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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
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
