Exercise 3-9 (continued)
2. Activity costs are assigned to the two hospitals as follows:
City General:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Customer deliveries ………….
$80.00
per delivery
10
$ 800
Manual order processing ……
$75.00
per order
0
0
Electronic order processing ..
$16.00
per order
10
160
Line item picking ……………..
$1.25
per line item
100
125
Total activity costs ……………
$1,085
County General:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Customer deliveries ………….
$80.00
per delivery
20
deliveries
$ 1,600
Manual order processing ……
$75.00
per order
40
orders
3,000
Electronic order processing ..
$16.00
per order
0
orders
0
Line item picking ……………..
$1.25
per line item
260
line items
325
Total activity costs ……………
$4,925
3. Hospitals that require frequent deliveries, place a high volume of manual orders, and order many line
items are likely to be more expensive to serve.
Exercise 3-10 (30 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
$2,200,000
= = $20.00 per DLH
110,000 DLHs *
Exercise 3-10 (continued)
2. The activity rates are computed as follows:
Activity Cost Pools
(a)
Total
Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Supporting direct
labor ……………….
$797,500
110,000
DLH
$7.25
per DLH
Batch setups ……….
$680,000
400
setups
$1,700
per setup
Product sustaining ..
$650,000
2
products
$325,000
per product
General factory
$72,500
10,000
MHR
$7.25
Per MHR
3. Under the activity-based costing system, the unit product costs would
be computed as follows:
Xactive
Pathbreaker
Direct materials ………………..
$1,620,000
$3,825,000
Direct labor ……………………..
455,000
975,000
Supporting direct labor ………
253,750
543,750
Batch setups ……………………
425,000
255,000
Product sustaining …………….
325,000
325,000
General factory
18,125
54,375
Total cost (a) …………………..
$3,096,875
$5,978,125
Number of units (b) …………..
25,000
75,000
Unit product cost (a) ÷ (b) …
$123.88
$79.71
4. The traditional system uses one unit-level activity measure, direct labor
62.5% ($425,000 ÷ $680,000) of Batch setup costs (a batch-level
activity) to the Xactive product line and 37.5% ($255,000 ÷ $680,000)
Exercise 3-11 (30 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 …….
$18,000
2,000
DLHs
$9.00
per DLH
Purchase orders …
$1,050
525
orders
$2.00
per order
Product testing ….
$3,500
350
tests
$10.00
per test
Template etching .
$700
28
templates
$25.00
per template
General factory ….
$50,000
10,000
MHs
$5.00
per MH
2. a. Overhead cost is assigned to the products as follows:
Product A
Activity Cost Pool
(a)
Activity Rate
(b)
Actual Activity
(a) × (b)
ABC Cost
Labor related ……..
$9.00
per DLH
500
DLHs
$ 4,500
Purchase orders ….
$2.00
per order
80
orders
160
Product testing …..
$10.00
per test
200
tests
2,000
Template etching ..
$25.00
per template
0
templates
0
General factory …..
$5.00
per MH
3,400
MHs
17,000
Total ………………..
$23,660
Exercise 3-11 (continued)
Product B
Activity Cost Pool
(a)
Activity Rate
(b)
Actual Activity
(a) × (b)
ABC Cost
Labor related ……..
$9.00
per DLH
100
DLHs
$ 900
Purchase orders ….
$2.00
per order
105
orders
210
Product testing …..
$10.00
per test
60
tests
600
Template etching ..
$25.00
per template
14
templates
350
General factory …..
$5.00
per MH
2,200
MHs
11,000
Total ………………..
$13,060
Product C
Activity Cost Pool
(a)
Activity Rate
(b)
Actual Activity
(a) × (b)
ABC Cost
Labor related ……..
$9.00
per DLH
700
DLHs
$ 6,300
Purchase orders ….
$2.00
per order
180
orders
360
Product testing …..
$10.00
per test
0
tests
0
Template etching ..
$25.00
per template
10
templates
250
General factory …..
$5.00
per MH
1,800
MHs
9,000
Total ………………..
$15,910
Product D
Activity Cost Pool
(a)
Activity Rate
(b)
Actual Activity
(a) × (b)
ABC Cost
Labor related ……..
$9.00
per DLH
700
DLHs
$ 6,300
Purchase orders ….
$2.00
per order
160
orders
320
Product testing …..
$10.00
per test
90
tests
900
Template etching ..
$25.00
per template
4
templates
100
General factory …..
$5.00
per MH
2,600
MHs
13,000
Total ………………..
$20,620
Exercise 3-11 (continued)
3. The conventional system would assign 5% (100 DLH ÷ 2,000 DLH) of all
overhead costs to Product B. The ABC system would assign 20% (105
orders ÷ 525 orders) of the purchase order activity costs to Product B.
Problem 3-12A (30 minutes)
1. Under the traditional direct labor-dollar 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 dollars
$508,625
= = $3.13 per DL$
$162,500
The unit product costs using the conventional approach would be
computed as follows:
EX300
TX500
Direct materials ………………….
$366,325
$162,550
Direct labor ……………………….
