5-21
EXERCISE 5-44 (20 MINUTES)
There are many key activities that can be suggested for each business. Some possibilities
are listed below. After each activity, a suggested cost driver is given in parentheses.
(1)
airline:
(a)
reservations (reservations booked)
(b)
baggage handling (pieces of baggage handled)
(c)
flight crew operations (air miles flown)
(d)
aircraft operations (air miles flown)
(e)
(2)
restaurant
(a)
purchasing (pounds or cost of food purchased)
(b)
kitchen operations (meals prepared)
(c)
table service (meals served)
(d)
table clearing (meals served)
(e)
dish washing (dishes washed)
(3)
fitness club:
(a)
front desk operations (number of patrons)
(b)
membership records (number of records)
(c)
personnel (number of employees)
(d)
equipment maintenance (maintenance hours)
(e)
fitness consultation (hours of service)
(4)
bank:
(a)
teller window operations (number of customers)
(b)
loan processing (loan applications)
(c)
check processing (checks processed)
(d)
personnel (number of employees)
(e)
security (number of customers)
(5)
hotel:
(a)
front desk operations (number of guests)
(b)
bell service (pieces of luggage handled)
(c)
housekeeping service (number of guest-days)
(d)
room service (meals delivered)
(e)
telephone service (phone calls made)
(6)
hospital:
(a)
admissions (patients admitted)
(b)
diagnostic lab (tests performed)
(c)
nursing (nursing hours)
(d)
surgery (hours in operating room)
(e)
general patient care (patient-days of care)
Chapter 05 – Activity-Based Costing and Management
5-22
SOLUTIONS TO PROBLEMS
PROBLEM 5-45 (35 MINUTES)
2. Allocation of administrative cost based on billable hours:
Information
5-23
PROBLEM 5-45 (CONTINUED)
3. Activity-based application rates:
Activity
Cost
Activity
Driver
Application
Rate
Staff support
$207,000
÷
300 clients
$690 per client
29,760
Staff support, in-house computing, and miscellaneous office charges of e-commerce
consulting and information systems services:
Activity
E-Commerce
Consulting
Information
Systems
Services
Staff support:
Miscellaneous office charges:
5-24
PROBLEM 5-45 (CONTINUED)
Profitability e-commerce consulting and information systems services:
E-Commerce
Consulting
Information
Systems
Services
Billings:
Less: Professional staff cost:
3,600 hours x $50
2,400 hours x $50
Administrative cost…….
4. Yes, his attitude should change. Even though both services are needed and
professionals are paid the same rate, the income percentages show that e-commerce
5. Probably not. Although both services produce an attractive return for Clark and
Chapter 05 – Activity-Based Costing and Management
5-25
PROBLEM 5-46 (60 MINUTES)
1. The predetermined overhead rate is calculated as follows:
*Direct labor, budgeted hours:
Chapter 05 – Activity-Based Costing and Management
5-26
PROBLEM 5-46 (CONTINUED)
2. Activity-based-costing analysis:
Activity
Activity
Cost Pool
Cost
Driver
Cost
Driver
Quantity
Pool
Rate
Product
Line
Cost
Driver
Quantity
for
Product
Line
Activity
Cost for
Product
Line
Product
Line
Prod.
Volume
Activity
Cost per
Unit of
Product
Machine
$310,500
Machine
115,000
$ 2.70
REG
50,000
$135,000
5,000
$27.00
Related
Hours
48,000
4,000
32.40
GMT
17,000
1,000
45.90
Total
$310,500
Material
52,500
Prod.
REG
40
$ 21,000
5,000
4.20
Runs
4,000
5.25
GMT
20
10,500
1,000
10.50
Total
100
$ 52,500
Purch.
75,000
Purch.
300
250.00
REG
100
$ 25,000
5,000
5.00
Orders
ADV
96
24,000
4,000
6.00
GMT
104
1,000
26.00
300
$ 75,000
85,000
Prod.
100
850.00
REG
$ 34,000
5,000
6.80
Runs
ADV
40
34,000
4,000
8.50
GMT
1,000
17.00
Total
100
$ 85,000
Inspect.
27,500
Inspect.
1,100
25.00
REG
400
$ 10,000
5,000
2.00
Hours
ADV
400
10,000
4,000
2.50
GMT
300
1,000
7.50
Total
$ 27,500
66,000
Ship.
