Problem 3-12B (30 minutes)
1. Under the traditional direct labor-dollar based costing system,
manufacturing overhead is applied to products using the predetermined
$3.00 per DL$ (rounded)
The unit product costs using the conventional approach would be
computed as follows:
LE100
UL600
Direct materials ………………….
$ 720,000
$357,000
Direct labor ……………………….
240,000
100,000
Manufacturing overhead
applied @ $3.00 (rounded)
per direct labor-dollar ……….
720,000
300,000
Total manufacturing cost (a) …
$1,680,000
$757,000
Number of units (b) …………….
120,000
25,000
Unit product cost (a) ÷ (b) …..
$14.00
$30.28
Problem 3-12A (continued)
2. The activity rates are computed as follows:
Activity Cost Pools
(a)
Total Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Machining …………..
$400,000
MHR
$2.34
per MHR
Setups ……………….
$300,000
setup hrs.
$400
per setup hr.
Product-level ……….
$200,500
products
$50,125
per product
General factory ……
$120,000
DL$
$0.37
per DL$
Under the activity-based costing system, the unit product costs would
be computed as follows:
LE100
UL600
Direct materials ………………..
$ 720,000
$ 357,000
Direct labor ……………………..
240,000
100,000
Machining ……………………….
84,240
315,900
Setups …………………………...
60,000
240,000
Product sustaining …………….
100,250
100,250
General factory ………………..
88,800
31,450
Total cost (a) …………………..
$1,293,290
$1,144,600
Number of units (b) …………..
120,000
25,000
Unit product cost (a) ÷ (b) …
$10.78
$45.78
3. The traditional system uses one unit-level activity measure, direct labor
21.1% ($84,240 ÷ $400,000) of Machining costs to the LE100 product
line and 78.9% ($315,900 ÷ $400,000) to the UL600 product line. It
Problem 3-13B (15 minutes)
Activity
Level
Possible Activity Measures
a.
A percentage of all completed
goods are inspected on a
random basis.
Unit
Number of units inspected;
Inspection time
b.
Employees are trained in
general procedures.
Factory or
Product
Arbitrary if factory-level*
c.
Machines are set up between
batches of different
products.
Batch
Number of setups; Setup
time
d.
Material is received on the
receiving dock and moved
to the production area.
Batch or
Unit
Number of material moves
e.
Milling machines are used to
make components for
products.
Unit
Number of units processed;
Machine-hours
f.
Production orders are issued
for jobs.
Batch
Number of production orders
g.
Purchase orders are issued for
materials required in
production.
Batch
Number of purchase orders
h.
The company’s grounds crew
maintains planted areas
surrounding the factory.
Factory
Arbitrary*
i.
The engineering department
makes modifications in the
designs of products.
Product
Engineering time
j.
The human resources
department screens and
hires new employees.
Factory
Arbitrary*
k.
The maintenance crew does
routine periodic
maintenance on general-
purpose equipment.
Factory
Arbitrary*
l.
The plant controller prepares
periodic accounting reports.
Factory
Arbitrary*
Problem 3-14B (continued)
1. The first step is to determine the activity rates:
Serving a Party
Serving a Diner
Serving Drinks
Total cost (a) ………………………
$3,100
$25,600
$22,800
Total activity (b) ………………….
1,000
parties
4,000
diners
12,000
drinks
Cost per unit of activity (a)÷(b)
$3.10
per party
$6.40
per diner
$1.90
per drink
2. According to the ABC system, the cost of serving each of the parties can be computed as follows:
Serving a Party
Serving a Diner
Serving Drinks
Cost per unit of activity …………………………………………..
$3.10
per party
$6.40
per diner
$1.90
per drink
1
3
4
party
diners
drinks
Cost ……..
$3.10
$19.20
$7.60
$29.90
b. A party of two diners who order no drinks:
1
2
0
party
diners
drinks
Cost ……..
$3.10
$12.80
$0.00
$15.90
1
1
2
party
diner
drinks
Cost ……..
$3.10
$6.40
$3.80
$13.30
Problem 3-14B (continued)
3. The average cost per diner for each party can be computed by dividing
the total cost of the party by the number of diners in the party as
follows:
4. The average cost per diner differs from party to party under the activity-
($3.10) does not depend on the number of diners in the party.
$3.10. With two diners, the average cost per diner is cut in half to
$1.55. With five diners, the average cost per diner would be only $0.62.
And so on. Second, the average cost per diner differs also because of
$12.88 per diner because the $12.88 per diner figure does not recognize
differences in the diners’ demands on resources. It does not recognize
that some diners order more drinks than others nor does it recognize
Problem 3-15B (75 minutes)
1. The company’s estimated total direct labor-hours for the year can be
computed as follows:
Deluxe model: 10,000 units × 2.0 DLH per unit ….
20,000
Regular model: 50,000 units × 1.0 DLH per unit …
50,000
Total direct labor-hours …………………………………
70,000
Deluxe
Regular
Direct materials ……………………
$ 50
$30
Direct labor …………………………
30
15
Manufacturing overhead:
$44 per DLH × 2.0 DLHs ……..
