Answers to questions
1. A cost object is something whose cost one is trying to determine the cost. Cost objects
2. Managers need timely cost information. They may have to sacrifice accuracy in order
to get the information in time for decision making. For instance, managers need cost
3. For product costing one needs to accumulate the costs necessary to produce the
product, which are direct materials, direct labor, and overhead.
4. A direct cost is a cost that is easily traceable to a cost object. A cost–benefit analysis
5. A direct cost can be either a fixed or variable cost, and an indirect cost can be either
a fixed or variable cost. For example, supervisor salaries are usually fixed costs but
6. The depreciation on machinery used in only one department is a direct cost to that
7. The cost driver chosen to use in allocating a cost should be some activity that drives
the cost. In other words, the cost driver should be the activity responsible for changes in the
8. To determine an allocation rate divide the total cost to be allocated by the total cost
9. Direct material and direct labor costs are direct costs of the product. Overhead costs
10. It is not possible to trace some costs, such as the utility cost of heating a factory, to
individual products. It is not cost effective to trace other manufacturing costs to
11. Overhead costs are allocated to the product in order to estimate the total cost of
manufacturing the product and to evenly spread overhead costs over the units
12. The volume of production may vary from month to month. If an equal amount of
13. The statement is incorrect. Choosing an inappropriate allocation base can result in
inaccurate product costs which can cause poor decisions. An allocation base that does
14. Both students are correct. Costs should be estimated beforehand to determine the
project’s merits and to plan expenditures. Projected costs have to be estimated costs
15. A cost pool is the accumulation of individual costs into a single total. Cost pools
eliminate the need to allocate every single indirect cost the company incurs. By
accumulating similar costs that are linked to a common cost driver into a single pool,
one allocation can be made for the entire cost pool.
Exercise 12-1A
a.
Items
Direct
Cost
Indirect
Cost
Depreciation on home office building
X
Salary of corporate office manager
X
Wages of workers assigned to a specific construction project
X
Supplies used by the Commercial Construction Division
X
Labor on a particular house
X
Salary of the supervisor of commercial construction projects
X
Supplies, such as glue and nails, used by the Home Construction
Division
X
Cost of building permits
X
Materials used in commercial construction project
X
Depreciation on home building equipment (small tools such as
hammers or saws)
X
Company president’s salary
X
Depreciation on crane used in commercial construction
X
b.
Items
Direct
Cost
Indirect
Cost
Depreciation on home office building
X
Salary of corporate office manager
X
Wages of workers assigned to a specific construction project
X
Supplies used by the Commercial Construction Division
X
Labor on a particular house
X
Salary of the supervisor of commercial construction projects
X
Supplies, such as glue and nails, used by the Home Construction
Division
X
Cost of building permits
X
Materials used in commercial construction project
X
Depreciation on home-building equipment (small tools such as
hammers or saws)
X
Company president’s salary
X
Depreciation on crane used in commercial construction
X
Exercise 12-1 (continued)
c.
Items
Direct
Cost
Indirect
Cost
Depreciation on home office building
X
Salary of corporate office manager
X
Wages of worker assigned to a specific construction project
X
Supplies used by the Commercial Construction Division
X
Labor on a particular house
X
Salary of the supervisor of commercial construction projects
X
Supplies, such as glue and nails, used by the Home Construction
Division
X
Cost of building permits
X
Materials used in commercial construction project
X
Depreciation on home-building equipment (small tools such as
hammers or saws)
X
Company president’s salary
X
Depreciation on crane used in commercial construction
X
Exercise 12-2
Step 1 is to determine the allocation rate: 30
Fringe benefit cost
$330,000
Allocation rate
––––––––––––––––––––
–––––––––––
$5,500 per employee
No. of employees
60
(Cost driver)
Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base
(i.e., cost driver) for each division:
Division
Allocation Rate
x
Weight of Base
=
Allocated Cost
A
$5,500
x
36
=
$198,000
B
$5,500
x
24
=
132,000
Total allocated cost
$330,000
Exercise 12-3
a.
