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e.
Product A
Product B
Indirect labor
Department 1 ($307,000)
(Total ILHs for A = 2,500 + 5,000 + 252 = 7,752)
(Total ILHs for B = 2,400 + 10,000 + 248 = 12,648)
Total indirect labor hours = 20,400
(7,752 ÷ 20,400 = 38%)
$116,660
(12,648 ÷ 20,400 = 62%)
$ 190,340
Department 2 ($262,000)
(Total ILHs for A = 2,680 + 1,000 + 250 = 3,930)
(Total ILHs for B = 5,000 + 3,860 + 310 = 9,170)
Total indirect labor hours = 13,100
(3,930 ÷ 13,100 = 30%)
78,600
(9,170 ÷ 13,100 = 70%)
183,400
Power
Total MHs in Dept. 1 = 5,000 + 10,000 = 15,000
Dept. 1 = $72,000 (Product A, 1/3; Product B, 2/3)
24,000
48,000
Total MHs in Dept. 2 = 5,000 + 20,000 = 25,000
Dept. 2 = $408,000 (Product A, 1/5; Product B, 4/5)
81,600
326,400
Machinery-related (same basis as Power)
Department 1 (1/3, 2/3)
133,333
266,667
Department 2 (1/5, 4/5)
160,000
640,000
Building occupancy (same basis as Power)
Department 1 (1/3, 2/3)
133,333
266,667
Department 2 (1/5, 4/5)
100,000
400,000
Purchasing
Total lbs. of X = 50,000 + 50,000 = 100,000
Total lbs. of Y= 100,000
Material X $48,000 (Product A, 1/2; Product B, 1/2)
24,000
24,000
Material Y $72,000 (all Product B)
0
72,000
Total overhead cost
$851,526
$2,417,474
f.
Product A
Product B
Raw material X (1/2, 1/2)
$ 400,000
$ 400,000
Raw material Y (all B)
0
200,000
Direct labor––Dept. 1 (4/5, 1/5)
300,000
75,000
Direct labor––Dept. 2 (1/2, 1/2)
100,000
100,000
Overhead (from part e)
851,526
2,417,474
Total product costs
$1,651,526
$3,192,474
Number of units
÷10,000
÷10,000
Cost per unit
$ 165.15*
$ 319.25*
*Rounded
[Adapted from Roth and Borthick, “Getting Closer to Real Product Costs,” Man-
agement Accounting (May 1989), pp. 28–33.]
88 Chapter 4
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47. a. Allocation rates:
Utilities: $1,800,000 ÷ 90,000 = $20 per MH; assigned to products using
Scheduling & setup: $1,638,000 ÷ 1,170 = $1,400 per setup; assigned to prod-
Material handling: $3,840,000 ÷ 2,400,000 = $1.60 per lb.; assigned to prod-
PRODUCTS
A
B
C
Direct costs
$ 120,000
$ 120,000
$ 135,000
Utilities
900,000
300,000
600,000
Scheduling & setup
273,000
798,000
567,000
Material handling
1,200,000
720,000
1,920,000
Total
$ 2,493,000
$1,938,000
$3,222,000
Units produced
÷ 60,000
÷ 30,000
÷ 90,000
Cost per unit
$ 41.55
$ 64.60
$ 35.80
b. Total overhead = $1,800,000 + $1,638,000 + $3,840,000 = $7,278,000; Total
(1)
Product A
Product B
Product C
Direct costs
$ 120,000
$ 120,000
$ 135,000
Overhead
2,328,960
1,310,040
3,639,000
Total
$ 2,448,960
$1,430,040
$ 3,774,000
Units produced
÷60,000
÷30,000
÷90,000
Cost per unit
$ 40.82
$ 47.67
$ 41.93
(2) Traditional
Product A: $40.82 1.25 = $51.03
Product B: $47.67 1.25 = $59.59
To the extent that there is error in determining costs, mispricing will also exist
when prices are set based on costs, as is evident in this problem. Although
Chapter 4 89
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accessible website, in whole or in part.
traditional costing system would result in underpricing Product B and over-
pricing Product C, which would affect both sales volume and company profit-
ability.
48. a. Predetermined rate using MHs: $5,850,000 ÷ 1,000,000 = $5.85 per MH
b.
