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Solutions Manual, Chapter 7 1
Chapter 7
Activity-Based Costing: A Tool to Aid
Decision Making
Solutions to Questions
7-1 Activity-based costing differs from
traditional costing systems in a number of ways.
In activity-based costing, nonmanufacturing as
well as manufacturing costs may be assigned to
products. And, some manufacturing costs—
developed in the 1800s, this assumption may
have been reasonably accurate. However, direct
labor has declined in importance over the years
7-3 Top managers provide leadership that is
ABC system. Tapping the knowledge of cross-
functional employees also lessens their resistance
to ABC because they feel included in the
implementation process.
7-5 Organization-sustaining costs, customer-
level costs, and the costs of idle capacity should
activity. The most practical approach is often to
ask employees how they spend their time. It is
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2 Managerial Accounting, 16th Edition
7-8 In traditional cost systems, product-level
costs are indiscriminately spread across all
products using direct labor-hours or some other
allocation base related to volume. As a
consequence, high-volume products are assigned
7-9 Activity rates tell managers the average
cost of resources consumed to carry out a
particular activity such as processing purchase
orders. An activity whose average cost is high
may be a good candidate for process
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Solutions Manual, Chapter 7 3
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
4 Managerial Accounting, 16th Edition
Chapter 7: Applying Excel
The completed worksheet is shown below.
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Solutions Manual, Chapter 7 5
Chapter 7: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
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6 Managerial Accounting, 16th Edition
Chapter 7: Applying Excel (continued)
1. When the number of units ordered by OfficeMart is doubled to 160
units, the result is:
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Solutions Manual, Chapter 7 7
Chapter 7: Applying Excel (continued)
a. The customer margin under activity-based costing at 80 units was
only $840, whereas the customer margin at 160 units is $7,640. The
number of units ordered has doubled, but the customer margin is
almost ten times what it was. The customer margin would have
b. The product margin under traditional costing has exactly doubled,
going from a loss of $10,800 to a loss of $21,600, because all of the
c. Assuming that the activity-based costing system was carefully
designed and implemented, it will provide a more accurate picture of
what happens to profits as the number of units ordered increases. If
some of the fixed manufacturing overhead costs are order-related
and customer-related costs and some are not attributable to
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8 Managerial Accounting, 16th Edition
Chapter 7: Applying Excel (continued)
2. With the changes in the data, the worksheet should look like this:
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
Solutions Manual, Chapter 7 9
Chapter 7: Applying Excel (continued)
c. Even though the number of units ordered is exactly the same, the
profitability picture has shifted radically and is summarized below:
Lower-end,
Fewer orders,
More units per order
Hi
g
her-end,
More orders,
Fewer units per
order
Customer mar
g
in,
activity-based
Lower-end,
Fewer orders,
More units per order
Hi
g
her-end,
More orders,
Fewer units per order
Sellin
g
price …………. $595 $795
Direct materials ……. 180 185
Under the traditional costing method, $500 of manufacturing
overhead is allocated to each. Consequently, the product margin is
Under activity-based costing, the additional costs of processing 20
orders rather than 4 orders increases the order-related overhead
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10 Managerial Accounting, 16th Edition