3. Refer to Figure 7-6.
A.
What is the plantwide overhead rate based on machine hours?
B.
Assuming a plantwide overhead rate, what is the unit cost of the basic model?
C.
Assuming a plantwide overhead rate, what is the unit cost of the premium model?
A.
Plantwide overhead rate = $419,000/(2,500 + 2,500) = $83.80 per machine hour.
B.
Unit cost of basic model:
C.
Unit cost of premium model:
4. Taylor Corporation produces two models of their leather brief cases: deluxe and standard. The four
activities and four drivers are as follows:
Hours
Activities:
Cost
Driver
Deluxe
Standard
Total
Cutting
$
96,000
Cutting hours
2,200
1,300
3,500
Assembling
42,000
Assembly hours
1,150
980
2,130
Inspecting
15,000
Inspection hours
800
500
1,300
Reworking
8,000
Rework hours
20
35
55
($27.50 6,000)/10,000
($2,800 32)/10,000
($43.50 1,500)/10,000
Unit cost of basic
Required:
A. Calculate the consumption ratios for the four drivers.
B. Calculate the activity rates that would be used to assign costs to each product. Round your answer
to two decimal places.
C. Calculate the unit cost assuming that 500 deluxe models were produced and 700 standard models
were produced.
Figure 7-7.
Armstrong Company produces a variety of bicycles. One of its plants produces two bicycles: a
mountain model and a racing model. At the beginning of the year, the following data were prepared for
this plant:
Mountain
Racing
Quantity
250,000
125,000
Selling Price
$1,200
$1,000
Unit Prime Cost
$ 400
$ 500
In addition, the following information was provided so that overhead costs could be assigned to each
product:
Activity Name
Activity Driver
Activity Cost
Racing
Mountain
Machining
Machine hours
$20,000,000
250,000
250,000
Engineering
Engineering hours
$ 8,000,000
75,000
50,000
Packing
Packing orders
$ 3,500,000
50,000
125,000
5. Refer to Figure 7-7.
A.
Calculate the activity rate for machining.
B.
Calculate the activity rate for engineering.
C.
Calculate the activity rate for packing.
6. Refer to Figure 7-7. Armstrong Company uses activity-based costing to calculate product costs.
A.
Calculate the per unit product cost for a mountain bike.
B.
Calculate the per unit product cost for a racing bike.
C.
Assume Armstrong Company adds 40% to the cost of a mountain bike and 35% to the
cost of a racing bike obtain the selling prices. Calculate the selling prices for a
mountain bike and a racing bike.
A.
Mountain bike product cost per unit = $463.20.
B.
Racing bike product cost per unit = $625.60.
Machining rate = $20,000,000/(250,000 + 250,000) = $40 per machine hour.
Engineering rate = $8,000,000/(75,000 + 50,000) = $64 per engineering hour.
Packing rate = $3,500,000/(50,000 + 125,000) = $20 per packing order.
Calculation of unit product costs:
Machining:
B.
Engineering rate = $8,000,000/125,000 = $64 per engineering hour.
C.
Packing rate = $3,500,000/175,000 = $20 per packing order.
7. Tires Unlimited Corp. produces two types of tires, regular and snow tires. The company uses
activity-based costing and has identified two activities and their budgeted costs:
Molding
$
75,000
Assembly
$
260,000
Molding is based on mixing hours and assembly is based on machine hours. Information regarding
each product is as follows:
Regular tire
Snow tire
Units produced
5,000
2,000
Mixing hours
525
275
Machine hours
1,000
460
Required:
A. Calculate the activity rate for molding and assembly. Round your answer to two decimal places.
B. Calculate how much total overhead is assigned to each type of tire.
C. Calculate the unit overhead assigned to each type of tire.
D. Assume the company does not use ABC costing. Calculate the plantwide overhead rate, based on
machine hours. Round your answer to two decimal places.
E. Calculate the total overhead assigned to each type of tire using the plantwide overhead rate.
8. Randy Company produces candy sticks (hooked and straight). Both products pass through two
producing departments. The hooked sticks’s production is much more labor-intensive than the straight
sticks. The straight stick is also more popular. The following data have been gathered for the two
products:
Product Data
Hooked
Straight
Units produced per year
200,000
2,000,000
Machine hours
10,000
40,000
Packing orders
30,000
30,000
Randy has decided to use activity-based costing and has developed two types of activities, machine
related (based on machine hours), and other overhead (based on packing orders). Machine-related
costs equal $160,000. Other overhead costs equal $240,000.
A.
Calculate the activity rate for machine-related costs based on machine hours.
B.
Calculate the activity rate for other overhead costs based on packing orders.
C.
Using the two activity rates, calculate the overhead cost per unit for hooked sticks.
(Carry out computations to three decimal places.)
D.
