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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)
(2)
restaurant
(a)
purchasing (pounds or cost of food purchased)
(3)
fitness club:
(a)
front desk operations (number of patrons)
(4)
bank:
(a)
teller window operations (number of customers)
(e)
security (number of customers)
(5)
hotel:
(a)
front desk operations (number of guests)
(6)
hospital:
(a)
admissions (patients admitted)
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, in-house computing, and miscellaneous office charges of e-commerce
consulting and information systems services:
Activity
E-Commerce
Consulting
Information
Systems
Services
Staff support:
5-24
PROBLEM 5-45 (CONTINUED)
Profitability e-commerce consulting and information systems services:
E-Commerce
Consulting
Information
Systems
Services
Billings:
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
Purch.
75,000
Purch.
300
250.00
REG
100
$ 25,000
5,000
5.00
Orders
ADV
96
24,000
4,000
6.00
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
Eng.
32,500
Eng.
650
50.00
REG
250
$ 12,500
5,000
2.50
Hours
ADV
200
10,000
4,000
2.50
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
Manufacturing overhead (based on ABC):
Machine-related .........................
$ 27.00
$ 32.40
$ 45.90
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
5. The REG and ADV products were overcosted by the traditional system, and the GMT
product was undercosted by the 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
(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
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
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:
Machine processing:
Product shipping:
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
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:
2. Activity-based overhead application rates:
Activity
Cost
Activity Cost
Driver
Application
Rate
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:
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:
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
4.
Overhead to be assigned to chemical order, given a single predetermined overhead
rate:
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
(b)
Unit cost per container:
Direct material................................
$210
