PROBLEM 4-3A (Continued)
Total manufacturing cost per stairway under ABC:
Direct materials ……………………………………………………………. $ 103,600
Direct labor ………………………………………………………………….. 112,000
(d) The difference between the traditional cost and the activity-based cost
per unit, $1,356.56 versus $1,134.20, is not great in amount but $222.36
($1,356.56 – $1,134.20) is 19.6% of the more correct ABC cost per
PROBLEM 4-4A
(a) Computation of unit costs—traditional costing
Overhead cost per direct labor hour is $1,241,660 ÷ (150,000 + 27,000) =
$7.015
Products
Manufacturing Costs
CoolDay
LiteMist
Direct materials
Direct labor
Overhead
$0.400
0.500
0.351*
$1.251
$1.200
0.900
0.631**
$2.731
*$7.015 X .05 **$7.015 X .09
(b)
Activity Cost Pools
Estimated
Overhead
÷
Expected Use
of Cost Drivers
=
Activity-Based
Overhead Rates
Grape processing
Aging
Bottling and corking
Labeling and boxing
Maintain and inspect
equipment
$ 145,860
396,000
270,000
189,000
240,800
$1,241,660
6,600
6,600,000
900,000
900,000
800
$22.10 per cart
$ 0.06 per month
$ 0.30 per bottle
$ 0.21 per bottle
$301 per inspection
(c)
CoolDay
LiteMist
Activity Cost Pools
Expected
Use of
Cost
Drivers
X
Activity-
Based
Overhead
Rates
=
Cost
Assigned
Expected
Use of
Cost
Drivers
X
Activity-
Based
Overhead
Rates
=
Cost
Assigned
Grape processing
Aging
Bottling and corking
Labeling and boxing
Maintain and inspect
equipment
Total costs assigned (a)
Liters produced (b)
Overhead cost per
liter [(a) ÷ (b)]
6,000
3,000,000
600,000
600,000
350
$22.10
$ 0.06
$ 0.30
$ 0.21
$301
$132,600
180,000
180,000
126,000
105,350
$723,950
3,000,000
$0.241
600
3,600,000
300,000
300,000
450
$22.10
$ 0.06
$ 0.30
$ 0.21
$301
$ 13,260
216,000
90,000
63,000
135,450
$517,710
300,000
$1.726
PROBLEM 4-4A (Continued)
(d)
Products
Manufacturing Costs
CoolDay
LiteMist
Direct materials
Direct labor
Overhead
$0.400
0.500
0.241
$1.141
$1.200
0.900
1.726
$3.826
(e) To: Mr. Jack Eller
From: Student
Subject: Product costs using traditional approach versus ABC
The memorandum covers the following points:
a. ABC allocates overhead costs as a function of each product’s use
b. Traditional approaches that allocate costs as a function of volume
tend to be biased toward allocating too much overhead to high
c. In the case of the Benton Corporation, the LiteMist product required
the company to begin using more complex methods and equipment.
PROBLEM 4-5A
(a) Computation of assigned overhead under traditional costing (“direct
labor dollars” appears in the first line of the schedule of overhead data):
Predetermined overhead rate X direct labor dollars
(b) (1) Computation of activity-based overhead rates:
Activity Cost Pools
Estimated
Overhead
÷
Expected Use of
Cost Drivers per Activity
=
Activity-Based
Overhead Rates
Employee training
Typing and secretarial
Computing
Facility rental
Travel
$216,000
76,200
204,000
142,500
81,300
$720,000
$1,800,000 Direct labor dollars
2,500 Reports/forms
60,000 Minutes
40 Employees
Direct
$.12 per DL dollar
$30.48 per report/form
$3.40 per minute
$3,562.50 per employee
Direct
(2) Assignment of overhead to audit and tax services:
Audit
Tax
Activity Cost Pools
Expected
Use of
Cost
Driver
X
Activity-
Based
Overhead
Rate
=
Cost
Assigned
Expected
Use of
Cost
Driver
X
Activity-
Based
Overhead
Rate
=
Cost
Assigned
Employee training
Typing and secretarial
Computing
Facility rental
Travel
$1,050,000
800
25,000
22
56,000
$.12
$30.48
$3.40
$3,562.50
Direct
$126,000
24,384
85,000
78,375
56,000
$750,000
1,700
35,000
18
25,300
$.12
$30.48
$3.40
$3,562.50
Direct
$ 90,000
51,816
119,000
64,125
25,300
Overhead costs
assigned
$369,759
$350,241
PROBLEM 4-5A (Continued)
(c) Overhead is assigned to the two service lines as follows:
Audit
Tax
Traditional costing
ABC
Difference
$420,000
369,759
$ 50,241
$300,000
350,241
$ 50,241
ability of each service.
PROBLEM 4-1B
(a) Computation of unit costs—traditional costing.
VideoPlus, Inc.
Products
Manufacturing Costs
Standard Model
Deluxe Model
Direct materials
Direct labor
Overhead
Total unit cost
$11
18
* 15*
$44
$42
18
* 15*
$75
*$7.50 X 2 = $15
(b) VideoPlus, Inc.
