Chapter 5 Solutions Comm 305
February 13, 2017 | Author: mike | Category: N/A
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Brief Exercises Identify BE51 difference s between Infotrac Inc. sells a highspeed retrieval system for information. It provides the following costing information for the year. systems. Budgeted Actual Overhead cost
$500,000
$450,000
Machine hours
50,000
40,000
100,000
90,000
Direct labour hours Overhead is applied on the basis of machine hours.
(a) Calculate the predetermined overhead rate. (b) Determine the amount of overhead applied for the year. (c) Explain how an activitybased costing system might differ in terms of calculating a predetermined overhead rate. Identify BE52 Sassafras Inc. has conducted an analysis of overhead costs related to one of its product lines difference using a traditional costing system (volumebased) and an activitybased costing system. s between Following are its results: costing Traditional Costing ABC systems. Sales revenues $1,000,000 $1,000,000 Overhead costs:
Identify cost drivers. Identify cost drivers.
Product RX3
$ 68,000
$ 100,000
Product Y12
72,000
40,000
$ 140,000
$ 140,000
Explain how a difference in the overhead costs between the two systems may have occurred. BE53 Altex Co. identifies the following activities that pertain to manufacturing overhead: materials handling, machine setups, factory machine maintenance, factory supervision, and quality control. For each activity, identify an appropriate cost driver. BE54 Ayala Company manufactures four products in a single production facility. The company uses activitybased costing. The company has identified the following activities through its activity analysis: (a) inventory control, (b) machine setups, (c) employee training, (d) quality inspections, (e) material ordering, (f) drilling operations, and (g) building maintenance.
For each activity, name a cost driver that might be used to assign overhead costs to products. Calculat BE55 XOX Co. produces three products, Products Red, Black, and Yellow. Product Red requires e 180 machine setups, Product Black requires 240 setups, and Product Yellow requires 540 activity setups. XOX has identified an activity cost pool with allocated manufacturing overhead of based $960,000 for which the cost driver is machine setups. How much manufacturing overhead is overhead assigned to each product? rates. Calculat BE56 Coats Galore, Inc. uses activitybased costing as the basis for information to set prices for its e six lines of seasonal coats. Calculate the activitybased overhead rates using the following activity budgeted data for each of the activity cost pools.
based overhead rates.
Activity Cost Pools
Estimated Overhead
Designing
Expected Use of Cost Drivers per Activity
$ 450,000
12,000 designer hours
Sizing and cutting
4,000,000
160,000 machine hours
Stitching and trimming
1,440,000
80,000 labour hours
Wrapping and packing
336,000
32,000 finished units
Calculat BE57 Computer Parts, Inc., a manufacturer of computer chips, employs activitybased costing. The e following budgeted data for each of the activity cost pools are provided below for the year activity 2012. based Activity Cost Pools Estimated Overhead Expected Use of Cost Drivers per Activity overhead Ordering and receiving $ 90,000 15,000 orders rates. Etching Soldering
480,000 60,000 machine hours 1,760,000 440,000 labour hours
For 2012, the company had 11,000 orders and used 50,000 machine hours, and labour hours totalled 500,000. What is the total overhead applied? Classify BE58 Hirani Novelty Company identified the following activities in its production and support activities operations. Classify each of these activities as either valueadded or non–valueadded. as value (a) Purchasing added or (b) Receiving non (c) Design engineering value (d) Storing inventory added. (e) Cost accounting (f) Moving work in process (g) Inspecting and testing (h) Painting and packing Classify BE59 Wu and Martin is an architectural firm that is contemplating the installation of activitybased service costing. The following activities are performed daily by staff architects. Classify these compan activities as valueadded or non–valueadded: (a) designing and drafting, 3 hours; (b) staff y meetings, 1 hour; (c) onsite supervision, 2 hours; (d) lunch, 1 hour; (e) consultation with activities client on specifications, 1.5 hours; (f) entertaining a prospective client for dinner, 2 hours. as value added or non value added. Classify BE510 activities accordin Quick Pix is a large digital processing centre that serves 130 outlets in grocery stores, g to service stations, camera and photo shops, and drug stores in 16 nearby towns. Quick Pix level. operates 24 hours a day, six days a week. Classify each of the following activity costs of Quick Pix as either unitlevel, batchlevel, productlevel, or facilitylevel. (a) Colour printing materials (b) Photocopy paper (c) Depreciation of machinery (d) Setups for enlargements (e) Supervisor's salary
(f) Ordering materials (g) Pickup and delivery (h) Commission to dealers (i) Insurance on the building (j) Loading developing machines Classify BE511 activities accordin Tool Time, Inc. operates 20 injection moulding machines in the production of tool boxes of g to four different sizes, named the Apprentice, the Handyman, the Journeyman, and the level. Professional. Classify each of the following costs as unitlevel, batchlevel, productlevel, or facilitylevel. (a) Firstshift supervisor's salary (b) Powdered raw plastic (c) Dies for casting plastic components (d) Depreciation on injection moulding machines (e) Changing dies on machines (f) Moving components to the assembly department (g) Engineering design (h) Employee health and medical insurance coverage Calculat BE512 Montreal Inc.'s chief financial officer is not satisfied with the traditional method of e rates allocating manufacturing overhead. He believes that most of the manufacturing overhead and costs relate to the V120 product line because of its complexity. He therefore develops the activity following three activity cost pools and related cost drivers to better understand these costs: levels. Expected Use of Cost Drivers Estimated Overhead Activity Cost Pools Costs Setting up machines Assembling Inspection
1,500 50,000
setups
$ 300,000
labour hours
1,500,000
60 inspections
300,000
(a) Calculate the predetermined overhead rate for each activity. (b) Classify each of these activities as unitlevel, batchlevel, productlevel, or facility level.
