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Analytical Thinking (continued)
2. The unit product cost of each product under activity-based costing is
given below. For comparison, the costs computed by the company’s
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
54 Introduction to Managerial Accounting, 7th Edition
Analytical Thinking (continued)
Note to the Instructor:
You may wish to mention to your class that
before any decision can be made regarding dropping a product line, a
careful analysis will have to be made of the potential avoidable costs.
The unit product costs probably include some idle capacity costs and
facility-level costs that are not relevant in such a decision.
4. Perhaps the competition hasn’t been able to touch FirstLine Cases’ price
because the company has been selling its specialty briefcases at a price
that is below its cost. Thus, rather than “gouging” its customers,
FirstLine Cases’ competitor is probably just pricing its specialty items at
Chapter 3
Take Two Solutions
Exercise 3-2 (15 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 .....................
$ 52,000
10,000
DLHs
$ 5.20
per DLH
Machine related .................
15,000
20,000
MHs
0.75
per MH
Machine setups ..................
42,000
1,000
setups
42.00
per setup
Production orders ...............
18,000
500
orders
36.00
per order
Product testing ...................
48,000
2,000
tests
24.00
per test
Packaging ..........................
75,000
5,000
packages
15.00
per package
General factory ..................
108,800
10,000
DLHs
10.88
per DLH
Total .................................
$358,800
2. The predetermined overhead rate based entirely on direct labor-hours would be computed as follows:
Total estimated overhead cost (a) ............
$358,800
Total expected direct labor-hours (b) ........
10,000
DLHs
Predetermined overhead rate (a) ÷ (b) ....
$35.88
per DLH
Exercise 3-3 (30 minutes)
The unit product costs for the products are a combination of direct materials, direct labor, and overhead
costs. The overhead costs assigned to each product would be computed as follows:
J78
B52
Expected
Activity
Amount
Expected
Activity
Amount
Labor related, at $7.00 per direct labor-hour ........
1,000
$ 7,000
40
$ 280
Machine related, at $3.00 per machine-hour ........
3,200
9,600
30
90
Machine setups, at $40.00 per setup ...................
5
200
1
40
Production orders, at $160.00 per order ...............
5
800
1
160
Shipments, at $120.00 per shipment....................
10
1,200
1
120
General factory, at $4.00 per direct labor-hour .....
1,000
4,000
40
160
Total overhead cost assigned (a) .........................
$22,800
$ 850
Number of units produced (b) .............................
3,000
100
Overhead cost per unit (a) ÷ (b) .........................
$ 7.60
$8.50
The unit product costs combine direct materials, direct labor, and overhead costs as follows:
J78
B52
Direct materials .............................................
$ 6.50
$31.00
Direct labor ...................................................
3.75
6.00
Manufacturing overhead (see above) ..............
7.60
8.50
Unit product cost ...........................................
$17.85
$45.50
Exercise 3-4 (30 minutes)
1. Using the company's conventional costing system, the overhead costs applied to the products would
be computed as follows:
Product H
Product L
Total
Number of units produced (a) ...........
40,000
8,000
Direct labor-hours per unit (b) ...........
0.50
0.50
Total direct labor-hours (a) × (b) ......
20,000
4,000
24,000
Total manufacturing overhead (a) .............
$1,632,000
Total direct labor-hours (b) .......................
24,000
DLHs
Predetermined overhead rate (a) ÷ (b) ......
$ 68.00
per DLH
Product H
Product L
Total
Manufacturing overhead applied per unit
0.50 DLH per unit × $68.00 per DLH ......
$ 34.00
$ 34.00
Number of units produced ........................
40,000
8,000
Total manufacturing overhead applied ......
$1,360,000
$272,000
$1,632,000
2. Using the proposed ABC system, overhead costs would be assigned as follows:
Product H
Product L
Total
Total manufacturing overhead assigned (a) ..........
$816,000
$816,000
$1,632,000
Number of units produced (b) .............................
40,000
8,000
Manufacturing overhead per unit (a) ÷ (b) ...........
$ 20.40
$ 102.00
Exercise 3-4 (continued)
3. Under the company’s old method of allocating overhead costs, the high-
volume product, Product H, was allocated most of the overhead cost.
This occurred simply because the high-volume product is responsible for
most of the direct labor-hours. When the overhead is split evenly
Exercise 3-7 (45 minutes)
1. The unit product costs under the company's conventional costing system
would be computed as follows:
Mercon
Wurcon
Total
Number of units produced (a) .....................
10,000
48,000
Direct labor-hours per unit (b) .....................
0.20
0.25
Total direct labor-hours (a) × (b) ................
2,000
12,000
14,000
Total manufacturing overhead (a) ...............
$336,000
Total direct labor-hours (b) .........................
14,000
DLHs
Predetermined overhead rate (a) ÷ (b) ........
$24.00
per DLH
Mercon
Wurcon
Direct materials ..........................................
$10.00
$ 8.00
Direct labor ................................................
3.00
3.75
Manufacturing overhead applied:
0.20 DLH per unit × $24.00 per DLH .........
4.80
0.25 DLH per unit × $24.00 per DLH .........
6.00
Unit product cost ........................................
$17.80
$17.75
Exercise 3-7 (continued)
2. The unit product costs with the proposed ABC system can be computed as follows:
Activity Cost Pool
Estimated
Overhead
Cost*
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Labor related .............
$168,000
14,000
direct labor-hours
$12.00
per direct labor-hour
Engineering design .....
168,000
8,000
engineering-hours
$21.00
per engineering-hour
$336,000
*The total manufacturing overhead cost is split evenly between the two activity cost pools.
Manufacturing overhead is assigned to the two products as follows:
Mercon
Wurcon
Expected
Expected
Activity
Amount
Activity
Amount
Labor related, at $12.00 per direct labor-hour ..........
2,000
$ 24,000
12,000
$144,000
Engineering design, at $21.00 per engineering-hour .
4,000
84,000
4,000
84,000
Total overhead cost assigned (a).............................
$108,000
$228,000
Number of units produced (b) .................................
10,000
48,000
Overhead cost per unit (a) ÷ (b) .............................
$10.80
$4.75
Exercise 3-7 (continued)
The unit product costs combine direct materials, direct labor, and
Exercise 3-9 (30 minutes)
1. The activity rates are computed as follows:
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Customer deliveries
$400,000
4,000
deliveries
$100.00
per delivery
Manual order processing
$300,000
4,000
orders
$75.00
per manual order
Electronic order processing
$200,000
12,500
orders
$16.00
per electronic order
Line item picking
$500,000
400,000
line items
$1.25
per line item picked
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 ...............
$100.00
per delivery
10
deliveries
$1,000
Manual order processing ........
$75.00
per order
0
orders
0
Electronic order processing ....
$16.00
per order
10
orders
160
Line item picking ...................
$1.25
per line item
100
line items
125
Total activity costs .................
$1,285
County General:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Customer deliveries ...............
$100.00
per delivery
20
deliveries
$2,000
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 .................
$5,325
