Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 17
Chapter 17
Activity-Based Costing and Analysis
QUESTIONS
1. Manufacturing overhead costs cannot be traced to units of product like direct
2. Overhead is commonly assigned to products using (a) a plantwide overhead rate,
(b) departmental overhead rates, or (c) activity based costing.
3. Direct labor hours and machine hours are commonly used to assign overhead costs
because they are readily available. Companies keep track of direct labor hours for
payroll purposes anyway and machine hours can be measured easily. The ready
4. A single plantwide overhead rate is easy to use. All the overhead costs are put into
5. The assumptions underlying the use of a single plantwide overhead rate are (a) the
6. Anything to which costs would be assigned is considered a “cost object.” Common
cost objects are units of product, product lines, departments, activities, and
projects.
7. If the assumptions mentioned in question 5 are violated, there will be distortions.
That is, if all overhead costs are not related to the single base there will be
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 17
8. Departmental overhead rates reflect the unique costs and drivers in various
9. Departmental overhead rates are similar to plantwide overhead rates in the fact that
they pool together costs that may be incurred differently. Distorted cost
10. Overhead allocation under ABC is more accurate because (1) there are more cost
pools, (2) costs in each pool are more similar, and (3) allocation is based on
activities that cause costs.
11. Companies may choose to use an alternative, more expensive method of assigning
12. The first step in ABC is to identify the activities that cause costs to be incurred.
13. An activity cost driver is the measure of the activity that causes costs to be
14. Value-added activities are those that increase the value of a product or service.
15. Unit level activities: Activities that must be performed for each unit of product.
Batch level activities: Activities that are related to the number of batches, lots, or
16. Activity-based costing may be used in any type of organization. The premise of
ABC is that activities cause costs. Since all organizations engage in activities,
17. While ABC may provide more accurate cost assignments, the additional cost to
implement activity-based costing may not be justified. That is, the value of the
18. The key components of lean accounting are (1) eliminating waste in the accounting
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 17
QUICK STUDIES
Quick Study 17-1 (5 minutes)
Quick Study 17-2 (10 minutes)
Quick Study 17-3 (10 minutes)
Quick Study 17-4 (5 minutes)
Quick Study 17-5 (5 minutes)
Quick Study 17-6 (5 minutes)
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 17
Quick Study 17-7 (5 minutes)
Quick Study 17-8 (10 minutes)
Quick Study 17-9 (5 minutes)
Quick Study 17-10 (5 minutes)
1. Plant-wide overhead rate (based on direct labor hours)
Quick Study 17-11 (5 minutes)
Quick Study 17-12 (5 minutes)
Departmental overhead rate
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Quick Study 17-13 (10 minutes)
Activity Cost Pool
Expected
Cost
Expected
Amount of
Cost Driver
Activity
Overhead Rate
Purchasing …………………..
$19.40 per square foot
Quick Study 17-14 (10 minutes)
1. Cost of technical support per service call =
= $25
2. Assign technical support costs to each model
Quick Study 17-15 (10 minutes)
Expected Activity Activity
Activity Cost Driver* Rate
1 $ 140,000 35,000 $ 4.00
Quick Study 17-16 (10 minutes)
EXERCISES
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Exercise 17-1 (10 minutes)
Exercise 17-2 (10 minutes)
Control
Activity Level
A. Registering patients U
Exercise 17-3 (10 minutes)
1. Plantwide overhead rate: $2,180,000/125,000 DLH = $17.44/DLH
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Exercise 17-4 (15 minutes)
Compute overhead allocation rates for each activity
Expected Activity Activity
Activity Cost Driver Rate
Handling material $ 625,000 100,000 parts $6.25/part
Exercise 17-5 (15 minutes)
Note: Activity rates are taken from Exercise 17-4.
Assign overhead costs to deluxe and basic models using ABC
Deluxe
Handling material $6.25/part 20,000 parts $ 125,000
Inspecting product $600/batch 250 batches 150,000
Basic
Handling material $6.25/part 30,000 parts $ 187,500
Inspecting product $600/batch 100 batches 60,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 17
Exercise 17-6 (10 minutes)
Exercise 17-7 (15 minutes)
1. Molding
2. Part A27C
Molding 5,100 MH x $23.93/MH $122,043
3. A27C
Departmental $130,646 ÷ 9,800 units $13.33/unit*
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Exercise 17-8 (25 minutes)
1. $1,004,000 + $465,300 + $232,000 = $283.55/machine hour
6,000 machine hours
2. Model 145
Materials and labor $250.00
3. Model 145 Model 212
Price per unit $820.00 $480.00
Using a single plantwide overhead rate, Model 212 appears to be
unprofitable. Management may be inclined to stop producing this
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Exercise 17-9 (25 minutes)
1. Components $1,004,000/6,000 MH $167.33/machine hour*
*rounded
Model 145 Model 212
Components
1,800 MH x $167.33/MH $ 301,194*
2. Model 145 Model 212
3. Model 145 Model 212
Price per unit $820.00 $480.00
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 17
Exercise 17-10 (25 minutes)
2.
