Chapter 17
Activity-Based Costing and Analysis
QUESTIONS
1.
Manufacturing overhead costs cannot be traced to units of product like direct
materials and direct labor. Assigning overhead costs to units of product requires
some sort of allocation on some “reasonable” basis.
2.
Overhead is commonly assigned to products using (a) a plantwide overhead rate,
(b) departmental overhead rates, or (c) activity based costing.
3.
Direct labor hours and machine hours are commonly used to assign overhead costs
because they are readily available. Companies keep track of direct labor hours for
payroll purposes anyway and machine hours can be measured easily. The ready
availability and understandability of these measures are reasons that many
companies use them as the basis for assigning overhead. Many overhead costs
such as indirect labor and supervision may be related to direct labor hours, and
others such as machine maintenance and electricity may be closely related to
machine hours. So, there is also logic for using these measures for assigning such
overhead costs.
4.
A single plantwide overhead rate is easy to use. All the overhead costs are put into
a single pool and averaged over all the products based on a single driver. If all
costs consume overhead in the same proportion this may be a reasonable method
of assigning overhead to product.
5.
The assumptions underlying the use of a single plantwide overhead rate are (a) the
overhead costs are logically related to the base used to determine the rate (e.g.
direct labor hours or machine hours) and (b) all costs are consumed by products in
the same proportions.
6.
Anything to which costs would be assigned is considered a “cost object.” Common
cost objects are units of product, product lines, departments, activities, and
projects.
7.
If the assumptions mentioned in question 5 are violated, there will be distortions.
That is, if all overhead costs are not related to the single base there will be
distortions, or if products consume resources in different proportions some
products will be assigned too much overhead cost and some will be assigned too
little.
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Solutions Manual, Chapter 17
961
8.
Departmental overhead rates reflect the unique costs and drivers in various
departments, whereas these potentially important differences are lost when all the
costs are combined into a single plantwide overhead rate.
9.
Departmental overhead rates are similar to plantwide overhead rates in the fact that
they pool together costs that may be incurred differently.
Distorted cost
assignments can occur under both departmental and plant-wide methods. They are
different because the departmental rates recognize differences among departments
and assign overhead to products based on the driver that makes the most sense for
each department.
10.
Companies may choose to use an alternative, more expensive method of assigning
costs than ones allowed for external financial reporting because they may need
more accurate information for strategic decision making, cost control, and other
managerial purposes.
11.
The first step in ABC is to identify the activities that cause costs to be incurred.
12.
An activity cost driver is the measure of the activity that causes costs to be
incurred. For instance, the activity driver for the activity “printing checks” might be
number of checks printed.
13.
Value-added activities are those that increase the value of a product or service.
14.
Unit level activities: Activities that must be performed for each unit of product.
Batch level activities: Activities that are related to the number of batches, lots, or
groups of units. They do not have to be performed for each unit of product.
Product level activities: Activities that are associated with the number of different
product lines. They are not incurred for each unit or even for each batch of product.
Facility level activities: Activities that are related to maintaining productive
capacity. They do not change with respect to the number of units, batches, or
product lines produced.
15.
Activity-based costing may be used in any type of organization. The premise of
ABC is that activities cause costs. Since all organizations engage in activities,
these activities may be associated with costs they incur. Service enterprises must
determine appropriate fees for the services they provide, so it would be just as
appropriate for such a company to determine the cost of providing those services
as it is for a manufacturer to determine the cost of making a product.
16.
While ABC may provide more accurate cost assignments, the additional cost to
implement activity-based costing may not be justified. That is, the value of the
improved accuracy may not result in higher profitability. Like any business
decision, the choice of accounting method depends on weighing the costs against
the benefits.
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962
Financial & Managerial Accounting, 5th Edition
QUICK STUDIES
Quick Study 17-1 (10 minutes)
1. D
2. A
3. C
4. B
Quick Study 17-2 (5 minutes)
1. A, C, D
2. B
3. A, B
Quick Study 17-3 (5 minutes)
The three main advantages are: (1) They are based on readily available
information, (2) they are easy to apply, and (3) they are consistent with
GAAP and therefore can be used for external reporting.
Quick Study 17-4 (10 minutes)
1. F
2. U
3. P
4. F
5. U
6. B
7. B
Quick Study 17-5 (5 minutes)
1.
Plant-wide overhead rate (based on direct labor hours)
($1,200,000 + $600,000)/(12,000 DLH + 20,000 DLH) = $56.25/DLH
2.
Plant-wide overhead rate (based on machine hours)
($1,200,000 + $600,000)/(6,000 MH + 16,000 MH) = $81.82/MH (rounded)
Quick Study 17-6 (10 minutes)
Departmental overhead rates
Assembly:
$1,200,000/12,000 DLH = $100/DLH
Finishing:
$600,000/16,000 MH = $37.50/MH
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Solutions Manual, Chapter 17
963
Quick Study 17-7 (10 minutes)
1. Plantwide overhead rate: $2,480,000/125,000 DLH = $19.84/DLH
2. Assign overhead costs to Deluxe and Basic models
Deluxe
Overhead cost
25,000 DLH x $19.84/DLH
÷ production volume (units)
Average overhead cost per unit
$ 496,000
÷
10,000
$49.60/unit
Basic
Overhead cost
60,000 DLH x $19.84/DLH
÷ production volume (units)
Average overhead cost per unit
$ 1,190,400
÷
30,000
$39.68/unit
Quick Study 17-8 (15 minutes)
Activity
Expected
Cost
Activity
Driver
Activity
Rate
Handling material
$ 625,000
100,000 parts
$6.25/part
Inspecting product
900,000
1,500 batches
$600/batch
Processing orders
105,000
700 orders
$150/order
Paying suppliers
175,000
500 invoices
$350/invoice
Insuring factory
300,000
40,000 ft2
$7.50/ft2
Designing pkg.
375,000
10 models
$37,500/model
$2,480,000
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964
Financial & Managerial Accounting, 5th Edition
Quick Study 17-9 (15 minutes)
Note: Activity rates are from Quick Study 17-8.
Assign overhead to Deluxe and Basic model using ABC
Deluxe
Handling material
Inspecting product
Processing orders
Paying suppliers
Insuring factory
Designing pkg.
$6.25/part
$600/batch
$150/order
$350/invoice
$7.50/sq. ft.
$37,500/model
20,000 parts
250 batches
50 orders
50 invoices
10,000 sq. ft.
1 model
$
30,000 parts
100 batches
20 orders
10 invoices
7,000 sq. ft.
1 model
$
÷ production volume (units)
Average overhead cost per unit
Basic
Handling material
Inspecting product
Processing orders
Paying suppliers
Insuring factory
Designing pkg.
$6.25/part
$600/batch
$150/order
$350/invoice
$7.50/sq. ft.
$37,500/model
÷ production volume (units)
Average overhead cost per unit (rounded)
125,000
150,000
7,500
17,500
75,000
37,500
$ 412,500
÷
10,000
$41.25/unit
187,500
60,000
3,000
3,500
52,500
37,500
$ 344,000
÷
30,000
$11.47/unit
Quick Study 17-10 (5 minutes)
1. D
2. A
3. D
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Solutions Manual, Chapter 17
965
Quick Study 17-11 (10 minutes)
$250,000
= $25
10,000
1.
Cost of technical support per service call =
2.
Assign technical support costs to each model
Deluxe: 550 calls x $25 per call = $13,750
Basic: 250 calls x $25 per call = $ 6,250
Quick Study 17-12 (10 minutes)
Activity
Expected
Cost
Activity
Driver*
Activity
Rate
1
$ 140,000
35,000
$ 4.00
2
90,000
30,000
3.00
3
82,000
5,125
16.00
*Computed as the sum of the budgeted cost driver activity of all three products.
