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Problem C-3A (25 minutes)
1. When companies experience strong price pressure on their high-
volume, commodity-type products, they should be concerned. Many
2. The company may be charging less for its low-volume, custom-order
products than the competitors because the company is using a volume-
3. While prices are really set in the marketplace based on customer
demand and supply of the product, companies still look at costs to
4. Custom-order furniture requires handling special fabrics, buying in
smaller quantities (which may be more expensive than buying “in bulk”),
5. In addition to obtaining a more accurate picture of the costs of making
various products, activity based costing also gives information about
Problem C-4A (45 minutes)
1. Plantwide overhead rate:
Engineering support $ 24,500
Product A Product B
Direct materials per unit $15.00 $24.00
Direct labor per unit
Product A
Product B
2. Product A Product B
Gross profit per unit $ 3.63 $35.36
x units purchased per customer
C-20
Problem C-4A (concluded)
3. Engineering Support $24,500/(12 + 58) modifications $350/modification
Product A Product B
Engineering support
A: 12 modifications @ $350 $ 4,200
4. Product A Product B
Gross profit per unit (from above) $5.70 $24.97
x units per customer (part 2) x 20 units x 5 units
C-21
Problem C-4A (concluded)
5. Activity based costing gives better information than the plantwide rate
based on volume-related measures because ABC associates the cost of
Problem C-5A (25 minutes)
1. Liquid materials $2,304/(1,400 + 37,000) gallons $0.06/gallon
PowerPunch
SlimLife
Liquid material
1,400 gal x $0.06
$ 84
37,000 gal x $0.06
$ 2,220
2. PowerPunch SlimLife
Total cost of line $19,122 $95,070
Problem C-5A (concluded)
3. For PowerPunch:
4. The price of SlimLife must cover the costs associated with the product,
so the minimum price for this product is $0.53/bottle.
Problem C-6A (45 minutes)
Part 1
Determination of cost per driver unit
Cost Center
Cost
Driver
Cost per Driver
Professional salaries .......................
$2,000,000
10,000 hours
$200 per hour
Part 2
Allocation of cost to the surgical departments using ABC
GENERAL SURGERY
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries .............
2,500 hours
$200 per hr.
$ 500,000
C-23
Problem C-6A (concluded)
ORTHOPEDIC SURGERY
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries .............
7,500 hours
$200 per hr.
$1,500,000
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Appendix C
C-24
PROBLEM SET B
Problem C-1B (45 minutes)
1. Wrapping $500,000/100,000 units = $5/unit
2.
Holiday Basket
Executive Basket
Wrapping
8,000 units x $5
$ 40,000
1,000 units x $5
$ 5,000
3. Cost per unit Holiday Basket Executive Basket
C-25
Problem C-1B (concluded)
4. Plantwide overhead rate
Wrapping ($300,000 + $200,000) $ 500,000
5.
Holiday Basket Executive Basket
Activity based cost per unit $14.25 $73.90
C-26
Problem C-2B (45 minutes)
1. Plantwide rate:
2.
Extra Fine Family Style
3.
Extra Fine Family Style
Selling price per case $18.00 $ 9.00
Problem C-2B (concluded)
4. Mixing & Cooking ($4,500 + $11,250)/1,500 MH $10.50/MH
Product testing $112,500/600 batches $187.50/batch
5. Extra Fine Family Style
Selling price per case $18.00 $9.00
6. Departmental overhead rates would be a modest improvement over the
plantwide rate because they could show differences across
C-28
Problem C-3B (25 minutes)
1. The major costs of making the boxes are designing the boxes, setting
up machines to make the right cuts, cutting the cardboard, printing
3. Yes. Lakeside’s old customers bought the same type of boxes over
4. Possibly. If ABC had been used rather than a volume-based system,
Lakeside would have realized that small customers who want
5. ABC gives managers information about the activities and the costs of
C-29
Problem C-4B (45 minutes)
1. Plantwide overhead rate:
Engineering support $ 56,250
Electricity 112,500
Standard Deluxe
Direct materials cost per unit $ 4.00 $ 8.00
Direct labor cost per unit
2.
Profit per customer Standard Deluxe
Gross profit per unit $3.80 $ 12.80
Problem C-4B (concluded)
3. Eng. support $56,250/(50 + 25) modifications = $750/modification
* From part 1
Standard
Deluxe
Engineering
50 mods. x $750
$37,500
25 mods. x $750
$ 18,750
Electricity
120,000 MH x $0.75
90,000
30,000 MH x $0.75
22,500
4. Standard Deluxe
Gross profit per unit $ 4.09 $ 11.64
5. ABC gives more appropriate information to managers because it
identifies the resources consumed by each product line, and assigns
C-31
Problem C-5B (30 minutes)
1. Components $495,000/(450,000 + 100,000) parts $0.90/part
Fun with Fractions
Count Calculus
Components
450,000 parts x$0.90
$ 405,000
100,000 parts x $0.90
$ 90,000
Assembly
15,000 DLH x$14.40
216,000
2,000 DLH x $14.40
28,800
2. Cost per unit Fun with Fractions Count Calculus
Total manufacturing cost $1,240,200 $275,760
3. Selling price of Count Calculus $59.95
4. Since the cost associated with Fun with Fractions is $8.27, the price
Problem C-6B (45 minutes)
Part 1
Determination of cost per driver unit
Cost Center
Cost
Driver
Cost per Driver
Professional salaries ...........
$600,000
10,000 hours
$60 per hour
Part 2
Allocation of costs to the landscaping departments using ABC
GENERAL LANDSCAPING
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
CUSTOM DESIGN LANDSCAPING
Cost
Driver
Cost per
Driver Unit
Allocated
Cost
Professional salaries .............
7,500 hours
$60 per hr.
$ 450,000
Part 3
If costs were allocated on the number of customers, the average cost of
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Appendix C
C-33
SERIAL PROBLEM — SP C
1. Direct materials $2,500
2. Setting up machines $20,000/25 batches = $800/batch
3. ABC gives a better representation of the cost of producing Job 6.15
because it reflects the resources consumed in the production
