Chapter 5 Class Problems (1)

5-23

(30 min.) Activity-based costing, manufacturing.

1. Simple costing system: Total indirect costs = $95,000 + $45,000 + $25,000 + $60,000 + $8,000 + 3%[($125  3,200) + ($200  1,800)] = $255,800 Total machine-hours = 5,500 + 4,500 = 10,000 Indirect cost rate per machine-hour = $255,800  10,000 = $25.58 per machine-hour Simple Costing System Direct materialsa Direct manufacturing laborb Indirect cost allocated to each job ($25.58 × 5,500; 4,500 machine hours)

Interior $ 96,000 76,800

Exterior $ 81,000 64,800

140,690

115,110

Total costs

$313,490

$260,910

$

$ 144.95

Total cost per unit ($313,490  3,200; $260,910  1,800) a b

2.

$30 × 3,200 units; $45  1,800 units $16 × 1.5 × 3,200 units; $16  2.25  1,800 units

Activity-based Costing System Total Cost of Activity (2)

Activity (1) Product scheduling Material handling Machine setup Assembly Inspection Marketing c

97.97

40 + 85 = 125;

$ $ $ $ $ d

95,000 45,000 25,000 60,000 8,000

72 + 168 = 240;

Cost Driver Quantity (4)

Cost Driver (3)

125c 240d 200e 10,000 400f

production runs material moves machine setups machine hours inspections selling price e

45 + 155 = 200;

f

250 + 150 = 400

Allocation Rate (5) = (2)  (4) $ 760.00 $ 187.50 $ 125.00 $ 6.00 $ 20.00 $ 0.03

per production run per material move per setup per machine hour per inspection per dollar of sales

ABC System Direct materials Direct manufacturing labor Indirect costs allocated: Product scheduling ($760 per run  40; 85) Material handling ($187.50 per move  72; 168) Machine setup ($125 per setup  45; 155) Assembly ($6 per MH × 5,500; 4,500) Inspection ($20 per inspection × 250; 150) Marketing (0.03  $125  3,200; 0.03  $200  1,800) Total costs Total cost per unit ($272,325 ÷ 3,200 units; $302,075 ÷ 1,800 units)

Interior $ 96,000 76,800

Exterior $ 81,000 64,800

30,400 13,500 5,625 33,000 5,000 12,000 $272,325

64,600 31,500 19,375 27,000 3,000 10,800 $302,075

$ 85.10

$ 167.82

3. Cost per unit Simple Costing System Activity-based Costing System Difference (Simple – ABC)

Interior $97.97 $85.10 $12.87

Exterior $144.95 $167.82 $(22.87)

Relative to the ABC system, the simple costing system overcosts interior doors and undercosts exterior doors. Under the simple costing system, the doors require a similar number of total machine hours (5,500 for interior and 4,500 for exterior), even though interior doors take fewer machine hours per unit. Under the simple costing system, the volume of the production of interior doors is driving the amount of overhead allocated to that product. The ABC study reveals that each exterior door requires more production runs, material moves, and setups. This is reflected in the higher indirect costs allocated to exterior doors in the ABC system. 4. Open Doors, Inc. can use the information revealed by the ABC system to change its pricing based on the ABC costs. Under the simple system, Open Doors was making an operating margin of 21.6% on each interior door (($125 – $97.97)  $125) and 27.5% on each exterior door (($200 – $144.95)  $200). But, the ABC system reveals that it is actually making an operating margin of about 32% (($125 – $85.10)  $125) on each interior door and about 16% (($200 – $167.82)  $200) on each exterior door. Open Doors, Inc. should consider decreasing the price of its interior doors to be more competitive. Open Doors should also consider increasing the price of its exterior doors, depending on the competition it faces in this market. Open Doors can also use the ABC information to improve its own operations. It could examine each of the indirect cost categories and analyze whether it would be possible to deliver the same level of service, but consume fewer indirect resources, or find a way to reduce the per-unit-cost-driver cost of some of those indirect resources. Making these operational improvements can help Open Doors to reduce costs, become more competitive, and reduce prices to gain further market share while increasing its profits.

Carrol Company, which uses an activity-based costing system, produces travel trailers and boat trailers. The company allocates batch setup costs to the two products using the following basic data:

Budgeted units to be produced Budgeted number of setups Budgeted number of direct labor hours per unit

Travel trailers 2,250 340 40

Boat trailers 2,900 560 60

Total budgeted setup costs for the year are $158,400. If the setup costs are allocated using direct labor hours, how much of the total setup costs would be allocated to boat trailers? A) $158,400 B) $104,400 C) $240,331 D) $306,240 Answer: B Explanation: B) Total budgeted number of travel trailers to be produced 2,250 Budgeted number of direct labor hours per unit Travel trailers direct labor hours Total budgeted number of boat trailers to be produced Budgeted number of direct labor hours per unit Boat trailers direct labor hours Travel trailers direct labor hours Boat trailers direct labor hours Total direct labor hours

90,000

2,900 174,000 90,000 264,000

$158,400/264,000 × 174,000 = $104,400

Seven Star Corp sells two versions of a product, Standard and Deluxe. The following is the information on the production cost of the two: Annual Output Product DM in units Total DLH Deluxe $78.00 12,000 30,000 Standard $48.00 96,000 144,000 174,000 The company has been using direct labor hours (DLH) as the cost driver. The wage rate per hour is $20. Seven Star has decided to implement an activity-based costing system to see if their cost estimates are accurate. They collected the data as follows: Activity Cost Pool Machine setup Special processing General factory Total Activity Measure # of setups Machine hours DLH

Cost Driver or Activity Measure # of setups Machine hours DLH

Estimated OH cost $504,000 $600,000 $3,165,000 $4,269,000

Standard Deluxe Total 60 120 180 0 22,000 22,000 144,000 30,000 174,000

1. If the company uses ABC with the cost drivers above, which of the following gives the correct activity rates A) B) C) D) E)

Setup $2800/setup; Special Processing $27/MH Setup $280/setup ; Special Processing $3.39/DLH Setup $22.90/MH Special Processing $3.39/DLH General Factory $18.19/DLH; Setup $280/Setup General Factory $18.19/DLH; Setup $22.90/MH

2. What is the Overhead Applied Per unit to the standard product? A) B) C) D) E)

$24.49 $29.03 $30.17 $30.45 None of the above

1.

a ($504,000/180) =2800/set up ; (600,000/22,000) = 27.27/special processing; (3,165,000/174,000) = 18.19GF

2.

b OH: ($280060) + (27.27x0) +(20)+ (18.19 x 144,000) = 2,787,360/96,000units = $ 29.03 per unit

Diggity Dank Corporation uses an activity-based costing system with two activity cost pools. Diggity Dank uses direct labor hours as the measure of activity in the first activity cost pool and the number of orders in the second activity cost pool. The following information relates to these two activity cost pools for last year:

What was Diggity Dank's under- or overapplied overhead for last year? A. B. C. D.

$17,000 overapplied $20,000 underapplied $27,000 underapplied $73,000 overapplied

Predetermined rate per direct labor hours = Budgeted Manufacturing Overhead
 Budgeted direct labor hours
 = $600,000/120,000 = $5.00 Activity cost pool 1 manufacturing overhead applied = $5.00 x 145,000 = $725,000 Predetermined rate per number of orders = $320,000/4,000 = $80 Activity cost pool 2 manufacturing overhead applied = $80 x 3,600 = $288,000 Total manufacturing overhead applied = $725,000 + $288,000 = $1,013,000
 Total actual manufacturing overhead = $580,000 + $360,000 = $ 940,000
 Difference $ 73,000