Chapter 7 – Activity-Based Costing and Activity-Based Management
7-21
Problem 7-20
$1,845,000
(25,000 DLH + 16,000 DLH)
Tablets
Books
Direct Materials
$3.00
$10.00
Direct Labor
4.00
8.00
Overhead
25,000 DLH
62,500 tablets
× $45/DLH =
18.00
16,000 DLH
20,000 tablets
× $45/DLH =
36.00
Total Unit Cost
$25.00
$54.00
b. ABC Rates
Binding:
book s ) 20,000 +tablets 50062
$247,500
= $3.00/unit
Printing:
hours machine 120,000) + (125,000
$796,250
= $3.25/machine hour
Product Design:
orders c hange 2,000) + (1,250
$195,000
= $60/change order
7-22
Problem 7-20, continued
ABC overhead allocation
Tablets
Binding
62,500 tablets × $3.00/unit
$187,500
Printing
125,000 MH × $3.25/MH
406,250
Product Design
1,250 change orders × $60/change order
75,000
Total Overhead
668,750
Units produced
÷ 62,500
Overhead per unit
$10.70
Books
Binding
20,000 books × $3.00/unit
$60,000
Printing
120,000 MH × $3.25/MH
390,000
Product Design
2,000 change orders × $60/change order
120,000
Total Overhead
570,000
Units produced
÷ 20,000
Overhead per unit
$28.50
ABC unit cost
Tablets
Books
Direct Materials
$3.00
$10.00
Direct Labor
4.00
8.00
Overhead
10.70
28.50
Total Unit Cost
$17.70
$46.50
7-23
Problem 7-20, continued
c.
OH allocated to tablets using traditional DLH
(25,000 DLH × $45/DLH)
$1,125,000
OH allocated to books using traditional DLH
(16,000 DLH × $45/DLH)
720,000
Totaled allocated OH using traditional DLH
$1,845,000
OH allocated to tablets using ABC
668,750
OH allocated to books using ABC
570,000
Totaled allocated OH using ABC
1,238,750
Difference in allocated overhead
$ 606,250
Problem 7-21
$899,000
Chapter 7 – Activity-Based Costing and Activity-Based Management
7-25
FM-9
Assembly
14,000 DLH × $22/DLH
$308,000
Setup
40 setups × $2,700/setup
108,000
Packaging:
8,000 pounds × $9/pound
72,000
Total overhead
$488,000
Number of units produced
2,000
Overhead per unit
$244.00
packaging cost that was charged to AM-2. Properly allocating these
resources to the low-volume FM-9 product significantly increases its
per unit cost.
7-26
Problem 7-22
a.
Tablets
Books
Sales price
$33.00
$65.00
Product costs
25.00
54.00
Product margin
$ 8.00
$11.00
b.
Tablets
Books
Sales price
$33.00
$65.00
Product costs
25.00
54.00
Product margin
$ 8.00
$11.00
× Unit sales
62,500
20,000
= Total margin
$500,000
$220,000
% of total margin
$500,000
($500,000 $220,000)
= 69.4%
$220,000
($500,000 $220,000)
= 30.6%
Chapter 7 – Activity-Based Costing and Activity-Based Management
7-27
Problem 7-22, continued
c. S&A Cost ABC Rates
Shipping:
$320,625
(31,250 lbs. + 40,000 lbs.)
= $4.50/lb.
Advertising:
$180,000
(125,000 + 100,000) mailings
= $0.80/mailing
ABC selling & administrative cost allocation
Tablets
Shipping
31,250 lbs. × $4.50/lb.
$140,625
Advertising
125,000 mailings × $0.80/mailing
100,000
Commissions
$33 × 62,500 tablets × 5%
103,125
Total S&A cost
343,750
Units produced
÷ 62,500
S&A cost per unit
$5.50
Books
Shipping
40,000 lbs. × $4.50/lb.
$180,000
Advertising
100,000 mailings × $0.80/mailing
80,000
Commissions
$65 × 20,000 books × 5%
65,000
Total S&A cost
325,000
Units produced
÷ 20,000
S&A cost per unit
$16.25
Tablets
Books
Sales Price
$33.00
$65.00
Product Costs
17.70
46.50
Selling & Administrative
5.50
16.25
Product Margin
$ 9.80
$2.25
7-28
Problem 7-22, continued
d.
Tablets
Books
Sales Price
$ 33.00
$ 65.00
Product Costs
17.70
46.50
Selling & Administrative
5.50
16.25
Product Margin
9.80
2.25
× Unit sales
62,500
20,000
= Total margin
$612,500
$45,000
% of total margin
$612,500
($612,500 220,000)
= 93.2%
$45,000
($612,500 45,000)
= 6.8%
e. The company sends out 100,000 mailings to generate sales of only
Chapter 7 – Activity-Based Costing and Activity-Based Management
7-29
Problem 7-23
a.
Cost Pool
Calculation
Activity Rate
Setting up new employees
$75,000
500 new employees
= $150/new employee
Processing weekly payroll
$780,000
2,500,000 checks
= $0.312/check
Weekly reporting
$300,000
100 clients
= $3,000/client
Annual tax reporting
$240,000
60,000 W-2s
= $4/W-2
b.
Cost Pool
Calculation
Expected
Annual Cost
Setting up new employees
20 new employees × $150
$3,000.00
Processing weekly payroll
20 employees × 52 weeks × $0.312
324.48
Weekly reporting
1 client × $3,000
3,000.00
Annual tax reporting
20 employees × $4
80.00
Total
$6,404.48
cause Patrick to incur additional costs to provide his service.
Therefore, he should increase his proposed price to cover such
contingencies.
7-30
Problem 7-24
a.
Hip
Knee
Shoulder
Revenue
$8,000
$10,000
$6,000
Less: Surgeon’s fee
1,200
1,800
1,500
Medical supplies
400
200
300
Overhead
5,200a
6,500b
3,900c
Profit
$1,200
$1,500
$ 300
a $8,000 × 0.65
b $10,000 × 0.65
c $6,000 × 0.65
b.
First, determine activity rates
Activity Cost Pool
Total
Costs
Driver Volumea
Activity rate
Operating room preparation
$ 864,000
1,200 sessions
$720 per session
Operating room use
1,449,000
2,760 hours
$525 per hour
Nursing and ancillary services
5,415,000
3,800 in-patient days
$1,425 per day
Administration
1,216,000
$15,200,000 sales revenue
$0.08 per revenue dollar
Miscellaneous
936,000
1,800 procedures
$520 per procedure
$9,880,000
a Sessions = number of procedures ÷ sessions per procedure =
600 hips 800 knees 400 shoulders
++
2 1 4
Hours = number of procedures × hours per procedure = (600 hips × 2) + (800 knees × 1.2) + (400 shoulders × 1.5)
In-patient days = number of procedures × days per procedure = (600 hips × 3) + (800 knees × 2) + (400 shoulders × 1)
Sales revenue = number of procedures × fee charged to patient = (600 hips × $8,000) + (800 knees × $10,000) + (400 shoulders × $6,000)
Procedures = 600 hips + 800 knees + 400 shoulders