Do It! Review Identify D513 Instructions characteristic Indicate whether the following statements are true or false. s of (a) The reasoning behind ABC cost allocation is that products consume activities and traditional activities consume resources. and ABC (b) Activitybased costing is an approach for allocating direct labour to products. costing (c) In today's increasingly automated environment, direct labour is never an appropriate systems. basis for allocating costs to products. (d) A cost driver is any factor or activity that has a direct causeeffect relationship with resources consumed. (e) Activitybased costing segregates overhead into various cost pools in an effort to provide more accurate cost information. CalculateD514 Weber Industries has three activity cost pools and two products. It expects to produce 3,000 activity units of Product BC113 and 1,400 of Product AD908. Having identified its activity cost pools based and the cost drivers for each pool, Weber accumulated the following data relative to those overhead activity cost pools and cost drivers. rates and Expected Use of Cost assign overhead Annual Overhead Data Drivers per Product using Expected Use of ABC. Activity Cost Estimated Cost Drivers per Product Product Cost Pool Drivers Overhead Activity BC113 AD908 Machine set up
Setups
$ 20,000
40
25
15
Machining
Machine hours
110,000
5,000
1,000
4,000
Packing
Orders
30,000
500
150
350
Instructions (a) Prepare a schedule showing the calculations of the activitybased overhead rates per cost driver. (b) Prepare a schedule assigning each activity's overhead cost to the two products. (c) Calculate the overhead cost per unit for each product. (Round to nearest cent.) (d) Comment on the comparative overhead cost per product. Classify D515 activities as value Instructions added or non Classify each of the following activities within a taxpreparation business as valueadded value (VA) or non–valueadded (NVA). added. (a) Advertising (b) Completing tax returns (c) Cleaning the office
(d) Billing clients (e) Answering client questions (f) Accompanying clients to audit proceedings Classify D516 Good Harvest Company manufactures four lines of garden tools. As a result of an activity activities analysis, the accounting department has identified eight activity cost pools. Each of the accordin product lines is produced in large batches, with the whole plant devoted to one product at a g to time. level.
Instructions
Classify each of the following activities or costs as unitlevel, batchlevel, productlevel, or facilitylevel. (a) Machining parts (b) Product design (c) Plant maintenance (d) Machine setup (e) Assembling parts (f) Purchasing raw materials (g) Property taxes (h) Painting
Exercises Assign E517 Elle Inc. has two types of handbags: standard and custom. The controller has decided to use overhead a plantwide overhead rate based on direct labour costs. The president has heard of activity using based costing and wants to see how the results would differ if this system were used. Two traditiona activity cost pools were developed: machining and machine setup. Presented below is l costing information related to the company's operations. and Standard Custom ABC. Direct labour costs
$50,000
$100,000
Machine hours
500
1,000
Setup hours
100
400
Total estimated overhead costs are $277,500. The overhead cost allocated to the machining activity cost pool is $177,000, and $100,500 is allocated to the machine setup activity cost pool.
Instructions (a) Calculate the overhead rate using the traditional (plantwide) approach. (b) Calculate the overhead rate using the activitybased costing approach. (c) Determine the difference in allocation between the two approaches. Explai E518 Perdon Inc. has conducted the following analysis related to its product lines using a traditional n the costing system (volumebased) and an activitybased costing system. Both the traditional and differe the activitybased costing systems include direct materials and direct labour costs. nce Total Costs betwee n Products Sales Revenue Traditional ABC traditio Product 440X $200,000 $50,000 $40,000 nal and activit Product 137Y 160,000 60,000 45,000 y Product 249S 80,000 20,000 45,000 based costing Instructions . (a) For each product line, calculate operating income using the traditional costing system. (b) For each product line, calculate operating income using the activitybased costing system. (c) Using the following formula, calculate the percentage difference in operating income for each of Perdon's product lines: . (Round the percentage to two decimals.) (d) Provide a rationale for why the costs for Product 440X are approximately the same using either the traditional or activitybased costing system.
Assign E519 International Fabrics has budgeted overhead costs of $955,000. It has allocated overhead on overhead a plantwide basis to its two products (wool and cotton) using direct labour hours, which are using estimated to be 477,500 for the current year. The company has decided to experiment with traditiona activitybased costing and has created two activity cost pools and related activity cost l costing drivers. These two cost pools are cutting (the cost driver is machine hours) and design (the and ABC. cost driver is the number of setups). Overhead allocated to the cutting cost pool is $400,000 and $555,000 is allocated to the design cost pool. Additional information related to these pools is as follows:
Wool
Machine hours Number of setups
Cotton
Total
100,000
100,000
200,000
1,000
500
1,500
(a) Determine the amount of overhead allocated to the wool product line and the cotton product line using activitybased costing. (b) What is the difference between the allocation of overhead to the wool and cotton product lines using activitybased costing versus the traditional approach, assuming direct labour hours were incurred evenly between the wool and cotton? Assign E520 overhead using traditional costing and ABC.
Alonzo Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, YuYu Ortega, has developed the following information: Estimated wheels produced Direct labour hours per wheel
Car
Truck
40,000
10,000
2
6
Total estimated overhead costs for the two product lines are $840,000. (a) Calculate the overhead cost assigned to the car wheels and truck wheels, assuming that direct labour hours is used to allocate overhead costs. (b) YuYu is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the truck wheel product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs: Activity Cost Pools Setting up machines Assembling Inspection
Expected Use of Cost Drivers 500 setups
Estimated Overhead Costs $260,000
35,000 labour hours
280,000
600 inspections
300,000
Calculate the activitybased overhead rates for these three cost pools. (c) Calculate the cost that is assigned to the car and truck product lines using an activity based costing system, given the following information: Number of setups
Expected Use of Cost Drivers per Product Car
Truck 100
400
Expected Use of Cost Drivers per Product
Car
Truck
Direct labour hours
20,000
15,000
50
550
Number of inspections
(d) What do you believe YuYu should do? Assign E521 overhead using Shady Lady sells window coverings to both commercial and residential customers. The traditional following information relates to its budgeted operations for the current year: costing and ABC. Commercial Residential Revenues
$300,000
$480,000
Direct material costs
$30,000
$70,000
Direct labour costs
100,000
300,000
55,000
185,000
162,000
532,000
$115,000
$ (52,000)
Overhead costs Operating income (loss)
The controller, Susan Chan, is concerned about the residential product line. She cannot understand why this line is not more profitable given that window coverings are less complex to install for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Following are the three activity cost pools and related information she developed: Activity Cost Pools
Estimated Overhead
Cost Drivers
Scheduling and travel
$84,000
Hours of travel
Setup time
77,000
Number of setups
Supervision
56,000
Direct labour cost
Expected Use of Cost Drivers per Product
Commercial
Residential
Scheduling and travel
1,000
680
Setup time
450
250
Instructions (a) Calculate the activitybased overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line. (b) Calculate the operating income for each product line, using the activitybased overhead rates. (c) What do you believe Susan Chan should do?
Assign E522 MY Company manufactures two products, Standard and Deluxe. MY's manufacturing overhead overhead costs consist of setting up machines, $400,000; machining, $1,500,000; inspecting, using $450,000; material handling $750,000; and purchasing orders $150,000. Information on the traditional two products is: costing Standard Deluxe and ABC. Direct labour hours
150,000
250,000
Machine setups
300
200
Machine hours
48,000
52,000
800
700
Material handling
5,000
10,000
Purchasing orders
300
200
Inspections
Instructions (a) Assign the total manufacturing overhead costs to the two products using traditional costing. (b) Assign the total manufacturing overhead costs to the two products using activitybased costing (ABC). Identify E523 Quik Prints Company is a small printing and copying firm with three highspeed offset activity printing presses, five copiers (two colour and three black and white), one collator, one cutting cost and folding machine, and one fax machine. To improve its pricing practices, ownermanager pools. Damon Whitebone is installing activitybased accounting. Damon employs five employees: two printers/designers, one receptionist/bookkeeper, one salesperson/copymachine operator, and one janitor/delivery clerk. Damon can operate any of the machines and, in addition to managing the entire operation, performs the training, designing, selling, and marketing functions.