Quick Study 17-13 (15 minutes)
Overhead cost allocation of indirect labor and supplies to Department 1
Rate:
($5,400 + $2,600) / $32,000 = $0.25 / $ of labor cost
Allocation:
$18,800 x $0.25 = $4,700
Overhead cost allocation of rent and utilities, general office, and
depreciation to Department 1
Rate:
Allocation:
($12,200 + $4,000 + $3,000) / 3,200 hrs = $6.00/machine hour
2,000 machine hrs x $6.00/machine hour = $12,000
Total overhead allocated to Department 1
$4,700 + $12,000 = $16,700
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966
Financial & Managerial Accounting, 5th Edition
Quick Study 17-14 (15 minutes)
1.
Activity
Expected
Cost
Activity
Driver
Activity
Rate
1
$ 93,000
7,750
$ 12.00
2
92,000
10,000
9.20
3
87,000
5,800
15.00
2.
Activity 1
2,500 x $12
5,250 x $12
Standard
Deluxe
30,000
63,000
Activity 2
4,500 x $9.20
5,500 x $9.20
41,400
50,600
Activity 3
3,000 x $15
2,800 x $15
$
45,000
__________
$
42,000
Total overhead cost
$
$
155,600
÷ Units produced
Overhead cost per unit
116,400
÷ 36,375 units
$
3.20
÷ 62,240 units
$
2.50
Quick Study 17-15 (10 minutes)
a. P
b. P
c. A
d. I
e. I
f. A
g. I
h. E
Quick Study 17-16 (5 minutes)
The two key components of lean accounting are (1) eliminating waste in the
accounting process and (2) using alternative metrics, such as percentage
of defective products produced, instead of focusing on cost-allocations as
in activity-based costing.
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Solutions Manual, Chapter 17
967
EXERCISES
Exercise 17-1 (10 minutes)
1. D
2. B
3. B
4. C
Exercise 17-2 (10 minutes)
There are two basic stages to activity-based costing. The first stage cost
assignment is to identify the activities involved in manufacturing products
and match those activities with the costs they cause. The second stage is
to compute an activity rate for each cost pool and then use this rate to
allocate overhead costs to products
Exercise 17-3 (10 minutes)
Overhead allocation under ABC is more accurate because (1) there are
more cost pools, (2) costs in each pool are more similar, and (3) allocation
is based on activities that cause costs.
Exercise 17-4 (10 minutes)
Activity
Part (1)
Control
Level
Part (2)
Activity
Driver
A.
Registering patients
U
Number of patients
B.
Cleaning beds
U
Beds, patients, labor hours
C.
Stocking exam rooms
F
Number of rooms
D.
Washing linens
B
Loads
E.
Ordering equipment
F
Cost of equipment,
Number of suppliers
F.
Heating
F
Degree-days, space
G.
Providing security
F
Hours worked, hours open
H.
Filling prescriptions
U
Number of prescriptions
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968
Financial & Managerial Accounting, 5th Edition
Exercise 17-5 (15 minutes)
1.
2.
3.
Overhead rate: €630,000/270,400 DLH = €2.33/DLH
Wine glasses:
254,000 DLH x €2.33/DLH = €591,820
€591,820/211,000 units = €2.80/unit
Vases:
16,400 DLH x €2.33/DLH = €38,212
€38,212/17,000 units = €2.25/unit
Overhead rate:
€630,000/1,000 set-ups = €630/setup
Wine glasses:
€630/setup x 200 setups = €126,000
€126,000/211,000 units = €0.60/unit
Vases:
€630/setup x 800 setups = €504,000
€504,000/17,000 units = €29.65/unit
Assigning the setup costs based on the activity that drives these
costs will give a more accurate cost assignment. This is true
because setup cost is a batch-level cost and not a unit-level cost (as
would be implied if direct labor hours was used as the base).
Exercise 17-6 (25 minutes)
1.
$1,004,000 + $465,300 + $232,000 = $283.55/machine hour
6,000 machine hours
Model 145
1,800 machine hours x $283.55/machine hour
÷ units produced
Model 212
4,200 machine hours x $283.55/machine hour
÷ units produced
$
510,390
÷ 1,500 units
$ 340.26/unit
$ 1,190,910
÷ 3,500 units
$ 340.26/unit
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Solutions Manual, Chapter 17
969
Exercise 17-6 (concluded)
2.
Model 145
Materials and labor
Overhead
Total cost per unit
$250.00
340.26
$590.26
Model 212
Materials and Labor
Overhead
Total cost per unit
$180.00
340.26
$520.26
3.
Price per unit
Model 145
$820.00
Model 212
$480.00
Cost per unit
590.26
520.26
$229.74
$(40.26)
Profit (loss) per unit
Using a single plantwide overhead rate, Model 212 appears to be
unprofitable. Management may be inclined to stop producing this
product, increase its selling price, or look for ways to cut the cost of
producing Model 212 in order to make it appear profitable. The
plantwide rate may be inappropriate in this case, since machine
hours are only accumulated in the components department, and over
40% of the overhead is incurred outside of that department.
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970
Financial & Managerial Accounting, 5th Edition
Exercise 17-7 (25 minutes)
1.
Components
Finishing
Support
$1,004,000/6,000 MH
$465,300/3,000 WH
$232,000/450 PO
$167.33/machine hour*
$155.10/welding hour
$515.56/purchase order*
*rounded
Model 145
Component Overhead
1,800 MH x $167.33/MH
4,200 MH x $167.33/MH
Finishing
800 WH x $155.10/WH
2,200 WH x $155.10/WH
Support
300 POs x $515.56/PO
150 POs x $515.56/PO
Total overhead cost
÷ Units produced
Overhead cost per unit
$
Model 212
301,194*
$
702,786*
124,080
341,220
154,668**
_________
$ 579,942
÷ 1,500 units
$
386.63
77,334**
$ 1,121,340
÷ 3,500 units
$
320.38
* The sum of these two amounts is $1,003,980. There is a $20 difference
from $1,004,000 due to rounding of the overhead rate.
**The sum of these two amounts is $232,002. There is a $2 difference
from $232,000 due to rounding of the overhead rate.
2.
Materials & labor per unit
Overhead cost per unit
Total cost per unit
Model 145
$250.00
386.63
$636.63
Model 212
$180.00
320.38
$500.38
Price per unit
Cost per unit
Profit (loss) per unit
Model 145
$820.00
636.63
$183.37
Model 212
$480.00
500.38
$(20.38)
3.
Model 145 appears profitable and Model 212 appears unprofitable.
Management may be inclined to stop producing Model 212, or may
consider increasing its selling price, if it is unable to cut production
costs to make that product show a profit. Departmental rates allocate
overhead differently based on departmental usage, so may be more
reflective of how each product uses that department’s resources.
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Solutions Manual, Chapter 17
971
Exercise 17-8 (35 minutes)
1.
