Concept explainers
a.
Calculate the amount of Maintenance Department costs that would be allocated to each product line (on a per-unit basis) using machine-hours as a single activity base.
a.

Explanation of Solution
Calculate the amount of Maintenance Department costs that would be allocated to each product line (on a per-unit basis) using machine-hours as a single activity base.
Product line |
Machine hours per unit (A) |
Per machine hours in $ (B) |
Amount in $ |
Boots | 0.10(3) | 5(2) | 0.50 |
Poles | 0.05(3) | 5(2) | 0.25 |
Helmets | 1.75(3) | 5(2) | 8.75 |
(Table 1)
Working Notes:
Calculate total machine hours:
Calculate the
Calculate the machine hours on per-unit basis:
Product line |
Machine hours (A) |
Units of production (B) |
Machine hours per -unit |
Boots | 5,000 | 50,000 | 0.10 |
Poles | 10,000 | 200,000 | 0.05 |
Helmets | 35,000 | 20,000 | 1.75 |
(Table 2)
(3)
b.
Calculate the amount of Maintenance Department costs that would be allocated to each product line (on a per-unit basis) using the proposed ABC method.
b.

Explanation of Solution
Activity-based costing:
It is a method that helps in finding the activities performed by a company and it tracks the indirect costs to the activities of the company that consumes resources.
Calculate the amount of Maintenance Department costs that would be allocated to each product line (on a per-unit basis) using the proposed ABC method.
Particulars | Product lines | |||
Total costs allocated | Boots in $ | Poles in $ | Helmets in $ | Total in $ |
Setup activities (9) | 31,250 | 18,750 | 12,500 | 62,500 |
Add: custodial activities (11) | 56,250 | 93,750 | 37,500 | 187,500 |
Total costs allocated (A) | 87,500 | 112,500 | 50,000 | 250,000 |
Units produced (B) | 50,000 | 200,000 | 20,000 | |
Maintenance cost per unit (A÷B) | 1.75 | 0.5625 | 2.50 |
(Table 3)
Working notes:
Calculate the percent of work orders used for setup activities:
Calculate the percent of machine hours used for custodial activities:
Calculate percent of work orders used in each activity pools:
Particulars | Work orders | Percent to total |
Setup activities | 600 | 25% (4) |
Custodial activities | 1,800 | 75% (5) |
Total work orders issued | 2,400 | 100% |
(Table 4)
(6)
Product lines |
Total amount in $ (A) |
Percentage of Allocation (B) |
Cost Allocated |
Setup activities | 100,000 | 25% (6) | 52,500 |
Custodial activities | 100,000 | 75% (6) | 187,500 |
Total | 250,000 |
(Table 5)
(7)
Calculate the percent of setup cost pool to the allocated to each product line using the number of production runs as an activity base.
Particulars | Number of production runs | Percent of total |
Production runs for boots | 500 | 50% |
Production runs for poles | 300 | 30% |
Production runs for helmets | 200 | 20% |
Total production runs | 1,000 | 100% |
(Table 6)
(8)
Allocate the setup cost pool to each of the product line based on the percentage.
Particulars | Amount in $ |
Costs allocated to base | 31,250 |
Costs allocated to poles | 18,750 |
Costs allocated to helmets | 12,500 |
Total order costs allocated to products | 62,500 |
(Table 7)
(9)
Calculate the percent of custodial pool to the allocated to each product line using the number of production runs as an activity base.
Particulars | Percent of total | |
Production runs for boots | 9,000 | 30% |
Production runs for poles | 15,000 | 50% |
Production runs for helmets | 6,000 | 20% |
Total square feet occupied | 30,000 | 100% |
(Table 8)
(10)
Allocate the custodial cost pool to each of the product line based on the percentage.
Particulars | Amount in $ |
Costs allocated to base | 56,250 |
Costs allocated to poles | 93,750 |
Costs allocated to helmets | 37,500 |
Total order costs allocated to products | 187,500 |
(Table 9)
(11)
c.
Explain whether cost allocations distorted using machine-hours as a single activity base
c.

Explanation of Solution
- Using machine hours as a single activity base will result in cost distortions for Company D. The largest distortion, related to product line helmet. Machine hours taken by company while producing helmet is comparatively more than boots, poles. When activity based costing is used by the company only 20% of the maintenance cost is been used to produce helmets.
- While using activity based costing for production it reduces the maintenance cost of helmets and it reallocates the cost with the production of boots and poles
- The following table provides the reallocation of maintenance cost for each product line under activity based costing:
Particulars | Boots | Poles | Helmets |
Maintenance cost per unit (Using machine hours) | 0.50 | 0.25 | 8.75 |
Maintenance cost per unit (Using activity based costing ) | 1.75 | 056 | 2.50 |
Percentage increase (decrease) using Activity based costing | 250% | 124% | (71%) |
(Table 10)
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