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This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Appendix 4A 61
Problem 4A-4 (continued)
The overhead applied to each product can be determined as follows:
Model X200
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Machine setups ....................................
$2,400
per setup
50
setups
$120,000
Special processing ................................
$15
per MH
12,000
MHs
180,000
General factory ....................................
$35
per DLH
9,000
DLHs
315,000
Total manufacturing overhead cost (a) ..
$615,000
Number of units produced (b) ...............
5,000
Overhead cost per unit (a) ÷ (b) ...........
$123.00
Model X99
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Machine setups ....................................
$2,400
per setup
100
setups
$ 240,000
Special processing ................................
$15
per MH
0
MHs
0
General factory ....................................
$35
per DLH
27,000
DLHs
945,000
Total manufacturing overhead cost (a) ..
$1,185,000
Number of units produced (b) ...............
30,000
Overhead cost per unit (a) ÷ (b) ...........
$39.50
62 Managerial Accounting for Managers, 4th Edition
Problem 4A-4 (continued)
b. The unit product cost of each model under the activity-based
approach would be computed as follows:
Model
X200
X99
Direct materials ....................................
$ 72.00
$50.00
Direct labor:
$10 per DLH × 1.8 DLHs, 0.9 DLHs .....
18.00
9.00
Manufacturing overhead (above) ...........
123.00
39.50
Total unit product cost ..........................
$213.00
$98.50
Comparing these unit cost figures with the unit costs in Part 1(b), we
3. It is especially important to note that, even under activity-based costing,
70% of the company’s overhead costs continue to be applied to
products on the basis of direct labor-hours:
Machine setups (number of setups) ...
$ 360,000
20
%
Special processing (machine-hours) ...
180,000
10
General factory (direct labor-hours) ...
1,260,000
70
Total overhead cost ..........................
$1,800,000
100
%
Thus, the shift in overhead cost from the high-volume product (Model
The increase in unit product cost for Model X200 can be explained as
assigned to Model X99 under the activity-based approach. It is common
in industry to have some products that require special handling or
special processing of some type. This is especially true in modern
factories that produce a variety of products. Activity-based costing
provides a vehicle for assigning these costs to the appropriate products.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Appendix 4A 63
Problem 4A-4 (continued)
Second, the costs associated with the batch-level activity (machine
setups) have also been assigned to the specific products to which they
Model X200:
Cost to complete one setup [see 2(a)] ........................
$2,400
(a)
Number of units processed per setup
(5,000 units per setup ÷ 50 setups = 100 units) .......
100 units
(b)
Setup cost per unit (a) ÷ (b) ......................................
$24
Model X99:
Cost to complete one setup (above) ...........................
$2,400
(a)
Number of units processed per setup
(30,000 units per setup ÷ 100 setups = 300 units) ...
300 units
(b)
Setup cost per unit (a) ÷ (b) ......................................
$8
Thus, the cost per unit for setups is three times as great for Model
X200, the low-volume product, as it is for Model X99, the high-volume
In sum, overhead cost has shifted from the high-volume product to the
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
64 Managerial Accounting for Managers, 4th Edition
Problem 4A-5 (60 minutes)
1. The company’s estimated direct labor-hours can be computed as
follows:
Deluxe model: 5,000 units × 2 DLHs per unit .....
10,000 DLHs
Regular model: 40,000 units × 1 DLH per unit ...
40,000 DLHs
Total direct labor hours ....................................
50,000 DLHs
Using just direct labor-hours as the base, the predetermined overhead
rate would be:
Estimated overhead cost $900,000
= = $18 per DLH
Estimated direct labor-hours 50,000DLHs
The unit product cost of each model using the company’s traditional
costing system would be:
Deluxe
Regular
Direct materials ........................
$40
$25
Direct labor ..............................
14
7
Manufacturing overhead:
$18 per DLH × 2 DLHs ...........
36
$18 per DLH × 1 DLH ............
18
Total unit product cost ..............
$90
$50
2. Predetermined overhead rates are computed below:
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Purchasing ................
$204,000
600 purchase
orders
$340 per purchase
order
Processing ................
$182,000
35,000 machine-
hours
$5.20 per
machine-hour
Scrap/rework ............
$379,000
2,000 orders
$189.50 per order
Shipping ...................
$135,000
900 shipments
$150 per shipment
Solutions Manual, Appendix 4A 65
Problem 4A-5 (continued)
3. a. The overhead applied to each product can be determined as follows:
The Deluxe Model
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Purchasing .................................
$340
per PO
200
POs
$ 68,000
Processing .................................
$5.20
per MH
20,000
MHs
104,000
Scrap/rework .............................
$189.50
per order
1,000
tests
189,500
Shipping ....................................
$150
per shipment
250
shipments
37,500
Total overhead cost (a) ..............
$399,000
Number of units produced (b) .....
5,000
Overhead cost per unit (a) ÷ (b) .
$79.80
The Regular Model
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Purchasing .................................
$340
per PO
400
POs
$136,000
Processing .................................
$5.20
per MH
15,000
MHs
78,000
Scrap/rework .............................
$189.50
per order
1,000
orders
189,500
Shipping ....................................
$150
per shipment
650
shipments
97,500
Total overhead cost (a) ..............
$501,000
Number of units produced (b) .....
40,000
Overhead cost per unit (a) ÷ (b) .
