Chapter 4 77
b.
Contracts: 21,000 $0.54
$11,340
Regulation: 27 $506
13,662
Court: 315 $230
72,450
Total
$97,452
The firm can hire an outside law firm to perform the legal work rather than do
the work internally. It is difficult to determine, without more information, how
34. a. 60 beds 360 days = 21,600
b. $3,620,400 ÷ 21,600 = $168 (rounded)
c.
Rooms [$504,000 ÷ (35 360)] = $504,000 ÷ 12,600
$ 40
Laundry [$151,200 ÷ (60 180)] = $151,200 ÷ 10,800
14
Nursing care ($1,314,000 ÷ 43,800)
30
Physical therapy ($960,000 ÷ 8,000)
120
General services ($691,200 ÷ 21,600)
32
d. Traditional: 6 $168 = $1,008
ABC:
$ 240
Laundry ($14 3)
42
180
Physical therapy ($120 30)
3,600
192
Total
$4,254
e. Traditional: 6 $168 = $1,008
$120
42
180
192
$534
35. a. $375,000 ÷ 75,000 calls = $5 per call
Cost assignment:
25 calls $5
$125
50 purchase orders $4
200
35 receiving reports $6
210
Total cost assigned
$535
78 Chapter 4
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
b. $535 ÷ 100 units = $5.35 per unit
36. a. $2,000,000 ÷ (170,000 + 30,000) = $2,000,000 ÷ 200,000 = $10 per MH
b. Utilities-related: $800,000 ÷ 200,000 = $4 per MH
Inspection-related: $1,200,000 ÷ 60,000 = $20 per inspection hour
c.
Regular
Hand-Sewn
Revenues
$ 6,400,000
$ 5,600,000
Direct costs
(5,000,000)
(4,400,000)
Overhead assigned
(880,000)
(1,120,000)
Profit before tax
$ 520,000
$ 80,000
tionaries are only generating 1.4 percent.
37. a. Overhead rate = $3,960,000 ÷ 330,000 units = $12 per unit
Mowers
Tractors
Total
Revenue
$19,500,000
$17,850,000
$37,350,000
Less:
Direct material
(4,000,000)
(2,700,000)
(6,700,000)
Direct labor
(2,800,000)
(6,000,000)
(8,800,000)
Overhead*
(3,600,000)
(360,000)
(3,960,000)
Profit (loss)
$ 9,100,000
$ 8,790,000
$17,890,000
Less: Admin. expense
(7,400,000)
Income before tax
$10,490,000
Number of units
÷ 300,000
÷ 30,000
Profit per unit
$ 30.33
$ 293.00
b. Mowers: $2,800,000 ÷ $20 per hour = 140,000 direct labor hours
Chapter 4 79
Mowers
Tractors
Total
Revenue
$19,500,000
$17,850,000
$37,350,000
Less:
Direct material
(4,000,000)
(2,700,000)
(6,700,000)
Direct labor
(2,800,000)
(6,000,000)
(8,800,000)
Overhead*
(1,260,000)
(2,700,000)
3,960,000)
Profit (loss)
$11,440,000
$ 6,450,000
$17,890,000
Less: Admin. expense
(7,400,000)
Income before tax
$10,490,000
Number of units
÷ 300,000
÷ 30,000
Profit per unit (rounded)
$ 38.13
$ 215.00
*Mowers: $9 140,000 = $1,260,000; Tractors: $9 300,000 = $2,700,000
c. Rate per DLH: $1,320,000 ÷ 440,000 = $3.00
Rate per MH: $2,640,000 ÷ 150,000 = $17.60
Mowers
Tractors
Total
Revenue
$19,500,000
$17,850,000
$ 37,350,000
Less:
Direct material
(4,000,000)
(2,700,000)
(6,700,000)
Direct labor
(2,800,000)
(6,000,000)
(8,800,000)
Overhead*
(860,000)
(3,100,000)
(3,960,000)
Profit (loss)
$11,840,000
$ 6,050,000
$ 17,890,000
Less: Admin. expense
(7,400,000)
Income before tax
$ 10,490,000
Number of units
÷ 300,000
÷ 30,000
Profit per unit (rounded)
$ 39.47
$ 201.67
= $860,000
nor inexpensively handled.