120,000
42,500
Manufacturing overhead
applied @ $3.13 per direct
labor-dollar……………………..
375,600
133,025
Total manufacturing cost (a) …
$861,925
$338,075
Number of units (b) …………….
60,000
12,500
Unit product cost (a) ÷ (b) …..
$14.37
$27.05
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 …………..
$198,250
152,500
MHR
$1.30
per MHR
Setups ……………….
$150,000
375
setup hrs.
$400
per setup hr.
Product-level ……….
$100,250
2
products
$50,125
per product
General factory ……
$60,125
162,500
DL$
$0.37
per DL$
727,850
$12.13
Problem 3-13A (15 minutes)
Activity
Level
Possible Activity Measures
a.
Milling machines are used to
make components for
products.
Unit
Number of units processed;
Machine-hours
b.
A percentage of all completed
goods are inspected on a
random basis.
Unit
Number of units inspected;
Inspection time
c.
Production orders are issued
for jobs.
Batch
Number of production orders
d.
The company’s grounds crew
maintains planted areas
surrounding the factory.
Facility
Arbitrary*
e.
Employees are trained in
general procedures.
Facility or
Product
Arbitrary if factory-level*
f.
The human resources
department screens and hires
new employees.
Facility
Arbitrary*
g.
Purchase orders are issued for
materials required in
production.
Batch
Number of purchase orders
h.
Material is received on the
receiving dock and moved to
the production area.
Batch or
Unit
Number of material moves
i.
The plant controller prepares
periodic accounting reports.
Facility
Arbitrary*
j.
The engineering department
makes modifications in the
designs of products.
Product
Engineering time
k.
Machines are set up between
batches of different products.
Batch
Number of setups; Setup time
l.
The maintenance crew does
routine periodic maintenance
on general-purpose
equipment.
Facility
Arbitrary*
Problem 3-14A (60 minutes)
1. The first step is to determine the activity rates:
Serving a Party
Serving a Diner
Serving Drinks
Total cost (a) ……………………….
$32,800
$211,200
$69,600
Total activity (b) …………………..
8,000
parties
32,000
diners
58,000
drinks
Cost per unit of activity (a)÷(b) .
$4.10
per party
$6.60
per diner
$1.20
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 .
$4.10
per party
$6.60
per diner
$1.20
per drink
1
4
3
party
diners
drinks
Cost ………………………..
$4.10
$26.40
$3.60
$34.10
b. A party of two diners who order no drinks:
1
2
0
party
diners
drinks
Cost ………………………..
$4.10
$13.20
$0.00
$17.30
c. A lone diner who orders two drinks:
1
1
2
party
diner
drinks
Cost ………………………..
$4.10
$6.60
$2.40
$13.10
Problem 3-14A (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-
based costing system for two reasons. First, the cost of serving a party
($4.10) does not depend on the number of diners in the party.
Therefore, the average cost per diner of this activity decreases as the
number of diners in the party increases. With only one diner, the cost is
$4.10. With two diners, the average cost per diner is cut in half to
$2.05. With five diners, the average cost per diner would be only $0.82.
Problem 3-15A (45 minutes)
1. The company’s estimated total direct labor-hours for the year can be
computed as follows:
Flexible model: 1,000 units × 2.0 DLH per unit ….
2,000
Rigid model: 10,000 units × 1.0 DLH per unit ……
10,000
Total direct labor-hours ………………………………..
12,000
Flexible
Rigid
Direct materials ……………………
$110.00
$ 80.00
Direct labor …………………………
30.00
15.00
Manufacturing overhead:
$50.00 per DLH × 2.0 DLHs …
100.00
$50.00 per DLH × 1.0 DLHs …
50.00
Unit product cost …………………
$240.00
$145.00
2. Activity rates can be computed as follows:
(a)
Estimated
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Overhead
Activity Cost Pool
Cost
Purchase orders …
$20,000
400
orders
$50.00
per order
Rework requests ..
$10,000
200
requests
$50.00
per request
Product testing ….
$210,000
2,100
tests
$100.00
per test
Machine related …
$360,000
4,000
MHs
$90.00
per MH
Problem 3-15A (continued)
3. a.
Flexible
Rigid
Expected
Expected
Activity
Amount
Activity
Amount
Purchase orders, at $50.00 per order ………
100
$ 5,000
300
$ 15,000
Rework requests, at $50.00 per request …..
60
3,000
140
7,000
Product testing, at $100.00 per test ………..
900
90,000
1,200
120,000
Machine related, at $90.00 per MH ………….
1,500
135,000
2,500
225,000
Total overhead cost assigned (a) ……………
$233,000
$367,000
Number of units produced (b) ………………..
1,000
10,000
Overhead cost per unit (a) ÷ (b) …………….
$233.00
$36.70
b. Using activity-based costing, the unit product costs would be:
Flexible
Rigid
Direct materials ……………..
$110.00
$ 80.00
Direct labor …………………..
30.00
15.00
Manufacturing overhead ….
233.00
36.70
Unit product cost …………..
