4-33
Problem 4.32 (Continued)
2. Activities Cost Driver Activity Rate
Setup Runs $240,000/300 = $800/run
Machine Machine hours $1,750,000/185,000 = $9.46*/MHr
Overhead assignment:
Part 127 Part 234
Setup costs:
$800 × 100 ………………….. $ 80,000
$800 × 200 ………………….. $ 160,000
Machine costs:
$9.46 × 60,000 …………….. 567,600
Receiving costs:
Engineering costs:
$200 × 5,000 ……………….. 1,000,000
$200 × 5,000 ……………….. 1,000,000
Material handling costs:
$1,000 × 500 ……………….. 500,000
Problem 4.32 (Concluded)
3. No. The cost of making Part 127 is $15.26, much less than the amount indi-
cated by functional-based costing. The company can compete with foreign
4. Part 234 is apparently quite expensive to make; thus, no competitor is willing
to sell it for $24, a price well below its cost of production. This explains why
5. The price of Part 127 should be lowered so that the product is competitive
Problem 4.33
1.
Resource assignment: Activity
Diagnosing Treating
Nursing:
$80,000 × 0.70 ……………. $ 56,000
$80,000 × 0.30 ……………. $ 24,000
Technicians:
$80,000 × 0.80 ……………. 64,000
$80,000 × 0.20 ……………. 16,000
4-35
Problem 4.33 (Concluded)
2. Capacity cost rate = $800,000/20,000 = $40 per hour
Activity costs:
Diagnosing: $40 × 3 × 4,000 = $480,000
4. ABC would need to do additional interviews/surveys to determine the amount
of time spent on each activity. TDABC would simply calculate the new capaci-
5. Diagnostic time = 2 + 1.5 (if mild) + 2 (if severe)
Activity rate (healthy case): $40 × 2 = $80 per patient
Problem 4.34
1. Plantwide rate = ($2,214,250 + $1,051,750 + $734,000)/10,000
= $400 per machine hour
Cylinder A: Unit cost = $400 × 3,000 = $1,200,000
2. Rates:
Welding
Rate 1: $776,000/4,000 = $194.00 per welding hour
Machining
Rate 2: $450,000/10,000 = $45.00 per machine hour
Inspecting
Rate 3: $448,250/1,000 = $448.25 per inspection
Materials Handling
Rate 4: $300,000/12,000 = $25.00 per move
Setups
Rate 5: $240,000/100 = $2,400.00 per batch
4-37
Problem 4.34 (Continued)
Overhead assignment:
Cylinder A Cylinder B
Rate 3:
$448.25 × 500 inspections …………….. 224,125
$448.25 × 500 inspections …………….. 224,125
Rate 4:
$25 × 7,200 moves ………………………… 180,000
$25 × 4,800 moves ………………………… 120,000
Rate 9:
$7.60 × 40,000 parts ……………………… 304,000
$7.60 × 10,000 parts ……………………… 76,000
Rate 10:
$65 × 1,500 engineering hours ………. 97,500
$65 × 500 engineering hours …………. 32,500
Rate 11:
Problem 4.34 (Continued)
Using plantwide rate assignments, Cylinder A is undercosted, and Cylinder B
3. Global consumption ratios:
4. Welding: (1,600/4,000, 2,400/4,000) = (0.40, 0.60)
Materials handling (parts): (40,000/50,000, 10,000/50,000) = (0.80, 0.20)
–2w1 = –1.25
w1 = 0.625
and thus,
w2 = 0.375
Cost pools:
Problem 4.34 (Continued)
Overhead assignment:
$30.00 × 40,000 parts ………………… 1,200,000
$30.00 × 10,000 parts ………………… 300,000
Total overhead costs …………………….. $ 2,200,000 $ 1,800,000
Units produced ……………………………… ÷ 1,500 ÷ 3,000
5. Inspection: (500/1,000, 500/1,000) = (0.50, 0.50)
Engineering: (1,500/2,000, 500/2,000) = (0.75, 0.25)
0.50w2 = 0.10
4-40
Problem 4.34 (Concluded)
Cost pools:
Inspection: 0.80 × $4,000,000 = $3,200,000
Overhead assignment:
Cylinder A Cylinder B
Rate 1:
$3,200 × 500 inspections …………… $1,600,000
$3,200 × 500 inspections …………… $1,600,000
4-41
Problem 4.35
1. Welding …………………………. $ 2,000,000
2. Allocation:
($2,000,000/$3,400,000) × $600,000 = $352,941
Cost pools:
Welding = $2,000,000 + $352,941 = $2,352,941
Activity rates:
Rate 1: Welding = $2,352,941/4,000 = $588 per welding hour
Overhead assignment:
Cylinder A Cylinder B
Rate 1:
$588 × 1,600 welding hours ……… $ 940,800
$588 × 2,400 welding hours ……… $ 1,411,200
4-42
Problem 4.35 (Concluded)
3. Percentage error:
Error (Cylinder A) = ($1,004 – $1,108)/$1,108 = –0.094 (–9.4%)
Problem 4.36
1. Plantwide rate = $1,650,000/1,100,000 = $1.50 per direct labor hour
2. Departmental rates:
Department 1: $850,000/425,000 = $2.00 per machine hour
Department 2: $800,000/912,500 = $0.88* per direct labor hour
Overhead cost per unit:
4-43
Problem 4.36 (Concluded)
3. Calculation of activity rates:
Rate 1 (setups) = $450,000/250 = $1,800 per setup
Rate 2 (inspections) = $350,000/5,000 = $70 per inspection hour
Overhead assignment:
Scientific Business
Setups:
$1,800 × 100 ……………………………… $180,000
$1,800 × 150 ……………………………… $ 270,000
Inspections:
Power:
$0.73 × 50,000 …………………………... 36,500
$0.73 × 500,000 …………………………. 365,000
Maintenance:
4. Using activity-based costs as the standard, the first set of departmental rates
decreased the accuracy of the overhead cost assignment (over the plantwide
4-44
CYBER RESEARCH CASE
4.37
Answers will vary.
The following problems can be assigned within CengageNOW and are auto-
graded. See the last page of each chapter for descriptions of these new assign-
ments.
• Analyzing Relationships—Calculate Overhead Rate and Overhead Variance
using graphs to show over-underapplied overhead.
• Analyzing Relationships—Practice allocating cost among various entities.
• Integrative Problem—Activity Based Costing, Strategic Cost Management, Ac-
tivity Based Management (Covers chapters 4, 11 and 12)