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Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(continued) E4-28B
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
× 7 MH
Overhead allocation
$41
$287
Finishing Department:
Departmental allocation rate
$28/ DL hr
$28/ DL hr
× DL hours used by Job
× 4 DL hrs
× 3 DL hrs
Overhead allocation
$ 112
$ 84
Total overhead allocation (from
both departments
$153
$371
Req. 5
Since the company sets its sales price at 125% of cost, and the job cost is affected by the allocation system used, its
sales price will also be affected by the allocation system it uses.
(15-20 min.) E4-29B
Req. 1
Northstar Company
Computation of Indirect Cost Allocation Rates
Activity
Total Estimated
Cost
Estimated Quantity of
Cost Allocation Base
Activity
Cost Allocation Rate
Materials handling
$ 12,000
÷
3,000 parts
=
$ 4 per part
Machine setups
$ 3,400
÷
10 setups
=
$340 per setup
Insertion of parts
$48,000
÷
3,000 parts
=
$ 16 per part
Finishing
$80,000
÷
2,000 hours
=
$ 40 per hour
Managerial Accounting 4e Solutions Manual
(continued) E4-29B
Req. 2
The amount of manufacturing overhead to be assigned to Job 420 is computed as follows
Job 420
Manufacturing overhead allocation
Activity
Actual Quantity of Cost
Allocation Base Used
Cost Allocation Rate
MOH assigned
Materials handling
150 parts
×
$4 / part
=
$ 600
Machine setups
2 setups
×
$340 / setup
=
680
Insertion of parts
150 parts
×
$16 / part
=
2,400
Finishing
100 hours
×
$ 40 / hr.
=
4,000
Total
$ 7,680
Req. 3
The amount of manufacturing overhead to be assigned to Job 510 is computed as follows
Job 510
Manufacturing overhead allocation
Activity
Actual Quantity of Cost
Allocation Base Used
Cost Allocation Rate
MOH assigned
Materials handling
500 parts
×
$4 / part
=
$ 2,000
Machine setups
4 setups
×
$340 / setup
=
1,360
Insertion of parts
500 parts
×
$16 / part
=
8,000
Finishing
310 hours
×
$ 40 / hr
=
12,400
Total
$23,760
(15-20 min.) E4-30B
Req. 1
Total overhead
$1,560,000
Divided by: Total machine hours
13,000
Predetermined MOH rate
$ 120
Req. 2
Cost of Job #356
Machine hours used
100
Multiplied by: Predetermined MOH rate
$120
Total MOH
$ 12,000
Job #356—traditional plantwide overhead rate
Direct material (270 lbs. ×$60/lb.)
$ 16,200
Direct labor (50 hrs. ×$15/hr.)
$750
MOH
$12,000
Total cost of job
$ 28,950
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(continued) E4-30B
Job #356—ABC
Direct material (270 lbs. ×$60 per lb.)
$ 16,200
Direct labor (50 DL hours. ×$15 per DL hour)
$750
Machine hours 100 x $10 per machine hour
$1,000
No. of engineering changes 5 x $60 per change order
$300
Pounds of hazardous waste
generated 50 x $340 per lb of hazardous
$17,000
Total cost of job
$ 35,250
(15-20 min) E4-31B
Req. 1
Operating
overhead
Total professional hours
Current operating overhead allocation rate
$231,500
÷
10,000
=
$23.15 per
professional hour
Req. 2
Billing Calculations
Based on current allocation system
Professional time (27hours × $65 per hour)
$1,755.00
Operating overhead (27 hours × $23.15 per professional hour)
+ 625.05
Total cost of job
$2,380.05
Markup on cost
× 129%
Bill to client
$3,070.26
Req. 3
Activity
Cost
Total activity allocation base
Activity allocation rate
Transportation to clients
$ 10,500
÷
15,000 miles driven (6,000 +
9,000)
=
$0.70 per mile
Blueprint copying
35,000
÷
1,000 copies (550 + 450)
=
$35 per copy
Office support
186,000
÷
5,000 secretarial hours (2,300 +
2,700)
=
$37.20 per secretarial hour
To calculate the activity cost allocation rates, you must use the total activity for the year.