Instructions
As Quik Prints' independent accountant who prepares tax forms and quarterly financial statements, you have been asked to identify the activities that would be used to accumulate overhead costs for assignment to jobs and customers. Using your knowledge of a small printing and copying firm (and some imagination), identify at least 12 activity cost pools as the start of an activitybased costing system for Quik Prints Company.
Identif E524 Galavic Corporation manufactures snowmobiles in its Blue Mountain plant. It has budgeted the y following costs for the first quarter's operations. activity Machine setup, indirect $ 4,000 Property taxes $ 29,000 cost materials pools and Inspections 16,000 Oil, heating 19,000 cost Tests 4,000 Electricity, plant lighting 21,000 drivers. Insurance, plant
110,000
Engineering prototypes
Engineering design
140,000
Depreciation, plant
Depreciation, machinery
520,000
Electricity, machinery
36,000
Custodial (machine maintenance) wages
19,000
Machine setup, indirect labour
20,000
60,000 210,000
Classify the above costs of Galavic Corporation into activity cost pools using the following: engineering, machinery, machine setup, quality control, factory utilities, and maintenance. Then identify a cost driver that may be used to assign each cost pool to each line of snowmobiles. Identif E525 Peter Catalano's Verde Vineyards, in the Niagara Peninsula, produces three varieties of wine: y merlot, viognier, and pinot noir. His winemaster, Kyle Pohle, has identified the following activity activities as cost pools for accumulating overhead and assigning it to products. cost 1. Culling and replanting. Dead or overcrowded vines are culled, and new vines are drivers. planted or relocated. (Each variety has a separate vineyard.) 2. Tying. The posts and wires are reset, and vines are tied to the wires for the dormant season. 3. Trimming. At the end of the harvest, the vines are cut and trimmed back in preparation for the next season. 4. Spraying. The vines are sprayed with chemicals for protection against insects and fungi. 5. Harvesting. The grapes are handpicked, placed in carts, and transported to the crushers. 6. Stemming and crushing. Cartfuls of bunches of grapes of each variety are separately loaded into machines, which remove stems and gently crush the grapes. 7. Pressing and filtering. The crushed grapes are transferred to presses, which mechanically remove the juices and filter out bulk and impurities. 8. Fermentation. The grape juice, by variety, is fermented in either stainlesssteel tanks or oak barrels. 9. Aging. The wines are aged in either stainlesssteel tanks or oak barrels for one to three years, depending on the variety. 10. Bottling and corking. Bottles are machinefilled and corked.
11. 12. 13. 14. 15.
Labelling and boxing. Each bottle is labelled, as is each ninebottle case, with the name of the vintner, vintage, and variety. Storing. Packaged and boxed bottles are stored awaiting shipment. Shipping. The wine is shipped to distributors and private retailers. Heating and airconditioning of plant and offices. Maintenance of buildings and equipment. Printing, repairs, replacements, and general maintenance are performed in the offseason.
For each of Verde's 15 activity cost pools, identify a probable cost driver that might be used to assign overhead costs to its three wine varieties. Calculate E526 Fontillas Instrument, Inc. manufactures two products: missile range instruments and space overhead pressure gauges. During April, it produced 50 range instruments and 300 pressure gauges rates, and incurred estimated overhead costs of $85,500. An analysis of estimated overhead costs assign reveals the following activities: overhead Activities Cost Drivers Total Cost using ABC, and 1. Materials handling Number of requisitions $33,000 discuss the 2. Machine setups Number of setups 27,900 advantage s of ABC. 3. Quality inspections Number of inspections 24,600 The cost driver volume for each product was as follows: Cost Drivers
Instruments
Gauges
Total
Number of requisitions
400
600
1,000
Number of setups
150
300
450
Number of inspections
200
400
600
Instructions (a) Determine the overhead rate for each activity. (b) Assign the manufacturing overhead costs for April to the two products using activity based costing. (c) Write a memorandum to the president of Fontillas Instrument explaining the benefits of activitybased costing. Calculate E527 H&Y Company uses four activity pools to apply overhead to its products. Each activity has overhead a cost driver used to allocate the overhead costs to the product. The activities and related rates and overhead costs are as follows: assign Activity Total Costs Volume of Cost Driver overhead using Material handling $ 200,000 100,000 parts ABC. Purchase orders 210,000 35 orders Setup hours
300,000
150 hours
Machining
480,000
3,000 machine hours
Activity
Total Costs
Volume of Cost Driver
Total costs
$1,190,000
The above activities are used by the two different products as follows:
PC21
WX34
Material handling
75,000 parts
25,000 parts
Purchase orders per product
15
20
Setup hours
100 hours
50 hours
Number of machine hours
2,000 machine hours
1,000 machine hours
(a)
Calculate how much of the material handling cost will be allocated to PC21. (b) Determine the ABC allocation rate for Purchase orders. (c) Calculate how much of the Setup costs will be allocated to WX34. (d) Calculate how much of the total activity costs will be allocated to PC21. Assign E528 Lim Clothing Company manufactures its own designed and labelled sports attire and sells its overhead products through catalogue sales and retail outlets. While Lim has used activitybased using costing in its manufacturing activities for years, it has always used traditional costing in traditional assigning its selling costs to its product lines. Selling costs have traditionally been assigned costing to Lim's product lines at a rate of 80% of direct material costs. Its direct material costs for the and ABC; month of March for Lim's “highintensity” line of attire are $400,000. The company has classify decided to extend activitybased costing to its selling costs. Data relating to the highintensity activities line of products for the month of March are as follows: as value Number of Cost Drivers added or Activity Cost Pools Cost Drivers Overhead Rate Used per Activity non value Sales commissions Dollar sales $0.06 per dollar $950,000 added. sales Advertising— TV/Radio
Minutes
Advertising— Newspaper
Column inches
Catalogues
Catalogues mailed
Cost of catalogue sales
Catalogue orders
Credit and collection
Dollar sales
$300 per minute
250
$10 per column inch
2,000
$2.50 per catalogue
6,000
$1 per catalogue order
9,000
$0.04 per dollar sales
$950,000
Instructions (a) Calculate the selling costs to be assigned to the highintensity line of attire for the month of March using 1. the traditional product costing system (direct material cost is the cost driver), and
2. activitybased costing. (b) By what amount does the traditional product costing system undercost or overcost the highintensity product line? (c) Classify each of the activities as valueadded or non–valueadded.
