Problem 3-18A (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 ………
$35,000
7,000
DLHs
$5
Production orders …
$4,000
2,000
orders
$2
Material receipts ….
$10,450
950
receipts
$11
Relay assembly ……
$7,000
1,000
relays
$7
General factory ……
$240,000
40,000
MHs
$6
2. 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 …………
$5
per DLH
2,400
DLHs
$12,000
Production orders ……
$2
per order
100
orders
200
Material receipts …….
$11
per receipt
400
receipts
4,400
Relay assembly ………
$7
per relay
170
relays
1,190
General factory ………
$6
per MH
12,000
MHs
72,000
Total ……………………
$89,790
Product B
Activity Cost Pool
(a)
Activity
Rate
(b)
Actual
Activity
(a) × (b)
ABC Cost
Labor related …………
$5
per DLH
500
DLHs
$ 2,500
Production orders ……
$2
per order
350
orders
700
Material receipts …….
$11
per receipt
208
receipts
2,288
Relay assembly ………
$7
per relay
170
relays
1,190
General factory ………
$6
per MH
7,000
MHs
42,000
Total ……………………
$48,678
Problem 3-18A (continued)
Product C
Activity Cost Pool
(a)
Activity
Rate
(b)
Actual
Activity
(a) × (b)
ABC Cost
Labor related …………
$5
per DLH
3,500
DLHs
$17,500
Production orders ……
$2
per order
800
orders
1,600
Material receipts …….
$11
per receipt
342
receipts
3,762
Relay assembly ………
$7
per relay
300
relays
2,100
General factory ………
$6
per MH
8,000
MHs
48,000
Total ……………………
$72,962
Product D
Activity Cost Pool
(a)
Activity
Rate
(b)
Actual
Activity
(a) × (b)
ABC Cost
Labor related …………
$5
per DLH
600
DLHs
$ 3,000
Production orders ……
$2
per order
750
orders
1,500
Material receipts …….
$11
per receipt
0
receipts
0
Relay assembly ………
$7
per relay
360
relays
2,520
General factory ………
$6
per MH
13,000
MHs
78,000
Total ……………………
$85,020
3. The conventional system would assign 20% (8,000 MHs ÷ 40,000 MHs)
of all overhead costs to Product C. The ABC system would assign 50%
(3,500 DLHs ÷ 7,000 DLHs) of the labor related activity costs to Product
C. It would assign approximately 40% (800 orders ÷ 2,000 orders) of
the production orders activity costs to Product C, 36% (342 receipts ÷
Communicating in Practice (30 minutes)
Date: Current Date
To: Maria Graham
From: Student’s Name
Subject: Overhead Allocation
I understand that you are thinking about purchasing a small manufacturing
company that assembles and packages its many products by hand. The
company currently uses direct labor hours to allocate overhead to its
products, but you plan to introduce automation. You have asked me to
comment on whether this technique should be continued.
Direct labor is an appropriate allocation base for overhead when overhead
Teamwork In Action
Student answers will vary depending on the operations they observe at the
restaurant they visit and on how they define a unit and products. The
following are only suggestive of the answers that might be offered for a
fast food restaurant that sells hamburgers and beverages:
a.
Unit-level activities
and costs
Grilling a burger, assembling a hamburger,
making a milkshake, costs of ingredients,
costs of containers, etc.
b.
Customer-level
activities and costs
Taking an order, assembling ordered items,
bagging order, taking payment, etc.
c.
Product-level activities
and costs
Cost of soft ice cream maker, cost of deep
fat fryer, cost of soda dispenser, etc.
d.
Facility-level activities
and costs
Cost of building rent, cost of manager’s
salary, heating and lighting the building,
etc.
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
Solutions Manual, Chapter 3 45
Ethics Challenge (15 minutes)
Most people would probably feel that the most equitable way to divide the
dinner bill among a group of friends is for each person to pay for the cost
of what he or she individually consumed. However, it would be easier to
split the bill equally among the individuals.
This relates to material in the chapter because the method of dividing up
the bill according to what each individual orders is similar to ABC and the
method of simply dividing the bill by the number of individuals is similar to
traditional costing methods. Figuring out the cost of what each individual
consumes properly allocates costs to the individuals who incurred them.
However, it sometimes is difficult to trace some costs to individuals. For
example, some dishes may be shared. This is also similar to ABC in that
some costs are easier to trace than others.
Case (150 minutes)
1. a. The predetermined overhead rate would be computed as follows:
Expected manufacturing overhead cost $3,000,000
=
Estimated direct labor-hours 50,000 DLHs
=$60 per DLH
Mona Loa
Malaysian
Direct materials (given) ……….
$4.20
$3.20
Direct labor (given) …………….
0.30
0.30
Manufacturing overhead:
0.025 DLH × $60 per DLH ….
1.50
1.50
Total unit product cost …………
$6.00
$5.00
2. a. Overhead rates by activity:
Activity Center
(a)
Estimated
Overhead
Costs
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Purchasing ……….
$513,000
1,710 orders
$300 per order
Material handling .
$720,000
1,800 setups
$400 per setup
Quality control …..
$144,000
600 batches
$240 per batch
Roasting …………..
$961,000
96,100 hours
$10 per hour
Blending …………..
