Chapter 7 – Activity-Based Costing and Activity-Based Management
7-31
Problem 7-24, continued
Second, allocate costs to each procedure
Hip
Knee
Shoulder
Operating room preparation
300a × $720
800 × $720
100 × $720
Operating room use
1,200b × $525
960 × $525
600 × $525
Nursing and ancillary services
1,800c × $1,425
1,600 × $1,425
400 × $1,425
Administration
$4,800,000d × $0.08
$8,000,000 × $0.08
$2,400,000 × $0.08
Miscellaneous
600 × $520
800 × $520
400 × $520
a600 procedures ÷ 2 procedures per operating room session
b600 procedures × 2 hours per procedure
c600 procedures × 3 inpatient day per procedure
d600 procedures × $8,000 per procedure
Hip
Knee
Shoulder
Total
$ 216,000
$ 576,000
$ 72,000
$ 864,000
630,000
504,000
315,000
1,449,000
Nursing and ancillary services
2,565,000
2,280,000
570,000
5,415,000
Administration
384,000
640,000
192,000
1,216,000
312,000
416,000
208,000
936,000
$4,107,000
$4,416,000
$1,357,000
$9,880,000
÷ 600
÷ 800
÷ 400
$ 6,845.00
$ 5,520.00
$ 3,392.50
7-32
Problem 7-24, continued
Third, calculate profit using ABC
Hip
Knee
Shoulder
Fee charged to patient
$8,000
$10,000
$6,000
Less: Surgeon’s fee
1,200
1,800
1,500
Medical supplies
400
200
300
ABC cost
6,845
5,520
3,393
Profit
($445)
$ 2,480
$ 807
d. The company could determine whether it is charging the appropriate amount for a hip
replacement, given the activities required. Comparison to competitor prices is a first step. As for
activities, given in-patient days are the most expensive, it’s worth determining whether 3 days is
procedures?
7-33
Problem 7-25
$6,000,000
$1,200,000
cost
Cashews
Chestnuts
Direct material
$4.20
$3.20
Direct labor
.30
.30
Overhead
1.50
1.50
Cost/lb.
6.00
5.00
40% markup
2.40a
2.00b
Selling price
$8.40
$7.00
a$6.00 × 40% = $2.40
b$5.00 × 40% = $2.00
b.
Cost Pool
Calculation
Activity Rate
Purchasing
$1,146,000
11,460 purchase orders
= $100/purchase order
Material handling
$1,440,000
1,800 setups
= $800/setup
Quality control
batches 600
$300,000
= $500/batch
Roasting
$1,922,000
96,100 hours
= $20/roasting hour
Seasoning
$672,000
33,600 hours
= $20/seasoning hour
Packaging
$520,000
26,000 hours
= $20/packaging hour
7-34
Problem 7-25, continued
Cashews
Purchasing
100,000 lbs.
2,500 lbs.
× $100
$4,000
Material handling
100,000 lbs.
10,000 lbs.
× 3 setups × $800
24,000
Quality control
100,000 lbs.
10,000 lbs.
× $500
5,000
Roasting
100,000 lbs.
100 lbs.
× 1 hour × $20
20,000
Seasoning
100,000 lbs.
100 lbs.
× .5 hour × $20
10,000
Packaging
100,000 lbs.
100 lbs.
× .1 hour × $20
2,000
Total overhead
65,000
Pounds produced
÷ 100,000
Overhead per pound
$0.65
Chapter 7 – Activity-Based Costing and Activity-Based Management
7-35
Problem 7-25, continued
Chestnuts
Purchasing
2,000 lbs.
50 lbs.
× $100
$4,000
Material handling
2,000 lbs.
500 lbs.
× 3 setups × $800
9,600
Quality control
2,000 lbs.
500 lbs.
× $500
2,000
Roasting
2,000 lbs.
100 lbs.
× 1 hour × $20
400
Seasoning
2,000 lbs.
100 lbs.
× .5 hour × $20
200
Packaging
2,000 lbs.
100 lbs.
× .1 hour × $20
40
Total overhead
16,240
Pounds produced
÷ 2,000
Overhead per pound
$8.12
7-36
Problem 7-25, continued
Cashews
Chestnuts
Direct material
$4.20
$3.20
Direct labor
.30
.30
Overhead
.65
8.12
Cost/lb.
