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P19-40B, cont.
Requirement 2
Standard
Unfinished
Requirement 3
Manufacturing product costs are reported in the external financial statements in the inventory accounts
on the balance sheet and Cost of Goods Sold on the income statement. Full product costs are used for
Requirement 4
Sales price per unit
=
Full product cost
+
Net profit
=
$65(b)
+
$16
P19-41B Using ABC in a service company
Learning Objective 4
1. Total OH cost $510
Weston Plant Service completed a special landscaping job for Briggs Company. Weston uses ABC and
has the following predetermined overhead allocation rates:
The Briggs job included $900 in plants; $1,200 in direct labor; one design; and 30 plants.
Requirements
1. What is the total cost of the Briggs job?
2. If Briggs paid $3,410 for the job, what is the operating income or loss?
3. If Weston desires an operating income of 40% of cost, how much should the company charge for the
Briggs job?
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Overhead Cost
Requirement 2
Profit
=
$3,410 service revenue
–
$2,610 total cost
=
$800
Requirement 3
P19-42B Recording manufacturing costs for a JIT system
Learning Objective 5
2. Conversion Costs $380,000 CR
High Range produces fleece jackets. The company uses JIT costing for its JIT production system.
High Range has two inventory accounts: Raw and In-Process Inventory and Finished Goods
Inventory. On February 1, 2016, the account balances were Raw and In-Process Inventory, $13,000;
Finished Goods Inventory, $2,000.
The standard cost of a jacket is $36, composed of $16 direct materials plus $20 conversion costs. Data
for February’s activities follow:
Requirements
1. What are the major features of a JIT production system such as that of High Range?
2. Prepare summary journal entries for February. Underallocated or overallocated conversion costs are
adjusted to Cost of Goods Sold monthly.
3. Use a T-account to determine the February 29, 2016, balance of Raw and In-Process Inventory.
SOLUTION
Requirement 1
A just-in-time management system is an inventory management system in which a company produces
just in time to satisfy customer needs. Suppliers deliver raw materials just in time to begin production
and finished units are completed just in time for delivery to customers.
P19-42B, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Raw and In-Process Inventory
299,000
Accounts Payable
299,000
Requirement 3
Raw and In-Process Inventory
Feb. 1 13,000
304,000
P19-43B Analyzing costs of quality
Learning Objective 6
2. Net benefit $11,100
Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new
skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure,
and external failure activities. The predicted reductions in activities over the two-year life of the
skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.
Requirements
1. Calculate the predicted quality cost savings from the design engineering work.
SOLUTION
Requirement 1
Activity
Predicted
Reduction in
Activity Units
×
Predetermined
Overhead
Allocation Rate
per Unit
=
Predicted
Quality Cost
Savings
Inspection of incoming raw
materials
395
×
$ 39
=
$ 15,405
Requirement 2
Total predicted quality cost savings
$ 119,100
Requirement 3
Some quality costs are hard to measure because they don’t appear in a company’s accounting records;
Continuing Problem
P19-44 Comparing costs from ABC and single-rate systems
This problem continues the Daniels Consulting situation from Problem P17-40 of Chapter 17. Recall
that Daniels allocated indirect costs to jobs based on a predetermined overhead allocation rate, computed
as a percentage of direct labor costs. Because Daniels provides a service, there are no direct materials
costs. Daniels is now considering using an ABC system. Information about ABC costs follows:
Records for two clients appear here:
Requirements
1. Compute the total cost for each job. The cost of direct labor is $176 per hour.
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Overhead
Cost
Tommy’s Trains
Design
$1,350 per design
×
3 designs
=
$ 4,050
Marcia’s Cookies
Design
$1,350 per design
×
4 designs
=
$ 5,400
Direct Labor Rate
per DLHr
×
Number of DLHr
worked
=
Total Direct
Labor Cost
Tommy’s
Trains
Marcia’s
Cookies
Total travel and meal costs
$ 10,700
$ 600
P19-44, cont.
Requirement 2
Compared with Problem P17-40, the total cost of the Tommy’s Trains is $2,828 less tahn using ABC
($162,470 – $165,298) and the total cost of Marcia’s Cookies is $5,656 greater using ABC ($49,200 –
$43,544).
Requirement 3
Desired
Operating Income
=
Total Cost
×
25%
Tommy’s Trains
=
$ 162,470
×
25%
=
$ 40,618
CRITICAL THINKING
Decision Cases
Decision Case 19-1
Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The
company’s original job costing system has two direct cost categories: direct materials and direct labor.
Overhead is allocated to jobs at the single rate of $22 per direct labor hour.
Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B.
Budget data relating to the contracts follow:
Requirements
1. Compute the budgeted product cost per unit for each job, using the original costing system (with two
direct cost categories and a single overhead allocation rate).
2. Suppose Harris Systems adopts the ABC system. Compute the budgeted product cost per unit for
each job using ABC.
3. Which costing system more accurately assigns to jobs the costs of the resources consumed to
produce them? Explain.
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base
Used
=
Allocated
Manufacturing
Overhead Cost
Job A
Job B
Total direct materials cost
$ 220,000
$ 30,000
Total direct labor cost
160,000
12,000
Decision Case 19-1, cont.
