Accounting Chapter 26 Homework Cost Allocation And Activity based Costing Prob

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–6A (FIN MAN); Prob. 11–6A (MAN) (Concluded)

3.

Procedure A Procedure B Procedure C

Reimbursement (patient days ×

reimbursement rate)* $ 682,080 $1,319,500 $1,948,800

Total activity cost (from 2.) 819,840 721,800 1,507,200

4. Procedure A requires more activity cost than is being reimbursed by the insurance

company. As a result, the hospital may wish to determine if the costs of providing

Procedure A are too high. Hospital management may wish to investigate the

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–1B (FIN MAN); Prob. 11–1B (MAN)

1. a. Direct labor overhead rate:

2.

a. Direct labor hours:

Blending Department…………

…

260 dlh 245 dlh 215 dlh

Packing Department……………

…

470 300 130

Total direct labor hours………

…

730 dlh 545 dlh 345 dlh

…

=

Skim Milk Cream

$185 per direct labor hour

Whole Milk

$299,700

1,620 direct labor hours

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–2B (FIN MAN); Prob. 11–2B (MAN)

1.

Production department factory

2. Whole milk

Blending Department…………………

…

=$ 71,500

Packing Department…………………

…

=63,450

Total factory overhead for whole milk………………………………………………

…

$134,950

…

470 dir. labor hrs. × $135/dlh

650 dir. mach. hrs. × $110/dmh

Dept. Dept.

Blending Packing

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–3B (FIN MAN); Prob. 11–3B (MAN)

1. Production department rates:

2.

× =

Receivers:

Subassembly Department……… × $300 /dlh =

…

Loudspeakers:

Subassembly Department……… × $300 /dlh =

Final Assembly Department……

…

× $210 /dlh =

3. Activity-based rates:

Factory

overhead……

…

$138,600 $261,800 $198,800 $114,800

Production

Overhead

Factory

Rate

Department

Subassembly Final Assembly

Department

$262,500

Department

$157,500

183,750

Subassembly Final Assembly

Department

Direct

Labor Hours

875

525

875

Setup

Quality

Control

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–3B (FIN MAN); Prob. 11–3B (MAN) (Concluded)

4.

Activity Activity

Activity Cost Cost

Setup 80 setups /setup 320 setups /setup

5. The activity-based overhead allocation reveals that loudspeakers are more costly on a per-unit basis than are the receivers. The multiple

production department rate method determines that the per-unit factory overhead is nearly the same for the two products. The multiple

Loudspeakers

×= ×=

Rate

Activity

Rate

Receivers

Activity

Usage

Activity

Usage

Activity

$346.50 $ 27,720

$346.50 $110,880

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–4B (FIN MAN); Prob. 11–4B (MAN)

1.

Total activity cost…………

…

$500,000 $44,000 $115,000 $84,000

2.

Activity

Production 5,000 mh /mh 2,500 mh /mh

Setup 85 setups /setup 170 setups /setup

Activity

Production 2,500 mh /mh

Setup 195 setups /setup

Inspection 550 insp. /insp.

Powdered Sugar

Activity-

White Sugar

Activity-

$40 22,000

Base Activity Activity

Usage × Rate

Cost

Activity

Brown Sugar

Usage × Rate =

Activity-

Activity

Customer ServiceProduction Setup ShippingInspection

Activity Base

54,400

$50 $250,000 $50 $125,000

$320

Usage × Rate =

Base Activity

$144,000

Cost

$320 27,200

$50

=Cost

$125,000

$320 62,400

…

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–4B (FIN MAN); Prob. 11–4B (MAN) (Concluded)

3. The unit costs are different even though each product requires 0.5 machine

hour because the products consume many activities in ratios different from the

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–5B (FIN MAN); Prob. 11–5B (MAN)

1.

Activity cost pool……………………… $76,860 $25,920 $311,250

2.

The Warehouse

Customer service……………………… × $180/sr = $ 11,160

Sales order processing………………

…

× $24/so = 7,200

Advertising support…………………

…

× $1,250/ad =31,250

Total nonmanufacturing activity costs…………………………………………

…

$ 49,610

Kosmo Co.

Customer service……………………… × $180/sr = $ 61,200

Sales order processing………………

…

× $24/so = 15,360

…

Processing Support

Sales Order Advertising

Customer

Service

300 sos

25 ads

340 srs

640 sos

62 srs

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–5B (FIN MAN); Prob. 11–5B (MAN) (Concluded)

3.

The Supply

Warehouse Kosmo Co. Universe

Revenues $899,100 $899,100 $899,100

4. Kosmo Co. has low profitability, while the other two customers have acceptable

margins. This is because Kosmo Co. requires many customer services, sales

order processing, and advertising support activities. For example, Kosmo Co.

orders frequently in small order sizes, which increases the sales order processing

costs; it requests a large amount of service; and it requires extensive promotional

support. The company’s options include:

a. Drop Kosmo Co. This does not necessarily mean that all the costs can be

avoided. The costs will only be eliminated if the reduced activity translates

into lower spending. Thus, the company should evaluate the contribution

margin of this customer relationship before making this decision.

services. This is a good long-term solution.