Components
Changeover
Machining
Setups
$500,000 / 800 batches
$279,000 / 6,000 machine hours
$225,000 / 120 setups
$625/batch
$46.50/MH
$1,875/setup
Finishing
Welding
Inspecting
Rework
$180,300 / 3,000 welding hours
$210,000 / 700 inspections
$75,000 / 300 rework orders
$60.10/WH
$300/inspection
$250/rework order
$135,000 / 450 purchase orders
$300/PO
$97,000 / 5,000 units
$ 19.40/unit
Support
Purchasing
Providing space
and utilities
Model 145
Changeover
400 batches x $625/batch
$ 250,000
Machining
1,800 MH x $46.50/MH
83,700
4,200 MH x $46.50/MH
Setups
60 setups x $1,875/setup
112,500
Welding
800 WH x $60.10/WH
48,080
2,200 WH x $60.10/WH
Inspecting
400 inspections x $300/inspection
120,000
300 inspections x $300/inspection
Rework
160 rework orders x $250/rework order 40,000
140 rework orders x $250/rework order
Purchasing
300 purchase orders x $300/PO
90,000
150 purchase orders x $300/PO
Space & Utilities
1,500 units x $19.40/unit
29,100
3,500 units x $19.40/unit
_________
Total overhead cost
$ 773,380
÷ Units produced
÷ 1,500 units
Overhead cost per unit (rounded)
$ 515.59
Model 212
$ 250,000
195,300
112,500
132,220
90,000
35,000
45,000
67,900
$ 927,920
÷ 3,500 units
$
265.12
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972
Financial & Managerial Accounting, 5th Edition
Exercise 17-8 (concluded)
2.
Materials & labor cost per unit
Overhead cost per unit
Total cost per unit
Model 145
$250.00
515.59
$765.59
Model 212
$180.00
265.12
$445.12
Price per unit
Total cost per unit
Profit (loss) per unit
Model 145
$820.00
765.59
$ 54.41
Model 212
$480.00
445.12
$ 34.88
3.
Both product lines appear profitable. Using ABC we see that Model
145 is not generating nearly as much profit as it appeared to generate
using the volume-based systems in Exercise 17-6 and Exercise 17-7.
Furthermore, Model 212, which appeared to be unprofitable using the
volume-based cost assignment systems is clearly profitable when
costs are assigned using ABC, which more accurately reflects the
resources consumed to produce each product line. The company
should continue to produce both product lines but may still want to
look at the costs of each activity to see if both products can be even
more profitable.
Exercise 17-9 (10 minutes)
1.
2.
($730,000 + $590,000) / (52,000 DLH + 48,000 DLH) = $13.20/DLH
Part A27C
6,200 DLH x $13.20/DLH =
$81,840
Part X82B
5,650 DLH x $13.20/DLH =
$74,580
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Solutions Manual, Chapter 17
973
Exercise 17-10 (15 minutes)
1.
Molding
$730,000 ÷ 30,500 MH = $23.93/MH (rounded)
Trimming
$590,000 ÷ 48,000 DLH = $12.29/DLH (rounded)
2.
3.
Part A27C
Molding
Trimming
5,100 MH x $23.93/MH
700 DLH x $12.29/DLH
$122,043
8,603
$130,646
Part X82B
Molding
Trimming
1,020 MH x $23.93/MH
3,500 DLH x $12.29/DLH
$ 24,409
43,015
$ 67,424
A27C
Departmental
$130,646 ÷ 9,800 units
$13.33/unit*
X82B
Departmental
$67,424 ÷ 54,500 units
$ 1.24/unit*
*rounded
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974
Financial & Managerial Accounting, 5th Edition
Exercise 17-11 (25 minutes)
1. ($300,000 + $200,000) / (75,000 + 125,000) DLH = $2.50/DLH
2.
Direct materials
$ 280,000
Direct labor
Fabricating
$140,000
Implementation
464,000
604,000
Overhead [(7,000 + 16,000 DLH) x $2.50/DLH]
57,500
$ 941,500
÷ units produced
Manufacturing cost per unit
÷ 35,000
$26.90/unit
3.
Fabricating
Implementation
$300,000 / 80,000 MH =
$3.75/MH
$200,000 / 125,000 DLH = $1.60/DLH
4.
Direct materials
Direct labor
Fabricating
Implementation
Overhead
Fabricating (15,040 MH x $3.75/MH)
Implementation (16,000 DLH x $1.60/DLH)
÷ units produced
Manufacturing cost per unit
$ 280,000
$140,000
464,000
56,400
25,600
604,000
82,000
$ 966,000
÷ 35,000
$27.60/unit
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Solutions Manual, Chapter 17
975
Exercise 17-12 (35 minutes)
1.
Total direct labor hours:
Product A: 10,000 units x 0.20 DLH/unit = 2,000 DLH
Product B: 2,000 units x 0.25 DLH/unit = 500 DLH
Total direct labor hours
2,500 DLH
Plant-wide overhead rate:
$249,000/2,500 DLH = $99.60/DLH
Product A
Direct materials
A: 10,000 units x $2/unit
B: 2,000 units x $3/unit
Direct labor
A: 2,000 DLH x $24/DLH
B: 500 DLH x $24/DLH
Overhead
A: 2,000 DLH x $99.60/DLH
B: 500 DLH x $99.60/DLH
Total manufacturing cost
÷ Number of units
$
Product B
20,000
$
6,000
48,000
12,000
199,200
__________
$ 267,200
$
49,800
67,800
÷ 10,000 units
÷ 2,000 units
$ 26.72/unit
$33.90/unit
Price per unit
Product A
$20.00
Product B
$60.00
Cost per unit
26.72
33.90
$ (6.72)
$26.10
Manufacturing cost per unit
2.
Profit (loss) per unit
It appears that Product A is not profitable. The company may decide
that this product line should be eliminated if it cannot reduce the cost
of Product A or increase the selling price.
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976
Financial & Managerial Accounting, 5th Edition
Exercise 17-12 (concluded)
3.
Overhead rates
Machine setup
$121,000/(10 + 12) setups
Material handling
$48,000/16,000 parts*
Quality control
$80,000/(40 + 210) insp. hrs.
$5,500/setup
$3/part
$320/insp.hr.
*Product A: 1 part/unit x 10,000 units = 10,000 parts
Product B: 3 parts/unit x 2,000 units = 6,000 parts
16,000 parts
Product A
$
20,000
48,000
Direct Materials (from part 1)
Direct labor (from part 1)
Overhead
Machine setup
A: 10 setups x $5,500/setup
55,000
B: 12 setups x $5,500/setup
Material handling
A: 10,000 parts x $3/part
30,000
B: 6,000 parts x $3/part
Quality control
A: 40 insp. hr. x $320/insp. hr.
12,800
B: 210 insp. hr. x $320/insp. hr._________
Total manufacturing cost
$ 165,800
÷ Number of units
÷ 10,000 units
Manufacturing cost per unit
$ 16.58/unit
4.
Price per unit
Cost per unit
Profit (loss) per unit
Product A
$20.00
16.58
$ 3.42
Product B
$
6,000
12,000
66,000
18,000
67,200
$ 169,200
÷ 2,000 units
$ 84.60/unit
Product B
$ 60.00
84.60
$(24.60)
Using this approach (activity based costing) the company sees that
Product B is not profitable, and Product A is profitable. The company
should evaluate the activities used to produce Product B and
determine how costs can be reduced. If they cannot be reduced, the
company should consider discontinuing Product B. Volume-based
costing overstates the cost of high-volume products and understates
the cost of low-volume products. ABC more accurately reflects the
cost of production by assigning costs to product lines based on the
activities required to produce them.
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Solutions Manual, Chapter 17
977
Exercise 17-13 (20 minutes)
1.
Client consultation
$270,000/1,500 contact hours
$180/con.hr.
Drawings
$115,000/2,000 design hours
$57.50/design hr.
Modeling
$30,000/40,000 sq. ft.
$0.75/sq. ft.
Supervision
$120,000/600 days
$200/day
Billing/Collection
$22,000/8 jobs
$2,750/job
Client consultation
450 contact hours x $180/con. hr.
Drawings
340 design hrs. x $57.50/design hr.
Modeling
9,200 sq. ft. x $0.75/sq. ft.
Supervision
200 days x $200/day
Billing/Collection
1 job x $2,750/job
2.
