Maintenance
£360,000
Inspection
750,000
The plant currently applies overhead using direct labour hours and expected capacity of 100,000 direct
labour hours. The following data has been assembled for use in developing a bid for a proposed job.
Bid prices are calculated as full manufacturing cost plus a 20 per cent markup.
Direct materials
£2,100
Direct labour
£5,625
Machine hours
450
Number of inspections
4
Direct labour hours
550
Total expected machine hours for all jobs during the year is 60,000, and the total expected number of
inspections is 4,000.
Required:
a.
Compute the total cost of the potential job using direct labour hours to assign overhead.
Determine the bid price for the potential job.
b.
Compute the total cost of the job using activity-based costing and the appropriate activity
drivers.
Determine the bid price if activity-based costing is used.
c.
Prepare a memorandum to the plant manager recommending a bid price for the potential job.
Support your recommendation by explaining which costing method best reflects the actual
cost of the job.
•
Direct materials
Direct labour
Overhead:
(£1,110,000/100,000) 550
Bid price (£13,830 120%)
b.
Direct materials
Direct labour
Overhead:
(£360,000/60,000) 450
(£750,000/4,000) 4
Total cost
£11,175
Bid price (£11,175 120%)
The memorandum can be graded based on a number of factors, including the following:
provides a more accurate product cost.
2. Hunter Company manufactures two products (XX and YY). The overhead costs have been divided into
four cost pools that use the following activity drivers:
Number of
Number of
Number of Labour
Labour
Product
Orders
Setups
Transactions
Hours
XX
60
20
50
2,000
YY
20
80
70
500
Cost per pool
£16,000
£13,000
£2,400
£20,000
Required:
a.
Compute the allocation rates for each of the activity drivers listed.
b.
Allocate the overhead costs to Products XX and YY using activity-based costing.
c.
Compute the overhead rate using labour hours under the traditional functional-based
costing system.
d.
Allocate the overhead costs to Products XX and YY using the traditional
functional-based costing system overhead rate calculated in part (c).
Number of
Labour
Orders
Hours
Cost per pool
£16,000
£20,000
Total
÷__100
÷_2,500
Allocation rate
£ 130
b.
Number of orders
£12,000
Number of setups
No. of labour trans.
1,000
70 £20 =
Labour hours
£31,600
Product XX: 2,000 £20.56 = £41,120
3. Lyons, Inc., has identified the following overhead costs and activity drivers for next year:
Overhead Item
Expected Cost
Activity Driver
Expected Qty.
Setup costs
£150,000
Number of setups
1,200
Ordering costs
40,000
Number of orders
10,000
Maintenance
200,000
Machine hours
16,000
Power
20,000
Kilowatt hours
100,000
The following are two of the jobs completed during the year:
punctuation, and writing style.
Job XX
Job YY
Direct materials
£2,250
£2,500
Direct labour
3,000
1,875
Units completed
375
300
Direct labour hours
90
110
Number of setups
6
8
Number of orders
8
15
Machine hours
180
150
Kilowatt hours
90
120
The company’s normal activity is 20,000 direct labour hours.
Required:
a.
Determine the unit cost for each job using direct labour hours to apply overhead.
b.
Determine the unit cost for each job using the four activity drivers. (Round amounts to 2
decimal places.)
c.
Which method produces the more accurate cost assignment? Why?
Unit cost for Job XX:
Unit cost for Job YY:
Direct materials
Direct labour
Overhead assigned: (£20.50* 90)
Total cost
Unit cost (£7,095/375)
*(£150,000 + £40,000 + £200,000 + £20,000)/20,000 = £20.50/DLH
Direct materials
Direct labour
Overhead assigned: (£20.50 110)
Total cost
Unit cost (£6,630/300)
b.
Unit cost for Job XX:
Unit cost for Job YY:
Setup:
£150,000/1,200 = £125/setup
Ordering:
£40,000/10,000 = £4/order
Maintenance:
£200,000/16,000 = £12.50/hour
Power:
£20,000/100,000 = £0.20/kilowatt hour
Job XX
Direct materials
£2,250
4. Holbrook, Inc., has identified the following overhead costs and cost drivers for next year:
Overhead Item
Expected Cost
Cost Driver
Expected Quantity
Setup costs
£960,000
Number of setups
4,800
Ordering costs
160,000
Number of orders
20,000
Maintenance
640,000
Machine hours
64,000
Power
80,000
Kilowatt hours
200,000
The following are two of the jobs completed during the year:
Job 701
Job 702
Prime costs
£25,000
£18,000
Units completed
650
500
Direct labour hours
180
220
Number of setups
12
15
Number of orders
16
30
Machine hours
360
300
Kilowatt hours
180
650
The company’s normal activity is 40,000 direct labour hours.
