Copyright © 2015 Pearson Education, Inc.
4-38
(20-30 min.) P4-42A
Req. 1
Robotic Construction Toys Corp
Predicted Quality Cost Savings
Activity
Predicted
Reduction In
Activity Units
×
Activity Cost
Allocation
Rate
=
Predicted
Reduction
In Activity
Costs
Inspection of incoming materials
305
$17
$ 5,185
Inspection of finished goods
305
$31
9,455
Number of defective units discovered in-house
3,200
$16
51,200
Number of defective units discovered by customers
900
$36
32,400
Lost sales to dissatisfied customers
330
$61
20,130
Total predicted quality cost savings
$118,370
Req. 2
Robotic Construction Toys Corp.
Net Benefit of Design Engineering Effort
Total predicted quality—cost savings
$118,370
Less: Cost of design engineering
(80,000)
Net benefit of design engineering
$ 38,370
Req. 3
Measuring the cost of quality-related activities is difficult. As an alternative, they could monitor nonfinancial measures
of quality and attempt to improve them.
1,200
$140,000
Total indirect costs allocated
$420,000
$140,000
÷ Number of units
Managerial Accounting 4e Solutions Manual
(continued) P4-43A
Req. 3
The activity-based costing system is more accurate than the single-rate system in assigning the costs of the resources
each job consumes. The single rate allocates all overhead cost based on direct labor hours. Job A units require 90 direct
income.
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
Problems (Group B)
(40 min.) P4–44B
Req. 1
Plantwide
overhead rate
=
Total manufacturing overhead
Total direct labor hours
=
$1,090,000
19,500* direct labor hours
=
$56 per direct labor hour (rounded)
*When calculating plantwide overhead rates, all direct labor
hours incurred in the plant are used.
Req. 2
Department allocation rate
=
Department overhead cost
Department allocation base
Machining
=
$650,000
4,000 machine hours
=
$163 per machine hour (rounded)
Assembly
=
$440,000
16,000 direct labor hours
=
$28 per direct labor hour (rounded)
Managerial Accounting 4e Solutions Manual
(continued) P4-44B
Req. 5
Overhead allocation based on departmental rates:
Job 500
Job 501
Machining Department:
Departmental allocation rate
$163/ MH
$163/ MH
× Machine hours used by Job
× 5 MH
× 10 MH
Overhead allocation
$815
$1,630
Assembly Department:
Departmental allocation rate
$28/ DL hr
$28/ DL hr
× DL hours used by Job
× 13 DL hrs
× 13 DL hrs
Overhead allocation
$364
$364
Total overhead allocation
$1,179
$1,994
Req. 6
The single plantwide overhead rate assigned the same amount of overhead to both jobs. The departmental rates assign
more overhead cost to Job 501 than Job 500 due to the extra machine hours used. This seems fairer.
Req. 7
Manufacturing cost and sales price using current costing system:
Job 500
Job 501
Direct Materials
$1,800
$1,800
Direct Labor (16 DL hours × $20)
320
320
Manufacturing overhead (from req. 4)
896
896
Total manufacturing cost
$3,016
$3,016
Markup for pricing (%)
× 125%
× 125%
Sales price (rounded)
$3,770
$3,770
Req. 8
Gross profit using current costing system:
Job 500
Job 501
Sales Price (from Req. 7)
$3,770
$3,770
Less: Total manufacturing cost
3,016
3,016
Gross profit / (loss)
$754
$754
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(continued) P4–44B
Gross profit using departmental rate costing system:
Job 500
Job 501
Sales price (from Req. 7)
$ 3,770
$ 3,770
Less: Total mfg. cost
Direct Materials
$ 1,800
$ 1,800
Direct Labor [(3+13) x $20]
320
320
Manufacturing overhead (from req. 5)
1,179
3,299
1,994
4,114
Gross profit (loss)
$ 471
$(344)
(20-30 min.) P4–45B
Req. 1
Russell Corp.