Assign E529 Healthy Products, Inc. uses a traditional product costing system to assign overhead costs overhead uniformly to all products. To meet Canadian Food Inspection Agency (CFIA) requirements using and to assure its customers of safe, sanitary, and nutritious food, Healthy Products engages in traditional a high level of quality control. It assigns its qualitycontrol overhead costs to all products at a costing rate of 17% of direct labour costs. Its direct labour cost for the month of June for its low and ABC; calorie dessert line is $55,000. In response to repeated requests from its vicepresident, classify finance, Healthy's management agrees to adopt activitybased costing. Data relating to the activities lowcalorie dessert line for the month of June are as follows: as value Number of Cost Drivers added or Activity Cost Pools Cost Drivers Rate Used per Activity non value Inspections of Number of $0.60 per 6,000 kilograms added. material received kilograms kilogram Inprocess inspections
Number of servings
$0.33
CFIA certification
Customer orders
$12.00
per serving per order
10,000
servings
420 orders
Instructions (a) Calculate the qualitycontrol overhead cost to be assigned to the lowcalorie dessert product line for the month of June using 1. the traditional product costing system (direct labour cost is the cost driver), and 2. activitybased costing.
(b) By what amount does the traditional product costing system undercost or overcost the lowcalorie dessert line? (c) Classify each of the activities as valueadded or non–valueadded. Classify E530 In an effort to expand the usefulness of its activitybased costing system, Peter Catalano's activities Verde Vineyards decides to adopt activitybased management techniques (AMB). One of ad these ABM techniques is classifying its activities as either valueadded or non–valueadded. value Instructions added or Using Verde's list of 15 activity cost pools in E525, classify each of the activities as either non valueadded or non–valueadded. value added.
Classify E531 Anna Bellatorre, Inc. is interested in using its activitybased costing system to improve its activities operating efficiency and its profit margins by applying activitybased management techniques. as value As part of this undertaking, you have been asked to classify its plant activities as valueadded added or or non–valueadded. non Instructions value Using the list of activities below, classify each activity as either valueadded or non–value added. added. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
Designing new models Purchasing raw materials and parts Storing and managing inventory Receiving and inspecting raw materials and parts Interviewing and hiring new personnel Machine forming sheet steel into appliance parts Manually assembling parts into appliances Training all employees of the company Insuring all tangible fixed assets Supervising production Maintaining and repairing machinery and equipment Painting and packaging finished appliances
Classify E532 service compan Duplessis and Najarali is a law firm that is initiating an activitybased costing system. Réjean y Duplessis, the senior partner and a strong supporter of ABC, has prepared the following list of activities activities performed by a typical lawyer in a day at the firm: as value added or Activities Hours non Writing contracts and letters 1.0 value added. Attending staff meetings 0.5 Taking depositions
1.0
Doing research
1.0
Travelling to/from court
1.0
Contemplating legal strategy
1.0
Eating lunch
1.0
Litigating a case in court
2.5
Entertaining a prospective client
2.0
Instructions Classify each of the activities listed by Réjean Duplessis as valueadded or non–valueadded and defend your classification. How much time was valueadded and how much was non– valueadded?
Classify E533 Having itemized its costs for the first quarter of next year's budget, Galavic Corporation wants activities to install an activitybased costing system. First, it identified the activity cost pools in which to by level. accumulate factory overhead; second, it identified the relevant cost drivers. (This was done in E524.)
Instructions Using the activity cost pools identified in E524, classify each of those cost pools as either unitlevel, batchlevel, productlevel, or facilitylevel. Classify E534 Otto Dieffenbach & Sons, Inc. is a small manufacturing company that uses activitybased activities costing. Dieffenbach & Sons accumulates overhead in the following activity cost pools. by level. 1. 2. 3. 4. 5. 6. 7. 8.
Hiring personnel Managing parts inventory Purchasing Testing prototypes Designing products Setting up equipment Training employees Inspecting machine parts
9. Machining 10. Assembling
Instructions For each activity cost pool, indicate whether the activity cost pool would be unitlevel, batch level, productlevel, or facilitylevel.
Problems: Set A Assign P535A FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: overhead (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a using highvolume (54,000 units), halflitre cylinder that holds 2.5 kilograms of multipurpose traditiona dry chemical at 480 PSI (pounds per square inch). The commercial model is a lowvolume l costing (10,200 units), twolitre cylinder that holds 10 kilograms of multipurpose dry chemical at and 390 PSI. Both products require 1.5 hours of direct labour for completion. Therefore, total ABC; annual direct labour hours are 96,300 or . Expected calculate annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is unit $15.60 or per direct labour hour. The direct materials cost per costs; unit is $18.50 for the home model and $26.50 for the commercial model. The direct labour classify cost is $19 per unit for both the home and the commercial models. activities as value The company's managers identified six activity cost pools and related cost drivers, and added or accumulated overhead by cost pool as follows: non
value added.
Estimated Overhead
Expected Use of Cost Drivers
$ 70,350
335,000
215,000
120,000
Machine hours
150,500
35,000
27,000
8,000
Assembling
Number of parts
390,600
217,000
165,000
52,000
Testing
Number of tests
51,000
25,500
15,500
10,000
Painting
Litres
52,580
5,258
3,680
1,578
Packing and shipping
Kilograms
787,250
335,000
215,000
120,000
$1,502,280
Activity Cost Pools
Cost Drivers
Receiving
Kilograms
Forming
Expected Use of Drivers by Product Home
Commercial
Instructions (a) Under traditional product costing, calculate the total unit cost of each product. Prepare a simple comparative schedule of the individual costs by product (similar to Illustration 54). (b) Under ABC, prepare a schedule showing the calculations of the activitybased overhead rates (per cost driver). (c) Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Include a calculation of overhead cost per unit, rounding to the nearest cent.) (d) Calculate the total cost per unit for each product under ABC. (e) Classify each of the activities as a valueadded activity or a non–valueadded activity. (f) Comment on 1. the comparative overhead cost per unit for the two products under ABC, and 2. the comparative total costs per unit under traditional costing and ABC. Assign P536A Allen Inc. is a manufacturer of quality shoes. The company has always used a plantwide overhead allocation rate for allocating manufacturing overhead to its products. The plant manager costs believes it is time to change to a better method of cost allocation. The accounting using department has established the following relationships between production activities and traditional manufacturing overhead costs: costing Activities Cost Drivers Allocation Rate and ABC; compare Material handling Number of parts $ 8 per part results. Assembly Labour hours 80 per hour Inspection
Time spent by item at inspection station
12 per minute
The previous plantwide allocation rate method was based on direct manufacturing labour
hours, and if that method is used, the allocation rate is $800 per labour hour.