SHRUTE INC.

Customer Profitability Report

For the Year Ended December 31

1

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–6B (FIN MAN); Prob. 11–6B (MAN)

1. The depreciation and maintenance cost per mile is calculated as follows:*

2.

Monthly

Ground

Personnel

Terminal City Cost per City ÷ =

Charlotte……………

…

$256,000 ÷ =

…

3.

Passenger revenue

(passengers × ticket price)

Fuel, crew, and depreciation

Flight Profitability Report

Arrivals/Departures

Number of

320

Arrival/Departure

$800

BLUE STAR AIRLINE

Rate per City

For Three Representative Flights

$55,600

Flight 103Flight 102Flight 101

$ 7,640

$22,075

CHAPTER 26 Cost Allocation and Activity-Based Costing

Prob. 26–6B (FIN MAN); Prob. 11–6B (MAN) (Concluded)

4. The break-even formula is:

None of the costs in a flight are variable to the number of seats. Essentially, the

costs will be incurred regardless of the number of passengers on the flight.

Thus, the costs of the flight are all fixed. Given this assumption, the break-even

number of passengers is a straightforward division of the costs by the fare. The

results are (rounded to the nearest whole number):

101

Approximate Break-Even

$41,700 ÷ $695 = 60 passengers

Flight

CHAPTER 26 Cost Allocation and Activity-Based Costing

CP 26–1 (FIN MAN); CP 11–1 (MAN)

The net income is larger because the controller took period costs and treated them

as product costs for financial reporting purposes. All of the post-manufacturing

costs should be treated as an expense in the period incurred according to generally

accepted accounting principles (GAAP). If treated as product costs for financial

reporting purposes, some of these period costs were included in inventory while the

rest were included in the cost of goods sold. As a result, the net income would be

higher by the amount of period cost included (capitalized) in inventory.

CP 26–2 (FIN MAN); CP 11–2 (MAN)

The product profitability report indicates that the two products are equal in terms of

profitability (on a per-case basis). However, the additional information indicates that

there will be more activities required for Fizz Whiz than for Storm Soda. Apparently,

the factory overhead costs are being allocated on the basis of a single activity base

CASES & PROJECTS

CHAPTER 26 Cost Allocation and Activity-Based Costing

CP 26–3 (FIN MAN); CP 11–3 (MAN)

Wells Fargo Insurance Service’s (WFIS) activity-based costing model provides more

accurate product costs than does the revenue-based allocation scheme. This is

because WFIS has a large amount of processing and service expenses that are

unrelated to revenue volume but are instead related to products being “easy” and

“difficult.” WFIS’s actual activities associated with processing and service expenses

included phone inquiries, written inquiries, electronic processing, claim processing,

CHAPTER 26 Cost Allocation and Activity-Based Costing

CP 26–4 (FIN MAN); CP 11–4 (MAN)

1. Floor Bookshelf Ribbon

Loudspeakers Loudspeakers Loudspeakers

Gross profit as percentage

of sales…………………………………

…

30% 40% 10%

2. To: Management of Boom Box Sounds Inc.

From: Controller

The enclosed product profitability report indicates that our product lines provide

varying degrees of profitability. By far, our most profitable product line is the

bookshelf loudspeakers. The floor loudspeakers provide a healthy gross profit.

Bookshelf Loudspeakers

Bookshelf loudspeakers provide both a healthy gross profit and operating return

on sales.

Floor Loudspeakers

We should retain the floor loudspeakers in our product portfolio. The product

provides us a healthy gross profit. Unfortunately, we spend too much on

marketing this high-volume line of product. The vice president of marketing

assures me that the product has strong recognition in the marketplace. As such,

I recommend that we reduce our marketing effort for this product and manage

our profit for this product more carefully.

Ribbon Loudspeakers

Ribbon loudspeakers are one of our “up and comers.” No other competitor has

a similar product. Thus, we have the market to ourselves. Yet, this product does

CHAPTER 26 Cost Allocation and Activity-Based Costing

CP 26–5 (FIN MAN); CP 11–5 (MAN)

Adlin’s concern appears valid. Teldar Tech Inc. is presently using direct labor as an

allocation base. This method, either as a single plantwide factory overhead rate or

as multiple production department factory overhead rates, will distort the product

costs when activities are consumed by products in different proportions than their

consumption of direct labor hours. The high-volume T-100 calculators appear easy

to make and consume relatively little factory support overhead, while the T-900

series consumes a small amount of direct labor (they are low-volume) but larger

CP 26–6 (FIN MAN); CP 11–6 (MAN)

Students may arrive at a variety of possible activities and activity bases. Below is a

representative list.

Activity Activity Base

Opening an account Number of accounts opened

Teller deposit transaction Number of teller deposits

Teller withdrawal transaction Number of teller withdrawals

ATM withdrawal transaction Number of ATM withdrawals