E19-22, cont.
Requirement 3
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
$9.20 per DLHr
×
14,000 DLHr
=
$128,800
Total manufacturing overhead cost
128,800
Total cost
=
×
125% markup
=
$504,750
Requirement 4
Activity-based costing allocation of manufacturing overhead is more accurate than traditional single
plantwide rate allocation of manufacturing overhead. Activity-based costing considers the resources
E19-23 Allocating indirect costs and computing income, service company
Learning Objective 4
2. Total OH cost $28,500
Requirements
1. Compute Southern’s predetermined overhead allocation rate per direct labor hour.
2. Compute the total cost assigned to the Halbert engagement.
3. Compute the operating income from the Halbert engagement.
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
=
Total estimated overhead costs
Total estimated quantity of the
overhead allocation base
=
$150 per DLHr
Requirement 2
Allocation Base Used
Overhead Cost
×
190 DLHr
=
×
=
Total direct labor cost
Total overhead cost
Total cost
Predetermined
Overhead
×
Actual Quantity
of the
=
Allocated
Requirement 3
Service revenue
=
$64,600 total direct labor cost
×
160%
=
$103,360
=
E19-24 Computing ABC allocation rates, service company
Learning Objective 4
POHR training $109 per DLHr
Refer to Exercise E19-23. The president of Southern suspects that her allocation of indirect costs could
be giving misleading results, so she decides to develop an ABC system. She identifies three activities:
documentation preparation, information technology support, and training. She figures that
documentation costs are driven by the number of pages, information technology support costs are driven
by the number of software applications used, and training costs are driven by the number of direct labor
hours worked. Estimates of the costs and quantities of the allocation bases follow:
Compute the predetermined overhead allocation rate for each activity. Round to the nearest dollar.
SOLUTION
Note: Exercises E19-23 and E19-24 must be completed before attempting Exercise E19-25.
E19-25 Using ABC to allocate costs and compute profit, service company
Learning Objective 4
1. Total OH cost $47,990
Refer to Exercises E19-23 and E19-24. Suppose Southern’s direct labor rate was $340 per hour. The
Halbert engagement used the following resources last month:
Requirements
1. Compute the cost assigned to the Halbert engagement, using the ABC system.
2. Compute the operating income or loss from the Halbert engagement, using the ABC system.
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate(a)
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Overhead Cost
×
=
×
=
×
=
20,710
$ 47,990
Direct Labor Rate
per DLHr
×
Number of DLHr
worked
=
Total Direct
Labor Cost
$340 per DLHr
×
190 DLHr
=
$64,600
Total direct labor cost
Total overhead cost
Total cost
Requirement 2
Service revenue
=
$64,600 total direct labor cost
×
160%
=
$103,360
=
$112,590 total cost
=
Note: Exercise E19-25 must be completed before attempting Exercise E19-26.
E19-26 Using ABC to achieve target profit, service company
Learning Objective 4
$187,650.00
Refer to Exercise E19-25. Southern desires a 40% target net profit after covering all costs. Considering
the total costs assigned to the Halbert engagement in Exercise E19-25, what would Southern have to
charge the customer to achieve that net profit? Round to two decimal places.
SOLUTION
Desired net profit
=
Required service revenue
–
Total cost
=
Required service revenue
–
Total cost
=
=
E19-27 Recording manufacturing costs in a JIT costing system
Learning Objective 5
1. COGS $21,840 DR
Requirements
1. Prepare summary journal entries for January.
2. The January 1, 2016, balance of the Raw and In-Process Inventory account was
$60. Use a T-account to find the January 31 balance.
3. Use a T-account to determine whether conversion costs are overallocated or underallocated for the
month. By how much? Prepare the journal entry to adjust the Conversion Costs account.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Raw and In-Process Inventory
6,000
Accounts Payable
6,000
Conversion Costs
Wages Payable, Accumulated Depreciation, etc.
