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Appendix C - Activity-Based Costing
2. Product A Product B
Gross profit per unit $ 3.63 $35.36
x units purchased per customer
A: 10,000 units/500 customers x 20 units
B: 2,000 units/400 customers ________ x 5 units
We see that the gross profit per customer from Product A ($72.60) is not
adequate to cover the cost of providing service to customers of this
AppC-1999
Appendix C - Activity-Based Costing
Problem C-4A (concluded)
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
A: 1,000 MH @ $10/MH 10,000
B: 2,400 MH@ $10/MH 24,000
Setups
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
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
AppC-1999
Appendix C - Activity-Based Costing
Problem C-4A (concluded)
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 C-5A (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
Utilities $1,422/(200 + 3,750) machine hrs $0.36/MH
* PowerPunch: 12,500 bottles x 3 labels/bottle = 37,500 labels
SlimLife: 180,000 bottles x 1 label / bottle = 180,000 labels
Total labels 217,500 labels
PowerPunch SlimLife
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. PowerPunch SlimLife
Total cost of line $19,122 $95,070
÷ Production volume ÷12,500 bottles ÷180,000 bottles
Average cost per bottle $1.53/bottle $0.53/bottle*
*Rounded
AppC-1999
Appendix C - Activity-Based Costing
Problem C-5A (concluded)
3. For PowerPunch:
Price $3.75
4. The price of SlimLife must cover the costs associated with the product,
so the minimum price for this product is $0.53/bottle.
Problem C-6A (45 minutes)
Part 1
Determination of cost per driver unit
Cost Center Cost Driver Cost per Driver
Professional salaries.......................$2,000,000 10,000 hours $200 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 $200 per hr. $ 500,000
Patient services & supplies.......400 patients $75 per patient 30,000
AppC-1999
Appendix C - Activity-Based Costing
Problem C-6A (concluded)
ORTHOPEDIC SURGERY
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries............. 7,500 hours $200 per hr. $1,500,000
Patient services & supplies.......100 patients $75 per patient 7,500
[Note that the sum of the amounts allocated to General Surgery and Orthopedic
Surgery ($638,000 + $1,699,500) equals the total amount of indirect costs ($2,337,500).]
Part 3
If all center costs were allocated on the number of patients, the average
cost of general surgery would increase. Since general surgery sees 80% of
AppC-1999
Appendix C - Activity-Based Costing
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
Cooking $270,000/1,000 batches = $270/batch
* 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
2.
Holiday Basket Executive Basket
Wrapping 8,000 units x $5...................... $ 40,000 1,000 units x $5...................... $ 5,000
Assembling 2,000 DLH x $20..................... 40,000 500 DLH x $20........................ 10,000
3. Cost per unit Holiday Basket Executive Basket
Total overhead cost $114,000 $73,900
AppC-1999
Appendix C - Activity-Based Costing
Problem C-1B (concluded)
4. Plantwide overhead rate
Wrapping ($300,000 + $200,000) $ 500,000
Assembling 400,000
Product Design 180,000
Holiday Basket
Overhead assigned (2,000 DLH x $72.50/DLH) $ 145,000
÷ units ÷8,000 units
Overhead cost per unit* $ 18.13
*Rounded
Executive Basket
5.
Holiday Basket Executive Basket
Activity based cost per unit $14.25 $73.90
The plantwide overhead rate assigns too much cost to the Holiday
Basket (which is a comparatively high-volume product) and understates
AppC-1999
Appendix C - Activity-Based Costing
associated with number of units of output.
Problem C-2B (45 minutes)
1. Plantwide rate:
Total overhead cost = $128,250 + $268,000 + $182,000 = $578,250 .
Total volume 20,000 + 100,000 cases 120,000 cases
= $4.82/case*
*Rounded
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
Gross margin (loss) per case $ 7.18 $(0.82)
AppC-1999
