Solutions Manual, Chapter 6 41
Problem 6-20 (continued)
5. Gallatin Carpet Cleaning appears to be losing money on the Flying N
Ranch job. However, caution is advised. Some of the costs may not be
simple report in part (4) above.
Nevertheless, there is a point at which travel costs eat up all of the
6. The company should consider charging a fee for travel to outlying
customers based on the distance traveled and a flat fee per job. At
present, close-in customers are in essence subsidizing service to
outlying customers and large-volume customers are subsidizing service
may choose to clean their carpets more frequently if the price were
more attractive.)
42 Managerial Accounting for Managers, 4th Edition
Appendix 6A
ABC Action Analysis
Exercise 6A-1 (20 minutes)
Sales (100 clubs × $50 per club) ……………………..
$5,000.00
Green costs:
Direct materials (100 clubs × $29.50 per club) ….
$2,950.00
2,950.00
Green margin ………………………………………………
2,050.00
Yellow costs:
Direct labor (100 clubs × 0.3 hour per club ×
$20.50 per hour) ………………………………………
615.00
Indirect labor ……………………………………………..
95.90
Marketing expenses …………………………………….
540.70
1,251.60
Yellow margin ………………………………………………
798.40
Red costs:
Factory equipment depreciation ……………………..
103.70
Factory administration ………………………………….
259.00
Selling and administrative wages and salaries ……
429.00
Selling and administrative depreciation …………….
30.00
821.70
Red margin …………………………………………………
$ (23.30)
Sales (100 clubs × $50 per club) ……………………..
$5,000.00
Costs:
Direct materials ………………………………………….
$2,950.00
Direct labor ……………………………………………….
615.00
Supporting direct labor ……………………………….
285.40
Batch processing ……………………………………….
55.10
Order processing ……………………………………….
114.80
Customer service ……………………………………….
1,003.00
5,023.30
Customer margin ………………………………………….
$ (23.30)
44 Managerial Accounting for Managers, 4th Edition
Exercise 6A-2 (continued)
2. The table prepared in part (1) above allows two different perspectives
on the overhead cost of the order. The column totals that appear in the
last row of the table tell us the cost of the order in terms of the
activities it required. The row totals that appear in the last column of the
table tell us how much the order cost in terms of the overhead accounts
in the underlying accounting system. Another way of saying this is that
the column totals tell us what the costs were incurred
for
. The row
totals tell us what the costs were incurred
on
. For example, you may
spend money
on
a chocolate bar in order to satisfy your craving
for
chocolate. Both perspectives are important. To control costs, it is
necessary to know both what the costs were incurred for and what
actual costs would have to be adjusted (i.e., what the costs were
incurred on).
The two different perspectives can be explicitly shown as follows:
What the overhead costs were incurred
on
:
Manufacturing overhead:
Indirect labor …………………………..
$1,950
Factory depreciation ………………….
1,760
Factory utilities …………………………
24
Factory administration ……………….
180
General selling & administrative:
Wages and salaries ……………………
1,780
Depreciation …………………………….
92
Taxes and insurance ………………….
40
Selling expenses ……………………….
400
Total overhead cost ……………………..
$6,226
What the overhead costs were incurred
for
:
Order size ………………………………….
$3,370
Customer orders …………………………
320
Product testing …………………………..
356
Selling ………………………………………
2,180
Total overhead cost ……………………..
$6,226
46 Managerial Accounting for Managers, 4th Edition
Exercise 6A-3 (continued)
adjustment codes:
Sales (1,000 units × $20 per unit) ………………….
$20,000.00
Green costs:
Direct materials (1,000 units × $8.50 per unit) .
$8,500.00
8,500.00
Green margin …………………………………………….
11,500.00
Yellow costs:
Direct labor (1,000 units × $6.00 per unit) …….
6,000.00
Indirect labor …………………………………………..
290.00
Marketing expenses …………………………………..
847.50
7,137.50
Yellow margin …………………………………………….
4,362.50
Red costs:
Factory equipment depreciation …………………..
1,034.00
Factory administration ……………………………….
214.00
Selling and administrative wages and salaries …
1,900.00
Selling and administrative depreciation ………….
54.00
3,202.00
Red margin ……………………………………………….
$ 1,160.50