Direct material
$ 50,000
Direct labor
150,000
Applied overhead (5,000 $5.85)
29,250
Total cost
$229,250
Divided by number of doors
÷ 2,500
Cost per door
$ 91.70
c. Predetermined rate per activity per unit of cost driver:
Electric power: $500,000 ÷ 200,000 = $2.50 per kilowatt hour
Cost per door:
Direct material
$ 50,000
Direct labor
150,000
Applied overhead
Electric power ($2.50 500)
$ 1,250
Work cells ($10 1,000)
10,000
Material handling ($5 20)
100
Quality control ($20 15)
300
Setups ($14 6)
84
11,734
Total cost
$211,734
Number of doors
÷ 2,500
Cost per door (rounded)
$ 84.69
will be a profit. In determining the selling price of the door under both meth-
ods, add 40 percent of total manufacturing costs:
Present System
ABC System
Unit costs
$ 91.70
$ 84.69
Plus gross profit at 40%
36.68
33.88
Selling price
$128.38
$118.57
90 Chapter 4
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products at a lower price than competitors while maintaining the same gross
margin ratio.
cent) of manufacturing overhead costs.
[Adapted from Nabil Hassa, Herbert E. Brown, and Paul M. Saunders, “Management
Accounting Case Study: Beaver Window Inc.,” Management Accounting Campus
49. a. Advantages associated with activity-based costing systems include:
highlighting non-value-added activities so that they can be reduced or elim-
inated;
improving the accuracy of product costing by tightening associations be-
tween costs and their causes;
b. VOH rate = $1,120,000 ÷ 280,000 = $4 per DLH
Product #347
Product #658
Direct material
65,000 $80
$5,200,000
40,000 $140
$ 5,600,000
Direct labor
65,000 1.5 $14
1,365,000
40,000 4 $14
2,240,000
Variable overhead
65,000 1.5 $4
390,000
40,000 4 $4
640,000
Machine charge
65,000 0.5 $10
325,000
40,000 1.5 $10
600,000
Material handling charge
65,000 $80 0.10
520,000
40,000 $140 0.10
560,000
Total cost of production
$7,800,000
$ 9,640,000
Sales
$9,750,000
$12,000,000
Total costs
(7,800,000)
(9,640,000)
Contribution
$1,950,000
$ 2,360,000
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c.
Product #347
Product #658
Direct material
65,000 $80
$5,200,000
40,000 $140
$ 5,600,000
Material overhead
Procurement ($0.10 per part)
162,500
220,000
Prod. scheduling ($2 per unit)
130,000
80,000
Pack. & ship. ($4 per unit)
260,000
160,000
Variable overhead
Machine setup ($1.60 per setup)
208,000
192,000
Waste disposal ($3 per pound)
3,900
42,000
Quality contr. ($3.50 per insp.)
227,500
280,000
General sup. ($0.60 per unit)
39,000
24,000
Manufacturing:
Mach. ins. ($0.40 per part)
624,000
560,000
Manual ins. ($4 per part)
260,000
3,200,000
Wave solder. ($1.20 per unit)
78,000
48,000
Total costs
$7,192,900
$10,406,000
Sales
$9,750,000
$12,000,000
Total costs
(7,192,900)
(10,406,000)
Contribution
$2,557,100
$ 1,594,000
d. Based on the calculations made in (a), Product #658 appears to be more profitable
(in total dollars of gross profit) than Product #347. Under ABC allocations, Prod-
uct #347 appears to generate a greater dollar contribution toward profits than
Product #658; additionally the rate of return for Product #347 (26.2%) is much
(CMA adapted)
50. a.
Assignment of overhead costs:
Altamont
Ballard
Circleville
General administration
$155,420
$122,700
$130,880
Project costing
21,600
13,920
12,480
A/P/Receiving
62,550
52,820
23,630
A/R
24,440
18,330
4,230
Payroll
10,200
11,700
8,100
Personnel recruiting
15,200
7,600
15,200
Employee ins. processing
4,760
5,460
3,780
Proposals
54,210
68,110
16,680
Sales meetings
96,960
74,740
30,300
Shipping
9,600
12,000
2,400
Ordering
20,160
16,320
11,520
Duplicating costs
19,780
17,940
8,280
Blueprinting
34,650
27,720
14,630
Total
$529,530
$449,360
$282,110
Direct overhead
195,000
286,100
203,500
Total overhead
$724,530
$735,460
$485,610
92 Chapter 4
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b.
Altamont
Ballard
Circleville
Sales
$1,500,000
$1,419,000
$1,067,000
Direct labor
(382,000)
(317,000)
(325,000)
Direct material
(281,000)
(421,000)
(185,000)
Net contribution
$ 837,000
$ 681,000
$ 557,000
c.
Altamont
Ballard
Circleville
Net contribution
$ 837,000
$ 681,000
$ 557,000
Overhead
(724,530)
(735,460)
(485,610)
Contribution
$ 112,470
$ (54,460)
$ 71,390
d. It is apparent that there are weaknesses in the traditional product costing system
that are having a profound effect on profitability measures. Relative to profit
(IMA adapted)
51. a. Send/receive goods: $50,000 ÷ 500,000 = $0.10 per lb.