38. a. As variety in products increases, costs will also increase. Thus, the shift to
small special orders will increase costs in purchasing (more orders, more calls
customer service (new larger catalogs, possible complaints from customers re-
ceiving wrong or slightly wrong orders, more time for sales calls), production
80 Chapter 4
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
scheduling (variety in setups, increase in movement of materials depending on
production run), and laboratory work (research and development tests incurred
to make certain that the products meet the appropriate environmental and
technical requirements).
drivers and overhead costs.
39. a. Outlined below are the purpose and several characteristics of the two noted
cost systems:
(1) Inventory measurement
Meets external reporting requirements for aggregate balance sheet val-
uation and income determination.
Provides monthly and quarterly reporting.
(2) Activity-based costing
b. A cost system developed to value inventory may distort product cost infor-
mation because that system
was designed to value inventory in the aggregate and not relate to product
cost information;
uses a common departmental or factory-wide measure of activity, such as
direct labor hours or dollars (now a small portion of overall production
c. The benefits that management can expect from activity-based costing system
are that such a system:
Leads to a more competitive position by evaluating activity costs (that is,
Chapter 4 81
accessible website, in whole or in part.
Streamlines production processes by reducing non-value-added activities,
Provides management with a more thorough understanding of product
costs and product profitability for strategies and pricing decisions.
Highlights interrelationships among activities.
d. The steps that a company, using a traditional cost system, would take to im-
plement activity-based costing include:
Identify activity centers and cost drivers.
Assign costs to activity center cost pools using appropriate first-stage cost
drivers.
Assign activity center cost pools to products, services, or other cost objects
(CMA adapted)
40. a. In the modern competitive environment, firms must be willing to relinquish
unprofitable customers so that the highest quality of service is provided to the
b. There are ethical obligations in ending all business relationships. This is par-
involve an explanation as to why service is being discontinued;
be announced well in advance of discontinuing services to the customer;
c. Activity-based costing is a financial management tool. It is not a tool for ethi-
cal management of a firm, nor is it a tool that can expressly impound non–
financial, qualitative information. To the extent that factors such as customer
82 Chapter 4
accessible website, in whole or in part.
PROBLEMS
41. a. Base wages: $63,000,000 ÷ 3,150,000 = $20 per regular hour worked
Health care benefits: $10,500,000 ÷ 2,100 = $5,000 per worker
Payroll taxes: $5,018,832 ÷ $71,697,600 = $0.07 per $1 of factory wages
c. It can be inferred that the use of overtime hours minimizes some cost drivers.
42. a. Surgery: professional hours (this is an activity base that would drive many
costs related to surgery and would be easy to track)
Housing patients: days in hospital (this activity base would be easy to follow
and would account for use of time and space)
b. Total costs = $13,125,000 + $6,187,500 + $850,000 = $20,162,500
c. Professional salaries: $13,125,000 ÷ 75,000 = $175 per hr.
d. Surgery = (3,750 $175) + (12,500 $110) + (500 $340) = $656,250 +
Housing = (70,000 $175) + (27,500 $110) + (1,250 $340) = $12,250,000
Outpatient care = (1,250 $175) + (16,250 $110) + (750 $340) =
e. Surgery: $2,201,250 ÷ 3,750 = $587 per professional hour
Chapter 4 83
43. a. The high–low method can be used to determine the variable and fixed cost
portions:
High 44 POs $ 12,400
b. The number of machine setups could have increased by 14 for the following
reasons: (1) all parts of the special orders were not run at the same time; (2)
d. Engineering design and specification costs were not included in the original
e. Purchasing cost: number of purchase orders
Utilities: number of machine hours
Supervisors: number of supervisors; number of direct labor hours; number of
production runs
Depreciation: period of time
Quality control and inspection: number of desks inspected; hours of quality
control time; machine hours
hours of design time
f. OH rate based on MHs = $44,800 ÷ 6,400 = $7 per MH
No. First, the method used did not consider additional costs such as engineer-
difficulties.
