DO IT! 4-2 (Continued)
(d) These computations show that the total overhead assigned to Product
that assigned to each BC113.
DO IT! 4-3
1. NVA
DO IT! 4-4
(a) unit-level
(b) product-level
(c) facility-level
SOLUTIONS TO EXERCISES
EXERCISE 4-1
(a)
Estimated overhead
= Predetermined overhead rate
Direct labor costs
$270,000
= 180% of direct labor cost
$50,000 + $100,000
(b)
Activity cost pools
Cost drivers
Estimated overhead
Machining
Machine hours
$170,000
Machine setup
Set up hours
100,000
Machining:
Machine setup:
$170,000
= $85 per machine hour
$100,000
= $200 per setup hour
1,000 + 1,000
400 + 100
(c)
Traditional costing
Standard
Custom
$50,000 X 180%
$90,000
$100,000 X 180%
$180,000
$90,000
$180,000
Activity-based costing
Machining:
1,000 X $85
$85,000
1,000 X $85
$85,000
Machine setup:
100 X $200
20,000
400 X $200
80,000
$105,000
$165,000
EXERCISE 4-2
(a)
Traditional costing system
Product 540X
Product 137Y
Product 249S
Sales
$180,000
$160,000
$70,000
Costs
55,000
50,000
15,000
Operating income
$125,000
$110,000
$55,000
(b)
Activity-based costing system
Product 540X
Product 137Y
Product 249S
Sales
$180,000
$160,000
$70,000
Costs
50,000
35,000
35,000
Operating income
$130,000
$125,000
$35,000
(c)
Product 540X:
($130,000 – $125,000) ÷ $125,000 = 4.00%
Product 137Y
($125,000 – $110,000) ÷ $110,000 = 13.64%
Product 249S
($35,000 – $55,000) ÷ $55,000 = (36.36%)
(d)
These costs are similar probably because the cost drivers are
essentially the same; that is, they are based on a unit volume
concept.
EXERCISE 4-3
(a)
Activity cost pools
Cost drivers
Estimated overhead
Cutting
Machine hours
$360,000
Design
Number of setups
630,000
Activity-based overhead rates
Cutting
Design
$360,000
= $1.80 per machine hour
$630,000
= $420 per setup
200,000
1,500
Wool
Cotton
Activity-based costing
Cutting
100,000 X $1.80
$180,000
100,000 X $1.80
$180,000
Design
1,000 X $420
420,000
500 X $420
210,000
Total cost allocated
$600,000
$390,000
(b)
Estimated overhead
=
$990,000
= $2.20 per direct labor hour
Direct labors hours
450,000
Wool
Cotton
Traditional costing
225,000 X $2.20
$495,000
225,000 X $2.20
$495,000
The wool product line is allocated $105,000 ($600,000 – $495,000) more
EXERCISE 4-4
(a)
Direct labor hours for car wheels
(40,000 X 1)
= 40,000
Direct labor hours for truck wheels
(10,000 X 3)
= 30,000
Total direct labor hours
70,000
$770,000
(total estimated overhead)
= $11 per direct labor hour.
70,000
(total direct labor hours)
Overhead assigned
Car wheels
(40,000 X $11)
= $440,000
Truck wheels
(30,000 X $11)
= 330,000
Total overhead
$770,000
(b)
Activity Cost Pool
Estimated
Overhead
÷
Expected
Use of
Cost
Drivers
=
ABC
Overhead
Rate
Setting up machines
$220,000
1,000
$220
Assembling
280,000
70,000
$ 4
Inspection
270,000
1,200
$225
(c)
Car Wheels
Activity Cost Pools
Expected Use
of Cost Driver
per Product
X
Activity-Based
Overhead
Rates
=
Cost
Assigned
Setting up machines
200
$220
$ 44,000
Assembling
40,000
$ 4
160,000
Inspection
100
$225
22,500
Total cost assigned
$226,500
EXERCISE 4-4 (Continued)
(c)
Truck Wheels
Activity Cost Pools
Expected use
of Cost Driver
per Product
X
Activity-
Based
Overhead
Rates
=
Cost
Assigned
Setting up machines
800
$220
$176,000
Assembling
30,000
$ 4
120,000
Inspection
1,100
$225
247,500
Total cost assigned
$543,500
(d) Assuming that the cost drivers are a reasonable representation of
what is occurring in the two product lines, it seems appropriate to
EXERCISE 4-5
(a)
Activity Cost Pools
Estimated Overhead
÷
Expected use
of Cost Drivers
=
ABC Overhead Rates
Scheduling and travel
$105,000
1,500
$ 70.00
Setup time
$ 70,000
700
$100.00
Supervision
$ 60,000
$400,000*
$ .15
Commercial
Activity Cost Pools
Expected use of Cost
Drivers per Product
X
ABC Overhead Rates
=
Cost Assigned
Scheduling and travel
1,000
$ 70.00
$ 70,000
Setup time
450
$100.00
45,000
Supervision
$100,000
$ .15
15,000
Total assigned costs
$130,000
Residential
Activity Cost Pools
Expected use of Cost
Drivers per Product
X
ABC Overhead Rates
=
Cost Assigned
Scheduling and travel
500
$ 70.00
$ 35,000
Setup time
250
$100.00
25,000
Supervision
$300,000
$ .15
45,000
Total assigned costs
$105,000
(b)
Commercial
Residential
Revenues
$300,000
$480,000
Direct material costs
$ 30,000
$ 50,000
Direct labor costs
100,000
300,000
Overhead costs
130,000
260,000
105,000
455,000
Operating income (loss)
$ 40,000
$ 25,000
(c) Assuming that the cost drivers are a reasonable representation of
what is occurring in the two product lines, it seems appropriate to
EXERCISE 4-6
(a) Traditional costing:
(1) One mobile safe:
(2) One walk-in safe:
(b) Activity-based costing:
(1) Material handling costs
(a) One mobile safe:
(b) One walk-in safe:
(2) Purchasing activity costs
(a) One mobile safe:
(b) One walk-in safe:
EXERCISE 4-6 (Continued)
(c) The total amount of overhead allocated to each unit of the two products
under the two allocation approaches is:
Traditional
Costing
Activity-Based
Costing
Mobile safe
Walk-in safe
$ 416
$3,536
** $761.25**
$ 2,155**
EXERCISE 4-7
The following activities might be identified at Quik Prints Company from
your analysis of its operations and a discussion with the owner-manager,
Terry Morton.
1. Hiring and training personnel
2. Purchasing supplies and materials
3. Selling, promoting, and marketing
4. Billing and collecting
EXERCISE 4-8
Budgeted Costs
Activity Cost Pool
Cost Driver
Engineering design
Engineering prototypes
Engineering
Engineering hours
Depreciation, machinery
Electricity, machinery
Machinery
Machine hours
Machine setup, indirect labor
Machine setup, indirect
materials
Machine setup
Number of setups
Inspections
Tests
Quality control
Number of tests or
inspections
Depreciation, plant
Insurance, plant
Property taxes
Oil, heating
Electricity, plant lighting
Factory utilities
Square feet or
Machine hours
Machine maintenance wages
Maintenance
Number of
machines or
Machine hours
EXERCISE 4-9
1.
2.
3.
4.
5.
6.
7.
8.
Labor hours
Labor hours
Labor hours
Gallons of chemicals
Number of cartfuls or
labor hours
Number of cartfuls
Gallons of juice
Gallons of juice
9.
10.
11.
12.
13.
14.
15.
Gallons of wine or months of aging
Number of bottles
Number of bottles
Number of boxes
Number of shipments
Number of gallons processed
Number of gallons processed