Managerial Accounting 4e Solutions Manual
(continued) E4-31B
Req. 4
Total cost of job
x
Markup percentage
=
Amount billed
$2,577.00*
x
129%
=
$3,324.33
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(15-20 min.) E4-32B
Req. 1
Total pharmacy cost allocation rate (using number of prescriptions):
Cost pools
Total annual
estimated cost
Pharmacy occupancy costs (utilities, rent, and other costs)
$96,000
Packaging supplies (bottles, bags, and other packaging)
$35,000
Professional training and insurance costs
$96,000
Total pharmacy overhead
$227,000
Divide by number of prescriptions
25,000
Total pharmacy cost allocation rate per prescription
$ 9.08
Req. 2
Cost assigned using traditional overhead allocation
Customer order #1102
5 prescriptions × $9.08
$45.40
Req. 3
Cost assigned using traditional overhead allocation
Customer order #1103
3 prescriptions × $9.08
$27.24
Req. 4
Cost Pools
Estimated Cost
Cost Drivers
Estimated Cost
Driver Activity
Cost
Allocation
Rate
Pharmacy Occupancy Costs
$96,000
Technician Hours
80,000
$1.20
Packaging Supplies
$35,000
Number of
Prescriptions
25,000
$1.40
Training and Insurance Costs
$96,000
Pharmacist Hours
24,000
$4.00
Req. 5
Customer order #1102
Used:
Used by this
order
Allocation
Rate
ABC assigned cost
Technician hrs. for order
0.5
$1.20
$ 0.60
Number of prescriptions
5
$1.40
$ 7.00
Pharmacist hours
2
$4.00
$ 8.00
Total ABC Cost
$ 15.60
Managerial Accounting 4e Solutions Manual
(continued) E4-32B
Req. 6
Customer order #1103
Used:
Used by this
order
Allocation
Rate
ABC assigned cost
Technician hrs. for order
0.5
$1.20
$ 0.60
Number of prescriptions
3
$1.40
$ 4.20
Pharmacist hours
2.5
$4.00
$ 10.00
Total ABC Cost
$ 14.80
Req. 7
The activity-based costing (ABC) allocation method would produce a more accurate product cost because this method
takes into account the specific resources used by each order.
Managerial Accounting 4e Solutions Manual
(continued) E4-33B
Req. 3
Medium
(42-inch)
Large
(63-inch)
Cost/unit using current system
$ 396.08
$534.87
Cost/unit using ABC
424.34
514.47
Overcosting/(Undercosting)
$(28.26)
20.40
Number of units produced
3,020
4,180
Total cost distortion
$(85,345.20)
$85,272.00
The Medium units had been undercosted and the Large units had been overcosted. Since the company sets its sales
price at 300% of manufacturing cost, the resulting sales price should have been about higher for the Medium units and
lower for the Large units than if ABC costing had been used.
(20-30 min.) E4-34B
Req. 1
Trudell Corp.
Total Budgeted Indirect Manufacturing Costs
Activity
Budgeted Quantity of
Cost Allocation Base
Activity Cost
Allocation Rate
Total Budgeted
Indirect Cost
Materials handling [(6.0 x 1,000) + (8.0 x 1,000)]
14,000
$ 3.78
$ 52,920
Machine setups 10 + 10
20
$305.00
6,100
Insertion of parts [(6.0 x 1,000) + (8.0 x 1,000)]
14,000
$ 31.00
434,000
Finishing [(1.2 x 1,000) + (3.2 x 1,000)]
4,400
$ 58.00
255,200
Total budgeted indirect cost
$748,220
Req. 2
Trudell 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
$ 3.78
6
8
$ 22.68
$ 30.24
Machine setups
$305.00
0.010
(=10/1,000)
0.010
(=10/1,000)
3.05
3.05
Insertion of parts
$ 31.00
6
8
186.00
248.00
Finishing
$ 58.00
1.2
3.2
69.60
185.60
Total ABC allocated
indirect cost
$281.33
$466.89
__________
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(continued) E4-34B
Req. 3
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(15-20 min) E4-36B
2. Traditional organization
4. Lean organization
6. Lean organization
8. Lean organization
10. Lean organization
12. Traditional organization
Managerial Accounting 4e Solutions Manual
(15-20 min) E4-37B
Req. 1
Cost of Quality Report
Total Costs of
Quality
Percentage of
total costs of
quality (rounded)
Prevention Costs:
Personnel training
$ 34,000
Preventative maintenance
6,000
Total prevention costs
$ 40,000
5%
Appraisal Costs:
Inspecting products at half-way point
$ 42,000
Inspection of raw materials
5,000
Total appraisal costs
$ 47,000
6%
Internal Failure Costs:
Production loss due to machine breakdowns
$ 16,000
Cost of defective products
86,000
Cost of disposing of rejected products
14,000
Total internal failure costs
$116,000
14%
External Failure Costs:
Recall of Batch #59374
$171,000
Warranty claims
432,000
Total external failure costs
$603,000
75%
Total Costs of Quality
$806,000
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
Problems (Group A)
(40 min.) P4-39A
Req. 1
Plantwide
overhead rate
=
Total manufacturing overhead
Total direct labor hours
=
$1,120,000
15,500* direct labor hours
=
$72 per direct labor hour (rounded)
*When calculating plantwide overhead rates, all direct labor
hours incurred in the plant are used.