$12.53
66 Managerial Accounting for Managers, 4th Edition
Problem 4A-5 (continued)
b. Using activity-based absorption costing, the unit product cost of each
model would be:
Deluxe
Regular
Direct materials ..........................
$ 40.00
$25.00
Direct labor ................................
14.00
7.00
Manufacturing overhead (above) .
79.80
12.53
Total unit product cost ................
$133.80
$44.53
analysis in part 3(a).
When the company’s overhead costs are analyzed on an activities basis,
very costly to the company.
When activity-based absorption costing is used and the company’s
been increasing rapidly.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
Case 4A-6 (90 minutes)
1. a. The predetermined overhead rate would be computed as follows:
Expected manufacturing overhead cost $2,200,000
=
Estimated direct labor-hours 50,000 DLHs
= $44 per DLH
system, would be:
Kenya
Dark
Viet
Select
Direct materials (given) .........
$4.50
$2.90
Direct labor (given) ...............
0.24
0.24
Manufacturing overhead:
0.02 DLH × $44 per DLH .....
0.88
0.88
Total unit product cost ...........
$5.62
$4.02
2. a. Overhead rates for each activity cost pool:
Activity Cost
Pools
(a)
Estimated
Overhead
Costs
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Purchasing ...........
$560,000
2,000
orders
$280
per order
Material handling ..
$193,000
1,000
setups
$193
per setup
Quality control ......
$90,000
500
batches
$180
per batch
Roasting ...............
$1,045,000
95,000
hours
$11
per hour
Blending ...............
$192,000
32,000
hours
$6
per hour
Packaging .............
$120,000
24,000
hours
$5
per hour
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
68 Managerial Accounting for Managers, 4th Edition
Case 4A-6 (continued)
Before we can determine the amount of overhead cost to assign to
the products we must first determine the activity for each of the
products in the six activity centers. The necessary computations
follow:
Number of purchase orders:
Kenya Dark: 80,000 pounds ÷ 20,000 pounds per order = 4 orders
Viet Select: 4,000 pounds ÷ 500 pounds per order = 8 orders
Number of setups:
Kenya Dark: 16 batches × 2 setups per batch = 32 setups
Viet Select: 8 batches × 2 setups per batch = 16 setups
Number of batches:
Kenya Dark: 80,000 pounds ÷ 5,000 pounds per batch = 16 batches
Viet Select: 4,000 pounds ÷ 500 pounds per batch = 8 batches
Roasting hours:
Kenya Dark: 1.5 hours × (80,000 pounds ÷ 100 pounds) = 1,200
hours
Viet Select: 1.5 hours × (4,000 pounds ÷ 100 pounds) = 60 hours
Blending hours:
Kenya Dark: 0.5 hour × (80,000 pounds ÷ 100 pounds) = 400 hours
Viet Select: 0.5 hour × (4,000 pounds ÷ 100 pounds) = 20 hours
Packaging hours:
Kenya Dark: 0.3 hour × (80,000 pounds ÷ 100 pounds) = 240 hours
Viet Select: 0.3 hour × (4,000 pounds ÷ 100 pounds) = 12 hours
Solutions Manual, Appendix 4A 69
Case 4A-6 (continued)
The overhead applied to each product can be determined as follows:
Kenya Dark
Activity Cost Pool
Activity Rate
Expected Activity
Amount
Purchasing ..................
$280
per order
4
orders
$ 1,120
Material handling ........
$193
per setup
32
setups
6,176
Quality control ............
$180
per batch
16
batches
2,880
Roasting .....................
$11
per roasting hour
1,200
roasting hours
13,200
Blending .....................
$6
per blending hour
400
blending hours
2,400
Packaging ...................
$5
per packaging hour
240
packaging hours
1,200
Total ..........................
$26,976
Viet Select
Activity Cost Pool
Activity Rate
Expected Activity
Amount
Purchasing ..................
$280
per order
8
orders
$2,240
Material handling ........
$193
per setup
16
setups
3,088
Quality control ............
$180
per batch
8
batches
1,440
Roasting .....................
$11
per roasting hour
60
roasting hours
660
Blending .....................
$6
per blending hour
20
blending hours
120
Packaging ...................
$5
per packaging hour
12
packaging hours
60
Total ..........................
$7,608
70 Managerial Accounting for Managers, 4th Edition
Case 4A-6 (continued)
b. According to the activity-based absorption costing system, the
manufacturing overhead cost per pound is:
Kenya
Dark
Viet
Select
Total overhead cost assigned (above) (a) ...
$26,976
$7,608
Number of pounds manufactured (b) ..........
80,000
4,000
Cost per pound (a) ÷ (b) ...........................
$0.34
$1.90
c. The unit product costs according to the activity-based absorption
costing system are:
Kenya
Dark
Viet
Select
Direct materials (given) ...........
$4.50
$2.90
Direct labor (given) .................
0.24
0.24
Manufacturing overhead ..........
0.34
1.90
Total unit product cost .............
$5.08
$5.04
3. MEMO TO THE PRESIDENT: Analysis of JSI’s data shows that several
activities other than direct labor drive the company’s manufacturing
undercosts low-volume products, such as the Viet Select coffee, and
significantly overcosts high-volume products, such as our Kenya Dark
coffee.
based cost of $5.04 per pound. Under our present costing and pricing
system, our high-volume products, such as our Kenya Dark coffee, may
may be required.