5.15
11.62
40% markup
2.06a
4.65b
Selling price
$7.21
$16.27
a$5.15 × 40% = $2.06
b$11.62 × 40% = $4.65 (rounded from $4.648)
c. As a result of the activity-based costing analysis, Nancy’s managers must recognize that they
cannot continue to sell chestnuts at the $7.00 per pound. At that price, the company is not even
The company does have an opportunity with cashews. If the market is currently paying $8.40 per
Chapter 7 – Activity-Based Costing and Activity-Based Management
7-37
Problem 7-26
$1,260,000
105,000 test hours
b.
HTT
ATT
SST
ACT
AQT
Test pool labora
$126,000
$84,000
$84,000
$42,000
$84,000
Supervision
28,800
10,800
10,800
10,800
10,800
Depreciation
48,000
22,000
39,000
32,000
37,000
Heat
85,000
8,500
8,500
51,000
17,000
Electricity
37,200
12,400
12,400
49,600
12,400
Water
0
0
14,800
14,800
44,400
Setup
11,600
8,700
17,400
8,700
11,600
Indirect materials
16,500
15,600
31,200
20,600
20,100
Supplies
6,000
6,000
15,000
12,000
21,000
Total costs
$359,100
$168,000
$233,100
$241,500
$258,300
Test hours
31,500
10,500
26,250
21,000
15,750
Cost per hour
$11.40
$16.00
$8.88
$11.50
$16.40
afor HTT: $420,000 total labor cost
10 employees × 3 HTT employees
c.
HTT
ATT
SST
ACT
AQT
Cost per hour
$11.40
$16.00
$8.88
$11.50
$16.40
45% markup (rounded)
5.13
7.20
4.00
5.18
7.38
Hourly billing rate
$16.53
$23.20
$12.88
$16.68
$23.78
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
7-38
d. The newly calculated billing rates for ATT, ACT and AQT are all
Before changing prices, Rick needs to determine what customers are
Chapter 7 – Activity-Based Costing and Activity-Based Management
7-39
Problem 7-27
$69,600,000
100,000 MH + 240,000 MH + 240,000 MH
Superior
Deluxe
Ultra
Direct Materials
$17,600,000
$27,360,000
$40,200,000
Direct Labor
10,700,000
13,320,000
16,600,000
Overhead ($120 × total MH)
12,000,000
28,800,000
28,800,000
Total Cost
$40,300,000
$69,480,000
$85,600,000
Divided by units produced
1,000
1,200
800
Cost per unit
$ 40,300
$ 57,900
$ 107,000
b. First, determine activity rates
Costs
Drivera
Activity rate
Machining
$13,920,000
580,000 machine hours
$24 per machine hour
Machine setup and calibration
24,000,000
1,000 setups
$24,000 per setup
Quality inspections
14,140,000
20,000 inspections
$707 per inspection
Materials receiving
6,760,000
2,000 deliveries
$3,380 per delivery
Materials requisitions
10,780,000
13,475 requisitions
$800 per requisition
$69,600,000
Quality inspections = batches × inspections per batch
7-40
Problem 7-27, continued
Second, allocate costs to each procedure
Superior
Deluxe
Ultra
Machining
100,000 × $24
240,000 × $24
240,000 × $24
Machine setup and calibration
200 × $24,000
400 × $24,000
400 × $24,000
Quality inspections
2,000 × $707
6,000 × $707
12,000 × $707
Materials receiving
600 × $3,380
600 × $3,380
800 × $3,380
Materials requisitions
3,275 × $800
4,200 × $800
6,000 × $800
Superior
Deluxe
Ultra
Total
Machining
$ 2,400,000
$ 5,760,000
$ 5,760,000
$13,920,000
Machine setup and calibration
4,800,000
9,600,000
9,600,000
24,000,000
Quality inspections
1,414,000
4,242,000
8,484,000
14,140,000
Materials receiving
2,028,000
2,028,000
2,704,000
6,760,000
Materials requisitions
2,620,000
3,360,000
4,800,000
10,780,000
Total cost allocated
$13,262,000
$24,990,000
$31,348,000
$69,600,000
Divide by # of boats produced
÷ 1,000
÷ 1,200
÷ 800
Overhead cost per boat
$ 13,262
$ 20,825
$ 39,185
Third, calculate cost using ABC
Superior
Deluxe
Ultra
Direct Materials
$17,600,000
$27,360,000
$40,200,000
Direct Labor
10,700,000
13,320,000
16,600,000
Overhead
13,262,000
24,990,000
31,348,000
Total Cost
$41,562,000
$65,670,000
$88,148,000
Divided by units produced
÷ 1,000
÷ 1,200
÷ 800
Cost per unit
$ 41,562
$ 54,725
$ 110,185