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Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
Chapter 4
Activity-Based Costing, Lean Operations, and the Costs of
Quality
Quick Check
Answers:
Managerial Accounting 4e Solutions Manual
(continued) S4-2
Req. 2
The manufacturing cost of Job 484 is determined by summing the three manufacturing costs assigned to the job.
Direct materials
$2,350
Direct labor ($25 per hour × 12 hours)
300
Manufacturing overhead
216
Total Job Cost
$2,866
(5-10 min) S4-3
Req. 1
Manufacturing Overhead
Machine Hours
Plantwide Overhead Rate
$3,315,000
÷
17,000
=
$195 per machine hour
Req. 2
Production
Departments
Departmental
Manufacturing Overhead
Machine Hours
Departmental Overhead
Rates
Potato Chips
$2,014,000
÷
10,600
=
$190 per machine hour
Corn Chips
$672,000
÷
3,000
=
$224 per machine hour
Cheese Puffs
$ 629,000
÷
3,400
=
$185 per machine hour
TOTAL
$3,315,000
17,000
Req. 3
(5 min.) S4-4
Activity
Manufacturing Overhead
Cost Driver
Activity Cost Allocation Rate
Preparation
$572,000
÷
13,000 preparation
hours
=
$44 per preparation hour
Cooking and Draining
$925,000
÷
25,000 cooking and
draining hours
=
$37 per cooking and draining
hour
Packaging
$300,000
÷
6,000,000 packages
=
$0.05 per package
(5-10 min.) S4-5
Req. 1 and 2
The total amount of manufacturing overhead allocated to the order (and the amount of manufacturing overhead per
bag) is computed as follows:
Activity Cost Allocation Rate
Use of Cost Driver
Allocated Manufacturing
Overhead
$44 per preparation hour
16 preparation hours
$ 704
$37 per cooking and draining hour
30 cooking and draining hours
1,110
$0.05 per package
16,000 bags
800
TOTAL
$2,614
Number of bags
÷ 16,000
Manufacturing overhead per bag
$ 0.16 (rounded)
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
Copyright © 2015 Pearson Education, Inc.
4-3
(continued) S4-5
Req. 3
In addition to the costs previously listed, the company needs to consider direct materials and direct labor.
(5-10 min.) S4-6
Req. 1
Activity
Estimated Total
Manufacturing Overhead
Costs
(A)
Estimated Total Usage of
Cost Driver
(B)
Activity Cost Allocation Rate
(A ÷ B)
Machine setup
$ 159,500
2,900 set-ups
$ 55 per setup
Machining
$ 720,000
4,800 machine hours
$150 per machine hour
Quality control
$ 264,000
4,400 tests run
$ 60 per QC test
Req. 2
Job Cost Record
JOB #557
Manufacturing Costs
Direct Materials
$1,250
Direct Labor:
John: 12 × $25 = $300
Allison: 4 × $28 = $112
412
Manufacturing Overhead: [(2 x $55) + (4 x $150) + (3 x $60)]
890
TOTAL JOB COST
$2,552
(15-20 min.) S4-7
a. Product-level
b. Batch-level
c. Product-level
(15-20 min.) S4-8
1. Facility-level
3. Product-level
5. Facility-level
7. Batch-level
9. Facility-level
Managerial Accounting 4e Solutions Manual
(5 min) S4-9
2. The company operates in a very competitive industry — more likely
likely
4. In bidding for jobs, managers lose bids they expected to win and win bids they expected to lose — more likely
6. The company produces high volumes of some of its products and low volumes of other products — more likely
(10-15 min.) S4-10
a. Value added
b. Value added
(5 min.) S4-11
a. Lean production system
b. Lean production system
c. Traditional production system
(10-15 min.) S4-12
1. Incremental cost of using a higher grade raw material — prevention
3. Lost productivity due to machine breakdown — internal failure
5. Warranty repairs — external failure
7. Legal fees from customer lawsuits — external failure
9. Redesigning the production process — prevention
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(10-15 min.) S4-13
Req. 1
Cost (Benefit)
Analysis
Costs (Savings)
Prevention costs:
Negotiating with and training suppliers to obtain higher quality materials and on-time
delivery
$ 550,000
Redesigning the speakers to make them easier to manufacture
1,405,000
Appraisal costs:
Additional 20 minutes of testing for each speaker
604,000
Avoid inspection of raw materials
(404,000)
Internal failure costs:
Rework avoided because of fewer defective units
(656,000)
Avoid lost profits from lost production due to rework
(309,000)
External failure costs:
Reduced warranty repair costs
(208,000)
Avoid lost profits from lost sales due to disappointed customers
(858,000)
Net cost (benefit) from implementing quality program
$ 124,000
Req. 2
The company should not implement the new quality program. The company would lose $124,000 by implementing the
new program.