Finished Goods Inventory
Raw and In-Process Inventory (525 units × $10/unit)
5,250
Conversion Costs (525 units × $32/unit)
Accounts Receivable (520 units × $58/unit)
Sales Revenue
Cost of Goods Sold (520 units × $42/unit)
Finished Goods Inventory
Requirement 2
Raw and In-Process Inventory
Jan. 1 60
5,250
Jan. 31 810
Requirement 3
Conversion costs are overallocated by $800.
16,800
800 Jan. 31
Date
Accounts and Explanation
Debit
Credit
Conversion Costs
Cost of Goods Sold
E19-28 Recording manufacturing costs in a JIT costing system
Learning Objective 5
1. R&IP $5,500 CR
Golner produces electronic calculators. Suppose Golner’s standard cost per calculator is $20 for direct
materials and $61 for conversion costs. The following data apply to August activities:
Requirements
1. Prepare summary journal entries for August using JIT costing, including the entry to adjust the
Conversion Costs account.
2. The beginning balance of Finished Goods Inventory was $1,300. Use a T-account to find the ending
balance of Finished Goods Inventory.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Raw and In-Process Inventory
6,900
Accounts Payable
6,900
Conversion Costs
Wages Payable, Accumulated Depreciation, etc.
Finished Goods Inventory
Raw and In-Process Inventory (275 units × $20/unit)
5,500
Conversion Costs (275 units × $61/unit)
Accounts Receivable (270 units × $115/unit)
Sales Revenue
Cost of Goods Sold (270 units × $81/unit)
Cost of Goods Sold ($17,000 – $16,775)
Conversion Costs
Requirement 2
Finished Goods Inventory
Aug. 1 1,300
21,870
22,275
E19-29 Classifying quality costs
Learning Objective 6
Total external failure costs $103,500
Decker & Co. makes electronic components. Chris Decker, the president, recently instructed Vice
President Jim Bruegger to develop a total quality control program. “If we don’t at least match the quality
improvements our competitors are making,” he told Bruegger, “we’ll soon be out of business.” Bruegger
began by listing various “costs of quality” that Decker incurs. The first six items that came to mind
were:
a. Costs incurred by Decker customer representatives traveling to customer sites to repair defective
products, $13,500.
b. Lost profits from lost sales due to reputation for less-than-perfect products,
$35,000.
c. Costs of inspecting components in one of Decker’s production processes, $22,500.
d. Salaries of engineers who are redesigning components to withstand electrical overloads, $90,000.
e. Costs of reworking defective components after discovery by company inspectors,
$25,000.
f. Costs of electronic components returned by customers, $55,000.
Classify each item as a prevention cost, an appraisal cost, an internal failure cost, or an external failure
cost. Then determine the total cost of quality by category.
SOLUTION
Prevention
Cost
Appraisal
Cost
Internal Failure
Cost
External Failure
Cost
a.
$ 13,500
c.
e.
55,000
Total
$ 103,500
E19-30 Classifying quality costs and using these costs to make decisions
Learning Objective 6
2. Total cost to undertake $185,000
Clegg, Inc. manufactures door panels. Suppose Clegg is considering spending the
following amounts on a new total quality management (TQM) program:
Requirements
1. Classify each cost as a prevention cost, an appraisal cost, an internal failure cost, or an external
failure cost.
2. Should Clegg implement the new quality program? Give your reason.
SOLUTION
Requirements 1 and 2
Undertake the New TQM Program
Prevention
Training employees in TQM
$ 22,000
Training suppliers in TQM
38,000
quality materials
Total prevention costs
Strength-testing one item from each batch of panels
70,000
Total appraisal costs
Do Not Undertake the New TQM Program
Appraisal
Avoid inspection of raw materials
$ 52,000
Total appraisal costs
$ 52,000
Avoid rework and spoilage
Total internal failure costs
Avoid lost profits from lost sales due to disappointed customers
Avoid warranty costs
Total external failure costs
Total costs of not undertaking the new TQM program
$ 220,000
Clegg should implement the new TQM program. The total cost of undertaking the new TQM program
($185,000) is less than the total cost of not undertaking the new TQM program ($220,000) by $35,000.
Clegg would save $35,000 by undertaking the program.