$373.00
$131.70
Problem 3-15A (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 flexible
model requires twice as much labor as the rigid model, it still is not
being assigned enough overhead cost according to the activity-based
Problem 3-16A (45 minutes)
1. The company expects to work 40,000 direct labor-hours, computed as
follows:
LEC 40: 60,000 units × 0.40 DLH per unit ………….
24,000
DLHs
LEC 90: 20,000 units × 0.80 DLH per unit ………….
16,000
DLHs
Total direct labor-hours ………………………………….
40,000
DLHs
Direct materials ………………………
Direct labor …………………………...
Unit product cost ……………………
Problem 3-16A (continued)
2. Activity rates can be computed as follows:
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected Activity
(a) ÷ (b)
Activity Rate
Maintaining inventory ………….
$225,000
1,500
part types
$150.00
per part type
Processing purchase orders ….
$182,000
2,800
orders
$65.00
per order
Quality control …………………..
$45,000
2,250
tests
$20.00
per test
Machine-related …………………
$460,000
10,000
MHs
$46.00
per MH
LEC 40
Maintaining parts inventory, at $150.00 per part type..
Processing purchase orders, at $65.00 per order ………
Quality control, at $20.00 per test …………………………
Machine-related, at $46.00 per MH ……………………….
Total manufacturing overhead cost ……………………….
Units produced………………………………………………….
Manufacturing overhead per unit ………………………….
Problem 3-16A (continued)
b. Using activity-based costing, the unit product costs would be:
LEC 40
LEC 90
Direct materials …………………………….
$30.00
$50.00
Direct labor ………………………………….
6.00
12.00
Manufacturing overhead (see above) …
5.06
30.42
Unit product cost …………………………..
$41.06
$92.42
4. Although the LEC 90 accounts for only 25% of the company’s total
production, it is responsible for 60% of the part types carried in
inventory and 84% of the machine-hours worked. It is also responsible
for 78% of the tests needed for quality control. These factors have been
$80.24, it is possible that the company may actually be losing money on
Problem 3-17A (45 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
$1,785,000
= = $85.00 per DLH
21,000 DLHs
b. The unit product costs are computed as follows:
Model N
800 XL
Model N
500
Direct materials …………………..
$ 75.00
$ 25.00
Direct labor:
$18.00 per DLH × 3.0 DLHs ..
54.00
$18.00 per DLH × 1.0 DLHs ..
18.00
Manufacturing overhead:
$85.00 per DLH × 3.0 DLHs ..
255.00
$85.00 per DLH × 1.0 DLHs ..
85.00
Unit product cost ………………..
$384.00
$128.00
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 ……
$360,000
300
setups
$1,200.00
per setup
Special processing ..
$165,000
16,500
MHs
$10.00
per MH
General factory ……
$1,260,000
21,000
DLHs
$60.00
per DLH
Problem 3-17A (continued)
b. The unit product costs would now be computed as follows, starting
with the computation of the manufacturing overhead:
Model N 800
XL
Model N
500
Machine setups:
$1,200.00 per setup × 100 setups ….
$120,000
$1,200.00 per setup × 200 setups ….
$240,000
Special processing:
$10.00 per MH × 16,500 MHs ……….
165,000
$10.00 per MH × 0 MHs ……………….
0
General factory:
$60.00 per DLH × 9,000 DLHs ………
540,000
$60.00 per DLH × 12,000 DLHs ……..
720,000
Total overhead cost (a) ………………….
$825,000
$960,000
Number of units produced (b) ………….
3,000
12,000
Overhead cost per unit (a) ÷ (b) ………
$275.00
$80.00
Model N 800
XL
Model N
500
Direct materials ……………………………..
$ 75.00
$25.00
Direct labor:
$18.00 per DLH × 3.0 DLHs …………..
54.00
$18.00 per DLH × 1.0 DLHs …………..
18.00
Manufacturing overhead (see above) …
275.00
80.00
Unit product cost …………………………..
$404.00
$123.00
3. It is important to note that, even under activity-based costing, 71% of
the company’s overhead costs continue to be assigned to products on
Machine setups (number of setups) …..
$ 360,000
20
%
Special processing (machine-hours) ….
165,000
9
General factory (direct labor-hours) …..
1,260,000
71
Total …………………………..……………..
$1,785,000
100
%
Problem 3-17A (continued)
Thus, the shift in overhead cost from the high-volume product Model N
500 to the low-volume product Model N 800 XL occurred as a result of
reassigning only 29% of the company’s overhead costs.
The increase in unit cost of Model N 800 XL can be explained as follows:
batch, the higher unit cost. In this example, the data can be analyzed as
follows:
Model N 800 XL:
Machine setup cost from ABC system (a)
$1,200
per setup
Average number of units per setup
3,000 units ÷ 100 setups (b) ……………
30
units per setup
Average setup cost per unit (a) ÷ (b) …..
$40.00
per unit
Model N 500:
Machine setup cost from ABC system (a)
$1,200
per setup
Average number of units per setup
12,000 units ÷ 200 setups (b) ………….
60
units per setup
Average setup cost per unit (a) ÷ (b) …..
$20.00
per unit