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SOLUTION
(20 min.) Plantwide, department, and ABC indirect cost rates.
1.
Actual plantwide variable MOH rate
based on machine hours, $280,000
¸
5,000 $56 per machine hour
Southern
Motors
Caesar
Motors
Jupiter
Auto Total
Variable manufacturing overhead, allocated based on machine hours
($56
´
300; $56
´
3,700; $56
´
1,000)
$56,00
2.
Departme
nt
MOH in
2017
Total
Driver Units Rate
Design $ 35,000 500 $70 per CAD-design hour
Production 25,000 500 $50 per engineering hour
Engineerin
g
220,000 5,000 $44
per machine hour
Souther
n
Motors
Caesar
Motors
Jupite
r Auto Total
Design-related overhead, allocated on
CAD-design hours
(150
´
$70; 250
´
$70; 100
´
$70)
$
$
$
Production-related overhead, allocated on
engineering hours
(130
´
$50; 100
´
$50; 270
´
$50)
Engineering-related overhead, allocated on
machine hours
´
´
´
13,200
0
0
0
5-1
3.
Southern
Motors
Caesar
Motors
Jupiter
Auto
a. Department rates
The manufacturing overhead allocated to Southern Motors increases by 80% under the
department rates, the overhead allocated to Caesar decreases by about 11%, and the overhead
The percentage of total driver units in each department used by the companies is:
Department
Cost
Driver
Southern
Motors
Caesar
Motors
Jupiter
Auto
Design
Engineering
Production
CAD-design hours
Engineering hours
Machine hours
30%
26
6
50%
20
74
20%
54
20
The Southern Motors contract uses only 6% of total machines hours in 2017, yet uses
30% of CAD design-hours and 26% of engineering hours. The result is that the plantwide rate,
In contrast, the Caesar Motors contract uses less of design (50%) and engineering (20%)
Caesar Motors was probably complaining under the use of the simple system because its
contract was being overcosted relative to its consumption of MOH resources. Southern and
Jupiter, on the other hand, were having their contracts undercosted and underpriced by the simple
4. Other than for pricing, RC can also use the information from the department-based
system to examine and streamline its own operations so that there is maximum value-added from
all indirect resources. It might set targets over time to reduce both the consumption of each
5-2
5. It would not be worthwhile to further refine the cost system into an ABC system if (1) a
single activity accounts for a sizable proportion of the department’s costs or (2) significant costs
¸
overhead.
5-22 Plant-wide, department, and activity-cost rates. Acclaim Inc. makes two styles of
trophies, basic and deluxe, and operates at capacity. Acclaim does large custom orders. Acclaim
budgets to produce 10,000 basic trophies and 5,000 deluxe trophies. Manufacturing takes place
in two production departments: forming and assembly. In the forming department, indirect
manufacturing costs are accumulated in two cost pools, setup and general overhead. In the
assembly department, all indirect manufacturing costs are accumulated in one general overhead
cost pool. The basic trophies are formed in batches of 200 but because of the more intricate detail
of the deluxe trophies, they are formed in batches of 50.
The controller has asked you to compare plant-wide, department, and activity-based cost
allocation.
Required
1. Calculate the budgeted unit cost of basic and deluxe trophies based on a single plant-wide
overhead rate, if total overhead is allocated based on total direct costs. (Don’t forget to
include direct material and direct manufacturing labor cost in your unit cost calculation.)
2. Calculate the budgeted unit cost of basic and deluxe trophies based on departmental overhead
rates, where forming department overhead costs are allocated based on direct manufacturing
labor costs of the forming department and assembly department overhead costs are allocated
based on total direct manufacturing labor costs of the assembly department.
5-3
3. Calculate the budgeted unit cost of basic and deluxe trophies if Acclaim allocates overhead
costs in each department using activity-based costing, where setup costs are allocated based
on number of batches and general overhead costs for each department are allocated based on
direct manufacturing labor costs of each department.
4. Explain briefly why plant-wide, department, and activity-based costing systems show
different costs for the basic and deluxe trophies. Which system would you recommend and
why?
SOLUTION
(50 min.) Plantwide, department, and activity-cost rates.
1.
Basic Deluxe Total
Direct materials
Forming $ 60,000 $35,000
Direct manufacturing labor
Forming 30,000 20,000
Budgeted
overhead rate
=
($48, 000 $32,000 $40,000) $120,000
$200,000 $200,000
+ + =
=
$0.60 per dollar of direct cost
Basic Deluxe Total
Direct materials $ 65,000 $ 45,000 $110,000
5-4
2.
Budgeted
overhead rate
Forming Dept.
—
=
Budgeted Forming Department overhead costs
Budgeted Forming Department direct manufacturing labor costs
=
$48,000 $32,000
$30,000 $20,000
+
+
=
$80,000
$50,000 =
$1.60 per Forming Department direct manuf.-labor dollar
Budgeted
overhead rate
Assembly Dept.
—
=
Budgeted Assembly Department overhead costs
Budgeted Assembly Department direct manufacturing labor costs
=
$40,000
($15, 000 $25, 000)+
=
$40,000
$40,000 =
$1 per Assembly Department direct manuf.-labor dollar
Basic Deluxe Total
Direct materials $ 65,000 $ 45,000 $110,000
Direct manufacturing labor 45 ,000 45 ,000 90 ,000
Allocated overhead
3.
