Exercise 3A-2 (45 minutes)
1. The unit product costs under the company’s conventional costing system
would be computed as follows:
Rascon
Parcel
Total
Number of units produced (a) …………………
20,000
80,000
Direct labor-hours per unit (b) …………………
0.40
0.20
Total direct labor-hours (a) × (b) …………….
8,000
16,000
24,000
Total manufacturing overhead (a) ……………
$576,000
Total direct labor-hours (b) …………………….
24,000
DLHs
Predetermined overhead rate (a) ÷ (b) ……..
$24.00
per DLH
Rascon
Parcel
Direct materials ……………………………………
$13.00
$22.00
Direct labor …………………………………………
6.00
3.00
Manufacturing overhead applied:
0.40 DLH per unit × $24.00 per DLH ………
9.60
0.20 DLH per unit × $24.00 per DLH ………
4.80
Unit product cost ………………………………….
$28.60
$29.80
Exercise 3A-2 (continued)
2. The unit product costs using activity-based absorption costing can be computed as follows:
Estimated
Overhead
Cost*
(b)
Expected Activity
(a) ÷ (b)
Activity Rate
$288,000
24,000
direct labor-hours
$12.00
per direct labor-hour
$288,000
6,000
engineering-hours
$48.00
per engineering-hour
$576,000
*The total estimated manufacturing overhead cost of $576,000 is split evenly between the two activi-
ty cost pools.
Manufacturing overhead is assigned to the two products as follows:
Rascon:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Labor related ………
$12
per DLH
8,000
DLHs
$ 96,000
Engineering design .
$48
per engineering-hour
3,000
engineering-hours
144,000
Total ………………….
$240,000
Parcel:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Labor related ………
$12
per DLH
16,000
DLHs
$192,000
Engineering design .
$48
per engineering-hour
3,000
engineering-hours
144,000
Total ………………….
$336,000
© The McGraw-Hill Companies, Inc., 2015. All rights reserved.
Solutions Manual, Appendix 3A 63
Exercise 3A-2 (continued)
The unit product costs combine direct materials, direct labor, and over-
head costs:
Rascon
Parcel
Direct materials ………………………………………
$13.00
$22.00
Direct labor ……………………………………………
6.00
3.00
Manufacturing overhead ($240,000 ÷ 20,000
units; $336,000 ÷ 80,000 units) ………………
12.00
4.20
Unit product cost …………………………………….
$31.00
$29.20
3. The unit product cost of the high-volume product, Parcel, declines under
the activity-based approach, whereas the unit product cost of the low-
volume product, Rascon, increases. This occurs because half of the
Exercise 3A-3 (continued)
2. The activity rates are computed as follows:
(a)
Estimated
(b)
Overhead
Total
(a) ÷ (b)
Activity Cost Pool
Cost
Expected Activity
Activity Rate
Supporting direct labor …
$200,000
50,000
DLHs
$4
per DLH
Batch setups ………………
$75,000
300
setups
$250
per setup
Safety testing …………….
$50,000
100
tests
$500
per test
Manufacturing overhead is assigned to the two products as follows:
Deluxe Product:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supporting direct labor ……….
$4
per DLH
10,000
DLHs
$ 40,000
Batch setups …………………….
$250
per setup
200
setups
50,000
Safety testing ……………………
$500
per test
30
tests
15,000
Total ……………………………….
$105,000
Standard Product:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supporting direct labor ……….
$4
per DLH
40,000
DLHs
$160,000
Batch setups …………………….
$250
per setup
100
setups
25,000
Safety testing ……………………
$500
per test
70
tests
35,000
Total ……………………………….
$220,000
Problem 3A-4 (60 minutes)
1. a. When direct labor-hours are used to apply overhead cost to products,
the company’s predetermined overhead rate would be:
Manufacturing overhead cost
Predetermined =
overhead rate Direct labor-hours
$1,800,000
= = $50 per DLH
36,000DLHs
b.
Model
X200
X99
Direct materials ……………………………………
$ 72
$ 50
Direct labor:
$10 per hour × 1.8 hours and 0.9 hours ….
18
9
Manufacturing overhead:
$50 per hour × 1.8 hours and 0.9 hours ….
90
45
Total unit product cost …………………………..
$180
$104
2. a. Predetermined overhead rates for the activity cost pools:
Activity Cost Pool
(a)
Estimated
Total Cost
(b)
Estimated
Total Activity
(a) ÷ (b)
Activity Rate
Machine setups ……
$360,000
150
setups
$2,400
per setup
Special processing ..
$180,000
12,000
MHs
$15
per MH
General factory ……
$1,260,000
36,000
DLHs
$35
per DLH
Problem 3A-4 (continued)
b. The unit product cost of each model under the activity-based ap–
proach would be computed as follows:
Model
X200
X99
Direct materials ………………………………
$ 72.00
$50.00
Direct labor:
$10 per DLH × 1.8 DLHs, 0.9 DLHs …..
18.00
9.00
Manufacturing overhead (above) ………..
123.00
39.50
Total unit product cost ……………………..
$213.00
$98.50
Comparing these unit cost figures with the unit costs in Part 1(b), we
find that the unit product cost for Model X200 has increased from
$180 to $213, and the unit product cost for Model X99 has decreased
from $104 to $98.50.
3. It is especially important to note that, even under activity-based costing,
70% of the company’s overhead costs continue to be applied to prod-
Machine setups (number of setups) …
$ 360,000
20
%
Special processing (machine-hours) …
180,000
10
General factory (direct labor-hours) …
1,260,000
70
Total overhead cost ……………………..
$1,800,000
100
%
Thus, the shift in overhead cost from the high-volume product (Model
X99) to the low-volume product (Model X200) occurred as a result of
reassigning only 30% of the company’s overhead costs.
The increase in unit product cost for Model X200 can be explained as