Chapter 09 – Activity-Based Costing
9-31
9-42. (40 min.) Choosing an Activity-Based Costing System: Pickle
Motorcycles, Inc.
a.
Pickle Motorcycles
Income Statement
Route 66
Main Street
Alley Cat
Sales revenue …………………………..
$7,600,000
$11,200,000
$9,500,000
Direct costs:
Direct material ……..……………………
3,000,000
4,800,000
4,000,000
Direct labor ………….……………….
288,000
480,000
1,080,000
Var. OHa ……………..……………
939,600
1,503,360
2,255,040
Cont. margin ………..…………………
$3,372,400
$4,416,640
$ 2,164,960
Fixed OH:
Plant admin. ……….………………….
Other ………………….……….
Gross profit …………….…………….
a Rate = $93.96 (= $4,698,000 ÷ 50,000 machine-hours) per machine-hour.
Chapter 09 – Activity-Based Costing
9-32
9-42. (continued)
b.
Pickle Motorcycles
Income Statement
Route 66
Main Street
Back Alley
Total
Sales revenue ……..……………………
$7,600,000
$11,200,000
$9,500,000
$28,300,000
Direct costs:
Direct material ….……………………….
3,000,000
4,800,000
4,000,000
11,800,000
Direct labor
288,000
480,000
1,080,000
1,848,000
Var. OH:
Mach. setup ……..……………………
102,960
a
159,120
205,920
468,000
Order proc. …………………………..
288,000
b
432,000
432,000
1,152,000
Warehousing …………………………..
418,500
c
418,500
837,000
1,674,000
Energy …………….…………….
151,200
d
241,920
362,880
756,000
Shipping ………….……………….
43,200
e
172,800
432,000
648,000
Cont. margin ……….………………….
$3,308,140
$4,495,660
$ 2,150,200
$ 9,954,000
Fixed OH:
Plant admin. …….…………………….
1,760,000
Other …………………………..
2,800,000
Gross profit …………………………..
$ 5,394,000
a $4,680 (= $468,000 ÷ 100 runs) per run x 22 runs = $102,960.
b $720 (= $1,152,000 ÷ 1,600 orders) per order x 400 orders = $288,000.
c $2,092.50 (= $1,674,000 ÷ 800 units) per unit x 200 units = $418,500.
d $15.12 (= $756,000 ÷ 50,000 machine-hours) per machine-hour x 10,000 machine-
hours = $151,200.
e $43.20 (= $648,000 ÷ 15,000 units) per unit shipped x 1,000 units shipped = $43,200
and other decisions.
d. Some costs may have no relationship to any volume or activity base. To artificially
Chapter 09 – Activity-Based Costing
9-33
9-43. (40 min.) Activity-Based Costing, Cost Flow Diagram, and Predetermined
Overhead Rates: Huron Furniture.
a.
Burden rate = (Total overhead costs ÷ Budgeted total direct labor-hours)
Budgeted total direct labor-hours = 3,200 + 1,800 + 5,000 = 10,000 hours
Chapter 09 – Activity-Based Costing
9-34
9-43. (continued)
b.
c.
Utilities ……………………….…
$450,000 ÷ 60,000 MH
=
$7.50 per machine-hour.
Scheduling and setup …..…
$450,000 ÷ 600 Setups
=
$750 per setup.
Material handling ……………
$1,200,000 ÷ 1,600,000 lbs.
=
$0.75 per pound.
Chapter 09 – Activity-Based Costing
9-35
9-43. (continued)
d.
Unit Costs:
Oval
Round
Square
Direct Costs …………………………..…………
$ 80,000
$ 80,000
$ 80,000
Overhead:
Utilities …………………………………..……
225,000a
75,000
150,000
Scheduling and setup ……………………
60,000b
225,000
165,000
Material handling …………………….……
375,000c
225,000
600,000
Total costs ………………………………….……
$740,000
$605,000
$995,000
Number of units …………………………..……
4,000
2,000
6,000
Unit cost …………………………………….……
$185.00
$302.50
$165.83
a $225,000 = $7.50 per machine-hour x 30,000 machine-hours.
b $60,000 = $750 per setup x 80 setups.
c $375,000 = $0.75 per pound x 500,000 pounds of material.
e. If management implemented an activity-based costing system it should be provided
with a more thorough understanding of product costs. By breaking down costs into
cost drivers, i.e., those activities that drive the costs, management should be able to
see the relationship between product complexity, product volume, and product cost.
This would be vital information for pricing decisions and profitability strategies.
Management should also be able to streamline the production process by reducing
those nonvalue-adding activities such as setups and travel time between activity
centers or departments. (Management might consider running larger batches, or
redesigning the plant layout.)
Chapter 09 – Activity-Based Costing
9-36
9-44. (40 min.) Activity-Based Costing, Cost Flow Diagram, and Predetermined
Overhead Rates: Utica Manufacturing.
a.
308
510
Direct costs ………………………………………….….
$216,000
$216,000
Overhead (@ $19 per machine-hour) ………….
1,140,000
1,710,000
Total costs ……………………………………………….
$1,356,000
$1,926,000
Number of units …………………………………….….
