deliveries in the Los Angeles area. The company is implementing an activity-based costing system that has four activity cost pools: Travel, Pickup and Delivery, Customer Service, and Other. The activity measures are miles for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool, and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure because it is an organization-sustaining activity. The following costs will be assigned using the activity-based costing system:

Driver and guard wages	$	720,000
Vehicle operating expense		280,000
Vehicle depreciation		120,000
Customer representative salaries and expenses		160,000
Office expenses		30,000
Administrative expenses		320,000
Total cost	$	1,630,000

The distribution of resource consumption across the activity cost pools is as follows:

	Travel		Pickup and Delivery		Customer Service		Other		Totals
Driver and guard wages	50	%	35	%	10	%	5	%	100	%
Vehicle operating expense	70	%	5	%	0	%	25	%	100	%
Vehicle depreciation	60	%	15	%	0	%	25	%	100	%
Customer representative salaries and expenses	0	%	0	%	90	%	10	%	100	%
Office expenses	0	%	20	%	30	%	50	%	100	%
Administrative expenses	0	%	5	%	60	%	35	%	100	%

Required:

Complete the first stage allocations of costs to activity cost pools.

2.

Green Thumb Gardening is a small gardening service that uses activity-based costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the size of customer lawns, the size of customer garden beds, the distance to travel to customers, and the number of customers. In addition, the costs of maintaining garden beds depends on whether the beds are low maintenance beds (mainly ordinary trees and shrubs) or high maintenance beds (mainly flowers and exotic plants). Accordingly, the company uses the five activity cost pools listed below:

Activity Cost Pool	Activity Measure
Caring for lawn	Square feet of lawn
Caring for garden beds–low maintenance	Square feet of low maintenance beds
Caring for garden beds–high maintenance	Square feet of high maintenance beds
Travel to jobs	Miles
Customer billing and service	Number of customers

The company already has completed its first stage allocations of costs and has summarized its annual costs and activity as follows:

Activity Cost Pool	Estimated Overhead Cost		Expected Activity
Caring for lawn	$	72,000	150,000	square feet of lawn
Caring for garden beds–low maintenance	$	26,400	20,000	square feet of low maintenance beds
Caring for garden beds–high maintenance	$	41,400	15,000	square feet of high maintenance beds
Travel to jobs	$	3,250	12,500	miles
Customer billing and service	$	8,750	25	customers

Required:

Compute the activity rate for each of the activity cost pools. (Round your answers to 2 decimal places except customer billing and service.)

3.

Klumper Corporation is a diversified manufacturer of industrial goods. The company’s activity-based costing system contains the following six activity cost pools and activity rates:

Activity Cost Pool	Activity Rates
Supporting direct labor	$	6	per direct labor-hour
Machine processing	$	4	per machine-hour
Machine setups	$	50	per setup
Production orders	$	90	per order
Shipments	$	14	per shipment
Product sustaining	$	840	per product

Activity data have been supplied for the following two products:

	Total Expected Activity
	K425	M67
Number of units produced per year	200	2,000
Direct labor-hours	80	500
Machine-hours	100	1,500
Machine setups	1	4
Production orders	1	4
Shipments	1	10
Product sustaining	1	1

Required:

How much total overhead cost would be assigned to K425 and M67 using the activity-based costing system?

Answer 1

Solution

SecuriCorp

First stage allocation of costs to activity cost pools:

First stage allocation:
		Travel		Pick-up and Delivery		Customer Service		Other	Total
	Percent	Amount	Percent	Amount	Percent	Amount	Percent	Amount
Driver and guard wages	50%	$360,000	35%	$252,000	10%	$72,000	5%	36,000	$720,000
Vehicle operating expenses	70%	$196,000	5%	$14,000	0%	$0	25%	$70,000	$280,000
Vehicle depreciation	60%	$72,000	15%	$18,000	0%	$0	25%	$30,000	$120,000
Customer representative salaries and expenses	0%	$0	0%	$0	90%	$144,000	10%	$16,000	$160,000
Office Expenses	0%	$0	20%	$6,000	30%	$9,000	50%	$15,000	$30,000
Administrative expenses	0%	$0	5%	$16,000	60%	$192,000	35%	$112,000	$320,000
Total assigned cost		$628,000		$306,000		$417,000		$279,000	$1,630,000

1. Green Thumb Gardening

Computation of the activity rate for each of the activity cost pools:

Activity Cost Pool	Estimated overhead cost	expected activity	cost per activity
Caring for lawn	$72,000	150,000 square feet of lawn	$0.48 per square feet	($72,000/150,000)
Caring for garden beds - low maintenance	$26,400	20,000 square feet of low maintenance beds	$1.32 per square feet	(26,400/20,000)
Caring for garden beds - high maintenance	$41,400	15,000 square feet of high maintenance	$2.76 per square feet of high maintenance- garden beds)	41,400/15,000
Travel to jobs	$3,250	12,500 miles	$0.26 per mile	$3,250/12,500
Customer billing and service	$8,750	25 customers	$350 per customer	(8,750/25 = $350 per customer

1. Klumper Corporation

Determination of the total overhead cost that would be assigned to K425 and M67 using the activity-based costing method:

K425
Activity	Expected activity	activity rate	total assigned cost
Supporting direct labor	80 DL hours	$6 per DLH	$480
Machine processing	100 MHs	$4 per MH	$400
Machine setups	1 setup	$50 per setup	$50
Production orders	1 order	$90 per order	$90
shipments	1 shipment	$14 per shipment	$14
Product sustaining	200 units of production	$840 per product	$840
Total overhead cost			$1,874
M67
Activity	Expected activity	activity rate	total assigned cost
Supporting direct labor	500 DLH	$6 per DLH	$3,000
Machine processing	1,500 MH	$4 per MH	$6,000
Machine setups	4 setup	$50 per setup	$200
Production orders	4 orders	$90 per order	$360
shipments	10 shipment	$14 per shipment	$140
Product sustaining	2,000 units	$840 per product	$840
Total overhead cost			$10,540