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P19-34A Computing product costs in an ABC system
Learning Objectives 2, 3
1. Standard $70 per unit
Owen, Inc. manufactures bookcases and uses an activity-based costing system. Owen’s activity areas
and related data follow:
Owen produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase,
which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and
other data follow:
Requirements
1. Compute the manufacturing product cost per unit of each type of bookcase.
2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard
bookcases at $5 each and to the unfinished bookcases at $4 each. Similar analyses were conducted of
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Standard bookcases
Materials handling
$1.00 per part
×
28,000 parts
=
$ 28,000
Standard
bookcases
Unfinished
bookcases
Total direct materials cost
$ 91,000
$ 81,400
Total direct labor cost
140,000
88,800
P19-34A, cont.
Requirement 2
Standard
bookcases
Unfinished
bookcases
Pre-manufacturing costs per unit
$ 5
$ 4
Requirement 3
Manufacturing product costs are reported in the external financial statements in the inventory accounts
Requirement 4
Sales price per unit
=
Full product cost
+
Net profit
P19-35A Using ABC in a service company
Learning Objective 4
1. Total OH cost $620
Mahoney Plant Service completed a special landscaping job for Cory Company. Mahoney uses ABC
and has the following predetermined overhead allocation rates:
Requirements
1. What is the total cost of the Cory job?
2. If Cory paid $2,495 for the job, what is the operating income or loss?
3. If Mahoney desires an operating income of 40% of cost, how much should the company charge for
the Cory job?
SOLUTION
Requirement 1
Predetermined
Overhead
×
Actual Quantity
of the
=
Allocated
Requirement 2
Operating Income
=
$2,495 service revenue
–
$1,995 total cost
=
$500
Requirement 3
P19-36A Recording manufacturing costs for a JIT system
Learning Objective 5
2. Conversion Costs $352,000 CR
Freeze Point produces fleece jackets. The company uses JIT costing for its JIT production system.
Freeze Point 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 $35, composed of $13 direct materials plus $22 conversion costs. Data
for February’s activities follow:
Requirements
1. What are the major features of a JIT production system such as that of Freeze Point?
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.
P19-36A, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Raw and In-Process Inventory
200,500
Accounts Payable
200,500
Requirement 3
Raw and In-Process Inventory
Feb. 1 13,000
208,000
200,500
P19-37A Analyzing costs of quality
Learning Objective 6
2. Net benefit $29,265
Lilly, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new
skateboard. Lilly’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.
2. Lilly spent $100,000 on design engineering for the new skateboard. What is the net benefit of this
“preventive” quality activity?
3. What major difficulty would Lilly’s managers have in implementing this costs-of- quality approach?
What alternative approach could they use to measure quality improvement?
SOLUTION
Requirement 1
Activity
Predicted
Reduction in
Activity Units
×
Predetermined
Overhead
Allocation Rate
per Unit
=
Predicted
Quality Cost
Savings
Inspection of incoming raw materials
415
×
$ 39
=
$ 16,185
Requirement 2
Total predicted quality cost savings
$ 129,265
Design engineering cost
(100,000)
Net benefit
$ 29,265
Requirement 3
Problems (Group B)
P19-38B Comparing costs from ABC and single-rate systems
Learning Objectives 1, 2
2. Travel packs $1.70
Haywood Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells
both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20
capsules to shops in airports, train stations, and hotels. The following information has been developed to
determine if an activity-based costing system would be beneficial:
Requirements
1. Compute the predetermined overhead allocation rate for each activity.
2. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the
commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the
total activity-based costs allocated to each product line, and then compute the cost per unit.)
3. Haywood’s original single plantwide overhead allocation rate system allocated indirect costs to
products at $151.00 per machine hour. Compute the total indirect costs allocated to the commercial
containers and to the travel packs under the original system. Then compute the indirect cost per unit
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
=
Total estimated overhead costs
Total estimated quantity of the
overhead allocation base
Requirement 2
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Commercial containers
Materials handling
$4.00 per kilo
×
13,500 kilos
=
$ 54,000
Packaging
$40.00 per MHr
×
2,250 MHr
=
90,000
Quality assurance
$60.00 per sample
×
300 samples
=
18,000
P19-38B, cont.
Requirement 3
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Commercial containers
Total indirect costs
$151.00per MHr
×
2,250 MHr
=
$ 339,750.00
÷ Number of units
÷ 3,000 units
Indirect cost per unit
$ 113.25
Requirement 4
Comparison of manufacturing overhead cost per unit:
Traditional
System
ABC
System
Difference
Commercial
Containers
$ 113.25 per unit(a)
–
$ 54.00 per unit(b)
=
$59.25
P19-39B Computing product costs in an ABC system
Learning Objective 2
1. Total activity-based costs $56.10
The Arial Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components
used in smartphones. Consider the following data regarding component T24 (amounts are per unit):
Requirements
1. Complete the missing items for the two tables.
2. Why might managers favor this ABC system instead of Arial’s older system, which allocated all
manufacturing overhead costs on the basis of direct labor hours?
SOLUTION
Requirement 1
Activity
Allocation Base
Cost Allocated
to each Unit
Start station
Number of raw component chassis
5
×
$ 1.30
=
$ 6.50
Direct materials cost
$ 79.00
Direct labor cost
22.00
Activity-based costs allocated
56.10(f)
Total manufacturing product cost
$ 157.10
Calculations:
(a)
$9.80
/
$0.35
=
28
(b)
13
×
$0.20
=
$2.60
(c)
$3.20
/
8
=
$0.40
(d)
0.41
×
$50.00
=
$20.50
(e)
$4.00
/
0.10
=
$40.00
(f)
Sum of column
Requirement 2
Because the traditional (older) costing system doesn’t reflect the way products actually use the
P19-40B Computing product costs in an ABC system
Learning Objectives 2, 3
1. Standard $75 per unit
McDowell, Inc. manufactures bookcases and uses an activity-based costing system. McDowell’s activity
areas and related data follow:
McDowell produced two styles of bookcases in April: the standard bookcase and an unfinished
bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials
costs, and other data follow:
Requirements
1. Compute the manufacturing product cost per unit of each type of bookcase.
2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard
bookcase?
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Standard
bookcases
Unfinished
bookcases
Total direct materials cost
$ 45,000
$ 50,400
Total direct labor cost
72,000
51,840