Using the two activity rates, calculate the overhead cost per unit for straight sticks.
(Carry out computations to three decimal places.)
9. The Thompson Company uses activity-based costing to determine product cost. Three activities and
their rates have been calculated as shown below.
Setting up equipment
= $500 per setup
Moving goods
= $20 per move
Machining
= $4 per machine hour
Thompson provided the following data from the job order cost sheet for Job #345
Direct materials
$2,000
Direct labor
1,800
Setups
1
Moves
30
Machine hours
900
A.
Calculate the overhead applied to Job #345.
B.
Calculate the total cost of Job #345.
C.
If price is calculated by applying a 30% markup on cost, what is the price for Job
A.
Machine-related rate = $160,000/(10,000 + 40,000) = $3.20 per machine hour.
B.
Other overhead rate = $240,000/(30,000 + 30,000) = $4.00 per packing order.
= [($3.20 10,000) +
($4 30,000)]/200,000 = $0.76.
= [($3.20 40,000) +
($4 30,000)]/2,000,000 = $0.124.
#345?
D.
Assume Job #345 required two setups, 15 moves, and 700 machine hours. Calculate the
overhead applied to Job #345.
E.
Assuming a 50% markup on cost, what is the price of Job #345 using the overhead rate
calculated in part D.
10. Assume that the accounts payable department of a company has 5 clerks; each one is paid $25,000 per
year ($125,000 total clerical salaries). On average, the clerks spend:
20% of their time on processing payments
30% of their time matching invoices, receiving documents, and billing statement
50% of their time correcting errors in the various documents
In addition, long distance telephone costs of $1,700 are directly traced to the activity “correcting
errors.”
A.
Assign the clerical salary cost to each of the three activities.
B.
What is the total cost of the “correcting errors” activity?
Processing payments = 0.20 $125,000 = $25,000.
Matching documents = 0.30 $125,000 = $37,500.
Correcting errors = 0.50 $125,000 = $62,500.
B.
Correcting errors = $62,500 + $1,700 = $64,200.
11. Assume that the accounts payable department of a company has 10 clerks; each one is paid $25,000
per year ($250,000 total clerical salaries). Six of the clerks spend the following percentages of time on
the three activities:
20% of their time on processing payments
30% of their time matching invoices, receiving documents, and billing statement
50% of their time correcting errors in the various documents
One clerk, the head clerk, spends 50% of her time on administrative duties, and the remainder on error
correction. The remaining three clerks spend 30% of their time on processing payments and the
remaining 70% of their time on matching documents.
Long distance telephone costs of $1,700 are directly traced to the activity “correcting errors.”
A.
Assign the clerical salary cost to each of the three activities, and to administration.
B.
What is the total cost of the “correcting errors” activity?
Figure 7-8.
Sallisaw Savings & Loan has requested an analysis of checking account profitability by customer type.
Customers are categorized according to size of their account: low balances, medium balances, and high
balances. The activities associated with the three different customer categories and their associated
annual costs are as follows:
Opening and closing statements
$ 100,000
Issuing monthly statements
$ 150,000
Processing transactions
$1,025,000
Customer inquiries
$ 200,000
Providing ATM services
$ 560,000
Total cost
$2,035,000
Additional data concerning the usage of the activities by the various customers are also provided:
Account Balance
Low
Medium
High
Number of accounts opened/closed
7,500
1,500
1,000
Matching
Correcting
Number of statements issued
225,000
50,000
25,000
Processing transactions
9,000,000
1,000,000
250,000
Number of telephone minutes
500,000
300,000
200,000
Number of ATM transactions
675,000
100,000
25,000
Number of checking accounts
19,000
4,000
2,000
12. Refer to Figure 7-8.
A.
Calculate the total number of checking accounts.
B.
Calculate the yearly overall cost per checking account.
C.
Calculate the monthly overall cost per checking account.
13. Refer to Figure 7-8. Sallisaw uses an activity-based costing system. The activity rate for opening and
closing statements is based on the number of accounts opened and closed. The activity rate for issuing
monthly statements is based on the number of statements issued. The activity rate for processing
transactions is based on the number of transactions processed. The activity rate for customer inquiries
is based on the number of telephone minutes. The rate for ATM services is based on the number of
ATM transactions.
A.
Calculate the activity rate for opening and closing accounts.
B.
Calculate the activity rate for issuing monthly statements.
C.
Calculate the activity rate for processing transactions.
D.
Calculate the activity rate for customer inquiries.
E.
Calculate the activity rate for providing ATM services.
F.
Calculate the cost per account by customer category using the five activity rates.
G.
Sallisaw Savings & Loan offers free checking to all its customers. Overall, the interest
revenues average $105 per account; however, the interest revenues earned per account
by category are $95, $115, and $180 from the low, medium and high balance accounts,
respectively. Calculate the overall average profit per account. Then calculate the
average profit per account for each of the three customer categories. Refer to part F
for the cost per account by customer category.