Total cost of job
$ 81,000
19,550
6,900
40,000
2,750
$150,200
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978
Financial & Managerial Accounting, 5th Edition
Exercise 17-14 (30 minutes)
Calculation of predetermined overhead rates to apply ABC
Overhead Cost
Total
Category (Activity
Total
Amount of
Cost Pool)
Cost
Cost Driver Predetermined Overhead Rate
Supervision ......................
$ 5,400
$36,000
15% of direct labor cost
Depreciation.....................56,600
2,000 MH
$28.30 per machine hour
Line preparation ..............46,000 250 setups
$184.00 per setup
1. Assignment of overhead costs to the two products using ABC
Rounded edge
Cost
Driver
Supervision ............................ $12,200
Machinery depreciation ........ 500 hours
Line preparation .................... 40 setups
Total overhead assigned ......
Cost per
Driver Unit
Assigned Cost
15%
$ 28.30
$184.00
$ 1,830
14,150
7,360
$23,340
Squared edge
Cost
Driver
Supervision ............................ $23,800
Machinery depreciation ........1,500 hours
Line preparation ....................210 setups
Total overhead assigned ......
Cost per
Driver Unit
Assigned Cost
15%
$ 28.30
$184.00
$ 3,570
42,450
38,640
$84,660
2. Average cost per foot of the two products
Rounded edge
Direct materials ........................... $19,000
Direct labor ..................................
12,200
Overhead (using ABC) ...............
23,340
Total cost ..................................... $54,540
Quantity produced ...................... 10,500 ft.
Average cost per foot* (ABC) .....
$5.19
Squared edge
$ 43,200
23,800
84,660
$151,660
14,100 ft.
$10.76
*rounded
3. Using ABC, the average cost of rounded edge shelves declines and the
average cost of squared edge shelves increases. Under the current
allocation method, the rounded edge shelving was allocated 34% of all of
the overhead cost ($12,200 direct labor/$36,000 total direct labor). However,
it does not use 34% of all of the overhead resources. Specifically, it uses
only 25% of machine hours (500 MH/2,000 MH), and 16% of the setups
(40/250).
Activity based costing allocated the individual overhead
components in proportion to the resources used.
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Solutions Manual, Chapter 17
979
Exercise 17-15 (40 minutes)
Part 1
Determination of cost per driver unit
Cost Center
Cost
Professional salaries .......................
$1,600,000
Driver
Cost per Driver
10,000 hours
$160 per hour
Patient services & supplies ............
$ 27,000
600 patients
$45 per patient
Building cost ....................................
$ 150,000
1,500 sq. ft.
$100 per sq. ft.
Total costs ........................................
$1,777,000
Part 2
Allocation of cost to the surgical departments using ABC
GENERAL SURGERY
Cost
Cost per
Allocated
Driver
Driver Unit
Cost
Professional salaries ............. 2,500 hours
$160 per hr.
$400,000
Patient services & supplies ...... 400 patients $45 per patient
18,000
Building cost .......................... 600 sq. ft. $100 per sq. ft.
60,000
Total ................................................................................................. $478,000
Average cost per patient ...................................................................$
1,195
ORTHOPEDIC SURGERY
Cost
Cost per
Allocated
Driver
Driver Unit
Cost
Professional salaries ............. 7,500 hours
$160 per hr.
$1,200,000
Patient services & supplies ...... 200 patients $45 per patient
9,000
Building cost .......................... 900 sq. ft. $100 per sq. ft
90,000
Total ................................................................................................$1,299,000
Average cost per patient ...................................................................
$
6,495
[Note that the sum of the amounts allocated to General Surgery and Orthopedic
Surgery ($478,000 + $1,299,000) equals the total amount of indirect costs ($1,777,000).]
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980
Financial & Managerial Accounting, 5th Edition
PROBLEM SET A
Problem 17-1A (45 minutes)
1. Plantwide rate
Engineering support
$ 24,500
Electricity
34,000
Setup costs
52,500
Total manufacturing overhead $111,000
÷ 6,200* direct labor hours = $17.90/DLH
*rounded
*
Product A
Product B
10,000 units x 0.3 DLH/unit =
2,000 units x 1.6 DLH/unit =
Direct materials per unit
Direct labor per unit
A: 0.3 DLH/unit @ $20/DLH
B: 1.6 DLH/unit @ $20/DLH
Manufacturing overhead per unit
A: 0.3 DLH/unit @ $17.90/DLH
B: 1.6 DLH/unit @ $17.90/DLH
Total manufacturing cost per unit
Selling price per unit .....................
Manufacturing cost per unit .........
Gross margin per unit ...................
2.
Gross margin per unit
x Units purchased per customer
A: 10,000 units/500 customers
B: 2,000 units/400 customers
Gross margin per customer
3,000 DLH
3,200 DLH
6,200 DLH
Product A
$15.00
Product B
$24.00
6.00
32.00
5.37
______
$26.37
Product A
$30.00
26.37
$ 3.63
28.64
$84.64
Product B
$120.00
84.64
$ 35.36
Product A
$ 3.63
Product B
$35.36
x 20 units
_________
$72.60
x 5 units
$176.80
Total customer service cost
$81,000
÷ number of customers
÷ 900 customers
Customer service cost per customer $90/customer
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Solutions Manual, Chapter 17
981
Problem 17-1A (continued)
We see that the gross margin per customer from Product A ($72.60) is not
adequate to cover the cost of providing service to customers of this
product ($90). It appears that the company is incurring a loss associated
with each customer of Product A.
3. Engineering Support
$24,500/(12 + 58) modifications $350/modification
Electricity
$34,000/3,400* machine hours
$10/MH
Setup
$52,500/(125 + 225) batches
$150/batch
*Product A 10,000 units x 0.1 MH/unit = 1,000 MH
Product B 2,000 units x 1.2 MH/unit = 2,400 MH
3,400 MH
Product A
Engineering support
A: 12 modifications @ $350
B: 58 modifications @ $350
$ 4,200
Electricity
A: 1,000 MH @ $10/MH
B: 2,400 MH@ $10/MH
10,000
Product B
$20,300
24,000
Setups
A: 125 batches @ $150/batch
B: 225 batches @ $150/batch
18,750
______
Total overhead cost by product line
÷ Number of units
Overhead cost per unit (rounded)
Direct materials cost per unit
Direct labor cost per unit (part 1)
Total manufacturing cost per unit
$32,950
÷10,000 units
$ 3.30
15.00
6.00
$24.30
Selling price per unit
Total manufacturing cost per unit
Gross profit per unit
$30.00
24.30
$ 5.70
33,750
$78,050
÷2,000 units
$39.03
24.00
32.00
$95.03
$120.00
95.03
$ 24.97
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982
Financial & Managerial Accounting, 5th Edition
Problem 17-1A (concluded)
4.
Product A
Product B
Gross profit per unit (from above)
$5.70
$24.97
x units per customer (part 2)
x 20 units
x 5 units
Gross profit per customer
$114.00
$ 124.85
Gross profit per customer
$114.00
$124.85
- 90.00
- 90.00
$ 24.00
$ 34.85
- Service cost per customer (part 2)
Profit (loss) per customer
The gross profit per customer is adequate to cover the cost of providing
customer service under ABC for both Product A and Product B
5. Activity based costing gives better information than the plantwide rate
based on volume-related measures because ABC associates the cost of
the various activities that must be performed in order to make, sell, and
provide services to customers.
Resource consumption (i.e. the
incurrence of costs) is driven by the activities that are performed;
assigning costs based on the consumption of these activities more
appropriately (accurately) reflects the cost associated with each cost
object.
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Solutions Manual, Chapter 17
983
Problem 17-2A (25 minutes)
1. When companies experience strong price pressure on their highvolume, commodity-type products, they should be concerned. Many
managers will blame competitive price cutting on attempts by
competitors to undercut prices to gain an edge and drive out existing
companies. While this may be a strategy, it is possible that a new
entrant to a market has more efficient production systems that allow
more competitive pricing.