1,100
60.00
REG
500
$ 30,000
5,000
6.00
400
4,000
6.00
GMT
200
1,000
12.00
$ 66,000
Eng.
32,500
Eng.
650
50.00
REG
250
$ 12,500
5,000
2.50
Hours
ADV
200
10,000
4,000
2.50
GMT
200
1,000
10.00
Total
650
$ 32,500
Machine
115,000
5.00
REG
50,000
$250,000
5,000
50.00
Hours
48,000
4,000
60.00
GMT
85,000
1,000
85.00
Total
$575,000
Chapter 05 – Activity-Based Costing and Management
5-27
PROBLEM 5-46 (CONTINUED)
3. Calculation of new product costs under ABC.
REG
ADV
GMT
Direct material …………………………...
$129.00
$151.00
$203.00
Total direct costs per unit …………..
$300.00
$360.00
$450.00
Manufacturing overhead (based on ABC):
Machine-related …………………….
$ 27.00
$ 32.40
$ 45.90
Purchasing …………………………...
Inspection ……………………………..
Packing/shipping …………………..
Facility ………………………………….
Total product cost per unit ………….
$403.50
$483.15
$663.90
Chapter 05 – Activity-Based Costing and Management
5-28
PROBLEM 5-46 (CONTINUED)
4. Comparison of costs and target prices under two alternative product-costing
systems:
REG
ADV
GMT
Reported unit overhead cost:
Traditional, volume-based costing system …………
$108.00
$132.00
$156.00
Activity-based costing system …………………………..
Traditional, volume-based costing system …………
Activity-based costing system …………………………..
Sales price data:
Actual current selling price ……………………………………
5. The REG and ADV products were overcosted by the traditional system, and the GMT
product was undercosted by the traditional system
Reported unit product cost:
Traditional, volume-based costing system …………
$408.00
$492.00
$606.00
Activity-based costing system …………………………..
GMT undercosted by traditional system …………….
5-29
PROBLEM 5-47 (25 MINUTES)
The information supplied by the ABC project team is in columns A, B, C, D, F, G, and I.
Activity
Activity
Cost
Pool
Cost
Driver
Cost
Driver
Quantity
Pool
Rate
Product
Line
Cost
Driver
Quantity
for
Product
Line
Activity
Cost for
Product
Line
Product
Line
Production
Volume
Activity
Cost
per Unit
of
Product
The results of the ABC calculations are in columns E, H and J. The ABC calculations are as
follows:
(1) Compute pool rate for material-handling activity:
(2) Compute total activity cost for each product line:
Product
Line
Pool Rate
x
Cost Driver
Quantity for
Product Line
=
Activity Cost for
Each Product Line
ADV
GMT
(3) Compute product cost per unit for each product line:
Product
Line
Activity Cost
for Each
Product
Line
÷
Product Line
Production Volume
Activity Cost
per Unit
= of Product
REG
5-30
PROBLEM 5-48 (30 MINUTES)
1. Deluxe manufacturing overhead cost:
$3,600,000 ÷ 30,000 units = $120 per unit
Deluxe
Executive
2. Activity-based application rates:
Activity
Cost
Activity
Driver
Application
Rate
setups
5-31
PROBLEM 5-48 (CONTINUED)
Manufacturing setup, machine processing, and product shipping costs of a Deluxe
unit and an Executive unit:
Activity
Deluxe
Executive
Manufacturing setups:
$ 840,000
$ 504,000
Machine processing:
Product shipping:
640,000
480,000
Total …………………………….
$3,016,000
$3,144,000
Production volume (units)….
Cost per unit…………………..
The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured cost of
an Executive cabinet is $194.80. The calculations follow:
Deluxe
Executive
Direct material…………………………………
$ 40.00
$ 65.00
Direct labor…………………………………….
25.00
25.00
Total cost……………………………………….
$253.50
$194.80
3. The Deluxe storage cabinet is undercosted. The use of machine hours produced a
Chapter 05 – Activity-Based Costing and Management
5-32
PROBLEM 5-48 (CONTINUED)
4. Cost distortion:
Deluxe Executive
5. No, the discount is not advisable. The regular selling price of $270, when compared
against the more accurate ABC cost figure, shows that each sale provides a profit to
Chapter 05 – Activity-Based Costing and Management
5-33
PROBLEM 5-49 (25 MINUTES)
1.
a.