84 Chapter 4
44. a. $2,362,500 ÷ (30,000 + 37,500) = $2,362,500 ÷ 67,500 = $35
Direct material cost = $544,500 ÷ 330,000 = $1.65 per pound
Product A
Product B
Direct material cost
$ 230,175
$ 314,325
Direct labor cost
360,000
450,000
Overhead
1,050,000
1,312,500
Total cost
$1,640,175
$2,076,825
Divided by # of units
÷ 15,000
÷ 7,500
Cost per unit
$ 109.345
$ 276.91
b. $2,362,500 ÷ (52,500 + 22,500) = $2,362,500 ÷ 75,000 = $31.50
Product A
Product B
Direct material cost
$ 230,175
$ 314,325
Direct labor cost
360,000
450,000
Overhead
1,653,750
708,750
Total cost
$2,243,925
$1,473,075
Divided by # of units
÷ 15,000
÷ 7,500
Cost per unit
$ 149.595
$ 196.41
c. Utilities: $750,000 ÷ 75,000 = $10 per MH
Product A
Product B
Direct material cost
$ 230,175
$ 314,325
Direct labor cost
360,000
450,000
Utilities
525,000
225,000
Setup
64,500
129,000
Material handling
599,850
819,150
Total cost
$1,779,525
$1,937,475
Divided by # of units
÷ 15,000
÷ 7,500
Cost per unit
$ 118.635
$ 258.33
45. a. Umbrella: $24 ÷ $30 = 80% of an hour; 0.80 60 minutes = 48 minutes
b. Umbrellas ($24 300,000) $ 7,200,000
c. Allocation rates:
Quality control: $630,000 ÷ 420,000 = $1.50 per unit
Chapter 4 85
accessible website, in whole or in part.
OH Cost Allocation
Umbrellas
Gazebos
Chaise Lounge
Quality control:
$1.50 300,000
$ 450,000
$1.50 30,000
$ 45,000
$1.50 90,000
$ 135,000
Setups:
$200 600
120,000
$200 1,300
260,000
$200 1,100
220,000
Material handling:
$0.30 1,200,000
360,000
$0.30 3,000,000
900,000
$0.30 1,800,000
540,000
Equipment operation:
$4.99 600,000
$4.99 1,100,000
$4.99 1,300,000
2,994,000
5,489,000
6,487,000
Total overhead
$3,924,000
$6,694,000
$7,382,000
Number of units
÷ 300,000
÷ 30,000
÷ 90,000
Cost per unit
$ 13.08
$ 223.13*
$ 82.02*
*Rounded
Total cost per unit:
DM
$12.00
$120.00
$ 12.00
DL
18.00
135.00
45.00
OH
13.08
223.13
82.02
Total
$43.08
$478.13
$139.02
d. If prices are set based on product costs, activity-based costing would generate
46. a.
Indirect labor
Dept. 1 ($682,000 $375,000)
$ 307,000
Dept. 2 ($462,000 $200,000)
262,000
Machine ($400,000 + $800,000)
1,200,000
Power
400,000
Building
1,000,000
Purchasing
100,000
Total
$3,269,000
b. Total DLHs = Dept. 1 + Dept. 2 = 25,000 + 10,000 = 35,000
86 Chapter 4
c. DLH for Product A = 20,000 in Dept. 1 + 5,000 in Dept. 2 = 25,000 DLHs
Product A
Product B
DM:
(1/2 to each for X;
all Y to B)
$ 400,000
$ 600,000
DL:
Dept. 1 (4/5, 1/5)
$300,000
$ 75,000
Dept. 2 (1/2, 1/2)
100,000
400,000
100,000
175,000
OH $93.40 per DLH
2,335,000
934,000
Total cost
$3,135,000
$1,709,000
Number of units
÷ 10,000
÷ 10,000
Cost per unit
$ 313.50
$ 170.90
d. Building occupancy: $1,000,000 ÷ 500,000 = $2 per sq. ft.
Purchasing: 10,000 $2 = $20,000
Purchasing: $100,000 direct costs + $20,000 allocated building occupancy
cost = $120,000; $120,000 ÷ 500 purchase orders = $240 per purchase order
Material X: 200 $240 = $48,000