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Problem 6-17 (45 minutes)
1. Under the traditional direct labor-hour based costing system,
manufacturing overhead is applied to products using the predetermined
overhead rate computed as follows:
Estimated total manufacturing overhead cost
Predetermined =
overhead rate Estimated total direct labor -hours
$1,980,000
= = $16.50 per DLH
120,000 DLHs*
DLHs.
Consequently, the product margins using the traditional approach would
be computed as follows:
Xtreme
Pathfinder
Total
Sales ...................................
$2,800,000
$7,920,000
$10,720,000
Direct materials ....................
1,440,000
4,240,000
5,680,000
Direct labor ..........................
480,000
960,000
1,440,000
Manufacturing overhead
applied @ $16.50 per
direct labor-hour ................
660,000
1,320,000
1,980,000
Total manufacturing cost ......
2,580,000
6,520,000
9,100,000
Product margin ....................
$ 220,000
$1,400,000
$ 1,620,000
32 Managerial Accounting for Managers, 4th Edition
Problem 6-17 (continued)
2. The first step is to determine the activity rates:
Activity Cost Pools
(a)
Total
Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Supporting direct
labor ...................
$783,600
120,000
DLH
$6.53
per DLH
Batch setups ..........
$495,000
300
setups
$1,650
per setup
Product sustaining ..
$602,400
2
products
$301,200
per product
assigned to products.
Under the activity-based costing system, the product margins would be
computed as follows:
Xtreme
Pathfinder
Total
Sales ................................
$2,800,000
$7,920,000
$10,720,000
Direct materials .................
1,440,000
4,240,000
5,680,000
Direct labor .......................
480,000
960,000
1,440,000
Supporting direct labor ......
261,200
522,400
783,600
Batch setups .....................
330,000
165,000
495,000
Product sustaining .............
301,200
301,200
602,400
Total cost .........................
2,812,400
6,188,600
9,001,000
Product margin .................
$ (12,400)
$1,731,400
$ 1,719,000
Solutions Manual, Chapter 6 33
Problem 6-17 (continued)
3. The quantitative comparison is as follows:
Xtreme
Pathfinder
Total
Traditional Cost System
(a)
Amount
(a) ÷ (c)
%
(b)
Amount
(b) ÷ (c)
%
(c)
Amount
Direct materials .......................
$1,440,000
25.4%
$4,240,000
74.6%
$5,680,000
Direct labor .............................
480,000
33.3%
960,000
66.7%
1,440,000
Manufacturing overhead ..........
660,000
33.3%
1,320,000
66.7%
1,980,000
Total cost assigned to products
$2,580,000
$6,520,000
$9,100,000
Activity-Based Costing System
Direct costs:
Direct materials .......................
$1,440,000
25.4%
$4,240,000
74.6%
$5,680,000
Direct labor .............................
480,000
33.3%
960,000
66.7%
1,440,000
Indirect costs:
Supporting direct labor ............
261,200
33.3%
522,400
66.7%
783,600
Batch setups ...........................
330,000
66.7%
165,000
33.3%
495,000
Product sustaining ...................
301,200
50.0%
301,200
50.0%
602,400
Total cost assigned to products
$2,812,400
$6,188,600
9,001,000
Costs not assigned to products:
Other ......................................
99,000
Total cost ................................
$9,100,000
34 Managerial Accounting for Managers, 4th Edition
Problem 6-17 (continued)
The traditional and activity-based cost assignments differ for two
reasons. First, the traditional system assigns all $1,980,000 of
activity) to each product line.
Solutions Manual, Chapter 6 35
Problem 6-18 (45 minutes)
1. The results of the first-stage allocation appear below:
Job Size
Estimating
and Job
Setup
Working on
Nonroutine
Jobs
Other
Totals
Wages and salaries .........
$150,000
$ 30,000
$ 90,000
$ 30,000
$ 300,000
Disposal fees ...................
420,000
0
280,000
0
700,000
Equipment depreciation ...
36,000
4,500
18,000
31,500
90,000
On-site supplies ..............
30,000
15,000
5,000
0
50,000
Office expenses ...............
20,000
70,000
50,000
60,000
200,000
Licensing and insurance ...
120,000
0
200,000
80,000
400,000
Total cost .......................
$776,000
$119,500
$643,000
$201,500
$1,740,000
to activities related to job size.
$300,000 × 50% = $150,000.
Other entries in the table are determined in a similar manner.
2.
Activity Cost Pool
(a)
Total Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Job size .................
$776,000
800
thousand square feet
$970
per thousand square feet
Estimating and job
setup ..................
$119,500
500
jobs
$239
per job
Working on
nonroutine jobs ...
$643,000
100
nonroutine jobs
$6,430
per nonroutine job
36 Managerial Accounting for Managers, 4th Edition
Problem 6-18 (continued)
3. The costs of each of the jobs can be computed as follows using the activity rates computed above:
a.