Instructions (a) Assume that a batch of 1,000 pairs of shoes requires 4,000 parts, 50 direct manufacturing labour hours, and 60 minutes of inspection time. What are the indirect manufacturing costs per pair of shoes to produce a batch of 1,000 pairs of shoes, assuming the previous plantwide allocation rate method is used? (b) What are the indirect manufacturing costs per pair of shoes to produce a batch of 1,000 pairs of shoes, assuming the activitybased method of allocation is used? (c) Comment on the results. (adapted from CMA Canada) Assign P537A Jacobson Electronics manufactures two HD television models: the Royale, which sells for overhead $1,400, and a new model, the Majestic, which sells for $1,100. The production costs to calculated per unit under traditional costing for each model in 2012 were as follows: products Traditional Costing Royale Majestic using ABC and Direct materials $600 $320 evaluate Direct labour ($20 per hour) 100 80 the decision. Manufacturing overhead ($35 per direct labour hour) 175 140 Total per unit cost
$875
$540
In 2012, Jacobson manufactured 20,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $35 per direct labour hour was determined by dividing total expected manufacturing overhead of $4.9 million by the total direct labour hours (140,000) for the two models. Under traditional costing, the gross profit on the models was $525 for the Royale or , and $560 for the Majestic or . Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model. Before finalizing its decision, management asks Jacobson's controller to prepare an analysis using activitybased costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2012: Activity Cost Pools
Cost Drivers
Estimated Overhead
Expected Use of Cost Drivers
$ 750,000
25,000
ActivityBased Overhead Rate
Purchasing
Number of orders
Machine set ups
Number of set ups
600,000
20,000
30 per setup
Machining
Machine hours
3,100,000
100,000
31 per hour
Quality control
Number of inspections
450,000
5,000
90 per inspection
The cost drivers used for each product were as follows:
$30 per order
Cost Drivers
Royale
Majestic
Purchase orders
11,250
13,750
25,000
Machine setups
10,000
10,000
20,000
Machine hours
40,000
60,000
100,000
2,250
2,750
5,000
Inspections
Total
Instructions (a) Assign the total 2012 manufacturing overhead costs to the two products using activity based costing (ABC). (b) What was the cost per unit and gross profit of each model using ABC costing? (c) Are management's future plans for the two models sound? Explain.
Assign P538A Kiddy Company manufactures bicycles. It recently received a request to manufacture 10 overhead units of a mountain bike at a price lower than it normally accepts. Bruce, the sales manager, costs indicated that if the order were accepted at that price, the company could expect additional using orders from the same client. Bruce believes that if Kiddy could offer this price in the traditional market generally, sales of this bike would increase by 30%. Melany, president of Kiddy, is costing skeptical about accepting the order. The company has a policy of not accepting any order and ABC; that does not provide a markup of 20% on full manufacturing costs. The price offered is compare $575 per bike. results. The controller, Sanjay, has recently researched the possibility of using activitybased multiple overhead rates instead of the single rate currently in use. He has promised more accurate estimated overhead product costing, and Melany is curious about how this approach would affect product costing and pricing of the mountain bike.
The plantwide overhead rate is based on an expected volume of 10,000 direct labour hours and the following budgeted overhead: Machine operating costs
$ 75,000
Rework labour
45,000
Inspection
25,000
Scrap costs
35,000
General factory overhead Total
120,000 $300,000
Expected activities for selected cost drivers for 2012: Machine hours
25,000
Units reworked
600
Inspection hours
500
Units scrapped
140
Direct labour hours
12,000
Estimated data for the production of one mountain bike: Direct materials
$ 160
Direct labour (7.5 hours/unit)
$ 180
Number of machine hours
6
Number of units reworked
0.25
Number of inspection hours
0.10
Number of units scrapped
0.05
Instructions (a) Using the singlerate method to assign overhead on a plantwide basis, determine whether or not Kiddy should accept the order for the 10 mountain bikes. Explain your decision. (b) Using activitybased costing to assign overhead, determine whether or not Kiddy should accept the order for the 10 mountain bikes. Explain your decision. (adapted from CGACanada)
Assign P539A Stellar Stairs Co. designs and builds factorymade premium wooden stairs for homes. The overhead manufactured stair components (spindles, risers, hangers, hand rails) permit installation of costs stairs of varying lengths and widths. All are made of white oak wood. The company's using budgeted manufacturing overhead costs for 2012 are as follows: traditional Overhead Cost Pools Amount costing and ABC; Purchasing $ 57,000 compare Handling materials 82,000 results. Production (cutting, milling, finishing)
210,000
Setting up machines
85,000
Inspecting
90,000
Inventory control (raw materials and finished goods)
126,000
Utilities
180,000
Total budget overhead costs
$830,000
For the last four years, Stellar Stairs Co. has been charging overhead to products on the basis of machine hours. For 2012, it has budgeted 100,000 machine hours. Heather Fujar, ownermanager of Stellar Stairs Co., recently directed her accountant, Kiko Nishikawa, to implement the activitybased costing system that she has repeatedly proposed. At Heather Fujar's request, Kiko and the production foreperson identify the following cost drivers and their usage for the previously budgeted overhead cost pools. Expected Use of Cost Drivers
Activity Cost Pools
Cost Drivers
Purchasing
Number of orders
600
Handling materials
Number of moves
8,000
Production (cutting, milling, finishing)
Direct labour hours
Setting up machines
Number of setups
1,250
Inspecting
Number of inspections
6,000
Inventory control (raw materials and finished goods)
Number of components
168,000
Utilities
Square metres occupied
100,000
9,000
Jason Dion, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At Jason's request, Kiko prepares cost estimates for producing components for 280 stairways so Jason can submit a contract price per stair to Community Builders. She accumulates the following data for the production of 280 stairways:
Direct materials Direct labour Machine hours Direct labour hours
$103,600 112,000 14,500 5,000
Number of purchase orders
60
Number of material moves
800
Number of machine setups
100
Number of inspections
450
Number of components Number of square metres occupied
16,000 800
Instructions (a) Calculate the predetermined overhead rate using traditional costing with machine hours as the basis. (b) What is the manufacturing cost per stairway under traditional costing? (Round to the nearest cent.) (c) What is the manufacturing cost per stairway under the proposed activitybased costing? (Round to the nearest cent. Prepare all of the necessary schedules.) (d) Which of the two costing systems is preferable in pricing decisions and why?
