Activity-Based Costing

Homework 4
Activity-Based Costing

 You are to complete this assignment by the time class starts on the due date (indicated in the syllabus or during class).  You are free to use resources or talk with classmates, but all work turned in must be your own. You may type or write/scan and upload to Blackboard, but make sure that I can read everything written down. It is your responsibility to make sure that the correct images have been uploaded.



  1. Green Thumb Gardening is a small gardening service that used 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:


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 has already completed its first stage allocations of costs (overhead costs to each activity cost pool) and has summarized its annual costs and activity as follows:


Caring for Lawn $72,000 150,000 sq ft of lawn
Caring for garden beds – Low Maintenance $26,400 20,000 sq ft of low maintenance beds
Caring for garden beds – High Maintenance $41,400 15,000 sq ft 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.






  1. Klumber 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:


Supporting Direct Labor $6.00 per direct labor-hour
Machine Processing $4.00 per machine-hour
Machine Setups $50.00 per setup
Production Orders $90.00 per order
Shipments $14.00 per shipment
Product Sustaining $840.00 per product


Activity data have been applied for the following two products:



  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: Determine the total overhead cost that would be assigned to each of the products listed above in the activity-based costing system.




















  1. Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the compnay’s estimator and the work supervisors. The on-site supervisors claim that the estimators do not adequately distinguish between routine work such as removal of asbestos insulation around heating pipes in older homes and nonroutine work such as removing asbestos contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “My job is to measure the are to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.50 to determine the bid price. Since our average cost is only $2.175 per square foot, that leaves enough cushion to take care of nonroutine work that shows up.”

To shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based costing system follow:


Activity Cost Pool Activity Measure (Cost Driver) Total Activity
Removing Asbestos Thousands of square feet 800,000 square feet
Estimating and Job Setup Number of Jobs 500 Jobs
Working on Nonroutine Jobs Number of Nonroutine Jobs 100 nonroutine jobs


Overhead Costs for the Year  
Wages and salaries $300,000
Disposal fees $700,000
Equipment depreciation $90,000
On-site supplies $50,000
Office expenses $200,000
Licensing and Insurance 400,000
TOTAL COST $1,740,000


Distribution of Consumption Across Activities
  Removing Asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total
Wages and salaries 50% 10% 30% 10% 100%
Disposal fees 60% 0% 40% 0% 100%
Equipment depreciation 40% 5% 20% 35% 100%
On-site supplies 60% 30% 10% 0% 100%
Office expenses 10% 35% 25% 30% 100%
Licensing and Insurance 30% 0% 50% 20% 100%


*Other includes costs of idle capacity, etc. that is not allocated to any activity cost pool, but just “exists” regardless of the job on hand. Thus, you need the “other” to determine the distribution of overhead costs in each of the activity cost pools, but you do not need to compute an activity rate or take into consideration when determining the cost of a particular job.




  1. Perform the first-stage allocation of costs to the activity cost pools. (Hint: Find the overhead costs to be allocated to each of the activity cost pools. Create a table like the third table given but fill in the dollar amounts to replace the % distribution and sum up each column to get overhead costs allocated to each activity cost pool.)


  1. Compute the activity rates for the activity cost pools.


  1. Using the activity rates you have computed, determine the total cost and average cost per thousand square feet of each of the following jobs according to the activity-based costing system:
  • A routine 1,000-square-foot asbestos removal job
  • A routine 2,000-square-foot asbestos removal job
  • A nonroutine 2,000-square-foot asbestos removal job


  1. Given the results you obtained in c) above, do you agree with the estimator that the company’s present policy for bidding on jobs is adequate? Explain (you do not have to do any calculations and can explain in just words)




  1. Classify the following activities into the appropriate cost hierarchies (unit, batch, product, customer, or org-sustaining):


  1. A clothing store makes sales calls made to customers
  2. Samsung conducting market research to understand and take into account when developing the new line of products at the company (e.g. the next generation of Galaxy phones)
  3. Coca Cola setting up machinery for bottling
  4. A law firm making trips to meet and talk with clients
  5. A company preparing quarterly financial reports to be filed with the SEC
  6. A CD production company placing CDs individually into protective cases
  7. Lighting and heating at a company’s production facility
  8. Paying property taxes for a manufacturing company’s corporate headquarters
  9. Kraft Foods placing fifty containers into each box before sending the boxes to the warehouse
  10. Hershey’s cutting chocolate into individual pieces before the pieces are sent to be wrapped
  11. Deloitte recruiting and interviewing candidates to be the next group of entry-level auditors
  12. Tesla making designs for its various brands of electric cars






  1. Which of the following is NOT a reason why activity based costing should be used rather than traditional costing?


  1. Today, indirect costs make up most of total manufacturing costs
  2. Product diversity has increased, and more different products have to be costed
  3. Inflation has made cost of direct materials higher
  4. Product competition has made it more difficult to set prices however you want.


  1. Which of the following is the best cost driver for an activity cost pool containing activities related to product development?


  1. Machine hours
  2. Number of parts in a product
  3. Direct material cost
  4. Number of different types of indirect materials


  1. Wilson Company has two products: A and B. The company uses activity-based costing. The total overhead cost and activity for each of the company’s three activity cost pools are as follows:


The activity rate under the activity-based costing system for Activity 3 is closest to:


  1. $19.22
  2. $36.24
  3. $38.44
  4. $57.67





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