Routine one thousand square foot job:
Job size (1 thousand square feet @ $970 per thousand square feet) ....
$ 970.00
Estimating and job setup (1 job @ $239 per job) ................................
239.00
Nonroutine job (not applicable) ..........................................................
0
Total cost of the job ..........................................................................
$1,209.00
Cost per thousand square feet ($1,209 ÷ 1 thousand square feet) .......
$1,209.00
b.
Routine two thousand square foot job:
Job size (2 thousand square feet @ $970 per thousand square feet) ....
$1,940.00
Estimating and job setup (1 job @ $239 per job) ................................
239.00
Nonroutine job (not applicable) ..........................................................
0
Total cost of the job ..........................................................................
$2,179.00
Cost per thousand square feet ($2,179 ÷ 2 thousand square feet) .......
$1,089.50
c.
Nonroutine two thousand square foot job:
Job size (2 thousand square feet @ $970 per thousand square feet) ....
$1,940.00
Estimating and job setup (1 job @ $239 per job) ................................
239.00
Nonroutine job ..................................................................................
6,430.00
Total cost of the job ..........................................................................
$8,609.00
Cost per thousand square feet ($8,609 ÷ 2 thousand square feet) .......
$4,304.50
Solutions Manual, Chapter 6 37
Problem 6-18 (continued)
thousand square feet may be substantially under the company’s cost for
nonroutine work suggests that the estimator should try. And if a
thousand square feet on nonroutine work. Consequently, Mercer
Asbestos Removal may find that its product mix shifts toward
38 Managerial Accounting for Managers, 4th Edition
Problem 6-19 (20 minutes)
1. The cost of serving the local commercial market according to the ABC model can be determined as
follows:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Animation concept ........
$6,040
per proposal
25
proposals
$151,000
Animation production ....
$7,725
per minute of animation
5
minutes
38,625
Contract administration .
$6,800
per contract
10
contracts
68,000
$257,625
2. The margin earned serving the local commercial market is negative, as shown below:
Profitability Analysis
Sales ...................................................
$180,000
Costs:
Animation concept ..............................
$151,000
Animation production ..........................
38,625
Contract administration .......................
68,000
257,625
Margin .................................................
$(77,625)
3. It appears that the local commercial market is losing money and the company would be better off
segment should not be dropped. These issues will be discussed in more depth in Chapters 12 and 13.
Solutions Manual, Chapter 6 39
Problem 6-20 (45 minutes)
1. The first-stage allocation of costs to activity cost pools appears below:
Distribution of Resource Consumption
Across Activity Cost Pools
Cleaning
Carpets
Travel
to Jobs
Job
Support
Other
Total
Wages .......................................
70%
20%
0%
10%
100%
Cleaning supplies .......................
100%
0%
0%
0%
100%
Cleaning equipment depreciation .
80%
0%
0%
20%
100%
Vehicle expenses ........................
0%
60%
0%
40%
100%
Office expenses ..........................
0%
0%
45%
55%
100%
President’s compensation ............
0%
0%
40%
60%
100%
Cleaning
Carpets
Travel
to Jobs
Job
Support
Other
Total
Wages ........................................
$105,000
$30,000
$ 0
$ 15,000
$150,000
Cleaning supplies ........................
40,000
0
0
0
40,000
Cleaning equipment depreciation ..
16,000
0
0
4,000
20,000
Vehicle expenses .........................
0
48,000
0
32,000
80,000
Office expenses ...........................
0
0
27,000
33,000
60,000
President’s compensation .............
0
0
32,000
48,000
80,000
Total cost ...................................
$161,000
$78,000
$59,000
$132,000
$430,000
Example: 70% of $150,000 = $105,000
Other entries in the table are determined in a similar manner.
40 Managerial Accounting for Managers, 4th Edition
Problem 6-20 (continued)
2. The activity rates are computed as follows:
Activity Cost Pool
(a)
Total Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Cleaning carpets...
$161,000
20,000
hundred
square feet
$8.05
per hundred
square feet
Travel to jobs .......
$78,000
60,000
miles
$1.30
per mile
Job support ..........
$59,000
2,000
jobs
$29.50
per job
3. The cost for the Flying N Ranch job is computed as follows:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Cleaning carpets ...
$8.05
per hundred
square feet
5
hundred
square feet
$ 40.25
Travel to jobs .......
$1.30
per mile
75
miles
97.50
Job support ..........
$29.50
per job
1
job
29.50
Total ....................
$167.25
costs calculated in part (3) above.
Sales ........................
$140.00
Costs:
Cleaning carpets .....
$40.25
Travel to jobs .........
97.50
Job support ............
29.50
167.25
Margin ......................
$(27.25)