Month
Jan
Feb
Mar
Apr
Total
Number of units
5,000
6,500
2,500
4,000
18,000
Allocation rate
Overhead cost
$72,000 x 4
for
–––––––––––––––
=
––––––––––––––
=
$16 per unit
overhead
No. of units
18,000
b. Assign the cost by multiplying the allocation rate by the weight of the base (cost
driver) for each month:
Month
Allocation Rate
x
Weight of Base
=
Allocated Cost
Jan.
$16
x
5,000
=
$ 80,000
Feb.
16
x
6,500
=
104,000
Mar.
16
x
2,500
=
40,000
Apr.
16
x
4,000
=
64,000
Total
$288,000
c. Computation of cost per unit:
Month
Jan.
Feb.
Mar.
Apr.
Number of units (a)
5,000
6,500
2,500
4,000
Expected cost
Overhead (b)
$ 80,000
$104,000
$40,000
$ 64,000
Direct costs (c = a x $18)
90,000
117,000
45,000
72,000
Total cost (d)
$170,000
$221,000
$85,000
$136,000
Cost per unit (d ÷ a)
$34.00
$34.00
$34.00
$34.00
Exercise 12-4
Cost Pool
÷
Base
Computation
Allocation Rate
Total overhead
÷
No. units
$300,000 ÷ 12,000 =
$25 per unit
b.
Allocation
Rate
x
Weight
of Base
=
January
Number of units (a)
1,600
a.
Indirect overhead costs
$25
x
1,600
=
$40,000
Direct materials (a x $64)
102,400
Direct labor (a x $52)
83,200
Total
$225,600
c. The amount computed in requirement b is an estimated amount. Accuracy could be
improved by waiting until December to determine the amount of product cost.
However, a manager may need to know the cost of products in January. Indeed, there
are necessary for a variety of decisions required to run a business.
Exercise 12-5
a.
Cost Items
Indirect
Materials
Indirect
Labor
Indirect
Utilities
Vacation pay
x
Sewer bill
x
Staples
x
Natural gas bill
x
Pens
x
Ink cartridges
x
Payroll taxes
x
Paper rolls for cash registers
x
Medical insurance
x
Salaries of secretaries
x
Water bill
x
b. Consumption of indirect materials is mostly related to sales activities. Therefore, sales
c. Accountants use cost pools to accumulate the costs of similar activities in the same
Exercise 12-6
a. Step 1 is to determine the allocation rate:
Allocation rate
Overhead cost
$360,000
for
=
–––––––––––––––––––
=
–––––––––––
=
$30 per DL hour
overhead cost
Direct labor hours
12,000
Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base
(cost driver):
Product
Allocation Rate
x
Weight of Base
=
Allocated Cost
Vogue
$30
x
2,000
=
$ 60,000
Beauty
30
x
4,000
=
120,000
Glamour
30
x
6,000
=
180,000
Total
$360,000
b. Step 1 is to determine the allocation rate:
Allocation rate
for
$90 per machine hour
overhead cost
Product
Allocation Rate
x
Weight of Base
=
Allocated Cost
Vogue
$90
x
1,200
=
$108,000
Beauty
90
x
1,400
=
126,000
Glamour
90
x
1,400
=
126,000
Total
$360,000
Exercise 12-7
a. Step 1 is to determine the allocation rate:
Allocation rate
Overhead cost
$250,000
for
–––––––––––––––
–––––––––––
$156.25 per machine hour
overhead cost
Machine hours
1,600
Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base
(cost driver):
Product
Allocation Rate
x
Weight of Base
=
Allocated Cost
Cups
$156.25
x
200
=
$ 31,250
Tablecloths
156.25
x
600
=
93,750
Bottles
156.25
x
800
=
125,000
Total
$250,000
b. Cain may have chosen machine hours as the cost driver because the manufacturing
Exercise 12-8
There is a logical cause and effect relationship between the fringe benefits cost and
the direct labor hours. The more labor is employed, the more fringe benefits cost
are incurred. In other words, labor is driving the fringe benefits cost. Accordingly,
the measure of labor hours is a rational allocation base for fringe benefits cost.