Per-Unit Manufacturing Costs
Standard
Desk
Unpainted
Desk
$ 95,000
$23,000
107,550
26,550
100,300
10,200
28,050
0
$330,900
$59,750
÷ 5,500
÷ 3,000
$ 60
$ 20
Req. 2
Russell Corp.
Full Product Costs
Standard
Desk
Unpainted
Desk
$ 4
$ 3
60
20
20
19
$84
$42
Managerial Accounting 4e Solutions Manual
(continued) P4–45B
Req. 3
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(continued) P4-46B
Req. 3
Product
Cost allocation rate
x
Actual qty. of allocation
base
=
Indirect cost allocated
Commercial
$450
x
900
=
$405,000
Travel
$450
x
300
=
$135,000
Now compute the indirect cost per unit for each product under the original single-allocation-base system.
Gibson Pharmaceuticals
Costs per Unit Under Original Machine-Hour Based System
Commercial Container
Travel Pack
$405,000
$135,000
÷ 2,800
÷ 80,000
$ 144.64
$ 1.69
*Rounded
Req. 4
The original system overcosted the commercial containers and undercosted the travel packs.
The original system allocated 3 times as much indirect cost to the commercial containers as to the travel packs.
However, commercial containers did not use 3 times as much of the material handling and quality assurance resources.
The ABC system recognizes that commercial containers do not require 3 times as much material handling and quality
assurance as travel packs. So, relative to the original system, ABC allocates less of the material handling and quality
assurance costs to commercial containers.
(20-30 min.) P4–47B
Req. 1
Large Construction Toys Corp.
Predicted Quality Cost Savings
Activity
Predicted
Reduction In
Activity Units
×
Activity Cost
Allocation
Rate
=
Predicted
Reduction
In Activity
Costs
Inspection of incoming materials
390
$20
$ 7,800
Inspection of finished goods
390
$32
12,480
Defective units discovered in-house
3,500
$12
42,000
Defective units discovered by
customers
900
$41
$36,900
Lost sales to dissatisfied customers
290
$58
16,820
Total predicted quality cost savings
$116,000
Managerial Accounting 4e Solutions Manual
(continued) P4-47B
Req. 2
Large Construction Toys Corp.
Net Benefit of Design Engineering Effort
Total predicted quality cost savings
$116,000
Cost of design engineering
(65,000)
Net benefit of design engineering
$ 51,000
Req. 3
Measuring the cost of quality-related activities is difficult. An alternative approach to measure quality improvement is
to monitor nonfinancial measures of quality and attempt to improve them.
(20-40 min.) P4–48B
Req. 1
Axis Systems
Product Costs per Unit (Original Cost System)
Job A
Job B
Direct materials
$210,000
$30,000
Direct labor
160,000
12,000
Allocated overhead (8,000 and 600) × $22
176,000
13,200
Total cost
$546,000
$55,200
Divide by number of units
÷ 100
÷ 10
Product cost per unit
$ 5,460
$ 5,520
Req. 2
Axis Systems
Product Costs Per Unit (ABC System)
Job A
Job B
Direct materials
$ 210,000
$30,000
Direct labor
160,000
12,000
Allocated overhead:
Materials handlinga
12,750
1,700
Machine setupb
3,000
2,000
Assemblingc
120,000
16,000
Shippingd
1,500
1,500
Total cost
$ 507,250
$63,200
Divide by number of units
÷ 100
÷ 10
Product cost per unit
$5,072.50
$ 6,320
__________
a (15,000
and
2,000)
×
$0.85
b (6
and
4)
×
$500
c (1,500
and
200)
×
$80
d (1
and
1)
×
$1,500
The change in costs of Job A does not exactly offset the change in costs of Job B between the original system and ABC,
because the company has more than these two jobs. If the company had only these two jobs, then the change in one job’s
costs would exactly offset the change in the other job’s costs.
