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Solutions Manual, Appendix 2A 61
Exercise 2A-3 (continued)
2. The activity rates are computed as follows:
(
a
)
Estimated
(
b
)
Overhead
T
ota
l
(
a) ÷ (b
)
A
ctivi
t
y
Cost Poo
l
Cos
t
Expected Activit
y
A
ctivity Rat
e
Supportin
g
direct labor .. $200,000 50,000 DLHs $4 per DLH
Manufacturing overhead is assigned to the two products as follows:
Deluxe Product:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supportin
g
direct labor ………. $4 per DLH 10,000 DLHs $ 40,000
Standard Product:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supportin
g
direct labor ………. $4 per DLH 40,000 DLHs $160,000
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62 Managerial Accounting, 16th Edition
Exercise 2A-3 (continued)
Activity-based absorption costing unit product costs are computed as
follows:
Delux
e
Standard
Direct materials ……………………………………….…. $ 72.00 $53.00
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Solutions Manual, Appendix 2A 63
Problem 2A-4 (60 minutes)
1. a. When direct labor-hours are used to apply overhead cost to products,
the company’s predetermined overhead rate would be:
Manufacturin
g
overhead cost
Predetermined =
b.
Model
X200 X99
Direct materials…………………………………… $ 72 $ 50
Direct labor:
2. a. Predetermined overhead rates for the activity cost pools:
Activity Cost Pool
(a)
Estimated
Total Cost
(b)
Estimated
Total Activity
(a) ÷ (b)
Activity Rate
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64 Managerial Accounting, 16th Edition
Problem 2A-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 processin
g
…………………………. $15 per MH 12,000 MHs 180,000
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 processin
g
…………………………. $15 per MH 0 MHs 0
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Solutions Manual, Appendix 2A 65
Problem 2A-4 (continued)
b. The unit product cost of each model under the activity-based ap-
proach would be computed as follows:
Model
X200 X99
Direct materials ……………………………… $ 72.00 $50.00
Direct labor:
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 prod-
ucts on the basis of direct labor-hours:
Machine setups (number of setups)… $ 360,000 20%
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
follows: First, where possible, overhead costs have been traced to the
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.
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66 Managerial Accounting, 16th Edition
Problem 2A-4 (continued)
Second, the costs associated with the batch-level activity (machine set-
ups) have also been assigned to the specific products to which they re-
late. These costs have been assigned according to the number of setups
completed for each product. However, because a batch-level activity is
Model X200:
Cost to complete one setup (see requirement 2a) ….... $2,400 (a)
Number of units processed per setup
Model X99:
Cost to complete one setup (see requirement 2a) ….... $2,400 (a)
Number of units processed per setup
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
low-volume product as a result of more appropriately assigning some
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Solutions Manual, Appendix 2A 67
Problem 2A-5 (60 minutes)
1. The company’s estimated direct labor-hours can be computed as fol-
lows:
Deluxe model: 5,000 units × 2 DLHs per unit….. 10,000 DLHs
Re
g
ular model: 40,000 units × 1 DLH per unit … 40,000 DLHs
The unit product cost of each model using the company’s traditional
costing system would be:
Deluxe Regular
Direct materials ………………… $ 40 $25
Direct labor ……………………… 38 19
Manufacturin
g
overhead:
2. Predetermined overhead rates are computed below:
Activity Cost Pool
(a)
Estimated
Overhead
Cost
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Purchasin
g
……………. $204,000 600 purchase or-
ders
$340 per purchase
order
Shippin
g
………………. $135,000 900 shipments $150 per shipment
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68 Managerial Accounting, 16th Edition
Problem 2A-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
Purchasin
g
………………………….. $340 per PO 200 POs $ 68,000
Processin
g
…………………………… $5.20 per MH 20,000 MHs 104,000
The Regular Model
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Purchasin
g
………………………….. $340 per PO 400 POs $136,000
Processin
g
…………………………… $5.20 per MH 15,000 MHs 78,000
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Solutions Manual, Appendix 2A 69
Problem 2A-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
4. Unit costs appear to be distorted as a result of using direct labor-hours
as the base for assigning overhead cost to products. Although the
When the company’s overhead costs are analyzed on an activities basis,
it appears that the deluxe model is more expensive to manufacture than
the company realizes. Note that the deluxe model accounts for a major-
When activity-based absorption costing is used and the company’s
transactions are analyzed by product, the overhead cost increases for
the deluxe model from $36.00 per unit to $79.80 per unit. This suggests
that less than half the overhead cost is being assigned to the deluxe
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70 Managerial Accounting, 16th Edition
Case 2A-6 (90 minutes)
1. a. The predetermined overhead rate would be computed as follows:
b. The unit product cost per pound, using the company’s present costing
system, would be:
Kenya
Dark
Viet
Select
Direct materials (
g
iven) ……… $4.50 $2.90
2. a. Overhead rates for each activity cost pool:
Activity Cost
Pools
(a)
Estimated
Overhead
Costs
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Purchasin
g
……….. $560,000 2,000 orders $280 per orde
r
Material handlin
g
.. $193,000 1,000 setups $193 per setup