Similarly, the measure of direct materials is a rational cost driver for indirect
materials cost. The more direct materials (e.g., lumber) are used, the more indirect
materials (e.g., nails, glue) are utilized. Accordingly, the measure of direct materials
cost is a rational base for the allocation of indirect materials cost. The computations
for the allocations and the total cost figures are shown below:
Step 1 is to determine the allocation rates:
Allocation rate
Fringe benefit cost
$60,000
for
––––––––––––––––––––
=
–––––––––––
=
$0.375 per labor $
Fringe benefits
Direct labor dollars
$160,000
Allocation rate
Indirect Mater. cost
$20,000
for
–––––––––––––––––––––
=
–––––––––––
=
$0.10 per material $
Indirect Mater.
Direct Mater. dollars
$200,000
Step 2 is to assign the costs by multiplying the allocation rate by the weight of the base
(i.e., cost driver) for each month:
Fringe Benefits
House
Allocation Rate
x
Weight of Base
=
Allocated Cost
1
$0.375
x
$30,000
=
$11,250
2
$0.375
x
$45,000
=
16,875
3
$0.375
x
$85,000
=
31,875
Total
$60,000
Exercise 12-8 (continued)
Indirect Materials
House
Allocation Rate
x
Weight of Base
=
Allocated Cost
1
$0.10
x
$45,000
=
$ 4,500
2
$0.10
x
$65,000
=
6,500
3
$0.10
x
$95,000
=
9,000
Total
$20,000
Step 3 sums the cost components to determine the total cost of each house:
Expected Costs
Home 1
Home 2
Home 3
Total
Direct labor
$30,000
$ 45,000
$ 85,000
$160,000
Direct materials
45,000
65,000
90,000
200,000
Fringe benefits
11,250
16,875
31,875
60,000
Indirect materials
4,500
6,500
9,000
20,000
Total cost
$90,750
$133,375
$215,875
$440,000
Exercise 12-9
There is a logical relationship between the amount of labor and the level of
production. The more labor hours worked, the more products produced. In order to
Step 1 is to determine the allocation rate:
Annual rent
$90,000*
Allocation rate
=
––––––––––––––––––––
=
–––––––––––
$18 per labor hour
Annual labor hours
5,000
(Cost driver)
*$7,500 x 12 = $90,000
Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base
(cost driver) for each month:
Month
Allocation Rate
x
Weight of Base
=
Allocated Cost
Jan.
$18
x
300
=
$ 5,400
Feb.
18
x
600
=
10,800
Exercise 12-10
A problem exists because the insurance premium is paid only in July. If all of the cost
Step 1 is to determine the allocation rate:
Insurance cost
$96,000
Allocation rate
=
––––––––––––––––––––
=
––––––––––
=
$2.40 per hour
No. of labor hours
40,000
(Cost driver)
Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base
(cost driver) for each month:
Month
Allocation Rate
x
Weight of Base
=
Allocated Cost
January
$2.40
x
3,000
=
$7,200
February
2.40
x
2,000
=
4,800
Exercise 12-11
a. The annual salary of the customer relations representative could be allocated by
computing an allocation rate based on the total number of complaints expected to
occur during the year. A monthly charge could be determined by multiplying the
rate by the weight of the base. The computations for such an allocation are shown
below:
Step 1 is to determine the allocation rate:
$72,000*
Allocation rate
=
=
$2.25 per complaint
Step 2 is to assign the cost by multiplying the allocation rate by the weight of the base
(cost driver) for each month:
Month
Allocation Rate
x
Weight of Base
=
Allocated Cost
January
$2.25
x
1,000
=
$2,250
February
2.25
x
1,300
=
2,925
b. An important question that must be addressed is why one would make such an
allocation. Since you do not charge for processing customer complaints, the
information would not be useful for pricing decisions. Since the representative has
no control over the number of complaints received, the cost per complaint would have