Chapter 5: Activity-Based Cost Systems
–107–
Labor
Vanilla
Chocolate
Straw-
berry
Mocha-
Almond
Total
Number of
production runs
18
16
4
3
Handle production
run (hours/run)
2.5
2.5
2.5
2.5
Indirect labor:
handle runs
45.0
40.0
10.0
7.5
102.5
Setup time per run
(hours)
2.0
1.0
2.0
3.2
Number of
employees per
changeover
2
2
2
2
Indirect labor
hours per run
4.0
2.0
4.0
6.4
Indirect labor: total
setup hours
72.0
32.0
16.0
19.2
139.2
Indirect labor:
maintain products
8.0
8.0
8.0
8.0
32.0
Total indirect labor
hours
80.0
34.0
34.7
273.7
Volume (gallons)
15,500
13,000
1,600
1,200
31,300
Direct labor hours
per gallon
0.025
0.025
0.025
0.025
Total direct labor
hours
387.5
325.0
40.0
30.0
782.5
Total labor hours
512.5
405.0
74.0
64.7
1,056.2
Productive hours
per employee per
month
133.0
Number of
employees needed
7.9
Number of full-
time employees
8.0
–108–
Machines
Vanilla
Chocolate
Straw-
Berry
Mocha-
Almond
Total
Production
volume
15,500
13,000
1,600
1,200
Machine hours
per 1000 gallons
11
11
11
11
Total machine
run time (hours)
170.5
143.0
17.6
13.2
344.3
Number of
production runs
18
16
4
3
Setup time per
run (hours)
2.0
1.0
2.0
3.2
Machine setup
time (hours)
36.0
16.0
8.0
9.6
69.6
Total machine
hours
206.5
159.0
25.6
22.8
413.9
Productive
hours per month
154.0
Number of
machines
needed (rounded
up)
3.0
are rounded):
Vanilla
Chocolate
Straw-
berry
Mocha-
Almond
Total
Selling price
$ 2.90
$ 2.90
$ 3.40
$ 4.00
$ 2.97
Sales volume
15,500
13,000
1,600
1,200
31,300
Revenues
$44,950
$ 37,700
$ 5,440
$ 4,800
$ 92,890
Direct
materials
9,300
7,800
960
780
18,840
Direct labor
(including
fringes)
13,563
11,375
1,400
1,050
27,388
Indirect labor
4,375
2,800
1,190
1,215
9,580
Machinery
10,325
7,950
1,280
1,140
20,695
Gross profit
$7,387
$ 7,775
$610
$ 615
$16,387
Gross profit
16.4%
20.6%
11.2%
12.8%
17.6%
Chapter 5: Activity-Based Cost Systems
–109–
(% of sales)
(c) The cost of the 8 production employees is 8 × $4,655 = $37,240 and the
unused labor capacity cost is therefore $37,240 − $27,388 − $9,580 =
$272. The cost of the 3 machines is 3 × $7,700 = $23,100 and the
5-22 Activity-based costing provides a means to accurately trace costs to
operational processes, and these costs can be used as one of the operations
management measures in the process perspective of a Balanced Scorecard.
5-23 The choice really depends on what short-term problems the company faces. If
it is experiencing large, rising, and difficulty-to-control indirect and support
costs, as well as a proliferation of products and customers, then an activity-
based costing system will supply valuable information to management
decisions on process improvements, product mix, pricing, and managing
If, however, the biggest issue the company faces is moving to a new strategy,
particularly one focused on customers and a new value proposition, then
implementing the Balanced Scorecard will be highly beneficial in
Atkinson, Solutions Manual t/a Management Accounting, 6E
–110–
Of course, both approaches are highly compatible with each other.
5-24 (a) Each server is available for (22 days) × (24 hours per day) = 528 hours
per month. The average cost per hour is therefore $3,696/528 hours = $7
per hour. Non-peak-hour usage accounts for (20 servers) × (16 hours per
(b) As discussed in part (a), the peak-usage hours should bear the cost of
5–25 (a)
Activity
Percent
Assigned
Cost*
Cost
Driver
Quantity
Activity
Cost Driver
Rate**
Handle customer
orders
75%
$450,000
8,000
$56.25 per
customer order
Process customer
complaints
10%
$60,000
400
$150.00 per
customer complaint
Perform customer
credit checks
15%
$90,000
450
$200.00 per
credit check
100%
$600,000
* $600,000 times the given percentage.
** Assigned Cost divided by Cost Driver Quantity.
(b) Capacity cost rate = $600,000/10,000 = $60 per hour.
