Exercise 17-15 (40 minutes)
Part 1
Determination of cost per driver unit
Cost Center Cost Driver Cost per Driver
Professional salaries….….…….........$1,600,000 10,000 hours $160 per hour
Part 2
Allocation of cost to the surgical departments using ABC
General Surgery
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries............. 2,500 hours $160 per hr. $400,000
Patient services & supplies.......400 patients $45 per patient 18,000
Orthopedic Surgery
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries............. 7,500 hours $160 per hr. $1,200,000
Patient services & supplies.......200 patients $45 per patient 9,000
[Note that the sum of the amounts allocated to General Surgery and Orthopedic
Surgery ($478,000 + $1,299,000) equals the total amount of indirect costs ($1,777,000).]
Exercise 17-16 (15 minutes)
1. Overhead rate: €630,000/270,400 DLH = €2.33/DLH
Wine glasses: 254,000 DLH x €2.33/DLH = €591,820
€591,820/211,000 units = €2.80/unit
2. Overhead rate: €630,000/1,000 set-ups = €630/setup
Wine glasses: €630/setup x 200 setups = €126,000
€126,000/211,000 units = €0.60/unit
3. Assigning the setup costs based on the activity that drives these
Exercise 17-17 (10 minutes)
Exercise 17-18 (10 minutes)
Part (1) Part (2)
Control Activity
Activity Level Driver
A. Registering patients U Number of patients
B. Cleaning beds U Beds, patients, labor hours
C. Stocking exam rooms F Number of rooms
PROBLEM SET A
Problem 17-1A (45 minutes)
1. Plantwide rate
Engineering support $ 24,500
Electricity 34,000
Setup costs 52,500
Product A Product B
Direct materials per unit $15.00 $24.00
Direct labor per unit
A: 0.3 DLH/unit @ $20/DLH 6.00
B: 1.6 DLH/unit @ $20/DLH 32.00
Manufacturing overhead per unit
A: 0.3 DLH/unit @ $17.90/DLH 5.37
2. Product A Product B
Gross margin per unit $ 3.63 $35.36
x Units purchased per customer
A: 10,000 units/500 customers x 20 units
Problem 17-1A (continued)
We see that the gross margin per customer from Product A ($72.60) is not
3. Engineering Support $24,500/(12 + 58) modifications $350/modification
Electricity $34,000/3,400* machine hours $10/MH
Product A Product B
Engineering support
A: 12 modifications @ $350 $ 4,200
B: 58 modifications @ $350 $20,300
Electricity
Selling price per unit $30.00 $120.00
Total manufacturing cost per unit 24.30 95.03
Gross profit per unit $ 5.70 $ 24.97
Problem 17-1A (concluded)
4. Product A Product B
Gross profit per unit (from above) $5.70 $24.97
x units per customer (part 2) x 20 units x 5 units
Gross profit per customer $114.00 $ 124.85
5. Activity based costing gives better information than the plantwide rate
based on volume-related measures because ABC associates the cost of
the various activities that must be performed in order to make, sell, and
Problem 17-2A (25 minutes)
1. When companies experience strong price pressure on their high-
volume, commodity-type products, they should be concerned. Many
managers will blame competitive price cutting on attempts by
2. The company may be charging less for its low-volume, custom-order
products than the competitors because the company is using a volume-
3. While prices are really set in the marketplace based on customer
demand and supply of the product, companies still look at costs to
4. Custom-order furniture requires handling special fabrics, buying in
smaller quantities (which may be more expensive than buying “in bulk”),
5. In addition to obtaining a more accurate picture of the costs of making
various products, activity based costing also gives information about
the cost of the activities that are performed. Managers may be surprised
Problem 17-3A (40 minutes)
1. Grinding……..…………………………………..….…………………….. Unit level
Polishing…………..…………………………………….………………… Unit level
2. Grinding & Polishing ($320,000+$135,000)/13,000 MH $35/MH
Product modification $600,000/1,500 Eng. hrs. $400/Eng. hr.
3.
Job 3175 Job 4286
Grinding & polishing 550 MH x $35…..........
$19,250 5,500 MH x $35…………$192,500
Product modification 26 Eng.hrs. x $400....10,400 32 Eng. hr. x $400........ 12,800
4. Job 3175 Job 4286
Total overhead cost of job $74,650 $383,425
Problem 17-3A (concluded)
5. Plantwide rate:
Grinding…………………………………………………….……………… $ 320,000
Polishing…………..…………………………………….………………… 135,000
Product modification…………..…………….….……….………….. 600,000
Job 3175 Job 4286
Overhead
500 DLH x $106.47 $ 53,235
4,375 DLH x $106.47 $ 465,806
*rounded
6. Average overhead cost
Job 3175 Job 4286
Using ABC $ 373.25 $ 153.37
Using plantwide rate $ 266.18 $ 186.32
The plantwide rate, which is closely associated with the volume of
production, overstates the cost of the high-volume product (in this case
Problem 17-4A (25 minutes)
1. Liquid materials $2,304/(1,400 + 37,000) gallons $0.06/gallon
Dry materials $6,941/(620 + 12,000) pounds $0.55/pound*
*rounded
** Hi-Voltage: 12,500 bottles x 3 labels/bottle = 37,500 labels
EasySlim: 180,000 bottles x 1 label / bottle = 180,000 labels
Total labels 217,500 labels
Hi-Voltage EasySlim
Liquid material 1,400 gal x $0.06.......... $ 84 37,000 gal x $0.06..........$ 2,220
Dry material 620 pounds x $0.55.... 341 12,000 pounds x $0.55. . 6,600
Utilities 200 MH x $0.36…..….... 72 3,750 MH x $0.36………… 1,350
2. Hi-Voltage EasySlim
Total cost of line $19,122 $95,070
3. Price for Hi-Voltage $3.75
4. The price of EasySlim must cover the costs associated with the product,
so the minimum price for this product is $0.53/bottle.