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PROBLEM SET B
Problem C-1B (45 minutes)
1. Wrapping $500,000/100,000 units = $5/unit
Assembling* $400,000/20,000 direct labor hours = $20/DLH
* The costs of Assembling and Obtaining business licenses should NOT be combined
because they are different with respect to their control level. From part 1, assembling
is a unit level activity while obtaining business licenses is a facility level activity.
(Management can control assembly costs by changing the number of direct labor
hours, but the cost of obtaining business licenses cannot be controlled by changing
the number of direct labor hours.) Obtaining business licenses is not really driven by
the number of direct labor hours, but this basis is used in order to assign this facility
level cost to units of product.
2.
Holiday Basket Executive Basket
Wrapping 8,000 units x $5...................... $ 40,000 1,000 units x $5...................... $ 5,000
Total ovhd. cost $114,000 $73,900
3. Cost per unit Holiday Basket Executive Basket
Total overhead cost $114,000 $73,900
Problem C-1B (concluded)
4. Plantwide overhead rate
Wrapping ($300,000 + $200,000) $ 500,000
Assembling 400,000
Holiday Basket
Overhead assigned (2,000 DLH x $72.50/DLH) $ 145,000
*Rounded
Executive Basket
Overhead assigned (500 DLH x $72.50/DLH) $ 36,250
5.
Holiday Basket Executive Basket
The plantwide overhead rate assigns too much cost to the Holiday
Basket (which is a comparatively high-volume product) and understates
Problem C-2B (45 minutes)
1. Plantwide rate:
*Rounded
Using this plantwide rate, the same overhead cost would be assigned to
each case of salsa, regardless of whether it is Extra Fine or Family Style.
2.
Extra Fine Family Style
Direct materials + Direct Labor $ 6.00 $ 5.00
3.
Extra Fine Family Style
Selling price per case $18.00 $ 9.00
It appears that Family Style salsa is not profitable and the company may
be inclined to stop producing this product if the costs cannot be
reduced (or price cannot be increased) to a profitable level.
Problem C-2B (concluded)
Product testing $112,500/600 batches $187.50/batch
Extra Fine Family Style
Mixing & cooking 500 MH x $10.50.................. $ 5,250 1,000 MH x $10.50............. $ 10,500
Product testing 200 batch. X $187.50........... 37,500 400 batch. x $187.50......... 75,000
Mach. calibration 200 runs x $625................... 125,000 200 runs x $625................ 125,000
5. Extra Fine Family Style
Selling price per case $18.00 $9.00
Using ABC, the Extra Fine salsa is not profitable, but the Family Style is
profitable; this conclusion is opposite to the one that we would make if
the plantwide rate was used for assigning cost.
6. Departmental overhead rates would be a modest improvement over the
plantwide rate because they could show differences across
Problem C-3B (25 minutes)
1. The major costs of making the boxes are designing the boxes, setting
up machines to make the right cuts, cutting the cardboard, printing
3. Yes. Lakeside’s old customers bought the same type of boxes over
4. Possibly. If ABC had been used rather than a volume-based system,
Lakeside would have realized that small customers who want
5. ABC gives managers information about the activities and the costs of
these activities that will help them make strategic decisions and
improve the accuracy of cost assignment.
Problem C-4B (45 minutes)
1. Plantwide overhead rate:
Engineering support $ 56,250
Overhead cost per unit $ 4.20/unit
Standard Deluxe
Direct materials cost per unit $ 4.00 $ 8.00
Direct labor cost per unit
Standard: 4 DLH x $20/DLH 80.00
Deluxe: 5 DLH x $20/DLH 100.00
2.
Profit per customer Standard Deluxe
Gross profit per unit $3.80 $ 12.80
x units per customer
This comparison shows that gross profit per customer exceeds service
cost per customer for both products. Thus, both products appear to be
profitable.
Problem C-4B (concluded)
3. Eng. support $56,250/(50 + 25) modifications = $750/modification
Standard Deluxe
Engineering 50 mods. x $750 $37,500 25 mods. x $750 $ 18,750
Total overhead $156,375 $53,625
÷ units ÷ 40,000 ÷ 10,000
4. Standard Deluxe
Gross profit per unit $ 4.09 $ 11.64
x units per customer* x 40 units x 10 units
*From Part 2
This analysis shows that the Standard product is in fact profitable, but
the high cost of production and service for the small volume of the
Deluxe product is unprofitable.
5. ABC gives more appropriate information to managers because it
identifies the resources consumed by each product line, and assigns
Problem C-5B (30 minutes)
1. Components $495,000/(450,000 + 100,000) parts $0.90/part
Assembly labor $244,800/(15,000 + 2,000) DLH $14.40/DLH
*Fun with Fractions: 150,000 units/100 units per carton = 1,500 cartons
Fun with Fractions Count Calculus
Components 450,000 parts x$0.90........... $ 405,000 100,000 parts x $0.90........ $ 90,000
Assembly 15,000 DLH x$14.40............ 216,000 2,000 DLH x $14.40............ 28,800
2. Cost per unit Fun with Fractions Count Calculus
*Rounded
4. Since the cost associated with Fun with Fractions is $8.27, the price
Problem C-6B (45 minutes)
Part 1
Determination of cost per driver unit
Cost Center Cost Driver Cost per Driver
Professional salaries...........$600,000 10,000 hours $60 per hour
Part 2
Allocation of costs to the landscaping departments using ABC
GENERAL LANDSCAPING
Cost Cost per Allocated
Driver Driver Unit Cost
Professional salaries.............2,500 hours $60 per hr. $150,000
Customer supplies.................
600 customers $187.50 per customer 112,500
CUSTOM DESIGN LANDSCAPING
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries.............7,500 hours $60 per hr. $ 450,000
Customer supplies.................
200 customers $187.50 per customer 37,500
Part 3
If costs were allocated on the number of customers, the average cost of
general landscaping would increase. Since 75% of the customers are general
SERIAL PROBLEM — SP C
1. Direct materials $2,500
2. Setting up machines $20,000/25 batches
Direct materials......................................................... $2,500
3. ABC gives a better representation of the cost of producing Job 6.15
because it reflects the resources consumed in the production