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(continued) P4-39A
Req. 5
Overhead allocation based on departmental rates:
Job 500
Job 501
Machining Department:
Departmental allocation rate
$67/ MH
$67/ MH
× Machine hours used by Job
× 9 MH
× 18 MH
Overhead allocation
$603
$1,206
Assembly Department:
Departmental allocation rate
$38/ DL hr
$38/ DL hr
× DL hours used by Job
× 15 DL hrs
× 15 DL hrs
Overhead allocation
$570
$570
Total overhead allocation
$1,173
$1,776
(from both departments)
Req. 7
Manufacturing cost and sales price using current costing system:
Job 500
Job 501
Direct Materials
$1,000
$1,000
Direct Labor [(15 + 4) x $25]
475
475
Manufacturing overhead (from req. 4)
1,368
1,368
Total manufacturing cost
$2,843
$2,843
Markup for pricing
× 110%
× 110%
Sales price (rounded)
$3,127
$3,127
Managerial Accounting 4e Solutions Manual
(continued) P4-39A
Req. 8
Gross profit using current costing system:
Job 500
Job 501
Sales Price (from Req. 7)
$3,127
$3,127
Less: Total manufacturing cost (from Req. 7)
2,843
2,843
Gross profit / (loss)
$ 284
$ 284
Gross profit using departmental rate costing system:
Job 500
Job 501
Sales price (from Req. 7 – Note: use sales price from current system
because question specifies that the sales price calculated in Req. 7 be
used)
$3,127
$3,127
Less: Total manufacturing cost:
Direct Materials
$1,000
$1,000
Direct Labor [(15 + 4) x $25]
475
475
Manufacturing overhead (from Req. 5)
1,173
1,776
Total manufacturing cost
$2,648
$3,251
Gross profit (loss)
$ 479
$ (124)
Req. 9
When utilizing a single rate allocation method, the company believes that both jobs are equally profitable.
When utilizing a refined costing method, the company will realize that Job 500 is profitable but Job 501 shows a loss.
(20-30 min.) P4-40A
Req. 1
Prescott Corp.
Per-Unit Manufacturing Costs
Standard
Desk
Unpainted
Desk
Direct materials
$ 99,000
$18,000
Materials handling (118,500 x $0.70); (28,500 x $0.70)
82,950
19,950
Assembling (5,700 x $16.00); (1,000 x $16.00)
91,200
16,000
Painting (5,500 x $5.10); (0)
28,050
0
Total manufacturing costs
$301,200
$53,950
Number of units
÷ 5,500
÷ 3,000
Manufacturing product cost per unit (rounded)
$ 55
$ 18
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(continued) P4-40A
Req. 2
Full Product Costs
Standard
Desk
Unpainted
Desk
Premanufacturing activities
$ 4
$ 3
Manufacturing product costs
55
18
Postmanufacturing activities
23
22
Full product cost per unit
$82
$43
Req. 3
Manufacturing product costs are reported in the financial statements.
Managers use full product costs for decisions, such as pricing and product emphasis.
Full product costs are reported in the costs of premanufacturing activities and postmanufacturing activities that are
expensed as incurred for external reporting. However, these costs often are assigned to products for internal decisions.
Req. 4
Full product cost……………………...
$ 82.00
Plus: Desired profit…………………………..
41.00
Sales price per unit – standard desk
$123.00
(30-40 min.) P4-41A
Req. 1
Sawyer Pharmaceuticals
ABC Cost Allocation Rates
Materials Handling
Packaging
Quality Assurance
Estimated indirect
activity costs
$180,000
$460,000
$116,000
÷ Estimated cost
allocation base
÷ 18,000 kilos
÷ 2,600 hours
÷ 1,500 samples
Activity overhead rate (rounded)
$ 10 / kilo
$ 177 / hour
$ 77 / sample
Req. 2
Sawyer Pharmaceuticals
Activity Costs Per Unit
Commercial Container
Travel Pack
Materials handling (8,500 and 6,000) × $10
$ 85,000
$ 60,000
Packaging (1,200 and 400) × $177
212,400
70,800
Quality assurance (240 and 340) × $77
18,480
26,180
Total indirect costs
$314,880
$156,980
÷ Number of units
÷ 2,500
÷ 80,000
Indirect activity cost per unit (rounded)
$ 126.35
$ 1.96