Activity Cost Pool
Estimated
Overhead
÷
Expected
Use of Cost Drivers
=
Activity-Based
Overhead Rate
Purchasing
Receiving
Assembling
Testing
Finishing
Packing and shipping
$ 126,000
30,000
444,000
115,000
140,000
195,000
$1,050,000
400 Orders
20,000 Pounds
74,000 Parts
23,000 Tests
70,000 Units
80,000 Pounds
$315.00 per order
$ 1.50 per pound
$ 6.00 per part
$ 5.00 per test
$ 2.00 per unit
$ 2.4375 per pound
(c) VideoPlus, Inc.
Standard Model
Deluxe Model
Activity Cost Pool
Expected
Use of
Drivers
X
Overhead
Rates
=
Cost
Assigned
Expected
Use of
Drivers
X
Overhead
Rates
=
Cost
Assigned
Purchasing
Receiving
Assembling
Testing
Finishing
Packing and shipping
Total costs assigned
Units produced
100
4,000
20,000
10,000
20,000
18,000
$315.00
$ 1.50
$ 6.00
$ 5.00
$ 2.00
$ 2.4375
$ 31,500
6,000
120,000
50,000
40,000
43,875
$291,375
20,000
300
16,000
54,000
13,000
50,000
62,000
$315.00
$ 1.50
$ 6.00
$ 5.00
$ 2.00
$ 2.4375
$ 94,500
24,000
324,000
65,000
100,000
151,125
$758,625
50,000
Overhead cost per unit
$14.57
$15.17
PROBLEM 4-1B (Continued)
(d) VideoPlus, Inc.
ABC Manufacturing Costs
Standard Model
Deluxe Model
Direct materials
Direct labor
Overhead
Total cost per unit
$11.00
18.00
14.57
$43.57
$42.00
18.00
15.17
$75.17
(e)
Activity
Value- vs. Non-value-added
Purchasing
Receiving
Assembling
Testing
Finishing
Packing and shipping
Non-value-added
Non-value added
Value-added
Non-value-added
Value-added
Value-added
(f) (1) Activity-based costing shows the standard model absorbs about
(2) The comparison of ABC and traditional costing shows that the
proper amount of overhead assigned to the two products in this
PROBLEM 4-2B
(a) The allocation of total manufacturing overhead using activity-based
costing is as follows:
Elite
Preferred
Overhead Rate
Drivers
Used
Cost
Assigned
Drivers
Used
Cost
Assigned
Total
Overhead
Purchase orders @ $31
Machine setups @ $29
Machine hours @ $31
Inspections @ $89
Total assigned costs (a)
Units produced (b)
Cost per unit (a) ÷ (b)
11,250
11,000
40,000
2,750
$ 348,750
319,000
1,240,000
244,750
$2,152,500
20,000
$107.63
13,750
9,000
60,000
2,250
$ 426,250
261,000
1,860,000
200,250
$2,747,500
10,000
$274.75
$ 775,000
580,000
3,100,000
445,000
$4,900,000
were:
Elite
Preferred
Direct materials
Direct labor
Manufacturing overhead
Total cost per unit
Sales price per unit
Cost per unit
Gross profit
$ 600.00
100.00
107.63
$ 807.63
$1,400.00
807.63
$ 592.37
$ 320.00
80.00
274.75
$ 674.75
$1,100.00
674.75
$ 425.25
of producing the Preferred system.
PROBLEM 4-3B
(a) Predetermined overhead rate using materials cost:
$550,000 ÷ $500,000 = 110% of materials cost
Direct materials ……………………………………………………… $ 5,200
Direct labor ……………………………………………………………. 3,500
Computation of Activity-Based Overhead Rate
Activity Cost Pools
Estimated
Overhead
÷
Total
Estimated Drivers
=
Activity-Based
Overhead Rate
Purchasing
Handling materials
Production
Setting up machines
Inspecting
Inventory control
Utilities
$ 45,000
50,000
130,000
85,000
60,000
80,000
100,000
$550,000
500 Orders
5,000 Moves
65,000 D/L Hours
1,000 Setups
4,000 Inspections
40,000 Components
50,000 Sq. ft.
$90 per order
$10 per move
$ 2 per D/L hour
$85 per setup
$15 per inspection
$ 2 per component
$ 2 per sq. ft.
Assignment of Overhead to Order of 12 armoires
Activity Cost Pools
Expected Use of
Drivers
X
Activity-Based
Overhead Rate
=
Cost Assigned
Purchasing
Handling materials
Production
Setting up machines
Inspecting
Inventory control
Utilities
3 Orders
32 Moves
200 D/L Hours
4 Setups
20 Inspections
640 Components
320 Sq. ft.
$90
$10
$ 2
$85
$15
$ 2
$ 2
$ 270
320
400
340
300
1,280
640
Total overhead assigned
$3,550
PROBLEM 4-3B (Continued)
Total manufacturing cost per armoire under ABC:
Direct materials ……………………………………………………………. $ 5,200
drivers under ABC than the single cost driver used with the traditional
volume-based system.