Another possibility is that there is a
difference in the cost assignment methods each competitor is using.
2. The company may be charging less for its low-volume, custom-order
products than the competitors because the company is using a volumebased costing system, which understates the true cost of producing
low-volume products. It could be that competitors know that customorder products consume relatively more resources per unit than highvolume, commodity-type products and know that a higher price should
be charged on those custom-order products to cover their greater costs.
3. While prices are really set in the marketplace based on customer
demand and supply of the product, companies still look at costs to
determine the price they would like to get if they could affect market
demand. Managers look at expected costs of production before
entering a new market to determine if the market price is profitable.
They may also reassess pricing strategies based on changes in the cost
of production.
4. Custom-order furniture requires handling special fabrics, buying in
smaller quantities (which may be more expensive than buying “in bulk”),
consulting with customers about their needs and preferences,
modifying pieces to suit an individual customer, and other activities that
are not necessary for mass-market furniture.
5. In addition to obtaining a more accurate picture of the costs of making
various products, activity based costing also gives information about
the cost of the activities that are performed. Managers may be surprised
to find how much these activities cost and may decide they need to take
action to reduce how frequently activities are performed, which will
reduce costs. They may also find that there are activities being
performed that are not needed, but still cause costs, and thus target
these activities for elimination.
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984
Financial & Managerial Accounting, 5th Edition
Problem 17-3A (40 minutes)
1. Grinding ...............................................................................
Polishing ..............................................................................
Product modification ..........................................................
Providing power ..................................................................
System calibration ..............................................................
2. Grinding & Polishing
Unit level
Unit level
Product level
Facility level
Batch level
($320,000+$135,000)/13,000 MH
$35/MH
Product modification
$600,000/1,500 Eng. hrs.
$400/Eng. hr.
Providing power
$255,000/17,000 DLH
$15/DLH
System calibration
$500,000/400 batches
$1,250/batch
3.
Job 3175
Job 4286
Grinding & polishing 550 MH x $35 ............$19,250 5,500 MH x $35........... $192,500
Product modification 26 Eng.hrs. x $400 ... 10,400 32 Eng. hr. x $400 .......
12,800
Providing power
500 DLH x $15 .......... 7,500 4,375 DLH x $15 ..........
65,625
System calibration
30 batches x $1,250 . 37,500 90 batches x $1,250 .... 112,500
Total cost of job
4.
$74,650
$383,425
Job 3175
Job 4286
Total overhead cost of job
$74,650
$383,425
÷ Number of units in job
÷200 units
÷2,500 units
Average overhead cost per unit
$373.25
$153.37
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Solutions Manual, Chapter 17
985
Problem 17-3A (concluded)
5. Plantwide rate:
Grinding ...............................................................................
$
320,000
Polishing ..............................................................................
135,000
Product modification ..........................................................
600,000
Providing power ..................................................................
255,000
System calibration ..............................................................
500,000
Total ......................................................................................
$ 1,810,000
÷ Direct labor hours ............................................................
÷17,000 DLH
Per DLH (rounded) ..............................................................
$106.47/DLH
Job 3175
Job 4286
Overhead
500 DLH x $106.47
4,375 DLH x $106.47
÷ units in each job
Average overhead cost per unit*
$ 53,235
÷200 units
$ 266.18
$ 465,806
÷2,500 units
$
186.32
Job 3175
$ 373.25
$ 266.18
Job 4286
$ 153.37
$ 186.32
*rounded
6. Average overhead cost
Using ABC
Using plantwide rate
The plantwide rate, which is closely associated with the volume of
production, overstates the cost of the high-volume product (in this case
Job 4286), and understates the cost of the low-volume product (Job
3175). ABC more accurately represents the cost of producing a product
because it considers how much of each resource is consumed by each
product in the manufacturing process.
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986
Financial & Managerial Accounting, 5th Edition
Problem 17-4A (25 minutes)
1. Liquid materials
Dry materials
Utilities
Bottling
Labeling
Machine setup
$2,304/(1,400 + 37,000) gallons
$6,941/(620 + 12,000) pounds
$1,422/(200 + 3,750) machine hrs
$77,000/(12,500 + 180,000) bottles
$6,525/217,500 labels**
$20,000/(500 + 300) setups
$0.06/gallon
$0.55/pound*
$0.36/MH
$0.40/bottle
$0.03/label
$25/setup
*rounded
** Hi-Voltage:
EasySlim:
12,500 bottles x 3 labels/bottle = 37,500 labels
180,000 bottles x 1 label / bottle = 180,000 labels
Total labels
217,500 labels
Hi-Voltage
Liquid material 1,400 gal x $0.06 .......... $
84
620 pounds x $0.55 ....
Dry material
341
200 MH x $0.36 ...........
Utilities
72
12,500 btls x $0.40..... 5,000
Bottling
37,500 labels x $0.03 .. 1,125
Labeling
Machine setup 500 setups x $25 ........ 12,500
Product Cost
$19,122
2.
Total cost of line
÷ Production volume
Average cost per bottle*
EasySlim
37,000 gal x $0.06 ..........$ 2,220
12,000 pounds x $0.55 .. 6,600
3,750 MH x $0.36 ............ 1,350
180,000 btls x $0.40 ....... 72,000
180,000 labels x $0.03 ... 5,400
300 setups x $25 ............ 7,500
$95,070
Hi-Voltage
$19,122
÷12,500 bottles
$1.53/bottle
EasySlim
$95,070
÷180,000 bottles
$0.53/bottle
*rounded
3. Price for Hi-Voltage
Mfg. cost per bottle
Profit per bottle
$3.75
1.53
$2.22
4. The price of EasySlim must cover the costs associated with the product,
so the minimum price for this product is $0.53/bottle.
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Solutions Manual, Chapter 17
987
Problem 17-5A (45 minutes)
1. Plantwide overhead rate:
Total overhead cost = $128,250 + $268,000 + $182,000 = $578,250 .
Total volume
20,000 + 100,000 cases
120,000 cases
= $4.82/case (rounded)
Using this plantwide rate, the same overhead cost would be assigned to
each case of salsa, regardless of whether it is Extra Fine or Family Style.
2.
Extra Fine
$ 6.00
Family Style
$ 5.00
4.82
4.82
$10.82
$ 9.82
Extra Fine
$18.00
Family Style
$ 9.00
Manufacturing cost per case
10.82
9.82
Gross margin (loss) per case
$ 7.18
$(0.82)
Direct materials + Direct Labor
Overhead
Manufacturing cost per case
3.
Selling price per case
It appears that Family Style salsa is not profitable and the company may
be inclined to stop producing this product if the costs cannot be
reduced (or price cannot be increased) to a profitable level.
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988
Financial & Managerial Accounting, 5th Edition
Problem 17-5A (concluded)
4. Mixing & Cooking
($4,500 + $11,250)/1,500 MH
Product testing
$112,500/600 batches
Machine calibration $250,000/400 production runs
Labeling & Defects ($12,000 + $6,000)/120,000 cases
Recipe formulation $90,000/45 focus groups
Heat, light and water $27,000/1,500 machine hours
Material handling $65,000/8 container types
Extra Fine
Mixing & cooking
Product testing
Mach. calibration
Labeling & defects
Recipe formulation
Heat, light, & water
Material handling
Total overhead
÷ cases
Overhead/case*
Material & labor
Total cost/case
$10.50/MH
$187.50/batch
$625/run
$0.15/case
$2,000/group
$18/MH
$8,125/type
Family Style
500 MH x $10.50.......... $ 5,250 1,000 MH x $10.50 .....
200 batch. X $187.50 ..
