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Financial & Managerial Accounting, 5th Edition
976
Exercise 17-12 (35 minutes)
1. Total direct labor hours:
Product A: 10,000 units x 0.20 DLH/unit = 2,000 DLH
Product B: 2,000 units x 0.25 DLH/unit = 500 DLH
Plant-wide overhead rate:
$249,000/2,500 DLH = $99.60/DLH
Product A Product B
Direct materials
A: 10,000 units x $2/unit $ 20,000
2. Product A Product B
Price per unit $20.00 $60.00
of Product A or increase the selling price.
Exercise 17-12 (concluded)
3. Overhead rates
Machine setup $121,000/(10 + 12) setups $5,500/setup
Material handling $48,000/16,000 parts* $3/part
Product A Product B
Direct Materials (from part 1) $ 20,000 $ 6,000
Direct labor (from part 1) 48,000 12,000
Overhead
Machine setup
4. Product A Product B
Price per unit $20.00 $ 60.00
Cost per unit 16.58 84.60
Profit (loss) per unit $ 3.42 $(24.60)
Financial & Managerial Accounting, 5th Edition
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Exercise 17-13 (20 minutes)
1.
Client consultation $270,000/1,500 contact hours $180/con.hr.
Drawings $115,000/2,000 design hours $57.50/design hr.
2.
Client consultation 450 contact hours x $180/con. hr. $ 81,000
Drawings 340 design hrs. x $57.50/design hr. 19,550
Exercise 17-14 (30 minutes)
Calculation of predetermined overhead rates to apply ABC
Overhead Cost
Category (Activity
Cost Pool)
Total
Cost
Total
Amount of
Cost Driver
Predetermined Overhead Rate
Supervision ......................
$ 5,400
$36,000
15%
of direct labor cost
Depreciation.....................
56,600
2,000 MH
$28.30
per machine hour
Line preparation ..............
46,000
250 setups
$184.00
per setup
1. Assignment of overhead costs to the two products using ABC
Rounded edge
Cost
Driver
Cost per
Driver Unit
Assigned Cost
Supervision ............................
$12,200
15%
$ 1,830
Machinery depreciation ........
500 hours
$ 28.30
14,150
Line preparation ....................
40 setups
$184.00
7,360
Total overhead assigned ......
$23,340
Financial & Managerial Accounting, 5th Edition
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Exercise 17-15 (40 minutes)
Part 1
Determination of cost per driver unit
Cost Center
Cost
Driver
Cost per Driver
Professional salaries .......................
$1,600,000
10,000 hours
$160 per hour
Patient services & supplies ............
$ 27,000
600 patients
$45 per patient
Building cost ................................
$ 150,000
1,500 sq. ft.
$100 per sq. ft.
Total costs ................................
$1,777,000
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
$160 per hr.
$400,000
Patient services & supplies ......
400 patients
$45 per patient
18,000
Building cost ..........................
600 sq. ft.
$100 per sq. ft.
60,000
Total ................................................................................................
$478,000
Average cost per patient ................................................................
$ 1,195
ORTHOPEDIC SURGERY
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries .............
7,500 hours
$160 per hr.
$1,200,000
Patient services & supplies ......
200 patients
$45 per patient
9,000
Building cost ..........................
900 sq. ft.
$100 per sq. ft
90,000
Total ................................................................................................
$1,299,000
Average cost per patient ................................................................
$ 6,495
[Note that the sum of the amounts allocated to General Surgery and Orthopedic
Surgery ($478,000 + $1,299,000) equals the total amount of indirect costs ($1,777,000).]
PROBLEM SET A
Problem 17-1A (45 minutes)
1. Plantwide rate
Engineering support $ 24,500
Electricity 34,000
Setup costs 52,500
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
Manufacturing overhead per unit
Financial & Managerial Accounting, 5th Edition
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Problem 17-1A (continued)
3. Engineering Support $24,500/(12 + 58) modifications $350/modification
Electricity $34,000/3,400* machine hours $10/MH
Setup $52,500/(125 + 225) batches $150/batch
*Product A 10,000 units x 0.1 MH/unit = 1,000 MH
Product B 2,000 units x 1.2 MH/unit = 2,400 MH
3,400 MH
Product A Product B
Engineering support
A: 12 modifications @ $350 $ 4,200
B: 58 modifications @ $350 $20,300
Electricity
Problem 17-1A (concluded)
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
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Problem 17-2A (25 minutes)
1. When companies experience strong price pressure on their high-
volume, commodity-type products, they should be concerned. Many
2. The company may be charging less for its low-volume, custom-order
products than the competitors because the company is using a volume-
3. While prices are really set in the marketplace based on customer
demand and supply of the product, companies still look at costs to
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
Problem 17-3A (40 minutes)
1. Grinding ............................................................................... Unit level
2. Grinding & Polishing ($320,000+$135,000)/13,000 MH $35/MH
Product modification $600,000/1,500 Eng. hrs. $400/Eng. hr.
3.
Job 3175
Job 4286
Grinding & polishing
550 MH x $35 ............
$19,250
5,500 MH x $35 ...........
$192,500
Product modification
26 Eng.hrs. 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
4. Job 3175 Job 4286
Total overhead cost of job $74,650 $383,425
Financial & Managerial Accounting, 5th Edition
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Problem 17-3A (concluded)
5. Plantwide rate:
Grinding ............................................................................... $ 320,000
Polishing .............................................................................. 135,000
Job 3175 Job 4286
Overhead
*rounded
6. Average overhead cost
Job 3175 Job 4286
Using ABC $ 373.25 $ 153.37
Using plantwide rate $ 266.18 $ 186.32
The plantwide rate, which is closely associated with the volume of
Problem 17-4A (25 minutes)
1. Liquid materials $2,304/(1,400 + 37,000) gallons $0.06/gallon
Dry materials $6,941/(620 + 12,000) pounds $0.55/pound*
Utilities $1,422/(200 + 3,750) machine hrs $0.36/MH
EasySlim: 180,000 bottles x 1 label / bottle = 180,000 labels
Total labels 217,500 labels
Hi-Voltage
EasySlim
Liquid material
1,400 gal x $0.06 ..........
$ 84
37,000 gal x $0.06 ..........
$ 2,220
Dry material
620 pounds x $0.55 ....
341
12,000 pounds x $0.55 ..
6,600
Utilities
200 MH x $0.36 ...........
72
3,750 MH x $0.36 ............
1,350
Bottling
12,500 btls x $0.40 .....
5,000
180,000 btls x $0.40 .......
72,000
Labeling
37,500 labels x $0.03 ..
1,125
180,000 labels x $0.03 ...
5,400
Machine setup
500 setups x $25 ........
12,500
300 setups x $25 ............
7,500
Product Cost
$19,122
$95,070
2. Hi-Voltage EasySlim
Total cost of line $19,122 $95,070
3. Price for Hi-Voltage $3.75
Financial & Managerial Accounting, 5th Edition
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Problem 17-5A (45 minutes)
1. Plantwide overhead rate:
2.
Extra Fine Family Style
3.
Extra Fine Family Style
Selling price per case $18.00 $ 9.00
Manufacturing cost per case 10.82 9.82
Problem 17-5A (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
*rounded
5. Extra Fine Family Style
Selling price per case $18.00 $9.00
6. Departmental overhead rates would be a modest improvement over the
plantwide rate because they could show differences across
Financial & Managerial Accounting, 5th Edition
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PROBLEM SET B
Problem 17-1B (45 minutes)
1. Plantwide overhead rate:
Engineering support $ 56,250
Electricity 112,500
Setup costs 41,250
Total overhead cost $ 210,000
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
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.