Manufacturing overhead costs include all indirect manufacturing costs (all
production costs except direct material and direct labor). Typical overhead costs
include:
b.
Companies develop overhead rates before production to facilitate the costing of
2.
The increase in the overhead rate should not have a negative impact on the
3.
Rather than using a plantwide overhead rate, Digital Light could implement
separate activity cost pools. Examples are as follows:
4.
An activity-based costing system might benefit Digital Light because it assigns
Chapter 05 – Activity-Based Costing and Management
5-34
PROBLEM 5-50 (30 MINUTES)
1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours
Medform
Procel
Direct material …………………………...
$ 30.00
$ 45.00
Direct labor:
45.00
60.00
Manufacturing overhead:
Total cost …………………………………..
$181.50
$247.00
2. Activity-based overhead application rates:
Activity
Cost
Activity Cost
Driver
Application
Rate
Machine
÷
50,000 machine
=
$10 per MH
Order
$120,000
÷
600 orders
=
$200 per OP
Chapter 05 – Activity-Based Costing and Management
5-35
PROBLEM 5-50 (CONTINUED)
Order processing, machine processing, and product inspection costs of a Medform
unit and an Procel unit:
Activity
Medform
Procel
Order processing:
Machine processing:
Product inspection:
Total
Production volume (units)
Cost per unit
The manufactured cost of a Medform unit is $204.60, and the manufactured cost of a
Procel unit is $228.52:
Medform
Procel
Direct material……………………………….
$ 30.00
$ 45.00
Direct labor:
45.00
60.00
Total cost…………………………………….
$204.60
$228.52
5-36
PROBLEM 5-50 (CONTINUED)
3. a. The Procel product is overcosted by $18.48 ($247.00 – $228.52) under the
traditional product-costing system. The labor-hour application base resulted
b. Yes, especially since Meditech’s selling prices are based heavily on cost. An
overcosted product will result in an inflated selling price, which could prove
Chapter 05 – Activity-Based Costing and Management
5-37
PROBLEM 5-51 (30 MINUTES)
1.
Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is
applied on the basis of direct-labor dollars. In general, a plantwide manufacturing-
overhead rate is acceptable only if a similar relationship between overhead and direct
labor exists in all departments or the company manufactures products that receive the
same proportional services from each department
2.
Because the company uses a plantwide overhead rate applied on the basis of direct-
labor dollars, the elimination of direct labor in the Molding Department through the
Chapter 05 – Activity-Based Costing and Management
5-38
PROBLEM 5-51 (CONTINUED)
3.
a.
In order to improve the allocation of overhead costs in the Cutting and Finishing
departments, management should move toward an activity-based costing system.
The firm should:
b.
In order to accommodate the automation of the Molding Department in its
overhead accounting system, the company should:
Chapter 05 – Activity-Based Costing and Management
5-39
PROBLEM 5-52 (40 MINUTES)
1.
Overhead to be assigned to chemical order:
Activity Cost
Pool
Pool
Rate
Level of
Cost Driver
Assigned
Overhead
Cost
Machine setups
$4,000 per setup
6 setups
$24,000
Material handling
Hazardous waste control
Quality control
Other overhead costs
4.
Overhead to be assigned to chemical order, given a single predetermined overhead
rate:
=
$34,375
5.
These chemicals entail a relatively large number of machine setups, a large amount of
hazardous materials, and several inspections. Thus, they are quite costly in terms of
Chapter 05 – Activity-Based Costing and Management
5-40
PROBLEM 5-52 (CONTINUED)
PROBLEM 5-53 (20 MINUTES)
1. Calculation of unit cost:
(a)
Overhead assigned to containers:
Activity Cost
Pool
Pool
Rate
Level of
Cost Driver
Assigned
Overhead
Cost
Machine setups
$4,000 per setup
4 setups
$16,000
Material handling
Hazardous waste control
Other overhead costs
$20 per machine hour
(b)
Unit cost per container:
Direct material…………………………..
$210
Direct labor ………………………………
Manufacturing overhead ……………
Total cost per container …………….
$520