978-0133058789 Chapter 4 Part 3

3. The activity-based costing system is generally more accurate because it better

allocates costs on a cause/effect basis. The Produce Department uses all of the produce

monitoring activity. The activity-based costing system recognizes this and allocates these

costs to the department.

However, even knowing an accurate operating income for each product is not sufficient

4-49 (30-35 min.)

1.

Cost

Annual Cost Driver Total

Cost Per Consumption Cost

2. Assuming that the results of the activity analysis are accurate, product 24Z2 is

or $2.63 ÷ $9.03 = 29%! Chrysler’s proposal should be rejected unless Chrysler

is willing to increase the price or unless O’Hanlon can significantly reduce its

costs. O’Hanlon should be aware, however, that the existing costing system is

also over-costing other products since all indirect costs are allocated. The

activity-based costing system should be used to cost all product lines in order to

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Costs of implementing activity-based costing include:

• The cost of a pilot study includes salaries of managers who are dedicated to

the study.

• Consultants are often necessary.

• Data collection is extensive since operational and financial data are often not

available as required to support the new ABC system.

• It may be necessary to maintain an ABC system separate from the accounting

system used for external reporting.

4-50 (60 min. or more)

The purpose of this exercise is to force students to look beyond the textbook.

The library has many examples of applications of management accounting that show that

4-51 (20-30 min.)

This problem reviews Chapters 2 through 4. It attempts to nail down some terms

that often give students trouble. Sharp distinctions should be made among gross profit,

contribution margin, manufacturing cost of goods sold and variable manufacturing cost of

goods sold. This problem was used originally as an exam question.

Fixed manufacturing overhead 15

Total manufacturing cost of goods sold 80 *

Gross profit 40

Selling and administrative expenses:

Variable 13 ***

4-52 (30-40 min.) This problem was originally used as an exam question. Probably

the easiest way to compute the answers is to prepare an income statement, filling in the

known items, and then solving for the unknowns.

a. The answer is W16,000, computed as follows, in thousands of won:

Sales W100

Variable costs:

Direct material W29

Direct labor 30

Variable manufacturing overhead 5

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c. The answer is W5,000, computed as follows:

Note that the contribution margin percentage = W 25 ÷ W 100 = 25%.

Break-even point = Total fixed costs ÷ Contribution margin percentage

... Total fixed costs = Break-even point × Contribution margin percentage

= W84,000 × .25

= W21,000

Now, Total fixed costs = Fixed mfg. overhead + Fixed selling and admin. expense

4-53 (30-35 min.) This problem was first used as an examination question.

Putting fixed and variable costs into an income statement format and computing the

missing items provides a framework for this solution. Amounts are in dollars.

Sales 130,000

1. Since total variable expenses are $75,000, variable selling and administrative

2. Since total fixed expenses are $22,000, fixed selling and administrative expenses

4. a. ($6,250 + $13,000) ÷ ($55,000 ÷ 1,000) = $19,250 ÷ $55 = 350 units

b. Let U = units

$55 × U – $19,250 = $17,600

4-54 (30-45 min.)

0. Direct-material cost £ 700,000 £ 70,400 £ 225,000

2. Machine hours 560,000 96,000 280,000

4. Number of production setups 80,000 40,000 40,000

6. Number of orders shipped 60,000 48,000 120,000

Total budgeted cost £2,063,500 £474,600 £1,328,150

Number of units ÷ 10,000 ÷ 800 ÷ 5,000

Unit cost £ 206.35 £ 593.25 £ 265.63

2. Total cost (except direct materials) per direct-labor hour:

£2,870,850 ÷ (4 × 10,000 + 18 × 800 + 9 × 5,000)

= £2,870,850 ÷ 99,400 = £28.88 per direct-labor hour

3. The new system is more complex and more costly. The added expense would be

4-55 (50-60 min.) This is a difficult problem that forces students to think carefully

1. The existing traditional system simply divides all costs by the number of cheesecakes

produced, regardless of the market for which the cheesecakes are produced:

Ingredients ($900,000 ÷ 500,000) $1.800

2. The ABC system allocates the costs of each of the four activities separately, and it

directly traces the cost of packaging materials as well as the ingredients. Administration

and Facilities Operations and Maintenance costs are first allocated to Mixing and Baking

and Decorating and Packaging as follows because they support the activities in those

departments:

3. In the traditional system, the restaurant cheesecakes received 20% of all production

overhead (100,000 ÷ 500,000 = 20%). In the ABC system, the restaurant cheesecakes

received much less of the cost because they used much fewer resources. In total they

4-56 (50-60 min.) Numbers except per unit amounts are in thousands.