Number of batches of basic trophies = 10,000 ÷ 200 trophies per batch = 50 batches
Forming Department
Budgeted setup rate
=
$48,000
150 batches
= $320 per batch
5-5
Budgeted general oerhead rate
=
$32,000
$50,000
= $0.64 per direct manuf.-labor dollar
Assembly Department
Budgeted general overhead rate
=
$40,000
$40,000
= $1 per direct manuf.-labor dollar
Basic Deluxe Total
Direct material costs $ 65,000 $ 45,000 $110,000
Direct labor costs 45 ,000 45 ,000 90 ,000
Forming Dept. overhead
Set up
General overhead
$0.64
´
$30,000; $20,000
Assembly Department overhead
General overhead
$1
´
$15,000; $25,000
15 ,000 25 ,000 40 ,000
4. As Triumph uses more refined cost pools, the costs of basic trophies decreases, and costs of
deluxe trophies increases. This is because deluxe trophies use a higher proportion of cost drivers
Department costing systems increase the costs of deluxe trophies relative to basic
trophies because the forming and assembly department costs are allocated based on direct
I would recommend that Acclaim use the activity-based costing system because
disaggregated information can improve decisions by allowing managers to see the details that
5-6
pricing and product-mix decisions, cost reduction and process-improvement decisions, design
decisions, and to plan and manage activities. However, too much detail can overload managers
5-23 ABC, process costing. Sander Company produces mathematical and financial calculators
and operates at capacity. Data related to the two products are presented here:
Total manufacturing overhead costs are as follows:
Required
1. Choose a cost driver for each overhead cost pool and calculate the manufacturing overhead
cost per unit for each product.
2. Compute the manufacturing cost per unit for each product.
3. How might Sander’s managers use the new cost information from its activity-based costing
system to better manage its business?
SOLUTION
(10–15 min.) ABC, process costing.
1. Rates per unit cost driver.
Activity Cost Driver Rate
Machining Machine-hours $360,000 ÷ (30,000 + 60,000)
= $4 per machine hour
Manufacturing overhead cost per unit:
5-7
Mathematical Financial
Machining: $4 × 30,000; 60,000 $120,000 $240,000
Set up: $1,200 × 45; $1,200 × 45 54,000 54,000
2.
Mathematical Financial
Manufacturing cost per unit:
Direct materials
Direct manufacturing labor
3. Disaggregated information can improve decisions by allowing managers to see the details
that help them understand how different aspects of cost influence total cost per unit. Managers
5-24 Department costing, service company. DLN is an architectural firm that designs and
builds buildings. It prices each job on a cost plus 20% basis. Overhead costs in 2017 are
$8,100,000. DLN’s simple costing system allocates overhead costs to its jobs based on number
of jobs. There were three jobs in 2017. One customer, Chandler, has complained that the cost and
price of its building in Chicago was not competitive.
As a result, the controller has initiated a detailed review of the overhead allocation to determine
if overhead costs should be charged to jobs in proportion to consumption of overhead resources
by jobs. She gathers the following information:
Required
5-8
1. Compute the overhead allocated to each project in 2017 using the simple costing system that
allocates overhead costs to jobs based on the number of jobs.
2. Compute the overhead allocated to each project in 2017 using department overhead cost
rates.
3. Do you think Chandler had a valid reason for dissatisfaction with the cost and price of its
building? How does the allocation based on department rates change costs for each project?
4. What value, if any, would DLN get by allocating costs of each department based on the
activities done in that department?
SOLUTION
(20 mins.) Department costing, service company
1. Using the simple costing system, total overhead costs are equally allocated to projects.
There were 3 projects in 2017, so the overhead cost per project is
Overhead cost
per project in 2017
$8,100,000
3
=
2. Rates per unit cost driver.
Activity Cost Driver Rate
Design Design department hours $3,000,000 ÷ (2,000 + 10,000 + 8,000)
Overhead cost allocated to each project using department overhead cost rates:
Chandler Henry Manley
Design: $150 × 2,000; 10,000; 8,000 $ 300,000 $1,500,000 $1,200,000
3.
Chandler Henry Manley
5-9
a. Department rates
The overhead allocated to Chandler decreases by 23% under the department rates, the overhead
allocated to Henry increases by about 17%, and the overhead allocated to Manley increases by
The percentage of total driver units in each department used by the companies is:
Department
Cost
Driver Chandler Henry Manley
Design
Engineering
Construction
Design-hours
Engineering-hours
Labor-hours
10%
32
35
50%
32
33
40%
36
32
The Chandler project uses only 10% of design-hours in 2017 and uses 32% of
In contrast, the Henry and Manley projects use more of design (50% and 40%,
Chandler was probably complaining about the costs resulting from using the simple
4. It would not be worthwhile to further refine the cost system into an ABC system if (1) a
single activity accounts for a sizable proportion of the department’s costs or (2) significant costs
5-10
5-25 Activity-based costing, service company. Speediprint Corporation owns a small printing
press that prints leaflets, brochures, and advertising materials. Speediprint classifies its various
printing jobs as standard jobs or special jobs. Speediprint’s simple job-costing system has two
direct-cost categories (direct materials and direct labor) and a single indirect-cost pool.
Speediprint operates at capacity and allocates all indirect costs using printing machine-hours as
the allocation base.
Speediprint is concerned about the accuracy of the costs assigned to standard and special
jobs and therefore is planning to implement an activity-based costing system. Speediprint’s
ABC system would have the same direct-cost categories as its simple costing system. However,
instead of a single indirect-cost pool there would now be six categories for assigning indirect
costs: design, purchasing, setup, printing machine operations, marketing, and administration. To
see how activity-based costing would affect the costs of standard and special jobs, Speediprint
collects the following information for the fiscal year 2017 that just ended.
Required
1. Calculate the cost of a standard job and a special job under the simple costing system.
2. Calculate the cost of a standard job and a special job under the activity-based costing system.
3. Compare the costs of a standard job and a special job in requirements 1 and 2. Why do the
simple and activity-based costing systems differ in the cost of a standard job and a special
job?
4. How might Speediprint use the new cost information from its activity-based costing system
to better manage its business?
5-11