Activity
Unit
Time
(Hours)
Activity Cost Driver Rate
Handle customer orders
0.75
$45
Per customer order
Process customer complaints
3.50
$210
Per customer complaint
Perform customer credit checks
3.00
$180
Per credit check
Chapter 5: Activity-Based Cost Systems
–111–
–112–
(c)
Activity
Unit
Time
(Hours)
Quantity
of
Activities
Total
Hours
Cost
Assigned
Handle customer orders
0.75
8,000
6,000
$360,000
Process customer complaints
3.50
400
1,400
$84,000
Perform customer credit checks
3.00
450
1,350
$81,000
Total
8,750
$525,000
Practical capacity used = 8,750 10,000 = 87.5%
(d)
Activity
Unit
Time
(Hours)
Quantity
of
Activities
Total
Hours
Cost
Assigned
Handle customer orders
0.75
8,500
6,375
$382,500
Process customer
complaints
3.50
350
1,225
$73,500
Perform customer credit
checks
3.00
500
1,500
$90,000
Total
9,100
$546,000
Chapter 5: Activity-Based Cost Systems
–113–
in part (a) overestimated the costs of performing activities by
apportioning all customer service costs to the three activities and
activity and about the unused capacity.
5-26 (a) The resource units would depend on the organization’s facilities and
resources. If the organization is self-contained with operating rooms,
recovery rooms, and radiology and pharmacy facilities, then these
(b) Capacity cost rates must be developed for each resource. Then, for each
patient, track their routing through the clinic to identify which resources
the patient uses, and how much time is spent with each resource.
5-27 (Unofficial CMA Answer, adapted)
(a) 1. Manufacturing support costs include all indirect production costs
(all production costs except direct material and direct labor).
methods. Typical manufacturing support costs include:
• Indirect labor, e.g., lift-truck driver’s wages, maintenance and
inspection labor, engineering labor, scheduling, purchasing
and supervisors.
equipment, rent expense, and utility expense.
Atkinson, Solutions Manual t/a Management Accounting, 6E
–114–
the end of a fiscal period.
(b) The cost driver rate increase should not have a negative impact on Moss
Manufacturing because the increase in indirect costs was offset by a
decrease in direct labor costs.
follows:
• Accumulate separate costs into departmental accounts (or other
relevant pools), with one account for each production and service
department. Each department would allocate its support costs to
(d) An activity-based costing system might benefit Moss Manufacturing
because it
• measures the cost of unused resource capacity and provides more accurate
company profitability
• costs products according to the activities involved in the
production process.
5-28 (a) A call-related activity cost driver would better identify the linkage to
Chapter 5: Activity-Based Cost Systems
–115–
(b)
Product X
Product Y
Previous system: Allocated support costs:
5% of sales
$20,000
$5,000
Activity-based costs: $.70 per minute
$4,900
$21,000
might include a company web address that provides answers to
frequently asked questions (based on calls to the call center).
(d) Product Y’s manager is likely to resist implementation of the activity–
center staff may also fear that the desire for cost or efficiency
improvements will lead to staff reduction or to outsourcing the entire
call center.
center staff to improve efficiency and lower costs per minute.
5-29 (a) Manufacturing support cost driver rate
$
,
,
,
,
$
.
1
1
5
0
0
0
0
0
1
0
0
0
0
0
3
0
0
0
0
0
2
8
7
5
p
e
r
d
i
r
e
c
t
l
a
b
o
r
h
o
u
r.
–116–
Costs Per Unit
Product X21
Product Y37
Direct materials cost
$120.00
$140.00
Direct labor cost
2 $(1,000,000100,000)
20.00
3 $(4,500,000300,000)
45.00
Manufacturing support cost
$28.75 (100,00050,000)
57.50
$28.75 (300,000100,000)
86.25
Unit cost
$197.50
$271.25
(b)
Cost
Cost
Costs Allocated to Products
Activity
Capacity
costs
Driver
Quantity
Driver
Rate
X21
Y37
Handling
$3,000,000
60,000
50
50 40,000
50 20,000
Number
of parts
2,400,000
20,000
120
120 12,000
120 8,000
Design
changes
3,300,000
3,000
1,100
1,100 2,000
1,100 1,000
Setups
2,800,000
14,000
200
200 8,000
200 6,000
$11,500,000
$7,240,000
$4,260,000
Costs Per Unit
X21
Y37
Direct materials cost
$120.00
$140.00
Direct labor cost
20.00
45.00
Manufacturing support cost
$7,240,000 50,000
144.80
$4,260,000 100,000
42.60
Unit cost
$284.80
$227.60
costs.