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14) ABC system is likely to provide high benefits to a company whose products that the company is well-
suited to make and show small profits.
15) Implementing ABC system never demotivates employees.
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16) Rachel's Pet Supply Corporation manufactures two models of grooming stations, a standard and a
deluxe model. The following activity and cost information has been compiled:
Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 3 30 650
Deluxe 7 50 150
Overhead costs $40,000 $120,000
Assume a traditional costing system applies the $160,000 of overhead costs based on direct labor hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of
components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?
e. Explain the difference between the costs obtained from the traditional costing system and the ABC
system. Which system provides a better estimate of costs? Why?
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17) Luzent Company produces two types of entry doors: Deluxe and Standard. The assignment basis for
support costs has been direct labor dollars. For 2015, Luzent compiled the following data for the two
products:
Deluxe Standard
Sales units 50,000 400,000
Sales price per unit $650.00 $475.00
Prime costs per unit $180.00 $130.00
Direct materials cost per unit $95.00 $75.00
Direct labor costs per unit $75.00 $55.00
Manufacturing support costs per unit $ 80.00 $120.00
Last year, Luzent Manufacturing purchased an expensive robotics system to allow for more decorative
door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to
help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the
following ABC information for 2015:
Activity Cost Driver Cost Total Deluxe Standard
Setups of setups $ 500,000 500 400 100
Machine-related of machine hours $44,000,000 600,000 300,000 300,000
Packing of shipments $ 5,000,000 250,000 50,000 200,000
Required:
a. Using the current system, what is the estimated
1. total cost of manufacturing one unit for each type of door?
2. profit per unit for each type of door?
b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe
door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this?
c. "ABC systems may result in misallocation of indirect costs." Do you agree? Give reasons for your
answer.
d. What considerations need to be examined when determining a sales mix strategy?
e. While implementing an ABC system for the first time, achieving a significant change overnight is
difficult and this may demotivate employees. How can managers overcome this problem?
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18) Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and
White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome,
and white faucets, respectively. The following additional data apply:
BRASS CHROME WHITE
Projected sales in units 30,000 50,000 40,000
PER UNIT data:
Selling price $40 $20 $30
Direct materials $ 8 $ 4 $ 8
Direct labor $15 $ 3 $ 9
Overhead cost based on direct labor hours
(traditional system) $12 $ 3 $ 9
Hours per 1000-unit batch:
Direct labor hours 40 10 30
Machine hours 25 25 10
Setup hours 1.0 0.5 1.0
Inspection hours 30 20 20
Total overhead costs and activity levels for the year are estimated as follows:
Activity Overhead costs Activity levels
Direct labor hours 2,900 hours
Machine hours 2,400 hours
Setups $465,500 95 setup hours
Inspections $405,000 2,700 inspection hours
$870,500
Required:
a. Using the traditional system, determine the operating profit per unit for the brass style of faucet.
b. Determine the activity-cost-driver rate for setup costs and inspection costs.
c. Using the ABC system, for the brass style of faucet:
1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit.
d. Explain the difference between the profits obtained from the traditional system and the ABC system.
Which system provides a better estimate of profitability? Why?
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19) Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and
White. Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches of brass, chrome
and white faucets, respectively. The following additional data apply:
BRASS CHROME WHITE
Projected sales in units 30,000 50,000 40,000
PER UNIT data:
Selling price $40 $20 $30
Direct materials $ 8 $ 4 $ 8
Direct labor $15 $ 3 $ 9
Overhead cost based on direct labor hours
(traditional system) $12 $ 3 $ 9
Hours per 1000-unit batch:
Direct labor hours 40 10 30
Machine hours 25 25 10
Setup hours 1.0 0.5 1.0
Inspection hours 30 20 20
Total overhead costs and activity levels for the year are estimated as follows:
Activity Overhead costs Activity levels
Direct labor hours 2,900 hours
Machine hours 2,400 hours
Setups $465,500 95 setup hours
Inspections $405,000 2,700 inspection hours
$870,500
Required:
a. Using the traditional system, determine the operating profit per unit for each style of faucet.
b. Determine the activity-cost-driver rate for setup costs and inspection costs.
c. Using the ABC system, for each style of faucet
1. compute the estimated overhead costs per unit.