(5-10 min.) S4-14
1. Internal failure cost
2. Appraisal cost
(15-20 min) S4-15
a. Defects
b. Overproduction
Managerial Accounting 4e Solutions Manual
(5 min) S4-16
1.
Shawn, an accountant at the Booth Corporation,
did not attend the training for the new activity-
based costing system because he figures it will not
be much different from the current allocation
system.
Competence - Maintain an appropriate
level of professional expertise by
continually developing knowledge and
skills.
2.
Joanna receives an iPod from a salesman at a lean
consulting group. She keeps the iPod, even though
she knows that her department will be responsible
for hiring a consulting firm to come in to offer lean
training sessions next year.
Integrity - Mitigate actual conflicts of
interest, regularly communicate with
business associates to avoid apparent
conflicts of interest. Advise all parties of
any potential conflicts.
3.
Noah, the plant manager, does not disclose the
quality issues he is aware of in the current
production process. He figures that he can get
them resolved in the next few months.
Credibility - Disclose all relevant
information that could reasonably be
expected to influence an intended user's
understanding of the reports, analyses, or
recommendations.
4.
Connery Corporation has an activity-based costing
system. Percy prepares reports each month that
are long and full of facts. The reports are hard to
understand for anyone but Percy.
Competence - Provide decision support
information and recommendations that are
accurate, clear, concise, and timely.
5.
Perkins Company operates in highly competitive
environment and has developed some proprietary
processes that allow it to maintain a market lead.
Simon, the CFO, does not have employees sign
non-disclosure agreements because he feels that
they are all family. He avoids talking about the
topic.
Confidentiality - Inform all relevant parties
regarding appropriate use of confidential
information. Monitor subordinates'
activities to ensure compliance.
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
Exercises (Group A)
(15-20 min.) E4-17A
Req. 1
Plantwide
overhead rate
=
Estimated total manufacturing costs
Estimated cost allocation base
=
$1,450,000
21,000* direct labor hours
=
$69 per direct labor hour (rounded)
*When calculating plantwide overhead rates, all direct labor
hours incurred in the plant are used.
Req. 2
Departmental overhead rate
=
Total department overhead
Cost allocation base (estimated)
Machining Dept. overhead rate
=
$625,000
15,300 machine hours
=
$41 per machine hour (rounded)
Finishing Dept. overhead rate
=
$825,000
17,800** direct labor hours
=
$46 per direct labor hour (rounded)
**When calculating the finishing departmental rate, only the direct labor hours incurred in the finishing department
are used.
Managerial Accounting 4e Solutions Manual
(continued) E4-17A
Req. 3
Overhead allocation based on single, plantwide rate:
Job 450
Job 455
Cost allocation base (actual)
7 DL hours
7 DL hours
× Plantwide cost allocation
rate
× $69/ DL hour
× $69 / DL hour
Overhead allocation
$ 483
$ 483
Req. 4
Overhead allocation based on departmental rates:
Job 450
Job 455
Machining Department:
Departmental allocation rate
$41/ MH
$41/ MH
× Machine hours used by Job
× 1 MH
× 6 MH
Overhead allocation
$41
$246
Finishing Department:
Departmental allocation rate
$46/ DL hr
$46/ DL hr
× DL hours used by Job
× 6 DL hrs
× 5 DL hrs
Overhead allocation
$276
$230
Total overhead allocation (from
both departments
$ 317
$ 476
Req. 5
The single plantwide rate overcosts Job 450 and overcosts Job 455. Since the company sets the sales price at 125% of
cost, and the job cost is affected by the allocation system used, the sales price will be affected by the allocation system
used.
Managerial Accounting 4e Solutions Manual
(15-20 min.) E4-19A
Req. 1
Total overhead
$ 2,190,000
Divided by: Total machine hours
15,000
Predetermined MOH rate
$ 146
Cost of Job #356
Machine hours used
90
Multiplied by: Predetermined MOH rate
$ 146
Total MOH
$ 13,140
Job #356—traditional plantwide overhead rate
Direct material
300 lbs. × $70/lb.
