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Problem C-2A (40 minutes)
1. Grinding & Polishing ($320,000+$135,000)/13,000 MH $35/MH
2.
Job 3175
Job 4286
Grinding & polishing
550 MH x $35 ....................
$19,250
5,500 MH x $35 ...................
$192,500
Product modification
26 Eng.Hr x $400 ..............
10,400
32 Eng. Hr. x $400 ...............
12,800
Providing power
500 DLH x $15 ..................
7,500
4,375 DLH x $15 ..................
65,625
System calibration
30 batches x $1,250 .........
37,500
90 batches x $1,250 ............
112,500
Total cost of job
$74,650
$383,425
3. Job 3175 Job 4286
Total overhead cost of job $74,650 $383,425
4. Plantwide rate
Grinding ............................................................................... $ 320,000
Polishing .............................................................................. 135,000
Product modification .......................................................... 600,000
Problem C-2A (concluded)
Job 3175 Job 4286
Overhead
500 DLH x $106.47 $ 53,235
4,375 DLH x $106.47 $ 465,806
5. Average overhead cost
Job 3175 Job 4286
Using ABC $ 373.25 $ 153.37
The plantwide rate, which is closely associated with the volume of
production, overstates the cost of the high-volume product (in this case
Problem C-3A (25 minutes)
1. When companies experience strong price pressure on their high-
volume, commodity-type products, they should be concerned. Many
managers will blame competitive price cutting on attempts by
2. The company may be charging less for its low-volume, custom-order
products than the competitors because the company is using a volume-
based costing system, which understates the true cost of producing
low-volume products. It could be that competitors know that custom-
products.
3. While prices are really set in the marketplace based on customer
demand and supply of the product, companies still look at costs to
determine the price they would like to get if they could affect market
4. Custom-order furniture requires handling special fabrics, buying in
smaller quantities (which may be more expensive than buying “in bulk”),
5. In addition to obtaining a more accurate picture of the costs of making
various products, activity based costing also gives information about
the cost of the activities that are performed. Managers may be surprised
Problem C-4A (45 minutes)
1. Plantwide overhead rate:
Engineering support $ 24,500
Electricity 34,000
Product A Product B
Direct materials per unit $15.00 $24.00
Direct labor per unit
A: 0.3 DLH/unit @ $20/DLH 6.00
B: 1.6 DLH/unit @ $20/DLH 32.00
Product A
Product B
Selling price per unit .....................
$30.00
$120.00
Manufacturing cost per unit .........
26.37
84.64
Gross profit per unit ......................
$ 3.63
$ 35.36
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
Problem C-4A (concluded)
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
Direct materials cost per unit 15.00 24.00
Direct labor cost per unit (part 1) 6.00 32.00
Total manufacturing cost per unit $24.30 $95.03
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
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 (50 minutes)
1. Total overhead = $215,630 + $399,480 + $515,600
Total direct labor hours 2,600 DLH + 1,600 DLH
Pup Tent Pop-Up Tent
Overhead cost by product line
Pup: 2,600 DLH @ $269.22/DLH $699,972*
Pop-Up: 1,600 DLH @ $269.22/DLH $430,752*
2. Total manufacturing cost per unit:
Direct materials and direct labor $25.00 $32.00
3. Gross profit per unit
Selling price per unit $65.00 $200.00
It appears that the Pup Tent is not profitable and management may
Problem C-5A (continued)
4. Pattern alignment $64,400/560 batches $115/batch
Cutting $50,430/12,300 machine hours $4.10/MH
Moving product $100,800/2,400 moves $42/move
Sewing $327,600/4,200 direct labor hours $78/DLH
Inspecting $24,000/600 inspections $40/inspection
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
Sewing
2,600 DLH x $78 ...............
202,800
1,600 DLH x $78 ...............
124,800
Inspecting
240 insp. x $40 .................
9,600
360 insp. x $40 .................
14,400
Folding
15,200 units x $2.10 .........
31,920
7,600 units x $2.10 ...........
15,960
Designing
70 mods x $1,000 .............
70,000
210 mods x $1,000 ...........
210,000
Providing space
4,300 sq. ft. x $6 ...............
25,800
4,300 sq. ft. x $6 ...............
25,800
Material handling
450,000 sq.yd. x $0.20 ................
90,000
470,000 sq.yd. x $0.20 .................
94,000
Total overhead
$508,520
$622,190
÷ units
÷ 15,200
÷ 7,600
Overhead per unit*
$ 33.46
$ 81.87
DM and DL per unit
25.00
32.00
Mfg. cost per unit
$ 58.46
$ 113.87
*Rounded
Problem C-5A (concluded)
5.
Pup Tent Pop-Up Tent
Selling price $65.00 $200.00
Both product lines are profitable without any cost cutting. The ABC cost
assignment method more accurately reflects the costs associated with
6. Departmental overhead rates based on direct labor hours and machine
hours are still volume-based measures and would not improve the
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
Patient services & supplies ............
$ 37,500
500 patients
$75 per patient
Building cost ................................
$ 300,000
2,000 sq. ft.
$150 per sq. ft.
Total costs ................................
$2,337,500
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
Building cost ..........................
720 sq. ft.
$150 per sq. ft.
108,000
Total ................................................................................................
$ 638,000
Average cost per patient ................................................................
$ 1,595
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
Building cost ..........................
1,280 sq. ft.
$150 per sq. ft
192,000
Total ................................................................................................
$1,699,500
Average cost per patient ................................................................
$ 16,995
[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
PROBLEM SET B
Problem C-1B (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
Packaging
150,000 boxes x$2.88 .........
432,000
10,000 boxes x $2.88 .........
28,800
Shipping
1,500 cartons x$14.40 ........
21,600
400 cartons x $14.40 .........
5,760
Set-ups
52 set-ups x $1,800 ............
93,600
52 set-ups x $1,800............
93,600
Total cost
$1,240,200
$275,760
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
Profit/unit $32.37
4. Since the cost associated with Fun with Fractions is $8.27, the price
