123. Nerrod Company sells its products at $500 per unit, net 30. The firm’s gross margin ratio
is 40 percent. The firm has estimated the following operating costs:
Activity Cost Driver and Rate
Sales calls $400 per visit
Order processing $100 per order
Deliveries $50 per order + $0.50 per mile
Sales returns $60 per return and $3 restocking per unit returned
Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:
XBT NINTO
Number of orders 10 2
Number of parts per order 500 2.000
Sales returns:
Number of returns 4 10
Number of units returned 40 50
Number of sales calls 6 10
Miles per delivery 10 20
Shipping terms FOB, Factory FOB, Destination
What is Nerrod’s total customer-sustaining cost applicable to Ninto?
124. Nerrod Company sells its products at $500 per unit, net 30. The firm’s gross margin ratio
is 40 percent. The firm has estimated the following operating costs:
Activity Cost Driver and Rate
Sales calls $400 per visit
Order processing $100 per order
Deliveries $50 per order + $0.50 per mile
Sales returns $60 per return and $3 restocking per unit returned
Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:
XBT NINTO
Number of orders 10 2
Number of parts per order 500 2.000
Sales returns:
Number of returns 4 10
Number of units returned 40 50
Number of sales calls 6 10
Miles per delivery 10 20
Shipping terms FOB, Factory FOB, Destination
What is Nerrod’s total customer batch-level cost applicable to Ninto?
125. Nerrod Company sells its products at $500 per unit, net 30. The firm’s gross margin ratio
is 40 percent. The firm has estimated the following operating costs:
Activity Cost Driver and Rate
Sales calls $400 per visit
Order processing $100 per order
Deliveries $50 per order + $0.50 per mile
Sales returns $60 per return and $3 restocking per unit returned
Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:
XBT NINTO
Number of orders 10 2
Number of parts per order 500 2.000
Sales returns:
Number of returns 4 10
Number of units returned 40 50
Number of sales calls 6 10
Miles per delivery 10 20
Shipping terms FOB, Factory FOB, Destination
What is Nerrod’s total sales-sustaining cost applicable to XBT as a customer?
126. Nerrod Company sells its products at $500 per unit, net 30. The firm’s gross margin ratio
is 40 percent. The firm has estimated the following operating costs:
Activity Cost Driver and Rate
Sales calls $400 per visit
Order processing $100 per order
Deliveries $50 per order + $0.50 per mile
Sales returns $60 per return and $3 restocking per unit returned
Nerrod Company has gathered the following data pertaining to activities it performed for two of
its customers:
XBT NINTO
Number of orders 10 2
Number of parts per order 500 2.000
Sales returns:
Number of returns 4 10
Number of units returned 40 50
Number of sales calls 6 10
Miles per delivery 10 20
Shipping terms FOB, Factory FOB, Destination
What is Nerrod’s total customer unit-level cost applicable to XBT as a customer?
127. Service and not-for-profit organizations often:
128. Customer profitability analysis:
129. Scott Cameras produces digital cameras and have decided to switch from a volume-
based system to an activity-based system. Scott produced 100,000 digital cameras in the most
recent quarter and has determined that their total activity costs were: $3,000,000 of materials
cost, $500,000 of labor costs, $1,000,000 of inspection costs, and $500,000 of packaging costs. It
takes 30 minutes of labor to produce each camera, inspections are done for 20% of all cameras
produced, and cameras are packaged individually.
Required:
What are the driver rates for each activity?
130. Plant overhead for ABC Corp in $150 million per year, a portion of which (20%) is
attributable to inspection costs which are charged to products on the basis the number of parts
in the products. The plant produces 500,000 units per year, and on the average, each product has
20 parts.
Required:
What is the average inspection cost in a product? What is the inspection cost for a product with
50 parts?
131. Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The
business began ten years ago as a one-owner bakery, but has dramatically changed in size and
function during the past five years. The four partners foresee the business doubling in sales
revenue within two years, and expect the firm to expand into other services including flowers,
furnishings, decorations, and music. Johnson Associates employs six full-time and ten part-time
employees. The four partners also work full-time, each partner managing a separate business
function. The firm currently uses a volume-based costing system installed seven years ago and
modified three years later.
Required:
(1) With just the above information, comment on Johnson Associates changing and future costing
system needs.
(2) Is Johnson Associates a probable candidate for an activity-based costing system (ABC)? Why
or why not?
132. Two students in a cost accounting class were arguing about the need to gather good unit
cost information for manufacturing. One student, Travis, maintained that a firm producing and
selling large quantities of relatively few products would have no need for an ABC system, since
an ABC system is usually more expensive to implement than a volume-based system. Alicia
countered that even firms with high-volume homogeneous products could benefit from a cost
management technique like activity-based costing (ABC).