$ 21,000
Direct labor
20 hrs. ×$25/hr.
500
MOH
13,140
Total cost of job
$ 34,640
Req. 2
Job #356—ABC
Direct material
300 lbs. × $70 per lb
$ 21,000
Direct labor
20 DL hours × $25 per DL
hour
500
Machine hours
90 x $40 per machine hour
3,600
No. of engineering change orders
9 x $90 per change order
810
Pounds of hazardous waste
generated
50 x $330 per lb of hazardous
16,500
Total cost of job
$ 42,410
ABC cost allocation rates:
Machine maintenance: $600,000 / 15,000 = $40 per machine hour
Engineering: $270,000 / 3,000 = $90 per change order
Hazardous waste: $1,320,000 / 4,000 = $330 per pound of hazardous waste
Req. 3
The cost estimate based on the activity-based costing (ABC) rates would provide more useful information because this
cost estimate takes into account the specific resources used by each product. This information can be used to price
jobs based on more accurate costs.
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(15-20 min) E4-20A
Req. 1
Operating
overhead
Total professional hours
Current operating overhead allocation rate
$230,000
÷
10,000
=
$23.00 per
professional hour
Req. 2
Billing Calculations
Based on current allocation system
Professional time (24 hours × $62 per hour)
$1,488.00
Operating overhead (24 hours × $23 per professional hour)
+ 552.00
Total cost of job
$2,040.00
Markup on cost
× 131%
Bill to client
$2,672.40
Req. 3
Activity
Cost
Total activity allocation base
Activity allocation rate
Transportation to clients
$ 8,000
÷
15,000 miles driven (5,500 +
9,500)
=
$0.53 per mile (rounded)
Blueprint copying
$ 37,000
÷
1,000 copies (200 + 800)
=
$37 per copy
Office support
$185,000
÷
5,000 secretarial hours (2,900 +
2,100)
=
$37 per secretarial hour
Req. 4
Total cost of job
$2,183.78 *
Multiplied by: Markup percentage
131%
Amount billed to client
$2,860.75
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
Req. 7
The activity-based costing (ABC) would produce a more accurate product cost because this method takes into account
the specific resources used by each order.
(20-25 min.) E4-22A
Managerial Accounting 4e Solutions Manual
(continued) E4-22A
Req. 2 (continued)
Then, apply them to the two products:
Manufacturing Cost
Medium
(42-inch)
Large
(63-inch)
Direct materials
$ 669,000
$1,270,000
Direct labor
225,000
385,000
Manufacturing overhead:
Medium:
(300 material orders × $296.30
= $88,890)
(21,400 machine hours ×
$12.70 = $271,780)
(4,140 packaging hours ×
$9.80 = $40,572)
Total allocation of overhead to Medium:
401,242
Large:
(240 material orders × $296.30
= $71,112)
(23,000 machine hours ×
$12.70 = $292,100)
(6,060 packaging hours ×
$9.80 = $59,388)
Total allocation of overhead to Large:
422,600
Total manufacturing cost
$1,295,242
$2,077,600
Divided by: Number of units produced
÷ 3,160
÷ 4,160
Cost per unit
$ 409.89 (rounded)
$ 499.42 (rounded)
Req. 3
Medium
Large
Cost per unit using current system
$ 380.31
$ 521.9
Cost per unit using ABC
409.89
499.42
Overcosting / (Undercosting)
($ 29.58)
$ 22.48
Number of units produced
× 3,160
× 4,160
Total cost distortion
($93,472.80)
$93,516.80
The Medium units had been undercosted and the Large units had been overcosted.
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(20-30 min.) E4-23A
Req. 1
Biltmore Corp.
Total Budgeted Indirect Manufacturing Costs
Activity
Budgeted Quantity of
Cost Allocation Base
Activity Cost
Allocation Rate
Total Budgeted
Indirect Cost
Materials handling [(6 x 1,000) + (8 x 1,000)]
14,000
$ 3.84
$ 53,760
Machine setups 20 + 20
40
$330.00
13,200
Insertion of parts [(6 x 1,000) + (8 x 1,000)]
14,000
$ 30.00
420,000
Finishing [(1.2 x 1,000) + (3.3 x 1,000)]
4,500
$ 54.00
243,000
Total budgeted indirect cost
$729,960
Req. 2
Biltmore Corp.
