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1.
Production department rates:
Cutting Finishing
Department Department
Factory overhead
Direct labor hours
Production department rate
/dlh /dlh
2.
Direct Labor Production Factory
Hours Department Rate = Overhead
Snowboards:
Cutting Department /dlh =
Finishing Department /dlh =
Total factory overhead
Number of units
Factory overhead per unit
Skis:
Cutting Department /dlh =
Finishing Department /dlh =
Total factory overhead
Number of units
Factory overhead per unit
3.
Activity-based rates:
Factory overhead
Activity base prod. runs
moves
dlh dlh
Activity rate /prod. run /move /dlh /dlh
4.
Activity Usage Activity Rate =Activity Cost Activity Usage Activity Rate =Activity Cost
Production Control runs /run = runs /run =
Materials Handling
moves
/move =
moves
/move =
Cutting Department dlh /dlh = dlh /dlh =
Finishing Department dlh /dlh = dlh /dlh =
Total
Number of units
Activity cost per unit
5.
Snowboards
Skis
Activity
[Key essay answer here]
Finishing
Control
Handling
Department
Department
Production
Materials
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Cutting
Problem 26(11)-3A
Name:
Section:
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1.
Production department rates:
Cutting Finishing
Department Department
Factory overhead $315,000 $540,000
2.
Direct Labor Production Factory
Hours
Department Rate
= Overhead
Snowboards:
Cutting Department 4,000 $52.50 /dlh = 210,000$
Finishing Department 2,000 $90.00 /dlh = 180,000
Skis:
Cutting Department 2,000 $52.50 /dlh = 105,000$
3.
Activity-based rates:
Factory overhead $237,000 $270,000 $156,000 $192,000
4.
Activity Usage Activity Rate =Activity Cost Activity Usage Activity Rate =Activity Cost
Production Control 430 runs $474.00 /run = 203,820$ 70 runs $474.00 /run = 33,180$
Materials Handling 5,000
moves
$36.00 /move = 180,000 2,500
moves
$36.00 /move = 90,000
5.
The activity-based overhead allocation reveals that snowboards consume more factory overhead on a per-unit basis than
do skis. The multiple production department factory overhead rate method does not show this because all factory
Snowboards
Skis
Activity
Control
Handling
Department
Department
Production
Materials
Cutting
Finishing
Problem 26(11)-3A
Name:
Solution
Section:
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1.
Production department rates:
Subassembly Final Assembly
Department Department
Factory overhead
Direct labor hours
Production department rate
/dlh /dlh
2.
Direct Labor Production Factory
Hours Department Rate = Overhead
Receivers:
Subassembly Department /dlh =
Final Assembly Department /dlh =
Total factory overhead
Number of units
Factory overhead per unit
Loudspeakers:
Subassembly Department /dlh =
Final Assembly Department /dlh =
Total factory overhead
Number of units
Factory overhead per unit
3.
Activity-based rates:
Factory overhead
Activity base setups insp. dlh dlh
Activity rate /setup /insp. /dlh /dlh
4.
Activity Usage Activity Rate =Activity Cost Activity Usage Activity Rate =Activity Cost
Setup setups /setup =
setups
/setup =
Quality Control insp. /insp. = insp. /insp. =
Subassembly Department dlh /dlh = dlh /dlh =
Final Assembly Department dlh /dlh = dlh /dlh =
Total
Number of units
Activity cost per unit
5.
Loudspeakers
Activity
[Key essay answer here]
Final Assembly
Setup
Control
Department
Department
Quality
Problem 26(11)-3B
Name:
Section:
Receivers
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Subassembly
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1.
Production department rates:
Subassembly Final Assembly
Department Department
Factory overhead $420,000 $294,000
2.
Direct Labor Production Factory
Hours Department Rate = Overhead
Receivers:
Subassembly Department 875 $300 /dlh = 262,500$
Final Assembly Department 525 $210 /dlh = 110,250
Loudspeakers:
Subassembly Department 525 $300 /dlh = 157,500$
Final Assembly Department 875 $210 /dlh = 183,750
3.
Activity-based rates:
4.
Activity Usage Activity Rate =Activity Cost Activity Usage Activity Rate =Activity Cost
Setup 80 setups $346.50 /setup = 27,720$ 320 setups $346.50 /setup = 110,880$
5.
Loudspeakers
Activity
Subassembly
Final Assembly
Setup
Control
Department
Department
Quality
Problem 26(11)-3B
Name:
Solution
Section:
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 determined that the per-unit factory overhead was nearly the
same for the two products. The multiple production department factory overhead rate method distorts the unit costs
Receivers
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1. Production Setup Materials Handling Inspection Engineering
Total activity cost
Divided by total activity base mh setups no. parts insp. hours eng. hours
Activity rate /mh /setup /part /hour /hour
2.