Required:
a.
b.
Overhead assigned:
£125 6
£4 8
£12.50 180
£0.20 90
Total cost
Unit cost (£8,300/375)
Direct material
Direct labour
Overhead assigned:
£125 8
£4 15
£12.50 150
£0.20 120
Total cost
Unit cost (£7,334/300)
c.
5. Rounders Company used the following information when determining the appropriate overhead rates
to use in its two production departments:
Fabrication
Assembly
Budgeted overhead
£350,000
£500,000
Budgeted activity:
Direct labour hours (DLH)
14,000
12,500
Machine hours (MH)
20,000
25,000
Units projected
7,000
4,000
Actual operating results were as follows:
Actual overhead cost
£355,000
£505,000
Actual activity:
Direct labour hours (DLH)
13,500
13,000
Machine hours (MH)
19,000
27,000
Two of the products in the product line were as follows:
Product 1
Product 2
Prime costs
£900,000
£1,200,000
Activity:
Fabrication
5,000 DLH
6,000 DLH
Assembly
9,000 MH
12,000 MH
Units produced
7,000
4,000
Required:
a.
b.
Unit cost for Product 1: £151.49 per unit (rounded)
Unit cost for Product 2: £348.12 per unit
Prime costs
Overhead applied:
5,000 DLH £32.08*
6,000 DLH £32.08*
Total cost
*£850,000/26,500 = £32.08 (rounded)
6. Ernest, Inc., has identified the following overhead costs and cost drivers for next year:
Overhead Item
Expected Cost
Cost Driver
Expected Quantity
Setup costs
£320,000
Number of setups
4,000
Ordering costs
120,000
Number of orders
20,000
Maintenance
480,000
Machine hours
24,000
Power
40,000
Kilowatt hours
160,000
The following are two of the jobs completed during the year:
Job 320
Job 321
Direct materials
£8,000
£19,000
Direct labour
£6,400
£12,000
Units completed
800
1,600
Direct labour hours
240
500
Number of setups
12
20
Number of orders
20
40
Machine hours
400
600
Kilowatt hours
280
400
The company’s normal activity is 32,000 direct labour hours. (Round amounts to two decimal places.)
Required:
a.
b.
c.
Product 1: £1,060,400/7,000 units = £151.49 per unit
Product 2: £1,392,480/4,000 units = £348.12 per unit
b.
Unit cost for Product 1: £172.14 per unit
Unit cost for Product 2: £397.50 per unit
Product 2
Prime costs
Overhead applied:
Fabrication:
5,000 DLH £25*
6,000 DLH £25*
Assembly:
9,000 MH £20**
12,000 MH £20**
Total cost
7. Parkes Manufacturing has four categories of overhead. The four categories and the expected overhead
costs for each category for next year are as follows:
Maintenance
£300,000
Materials handling
150,000
Setups
200,000
Inspection
250,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour
hours. For next year, 100,000 direct labour hours are budgeted.
The company has been asked to submit a bid for a proposed job. The plant manager feels that
obtaining this job would result in new business in future years. Usually bids are based upon full
manufacturing cost plus 25 per cent.
Estimates for the proposed job are as follows:
Direct materials
£20,000
Direct labour (1,500 hours)
£15,000
Number of materials moves
20
Number of inspections
25
Number of setups
5
Number of machine hours
750
In the past, full manufacturing cost has been calculated by allocating overhead using a traditional
volume-based cost driver system—direct labour hours. The plant manager has heard of a new way of
applying overhead that uses cost pools and cost drivers.
Expected activity for the four activity-based cost drivers that would be used are as follows:
Machine hours
40,000
Material moves
8,000
Setups
10,000
Quality inspections
15,625
Required:
a.
Determine the amount of overhead that would be allocated to the proposed job if direct
labour hours are used as the cost driver.
Determine the total cost of the proposed job.
Determine the company’s bid if the bid is based upon full manufacturing cost plus 25 per
cent.
b.
Determine the amount of overhead that would be applied to the proposed project if
activity-based costing is used.
Determine the total cost of the proposed job if activity-based costing is used.
Unit cost (£44,940/1,600)
Determine the company’s bid if activity-based costing is used and the bid is based upon full
manufacturing cost plus 25 per cent.
c.
Which product costing method produces the more competitive bid?
