Traditional costing vs Activity based costing..Please help

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  • #180641
    nishvik
    Participant

    Hello A71 friends,

    I am really stuck at this topic,somehow I am not able to understand and solve any MCQ’s on this topic..I know the theory but no idea on MCQ.

    Question CPA-03959

    Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given below.

    Units produced Wall Mirrors – 25 || Specialty Windows 25

    Material moves per product line Wall Mirrors – 5 || Specialty Windows-15

    Direct labor hours per unit Wall Mirrors- 200 || Specialty Windows-200

    Budgeted materials handling costs $50,000

    Under a costing system that allocates overhead on the basis of direct labor hours, the materials handling costs allocated to one unit of wall mirrors would be:

    a. $1,000

    b. $500

    c. $2,000

    d. $5,000

    Explanation

    Choice “a” is correct. $1,000.

    Wall mirrors – 25 units x 200 hours per unit =5,000 hours

    Specialty windows – 25 units x 200 hours per unit= 5,000 hours

    Total hours 10,000 hours

    Budgeted materials handling costs $50,000

    Divided by total hours ÷10,000

    Materials handling cost per hour $ 5

    Hours per unit x 200

    Costs allocated to one unit $ 1,000.

    Also given same information how would you calculate under Activity Based Costing Method?

    Does anyone know how to start/trick for solving them.I dont want to memorize them but understand.

    Any Explanation/input would be really appreciative 🙂

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    I am Done !!!!

Viewing 2 replies - 1 through 2 (of 2 total)
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  • #448440

    Activity Based Costing is the use of multiple costs, while a single activity uses a single activity to base costs on. In this problem we have $50,000 to allocate.

    Under a single activity…

    the problem provides we use hours to allocate costs. If we produce 50 windows each requiring 200 hours, we find that we have an hour allocation base of 10,000. 50,000 / 10,000 equals 5$ which represents cost / labor hours. As labor hours are incurred we apply the cost, so for one mirror, we need 200 hours, or 200×5 equlas 1,000. The trick to single activity is to find the TOTAL number of hours budgeted, and then apply.

    Under Activity Based Costing (ABC)…

    Same principle, but we use apples to apples. Direct Labor hours are not materiall handling costs. Under a single we applied with hours under ABC we could use the Material Moves which would be a better representative.

    Step 1: Total Moves

    Wall Mirrors: 25 mirrors x 5 moves equals 125 moves

    Specialty Mirros: 25 mirrors x 15 moves equals 375 moves

    Total Material Handling Moves: 500

    Step 2 Find the Allocation Base

    50,000 moves cost / 500 moves equals $100 per move.

    Step 3 Apply

    1 wall mirror x 5 moves per mirror x $100 per move equals $500

    As we can see single is a simplified version of ABC, or ABC is a single base done multiple times over for product line. Pay attention to the pull of the question and how they apply overhead. I hope this helps, please ask for clarification.

    sent from android, apologies for poor spelling and syntax.

    ALL 4 parts passed summer 13
    Ethics October 13
    Experience (waiting)

    Becker Only

    #448589

    Activity Based Costing is the use of multiple costs, while a single activity uses a single activity to base costs on. In this problem we have $50,000 to allocate.

    Under a single activity…

    the problem provides we use hours to allocate costs. If we produce 50 windows each requiring 200 hours, we find that we have an hour allocation base of 10,000. 50,000 / 10,000 equals 5$ which represents cost / labor hours. As labor hours are incurred we apply the cost, so for one mirror, we need 200 hours, or 200×5 equlas 1,000. The trick to single activity is to find the TOTAL number of hours budgeted, and then apply.

    Under Activity Based Costing (ABC)…

    Same principle, but we use apples to apples. Direct Labor hours are not materiall handling costs. Under a single we applied with hours under ABC we could use the Material Moves which would be a better representative.

    Step 1: Total Moves

    Wall Mirrors: 25 mirrors x 5 moves equals 125 moves

    Specialty Mirros: 25 mirrors x 15 moves equals 375 moves

    Total Material Handling Moves: 500

    Step 2 Find the Allocation Base

    50,000 moves cost / 500 moves equals $100 per move.

    Step 3 Apply

    1 wall mirror x 5 moves per mirror x $100 per move equals $500

    As we can see single is a simplified version of ABC, or ABC is a single base done multiple times over for product line. Pay attention to the pull of the question and how they apply overhead. I hope this helps, please ask for clarification.

    sent from android, apologies for poor spelling and syntax.

    ALL 4 parts passed summer 13
    Ethics October 13
    Experience (waiting)

    Becker Only

Viewing 2 replies - 1 through 2 (of 2 total)
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