Merriman Company provides the following ABC costing information: Total Costs Act
ID: 2538417 • Letter: M
Question
Merriman Company provides the following ABC costing information: Total Costs Activity cost drivers 10,000 hours 4,000,000 lines Activities Account inquiry hours Accounting billing lines Account verification accounts Correspondence letters Total costs The above activities used by Departments A and B as follows: $400,000 $280,000 $150,000 $50,000 40,000 accounts 4,000 letters $880,000 Dept. A. Dept. B 4,000 hours 200,000 lines Account inquiry hours Accounting billing lines Account verification accounts 10,000 accounts Correspondence letters How much of the account verification costs will be assigned to Dept. A.? 2,000 hours 400,000 lines 8,000 accounts 1,600 letters 1,000 letters a. $150,000 O b. $37,500 . $30,000 o d. $10,000Explanation / Answer
Solution:
First of all, we need to know the meaning of activity based costing system and how the activity rate is calculated under this system.
Activity Based Costing System
- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.
- This system determines all the activities related to product or production process.
- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.
- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.
- It helps to distribution of overheads on the basis of activities.
The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity or Expected Total Activity)
Here, we need to calculate the Activity Rate for Accounting Verification cost activity and then assigned to Dept. A by applying the actual activity used or incurred by the Dept A.
Activity Rate for Accounting Verification Cost = Estimated Total Costs for Account verification / Estimated total number of accounts
= $150,000 / 40,000 accounts
= $3.75 per account
The total costs assigned to Dept A = Actual Activity Incurred by Dept A 10,000 Accounts x Activity Rate
= 10,000 x $3.75
= $37,500
Hence, the correct option is b. $37,500