37,500 400 batch. x $187.50 .
200 runs x $625 .......... 125,000 200 runs x $625 .........
20,000 cases x $0.15 ..
3,000 100,000 cases x $0.15 .
30 groups x $2,000 .....
60,000 15 groups x $2,000 ....
500 MH x $18...............
9,000 1,000 MH x $18 ..........
5 types x $8,125 ..........
40,625 3 types x $8,125.........
$280,375
÷ 20,000
$ 14.02
6.00
$ 20.02
$ 10,500
75,000
125,000
15,000
30,000
18,000
24,375
$297,875
÷100,000
$
2.98
5.00
$
7.98
*rounded
5.
Selling price per case
Manufacturing cost per case
Gross margin (loss) per case
Extra Fine
$18.00
20.02
$(2.02)
Family Style
$9.00
7.98
$1.02
Using ABC, the Extra Fine salsa is not profitable, but the Family Style is
profitable; this conclusion is opposite to the one that we would make if
the plantwide rate was used for assigning cost.
6. Departmental overhead rates would be a modest improvement over the
plantwide rate because they could show differences across
departments. However, the departmental overhead rates are still based
on volume-related factors and do not accurately reflect the resources
consumed in manufacturing the products, so they would not be superior
to activity based costing.
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Solutions Manual, Chapter 17
989
PROBLEM SET B
Problem 17-1B (45 minutes)
1. Plantwide overhead rate:
Engineering support
Electricity
Setup costs
Total overhead cost
$
$
56,250
112,500
41,250
210,000
÷ machine hours
Plantwide overhead rate/MH
÷150,000* MH
$
1.40/MH
x machine hours/unit
Overhead cost per unit
x
$
*Standard:
Deluxe:
3 MH/unit
4.20/unit
40,000 units x 3 MH/unit = 120,000 MH
10,000 units x 3 MH/unit = 30,000 MH
Total machine hours
150,000 MH
Direct materials cost per unit
Direct labor cost per unit
Standard: 4 DLH x $20/DLH
Deluxe: 5 DLH x $20/DLH
Overhead cost per unit
Manufacturing cost per unit
Selling price per unit
Manufacturing cost per unit
Gross profit per unit
Standard
$ 4.00
80.00
4.20
$ 88.20
100.00
4.20
$112.20
$ 92.00
88.20
$ 3.80
$125.00
112.20
$ 12.80
2. Profit per customer
Standard
Gross profit per unit
$3.80
x units per customer
Standard (40,000 units/1,000 cust.) x 40 units/cust.
Deluxe (10,000 units/1,000 cust.)
___________
Gross profit per customer
$152.00
Service cost per customer ($250,000/2,000)
Profit per customer
Deluxe
$ 8.00
125.00
$ 27.00
Deluxe
$ 12.80
x 10 units/cust.
$128.00
125.00
$ 3.00
This comparison shows that gross profit per customer exceeds service
cost per customer for both products. Thus, both products appear to be
profitable.
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990
Financial & Managerial Accounting, 5th Edition
Problem 17-1B (concluded)
3. Eng. support $56,250/(50 + 25) modifications = $750/modification
Electricity
$112,500/150,000* machine hours = $0.75/machine hour
Setup
$41,250/(175 + 75) batches
= $165/batch
* From part 1
Standard
Engineering
Electricity
Setups
Total overhead
÷ units
Overhead/unit
Direct material
Direct labor
Mfg. cost/unit
50 mods. x $750
120,000 MH x $0.75
175 batches x $165
Selling price
Mfg. cost/unit
Gross profit/unit
4.
Gross profit per unit
x units per customer*
Gross profit per customer
Gross profit per customer
Service cost per customer*
Profit (loss) per customer
Deluxe
$37,500
90,000
28,875
$156,375
÷ 40,000
$
3.91
4.00
80.00
$ 87.91
$
$
25 mods. x $750
30,000 MH x $0.75
75 batches x $165
92.00
87.91
4.09
$ 18,750
22,500
12,375
$53,625
÷ 10,000
$ 5.36
8.00
100.00
$ 113.36
$ 125.00
113.36
$ 11.64
Standard
$ 4.09
x 40 units
$ 163.60
Deluxe
$ 11.64
x 10 units
$ 116.40
$ 163.60
125.00
$ 38.60
$ 116.40
125.00
$ (8.60)
*From Part 2
This analysis shows that the Standard product is in fact profitable, but
the high cost of production and service for the small volume of the
Deluxe product is unprofitable.
5. ABC gives more appropriate information to managers because it
identifies the resources consumed by each product line, and assigns
the costs of these activities accordingly. Using volume-based methods
such as the plantwide rate distorts product cost because the focus of
these methods is on the number of units of output, which may not be the
primary factor causing costs to be incurred.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 17
991
Problem 17-2B (25 minutes)
1.
The major costs of making the boxes are designing the boxes, setting
up machines to make the right cuts, cutting the cardboard, printing
the boxes, obtaining the cardboard material, labor, and utilities, and
shipping the boxes. Some of the costs, such as design and setup,
are not related to volume, but are related to number of different
products or number of batches. Some of the costs, such as materials
and labor, are volume-driven.
2.
Midwest has taken on more custom-made boxes for smaller-volume
customers.
3.
Yes. Midwest’s old customers bought the same type of boxes over
and over, so the design costs were spread over many units. The new
customers need different boxes for each different need, which means
that design and machine configuration costs should be spread over a
smaller number of units.
4.
Possibly. If ABC had been used rather than a volume-based system,
Midwest would have realized that small customers who want customdesigned and custom-made boxes require different activities than
than those required by existing large-volume customers. With ABC
the costs of activities associated with the special orders would be
assigned only to those orders, rather than being shared by all orders.
Midwest might have been using inaccurate cost information in setting
its selling prices.
5.
ABC gives managers information about the activities and the costs of
these activities that will help them make strategic decisions and
improve the accuracy of cost assignment.
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992
Financial & Managerial Accounting, 5th Edition
Problem 17-3B (45 minutes)
1. Control levels
Wrapping
Unit level
Assembling
Unit level
Product design
Product level
Obtaining business licenses
Facility level
Cooking
Batch level
2. Wrapping
$500,000/100,000 units
$5/unit
Assembling*
$400,000/20,000 direct labor hours $20/DLH
Product design
$180,000/3,000 design hours
$60/des. hr.
Obtaining license* $100,000/20,000 direct labor hours $5/DLH
Cooking
$270,000/1,000 batches
$270/batch
* The costs of Assembling and Obtaining business licenses should NOT be combined
because they are different with respect to their control level. From part 1, assembling
is a unit level activity while obtaining business licenses is a facility level activity.
(Management can control assembly costs by changing the number of direct labor
hours, but the cost of obtaining business licenses cannot be controlled by changing
the number of direct labor hours.) Obtaining business licenses is not really driven by
the number of direct labor hours, but this basis is used in order to assign this facility
level cost to units of product.
3.
Holiday Basket
Executive Basket
Wrapping
8,000 units x $5 ............. $ 40,000 1,000 units x $5 ............. $ 5,000
Assembling
2,000 DLH x $20.............
40,000 500 DLH x $20 ...............
10,000
Product design
40 design hrs x$60 ........
2,400 40 design hrs x$60........
2,400
Obtaining Lic.
2,000 DLH x $5...............
10,000 500 DLH x $5 .................
2,500
Cooking
80 batches x $270 .........
21,600 200 batches x $270 .......