ABC Indirect Manufacturing Cost per Unit
Activity
Cost
Allocation
Rate
Quantity of Cost Allocation Base
Used By:
Allocated Activity Cost Per
Wheel
Standard
Deluxe
Standard
Deluxe
Materials handling
$ 3.84
6
8
$ 23.04
$ 30.72
Machine setups
$330.00
0.020
(=20/1,000)
0.020
(=20/1,000)
6.60
6.60
Insertion of parts
$ 30.00
6
8
180.00
240.00
Finishing
$ 54.00
1.2
3.3
64.80
178.20
Total ABC allocated
indirect cost
$274.44
$455.52
Req. 3
Total budgeted manufacturing overhead
=
$729,960 (Req. 1)
Total budgeted direct labor hours [(2.0 x 1,000) + (3.3 x 1,000)]
=
5,300
Plantwide overhead rate
=
$137.73 / DL hour
(rounded)
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(15-20 min) E4-25A
1. Roles of plant employees — At lean producers, plant employees tend to have broader roles. They are cross-
the job.
2. Manufacturing cycle times — Lean producers put great emphasis on shortening their manufacturing cycle
3. Quality — Lean producers stress high quality in every aspect of production. Since lean producers do not carry
4. Inventory levels — Lean production systems strive to maintain low inventory levels. Lean producers try to
5. Batch sizes — Lean production systems produce units in much smaller batches than traditional production
6. Set-up times — Lean production systems stress short set-up times so that they can produce and deliver the
7. Workplace organization — Lean companies use a workplace organization system called “5s” (sort, set in order,
shine, standardize, sustain) to keep their work cells clean and organized. The goal of workplace organization
Managerial Accounting 4e Solutions Manual
(15-20 min) E4-26A
Req. 1
Cost of Quality Report for Healthy Snacks Corp
Total Costs of
Quality
Percentage of
total costs of
quality (rounded)
Prevention Costs:
Personnel training
$ 36,000
Preventative maintenance
9,000
Total prevention costs
$ 45,000
6%
Appraisal Costs:
Inspecting products at halfway point
$ 55,000
Inspection of raw materials
5,000
Total appraisal costs
$ 60,000
7%
Internal Failure Costs:
Production loss due to machine breakdowns
$ 16,000
Cost of defective products
80,000
Cost of disposing of rejected products
11,000
Total internal failure costs
$107,000
13%
External Failure Costs:
Recall of Batch #59374
$175,000
Warranty claims
416,000
Total external failure costs
$591,000
74%
Total Costs of Quality
$803,000
100%
Req. 2
Because the company has warranty returns and has had a product recall, the company may suffer a reputation for poor
quality products. If so, they are probably losing profits from losing sales. Unsatisfied customers will be reluctant to buy
from the company again. This report does not include an estimate of the lost profits arising from a reputation for poor-
quality products.
Req. 3
The Cost of Quality report shows that very little is being spent on prevention and appraisal, which is probably why the
internal and external failure costs are so high. It appears that the company is only inspecting the product halfway
through the production process, and not again at the end of the process. Perhaps that is the reason their external
failure costs are so high. The CEO should use this information to develop quality initiatives in the areas of prevention
and appraisal. Such initiatives should reduce future internal and external failure costs.
Managerial Accounting 4e Solutions Manual
Exercises (Group B)
(15-20 min.) E4-28B
Req. 1
Plantwide
overhead rate
=
Total manufacturing overhead
Cost allocation base (estimated)
=
$1,100,000
21,000 direct labor hours
=
$ 52 per direct labor hour
Req. 2
Department overhead rate
=
Total department overhead
Cost allocation base (estimated)
Machining Dept. overhead rate
=
$600,000
14,500 machine hours
=
$41 per machine hour*
Finishing Dept. overhead rate
=
$500,000
17,900 direct labor hours
=
$28 per direct labor hour*
*Rounded to the nearest dollar.
Req. 3
Overhead allocation based on single, plantwide rate:
Job 450
Job 455
Total direct labor hours
5 DL hours
5 DL hours
× Plantwide allocation rate
× $52/ DL hour
× $52/ DL hour
Overhead allocation
$260
$260
