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1.

The last step in activity-based costing is to:


a. Identify the major activities that pertain to the manufacture of specific products.
b. Allocate manufacturing overhead costs to activity cost pools.
c. Identify the cost drivers that accurately measure each activity’s contribution to the finished product.
d. Assign manufacturing overhead costs for each activity cost pool to products.

2. Kate Inc. of Cebu Corporation has decided to institute a pilot activity-based costing project in its five-person purchasing
department. Annual departmental costs are P 473,500. Because finding the best supplier takes the majority of effort
in the department, most of the costs are allocated to this area.
Activity Allocation Measure No. of People Total Cost
Find best suppliers No. of telephone calls 3 300,000
Issue purchase orders No. of purchase orders 1 100,000
Review receiving reports No. of receiving reports 1 73,500

During the year, the purchasing department made 150,000 telephone calls, issued 10,000 purchase orders, and reviewed
7,000 receiving reports. Many purchase orders are received in a single shipment.
One product manufactured by Cebu Corporation required the following purchasing department activities:
125 telephone calls, 60 purchase orders and 15 receipts.
What amount of purchasing department cost should be assigned to the product?
a. 1,007.50 c. 921.48
b. 4,500.00 d. 327.55

3. Using the same information in no. 4, what is the purchasing department cost per unit would be if 200 units of the
product are manufactured during the year?
a. 2.00 c. 10.00
b. 5.04 d. 10.50

4. Taal Mining Corp. makes specialty tools used in the mining industry. The company uses an activity-based costing
system for internal decision making purposes. The company has four activity cost pools as listed below:
Activity Cost Pool Activity Measure Activity Rate
Order size Number of direct labor hours P 17.60 per direct labor hour
Customer orders Number of customer orders P 360 per customer order
Product testing Number of testing hours P 79 per testing hour
Selling Number of sales calls P 1,494 per sales call
The managing director of the company would like information concerning the cost of a recently completed order for
hard-rock drills. The order required 150 direct labor hours, 18 hours of product testing, and three sales calls.
What is the total overhead cost assigned to the order?
a. 8,904 c. 9,408
b. 6,422 d. 4,622

Use the following information for questions 5 to 13:


Big 4 Inc. specializes in the distribution of pharmaceutical products. Big 4 buys from pharmaceutical companies and resells to
each of three different markets:
a. MC supermarket chains
b. Drugstore chains
c. K and G single-store pharmacies

Laura Rodriquez, the new controller of Big 4 reported the following data for August 2006:
MC Supermarket Drugstore K and G
Average revenue per delivery 30,900 10,500 1,980
Average cost of goods sold per delivery 30,000 10,000 1,800
Number of deliveries 120 300 1,000

For many years, Big 4has used gross margin percentage to evaluate the relative profitability of its customer groups
(distribution outlets). Ms. Rodriguez recently attended a seminar on activity-based costing and decides to consider using it at
Big 4. Ms. Rodriquez meets with all the key managers and many staff members. Generally, these individuals agree that there
are five key activity areas at Big 4:
Activity Area Cost Driver
1. Customer purchase order processing Purchase orders by customers
2. Line-item ordering Line items per purchase order
3. Store delivery Store deliveries
4. Cartons shipped to stores Cartons shipped
5. Shelf-stocking at customer store Hours of shelf-stocking

Each customer purchase order consists of one or more line items. A line item represents a single product (such as Extra-
Strength Ponstan capsules). Each store delivery entails the delivery of one or more cartons of products to a customer. Each
product is delivered in one or more separate cartons. Big 4 staff stack cartons directly onto display shelves in a store.
Currently, there is no charge for this service, and not all customers use Big 4 for this activity.
The August 2006 operating costs (other than cost of goods sold) of Big 4 are P 301,080. These operating costs are assigned
to the five activity areas. The costs in each area and the quantity of the cost allocation base used in that area for August 2006
are as follows:
Activity Area Total costs in Aug 2006 Total units of cost-allocation
base used in Aug 2006
1. Customer purchase order processing 80,000 2,000 orders
2. Line-item ordering 63,840 21,280 line items
3. Store delivery 71,000 1,420 store deliveries
4. Cartons shipped to stores 76,000 76,000 cartons
5. Shelf-stocking at customer store 10,240 640 hours
301,080
=========
Other data for August 2006 include the following:
MC Supermarket Drugstore K&K
Total number of orders 140 360 1,500
Average number of line items per order 14 12 10
Total number of store deliveries 120 300 1,000
Average number of cartons shipped per store delivery 300 80 16
Average number of hours of shelf stocking per store delivery 3.0 0.6 0.1

5. What is the 2006 gross margin for MC Supermarket Chains?


a. 112,000 c. 122,000
b. 150,000 d. 108,000
6. What is the 2006 gross margin for Drugstore Chains?
a. 100,000 c. 120,000
b. 150,000 d. 250,000
7. What is the 2006 gross margin for K and G Single Stores?
a. 180,000 c. 200,000
b. 120,000 d. 320,000
8. What is the operating income of Big 4?
a. 132,080 c. 136,920
b. 123,980 d. 163,290
9. The operating income margin of MC Supermarket Chains in August 2006 using the activity-based information is:
a. 1.31% c. 2.00%
b. 1.25% d. 1.51%
10. The operating income margin of Drugstore Chains in August 2006 using the activity-based information is:
a. 3.43% c. 1.75%
b. 2.56% d. 2.18%
11. The operating income margin of K and G Single Stores in August 2006 using the activity-based information is:
a. 0.37% c. 0.43%
b. 0.75% d. 0.27%
12. The total operating income under activity-based costing for August 2006 is:
a. 136,920 c. 106,220
b. 119,080 d. 123,000
13. The ratio of operating costs to revenues for MC Supermarkets Chains is:
a. 1.60% c. 1.75%
b. 1.50% d. 2.00%

PROBLEMS
1. Classification of Activities
Lubin Electronics Inc. makes avionics equipment for private aircraft manufacturers. The production process takes place in
three departments. The following costs were budgeted for February:
Computer programming – production 27,000
Custodial wages – plant 4,500
Depreciation – machinery 95,000
Depreciation – plant 60,000
Electricity – machinery 11,600
Eectricity – plant 7,400
Engineering design 36,000
Equipment maintenance – wages 14,100
Equipment maintenance – parts and supplies 2,900
Heating – plant 3,200
Inspection – production 3,800
Insurance – plant 10,000
Property taxe4s 9,300
Raw materials, components, subassemblies 280,000
Setup wages 19,000
Required:
(1) Identify each of the costs as one of the following:
(a) A unit-level activity
(b) A batch-level activity
(c) A product-level activity
(d) A facility-level activity

(2) Specify an appropriate cost driver for tracing to the products the costs that are associated with the various activity levels
previously identified.

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