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Appendix C - Activity-Based Costing
Problem C-2B (concluded)
4. Mixing & Cooking ($4,500 + $11,250)/1,500 MH $10.50/MH
Product testing $112,500/600 batches $187.50/batch
Machine calibration $250,000/400 production runs $625/run
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
Labeling & defects 20,000 cases x $0.15........... 3,000 100,000 cases x $0.15.... 15,000
Recipe formulation 30 groups x $2,000............. 60,000 15 groups x $2,000........... 30,000
Heat, light, & water 500 MH x $18....................... 9,000 1,000 MH x $18.................. 18,000
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
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
AppC-1999
Appendix C - Activity-Based Costing
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
2. Lakeside has taken on more custom-made boxes for smaller-volume
customers.
3. Yes. Lakeside’s old customers bought the same type of boxes over
and over, so the design costs were spread over many units. The new
4. Possibly. If ABC had been used rather than a volume-based system,
Lakeside would have realized that small customers who want
custom-designed and custom-made boxes require different activities
the activity was required for all orders.
5. ABC gives managers information about the activities and the costs of
AppC-1999
Appendix C - Activity-Based Costing
Problem C-4B (45 minutes)
1. Plantwide overhead rate:
Engineering support $ 56,250
Electricity 112,500
Setup costs 41,250
Overhead cost per unit $ 4.20/unit
*Standard: 40,000 units x 3 MH/unit = 120,000 MH
Deluxe: 10,000 units x 3 MH/unit = 30,000 MH
Total machine hours 150,000 MH
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
Overhead cost per unit 4.20 4.20
Manufacturing cost per unit $ 88.20 $112.20
2.
Profit per customer Standard Deluxe
Gross profit per unit $3.80 $ 12.80
x units per customer
Standard (40,000 units/1,000 cust.) x 40 units/cust.
Deluxe (10,000 units/1,000 cust.) ___________ x 10 units/cust.
This comparison shows that gross profit per customer exceeds service
cost per customer for both products. Thus, both products appear to be
profitable.
AppC-1999
Education.
Appendix C - Activity-Based Costing
Problem C-4B (concluded)
3. Eng. support $56,250/(50 + 25) modifications = $750/modification
Electricity $112,500/150,000* machine hours = $0.75/machine hour
Setup $41,250/(175 + 75) batches = $165/batch
* From part 1
Standard Deluxe
Engineering 50 mods. x $750 $37,500 25 mods. x $750 $ 18,750
Electricity 120,000 MH x $0.75 90,000 30,000 MH x $0.75 22,500
Setups 175 batches x $165 28,875 75 batches x $165 12,375
Total overhead $156,375 $53,625
÷ units ÷ 40,000 ÷ 10,000
Gross profit/unit $ 4.09 $ 11.64
4. Standard Deluxe
Gross profit per unit $ 4.09 $ 11.64
x units per customer* x 40 units x 10 units
Gross profit per customer $ 163.60 $ 116.40
*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
AppC-1999
Appendix C - Activity-Based Costing
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
Maintenance $100,800/(5,000 + 2,000) MH $14.40/MH
Total cartons 1,900 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
Maintenance 5,000 MH x$14.40................ 72,000 2,000 MH x $14.40.............. 28,800
2. Cost per unit Fun with Fractions Count Calculus
Total manufacturing cost $1,240,200 $275,760
*Rounded
3. Selling price of Count Calculus $59.95
4. Since the cost associated with Fun with Fractions is $8.27, the price
should be at least $8.27 to cover these costs. A higher price would
make the product profitable.
AppC-1999
Appendix C - Activity-Based Costing
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
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries.............2,500 hours $60 per hr. $150,000
Customer supplies.................
600 customers $187.50 per customer 112,500
Average cost per customer............................................................ $ 597.50
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
AppC-1999
Appendix C - Activity-Based Costing
SERIAL PROBLEM — SP C
1. Direct materials $2,500
2. Setting up machines $20,000/25 batches
$800/batch
Inspecting components $7,500/5,000 parts $1.50/part
Providing utilities $10,000/5,000 machine hours $2.00/MH
Inspecting: 400 parts @$1.50/part.......................... 600
Utilities: 600 MH @$2.00/MH.............................. 1,200 3,400
Total manufacturing cost........................................... $9,400
3. ABC gives a better representation of the cost of producing Job 6.15
because it reflects the resources consumed in the production
AppC-1999
