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Title: Problem C-4A
QA_Ori:
1.
Plantwide overhead rate:
Engineering support $24,500
Product
Product
Product A Product B
Direct materials per unit $15.00 $24.00
Direct labor per unit
Manufacturing overhead per unit
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
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 product ($90). It appears that
the company is incurring a loss of $17.40 ($72.60 - $90) associated with each customer
of Product A.
3.
Engineering Support $24,500/(12 + 58) modifications $350/modification
Product A Product B
Engineering support
A: 12 modifications @ $350 $4,200
B: 58 modifications @ $350 $20,300
Electricity
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
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
Title: Problem C-5A
QA_Ori:
1.
Total overhead = $215,630 + $399,480 + $515,600
Total direct labor hours 2,600 DLH + 1,600 DLH
= $1,130,710 = $269.22/DLH*
4,200 DLH
2. Total manufacturing cost per unit:
Direct materials and direct labor $25.00 $32.00
3. Gross profit per unit
It appears that the Pup Tent is not profitable and management may decide to
4.
Pattern alignment $64,400/560 batches $115/batch
Cutting $50,430/12,300 machine hours $4.10/MH
Pup Tent Pop-Up Tent
Pattern alignment 140 batches x $115..............$ 16,100 420 batches x $115..............$ 48,300
Cutting 7,000 MH x $4.10.................28,700 5,300 MH x $4.10.................21,730
Moving product 800 moves x $42..................33,600 1,600 moves x $42...............67,200
*Rounded
5.
Pup Tent Pop-Up Tent
Both product lines are profitable without any cost cutting. The ABC cost assignment
method more accurately reflects the costs associated with each product line
because it is based on the consumption of the activities that cause costs to be
incurred, whereas the plantwide overhead rate bases cost assignment on
volume-related factors.
6. Departmental overhead rates based on direct labor hours and machine hours are still
volume-based measures and would not improve the accuracy of cost assignment
relative to ABC. Departmental overhead rates may be an improvement over a plantwide
rate because the departmental rates at least recognize differences in drivers between
departments.
Title: Problem C-6A
QA_Ori:
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
ORTHOPEDIC SURGERY
Cost
Driver
Cost per Driver
Unit
Allocated Cost
Professional salaries..................... 7,500 hours $200 per hr. $1,500,000
[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
Title: Problem C-1B
QA_Ori:
1.
Components $495,000/(450,000 + 100,000) parts $0.90/part
Assembly labor $244,800/(15,000 + 2,000) DLH $14.40/DLH
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
3.
Selling price of Count Calculus $59.95
2.
Title: Problem C-2B
QA_Ori:
1.
Wrapping $500,000/100,000 units = $5/unit
* 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
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
4.
Plantwide overhead rate
Wrapping ($300,000 + $200,000) $500,000
Assembling 400,000
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 the cost of the Executive Basket