1. a) The indirect cost allocation rate is $2,850 / 11,400 = $.25 per check processed.

b) Retail Line Business Line Total

# of checks processed 2,280 9,120 11,400

Cost / check processed × $.25 × $.25 × $.25

2. Broken machines simply stop running. In contrast, “broken” or outdated cost systems

continue producing potentially misleading costs. Consequently, managers need to

recognize clues that the cost system needs refinement. Signs that Columbia City’s

3. Columbia City has three activities, each with the following expected costs:

Check payments: $440 + $700 = $1,140

Teller withdrawals and deposits: $1,200

Customer service call center: $450 + $60 = $510

The cost drivers and the estimated total quantity of each cost driver are:

Customer call center:

($450 + $60)/100 = $5.10 per customer call

b. The quantity of cost driver activity in each customer line is (in thousands):

Retail Line Business Line Total

Checks processed 2,280 9,120 11,400

175

Total Indirect Total Indirect

Cost Assigned Cost Assigned

To Retail To Business

Activity Customer Line Customer Line

Check payments:

$.10 × (2,280; 9,120) $ 228.00 $ 912.00

Teller withdrawals and deposits:

$3 × (320; 80) 960.00 240.00

Customer call center:

$5.10 × (95; 5) 484.50 25.50

Total indirect costs $1,672.50 $1,177.50

You might note that this solution assumes that all calls to the call center are equally

Business: $1,177.5/50 = $23.55

e. The original cost system allocates all indirect costs based on the number of checks

processed. Because retail customers write 20% of the checks, the original system

allocated 20% of the indirect costs to retail customers and 80% of the indirect costs were

allocated to business customers.

Revenue per account $10.00 $40.00

ABC cost per account 11.15 23.55

ABC profit (loss) per account $(1.15) $16.45

Original profit (loss) per account $6.20 $(5.60)

The ABC system suggests that business customers are profitable, but retail customers are

4. a) The ABC data suggest that the plan to simply increase the number of checking

account customers was not wise. Assuming it is easier to attract a given number of

retail customers than business customers, it is not surprising that the incentive plan

1) More accurate cost information

a. Can help Columbia City better price its services.

2) Cost control

a. Reduce consumption of costly cost drivers. For example, Columbia City

may want to encourage on-line banking to reduce the number of teller

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c) The relative advantage of ABC, that is, when its benefits exceed its cost, is

greatest:

1) When a company sells in a highly competitive industry, accurate cost

information is essential for setting prices that are competitive yet still allow the

2) When a company has high indirect costs. If indirect costs are low, it doesn’t

matter much how they are allocated.

4) When the company has sufficient information technology and accounting

expertise to implement the system and to record cost driver data.

Columbia City Bank is in a highly competitive environment. Most of its costs are

1) Non-accounting managers often serve on ABC teams. As in the case, ABC

system.

2) Managers need to understand ABC data to use it in decisions such as pricing,

product and customer profitability analysis, cost control, etc.

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4-57 (30 min.)

1. and 2. The following are the most likely activities and resources that student will

identify. There may be disagreements on the cost behavior – those listed below

are probably most likely, but different behavior can be supported under different

assumptions. Likewise, students might suggest other, equally reasonable, cost

4-58 (15-20 min.)

Nike’s balance sheet shows only one line for Inventories, with a 2011 balance of $2,715

4-59 (50-60 min.) For the solution to this Excel Application Exercise, follow the step-

1. PCB124 = $81.43; PCB136 = $228.02

3. The cost for PCG124 is greater under the ABC system by ($97.80 – $81.43) ÷ $81.43

= 20.1%, while the cost of PCB136 is less by ($228.02 – $203.46) ÷ $228.02 = 10.7%.

4-61 (25 – 30 min.) NOTE TO INSTRUCTOR: This solution is based on the web site

1. The site suggests that you should “Send a warm Bear hug.” The message changes as

2. A Bear-Gram is a unique idea that is the creative alternative to flowers and guaranteed

to last forever. The Bear-Gram is a hand-crafted Teddy Bear that is guaranteed for life.

journey.

3. Activities in the factory include designing new teddy bears, fur cutting, sewing, pin

and assembly (stuffing and installing joints), order processing, and shipping. The fur

4. Any company that has complexity in one or more functions of its value chain is a

good candidate for ABC. In addition, any company can benefit from the increased

5. The company is a manufacturer. It takes raw materials, applies labor and overhead,

and turns the materials into finished goods – teddy bears. Its inventory account would

include three categories: raw materials, work in process, and finished goods. From