54,000
Total ovhd. cost
$114,000
$73,900
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Solutions Manual, Chapter 17
993
Problem 17-3B (concluded)
4. Cost per unit
Total overhead cost
÷ Units produced
Overhead cost per unit
Holiday Basket
$114,000
÷8,000 units
$14.25
5. Plantwide overhead rate
Wrapping ($300,000 + $200,000)
Assembling
Product Design
Obtaining business license
Cooking ($150,000 + $120,000)
Total overhead
Executive Basket
$73,900
÷1,000 units
$73.90
$
500,000
400,000
180,000
100,000
270,000
$ 1,450,000
÷ Total direct labor hours
Overhead rate per DLH
÷20,000 DLH
$
72.50
Holiday Basket
Overhead assigned (2,000 DLH x $72.50/DLH)
÷ units
Overhead cost per unit (rounded)
$
145,000
÷8,000 units
$
18.13
Executive Basket
Overhead assigned (500 DLH x $72.50/DLH)
÷ units
Overhead cost per unit
$
36,250
÷1,000 units
$
36.25
6.
Holiday Basket
Activity based cost per unit
$14.25
Plantwide cost per unit
$18.13
Executive Basket
$73.90
$36.25
The plantwide overhead rate assigns too much cost to the Holiday
Basket (which is a comparatively high-volume product) and understates
the cost of the Executive Basket because it is a low-volume product.
The ABC costs more accurately reflect the costs of these products
because activity-based costing focuses on the consumption of
resources and assigns costs accordingly, whereas volume-based
costing (such as the plantwide rate) assigns costs based on measures
associated with number of units of output.
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994
Financial & Managerial Accounting, 5th Edition
Problem 17-4B (30 minutes)
1. Components
Assembly labor
Maintenance
Packaging materials
Shipping
Machine setup
*Fun with Fractions:
Count Calculus:
$495,000/(450,000 + 100,000) parts
$244,800/(15,000 + 2,000) DLH
$100,800/(5,000 + 2,000) MH
$460,800/(150,000 + 10,000) boxes
$27,360/1,900* cartons
$187,200/(52 + 52) setups
$0.90/part
$14.40/DLH
$14.40/MH
$2.88/box
$14.40/ctn.
$1,800/setup
150,000 units/100 units per carton = 1,500 cartons
10,000 units/ 25 units per carton = 400 cartons
Total cartons
1,900 cartons
Fun with Fractions
Count Calculus
Components
450,000 parts x $0.90 . $
405,000 100,000 parts x $0.90 $ 90,000
Assembly
15,000 DLH x $14.40 ...
216,000 2,000 DLH x $14.40 ....
28,800
Maintenance
5,000 MH x $14.40 ......
72,000 2,000 MH x $14.40......
28,800
Packaging
150,000 boxes x $2.88
432,000 10,000 boxes x $2.88 .
28,800
Shipping
1,500 cartons x $14.40
21,600 400 cartons x $14.40 .
5,760
Set-ups
52 set-ups x $1,800 ....
93,600 52 set-ups x $1,800 ...
93,600
Total cost
2. Cost per unit
$1,240,200
Fun with Fractions
$275,760
Count Calculus
Total manufacturing cost
$1,240,200
$275,760
÷ number of units
÷150,000 units
÷10,000 units
Average manufacturing cost per unit $8.27
3. Selling price of Count Calculus
Cost/unit
Profit/unit
$27.58
$59.95
27.58
$32.37
4. Since the cost associated with Fun with Fractions is $8.27, the price
should be at least $8.27 to cover these costs. A higher price would
make the product profitable.
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Solutions Manual, Chapter 17
995
Problem 17-5B (50 minutes)
1. Total overhead
Total direct labor hours
= $215,630 + $399,480 + $515,600
2,600 DLH + 1,600 DLH
= $1,130,710 = $269.22/DLH (rounded)
4,200 DLH
Pup Tent
Pop-Up Tent
Overhead cost by product line
Pup: 2,600 DLH @ $269.22/DLH
$699,972*
Pop-Up: 1,600 DLH @ $269.22/DLH
÷ Number of units produced
15,200 units
$430,752*
7,600 units
Overhead cost per unit (rounded)
$56.68
$46.05
*($699,972 + 430,752 = $1,130,724; $14 rounding error)
2. Total manufacturing cost per unit:
Direct materials and direct labor
Manufacturing overhead
Total manufacturing cost per unit
$25.00
46.05
$71.05
$32.00
56.68
$88.68
3. Gross profit per unit
Selling price per unit
Manufacturing cost per unit
Gross profit (loss) per unit
$65.00
71.05
$ (6.05)
$200.00
88.68
$111.32
It appears that the Pup Tent is not profitable and management may
decide to eliminate this product line if it cannot reduce cost (or raise the
selling price) to generate a profit.
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996
Financial & Managerial Accounting, 5th Edition
Problem 17-5B (continued)
4. Pattern alignment
$64,400/560 batches
$115/batch
Cutting
$50,430/12,300 machine hours
$4.10/MH
Moving product
$100,800/2,400 moves
$42/move
Sewing
$327,600/4,200 direct labor hours $78/DLH
Inspecting
$24,000/600 inspections
$40/inspection
Folding
$47,880/22,800 units
$2.10/unit
Design
$280,000/280 mod. orders
$1,000/mod.order
Providing space
$51,600/8,600 square feet
$6/sq. ft.
Material handling
$184,000/920,000 square yards
$0.20/sq. yd.
Pup Tent
Pop-Up Tent
Pattern alignment 140 batches x $115 ..........
$ 16,100 420 batches x $115 ..........
$ 48,300
Cutting
7,000 MH x $4.10 ..............28,700 5,300 MH x $4.10 ..............21,730
Moving product
800 moves x $42 ..............33,600 1,600 moves x $42 ...........67,200
Sewing
2,600 DLH x $78 ...............
202,800 1,600 DLH x $78 ...............
124,800
Inspecting
240 insp. x $40 ................. 9,600 360 insp. x $40 .................14,400
Folding
15,200 units x $2.10 .........31,920 7,600 units x $2.10 ...........15,960
Designing
70 mods. x $1,000 ............70,000 210 mods. x $1,000 ..........
210,000
Providing space
4,300 sq. ft. x $6 ...............25,800 4,300 sq. ft. x $6 ...............25,800
Material handling
450,000 sq.yd. x $0.20 ....... 90,000 470,000 sq.yd. x $0.20 ........94,000
Total overhead
$508,520
$622,190
÷ units
÷ 15,200
÷
7,600
Overhead per unit*
$
$
81.87
DM and DL per unit
Mfg. cost per unit
$
33.46
25.00
32.00
58.46
$ 113.87
*rounded
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Solutions Manual, Chapter 17
997
Problem 17-5B (concluded)
5.
Selling price
Manufacturing cost per unit
Gross profit per unit
Pup Tent
Pop-Up Tent
$65.00
$200.00
58.46
113.87
$ 6.54
$ 86.13
Both product lines are profitable without any cost cutting. The ABC cost
assignment method more accurately reflects the costs associated with
each product line because it is based on the consumption of the
activities that cause costs to be incurred, whereas the plantwide
overhead rate bases cost assignment on volume-related factors.
6. Departmental overhead rates based on direct labor hours and machine
hours are still volume-based measures and would not improve the
accuracy of cost assignment relative to ABC. Departmental overhead
rates may be an improvement over a plantwide rate because the
departmental rates at least recognize differences in drivers between
departments.
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998
Financial & Managerial Accounting, 5th Edition
Serial Problem — SP 17
1.
2.
Setting up machines
Batch level
Inspecting components
Unit level
Providing utilities
Facility level
Direct materials
Direct labor
3,500
Overhead (50% of DL)
1,750
Total mfg. cost
3.