Assign P540A International Steel Company has budgeted manufacturing overhead costs of $1,930,000. It overhead has allocated overhead on a plantwide basis to its two products (soft steel and hard steel) costs using machine hours, which are estimated to be 90,000 for the current year. The company using has decided to experiment with activitybased costing and has created five activity cost traditional pools and related activity cost drivers as follows: costing Activity Centre Cost driver Estimated Overhead Expected Activity and ABC; compare Material handling Number of moves $280,000 40,000 moves results. Purchase orders Number of orders $100,000 1,200 orders Product testing
Number of tests
$420,000
3,500 tests
Machine setup
Number of setups
$320,000
5000 setups
Machining
Machine hours
$810,000
90,000 machine hours
Each unit of the products requires the following:
Soft Steel
Hard Steel
Direct materials costs
$300
$200
Direct labour costs
$120
$60
Purchase orders
2
3
Machine setup
5
10
Product testing
3
4
Machining
50
50
Material handling
4
6
Instructions (a) Under traditional product costing using machine hours, calculate the total manufacturing cost per unit of both products. (b) Under ABC, prepare a schedule showing the calculation of the activitybased overhead rates (per cost driver). (c) Calculate the total manufacturing cost per unit for both products under ABC. (d) Write a memo to the president of the company discussing the implications of your analysis for the company's plans. In this memo, provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions.
Assign P541A overhead costs of Hy and van Lamsweerde is a public accounting firm that offers two primary services, services auditing and tax return preparation. A controversy has developed between the partners of using the two service lines regarding who is contributing the greater amount to the bottom line. traditional The area of contention is the assignment of overhead. The tax partners argue for assigning costing overhead on the basis of 40% of direct labour dollars, while the audit partners argue for anad implementing activitybased costing. The partners agree to use next year's budgeted data ABC; for analysis and comparison. The following overhead data are collected: calculate overhead Expected Use of Cost rates and Drivers per Service unit costs; Expected Use compare Activity Estimated of Cost results. Cost Pools Cost Drivers Overhead Drivers Audit Tax Employee training
Direct labour dollars
$216,000
$1,800,000
$1,000,000
$800,000
Typing and secretarial
Number of reports and forms
76,200
2,500
600
1,900
Computing
Number of minutes
204,000
60,000
25,000
35,000
Facility rental
Number of employees
142,500
40
22
18
Travel
Per expense reports
81,300
Direct
56,000
25,300
$720,000
Instructions (a) Using traditional product costing as proposed by the tax partners, calculate the total overhead cost assigned to both services (audit and tax) of Hy and van Lamsweerde. (b) 1. Using activitybased costing, prepare a schedule showing the calculations of the activitybased overhead rates (per cost driver). 2. Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers. (c) Classify each of the activities as a valueadded activity or a non–valueadded activity. (d) Comment on the comparative overhead cost for the two services under both traditional
costing and ABC.
Assign P542A GoGo Ltd. manufactures three models of children's swing sets: Standard, Deluxe, and overhead Super. The Standard set is made of steel, the Deluxe set is made of aluminum, and the costs Super set is made of a titaniumaluminum alloy. Because of the different materials used, using production requirements differ significantly across models in terms of machine types and traditional time requirements. However, once the parts are produced, assembly time per set is similar costing for the three models. For this reason, GoGo has adopted the practice of allocating overhead and ABC; costs on the basis of machine hours. Last year, the company produced 5,000 Standard sets, compare 500 Deluxe sets, and 2,000 Super sets. The company had the following revenues and results. expenses for the year: GOGO LTD. Income Statement Year Ended December 31, 2012
Standard
Deluxe
Super
Total
Sales
$475,000
$380,000
$560,000
$1,415,000
200,000
150,000
240,000
590,000
54,000
14,000
24,000
92,000
Machine setups
?
?
?
25,000
Order processing
?
?
?
60,000
Warehouse
?
?
?
90,000
Shipping
?
?
?
35,000
?
?
?
523,000
Plant administration
88,000
Other
182,000
Gross profit
$ 253,000
Direct costs: Direct materials Direct labour Variable overhead costs:
Contribution margin Fixed overhead costs:
The chief financial officer of GoGo has hired a consultant to recommend cost allocation bases. The consultant has recommended the following:
Activities
Cost Drivers
Machine setups
No. of production runs
Sales order processing
Activity Level Standard
Deluxe
Super
Total
22
11
17
50
No. of sales orders received
300
200
300
800
Warehouse costs
No. of units held in inventory
200
100
100
400
Shipping
No. of units shipped
5,000
500
2,000
7,500
The consultant found no basis for allocating the plant administration and other fixed overhead costs, and recommended that they not be applied to products.
Instructions (a) Complete the income statement using the bases recommended by the consultant. Do not allocate any fixed overhead costs. (b) Explain how activitybased costing might result in better decisions by GoGo's management.
Problems: Set B Assign P543B VidPlayers, Inc. manufactures two types of DVD players, a deluxe model and a standard overhead model. The deluxe model is a multiformat progressivescan DVD player with networking using capability, Dolby digital, and DTS decoder. The standard model's primary feature is traditiona progressivescan. Annual production is 20,000 units for the deluxe and 50,000 units for the l costing standard. and Both products require two hours of direct labour for completion. Therefore, total annual ABC; direct labour hours are 140,000 or . Expected annual calculate manufacturing overhead is $980,000. Thus, the predetermined overhead rate is $7 unit costs; or per direct labour hour. The direct materials cost per unit is classify $11 for the deluxe model and $42 for the standard model. The direct labour cost is $18 per activities unit for both the deluxe and the standard models. as value The company's managers identified six activity cost pools and related cost drivers and added or accumulated overhead by cost pool as follows. non value Expected Use of added. Drivers by Product
Cost Driver
Estimated Overhead
Expected Use of Cost Drivers
Purchasing
Orders
$130,000
Receiving
Kilograms
Assembling
Activity Cost Pool
Deluxe
Standard
500
150
350
30,000
20,000
4,000
16,000
Number of parts
370,000
74,000
20,000
54,000
Testing
Number of tests
115,000
23,000
10,000
13,000
Finishing
Units
140,000
70,000
20,000
50,000
Packing and shipping
Kilograms
195,000
78,000
17,000
61,000
$980,000
(a) Under traditional product costing, calculate the total unit cost of both products.