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
(continued) P4-48B
Req. 3
The activity-based costing system is more accurate than the single-rate system in assigning the costs of the resources
each job consumes. The single rate allocates all overhead cost based on direct labor hours. Job A units require 80 direct
Copyright © 2015 Pearson Education, Inc.
4-48
A4–49 Discussion & Analysis Questions
1. Explain why departmental overhead rates might be used instead of a single plantwide overhead rate.
A single plantwide overhead rate doesn’t always do a good job of matching the cost of overhead resources with
2. Using activity-based costing, why are indirect costs allocated while direct costs are not allocated?
Since direct costs can be traced to products, they are not allocated. Indirect costs, such as overhead, cannot be
3. How can using a single predetermined manufacturing overhead rate based on a unit-level cost driver cause a
high-volume product to be overcosted?
4. Assume a company uses a plantwide predetermined manufacturing overhead rate that is calculated using direct
labor hours as the cost driver. The use of this plantwide predetermined manufacturing overhead rate has
resulted in cost distortion. The company’s high-volume products are overcosted and its low-volume products are
5. A hospital can use activity-based costing (ABC) for costing its services. In a hospital, what activities might be
considered to be value-added activities?
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
What activities at that hospital might be considered to be non-value-added?
6. A company makes shatterproof, waterproof cases for iPhones. The company makes only one model and has
been very successful in marketing its case; no other company in the market has a similar product. The only
customization available to the customer is the color of the case. There is no manufacturing cost difference
7. Compare a traditional production system with a lean production system. Discuss the similarities and the
differences.
Some of the differences between a traditional production system and a lean production system are
• like machines grouped together vs. production cells
8. Think of a product with which you are familiar. Explain how activity-based costing could help the company that
9. It has been said that external failure costs can be catastrophic and much higher than the other categories. What
are some examples of external failure costs?
• Lost sales
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
Application & Analysis
A4–50
1. Describe the company selected, including its products or services.
1. Process customer purchases
3. Handle customer inquiries
5. Stock shelves
7. Close out cash registers daily
3. For each of the key activities, list a potential cost driver for that activity and describe why this cost driver would
be appropriate for the associated activity.
2. special orders
4. training sessions held
6. events scheduled
8. bookkeeper’s hours
Student responses will vary.
Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality
Copyright © 2015 Pearson Education, Inc.
4-53
(20–30 min.) A4-52
Ethics Mini-Case
1. The ethical issues in this situation are:
a. Competence: “Perform professional duties in accordance with relevant laws, regulations, and technical
standards.” By burying the cost for the silver line, he would be violating technical standards.
b. Competence: “Provide decision support information and recommendations that are accurate, clear, concise,
2. This does not influence the analysis of whether Jacob has violated any ethical principles. Even though it cannot be
3. I do not agree that no one is hurt by burying the cost in general cost pools; by burying the cost there, it is shared
4. Jacob’s responsibilities as a management accountant are to report information ethically, objectively, and
(20–30 min.) A4-53
Real Life Mini-Case
1. Think about the value chain for a carton of eggs that is sold in the grocery store. List as many steps in the value
chain as you can imagine. At what points in the value chain does waste most likely occur.
2. In this chapter, the eight wastes of traditional operations were discussed. Which types of waste are in the value
chain that you identified in question 1?
3. Answer the following questions from the standpoint of Cal-Maine Foods, Inc., and its egg farms:
Managerial Accounting 4e Solutions Manual
To individually stamp each egg, the company will have to create a new stamp for each egg batch, which may not
Foods.
4. Now answer the following questions from the standpoint of Walmart:
a. What costs might decrease as a result of purchasing eggs that are stamped individually with grade, size,
traceability code and freshness date information?
5. Who should bear the cost of individual egg stamping operations: Cal-Maine Foods, Walmart, or the consumer?
Because of the tremendous amount of waste involved with the current system of discarding entire cartons,
should individual egg stamping be mandated by the government? Why or why not?
Cal-Maine should bear the cost of the individual egg stamping operations because it is probably the one who it