Direct materials $ 280,000
Direct labor
3.
4.
Direct materials $ 280,000
Direct labor
Fabricating $140,000
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Exercise 17-11 (35 minutes)
1. Compute overhead allocation rates for each activity
Components
Changeover $500,000 / 800 batches $625/batch
Assign overhead costs to products Model 145 Model 212
Changeover
400 batches x $625/batch $ 250,000 $ 250,000
Machining
1,800 MH x $46.50/MH 83,700
4,200 MH x $46.50/MH 195,300
Purchasing
300 purchase orders x $300/PO 90,000
150 purchase orders x $300/PO 45,000
Space & Utilities
1,500 units x $19.40/unit 29,100
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Exercise 17-11 (concluded)
2. Model 145 Model 212
3. Model 145 Model 212
Price per unit $820.00 $480.00
For the instructor: Both product lines appear profitable. Using ABC we see that
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Exercise 17-12 (35 minutes)
1. Total direct labor hours:
Product A Product B
Direct materials
A: 10,000 units x $2/unit $ 20,000
B: 2,000 units x $3/unit $ 6,000
Direct labor
2. Product A Product B
Price per unit $20.00 $60.00
Cost per unit 26.72 33.90
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Exercise 17-12 (concluded)
3. Compute overhead allocation rates for each activity
Assign overhead (and direct materials and direct labor) costs to products
Product A Product B
Direct materials (from part 1) $ 20,000 $ 6,000
Direct labor (from part 1) 48,000 12,000
Overhead
Machine setup
4. Product A Product B
Price per unit $20.00 $ 60.00
Cost per unit 16.58 84.60
Profit (loss) per unit $ 3.42 $(24.60)
Yes. Using activity based costing the company sees that Product B is not
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Exercise 17-13 (15 minutes)
1. Overhead rate: $630,000/270,400 DLH = $2.33/DLH
2. Overhead rate: $630,000/1,000 pounds = $630/pounds
Exercise 17-14 (15 minutes)
Overhead cost allocation of indirect labor and supplies to Department 1
Total overhead allocated to Department 1
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Exercise 17-15 (15 minutes)
1. Compute overhead allocation rates for each activity
Expected Activity Activity
Activity Cost Driver Rate
1 $ 93,000 7,750 $ 12.00
2. and 3. Assign overhead costs to products
Standard Deluxe
Activity 1
2,500 x $12 30,000
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Exercise 17-16 (20 minutes)
1. Compute overhead allocation rates for each activity
Client consultation $270,000/1,500 contact hours $180/con.hr.
Drawings $115,000/2,000 design hours $57.50/design hr.
2. Assign overhead costs to architectural job
Client consultation 450 contact hours x $180/con. hr. $ 81,000
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Exercise 17-17 (30 minutes)
Compute overhead allocation rates for each activity
Overhead Cost
Category (Activity
Cost Pool)
Total
Cost
Total
Amount of
Cost Driver
Predetermined Overhead Rate
Supervision ………………….
of direct labor cost
56,600
per machine hour
Line preparation …………..
46,000
per setup
1. Assign overhead costs to the two products using ABC
Rounded edge
Cost
Driver
Cost per
Driver Unit
Assigned Cost
Supervision ……………………….
$12,200
15%
$ 1,830
Machinery depreciation ……..
$ 28.30
$184.00
Total overhead assigned ……
$23,340
Driver Unit
Assigned Cost
Supervision ……………………….
$ 3,570
Machinery depreciation ……..
$ 28.30
Total overhead assigned ……
$84,660
2. Average cost per foot of the two products
Rounded edge
Squared edge
Direct materials ………………………
$19,000
$ 43,200
Direct labor …………………………..
12,200
23,800
Overhead (using ABC) ……………
Total cost ……………………………….
$54,540
$151,660
Average cost per foot* (ABC) …..
$10.76
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Exercise 17-18 (40 minutes)
Part 1
Compute the overhead allocation rates for each activity
Activity Cost Pool
Cost
Activity
Allocation Rate
Professional salaries …………………..
$1,600,000
10,000 hours
$160 per hour
Total costs …………………………..
$1,777,000
Part 2
Assign costs to the surgical departments using ABC
GENERAL SURGERY
Activity
Allocation
Rate
Allocated
Cost
Professional salaries ………….
2,500 hours
$160 per hr.
$400,000
Total ……………………………………………………………………………………
$478,000
Average cost per patient ……………………………………………………….
ORTHOPEDIC SURGERY
Activity
Allocation
Rate
Allocated
Cost
Professional salaries ………….
7,500 hours
$160 per hr.
$1,200,000
Total ……………………………………………………………………………………
$1,299,000
Average cost per patient ……………………………………………………….