Homework Clinic
Social Science Clinic => Accounting => Topic started by: mcmcdaniel on Jul 6, 2018
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Activity-based costing, job-costing system.
The job costing system at Sheri's Custom Framing has five indirect cost pools (purchasing, material handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs: Job 215, an order of 15 intricate personalized frames, and Job 325, an order of 6 standard personalized frames. The controller wants you to compare overhead allocated under the current simple job-costing system and a newly designed activity-based job-costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of activity driver are as follows.
Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 325.
Required:
1. Compute the total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine-hours.
2. Compute the total overhead allocated to each job under an activity-based costing system using the appropriate activity drivers.
3. Explain why Sheri's Custom Framing might favor the ABC job-costing system over the simple job-costing system, especially in its bidding process.
Question 2
Newton Company bought equipment, paying cash, 25,000 . Which of the following is true in regards to the fundamental accounting equation?
a. Total assets increased by 25,000.
b. Total liabilities increased by 25,000.
c. Total liabilities decreased by 25,000.
d. Total Owner's Equity increased by 25,000.
e. Total assets are unaffected.
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Answer to Question 1
1. Overhead allocation using a simple job-costing system, where overhead is allocated based on machine hours:
Overhead allocation rate = 226,800 10,500 machine-hours = 21.60 per machine-hour
Job 215 Job 325
Overhead allocateda 864 1,296
a 21.60 per machine-hour 40 hours; 60 hours
2. Overhead allocation using an activity-based job-costing system:
Budgeted Overhead
(1) Activity Driver
(2) Budgeted Activity Driver
(3) Activity Rate
(4) = (1) (3)
Purchasing 35,000 Purchase orders processed 2,000 17.50
Material handling 43,750 Material moves 5,000 8.75
Machine maintenance 118,650 Machine hours 10,500 11.30
Product inspection 9,450 Inspections 1,200 7.875
Packaging 19,950 Units produced 3,800 5.25
226,800
Job 215 Job 325
Overhead allocated
Purchasing (17.50 25; 8 orders) 437.50 140.00
Material handling (8.75 10; 4 moves) 87.50 35.00
Machine maintenance (11.30 40; 60 hours) 452.00 678.00
Product inspection (7.875 9; 3 inspections) 70.88 23.63
Packaging (5.25 15; 6 units) 78.75 31.50
Total 1,126.63 908.13
3. The manufacturing manager likely would find the ABC job-costing system more useful in cost management. Unlike direct manufacturing labor costs, the five indirect cost pools are systematically linked to the activity areas at the plant. The result is more accurate product costing. The manufacturing manager can seek to reduce both the level of activity (fewer purchase orders, less material handling) and the cost of each activity (such as the cost per inspection).
Marketing managers can use ABC information to bid for jobs more competitively because ABC provides managers with a more accurate reflection of the resources used for and the costs of each job.
Answer to Question 2
E