Prepare a simple comparative schedule of the individual costs by product. (b) Under ABC, prepare a schedule showing the calculations of the activitybased overhead rates (per cost driver). (c) Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Include a calculation of overhead cost per unit, rounding to the nearest cent.) (d) Calculate the total cost per unit for each product under ABC. (e) Classify each of the activities as a valueadded activity or a non–valueadded activity. (f) Comment on 1. the comparative overhead cost per unit for the two products under ABC, and 2. the comparative total costs per unit under traditional costing and ABC. Assign P544B Tough Thermos, Inc. manufactures two plastic thermos containers at its plastic moulding overhead facility in Lethbridge, Alberta. Its large container, called the Ice House, has a volume of five to litres, side carrying handles, a snapdown lid, and a side drain and plug. Its smaller products container, called the Cool Chest, has a volume of two litres, an overthetop carrying handle, using which is part of a tilting lid, and a removable shelf. Both containers and their parts are made ABC and entirely of hardmoulded plastic. The Ice House sells for $35 and the Cool Chest sells for evaluate $24. The production costs calculated per unit under traditional costing for each model in decision. 2012 were as follows: Traditional Costing
Ice House
Cool Chest
Direct materials
$ 9.50
$ 6.00
Direct labour ($10 per hour)
8.00
5.00
Manufacturing overhead ($17.08 per direct labour hour)
13.66
8.54
Total per unit cost
$31.16
$19.54
In 2012, Tough Thermos manufactured 50,000 units of the Ice House and 20,000 units of the Cool Chest. The overhead rate of $17.08 per direct labour hour was determined by dividing total expected manufacturing overhead of $854,000 by the total direct labour hours (50,000) for the two models. Under traditional costing, the gross profit on the two containers was $3.84 for the Ice House or , and $4.46 for the Cool Chest or . The gross margin rates on cost are 12% for the Ice House or , and 23% for the Cool Chest or . Because Tough Thermos can earn a gross margin rate on the Cool Chest that is nearly twice as great as that earned on the Ice House, with less investment in inventory and labour costs, its management is urging its sales staff to put its efforts into selling the Cool Chest over the Ice House. Before finalizing its decision, management asks the controller Sven Meza to prepare a product costing analysis using activitybased costing (ABC). Meza accumulates the following information about overhead for the year ended December 31, 2012: Activities
Cost Drivers
Estimated Overhead
Expected Use of Cost Drivers
ActivityBased Overhead Rate
Expected Use of Cost Drivers
ActivityBased Overhead Rate
195,000
780
$250 per setup
Machine hours
320,000
80,000
$4 per machine hour
Tests and inspections
160,000
8,000
$20 per test
Activities
Cost Drivers
Machine set ups
Number of set ups
Extruding Quality control
Estimated Overhead
The cost drivers used for each product were the following: Cost Drivers
Ice House
Cool Chest
Total
Purchase orders
2,500
1,975
4,475
Machine setups
480
300
780
60,000
20,000
80,000
5,000
3,000
8,000
Machine hours Tests and inspections
Instructions (Assign the total 2012 manufacturing overhead costs to the two products using activitybased acosting (ABC). ) (What was the cost per unit and gross profit of each model using ABC costing? b ) ( cAre management's future plans for the two models sound? )
Assign P545B Mars Company has four categories of overhead: purchasing and receiving materials, overhead machine operating costs, materials handling, and shipping. The costs expected for these costs categories for the coming year are as follows: using Purchasing and receiving $ 300,000 traditional materials costing and ABC; Machine operating costs 900,000 compare Materials handling 160,000 results. Shipping Total
140,000 $1,500,000
The plant currently applies overhead using machine hours and expected annual capacity. Expected capacity is 300,000 machine hours. Pragya, the financial controller, has been asked to submit a bid on job #287, on which she has assembled the following data: Direct materials per unit
$1.35
Direct labour per unit
$1.85
Applied overhead Number of units produced Number of purchases and receipts
$ ? 6,000 3
Number of machine hours
3,000
Number of material moves
300
Number of kilometres to ship to the customer
2,300
Pragya has been told that Arrow Company, a major competitor, is using activitybased costing and will bid on job #287 with a price of $6.75 per unit. Before submitting her bid, Pragya wants to assess the effects of this alternative costing approach. She estimates that 850,000 units will be produced next year, 3,000 purchases and receipts will be made, 400,000 moves will be performed plantwide, and the delivery of finished goods will require
280,000 kilometres. The bid price policy is full manufacturing cost plus 25%.
Instructions (Calculate the bid price per unit of job #287 using machine hours to assign overhead. a ) (Using an activitybased approach, determine whether Mars or Arrow will produce the most bcompetitive bid and obtain the contract. Show all your calculations. ) (adapted from CGACanada)
Assign P546B Prime Furniture designs and builds factorymade, premium, wood armoires for homes. All overhead are made of white oak. Its budgeted manufacturing overhead costs for the year 2012 are as costs follows. using Overhead Cost Pools Amount traditional costing Purchasing $ 40,000 and ABC; Handling materials 45,000 compare results. Production (cutting, milling, finishing) 130,000 Setting up machines
50,000
Inspecting
60,000
Inventory control (raw materials and finished goods)
80,000
Utilities
105,000
Total budget overhead costs
$510,000
For the last four years, Prime Furniture has been charging overhead to products on the basis of materials cost. For the year 2012, materials cost of $500,000 were budgeted. Wei Huang, ownermanager of Prime Furniture, recently directed her accountant, Tom Turkel, to implement the activitybased costing system that he has repeatedly proposed. At Wei Huang's request, Tom and the production manager identify the following cost drivers and their usage for the previously budgeted overhead cost pools. Overhead Cost Pools
Activity Cost Drivers
Expected Use of Cost Drivers
Purchasing
Number of orders
500
Handling materials
Number of moves
5,000
Production (cutting, milling, finishing)
Direct labour hours
65,000
Overhead Cost Pools
Activity Cost Drivers
Expected Use of Cost Drivers
Setting up machines
Number of setups
1,000
Inspecting
Number of inspections
4,000
Inventory control (raw materials and finished goods)
Number of components
40,000
Utilities
Square metres occupied
5,000
Maria Carvalho, sales manager, has received an order for 10 luxury armoires from Cohn's Interior Design. At Maria's request, Tom prepares cost estimates for producing components for 10 armoires so Maria can submit a contract price per armoire to Cohn's. He accumulates the following data for the production of 10 armoires. Direct materials
$5,200
Direct labour
$3,500
Direct labour hours
200
Number of purchase orders
3
Number of material moves
32
Number of machine setups
4
Number of inspections
20
Number of components
640
Number of square metres occupied
32
Instructions (a) Calculate the predetermined overhead rate using traditional costing with materials cost as the basis. (b) What is the manufacturing cost per armoire under traditional costing? (c) What is the manufacturing cost per armoire under the proposed activitybased costing? (Prepare all of the necessary schedules.) (d) Determine which of the two costing systems is preferable in pricing decisions and why.