Activity Activity Activity Activity Activity Activity
Activity
Activity Base Usage Rate =Cost Activity Base Usage Rate =Cost Activity Base Usage Rate =Cost
Production mh mh mh
Setup setups setups setups
Material handling parts parts parts
Inspection insp. hours insp. hours insp. hours
Engineering eng. hours eng. hours eng. hours
Total
Number of units
Activity cost per unit
3.
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I8
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M5
Z4
0%
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Problem 26(11)-4A
Name:
Section:
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1. Production Setup Materials Handling Inspection Engineering
Total activity cost 264,000$ 96,000$ 9,600$ 50,000$ 150,000$
Divided by total activity base 2,200 mh 400 setups 480 no. parts 1,000 insp. hours 500 eng. hours
Activity rate 120$ /mh 240$ /setup 20$ /part 50$ /hour 300$ /hour
2.
Activity Activity Activity Activity Activity Activity
Activity
Activity Base Usage Rate =Cost Activity Base Usage Rate =Cost Activity Base Usage Rate =Cost
Production 1,000 mh $120 120,000$ 800 mh $120 96,000$ 400 mh $120 48,000$
Setup 60 setups $240 14,400 120 setups $240 28,800 220 setups $240 52,800
Material handling 80 parts $20 1,600 150 parts $20 3,000 250 parts $20 5,000
3.
The unit costs are different even though each product requires 0.8 machine hour because
the products consume many activities in ratios different from the volume. For example, the
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M5
Z4
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Problem 26(11)-4A
Name:
Solution
Section:
I8
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1. Production Setup Inspection Shipping Cust. Serv.
Total activity cost
Divided by total activity base mh setups inspections cust. orders requests
Activity rate /mh /setup /inspect. /cust. ord. /request
2.
Activity Activity Activity Activity Activity Activity
Activity
Activity Base Usage Rate =Cost Activity Base Usage Rate =Cost Activity Base Usage Rate =Cost
Production mh mh mh
Setup setups setups setups
Inspection insp. insp. insp.
Shipping cust. orders cust. orders cust. orders
Customer service requests requests requests
Total
Number of units
Activity cost per unit
3.
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Powdered Sugar
[Key essay answer here]
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White Sugar
Brown Sugar
0%
[Key code here]
Problem 26(11)-4B
Name:
Section:
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1. Production Setup Inspection Shipping Cust. Serv.
Total activity cost 500,000$ 144,000$ 44,000$ 115,000$ 84,000$
Divided by total activity base 10,000 mh 450 setups 1,100 inspections 5,750 cust. orders 600 requests
Activity rate 50$ /mh 320$ /setup 40$ /inspect. 20$ /cust. ord. 140$ /request
2.
Activity Activity Activity Activity Activity Activity
Activity
Activity Base Usage Rate =Cost Activity Base Usage Rate =Cost Activity Base Usage Rate =Cost
Production 5,000 mh $50 250,000$ 2,500 mh $50 125,000$ 2,500 mh $50 125,000$
Setup 85 setups $320 27,200 170 setups $320 54,400 195 setups $320 62,400
Inspection 220 insp. $40 8,800 330 insp. $40 13,200 550 insp. $40 22,000
3.
The unit costs are different even though each product requires 0.5 machine hour because
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White Sugar
Brown Sugar
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Problem 26(11)-4B
Name:
Solution
Section:
Powdered Sugar
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1.
Customer Project Engineering
Service Bidding Support
Activity cost
Activity base
serv. reqs. bids desgn. chngs.
Activity rate
/serv. req. /bid /change
2.
Number Activity
of Activities Rate = Total
Good Knowledge University
Customer service serv. reqs. /req.
Project bidding bids /bid
Engineering support desgn. chngs. /chng.
Total nonmanufacturing activity costs
Hot Shotz Arena
Customer service serv. reqs. /req.
Project bidding bids /bid
Engineering support desgn. chngs. /chng.
Total nonmanufacturing activity costs
Break-a-Leg Hospital
Customer service serv. reqs. /req.
Project bidding bids /bid
Engineering support desgn. chngs. /chng.
Total nonmanufacturing activity costs
3.
Good Hot Break-
Knowledge Shotz a-Leg
University Arena Hospital
Revenues
Less cost of goods sold
Gross profit
Less selling and administrative activities:
Customer service
Project bidding
Engineering support
Total selling and admin. activities
Income from operations
4.
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[Key essay answer here]
COLD ZONE MECHANICAL INC.