Opening and closing accounts:
$100,000/10,000 =
$10 per account
Issuing monthly statements:
$150,000/300,000 =
$0.50 per statement
Processing transactions:
$1,025,000/10,250,000 =
$0.10 per transaction
Customer inquiries:
$200,000/1,000,000 =
$0.20 per minute
Providing ATM services:
$560,000/800,000 =
$0.70 per transaction
A.
Total checking accounts = 19,000 + 4,000 + 2,000 = 25,000.
B.
Yearly overall cost per checking account = $2,035,000/25,000 = $81.40.
C.
Monthly overall cost per checking account = $81.40/12 = $6.78.
14. Heedy Company makes a product using two departments − Department 1 and Department 2.
Information on these departments is as follows:
Department 1
Department 2
Direct labor hours
10,000
90,000
Machine hours
40,000
10,000
Overhead cost
$240,000
$180,000
A.
Calculate the department overhead rate for each department. Use machine hours as the
base in Department 1 and direct labor hours as the base in Department 2.
B.
A job has prime cost of $270. It uses 10 machine hours in Department 1 and 15 direct
Opening and closing:
Issuing monthly statements:
$0.50 225,000
$0.50 50,000
$0.50 25,000
Processing transactions:
$0.10 9,000,000
$0.10 1,000,000
$0.10 250,000
Customer inquiries:
$0.20 500,000
$0.20 300,000
$0.20 200,000
Providing ATM services:
$0.70 675,000
$0.70 100,000
$0.70 25,000
Total Cost
Number of accounts
Cost per account
$95.00 − $87.37 =
$115.00 − $67.50 =
$180.00 − $52.50 =
labor hours in Department 2. Calculate the total product cost for the job.
C.
Recalculate the department overhead rate for each department. Use direct labor hours
as the base in Department 1 and machine hours as the base in Department 2.
D.
A job has prime cost of $270. It uses 10 direct labor hours in Department 1 and 15
machine hours in Department 2. Using the rates calculated in part C, calculate the total
product cost for the job.
15. Russell Company uses Beltran Company and Southern Express Inc. to buy the electronic chip used in
the manufacturing of its GPS device. Russell Co. has been using these two companies for several
years and would like to cut down to only one supplier to purchase the 1,200,000 chips needed per year.
In order to determine which supplier is the most cost effective Russell Co. compiled the following
data:
Activity
Activity Cost
Testing
800,000
Warranty work
3,600,000
Beltran Co.
Southern Express Inc.
Unit price
$
60
$
63
Units purchased
865,000
335,000
Testing hours
1,200
550
Warranty hours
5,000
1,400
Required:
A. Calculate the activity rate for each activity. Round your answer to two decimal places.
B. Calculate the cost per chip for each supplier.
C. Which supplier should Russell Company choose?
16. Stinler Corporation manufactures curtains for retail stores and for individual customers. The retail
chain buys 70% of the curtains produced. The individual customers purchase curtains in approximately
equal quantities, where the orders are about the same size. Data concerning Stinler’s customer activity
are as follows:
Retail Stores
Individual Customers
Units purchased
56,000
24,000
Orders placed
8
492
Number of sales calls
4
156
Manufacturing costs
8,000,000
3,500,000
Order filling costs allocated
375,000
225,000
Sales force costs allocated
265,000
135,000
Currently customer-driven costs are assigned to customers based on units sold, a unit-level driver.
Required:
A. Assign costs to customers by using an ABC approach.
B. Determine the selling (order filling and sales force) cost per unit sold for each type of customer.
Ordering
Sales calls
17. Flynn Company has a JIT system in place. Each manufacturing cell is dedicated to the production of a
single product or major subassembly. One cell, dedicated to the production of guitar pickups, has four
operations: machining, finishing, assembly, and testing.
For the coming year, the pickup cell has the following budgeted costs and cell time (both at theoretical
capacity):
Cell time:
8,000 hours
Theoretical output:
60,000 pickups
During the year, the following actual results were obtained:
Actual cell time:
8,000 hours
Actual output:
50,000 pickups
A.
Compute the theoretical velocity for the cell per hour.
B.
Compute the theoretical cycle time in minutes.
C.
Compute the actual velocity for the cell per hour.
D.
Compute the actual cycle time in minutes.
18. Lorimer Company had sales of $2,500,000 for last year. Data on quality-related costs for last year are
as follows:
Inspection
$ 80,000
Scrap
10,000
Rework
45,000
Quality training
20,000
Warranty work
100,000
Customer complaints
30,000
A.
Classify each of the quality-related costs as control (prevention and appraisal), internal
failure, or external failure.