Requirement 2
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Job A
Materials handling
$0.85 per part
×
15,000 parts
=
$ 12,750
Machine setup
$500 per setup
×
6 setups
=
3,000
Assembling
$80 per
assembling hour
×
1,500
assembling hours
=
120,000
Job A
Job B
Total direct materials cost
$ 220,000
$ 30,000
Total direct labor cost
160,000
12,000
Total manufacturing overhead cost
137,250
21,200
Total product cost
$ 517,250
$ 63,200
÷ Number of units
÷ 100 units
÷ 10 units
Product cost per unit
$ 5,172.50
$ 6,320
Decision Case 19-1, cont.
Requirement 3
Total Direct
Labor Hours
/
Number
of units
=
Direct Labor Hours
per Unit
Total Quantity
of the
Allocation Base Used
/
Number
of units
=
Quantity of
the Allocation Base
Used per Unit
Job A
Materials handling
15,000 parts
/
100 units
=
150 parts
Total
manufacturing
overhead cost
/
Number
of units
=
Manufacturing overhead
cost per unit
Job A
Traditional System
$176,000(a)
/
100 units
=
$ 1,760.00 per unit
ABC System
$137,250(b)
/
100 units
=
$ 1,372.50 per unit
Decision Case 19-1, cont.
Requirement 3, cont.
Comparison of manufacturing overhead cost per unit:
Traditional System
ABC System
Difference
Job A
$ 1,760.00 per unit
–
$ 1,372.50 per unit
=
$ 387.50
Job B
$ 1,320.00 per unit
–
$ 2,120.00 per unit
=
$ (800.00)
One unit of Job A requires 1.33 times as many direct labor hours than does one unit of Job B (80 direct
labor hours per unit / 60 direct labor hours per unit). However, one unit of Job B actually requires more
activity allocation base quantities using ABC for all four activities, as shown in the following table:
Quantity of the
Allocation Base
Used per Unit
for Job B
/
Quantity of the
Allocation Base
Used per Unit
for Job A
=
Ratio of the
Quantity of the
Allocation Base
Used per Unit
Materials handling
200 parts
/
150 parts
=
1.33 times
Decision Case 19-2
Harris Systems has decided to adopt ABC. To remain competitive, Harris Systems’s management
believes the company must produce the type of servers produced in Job B (from Decision Case 19-1) at
a target cost of $5,400. Harris Systems has just joined a B2B e-market site that management believes
will enable the firm to cut direct materials costs by 10%. Harris’s management also believes that a value
engineering team can reduce assembly time.
Compute the assembling cost savings required per Job B-type server to meet the
$5,400 target cost. (Hint: Begin by calculating the direct materials, direct labor, and
allocated overhead costs per server.)
SOLUTION
Revised total direct materials cost
=
Original total cost
×
(1 – 10%)
=
$30,000
×
90%
=
$27,000
Original assembling
cost per server
=
Original total
assembling cost
/
Number
of servers
=
$16,000 (c)
/
10
=
$1,600
(c)
Calculated in Decision Case 19-1
© 2016 Pearson Education, Inc.
19-93
Ethical Issue 19-1
Cassidy Manning is assistant controller at LeMar Packaging, Inc., a manufacturer of cardboard boxes
and other packaging materials. Manning has just returned from a packaging industry conference on
activity-based costing. She realizes that ABC may help LeMar meet its goal of reducing costs by 5%
over each of the next three years.
LeMar Packaging’s Order Department is a likely candidate for ABC. While orders are entered into a
computer that updates the accounting records, clerks manually check customers’ credit history and hand-
deliver orders to shipping. This process occurs whether the sales order is for a dozen specialty boxes
worth $80 or 10,000 basic boxes worth $8,000.
Manning believes that identifying the cost of processing a sales order would justify (1) further
computerization of the order process and (2) changing the way the company processes small orders.
However, the significant cost savings would arise from elimination of two positions in the Order
Department. The company’s sales order clerks have been with the company many years. Manning is
uncomfortable with the prospect of proposing a change that will likely result in terminating these
employees.
Use the IMA’s ethical standards (see Chapter 16) to consider Manning’s responsibility when cost
savings come at the expense of employees’ jobs.
SOLUTION
The IMA standard of competence states that management accountants should “provide decision support
information and recommendations that are accurate, clear, concise, and timely”.
Fraud Case 19-1
Anu Ghai was a new production analyst at RHI, Inc., a large furniture factory in North Carolina. One of
her first jobs was to update the predetermined overhead allocation rates for factory production costs.
This was normally done once a year, by analyzing the previous year’s actual data, factoring in projected
changes, and calculating a new rate for the coming year. What Anu found was strange. The activity rate
for “maintenance” had more than doubled in one year, and she was puzzled how that could have
happened. When she spoke with Larry McAfee, the factory manager, she was told to spread the
increases out over the other activity costs to “smooth out” the trends. She was a bit intimidated by Larry,
an imposing and aggressive man, but she knew something wasn’t quite right. Then one night she was at
a restaurant and overheard a few employees who worked at RHI talking. They were joking about the
work they had done fixing up Larry’s home at the lake last year. Suddenly everything made sense. Larry
had been using factory labor, tools, and supplies to have his lake house renovated on the weekends. Anu
had a distinct feeling that if she went up against Larry on this issue, she would come out the loser. She
decided to look for work elsewhere.
Requirements
1. Besides spotting irregularities, like the case above, what are some other ways that ABC cost data are
useful for manufacturing companies?
2. What are some of the other options that Anu might have considered?
SOLUTION
Requirement 1
An ABC system reflects the way products actually use a company’s resources (activities). Thus ABC
Requirement 2
Anu might have considered communicating with the company’s audit committee (if the company has