Required:
Choose sides in this discussion and present justifications for your choice.
133. The controller for Alabama Cooking Oil Co. established the following overhead cost pools
and cost drivers:
Overhead Cost Pool Budgeted Overhead Cost Driver Estimated Cost
Driver Level
Machine setups $186,000 # of setups 120 setups
Material handling 124,800 # of barrels 7,800 barrels
Quality control 316,200 # of inspections 1,020 inspections
Other overhead cost 172,500 # of machine hrs 11,500 machine hrs
An order of 800 barrels of cooking oil used:
# of setups 14
# of barrels 800
# of inspections 22
# of machine hours 1,100
Required:
(1) What is the overhead rate per machine hour if the number of machine hours is used as a
single cost driver under traditional costing system? (Round your intermediate calculation to the
nearest cent and final answer to the nearest whole dollar.)
(2) Using volume-based costing, how much overhead is assigned to the order based on machine
hours as a single cost driver?
(3) Using ABC costing, how much total overhead is assigned to the order?
134. Blackwelder Co. manufactures a variety of electric razors used by both men and women.
The company’s plant is partially automated. The company uses an activity-based cost system.
Listed below is cost driver information used in the product-costing system:
Overhead Cost pool Budgeted Overhead Cost Budgeted Cost
Driver Level Cost Driver
Machine depreciation/ $227,500 25,000 Machine hours
Maintenance Factory depreciation/ Utilities/insurance 154,940 25,400 Machine
hours
Product design 665,720 35,600 Hours in design
Material purchasing/storing 1,293,760 124,400 Raw materials
Two current product orders had the following requirements:
Men’s Razors Women’s Razor
Units produced and sold 26,000 30,000
Direct labor hours 50 40
Pounds of raw materials 980 1,120
Hours in design 32 38
Machine hours 85 60
Required:
1. Using ABC costing, how much overhead is assigned to the order for men’s razors?
2. Using ABC costing, how much overhead is assigned to the order for women’s razors?
135. Classify each of the following costs as unit-level (U), batch-level (B), product-level (P), or
facility-level (F) costs and identify an appropriate example of a possible cost driver for each item:
(1) Parts administration
(2) Production scheduling
(3) Materials handling
(4) Machine operations
(5) Personnel administration and training
(6) Plant security
(7) Machine setups
(8) Engineering changes
(9) Product design
(10) Rent for factory plant
136. Pairing Company has the following cost drivers identified as A through F for determining
product manufacturing overhead costs.
(A) Number of pieces of equipment
(B) Number of direct material purchase orders
(C) Number of production runs
(D) Square feet of warehouse space
(E) Number of machine hours
(F) Square feet of factory space
For each of the following activity cost pools, choose the letter of the most appropriate cost driver
for each cost pool.
Heating costs
Machinery power costs
Machinery set-up costs
Equipment maintenance costs
Materials storage costs
Purchasing department costs
137. Altima Company uses an overhead costing system based on direct labor hours for its two
products X and Y. The company is considering adopting an activity-based costing system, and
collects the following information for the month of October.
Product X Product Y
Production units 20,000 2,000
Direct materials cost per unit $50.00 $40.00
Direct labor cost per hour $10.00 $10.00
Direct labor hours 34,000 6,000
Overhead Overhead Total Activity Consumption
Cost pool cost activity Product X Product Y
Machine setup $60,000 1,000 setups 300 700
Engineering change order 40,000 100 orders 20 80
Facility rent 90,000 1,000 sq. feet 300 700
Required:
(1) Compute the unit manufacturing cost of each product under a volume-based costing system
based on direct labor hours.
(2) Compute the unit manufacturing cost of each product under the activity-based costing
system.
138. Castenet Company uses a volume-based costing system that applies overhead cost
based on direct labor hours at $250 per direct labor hour.
The company is considering adopting an activity-based costing system with the following data:
Activity Area Cost Driver Cost Driver Rate
Materials handling Number of parts $1.20
Lathe work Number of turns 0.30
Milling Number of machine hours 16.00
Grinding Number of parts 1.25
Testing Number of units tested 12.00
The two jobs processed in the month of June had the following characteristics:
Job A Job B
Direct materials costs $10,000 $50,000
Direct labor costs $1,000 $10,000
Number of direct labor hours 40 400
Number of parts 500 2,000
Number of turns 25,000 50,000
Number of machine hours 140 1,000
Number of units in each job (all tested) 15 200
Required:
1. Compute the unit manufacturing cost of each job under the firm’s current volume-based
costing system.
2. Compute the unit manufacturing cost of each job under the activity-based costing system.
3. Compare the unit manufacturing cost for Jobs A and B computed in requirements 1 and 2.
(a) Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?
