9
Activity-Based Costing
Solutions to Review Questions
9-1.
9-2.
The term “death spiral” refers to a process that begins by attempting to increase prices
9-3.
False. Department allocation is a two-stage process, so the first-stage assignment of
differ. This can affect the decisions managers make regarding individual products.
9-4.
Most companies produce multiple products and simply adding them up does not
9-5.
The costs include the systems and the software, but the most important cost is
managers’ time. Managers need to make many decisions about the activities and the
9-6.
1. Identify activities that consume resources.
2. Identify the cost driver associated with each activity.
9-7.
9-8.
9-9.
Activity-based costing will benefit most companies with high overhead costs and diverse
9-10.
A personnel department provides its services by completing a set of activities using
9-11.
9-12.
9-13.
Solutions to Critical Analysis and Discussion Questions
9-14.
9-15.
Activity-based costing does not change the process for direct costs, so the statement is
9-16.
Disagree. The services in a business school, as in any service business, require
9-17.
False. Activity-based costing is most useful when the first-stage allocation is to
9-18.
There is no rule that the price charged for a product has to exceed its cost. There may
9-19.
Activity-based costing is like any other information system; it has its benefits and its
9-20.
False. The lesson learned from activity-based costing is that costs are a function not
9-21.
False. Activity-based costing breaks down the costs into cost pools according to the
9-22.
9-23.
Without information on the use of overhead resources by products, it is difficult for
9-24.
when managers use product cost data to make decisions at the product level.
9-25.
Answers will vary based on the degrees offered and the nature of the school. Some
9-26.
Answers will vary. The function selected will determine the activities, but some
9-27.
Answers will vary. Elements of the system that suggest it is an ABC system include cost
9-28.
Although it appears that a time-driven activity-based cost system lacks a cost hierarchy,
Solutions to Exercises
9-29. (15 min.) Reported Costs and Decisions: McNulty, Inc.
Chairs
Desks
Total
a.
Sales revenue …………………………………………….
$1,150,000
$2,105,000
$3,255,000
Direct material …………………………………………….
Direct labor ………………………………………………..
b
Product cost ………………………………………………
$1,000,000
$1,684,000
$2,684,000
b. After dropping chairs, the profit margin on desks falls below 20 percent.
Desks
Total
Sales revenue …………………………………………….
$2,105,000
$2,105,000
Direct Labor ……………………………………………….
Direct materials …………………………………………..
Overhead …………………………………………………..
a
Product cost
$1,790,000
$1,790,000
Margin ……………………………………………………….
9-30. (15 min.) Reported Costs and Decisions: Kima Company.
Standard
Galaxy
Total
a.
Sales revenue …………………………………………….
$6,000,000
$2,700,000
$8,700,000
2,400,000
1,600,000
b
b. After dropping the standard model, the profit on the Galaxy model (and for the
company) becomes negative.
Total
Direct Labor ……………………………………………….
2,250,000
Product cost
$3,030,000
$3,030,000
9-31. (30 min.) Plantwide versus Department Allocation: Munoz Sporting
Equipment.
Baseball
Bats
Tennis
rackets
a.
Sales revenue …………………………………………….
$2,700,000
$1,800,000
Direct Labor ……………………………………………….
500,000
250,000
Direct Materials …………………………………………..
550,000
Overhead …………………………………………………..
a
b
b. Maria was wrong; Baseball bats were more profitable.
Baseball
Bats
Tennis
rackets
Sales revenue …………………………………………….
$2,700,000
$1,800,000
Direct Labor ……………………………………………….
Direct Materials …………………………………………..
550,000
Overhead …………………………………………………..
750,000
a
750,000
b
c. The plantwide allocation method allocates overhead at 200% of direct labor for both
9-32. (35 min.) Plantwide versus Department Allocation: Main Street Ice Cream
Company.
Strawberry
Vanilla
Chocolate
a.
Direct Labor (per 1,000 gallons) ……………………
$750
$825
$1,125
Raw Materials (per 1,000 gallons) …………………
800
500
600
c.
Strawberry
Vanilla
Chocolate
Direct Labor (per 1,000 gallons) ……………………
$750
$825
$1,125
Overhead …………………………………………………..
d. Charlene was correct in her belief that she was being allocated some of Department
9-33. (30 min.) Unitwide versus Department Allocation: Hernandez Bros.
a.
b.
Miami
New York
Employees …………………………………………………
1,900
600
Rate per employee ………………………………………
Allocated cost ……………………………………………..
Transitions …………………………………………………
Rate per transition ……………………………………….
Allocated cost …………………………………………….. $
Total allocated cost …………………………………….. $
Miami
New York
Employees …………………………………………………
1,900
600
Rate per employee ……………………………………..
$300
Allocated cost …………………………………………….
9-34. (30 min.) Unit wide versus Department Allocation: Hernandez Bros.
a. First, note that the total to be allocated is $750,000 (= $570,000 + $180,000 in the
New York
Employees …………………………………………………
600
Rate per employee ……………………………………..
Allocated cost …………………………………………….
Transitions …………………………………………………
Rate per transition ………………………………………
Allocated cost ……………………………………………. $
Total allocated cost …………………………………….. $
9-35. (30 min.) Activity-Based Costing: Joplin Industries.
a.
J25P
J40X
Direct material ……………………………………………………..
$1,500,000
$2,400,000
Direct labor
Assembly ………………………………………………………..
$ 750,000
$ 600,000
Packaging ………………………………………………………
990,000
360,000
Direct costs …………………………………………………………
$3,240,000
$3,360,000
Overhead
Assembling (@ $30/mh) ……………………………………
$ 180,000
$ 900,000
270,000
Handling material (@$3,000/run) ……………………….
120,000
Packaging building
Inspecting and Packaging (@$5/direct labor-hour) .
300,000
114,000
Shipping (@$1,320/shipment) …………………………...
132,000
264,000
Total ABC cost …………………………………………………….
$3,903,000
$5,028,000
Number of units ……………………………………………………
100,000
Unit cost ……………………………………………………………..
9-35. (continued)
b. Kris could have made the reductions he planned, but the effect on the product costs
would have been different. The $99,000 reduction in setup costs (25% of $396,000),
9-36. (30 min.) Activity-Based Costing in a Nonmanufacturing Environment:
Cathy’s Catering.
a. & b.
Activities
a.
Afternoon
Picnic
b.
Formal
Dinner
Advertising (parties) ………………………….
$ 100
$ 100
Planning (parties) ……………………………..
75
125
9-37. (35 min.) Activity-Based versus Traditional Costing: Maglie Company.
a.
Rate
Handheld
Home
Total
Direct labora ……………………………………………….
$1,160,400
$ 439,600
$1,600,000
Direct materialsb …………………………………………
$750,000
$ 684,000
$1,434,000
Overhead costs
$ 132,000
$ 660,000
$ 550,400
$1,440,000
Total costs ………………………………………………….
Total unit cost ……………………………………………..
9-37. (continued)
b.
Rate
Handheld
Home
Total
Direct labora ……………………………………………….
$1,160,400
$ 439,600
$1,600,000
Direct materialsb …………………………………………
750,000
684,000
1,434,000
Total costs ………………………………………………….
$2,954,760
$4,474,000
9-38. (35 min.) Activity-Based versus Traditional Costing: Doaktown Products.
a.
Rate
M-008
M-123
Total
Direct materialsa …………………………………………
$100,000
$ 80,000
$180,000
$ 15
$ 75,000
$ 45,000
$140,000
$140,000
$280,000
9-38. (continued)
b.
Rate
M-008
M-123
Total
Direct materialsa …………………………………………
$100,000
$ 80,000
$180,000
Direct laborb ……………………………………………….
Total costs ………………………………………………….
$400,000
9-39. (30 min.) Activity-Based Costing in a Service Environment: EL&P.
Note: Answers may vary slightly due to rounding.
a.
Commercial
Residential
Total
Revenuea …………………………………………………..
$315,000
$780,000
$1,095,000
Direct Laborb ……………………………………………..
175,000
325,000
500,000
b.
Rate
Commercial
Residential
Total
Revenue ……………………………………………………
$315,000
$780,000
$1,095,000
Direct Labor ……………………………………………….
175,000
325,000
500,000
Overhead
a
b
$ 19,000
c
$ 25,000
d
35,500
e
24,500
f
1.20
g
h
i
Total Overhead …………………………..………………
$ 119,500
$ 85,500
9-39. (continued)
c. The recommendation to EL&P is that they should reconsider dropping residential
9-40. (35 min.) Activity-Based versus Traditional Costing: Isadore’s
Implements, Inc.
a.
Cost Driver
Rate
Pencils
Pens
Setting up…………………………………………………..
$1,440
a
$28,800
d
$ 43,200
b.
Pencils
Pens
Total
Direct Labor Hours ………………………………………
4,500
a
15,000
19,500
Overhead …………………………………………………..
b
9-41. (35 min.) Activity-Based versus Traditional Costing—Ethical Issues:
Windy City Coaching.
a.
Account
Rate
Teen
Counseling
Executive
Coaching
Total
Revenue ……………………………………………………
$66,000
$135,000
$201,000
Expenses:
Administrative support ………………………………
$4,000
a
24,000
d
16,000
40,000
Transportation …………………………………………
b
14,400
e
21,600
36,000
b.
Account
Rate
Teen
Counseling
Executive
Coaching
Total
Revenue …………………………………………………….
$66,000
$135,000
$201,000
Expenses …………………………………………………..
a
b
9-41. (continued)
e. Activity-based costing assigns higher costs to teen counseling than the traditional
method does, so using this would increase the chances of receiving the grant. If teen
9-42. (30 min.) Activity-Based Costing—Cost Flows Through T-accounts:
Southwest Components.
Materials Inventory
$600,000
$300,000
$108,000 to WIP
Overhead Applied:
500 inspections x
$450 per inspection
= $225,000 to WIP
Overhead Applied:
Machine Setups
25 setups x $5,400
per setup =
$135,000 to WIP
Overhead Applied:
per hour = $450,000
to WIP
9-42. (continued)
Work in Process (WIP) Inventory
Fabrication Department
Direct Materials
600,000
Material Handling OH
Quality Inspect. OH
225,000
Running Machines OH
9-43. (30 min.) Activity-Based Costing—Cost Flows Through T-accounts:
Catalina Sails.
Materials Inventory
$550,000 to WIP
$275,000 to WIP
to WIP
Overhead Applied:
Quality Inspections
400 inspections x
$300 per inspection
= $120,000 to WIP
Overhead Applied:
$120,000 to WIP
Overhead Applied:
to WIP
9-43. (continued)
Work in Process (WIP) Inventory
Department Y
Direct Materials
550,000
Direct Labor
275,000
Material Handling
Quality Inspect.
120,000
Machine Setup
120,000
Running Machines
9-44. (20 min.) Activity-Based Costing for an Administrative Service: LastCall
Enterprises.
a.
Rate
LaidBack
StressedOut
Total
Allocated costsa …………………………..……………..
$1,100
$220,000
b
$55,000
c
$275,000
b.
Rate
LaidBack
StressOut
Total
Employee maintenancea ………………………………
$6,000
$60,000
b
$180,000
c
$240,000
Payrolld ……………………………………………………..
$140
28,000
e
7,000
f
35,000
9-45. (20 min.) Activity-Based Costing for an Administrative Service: John’s
Custom Computer Shop.
a.
Rate
Personal
Business
Total
b.
Rate
Personal
Business
Total
Billinga ……………………………………………………….
$48
$28,800
b
$19,200
c
$48,000
9-46. (20 min.) Time-Driven Activity-Based Costing: Kim Distribution Services.
Total cost in Distribution ……………………………….
9-47. (20 min.) Time-Driven Activity-Based Costing: City Enterprises.
Total cost in Personnel …………………………………
b.
$236.25
c.
108,000 minutes.
Solutions to Problems
9-48. (40 min.) Comparative Income Statements and Management Analysis: EZ–
Seat, Inc.
a. EZ-Seat, Inc. Income Statement
Account
Rate
Ergo
Standard
Total
Sales revenue …………………………………………….
$2,925,000
$2,760,000
$5,685,000
Direct materials …………………………………………..
$ 550,000
$ 500,000
Direct labor ………………………………………………..
Overhead costs:
a
e
b
f
1,080,000
c
g
d
h
Total overhead costs …………………………………..
3,708,000
b. Activity-based costing highlights the activities that cause costs, and provides insight
9-48. (continued)
c. EZ-Seat, Inc. Income Statement
Account
Rate
Ergo
Standard
Total
Sales revenue …………………………………………….
$2,925,000
$2,760,000
$5,685,000
Direct Materials …………………………………………..
Overhead Costs ………………………………………….
a
b
Operating Profit …………………………………………..
)
d. Dear Members of the Management Board:
9-49. (40 min.) Comparative Income Statements and Management Analysis:
Pepper’s Products.
a. Pepper’s Products: Income Statement
Account
Rate
Squeaky
Silent
Total
Sales revenue …………………………………………….
$43,200
$48,000
$91,200
Direct labor ………………………………………………..
Overhead costs:
b
f
c
g
Total overhead costs …………………………………..
a 25% = $6,000 administrative costs ÷ $24,000 direct labor costs.
b. Activity-based costing highlights the activities that cause costs, and provides insight
9-49. (continued)
c.
Pepper’s Products
Income Statement
Account
Rate
Squeaky
Silent
Total
Sales revenue …………………………………………….
$43,200
$48,000
$91,200
Direct Labor ……………………………………………….
Overhead Costs ………………………………………….
a
b
d. Dear Members of the Management Board:
The purpose of this report is to explain the differences between the profits in our
9-50. (15 min.) Ethics and Choice of Accounting Methods: Pepper’s Products.
Yes, you should show the results to management. You have an ethical responsibility
9-51. (50 min.) Activity-Based Costing and Predetermined Overhead Allocation
Rates: Kitchen Supply, Inc.
a. Computing overhead allocation rates
Activity
Cost
Driver
Est.
Costs
Driver
Units
Rate
Processing orders ………
No. of orders
$ 54,000
÷
200
=
$ 270
2,160
Using machines …………
Machine-hrs.
÷
12,000
=
1,600
b. Production Costs using Direct Labor-Hours
Account
Institutional
Standard
Silver
Total
Direct materials …………………………………………..
$ 39,000
$24,000
$15,000
$ 78,000
6,750
9-51. (continued)
c. Production Costs using ABC
Account
Institutional
Standard
Silver
Total
Direct materials …………………………………………..
$39,000
$ 24,000
$15,000
$78,000
Direct labor ………………………………………………..
6,750
6,750
9,000
22,500
Indirect costs
6,480
6,480
25,920
9,000
27,900
Total cost …………………………..………………………
$137,190
d. Internal Memorandum
The discrepancy between our product costs using direct-labor hours as the
allocation base versus activity-based costing is found in the way overhead costs are
9-52. (50 min.) Activity-Based Costing and Predetermined Overhead Rates:
College Supply Company.
a.
Activity
Recommended Base
Allocation Rate
Setting up production …
No. of runs
$360 per run ($36,000 ÷ 100 runs)
Processing orders ……..
No. of orders
$300 per order ($60,000 ÷ 200 orders)
Handling materials …….
$3.00 per lb. ($24,000 ÷ 8,000 lbs.)
Using machines …………
$7.20 per hour ($72,000 ÷ 10,000 hrs.)
management …………….
$1,500 per insp. ($60,000 ÷ 40 insp.)
Packing & shipping …….
$2.40 per unit ($48,000 ÷ 20,000 units)
Direct labor hour rate …
$150 per hour ($300,000 ÷ 2,000 hrs.)
b.
Short
Medium
Tall
Direct materials …………………………………………..
$ 6,000
$ 3,750
$ 3,000
9-52 (continued)
c.
Short
Medium
Tall
Direct materials …………………………………………..
$ 6,000
$ 3,750
$ 3,000
Direct labor ………………………………………………..
3,000
3,600
3,300
Setting up production …………………………………..
a
1,440
2,880
Processing orders ……………………………………….
b
Handling materials ………………………………………
1,200
c
2,400
Using machines ………………………………………….
3,600
d
2,160
2,160
Performing quality management ……………………
e
Shipping …………………………..………………………..
2,400
f
1,200
Total cost …………………………..………………………
d. Internal Memorandum
Re: Product Cost Discrepancy
9-53. (40 min.) Choosing an Activity-Based Costing System: Pickle
Motorcycles, Inc.
a.
Pickle Motorcycles
Income Statement
Route 66
Main Street
Alley Cat
Total
Sales revenue …………………………………………….
$7,600,000
$11,200,000
$9,500,000
$28,300,000
Direct costs:
Fixed OH:
9-53. (continued)
b.
Pickle Motorcycles
Income Statement
Route 66
Main Street
Alley Cat
Total
Sales revenue …………………………………………….
$7,600,000
$11,200,000
$9,500,000
$28,300,000
Direct costs:
Direct material …………………………………………
3,000,000
4,800,000
4,000,000
11,800,000
Var. OH:
Mach. setup …………………………………………….
Energy ……………………………………………………
Cont. margin ………………………………………………
$ 9,954,000
Fixed OH:
9-54. (40 min.) Activity-Based Costing, Cost Flow Diagram, and Predetermined
Overhead Rates: Churchill Products.
a.
Burden rate = (Total overhead costs ÷ Budgeted total direct labor-hours)
9-54. (continued)
b.
9-54. (continued)
d.
Unit Costs:
Oval
Round
Square
Direct Costs ……………………………………..
$240,000
$240,000
$240,000
Overhead:
Utilities ………………………………………..
675,000a
225,000
450,000
Material handling ………………………….
Total costs …………………………..…………..
Number of units ………………………………..
Unit cost ………………………………………….
$605.00
$331.67
e. If management implemented an activity-based costing system it should be provided
with a more thorough understanding of product costs. By breaking down costs into
9-55. (40 min.) Activity-Based Costing, Cost Flow Diagram, and Predetermined
Overhead Rates: Utica Manufacturing.
a.
Burden rate = (Total overhead costs ÷ Budgeted total machine-hours)
Budgeted total machine-hours = 60,000 + 90,000 = 150,000 hours
9-55. (continued)
b.
Inspection ……………………..
=
Production …………………….
=
Machine setup ……………….
=
$5,000 per setup.
Shipping ……………………….
=
c.
Unit Costs:
308
510
Direct Costs ……………………………………..
$216,000
$216,000
Overhead:
Total costs …………………………..…………..
Number of units ………………………………..
Unit cost ………………………………………….
d. If management implemented an activity-based costing system it should be provided
with a more thorough understanding of product costs. By breaking down costs into
9-56. (40 min.) Activity-Based Costing and Predetermined Overhead Rates:
Cain Components.
a.
Burden rate = (Total overhead costs ÷ Budgeted total machine-hours)
Budgeted total machine-hours = 150,000 + 100,000 = 250,000 hours
9-56. (continued)
b.
Receiving ……………………..
$600,000 ÷ $400,000 material dollars
=
150% of material dollars.
Production …………………….
=
Machine setup ……………….
=
$4,500 per setup.
Shipping ……………………….
=
Unit Costs:
Standard
Deluxe
Direct Costs ……………………………………..
$895,000
$405,000
Overhead:
Total costs …………………………..…………..
Number of units ………………………………..
Unit cost ………………………………………….
c. If these results are typical, it will probably not be worth adopting the ABC system.
The difference in the reported product costs are not significant, meaning they would
9-57. (40 min.) Activity-Based Costing and Predetermined Overhead Rates:
Cain Components.
a.
Receiving ……………………..
$600,000 ÷ $400,000 material dollars
=
150% of material dollars.
Manufacturing ……………….
=
$13.20 per machine-hour
Machine setup ……………….
=
$4,500 per setup.
Shipping ……………………….
=
$40.00 per unit.
Unit Costs:
Standard
Deluxe
Direct Costs ……………………………………..
$895,000
$405,000
Overhead:
Receiving …………………………………….
367,500a
232,500
Machine setup ……………………………..
337,500d
562,500
200,000
Total costs …………………………..…………..
9-58. (15 min.) Benefits of Activity-Based Costing: Cawker Products.
Activity-based costing would help to clear his confusion by identifying the activities that
drive overhead costs.
9-59. (40 min.) Choosing an Activity-Based Costing System: MTI.
a. Total overhead to allocate is $8,700,000 (= $2,400,000 + $1,800,000 + $2,400,000 +
$1,200,000 + $900,000).
The overhead rate is $348 per machine-hour (= $8,700,000 ÷ 25,000 machine-hours).
MTI
Income Statement
M3100
M4100
M6100
Total
Sales revenue …………………………………………….
$9,000,000
$15,000,000
$13,500,000
$37,500,000
Direct costs:
4,500,000
3,300,000
Var. overhead …………………………………………….
a
Contribution margin …………………………………….
$3,312,000
$4,920,000
$14,700,000
6,000,000
b. Cost driver rates:
Activity
Cost
Activity Volume
Unit Rate
Setting up machines ….
$2,400,000
÷
50 runs
=
$48,000 per run
Processing sales orders ………………………………
$1,800,000
÷
=
2,250 per order
÷
6,000 per unit
Operating machines …..
$1,200,000
÷
=
48 per machine-hr.
Shipping …………………..
÷
37,500 units shipped
=
24 per unit shipped
9-59. (continued)
Income Statement
M3100
M4100
M6100
Total
Sales revenue …………………………………………….
$9,000,000
$15,000,000
$13,500,000
$37,500,000
Direct costs:
Direct material. ………………………………………..
3,000,000
4,500,000
3,300,000
10,800,000
Direct labor ……………………………………………..
600,000
900,000
1,800,000
3,300,000
Var. overhead …………………………………………….
Setting up machines ……………………………………
a
Processing orders ………………………………………
405,000
b
900,000
495,000
1,800,000
Warehousing ………………………………………………
600,000
c
600,000
2,400,000
Operating machines …………………………………….
d
Shipping …………………………..………………………..
e
Cont. margin ………………………………………………
$3,387,000
$ 5,625,000
$14,700,000
Plant admin. ……………………………………………
c. Although both methods yield similar product costs, the activity-based costing method
provides a more detailed breakdown of the costs. This additional information should
9-60. (15 min.) Time-Based ABC – Time Equations: Kim Distribution Systems.
a.
Taking order = 10 minutes + 30 minutes (if retailer is new).
b.
c.
From the solution to Exercise 9-46 (a):
9-61. (15 min.) Time-Based ABC – Time Equations: City Enterprises.
a.
b.
c.
From the solution to Exercise 9-47 (a):
d.
Solutions to Integrative Cases
9-62. (50 Min) Cost Allocation and Environmental Processes—Ethical Issues:
California Circuits Company.
a.
Raw material …………………………….
Direct labor – Production …………….
$2.00
$2.00
Direct labor – Assembly ……………..
= 120% of direct labor costs
b.
XL-D
XL-C
Raw material ……………………………..
$12.00
$14.00
Direct labor – Production ……………..
$2.00
Direct labor – Assembly ………………
$8.00
a Overhead rate—Production Department = Production overhead ÷ Total machine–
hours
9-62. (continued)
d.
XL-D
XL-C
Raw material …………………………………..
$12.00
$14.00
Direct labor – Production …………………..
$2.00
$2.00
Direct labor – Assembly ……………………
$0.80
$0.80
Total production overhead …………………
8.47
6.12
a Production Department Overhead Calculations (Rate = Activity cost ÷ Driver volume):
Activity
Activity
Cost
Driver
Driver Volume
Rate
Supervision ………………………………………………..
$100,000
Direct
labor-hrs
100,000 .1 + 25,000 .1
= 12,500 hours
$8.00
Testing ………………………………………………………
Test
hours
100,000 3 + 25,000 3
= 375,000 hours
$0.40
= 200,000 machine-hours
Shipping …………………………………………………….
Weight
100,000 1.0 + 25,000 1.6
= 140,000 pounds
$0.05
= $10 per direct labor-hour
9-62. (continued)
e. This question raises the issue of costs that are missing in the typical accounting
records of the firm. In this case, the ABC system suggests that XL-C, the model that
9-63. (60 min.) Distortions Caused By Inappropriate Overhead Allocation Base:
Chocolate Bars, Inc.
a.
Almond
Dream
Krispy
Krackle
Creamy
Crunch
Product costs:
Labor-hours per case ……………………………….
7
3
1
Total cases produced ……………………………….
1,000
1,000
1,000
Material cost per case ………………………………
$8.00
$2.00
$9.00
Direct labor cost per case………………………….
Labor-hours per product …………………………...
7,000
3,000
1,000
Costs of products:
Material cost per case ………………………………
$ 8.00
$ 2.00
$ 9.00
Direct labor cost per case………………………….
Allocated overhead per case ……………………..
44.24
18.96
Product cost ……………………………………………
Selling price ……………………………………………….
Gross profit margin ……………………………………..
(10.87
29.16
%
39.09
%
Drop product? …………………………………………….
Yes
9-63. (continued)
c.
Krispy
Krackle
Creamy
Crunch
Direct labor cost per hour …………………………….
$6.00
$6.00
Direct labor-hours per case…………………………..
Total cases produced ………………………………….
2,000
Labor-hours per product ………………………………
3,000
2,000
Total labor-hours: 5,000
Allocation rate per labor-hour
=
Total overhead ÷ Total labor-hours
=
$69,500/5,000
=
per labor-hour
Allocated production costs:
Krispy
Krackle
Creamy
Crunch
Material cost per case ………………………………….
$ 2.00
$ 9.00
Direct labor cost per case …………………………....
18.00
6.00
Allocated overhead per case
Product cost ……………………………………………….
Selling price ……………………………………………….
Product cost—direct labor allocation base ………
)
)
)
Profit margin percentage ……………………………..
$(6.70) ÷ $55.00
$6.10 ÷ $35.00
(12.2)
%
17.4%
9-63. (continued)
d.
Creamy
Crunch
Direct labor cost per hour …………………………….
$6.00
Direct labor hours per case …………………………..
Total cases produced ………………………………….
3,000
Labor hours per product ………………………………
3,000
Total labor hours: 3,000
Allocation rate per labor hour
=
Total overhead/Total labor hours
=
$69,500/3,000
=
Allocated Production Costs:
Creamy
Crunch
Material cost per case ………………………………….
$ 9.00
Direct labor cost per case …………………………....
Allocated overhead per case ………………………..
Product cost ……………………………………………….
Gross profit margins:
Selling price ……………………………………………….
Product cost—direct labor allocation base ………
)
)
Profit margin percentage ……………………………..
$(3.17) ÷ $35.00
(9.1)%
The recommendation to management is to drop Creamy Crunch and sell out!
e. The policies and allocation method employed by CBI encourage poor decision
9-64. (90 min.) Multiple Allocation Bases: Chocolate Bars, Inc.
a.
Almond
Dream
Krispy
Krackle
Creamy
Crunch
Total
Total direct
labor hoursa …………………………………………….
7,000
(63.6%)
3,000
(27.3%)
1,000
(9.1%)
11,000
(100%)
Total machine
hoursa …………………………………………………….
2,000
(13.3%)
7,000
(46.7%)
6,000
(40%)
15,000
(100%)
Factory space
(sq. ft.) ……………………………………………………
1,000
(10%)
4,000
(40%)
5,000
(50%)
10,000
(100%)
Total rent for factory space:
$15,000 per month
Total machine operating costs:
$30,000 per month
Total cases produced/month:
3,000 cases
Product allocation base:
Fraction:
Labor (%)
Machine hours (%)
Factory space (%)
Krispy Krackle …………………………………………….
Creamy Crunch …………………………………………..
Allocated Costs:
Total
Per Case
(10% x $15,000) …………………………………………………..
=
Krispy Krackle (27.3% x $24,500) + (46.7% x $30,000) +
(40% x $15,000) …………………………………………………..
=
(50% x $15,000) …………………………………………………..
=
Almond Dream (63.6% x $24,500) + (13.3% x $30,000) +
Allocated production costs:
Almond
Dream
Krispy
Krackle
Creamy
Crunch
Material cost ………………………………………………
$ 8.00
$ 2.00
$ 9.00
Allocated OH ………………………………………………
Product cost ……………………………………………….
(46.70)
Profit (loss)…………………………………………………
$ 8.30
$ (1.73)
Profit margin ratio ……………………………………….
16.4%
9–64. (continued)
b. Based upon the table above and the gross profit margin rule, management would
recommend dropping Creamy Crunch. Two characteristics of Creamy Crunch
c.
Almond
Dream
Krispy
Krackle
Direct labor hours per case …………………………..
7
3
Machine hours per case ………………………………
2
7
Case of output per month …………………………….
Labor hours required …………………………………..
(82.4%)
(17.6%)
Total rent for factory space:
$15,000 per month
Total other overhead:
$24,500 per month
Total labor hours/month:
17,000
Fraction:
Almond Dream ……………………………………………
36.4%
9-64. (continued)
Allocated Cost:
Total
Per Case
Almond Dream (82.4% x $24,500) +
(36.4% x $30,000) + (33.3% x $15,000) ……………
=
$36,108
$18.05
(63.6% x $30,000) + (66.7% x $15,000) ……………
=
Allocated production costs:
Krackle
Material cost ………………………………………………
Direct labor ………………………………………………..
Allocated OH ………………………………………………
Production cost per case ……………………………..
Selling price ……………………………………………….
Product cost ……………………………………………….
Profit margin ratio:
Ratio = Gross Margin/Price …………………………..
Krispy Krackle (17.6% x $24,500) +
Allocated production costs:
Almond
Dream
Material cost ………………………………………………
Direct labor ………………………………………………..
Allocated OH ………………………………………………
Production cost per case ……………………………..
$73.17
Selling price ……………………………………………….
$85.00
Product cost ……………………………………………….
$11.83
Profit margin ratio:
Ratio = Gross Margin/Price …………………………..
9-64. (continued)
If we compute the gross margin for the three products at maximum production, we
find Almond Dream and Krispy Krackle to be equally profitable, computed as follows:
Almond
Dream
or
Krispy
Krackle
or
Creamy
Crunch
Cases ………………………………………………………..
3,000
3,000
3,000
Costs
$219,500
Revenue …………………………………………………….
$165,000
Gross margin………………………………………………
9-65. (90 min.) Activity-Based Costing – The Grape Cola Caper.
a. Percentage utilization of resource by activities:
Activity
Setups
Production
Runs
Products
Machine
Time
Indirect labor (including fringe benefits)
50%
40%
10%
0%
Information technology (IT)
Machinery depreciation
100
Machinery maintenance
100
Energy
100
Costs assigned to activiities:
Activity
Cost
Setups
Production
Runs
Products
Machine
Time
Indirect labor
$28,000
$14,000
$11,200
$2,800
$ 0
10,000
2,000
Machinery depreciation
Machinery maintenance
Energy
0
$52,000
$14,000
$19,200
$4,800
÷ Activity
110 runs
4 products
10,000 hrs
Cost driver rates
$174.55
$1,200
$1.40
9-65. (continued)
b.
Unit Costs on Cola Bottling Line
Diet
Regular
Cherry
Grape
Total
Materials
$ 25,000
$ 20,000
$ 4,680
$ 550
$ 50,230
Direct labor
10,000
8,000
1,800
200
20,000
Fringe benefits on direct labor
3,200
8,000
Setup costs
Production run costs
Product costs
Machine costs
Total costs
Volume
Cost per unit
9-65. (continued)
c.
Monthly Report on Cola Bottling Line
Diet
Regular
Cherry
Grape
Total
Sales revenue
$75,000
$60,000
$13,950
$1,650
$150,600
Costs
Gross margin