45 Minutes, Strong PROBLEM 17.7B
DOWNHILL FAS
T
a.
Maintenance department costs allocated to each product line on a
per-unit basis using machine hours (MH):
Compute total MH at “normal” production levels:
Step 1:
PROBLEM 17.7B
DOWNHILL FAST (continued)
b.
% of total
Assigning maintenance department costs to activity pools:
using the number of work orders as an
activity base.
Step 1:
Establish the percent of maintenance department
costs to be assigned to each activity cost pool
PROBLEM 17.7B
DOWNHILL FAST (concluded)
% of total
Boots Poles Helmets Total
c.
Boots Poles Helmets
$ 0.50 $ 0.25 $ 8.75
Determining maintenance costs per unit using ABC:
Allocating custodial cost pool to product lines:
Establish the percent of custodial cost pool to be
allocated to each product line using square
footage occupied as an activity base.
Step 1:
Using machine hours as a single activity base is likely to result in significant cost distortions
for this company. While helmet production consumes the most machine hours, only 20% of
the company’s total maintenance cost is attributed to helmet production when activity-base
ABC:
Maintenance cost per unit (using MH)
45 Minutes, Strong PROBLEM 17.8B
HAPPY CAT, INC.
a. Budgeted manufacturing overhead 60,000$
Budgeted direct labor hours (DLH) ÷ 15,000
Manufacturing overhead application rate $4 per DLH
Manufacturing overhead allocated using DLH Tabby Treat Fresh n’ Fish
y
b. Percent of cost driver assigned to each product lin
e
Tabby Treat Fresh n’ Fish
y
Manufacturing overhead allocated using AB
C
Tabby Treat Fresh n’ Fish
y
PROBLEM 17.8B
HAPPY CAT, INC. (concluded
)
c. Total manufacturing costs allocated to each product line Tabby Treat Fresh n’ Fishy
Direct Labor:
Tabby Treat (75,000 bags × $16 per DLH × 0.04 DLH) 48,000$
Tabby Treat (from part b)44,780
Fresh n’ Fishy
(f
rom part b
)
15,220
Total cost allocated using ABC 167,780$ 351,220$
d.
e.
The Fresh n’ Fishy product line is very labor intensive in comparison to the Tabby Treat
product line. Thus, the company’s current practice of using direct labor hours to allocate
remain strong while sales of Fresh n’ Fishy are on the decline.
The benefits the company would achieve by implementing an activity-based costing system
include: (1) a better identification of its operating inefficiencies, (2) a better understanding
SOLUTIONS TO CRITICAL THINKING CASE
S
CASE 17.1
CLASSIC CABINETS
a.
$396,000
38,750 DLH
Wood Metal
35 Minutes, Medium
=
The resulting cost per unit for each type of cabinet is:
If the machine is purchased, yearly depreciation will increase by $50,000 ($500,000/10
years). Thus, total overhead will increase to $396,000. Production of 10,000 wood cabinets
will require 20,000 hours of direct labor and production of 7,500 metal cabinets will
require 18,750 hours of direct labor. The resulting overhead application rate will be:
$10.22 per direct labor hour
CASE 17.1
CLASSIC CABINETS (concluded)
d. If each manager’s performance evaluation is based on the unit costs calculated in part a,
Walter will appear to have performed poorly relative to the initial estimated unit costs,
MICA CORPORATION
Under the current bonus system, unethical production managers could increase their bonuses
by purposely understating the square footage occupied by their respective product lines. To
25 Minutes, Medium CASE 17.3
THE BIDDING WARS
ETHICS, FRAUD & CORPORATE GOVERNANCE
It is tempting to say that underbidding is an unethical practice. But on the other hand, if it is
the standard and accepted practice, a company that does not “play the game” will win no
CASE 17.4
C. ERICKSON AND SONS, INC.
INTERNET
a.
Examples from the Web site of projects include: restaurants, building conversions, building
renovations, law offices, corporate headquarters, and a hospital, community center.
Examples of services provided include construction management (scheduling, procurement,
10 Minutes, Easy