Store goods: $16,000 ÷ 80,000 = $0.20 per cubic foot
Move goods: $20,000 ÷ 5,000 = $4.00 per square foot
Identify goods: $8,000 ÷ 500 = $16.00 per package
b. Barfield: 40,000 $0.16 = $6,400
c. Barfield: $9,280 1.4 = $12,992
charged to the three customers.
[Adapted from Harold P. Roth and Linda T. Sims, “Costing for Warehousing and Distri-
Chapter 4 93
52. a. $1,200,000 ÷ 100,000 = $12 per unit
b. Setups: $360,000 ÷ 40 = $9,000 per setup
Material handling: $480,000 ÷ $500,000 = $0.96 per $1 of DM cost
Regular
Special
Total
Setups (20 $9,000; 20 $9,000)
$180,000
$180,000
$ 360,000
MH ($320,000 $0.96; $180,000 $0.96)
307,200
172,800
480,000
QC* (1,200 $40; 1,800 $40)
48,000
72,000
120,000
Other (80,000 $2.40; 20,000 $2.40)
192,000
48,000
240,000
Total
$727,200
$472,800
$1,200,000
Number of units
÷ 80,000
÷ 20,000
OH cost per unit
$ 9.09
$ 23.64
2.5X = 3,000; X = 1,200 Regular; 1.5X = 1,800 Special
c.
Traditional system:
Regular
Special
Total
Direct material
$ 320,000
$180,000
$ 500,000
Direct labor
480,000
140,000
620,000
OH (80,000 $12; 20,000 $12)
960,000
240,000
1,200,000
Total cost
$1,760,000
$560,000
$2,320,000
Number of units
÷ 80,000
÷ 20,000
Cost per unit
$ 22.00
$ 28.00
ABC system:
Direct material
$ 320,000
$180,000
$ 500,000
Direct labor
480,000
140,000
620,000
OH
727,200
472,800
1,200,000
Total cost
$1,527,200
$792,800
$2,320,000
Number of units
÷ 80,000
÷ 20,000
Cost per unit
$ 19.09
$ 39.64
d.
Regular
Special
Cost per unit (traditional)
$22.00
$28.00
Cost per unit (ABC)
19.09
39.64
Increase (decrease) per unit
$ (2.91)
$11.64
Percentage increase (decrease)
(13.2)%
41.6%
the special units to some extent.
94 Chapter 4
e. A non-value-added (NVA) activity
lengthens the production or performance time.
increases the cost of product or services without adding product or service
value.
is one for which the customer would not be willing to pay.
provement of efficiencies in those that are deemed necessary.
f. Power could reduce costs by considering some or all of the following actions:
cesses to standardize them. Both products’ designs should be studied to see
if the most efficient processes are being used. The company may be able to
reduce the complexity and number of parts, tools, and processes required,
The company should examine the factory layout; significant material han-
dling costs could be resulting from an inefficient layout, resulting in excess
movement of materials to work stations.
Management should examine the need for hand inspection of each unit. The
53. a. Machine setup: $20,000 ÷ 200 = $100 per setup
Inspection: $130,000 ÷ 6,500 = $20 per inspection
Material handling: $80,000 ÷ 8,000 = $10 per move
Engineering: $50,000 ÷ 1,000 = $50 per hour
Job 101:
Machine setup (1 $100)
$ 100
Inspection (20 $20)
400
Material handling (30 $10)
300
Engineering (10 $50)
500
Total OH
$1,300
Chapter 4 95
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b.
Job 102:
Machine setup (2 $100)
$ 200
Inspection (10 $20)
200
Material handling (10 $10)
100
Engineering (50 $50)
2,500
Total OH
$ 3,000
Cost of Job 102:
Direct material
$12,000
Direct labor
2,000
OH
3,000
Total cost
$17,000
Number of units
÷ 50
Cost per unit
$ 340
c.
Job 103:
Machine setup (4 $100)
$ 400
Inspection (30 $20)
600
Material handling (50 $10)
500
Engineering (10 $50)
500
Total OH
$ 2,000
Cost of Job 103:
Direct material
$ 8,000
Direct labor
4,000
OH
2,000
Total cost
$14,000
Number of units
÷ 200
Cost per unit
$ 70
Selling price = $70 1.4 = $98 per unit
d.
Total budgeted OH cost
$280,000
Total budgeted DL cost
÷ $100,000
OH per DL $
$ 2.80
Cost of Job 103:
Direct material
$ 8,000
Direct labor
4,000
OH ($2.80 $4,000)
11,200
Total cost
$ 23,200
Number of units
÷ 200
Cost per unit
$ 116
selling price. Other products may have been significantly undercosted. The