30,000
18,000
Unit cost ………………………………………………….
$45.20
$107.00
Chapter 09 – Activity-Based Costing
9-37
9-44. (continued)
b.
Inspection ……………………..
$170,000 ÷ $68,000 material dollars
=
250% of material dollars.
Production ……..……………..
$1,500,000 ÷ 150,000 machine-hours
=
$10.00 per machine-hour
Machine setup ..……………..
$700,000 ÷ 140 Setups
=
$5,000 per setup.
Shipping ………..……………..
$480,000 ÷ 48,000 units
=
$10.00 per unit.
c.
Unit Costs:
308
510
Direct Costs …………………………..…………
$216,000
$216,000
Overhead:
Incoming inspection ………………………
125,000a
45,000
Production ……………………………..……
600,000b
900,000
Machine setup ………………………..…
250,000c
450,000
Shipping………………………………………
300,000d
180,000
Total costs ………………………………….……
$1,491,000
$1,791,000
Number of units …………………………..……
30,000
18,000
Unit cost …………………………………….……
$49.70
$99.50
a $125,000 = 250% of material dollars x $50,000.
b $600,000 = $10.00 per machine-hour x 60,000 machine-hours.
c $250,000 = $5,000 per setup x 50 setups.
d $300,000 = $10.00 per unit x 30,000 units.
d. If management implemented an activity-based costing system it should be provided
with a more thorough understanding of product costs. By breaking down costs into
cost drivers, i.e., those activities that drive the costs, management should be able to
see the relationship between product complexity, product volume, and product cost.
This would be vital information for pricing decisions and profitability strategies.
Management should also be able to streamline the production process by reducing
those nonvalue-adding activities such as setups and travel time between activity
centers or departments. (Management might consider running larger batches, or
redesigning the plant layout.)
Chapter 09 – Activity-Based Costing
9-45. (40 min.) Activity-Based Costing and Predetermined Overhead Rates:
Cain Components.
a.
Burden rate = (Total overhead costs ÷ Budgeted total machine-hours)
Budgeted total machine-hours = 150,000 + 100,000 = 250,000 hours
Chapter 09 – Activity-Based Costing
9-39
Unit Costs:
Standard
Deluxe
Direct Costs …………………………..…………
$895,000
$405,000
Overhead:
Receiving ……………………………….……
367,500a
232,500
Manufacturing …………………………..
3,300,000b
2,200,000
Machine setup ………………………..…
337,500c
562,500
Shipping………………………………………
800,000d
200,000
Total costs ………………………………….……
$5,700,000
$3,600,000
Number of units …………………………..……
20,000
5,000
Unit cost …………………………………….……
$285.00
$720.00
a $367,500 = 150% of material dollars x $245,000.
b $3,300,000 = $22.00 per machine-hour x 150,000 machine-hours.
c $337,500 = $4,500 per setup x 75 setups.
d $800,000 = $40.00 per unit x 20,000 units.
c. If these results are typical, it will probably not be worth adopting the ABC system.
The difference in the reported product costs are not significant, meaning they would
be unlikely to distort any decisions. It is important to note that this is true as long as
these results (number of units, costs, and so on) remain in roughly these
proportions. If there are large changes in the relative proportions, the two costs
systems might no longer report similar results.
9-46. (40 min.) Activity-Based Costing and Predetermined Overhead Rates:
Cain Components.
a.
Receiving ……………………..
$600,000 ÷ $400,000 material dollars
=
150% of material dollars.
Manufacturing ..……………..
$3,300,000 ÷ 250,000 machine-hours
=
$13.20 per machine-hour
Engineering …………………..
$2,200,000 ÷ 200 Setups
=
$11,000 per setup
Machine setup ..……………..
$900,000 ÷ 200 Setups
=
$4,500 per setup.
Shipping ………..……………..
$1,000,000 ÷ 25,000 units
=
$40.00 per unit.
Chapter 09 – Activity-Based Costing
9-40
Unit Costs:
Standard
Deluxe
Direct Costs …………………………..…………
$895,000
$405,000
Overhead:
Receiving ……………………………….……
367,500a
232,500
Manufacturing …………………………..
1,980,000b
1,320,000
Engineering …………………………………
825,000c
1,375,000
Machine setup ………………………..…
337,500d
562,500
Shipping………………………………………
800,000e
200,000
Total costs ………………………………….……
$5,205,000
$4,095,000
Number of units …………………………..……
20,000
5,000
Unit cost …………………………………….……
$260.25
$819.00
a $367,500 = 150% of material dollars x $245,000.
b $1,980,000 = $13.20 per machine-hour x 150,000 machine-hours.
c $825,000 = $11,000 per setup x 75 setups.
d $337,500 = $4,500 per setup x 75 setups.
e $800,000 = $40.00 per unit x 20,000 units.
b. If these results are typical, it will probably be worth adopting the ABC system. The
difference in the reported product costs is now significant, meaning they could be
distort decisions.
9-47. (15 min.) Benefits of Activity-Based Costing: Cawker Products.
Activity-based costing would help to clear his confusion by identifying the activities that
drive overhead costs.
In the old process, direct labor was used to move material. The costing system treats