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Problem 7-17 (45 minutes)
1. Under the traditional direct labor-hour based costing system,
manufacturing overhead is applied to products using the predetermined
overhead rate computed as follows:
Estimated total manufacturing overhead cost
Predetermined =
overhead rate Estimated total direct labor -hours
$1,980,000
= = $16.50 per DLH
120,000 DLHs *
*20,000 units of Xtreme @ 2.00 DLH per unit + 80,000 units of the
Pathfinder@ 1.0 DLH per unit = 40,000 DLHs + 80,000 DLHs = 120,000
DLHs.
Consequently, the product margins using the traditional approach would
be computed as follows:
Xtreme
Pathfinder
Total
Sales ...................................
$2,800,000
$7,920,000
$10,720,000
Direct materials ....................
1,440,000
4,240,000
5,680,000
Direct labor ..........................
480,000
960,000
1,440,000
Manufacturing overhead
applied @ $16.50 per
direct labor-hour ................
660,000
1,320,000
1,980,000
Total manufacturing cost ......
2,580,000
6,520,000
9,100,000
Product margin ....................
$ 220,000
$1,400,000
$ 1,620,000
Problem 7-17 (continued)
2. The first step is to determine the activity rates:
Activity Cost Pools
(a)
Total
Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Supporting direct
labor ...................
$783,600
120,000
DLH
$6.53
per DLH
Batch setups ..........
$495,000
300
setups
$1,650
per setup
Product sustaining ..
$602,400
2
products
$301,200
per product
*The Other activity cost pool is not shown above because it includes
organization-sustaining and idle capacity costs that should not be
assigned to products.
Under the activity-based costing system, the product margins would be
computed as follows:
Xtreme
Pathfinder
Total
Sales ................................
$2,800,000
$7,920,000
$10,720,000
Direct materials .................
1,440,000
4,240,000
5,680,000
Direct labor .......................
480,000
960,000
1,440,000
Supporting direct labor ......
261,200
522,400
783,600
Batch setups .....................
330,000
165,000
495,000
Product sustaining .............
301,200
301,200
602,400
Total cost .........................
2,812,400
6,188,600
9,001,000
Product margin .................
$ (12,400)
$1,731,400
$ 1,719,000
Problem 7-17 (continued)
The traditional and activity-based cost assignments differ for two
reasons. First, the traditional system assigns all $1,980,000 of
66.7% of all overhead to the Pathfinder product line. The ABC system
assigns 66.7% of Batch setup costs (a batch-level activity) to the
Problem 7-18 (continued)
3. The costs of each of the jobs can be computed as follows using the activity rates computed above:
a.
Routine one thousand square foot job:
Job size (1 thousand square feet @ $970 per thousand square feet) ....
$ 970.00
Estimating and job setup (1 job @ $239 per job) ................................
239.00
Nonroutine job (not applicable) ..........................................................
0
Total cost of the job ..........................................................................
$1,209.00
Cost per thousand square feet ($1,209 ÷ 1 thousand square feet) .......
$1,209.00
b.
Routine two thousand square foot job:
Job size (2 thousand square feet @ $970 per thousand square feet) ....
$1,940.00
Estimating and job setup (1 job @ $239 per job) ................................
239.00
Nonroutine job (not applicable) ..........................................................
0
Total cost of the job ..........................................................................
$2,179.00
Cost per thousand square feet ($2,179 ÷ 2 thousand square feet) .......
$1,089.50
c.
Nonroutine two thousand square foot job:
Job size (2 thousand square feet @ $970 per thousand square feet) ....
$1,940.00
Estimating and job setup (1 job @ $239 per job) ................................
239.00
Nonroutine job ..................................................................................
6,430.00
Total cost of the job ..........................................................................
$8,609.00
Cost per thousand square feet ($8,609 ÷ 2 thousand square feet) .......
$4,304.50
Problem 7-19 (20 minutes)
1. The cost of serving the local commercial market according to the ABC model can be determined as
follows:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Animation concept ........
$6,040
per proposal
25
proposals
$151,000
Animation production ....
$7,725
per minute of animation
5
minutes
38,625
Contract administration .
$6,800
per contract
10
contracts
68,000
$257,625
2. The margin earned serving the local commercial market is negative, as shown below:
Profitability Analysis
Sales ...................................................
$180,000
Costs:
Animation concept ..............................
$151,000
Animation production ..........................
38,625
Contract administration .......................
68,000
257,625
Margin .................................................
$(77,625)
3. It appears that the local commercial market is losing money and the company would be better off
dropping this market segment. However, as discussed in the previous problem, not all of the costs
Problem 7-20 (continued)
2. The activity rates are computed as follows:
Activity Cost Pool
(a)
Total Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Cleaning carpets...
$161,000
20,000
hundred
square feet
$8.05
per hundred
square feet
Travel to jobs .......
$78,000
60,000
miles
$1.30
per mile
Job support ..........
$59,000
2,000
jobs
$29.50
per job
3. The cost for the Flying N Ranch job is computed as follows:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Cleaning carpets ...
$8.05
per hundred
square feet
5
hundred
square feet
$ 40.25
Travel to jobs .......
$1.30
per mile
75
miles
97.50
Job support ..........
$29.50
per job
1
job
29.50
Total ....................
$167.25
4. The margin earned on the job can be easily computed by using the
costs calculated in part (3) above.
Sales ........................
$140.00
Costs:
Cleaning carpets .....
$40.25
Travel to jobs .........
97.50
Job support ............
29.50
167.25
Margin ......................
$(27.25)