Assign P547B Quality Paints Inc. uses a traditional cost accounting system to apply qualitycontrol costs overhead uniformly to all its products at a rate of 30% of the direct labour cost. The monthly direct costs labour cost for the varnish paint line is $100,000. The company is considering activity using based costing to apply qualitycontrol costs. The monthly data for the varnish paint line traditional have been gathered as follows: costing Use of Drivers for Varnish and ABC; Activity Cost Pools Cost Drivers Unit Rates Paint compare results. Incoming material Type of $ 25.00 per 50 types inspection material type Inprocess inspection
Number of units
0.30 per unit
30,000 units
Product certification
Per order
150.00 per order
80 orders
Instructions (a) Calculate the monthly qualitycontrol cost to be assigned to the varnish paint line using a traditional costing system that allocates overhead based on the direct labour cost. (b) Calculate the monthly qualitycontrol cost to be assigned to the varnish paint line using an activitybased costing system. (c) Comment on the results. (adapted from CMA Canada)
Assign P548B overhead costs International Steel Company has budgeted manufacturing overhead costs of $2,500,000. It using has allocated overhead on a plantwide basis to its two products (Standard Steel and Deluxe traditional Steel) using machine hours, which are estimated to be 100,000 for the current year. The costing company has decided to experiment with activitybased costing and has created five and ABC; activity cost pools and related activity cost drivers as follows: compare results. Activity Centre Cost driver Estimated Overhead Expected Activity Material handling
Number of moves
$250,000
50,000 moves
Purchase orders
Number of orders
$200,000
4,000 orders
Product testing
Number of tests
$450,000
9,000 tests
Machine setup
Number of setups
$600,000
6,000 setups
Machining
Machine hours
$1,000,000
100,000 machine hours
Each unit of the products requires the following
Standard Steel
Deluxe Steel
Direct materials costs
$200
$250
Direct labour costs
$100
$120
Purchase orders
2
3
Standard Steel
Deluxe Steel
Machine setup
5
10
Product testing
3
4
Machining
50
50
Materials handling
5
10
Instructions (a) Under traditional product costing using machine hours, calculate the total manufacturing cost per unit of both products. (b) Under ABC, prepare a schedule showing the calculation of the activitybased overhead rates (per cost driver). (c) Calculate the total manufacturing cost per unit for both products under ABC. (d) Write a memo to the president of the company discussing the implications of your analysis for the company's plans. In this memo, provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions.
Assign P549B overhead costs Scalar Manufacturing produces automobile parts in batches in one continuous using manufacturing process. The company uses direct labour hours to assign overhead to each traditional part. Magda, the financial controller, is wondering what the reasons are for the low profits costing in 2012 and why the gear product line did not attain Scalar's 20% net profit margin target and ABC; (net profit per unit on sale price). She has calculated the 2012 net profit per unit as follows: compare results. Brake Disk Gear Sales price per unit Manufacturing costs per unit: Direct materials Direct labour
Overhead
$35.00
$43.00
10.00
7.50
1.20
6.00
5.00
Brake Disk
Gear
25.00
Total manufacturing cost per unit
$16.20
$38.50
Net profit per unit
$18.80
$ 4.50
Net profit margin percentage
53.7%
10.5%
Magda intends to implement activitybased costing at Scalar. Each part requires engineering design activity. Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. The manufacturing process has five activities: engineering, setups, machining, inspection, and processing. Overhead has been assigned to each activity using direct attribution and resource drivers: Engineering
$ 80,000
Setups
45,000
Machining
120,000
Inspection
60,000
Processing
35,000
Total overhead
$340,000
Magda has identified activity drivers for each activity and listed their practical capacities: Engineering Hours
Number of Setups
Machine Hours
Number of Inspections
Direct Labour Hours
4,000
250
20,000
1,500
7,000
Following are the production data in 2012 for brake disks and gears:
Brake Disk
Gear
Number of units produced
5,000
3,000
Engineering hours per unit
0.05
0.15
Number of setups
25
9
Machine hours per unit
2.5
1
Number of inspections
250
125
Instructions (a) Using the activitybased approach, calculate the activity rates, the net profit per unit, and the net profit margin percentage for both the brake disk and the gear. (b) Explain why the new profit margin percentages for the brake disk and the gear are different from what they were originally. (adapted from CGACanada)
Assign P550B overhead costs to McDonald and O'Toole is a law firm that serves both individuals and corporations. A service controversy has developed between the partners of the two service lines as to who is using contributing the greater amount to the bottom line. The area of contention is the assignment traditional of overhead. The individual partners argue for assigning overhead on the basis of 28.125% costing of direct labour dollars, while the corporate partners argue for implementing activitybased and ABC; costing. The partners agree to use next year's budgeted data for purposes of analysis and calculate comparison. The following overhead data are collected to develop the comparison. overhead rates; Expected Use of Cost compare Divers per Service results. Expected Use Activity Estimated of Cost Cost Pool Cost Driver Overhead Drivers Corporate Individual Employee training
Direct labour dollars
$120,000
$1,600,000
$900,000
$700,000
Activity Cost Pool
Cost Driver
Expected Use of Cost Divers per Service
Estimated Overhead
Expected Use of Cost Drivers
Corporate
Individual
Typing and secretarial
Number of reports and forms
60,000
2,000
500
1,500
Computing
Number of minutes
100,000
40,000
17,000
23,000
Facility rental
Number of employees
100,000
25
14
11
Travel
Per expense reports
70,000
Direct
48,000
22,000
$450,000
Instructions (a) Using traditional product costing as proposed by the tax partners, calculate the total overhead cost assigned to both services (individual and corporate) of McDonald and O'Toole. (b) 1. Using activitybased costing, prepare a schedule showing the calculations of the activitybased overhead rates (per cost driver). 2. Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers. (c) Classify each of the activities as a valueadded activity or a non–valueadded activity. (d) Comment on the comparative overhead cost service line under both traditional costing and ABC.
Assign P551B ProDriver Inc. (PDI) recently started operations to obtain a share of the growing market for overhead golf equipment. PDI manufactures two models of specialty drivers: the Thunderbolt model costs and the Earthquake model. Two professional engineers and a professional golfer, none of using whom had any accounting background, formed the company as a partnership. The business ABC. has been very successful, and to cope with the increased level of activity, the partners have hired a CGA as their controller. One of the first improvements that the controller wants to make is to update the costing system by changing from a single overhead application rate using direct labour hours to activitybased costing. The controller has identified the following three activities as cost drivers, along with the related cost pools:
Number of Material Requisitions
Number of Product Inspections
Number of Orders Shipped
Thunderbolt
46
23
167
Earthquake
62
31
129
Costs per pool
$54,000
$8,200
$103,000
Model
Instructions (a) Using activitybased costing, prepare a schedule that shows the allocation of the costs of each cost pool to each model. Show your calculations. (b) Identify three conditions that should be present in PDI in order for the implementation of activitybased costing to be successful. (adapted from CGACanada)
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