B.
What percentage of sales is accounted for by quality-related costs?
C.
If quality-related costs could be reduced to 2% of sales, by how much would Lorimer’s
profit increase?
A.
Theoretical velocity = 60,000/8,000 = 7.5 pickups per hour.
B.
Theoretical cycle time = (8,000)(60 minutes per hour)/60,000 = 8 minutes per unit.
C.
Actual velocity = 50,000/8,000 = 6.25 pickups per hour.
D.
Actual cycle time = (8,000)(60 minutes per hour)/50,000 = 9.6 minutes per unit.
19. Consider the following information on activities:
Amount of
Driver That
Actual
Cost per unit
Activity (driver)
Should be Used
Amount
Used
of driver
Purchasing (purchase orders)
48,000
53,000
$40
Inspection (inspection hours)
0
22,000
$30
Rework (labor hours)
0
13,000
$20
A.
Which of the three activities, if any, is value-added?
B.
What is the nonvalue-added cost of each activity?
C.
What is the total value-added cost of the activities?
Nonvalue-added cost of Purchasing = (53,000 − 48,000)($40) = $200,000.
Nonvalue-added cost of Inspection = (22,000 − 0)($30) = $660,000.
Nonvalue-added cost of Rework = (13,000 − 0)($20) = $260,000.
C.
Total value-added cost
= Value-added cost of Purchasing
= 48,000($40) = $1,920,000
20. A company was evaluating the activity-based environmental cost of two different products − Product
X and Product Y. Information on two environmental activities is as follows:
Activity
Driver
Cost
Maintaining pollution equipment
Maintenance hours
$120,000
Toxic waste disposal
Pounds of waste
80,000
Data on Product X and Product Y follows:
Product X
Product Y
Production costs (nonenvironmental)
$400,000
$500,000
Units produced
100,000
200,000
Maintenance hours for pollution equipment
1,000
4,000
Pounds of toxic waste
10,000
30,000
A.
Assign the environmental activity costs to Product X and to Product Y.
B.
Calculate the unit environmental cost of Product X.
C.
Calculate the unit environmental cost of Product Y.
D.
Calculate the overall unit cost of Product X.
E.
Calculate the overall unit cost of Product Y.
21. Browning Manufacturing Company uses activity-based costing. The overhead budget for the coming
period is $1,053,000, consisting of the following:
Budgeted
Cost Pool
Amount
Supervision
$ 320,000
Machine usage
420,000
Machine setups
187,000
Design changes
126,000
Totals
$1,053,000
The potential allocation bases and their estimated amounts were as follows:
A.
Environmental cost of
= [$120,000(1,000/5,000) + $80,000(10,000/40,000)]
Product X
= $24,000 + $20,000 = $44,000
Environmental cost of
= [$120,000(4,000/5,000) + $80,000(30,000/40,000)]
Product Y
= $96,000 + $60,000 = $156,000
B.
Unit environmental cost of Product X = $44,000/100,000 = $0.44.
C.
Unit environmental cost of Product Y = $156,000/200,000 = $0.78.
D.
Unit cost Product X = ($400,000/100,000) + $0.44 = $4.44.
E.
Unit cost Product Y = ($500,000/200,000) + $0.78 = $3.28.
Allocation
Budgeted
Base
Amount
Number of design changes
35
Number of setups
110
Machine hours
6,000
Direct labor hours
10,000
A.
Determine the overhead rate for each cost pool, using the most appropriate allocation
base for each pool.
B.
Job 80130 required $45,000 for direct materials, $20,000 for direct labor, 2,000 direct
labor hours, 800 machine hours, five setups, and four design changes. Determine the
cost of Job 80130.
22. Charlotte Company produces folding chairs. It takes the company 18,000 hours to produce 90,000
chairs.
Required:
A. What is the velocity in hours?
B. What is the cycle time in hours?
ESSAY
1. Develop a set of at least five interview questions that could be used in the construction of an activity
dictionary. Also explain why you would ask each question, i.e., what information you hope to acquire
and how it would apply to the activity dictionary.
ANS:
2. A company has developed a list of quality-related costs as follows:
Year 1
Year 2
Supplier evaluation
$
0
$ 70,000
Quality training
10,000
50,000
Inspection of finished product
75,000
60,000
Rework
50,000
40,000
Warranty work
120,000
80,000
Sales
$2,000,000
$2,000,000
The company’s controller is pleased with the Year 2 results and commented that the company is now
on its way toward total quality. Is the controller right? Explain.
Control costs:
Supplier evaluation
Quality training
10,000
50,000
3. The Tilman Corporation has seen a significant increase in the amount spent on such items as warranty
and recall repairs. They would like to be able to reduce these costs and have asked you, the cost
accountant, for some advice. What would be your recommendation?