2. compute the estimated operating profit per unit.
d. Explain the differences between the profits obtained from the traditional system and the ABC system.
Which system provides a better estimate of profitability? Why?
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20) Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon,
Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the
ovens and cookie molds owned by the company. Based on budgetary projections, the information listed
below is available:
Macaroon Sugar Buttercream
Projected sales in units 500,000 800,000 600,000
PER UNIT data:
Selling price $0.80 $0.75 $0.60
Direct materials $0.20 $0.15 $0.14
Direct labor $0.04 $0.02 $0.02
Hours per 1000-unit batch:
Direct labor hours 2 1 1
Oven hours 1 1 1
Packaging hours 0.5 0.5 0.5
Total overhead costs and activity levels for the year are estimated as follows:
Activity Overhead costs Activity levels
Direct labor 2,400 hours
Oven $210,000 1,900 oven hours
Packaging $150,000 950 packaging hours
$360,000
Required:
a. Determine the activity-cost-driver rate for packaging costs.
b. Using the ABC system, for the sugar cookie:
1. compute the estimated overhead costs per thousand cookies.
2. compute the estimated operating profit per thousand cookies.
c. Using a traditional system (with direct labor hours as the overhead allocation base), for the sugar
cookie:.
1. compute the estimated overhead costs per thousand cookies.
2. compute the estimated operating profit per thousand cookies.
d. Explain the difference between the profits obtained from the traditional system and the ABC system.
Which system provides a better estimate of profitability? Why?
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Objective 5.7
1) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the
year 2015, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12
million pages.
For 2015 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing
manufacturing overhead costs, it was determined that number of design changes, setups, and inspections
are the primary manufacturing overhead cost drivers. The following information was gathered during
the analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $ 120,000 300 design changes
Setups 640,000 5,000 setups
Inspections 80,000 8,000 inspections
Total manufacturing overhead costs $840,000
During 2015, two customers, Money Managers and Hospital Systems, are expected to use the following
printing services:
Activity Money Managers Hospital Systems
Pages 60,000 76,000
Design changes 10 0
Setups 20 10
Inspections 30 38
When costs are assigned using the single cost driver, number of pages printed, then ________.
A) Velshi Printers will want to retain this highly profitable customer
B) Money Managers will likely seek to do business with competitors
C) Money Managers is unfairly over billed for its use of printing resources
D) Money Managers is grossly under billed for the job, while other jobs will be unfairly over billed
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2) Whitman Printing has contracts to complete weekly supplements required by forty-six customers. For
the year 20X5, manufacturing overhead cost estimates total $840,000 for an annual production capacity of
12 million pages.
For 2010, Whitman Printing decided to evaluate the use of additional cost pools. After analyzing
manufacturing overhead costs, it was determined that number of design changes, setups, and inspections
are the primary manufacturing overhead cost drivers. The following information was gathered during
the analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $ 120,000 200 design changes
Setups 640,000 4,000 setups
Inspections 80,000 16,000 inspections
Total manufacturing overhead costs $840,000
During 2010, two customers, Money Managers and Hospital Systems, are expected to use the following
printing services:
Activity Money Managers Hospital Systems
Pages 60,000 76,000
Design changes 10 2
Setups 20 10
Inspections 30 38
When costs are assigned using the single cost driver, number of pages printed, then Hospital Systems
________.
A) is fairly billed because resources are allocated uniformly to all jobs
B) is grossly under billed for the job, while other jobs will be unfairly over billed
C) will likely seek to do business with competitors
D) will contribute too little to profits, and Wallace Printing will not want to accept additional work from
the company
3) Activity-based costing information can be used for ________.
A) product-mix decisions
B) pricing decisions
C) advertisement decisions
D) inventory valuation