E19-31 Classifying quality costs and using these costs to make decisions
Learning Objective 6
2. Total cost to undertake $2,240,000
Langley manufactures high-quality speakers. Suppose Langley is considering spending the following
amounts on a new quality program:
Requirements
1. Classify each of these costs into one of the four categories of quality costs (prevention, appraisal,
internal failure, external failure).
2. Should Langley implement the quality program? Give your reasons.
SOLUTION
Requirements 1 and 2
Undertake the New Quality Program
Prevention
Negotiating and training suppliers to obtain higher-quality materials
and on-time delivery
$ 350,000
Do Not Undertake the New Quality Program
Appraisal
Avoid inspection of raw materials
$ 550,000
Total appraisal costs
$ 550,000
Lost production time due to rework
Total internal failure costs
Reduce warranty repair costs
Lost sales due to disappointed customers
Total external failure costs
Total costs of not undertaking the new quality program
$ 2,728,000
Langley should implement the new quality program. The total cost of undertaking the new quality
program ($2,240,000) is less than the total cost of not undertaking the new quality program ($2,728,000)
by $488,000. Langley would save $488,000 by undertaking the program.
Problems (Group A)
P19-32A Comparing costs from ABC and single-rate systems
Learning Objectives 1, 2
2. Travel packs $1.80
Crescent 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. Crescent’s original single plantwide overhead allocation rate costing system allocated indirect costs
to products at $153.00 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
SOLUTION
Requirement 1
Predetermined
Overhead
Allocation Rate
=
Total estimated overhead costs
Total estimated quantity of the
overhead allocation base
4,140 total estimated machine hours
Requirement 2
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Commercial containers
Materials handling
$4 per kilo
×
14,000 kilos
=
$ 56,000
Packaging
$50 per MHr
×
3,000 MHr
=
150,000
Quality assurance
$60 per sample
×
400 samples
=
24,000
Total activity-based costs
$ 230,000
÷ Number of units
Activity-based cost per unit
$ 57.50
Travel packs
Materials handling
$4 per kilo
×
5,400 kilos
=
$ 21,600
Packaging
$50 per MHr
×
=
27,000
Total activity-based costs
$ 97,200
÷ 54,000 units
Activity-based cost per unit
$ 1.80
P19-32A, cont.
Requirement 3
Predetermined
Overhead
Allocation Rate
×
Actual Quantity
of the
Allocation Base Used
=
Allocated
Manufacturing
Overhead Cost
Commercial
containers
Total indirect costs
$153.00 per MHr
×
3,000 MHr
=
$ 459,000.00
÷ Number of units
Indirect cost per unit
Travel packs
Total indirect costs
$153.00 per MHr
×
540 MHr
=
÷ Number of units
Indirect cost per unit
Requirement 4
Comparison of manufacturing overhead cost per unit:
Traditional
System
ABC
System
Difference
Commercial
Containers
$ 114.75 per unit(a)
–
$ 57.50 per unit(b)
=
$57.25
Travel packs
$ 1.53 per unit(a)
–
$ 1.80 per unit(b)
=
($0.27)
P19-33A Computing product costs in an ABC system
Learning Objective 2
1. Total activity-based costs $51.60
The Adam Manufacturing Company in Rochester, Minnesota, assembles and tests electronic
components used in smartphones. Consider the following data regarding component T24 (amounts are
per unit):
The activities required to build the component follow:
Requirements
1. Complete the missing items for the two tables.
2. Why might managers favor this ABC system instead of Adam’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
×
$ 1.20
=
$ 6.00
28(a)
Manual insertion
Number of manual insertions
8
0.50
4.00(b)
Wave solder
Number of components soldered
5
×
1.30
=
6.50
Test
Number of testing hours
0.43
50.00
Direct materials cost
$ 83.00
Direct labor cost
16.00
Activity-based costs allocated
51.60(f)
Total manufacturing product cost
$ 150.60
(a)
$5.60
=
(b)
8
×
$0.50
(c)
$2.80
(d)
×
=
(e)
$5.20
=
Sum of column
Requirement 2
Because the traditional (older) costing system doesn’t reflect the way products actually use the