$402,000
33,500 hours
$12 per hour
Packaging …………
$260,000
26,000 hours
$10 per hour
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
Solutions Manual, Chapter 3 47
Case (continued)
Before we can determine the amount of overhead cost to assign to
the products we must first determine the activity for each of the
products in the six activity centers. The necessary computations
follow:
Number of purchase orders:
Mona Loa: 100,000 pounds ÷ 20,000 pounds per order = 5 orders
Malaysian: 2,000 pounds ÷ 500 pounds per order = 4 orders
Number of batches:
Mona Loa: 100,000 pounds ÷ 10,000 pounds per batch = 10 batches
Malaysian: 2,000 pounds ÷ 500 pounds per batch = 4 batches
Number of setups:
Mona Loa: 10 batches × 3 setups per batch = 30 setups
Malaysian: 4 batches × 3 setups per batch = 12 setups
Roasting hours:
Mona Loa: 1 hour × (100,000 pounds ÷ 100 pounds) = 1,000 hours
Malaysian: 1 hour × (2,000 pounds ÷ 100 pounds) = 20 hours
Blending hours:
Mona Loa: 0.5 hour × (100,000 pounds ÷ 100 pounds) = 500 hours
Malaysian: 0.5 hour × (2,000 pounds ÷ 100 pounds) = 10 hours
Packaging hours:
Mona Loa: 0.1 hour × (100,000 pounds ÷ 100 pounds) = 100 hours
Malaysian: 0.1 hour × (2,000 pounds ÷ 100 pounds) = 2 hours
Case (continued)
Using the activity figures, manufacturing overhead costs can be
assigned to the two products as follows:
Mona Loa
Malaysian
Expected
Activity
Amount
Expected
Activity
Amount
Purchasing, at $300 per
order …………………….
5 orders
$ 1,500
4 orders
$1,200
Material handling, at
$400 per setup ………..
30 setups
12,000
12 setups
4,800
Quality control, at $240
per batch ……………….
10 batches
2,400
4 batches
960
Roasting, at $10 per
roasting hour ………….
1,000 hours
10,000
20 hours
200
Blending, at $12 per
blending hour ………….
500 hours
6,000
10 hours
120
Packaging, at $10 per
packaging hour ……….
100 hours
1,000
2 hours
20
Total overhead cost ……
$32,900
$7,300
b. According to the activity-based costing system, the manufacturing
overhead cost per pound is:
Mona Loa
Malaysian
Total overhead cost assigned (above) (a) …
$32,900
$7,300
Number of pounds manufactured (b) ……….
100,000
2,000
Cost per pound (a) ÷ (b) ………………………
$0.33
$3.65
c. The unit product costs according to the activity-based costing system
are:
Mona Loa
Malaysian
Direct materials (given) ……….
$4.20
$3.20
Direct labor (given) …………….
0.30
0.30
Manufacturing overhead ………
0.33
3.65
Total unit product cost …………
$4.83
$7.15
Case (continued)
3. MEMO TO THE PRESIDENT: Analysis of CBI’s data shows that several
activities other than direct labor drive the company’s manufacturing
overhead costs. These activities include purchase orders issued, number
Case (continued)
ALTERNATIVE SOLUTION:
Most students will compute the manufacturing overhead cost per pound
of the two coffees as shown above. However, the cost per pound can
also be computed as shown below.
This alternative approach provides
additional insight into the data and facilitates emphasis of some points
made in the chapter.
Mona Loa
Malaysian
Total
Per Pound
(÷ 100,000)
Total
Per Pound
(÷ 2,000)
Purchasing ………..
$ 1,500
$0.015
$1,200
$0.600
Material handling ..
12,000
0.120
4,800
2.400
Quality control ……
2,400
0.024
960
0.480
Roasting …………..
10,000
0.100
200
0.100
Blending …………..
6,000
0.060
120
0.060
Packaging …………
1,000
0.010
20
0.010
Total ………………..
$32,900
$0.329
$7,300
$3.650
Analytical Thinking (150 minutes)
1.
(a)
Estimated
Overhead
Costs
(b)
Expected Activity
(a) ÷ (b)
Activity Rate
Purchasing …………………….
$15,000
300
orders1
$50
per order
Material handling …………….
16,000
400
receipts2
$40
per receipt
Production orders and
setups ………………………..
6,000
60
setup-hours3
$100
per setup-hour
Inspection ……………………..
18,000
600
inspection-hours
$30
per inspection-hour
Frame assembly ………………
12,000
1,500
assembly-hours
$8
per assembly-hour
Machine related ………………
32,000
8,000
machine-hours4
$4
per machine-hour
Specialty: 25 setups × 2 hours per setup ……..
Total setup hours ……………………………………
Specialty: 2,500 units × 1.2 hours unit ………..
Total machine-hours ………………………………..
Analytical Thinking (continued)
Overhead cost charged to each product:
Standard
Specialty
Activity
Amount
Activity
Amount
Purchasing, at $50 per order:
Leather ……………………………..
50
$ 2,500
10
$ 500
Fabric ……………………………….
70
3,500
20
1,000
Synthetic …………………………...
0
0
150
7,500
Material handling, at $40 per receipt:
Leather ……………………………..
70
2,800
10
400
Fabric ……………………………….
85
3,400
20
800
Synthetic …………………………...
0
0
215
8,600
Production orders and setups, at
$100 per hour …………………….
10
1,000
50
5,000
Inspection, at $30 per hour………
200
6,000
400
12,000
Frame assembly, at $8 per hour ..
700
5,600
800
6,400
Machine related, at $4 per hour ..
5,000
20,000
3,000
12,000
Total manufacturing overhead
cost …………………………..……..
$44,800
$54,200