88
$44 per DLH × 1.0 DLHs ……..
44
Unit product cost …………………
$168
$89
2. Activity rates can be computed as follows:
(a)
Estimated
(b)
Expected
Activity
(a) ÷ (b)
Activity
Rate
Overhead
Activity Cost Pool
Cost
Purchase orders ….
$60,000
1,500
orders
$40
per order
Rework requests …
$280,000
2,800
requests
$100
per request
Product testing …..
$240,000
10,000
tests
$24
per test
Machine related ….
$2,500,000
12,500
MHs
$200
per MH
Problem 3-15B (continued)
3. a.
Deluxe
Regular
Expected
Expected
Activity
Amount
Activity
Amount
Purchase orders, at $40 per order …………..
500
$ 20,000
1,000
$ 40,000
Rework requests, at $100 per request ……..
800
80,000
2,000
200,000
Product testing, at $24 per test ………………
7,000
168,000
3,000
72,000
Machine related, at $200 per MH ……………
4,500
900,000
8,000
1,600,000
Total overhead cost assigned (a) ……………
$1,168,000
$1,912,000
Number of units produced (b) ………………..
10,000
50,000
Overhead cost per unit (a) ÷ (b) …………….
$116.80
$38.24
b. Using activity-based costing, the unit product costs would be:
Deluxe
Regular
Direct materials ………………
$ 50.00
$30.00
Direct labor ……………………
30.00
15.00
Manufacturing overhead …..
116.80
38.24
Unit product cost ……………
$196.80
$83.24
Problem 3-15B (continued)
4. Unit product costs are distorted as a result of using direct labor-hours as
the base for applying overhead costs to products. Although the deluxe
model requires twice as much labor as the regular model, it still is not
being assigned enough overhead cost according to the activity-based
Problem 3-16B (75 minutes)
1. The company expects to work 16,000 direct labor-hours, computed as
follows:
Mono-Relay: 18,000 units × 0.50 DLH per unit ….
9,000
DLHs
Bi-Relay: 7,000 units × 1.00 DLH per unit ………..
7,000
DLHs
Total direct labor-hours ………………………………..
16,000
DLHs
Direct materials ……………………..
Direct labor …………………………..
Manufacturing overhead:
Unit product cost …………………..
Problem 3-16B (continued)
2. Activity rates can be computed as follows:
Maintaining parts inventory, at $80 per part type …
Quality control, at $20 per test ………………………..
9,450
Machine-related, at $30 per MH ……………………….
1,000
Units produced……………………………………………..
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected Activity
(a) ÷ (b)
Activity Rate
Maintaining inventory ………….
$88,000
1,100
part types
$80
per part type
Processing purchase orders ….
$199,200
3,984
orders
$50
per order
Quality control …………………..
$299,000
14,950
tests
$20
per test
Machine-related …………………
$57,000
1,900
MHs
$30
per MH
Problem 3-16B (continued)
b. Using activity-based costing, the unit product costs would be:
Mono-Relay
Bi-Relay
Direct materials …………………………….
$50.00
$ 65.00
Direct labor …………………………..……..
4.50
9.00
Manufacturing overhead (see above) …
18.00
45.60
Unit product cost …………………………..
$72.50
$119.60
4. Although the Bi-Relay accounts for only 28% of the company’s total
production, it is responsible for 64% of the part types carried in
inventory and 53% of the machine-hours worked. It is also responsible
for 63% of the tests needed for quality control. These factors have been
$114.20, it is possible that the company may actually be losing money
Problem 3-17B (75 minutes)
1. a. When direct labor-hours are used to apply overhead costs to
products, other factors affecting the incurrence of overhead costs are
ignored. The company’s predetermined overhead rate would be:
Total manufacturing overhead
Predetermined =
overhead rate Total direct labor-hours
$435,000
= = $30 per DLH
14,500 DLHs
b. The unit product costs are computed as follows:
Model X200
Model X99
Direct materials ……………………
$100
$ 60
Direct labor:
$20 per DLH × 2.5 DLHs ……..
50
$20 per DLH × 1.2 DLHs ……..
24
Manufacturing overhead:
$30 per DLH × 2.5 DLHs ……..
75
$30 per DLH × 1.2 DLHs ……..
36
Unit product cost …………………
$225
$120
2. a. Activity rates can be computed as follows:
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Machine setups …….
$50,000
500
setups
$100
per setup
Special processing …
$95,000
47,500
MHs
$2
per MH
General factory …….
$290,000
14,500
DLHs
$20
per DLH
Problem 3-17B (continued)
b. The unit product costs would now be computed as follows, starting
with the computation of the manufacturing overhead:
Model X200
Model X99
Machine setups:
$100 per setup × 100 setups …………………………………
$10,000
$100 per setup × 400 setups …………………………………
$ 40,000
Special processing:
$2 per MH × 47,500 MHs ………………………………………
95,000
$2 per MH × 0 MHs ……………………………………………..