8. Explain the differences between direct assignment, driver assignments, and cost allocations.
9. Describe several of the major differences between a traditional functional-based cost management
system and an activity-based cost management system.
a.
£13,500 (£300,000 + £150,000 + £200,000 + £250,000)/100,000 = £9 per DLH
£48,500 £20,000 + £15,000 + £13,500
£60,625 £48,500 125%
b.
£6,500
Maintenance: £300,000/40,000 = £7.50 per machine hour
Materials handling: £150,000/8,000 = £18.75 per move
Setups: £200,000/10,000 = £20 per setup
Inspection: £250,000/15,625 = £16 per inspection
Overhead assigned:
£7.50 750
£18.75 20
£20 5
£16 25
£41,500 £20,000 + £15,000 + £6,500
£51,875 £41,500 125%
Activity-based costing produces more accurate cost information and a more competitive
bid.
10. In choosing a cost accounting system, the accountant must balance the total costs of implementing
such systems. What costs must be balanced to determine total cost? How do traditional
functional-based and activity-based cost systems balance the trade-offs?
11. Explain the advantage of using multiple overhead rates instead of a single plantwide overhead rate to
apply overhead.
12. Manchester Ltd. uses a job-order costing system and a predetermined overhead rate based on machine
hours.
At the beginning of the year, the company estimated manufacturing overhead for the year would be
£135,000 and 9,000 machine hours would be used.
The following information pertains to December of the current year:
Job No.
380
Job No.
381
Job No.
382
Totals
Work in process, December 1
£8,000
£13,000
£19,000
£40,000
December production activity:
Materials requisitioned
£2,000
£2,400
£3,600
£8,000
Direct labour costs
£1,200
£1,800
£2,000
£5,000
Machine hours
400
700
900
2,000
Actual manufacturing overhead costs incurred in December were £31,000.
Required:
a.
b.
13. Describe the differences between support and producing departments. Give three examples of each.
14. The support departments typically found in manufacturing and nonmanufacturing organizations are as
follows:
Cafeteria
Personnel
Maintenance
Purchasing
Accounting
Required:
£15 (£135,000/9,000)
Work in process, December 1
December production activity:
Materials requisitioned
Direct labour costs
Manufacturing overhead:
£15 400 machine hours
£15 700 machine hours
£15 900 machine hours
Totals
For each of the preceding support departments, indicate potential bases that could be used to allocate
costs to the producing departments.
15. Fox Company has two support departments (S1 and S2) and two producing departments (P1 and P2).
Estimated direct costs and percentages of services used by these departments are as follows:
Used by Department
Support Dept.
S1
S2
P1
P2
S1
–
10%
40%
50%
S2
20%
–
50%
30%
Direct costs
£4,500
£8,000
£10,000
£15,000
Required:
a.
Prepare a schedule allocating the support department costs to the producing departments
using the direct allocation method.
b.
Prepare a schedule allocating the support department costs to the producing departments
using the sequential allocation method.
Support Dept.
Direct costs
S1 allocation*
(4,500)
2,000
2,500
S2 allocation**
(8,000)
__5,000
__3,000
* 4/9 to P1, 5/9 to P2
** 5/8 to P1, 3/8 to P2
b.
Support Dept.
S1
S2
P1
P2
Direct costs
£4,500
£8,000
£10,000
£15,000
S1 allocation**
(6,100)
__2,711
__3,389
Cafeteria:
Number of employees in each department
Number of employees in each department that uses the cafeteria
Personnel:
Number of employees
Number of firings or layoffs
Number of new hires
Direct labour costs
Maintenance:
Number of repair orders
Number of machine hours
Maintenance hours
Purchasing:
Number of orders placed
Cost of orders
Accounting:
Number of transactions
16. Gray Enterprises has two support departments (S1 and S2) and two producing departments (A and B).
The distribution of services by the support departments is as follows:
Services Provided to
Services Provided from
S1
S2
A
B
S1
–
8%
74%
18%
S2
21%
–
47%
32%
Total department costs for the support and producing departments are as follows:
S1
£ 58,000
S2
124,000
A
712,000
B
568,000
Required:
Find the amount of total costs for A and B using the reciprocal method.
Direct costs
Allocate S1
Allocate S2
ESSAY
1. Compare/contrast cost assignment and cost allocation. Be sure to include direct assignment (tracing)
and driver tracing in your discussion.
* 0.20 to S1, 0.50 to P1, and 0.30 to P2
** 4/9 to P1, 5/9 to P2