Customer Profitability Report
For the Year Ended December 31
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Problem 26(11)-5A
Name:
Section:
Score:
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1.
Customer Project Engineering
Service Bidding Support
Activity cost
$83,720 $61,360 $86,800
Activity base
322 serv. reqs. 104 bids 217 desgn. chngs.
Activity rate
$260 /serv. req. $590 /bid $400 /change
2.
Number Activity
of Activities Rate = Total
Good Knowledge University
Customer service 60 serv. reqs. $260 /req. 15,600$
Project bidding 36 bids $590 /bid 21,240
Hot Shotz Arena
Customer service 52 serv. reqs. $260 /req. 13,520$
Project bidding 18 bids $590 /bid 10,620
Engineering support 30 desgn. chngs. $400 /chng. 12,000
3.
Good Hot Break-
Knowledge Shotz a-Leg
University Arena Hospital
Revenues 1,650,000$ 1,050,000$ 450,000$
4.
Break-a-Leg Hospital is unprofitable, while the other two customers have acceptable margins. This is because Break-a-Leg Hospital requires
many customer service, project bidding, and design change activities. For example, Break-a-Leg Hospital awards contracts on only 12% of the
bid efforts (6 contracts/50 bids); it requests a large amount of service; and it requires extensive design change effort. The company's options
b. Reprice Break-a-Leg Hospital work. Charge Break-a-Leg Hospital a higher price to compensate for the higher activities required to serve it.
However, the customer may not accept the price increase required to move it to a profitable relationship.
c. Encourage Break-a-Leg Hospital to reduce the amount of design changes and customer service requests. The design changes are probably
driving the customer service requests. This may be appealing, but there may be no incentive for Break-a-Leg Hospital to change its behavior.
d. Charge a price for customer service and design change separately. That is, unbundle the pricing of goods from the
support services. This is a good long-term solution. In addition, improve the bidding process in order to improve the
“hit rate” or the percentage of awarded contracts to bids.
COLD ZONE MECHANICAL INC.
Customer Profitability Report
For the Year Ended December 31
Problem 26(11)-5A
Name:
Solution
Section:
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Break-a-Leg Hospital is unprofitable, while the other two customers have acceptable margins. This is because Break-a-Leg Hospital requires
many customer service, project bidding, and design change activities. For example, Break-a-Leg Hospital awards contracts on only 12% of the
bid efforts (6 contracts/50 bids); it requests a large amount of service; and it requires extensive design change effort. The company's options
include:
a. Stop bidding Break-a-Leg Hospital projects: 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 headcount (dismissals). Thus, the company should evaluate the contribution margin of this
customer relationship before making this decision.
b. Reprice Break-a-Leg Hospital work. Charge Break-a-Leg Hospital a higher price to compensate for the higher activities required to serve it.
However, the customer may not accept the price increase required to move it to a profitable relationship.
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1.
Customer Sales Order Advertising
Service Processing Support
Activity cost pool
Activity base
serv. reqs. orders ads placed
Activity rate
/serv. req. /order /ad
2.
Number Activity
of Activities Rate = Total
Office Warehouse
Customer service serv. reqs. /req.
Sales order processing orders /order
Advertising support
ads placed /ad
Total nonmanufacturing activity costs
Office To-Go
Customer service serv. reqs. /req.
Sales order processing orders /order
Advertising support
ads placed /ad
Total nonmanufacturing activity costs
Office Universe
Customer service serv. reqs. /req.
Sales order processing orders /order
Advertising support
ads placed /ad
Total nonmanufacturing activity costs
3.
The Kosmo Supply
Warehouse Co. Universe
Revenues
Less cost of goods sold
Gross profit
Less selling and administrative activities:
Customer service cost
Sales order processing cost
Advertising support cost
Total selling and admin. activities
Income from operations
4.
Instructions
Problem 26(11)-5B
Name:
Section:
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[Key essay answer here]
SHRUTE INC.
Customer Profitability Report
For the Year Ended December 31
[Key code here]
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1.
Customer Sales Order Advertising
Service Processing Support
2.
Number Activity
of Activities Rate = Total
The Warehouse
Customer service 62 serv. reqs. $180 /req. 11,160$
Sales order processing 300 orders $24 /order 7,200
Advertising support
25 ads placed $1,250 /ad 31,250
Total nonmanufacturing activity costs 49,610$
Supply Universe
Customer service 25 serv. reqs. $180 /req. 4,500$
Sales order processing 140 orders $24 /order 3,360
3.
The Kosmo Supply
Warehouse Co. Universe
Revenues 899,100$ 899,100$ 899,100$
4.