$2,500
Setting up machines
$7,750
$20,000/25 batches
Inspecting components $7,500/5,000 parts
$1.50/part
Providing utilities
$2.00/MH
$10,000/5,000 machine hours
Direct materials
Direct labor
Overhead
Setting up: 2 batches @$800/batch
Inspecting: 400 parts @$1.50/part
Utilities:
600 MH @$2.00/MH
Total manufacturing cost
4.
$800/batch
$2,500
3,500
$1,600
600
1,200
3,400
$9,400
ABC gives a better representation of the cost of producing Job 6.15
because it reflects the resources consumed in the production
process and assigns costs based on this consumption. The method
used in part 2 assumes that all overhead costs are directly related to
the direct labor costs, which is not true in this case.
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Solutions Manual, Chapter 17
999
Reporting in Action
1.
— BTN 17-1
Examples of activities at Polaris and Arctic Cat:
 Ordering raw materials
 Receiving raw materials
 Assembling products
 Designing products
 Hiring employees
 Training employees
 Billing customers
 Providing customer service
2.
Polaris and Arctic Cat are considered manufacturing enterprises
since they manufacture and sell products. Both also provide some
services.
For example, Polaris offers financing services for
customers and Arctic Cat provides repair services for its products.
3.
Yes. It could be useful for determining the activities that the
companies perform and identifying the costs associated with each
activity. Strategically, the companies would want to focus on
activities that help to generate revenues and minimize or eliminate
activities that do not generate revenues, since all activities cause
some costs.
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1000
Financial & Managerial Accounting, 5th Edition
Comparative Analysis
— BTN 17-2
1.
POLARIS
Dec. 31,
For Year Ended ($ millions)
2011
Revenues .....................................................................
$2,656.9
Dec. 31,
2010
$1,991.1
Expenses* ....................................................................
2,331.1
1,787.3
Expenses/Revenues ...................................................0.877
0.898
*Cost of sales plus total operating expenses
ARCTIC CAT
Mar. 31,
For Year Ended ($ millions)
2011
Revenues .....................................................................
$464.7
Mar. 31,
2010
$450.7
Expenses* ....................................................................446.5
449.4
Expenses/Revenues ...................................................0.961
0.997
*Cost of goods sold plus total operating expenses
Arctic Cat has a higher ratio of expenses to revenues in both years.
2. Arctic Cat may want to analyze its costs in terms of the activities it is
engaged in. It might be doing things that incur costs, without aiding
productivity.
3. Some activities associated with opening a new retail location include:





Finding property to buy or rent
Building or remodeling
Obtaining business licenses
Hiring new employees
Training new employees
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Solutions Manual, Chapter 17
1001
Ethics Challenge
— BTN 17-3
1.
Employees have the responsibility to be honest when asked for
information by a superior. As a member of the organization it is an
employee’s responsibility to help the organization achieve its goals.
2.
Depending on your position, it may be appropriate to determine if the
redundancy is justified. This would certainly be the responsibility of
a manager who is attempting to improve efficiency, or help others
accomplish this task. An operational employee may not have the
responsibility to investigate.
3.
Your responsibility is to report accurately and objectively. If there
are personal biases in the reports filed, the decision maker may not
have appropriate information upon which to base his or her decision.
4.
Consider:
 Are you being objective?
 Is the activity you observed happening on a regular basis, or was
it a one-time occurrence?
 What are the implications of reporting your findings?
 What are the implications if you do not report your findings?
 What if you do not report your findings and the organization
ultimately fails, jeopardizing the livelihood of everyone in the
organization?
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1002
Financial & Managerial Accounting, 5th Edition
Communicating in Practice
TO:
FROM:
RE:
— BTN 17-4
[Name], CEO
[Student name], Cost Analyst
Activity Based Costing
Traditional methods of product costing have typically assigned
manufacturing overhead costs based on direct labor hours, direct labor
cost, or machine hours. These bases are all highly correlated with the
volume of output. Plantwide and departmental overhead rates based on
these measures are therefore appropriately referred to as “volume-based.”
While the total costs being assigned to products using volume-based
methods may be the same as the costs assigned in activity-base costing,
ABC differs in that it focuses on the consumption of resources (i.e. inputs)
required to manufacture each product line. Product lines may consume
inputs in proportions different from their relative proportion of output. For
example, low-volume custom orders may require much more attention to
various steps in the manufacturing process and interaction with customers
than the high-volume, mass-market products require.
Traditional methods of cost assignment pool together all the costs other
than direct materials and direct labor and spread these to products as if all
those costs were consumed by products in the same proportion. When
this assumption is not true, significant distortions in cost assignment may
occur.
An advantage of ABC is that it more accurately divides the total costs
among various product lines based on the resources that go into those
products. Disadvantage of ABC are that it can be difficult and costly to
implement.
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Solutions Manual, Chapter 17
1003
Taking It to the Net
— BTN 17-5
Activity-based costing is tested on Part 1 “Financial Planning,
Performance, and Control.” Major topics for this part of the exam include
planning, budgeting, and forecasting; performance management, cost
management, internal controls, and professional ethics.
Students wishing to become CMAs should take courses in economics,
financial accounting, management accounting, tax, auditing, quantitative
methods (mathematics, statistics, and operations management), and
finance.
Teamwork in Action
— BTN 17-6
Instructor note: Student answers to this problem will depend on the
restaurant visited.
1-2.
Filling an order at a typical fast-food establishment may involve
several people:
 Someone will take the order and receive payment.
 Another person may obtain drinks from the fountain.
 There may be one person doing the frying operation for French
fries, etc.
 A cook grill attendant may make the burger.
 A cook’s assistant may assemble the sandwich and wrap it.
3.
Some costs in a fast-food restaurant:
 Ingredients
 Paper products
 Utilities
 Salary of manager
 Wages of employees who perform various tasks
 Taxes
 Cleaning supplies
 Training employees
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1004
Financial & Managerial Accounting, 5th Edition
Entrepreneurial Decision
— BTN 17-7
1. New Belgium Brewing Company would need to:
 Create the product (or contract with someone to do this)
 Evaluate alternative ingredients
 Evaluate alternative methods of manufacturing
 Seek out the appropriate suppliers of materials and ingredients
 Test-market the new product line
2. Generally, we would want to assign the costs associated with productspecific activities to the products that consumed them, so we would not
want the cost of new products to be assigned to existing products. If
however, new products enhance the sales potential of other products, a
company may consider the synergies of the combining product lines
and assign costs accordingly.
Hitting the Road
— BTN 17-8
Refer to the TEAMWORK IN ACTION assignment. Students could make
individual observations about various fast-food restaurants and pool their
information. Alternatively, groups could go together to observe operations
and prepare reports based on their combined efforts.
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Solutions Manual, Chapter 17
1005
Global Decision — BTN
17-9
1. KTM’s three largest geographic segments are:
KTM
Net sales (€ millions)
2011
Other European ...........................................................
€301.5
North America .............................................................106.5
Other ............................................................................ 91.1
2. Piaggio’s three largest geographic segments are:
PIAGGIO
Net sales (€ millions)
2011
EMEA*/Americas .........................................................
€933.9
India..............................................................................395.0
Asia SEA** ................................................................... 188
* Europe, the Middle East, and Africa.
** Southeast Asia.
3. Customer service activities likely vary greatly across geographic
markets. While all customers expect good service, differences in
language, cultural customs, business customs and laws, and the
availability of alternatives will vary across countries and will impact
customer service activities. The ready supply of relatively inexpensive
labor in India and Southeast Asia might allow Piaggio to hire more
customer service personnel in those countries. Based on these data,
Piaggio derives its sales from a more diverse set of countries, and thus
would expect greater variation in its customer service activities as
compared to KTM.
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1006
Financial & Managerial Accounting, 5th Edition