0
General factory:
$20 per DLH × 2,500 DLHs ……………………………………
50,000
$20 per DLH × 12,000 DLHs …………………………..……..
240,000
Total overhead cost (a) …………………………………………..
$155,000
$280,000
Number of units produced (b) …………………………………..
1,000
10,000
Overhead cost per unit (a) ÷ (b) ……………………………….
$155
$28
Model X200
Model X99
Direct materials …………………………….
$100
$ 60
Direct labor:
$20 per DLH × 2.5 DLHs ………………
50
$20 per DLH × 1.2 DLHs ………………
24
Manufacturing overhead (see above) ..
155
28
Unit product cost ………………………….
$305
$112
3. It is important to note that, even under activity-based costing, 67% of
the company’s overhead costs continue to be applied to products on the
Machine setups (number of setups) ….
%
Special processing (machine-hours) …
General factory (direct labor-hours) ….
290,000
Total …………………………………………
%
Problem 3-17B (continued)
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 33% of the company’s overhead costs.
The increase in unit cost of Model X200 can be explained as follows:
batch, the higher the per unit cost of the batch activity. In this example,
the data can be analyzed as follows:
Model X200:
Machine setup cost from ABC system (a)
$100
per setup
Average number of units per setup
1,000 units ÷ 100 setups (b) …………..
10
units per setup
Average setup cost per unit (a) ÷ (b) ….
$10.00
per unit
Model X99:
Machine setup cost from ABC system (a)
$100
per setup
Average number of units per setup
10,000 units ÷ 400 setups (b) …………
25
units per setup
Average setup cost per unit (a) ÷ (b) ….
$4.00
per unit
Problem 3-18B (75 minutes)
1. The activity rates are computed as follows:
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected
Activity
(a) ÷ (b)
Activity
Rate
Labor related ……..
$200,000
20,000
DLHs
$10
per DLH
Production orders ..
$110,000
5,000
orders
$22
per order
Material receipts …
$108,000
1,800
receipts
$60
per receipt
Relay assembly …..
$960,000
12,000
relays
$80
per relay
General factory …..
$1,260,000
70,000
MHs
$18
per MH
2. Overhead cost is assigned to the products as follows:
Product A
Activity Cost Pool
(a)
Activity
Rate
(b)
Expected
Activity
(a) × (b)
Assigned
Overhead
Labor related …………
$10
per DLH
7,000
DLHs
$ 70,000
Production orders ……
$22
per order
800
orders
17,600
Material receipts …….
$60
per receipt
400
receipts
24,000
Relay assembly ………
$80
per relay
3,500
relays
280,000
General factory ………
$18
per MH
16,000
MHs
288,000
Total ……………………
$679,600
Product B
Activity Cost Pool
(a)
Activity
Rate
(b)
Expected
Activity
(a) × (b)
Assigned
Overhead
Labor related …………
$10
per DLH
1,000
DLHs
$ 10,000
Production orders ……
$22
per order
900
orders
19,800
Material receipts …….
$60
per receipt
800
receipts
48,000
Relay assembly ………
$80
per relay
2,000
relays
160,000
General factory ………
$18
per MH
26,000
MHs
468,000
Total ……………………
$705,800
Problem 3-18B (continued)
Product C
Activity Cost Pool
(a)
Activity
Rate
(b)
Expected
Activity
(a) × (b)
Assigned
Overhead
Labor related …………
$10
per DLH
8,000
DLHs
$ 80,000
Production orders ……
$22
per order
1,100
orders
24,200
Material receipts …….
$60
per receipt
300
receipts
18,000
Relay assembly ………
$80
per relay
3,000
relays
240,000
General factory ………
$18
per MH
17,000
MHs
306,000
Total ……………………
$668,200
Product D
Activity Cost Pool
(a)
Activity
Rate
(b)
Expected
Activity
(a) × (b)
Assigned
Overhead
Labor related …………
$10
per DLH
4,000
DLHs
$ 40,000
Production orders ……
$22
per order
2,200
orders
48,400
Material receipts …….
$60
per receipt
300
receipts
18,000
Relay assembly ………
$80
per relay
3,500
relays
280,000
General factory ………
$18
per MH
11,000
MHs
198,000
Total ……………………
$584,400
b. The conventional system would assign 20% (8,000 MHs ÷ 40,000
MHs) of all overhead costs to Product C. The ABC system would
assign 40% (8,000 DLHs ÷ 20,000 DLHs) of the labor related activity
costs to Product C. It would assign approximately 22% (1,100 orders
÷ 5,000 orders) of the production orders activity costs to Product C,
17% (300 receipts ÷ 1,800 receipts) of the materials receipts activity
costs to Product C, and 25% (3,000 relays ÷ 12,000 relays) of the
relay assembly costs to Product C. The conventional cost system
would undercost Product C relative to the ABC cost allocations.