Although the textbook that we will be using for this session will focus on traditional budgeting, activity-based budgeting (ABB) using ABC costing techniques is an important budgeting tool used by many organizations.
Activity-based Budgeting (ABB)
Although the textbook that we will be using for this session will focus on traditional budgeting, activity-based budgeting (ABB) using ABC costing techniques is an important budgeting tool used by many organizations. Each week, lessons present some information related to ABB. Although you had ABC costing in ACCT505, some of you may feel a little rusty on this topic.
To help you gain the necessary skills to complete the Week 1 assignment, it is suggested that you view this problem demo video before attempting to complete the homework assignment. Hopefully, you will find this learning technique to be a “change of pace.”
Transcript
Scenario: ABC Costing
The new president of the Blake Company was stumped. Why had profits gone down? He had directed the sales department to push the product with the highest contribution margin, and the sales department had come through with flying colors. The percent of flops sold had increased from 25% of units sold to 37.5% of units sold. So what happened?
Flops
Chops
Sales Price per Unit
$200
$600
Direct Materials per Unit
$100
$300
Direct Labor Cost per Hour
$30
$50
Direct Labor Hours per Unit
2 hours per unit
6 hours per unit
Number of Units Produced
30,000
20,000
Assignment Details
Important!
It is expected that the assignment will be completed using an Excel spreadsheet using formulas.
Answer the following questions.
Calculate the Blake Company’s estimated direct labor hours to produce flops and chops.
Calculate the predetermined variable overhead rate that will be used in the coming year using a traditional costing system based upon direct labor hours.
Using a traditional costing system based upon direct labor hours, compute the using product costs for flops and chops as well as contribution margin per unit.
It has been suggested to the president to consider the use of an ABC costing system to allocate manufacturing overhead. Engineering studies have revealed the following information about estimated manufacturing activities for the coming year.
Activity Cost Pool
Estimated Overhead Cost
Expected Activity Level
Setups
$860,000
200 setups
Scrap
$400,000
500 units
Testing
$300,000
5,000 tests
Machine Related
$2,400,000
100,000 machine related
Total
$4,000,000
Calculate the separate predetermined overhead rates for each of the activities listed above.
The following data are available about the activity levels needed to produce the projected 30,000 units of flops
Activity Cost Pool
Estimated Activity Level for Flops
Setups
50 setups
Scrap
200 units
Testing
2,000 tests
Machine Related
12,500 machine related
Calculate the expected variable overhead to be applied to flops.
The following data are available about the activity levels needed to produce the projected 20,000 units of chops
Activity Cost Pool
Estimated Activity Level for Gadgets
Setups
150 setups
Scrap
300 units
Testing
3,000 tests
Machine Related
87,500 machine related
Calculate the expected variable overhead to be applied to chops.
Calculate the total overhead (total for company) that is expected to be applied to flops and chops.
Calculate the projected unit costs and unit contribution margins for flops and chops using ABC costing.
What conclusions can you draw about the use of traditional costing versus ABC costing for the Blake Company? What recommendations do you have for the president?
Submit your Excel spreadsheet with its formulas to the Week 1 Homework Submission page.
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