978-1260153132 Chapter 2 Part 6

Solutions Manual, Chapter 2 51

Problem 2-21 (continued)

The overhead applied to Job B is computed as follows:

Machinin

g

A

ssembly

T

otal

Quantity of allocation base used (a) 12 5

3. The plantwide approach will overcost jobs that are intensive users of As-

sembly and minimal users of Machining. Conversely, it will undercost

products that are intensive users of Machining and minimal users of As-

sembly. These cost distortions will adversely impact the company’s pric-

52 Managerial Accounting, 16th Edition

Case 2-22 (60 minutes)

1. a. Estimated total manufacturin

g

overhead cost

Predetermined =

overhead rate Estimated total amount of the allocation base

b. The manufacturing overhead cost applied to the Koopers job is com-

puted as follows:

2. a.

Fabricating

Department

Machining

Department

Assembly

Department

Estimated manufacturin

g

b. Fabricatin

g

Department:

$2,800 × 175% ………………………. $4,900

Machinin

g

Department:

3. The bulk of the labor cost on the Koopers job is in the Assembly Depart-

ment, which incurs very little overhead cost. The department has an

overhead rate of only 30% of direct labor cost as compared to much

Use of a plantwide overhead rate in effect redistributes overhead costs

proportionately between the three departments (at 140% of direct labor

Solutions Manual, Chapter 2 53

Case 2-22 (continued)

4. The company’s bid was:

Direct materials …………………………………… $ 4,600

Direct labor ………………………………………… 9,500

Manufacturin

g

overhead applied (see require-

If departmental overhead rates had been used, the bid would have

been:

Direct materials …………………………………… $ 4,600

Direct labor ………………………………………… 9,500

g

Note that if departmental overhead rates had been used, Teledex Com-

54 Managerial Accounting, 16th Edition

Appendix 2A

Activity-Based Absorption Costing

Exercise 2A-1 (20 minutes)

1. Activity rates are computed as follows:

Activity Cost Pool

(a)

Estimated

Overhead

Cost

(b)

Expected

Activity

(a) ÷ (b)

Activity

Rate

Solutions Manual, Appendix 2A 55

Exercise 2A-1 (continued)

2. Overhead is assigned to the two products as follows:

Hubs:

Activity Cost Pool

(a)

Activity Rate

(b)

Activity

(a) × (b)

ABC Cost

Machine setups ………………… $180 per setup 100 setups $ 18,000

Sprockets:

Activity Cost Pool

(a)

Activity Rate

(b)

Activity

(a) × (b)

ABC Cost

Machine setups ………………… $180 per setup 300 setups $ 54,000

56 Managerial Accounting, 16th Edition

Exercise 2A-1 (continued)

2. Each product’s unit product cost is computed as follows:

Hubs Sprockets

Direct materials ……………………………. $32.00 $18.00

Direct labor:

$15 per DLH × 0.80 DLHs per unit …. 12.00

$15 per DLH × 0.40 DLHs per unit …. 6.00

Overhead:

Solutions Manual, Appendix 2A 57

Exercise 2A-2 (45 minutes)

1. The unit product costs under the company’s traditional costing system

would be computed as follows:

Rascon Parcel Total

Number of units produced (a) ………………… 20,000 80,000

Direct labor-hours per unit (b) ……………….. 0.40 0.20

Rascon Parcel

Direct materials ………………………………….. $13.00 $22.00

Direct labor ……………………………………….. 6.003.00

Manufacturin

g

overhead applied:

58 Managerial Accounting, 16th Edition

Exercise 2A-2 (continued)

2. The unit product costs using activity-based absorption costing can be computed as follows:

Activity Cost Pool

Estimated

Overhead

Cost*

(b)

Expected Activity

(a) ÷ (b)

Activity Rate

*The total estimated manufacturing overhead cost of $576,000 is split evenly between the two activ-

ity cost pools.

Manufacturing overhead is assigned to the two products as follows:

Rascon:

(a)

(b)

(a) × (b)

Parcel:

Activity Cost Pool

(a)

Activity Rate

(b)

Activity

(a) × (b)

ABC Cost

Labor related ……… $12 per DLH 16,000 DLHs $192,000

Solutions Manual, Appendix 2A 59

Exercise 2A-2 (continued)

The unit product costs combine direct materials, direct labor, and over-

head costs:

Rascon Parcel

Direct materials ……………………………………. $13.00 $22.00

3. The unit product cost of the high-volume product, Parcel, declines under

the activity-based approach, whereas the unit product cost of the low-

volume product, Rascon, increases. This occurs because half of the

overhead is applied on the basis of engineering design hours instead of

direct labor-hours. When the overhead was applied on the basis of di-

60 Managerial Accounting, 16th Edition

Exercise 2A-3 (45 minutes)

1. The predetermined overhead rate is computed as follows:

$325,000

Predetermined

= = $6.50 per DLH

overhead rate 50,000 DLHs

The unit product costs under the company’s traditional costing system

are computed as follows:

Delux

e

Stand

–

ard

Direct materials ……………………………………….…….. $72.00 $53.00