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Problem 26(11)-5B
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Section:
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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:
b. Reprice Kosmo Co. Charge Office To-Go a higher price to compensate for the higher activities required to serve it. The customer may not
accept the price increase required to move this to a profitable relationship.
c. Encourage Kosmo Co. to order in larger quantities. This may be appealing. However, if Kosmo Co. wishes to keep its inventories low, it will
avoid making large infrequent orders but instead will prefer smaller frequent orders.
d. Improve the internal operations of Shrute Inc. to reduce the impact of the sales order-related activities. Reduce the cost of sales
order processing.
e. Unbundle pricing. Price customer service and advertising support as separate services. In other words, unbundle the pricing of
goods from the support services. This is a good long-term solution.
SHRUTE INC.
Customer Profitability Report
For the Year Ended December 31
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.
b. Reprice Kosmo Co. Charge Office To-Go a higher price to compensate for the higher activities required to serve it. The customer may not
accept the price increase required to move this to a profitable relationship.
c. Encourage Kosmo Co. to order in larger quantities. This may be appealing. However, if Kosmo Co. wishes to keep its inventories low, it will
avoid making large infrequent orders but instead will prefer smaller frequent orders.
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1.
Scheduling
& Admitting Housekeeping Nursing
Activity cost
Activity base
patients days wgt. care units
Activity rate
/patient /day /unit
2.
Activity Activity
Usage Rate = Total
Procedure A:
Scheduling and admitting patients /patient
Housekeeping pat. days /pat. day
Nursing wgt. care units /unit
Total
Procedure B:
Scheduling and admitting patients /patient
Housekeeping pat. days /pat. day
Nursing wgt. care units /unit
Total
Procedure C:
Scheduling and admitting patients /patient
Housekeeping pat. days /pat. day
Nursing wgt. care units /unit
Total
3.
Procedure A Procedure B Procedure B
Reimbursement (patient days x reimb. rate)
Less total activity cost (from req. 2)
Excess (deficiency)
4.
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[Key essay answer here]
Problem 26(11)-6A
Name:
Section:
0%
[Key code here]
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1.
Scheduling
& Admitting Housekeeping Nursing
Activity cost
$432,000 $4,212,000 $5,376,000
Activity base
6,000 patients 27,000 days 192,000 wgt. care units
Activity rate
$72 /patient $156 /day $28 /unit
2.
Activity Activity
Usage Rate = Total
Procedure B:
Scheduling and admitting 650 patients $72 /patient 46,800$
Housekeeping 3,250 pat. days $156 /pat. day 507,000
Nursing 6,000 wgt. care units $28 /unit 168,000
Total 721,800$
Total 1,507,200$
3.
Procedure A Procedure B Procedure B
Reimbursement (patient days x reimb. rate) 682,080$ 1,319,500$ 1,948,800$
4.
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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
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Problem 26(11)-6A
Name:
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1.
Depreciation and maintenance cost per mile:
Fuel
Crew salaries
Depreciation
Total
Monthly number of miles flown
Rate per mile
2. Monthly Ground Number of Arriv./Depart.
Personnel Arrivals/ Rate per
Terminal City Cost per City Departures =City
Charlotte
Pittsburgh
Detroit
San Francisco
Total
3.
Flight 101 Flight 102 Flight 103
Passenger revenue (passengers x ticket price)
Fuel, crew, and depr. costs (miles x rate)
Ground personnel (sum of arriv./depart. charges)
Total costs
Flight income from operations
4. Ticket Price
Break-Even
Fixed Costs less Var. Cost Number of
Flight of Flight per Seat =Passengers
101
102
103
0%
[Key code here]
BLUE STAR AIRLINE
Flight Profitability Report
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For Three Representative Flights
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Problem 26(11)-6B
Name:
Section:
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1.
Depreciation and maintenance cost per mile:
Fuel 2,120,000$
Crew salaries 850,000
2. Monthly Ground Number of Arriv./Depart.
Personnel Arrivals/ Rate per
Terminal City Cost per City Departures =City
Charlotte 256,000$ 320 800$
Pittsburgh 97,500 130 750
3.
Flight 101 Flight 102 Flight 103
Passenger revenue (passengetrs x ticket price) 55,600$ 22,075$ 7,640$
Fuel, crew, and depr. costs (miles x rate) 40,000$ 16,000$ 8,000$
4. Ticket Price Break-Even
Fixed Costs less Var. Cost Number of
Flight of Flight per Seat =Passengers
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BLUE STAR AIRLINE
Flight Profitability Report
For Three Representative Flights
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Problem 26(11)-6B
Name:
Solution
Section:
