Note: Short Exercise S19-10 must be completed before attempting Short Exercise S19-11.
S19-11 Using ABM in a service company
Learning Objective 4
Refer to Short Exercise S19-10. Western desires a 20% target operating income after covering all costs.
Considering the total costs assigned to the Client 76 job in Short Exercise S19-10, what would Western
have to charge the customer to achieve that operating income? Round to two decimal places.
SOLUTION
Desired operating income
=
Required service revenue
–
Total cost
=
Required service revenue
–
Total cost
=
S19-12 Identifying just-in-time characteristics
Learning Objective 5
Consider the following characteristics of either a JIT production system or a traditional production
system. Indicate whether each is characteristic of a JIT production system or a traditional production
system.
a. Products are produced in large batches.
b. Large stocks of finished goods protect against lost sales if customer demand is higher than expected.
c. Suppliers make frequent deliveries of small quantities of raw materials.
d. Employees do a variety of jobs, including maintenance and setups as well as operating machines.
e. Machines are grouped into self-contained production cells or production lines.
f. Machines are grouped according to function. For example, all cutting machines are located in one
area.
g. The final operation in the production sequence “pulls” parts from the preceding operation.
h. Each employee is responsible for inspecting his or her own work.
i. Management works with suppliers to ensure defect-free raw materials.
SOLUTION
a.
Traditional production system
b.
Traditional production system
c.
JIT production system
d.
JIT production system
e.
JIT production system
Traditional production system
g.
JIT production system
h.
JIT production system
JIT production system
S19-13 Recording JIT costing journal entries
Learning Objective 5
Perfecto Products uses a JIT management system to manufacture trading pins. The standard cost per pin
is $1 for direct materials and $2 for conversion costs. Last month, Perfecto recorded the following data:
Use JIT costing to prepare journal entries for the month, including the entry to adjust the Conversion
Costs account.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Raw and In-Process Inventory
8,000
Accounts Payable
8,000
Conversion Costs
14,500
Wages Payable, Accumulated Depreciation, etc.
Finished Goods Inventory
11,400
Raw and In-Process Inventory (3,800 pins × $1/pin)
3,800
Accounts Receivable (3,400 pins × $6/pin)
Sales Revenue
Cost of Goods Sold (3,400 pins × $3/pin)
10,200
Finished Goods Inventory
S19-14 Matching cost-of–quality examples to categories
Learning Objective 6
Sammy, Inc. manufactures motor scooters. For each of the following examples of quality costs, indicate
which of the following quality cost categories each example represents: prevention costs, appraisal
costs, internal failure costs, or external failure costs.
1. Preventive maintenance on machinery
2. Direct materials, direct labor, and manufacturing overhead incurred to rework a defective scooter
that is detected in-house through inspection
SOLUTION
1.
Prevention costs
2.
Internal failure costs
3.
External failure costs
4.
Appraisal costs
5.
Prevention costs
6.
External failure costs
7.
Appraisal costs
8.
Internal failure costs
Exercises
E19-15 Computing and using single plantwide overhead allocation rate
Learning Objective 1
Basic $234,000
Aragon makes handheld calculators in two models: basic and professional. Aragon estimated $851,500
of manufacturing overhead and 655,000 machine hours for the year. The basic model actually consumed
180,000 machine hours, and the professional model consumed 475,000 machine hours.
Compute the predetermined overhead allocation rate using machine hours (MHr) as the allocation
base. How much overhead is allocated to the basic model? To the professional model?
SOLUTION
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Professional model
E19-16 Computing and using departmental overhead allocation rates
Learning Objective 1
Professional, total OH $644,000
Aragon (see Exercise E19-15) makes handheld calculators in two models—basic and professional—and
wants to refine its costing system by allocating overhead using departmental rates. The estimated
$851,500 of manufacturing overhead has been divided into two cost pools: Assembly Department and
Packaging Department. The following data have been compiled:
SOLUTION
Assembly Dept.
Packaging Dept.
Basic Model
145,000 MHr
80,000 DLHr
Professional Model
355,000 MHr
422,500 DLHr
500,000 MHr
502,500 DLHr
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Assembly Dept.
Basic Model
$1.10 per MHr
×
145,000 MHr
=
$ 159,500
Professional Model
$1.10 per MHr
×
355,000 MHr
=
390,500
Total manufacturing
overhead cost
$ 550,000
Packaging Dept.
Basic Model
$0.60 per DLHr
×
=
$ 48,000
Professional Model
$0.60 per DLHr
×
=
Total manufacturing
overhead cost
$ 301,500
Professional Model
Manufacturing overhead – Assembly Dept.
$ 159,500
Manufacturing overhead – Packaging Dept.
Total manufacturing overhead cost
$ 207,500
E19-17 Computing product costs in an activity-based costing system
Learning Objective 2
1. POHR machine setup $320 per setup
Farrington, Inc. uses activity-based costing to account for its chrome bumper manufacturing process.
Company managers have identified four manufacturing activities: materials handling, machine setup,
insertion of parts, and finishing. The budgeted activity costs for 2016 and their allocation bases are as
follows:
Farrington expects to produce 500 chrome bumpers during the year. The bumpers are expected to use
4,000 parts, require 10 setups, and consume 1,000 hours of finishing time.
Requirements
1. Compute the predetermined overhead allocation rate for each activity.
2. Compute the expected indirect manufacturing cost of each bumper.
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
=
Total estimated overhead costs
Total estimated quantity of the
overhead allocation base
10 total estimated setups
$51,000 total estimated overhead costs
$80,000 total estimated overhead costs
1,000 total estimated finishing direct labor hours
Requirement 2
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Materials handling
$1.50 per part
×
4,000 parts
=
$ 6,000
Machine setup
×
=
3,200
Insertion of parts
×
4,000 parts
=
51,000
×
1,000 finishing DLHr
=
80,000
Total manufacturing
overhead costs
÷ Number of bumpers
÷ 500 bumpers
$ 280.40
E19-18 Computing product costs in an activity-based costing system
Learning Objective 2
2. Total allocated OH $33,600
Tornado Champs Corp. uses activity-based costing to account for its motorcycle manufacturing process.
Company managers have identified three supporting manufacturing activities: inspection, machine
setup, and machine maintenance. The budgeted activity costs for 2016 and their allocation bases are as
follows:
Requirements
1. Compute the predetermined overhead allocation rate for each activity.
2. Compute the expected indirect manufacturing cost of each motorcycle.
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
=
Total estimated overhead costs
Total estimated quantity of the
overhead allocation base
20 total estimated setups
Requirement 2
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
×
=
Machine setup
×
=
Machine maintenance
×
=
Total manufacturing
overhead costs
÷ 20
Manufacturing overhead
cost per motorcycle
E19-19 Computing product costs in traditional and activity-based costing systems
Learning Objectives 1, 2
2. Standard $236.80
Erickson Company manufactures wheel rims. The controller expects the following ABC allocation rates
for 2016:
Requirements
1. Compute the total estimated indirect manufacturing cost for 2016.
2. Compute the estimated ABC indirect manufacturing cost per unit of each model. Carry each cost to
the nearest cent.
3. Prior to 2016, Erickson used a direct labor hour single plantwide overhead allocation rate system.
Compute the predetermined overhead allocation rate based on direct labor hours for 2016. Use this
rate to determine the estimated indirect manufacturing cost per wheel rim for each model, to the
nearest cent.
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
×
Total estimated
quantity of the
overhead allocation base
=
Total estimated
overhead costs
Materials handling
$3.00 per part
×
[(2.0 parts + 9.0 parts) × 500 rims]
$3.00 per part
×
[11.00 parts × 500 rims]
$3.00 per part
×
=
×
×
=
×
[(2.0 parts + 9.0 parts) × 500 rims]
×
×
=
×
×
×
2,250 finishing Hr for 500 rims
=
E19-19, cont.
Requirement 2
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
per Rim
=
Allocated
Manufacturing
Overhead Cost
per Rim
Standard rims
Materials handling
$3.00 per part
×
2.0 parts
=
$ 6.00
Machine setup
×
=
Insertion of parts
×
2.0 parts
=
54.00
2.0 finishing hours
Manufacturing
overhead cost per rim
Deluxe rims
Materials handling
$3.00 per part
×
9.0 parts
=
$ 27.00
Insertion of parts
×
9.0 parts
=
243.00
Manufacturing
overhead cost per rim
E19-19, cont.
Requirement 3
Total estimated direct
labor hours (DLHr)
=
Estimated DLHr per rim
×
500 rims
=
+
5.0 DLHr per deluxe rim]
×
500 rims
=
8.0 DLHr per rim
×
=
4,000 DLHr
Predetermined
Overhead
Allocation Rate
=
Total estimated overhead costs
Total estimated quantity of the
overhead allocation base
=
$90.45 per DLHr
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Standard rims
Manufacturing
overhead cost per rim
×
=
Deluxe rims
Manufacturing
overhead cost per rim
×
=
Note: Exercise E19-19 must be completed before attempting Exercise E19-20.
E19-20 Using activity-based costing to make decisions
Learning Objectives 1, 2, 3
1. Deluxe GP $149.20
Refer to Exercise E19-19. For 2017, Erickson’s managers have decided to use the same indirect
manufacturing costs per wheel rim that they computed in 2016. In addition to the unit indirect
manufacturing costs, the following data are expected for the company’s standard and deluxe models for
2017:
Requirements
1. If Erickson’s managers rely on the ABC unit cost data computed in Exercise E19-19, which model
will they produce? Carry each cost to the nearest cent. (Ignore selling and administrative expenses
for this calculation.)
2. If the managers rely on the single plantwide overhead allocation rate cost data, which model will
they produce?
3. Which course of action will yield more income for Erickson?
SOLUTION
Requirement 1
If Erickson’s managers rely on the ABC unit cost data calculated in E19-19, they will choose to produce
the standard rims because gross profit per standard rim is $182.20 compared to only $149.20 per deluxe
rim.
Standard rims
Deluxe rims
Direct materials cost per rim
$ 34.00
$ 50.00
Direct labor cost per rim
Total manufacturing cost per rim
$ 317.80
$ 590.80
Standard rims
Deluxe rims
Sales price per rim
$ 500.00
$ 740.00
Total manufacturing cost per rim
Gross profit per rim
$ 182.20
$ 149.20
Requirement 2
If Erickson’s managers rely on the single plantwide overhead allocation rate cost data calculated in E19-
19, they will choose to produce the deluxe rims because gross profit per deluxe rim is $183.75 compared
to only $147.65 per standard rim.
Standard rims
Deluxe rims
Direct materials cost per rim
$ 34.00
$ 50.00
Direct labor cost per rim
Total manufacturing cost per rim
$ 352.35
$ 556.25
Standard rims
Deluxe rims
Sales price per rim
$ 500.00
$ 740.00
Total manufacturing cost per rim
Gross profit per rim
$ 147.65
$ 183.75
E19-20, cont.
Requirement 3
Producing the standard rims will yield more income for Erickson because activity-based costing
allocation of manufacturing overhead is more accurate than single plantwide rate allocation of
Note: Exercises E19-19 and E19-20 must be completed before attempting Exercise E19-21.
E19-21 Using activity-based management and target costing
Learning Objective 3
OH cost per unit $406.80
Refer to Exercises E19-19 and E19-20. Controller Michael Bender is surprised by the increase in cost of
the deluxe model under ABC. Market research shows that for the deluxe rim to provide a reasonable
profit, Erickson will have to meet a target manufacturing cost of $525.00 per rim. A value engineering
study by Erickson’s employees suggests that modifications to the finishing process could cut finishing
cost from $80.00 to $60.00 per hour and reduce the finishing direct labor hours per deluxe rim from 2.50
hours to 2.0 hours. Direct materials would remain unchanged at $50.00 per rim, as would direct labor at
$54.00 per rim. The materials handling, machine setup, and insertion of parts activity costs also would
remain the same.
Would implementing the value engineering recommendation enable Erickson to achieve its target cost
for the deluxe rim?
SOLUTION
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
per Rim
=
Allocated
Manufacturing
Overhead Cost
per Rim
Materials handling
$3.00 per part
×
9.0 parts
=
$ 27.00
Machine setup
×
=
Insertion of parts
×
9.0 parts
=
243.00
2.0 finishing hours
Manufacturing
overhead cost per rim
Direct materials cost per rim
Direct labor cost per rim
Manufacturing overhead cost per rim
Total manufacturing cost per rim
E19-22 Using activity-based costing to make decisions
Learning Objectives 1, 2, 3
1. Cost per collar $12.22
Destiny Dog Collars uses activity-based costing. Destiny’s system has the following features:
Requirements
1. Compute the total estimated cost Destiny will incur to purchase the needed materials and then
assemble and package 25,000 dog collars. Also compute the cost per collar.
2. For bidding, Destiny adds a 25% markup to total cost. What total price will the company bid for the
entire Animal Hut order?
3. Suppose that instead of an ABC system, Destiny has a traditional product costing system that
allocates indirect costs at the rate of $9.20 per direct labor hour. The dog collar order will require
14,000 direct labor hours. What total price will Destiny bid using this system’s total cost?
4. Use your answers to Requirements 2 and 3 to explain how ABC can help Destiny make a better
decision about the bid price it will offer Animal Hut.
SOLUTION
Requirement 1
Predetermined Overhead
Allocation Rate
×
Overhead Cost
Purchasing
$60.00 per purchase order
×
=
Assembling
×
2 parts per collar × 25,000 collars
=
Total manufacturing overhead cost
Total direct materials cost
=
$8.00 per collar
25,000 collars
=
$200,000
=
$3.00 per collar
×
=
$75,000
Total direct materials cost
Total direct labor cost
Total manufacturing overhead cost
Total cost
÷ Number of collars
÷ 25,000 collars
Cost per collar
Actual Quantity
of the
=
Allocated
Manufacturing
Requirement 2
Total bid price
=
$305,500 total cost
×
125% markup
=
$381,875