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Activity-Based Costing: Solutions To Review Questions
Activity-Based Costing: Solutions To Review Questions
Chapter
Activity-Based Costing
Solutions to Review Questions
9-1.
Common allocation bases are direct labor-hours, direct labor costs, and machine-hours.
Somewhat less common is direct material costs.
9-2.
False. Department allocation is a two-stage process, so the first-stage assignment of
costs and the choice of cost drivers affects the allocation of costs to products. The total
product costs are the same under either approach, but the individual product costs
differ. This can affect the decisions managers make regarding individual products.
9-3.
Most companies produce multiple products and simply adding them up does not
account for differences in complexity of the use of resources. As an extreme example,
suppose a company produced airplanes and staplers. Allocating overhead on the basis
of units would assign the same overhead cost to a stapler and a plane.
9-4.
The costs include the systems and the software, but the most important cost is
managers time. Managers need to make many decisions about the activities and the
cost drivers and managers need to make many of the first-stage allocations. The
benefits come from having better information about the use of resources and better
information for decisions.
9-5.
1.Identify activities that consume resources.
2.Identify the cost driver associated with each activity.
3.Compute a cost rate per activity unit (e.g., rate per setup, rate per part, rate per
machine-hour).
4.Allocate costs to products by multiplying the activity rate times the volume of activity
consumed by the product.
9-6.
9-1
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False. While the total cost allocated is the same, the reported costs for individual
products will differ. Because managers make decisions at the product level, it is
important that the reported costs reflect, to the extent possible, the use of resources by
the products.
9-7.
Activity-based costing will benefit most companies with high overhead costs and diverse
products and processes. If there is little overhead or if there is a single product, the
allocation process will not result in significantly different product costs. (Even if there are
only a few, relatively homogeneous products, activity-based costing may be useful for
cost management. See chapter 10 for a discussion.)
9-8.
A personnel department provides its services by completing a set of activities using
resources. In this way, implementing activity-based costing in an administrative function
is the same as implementing it in a manufacturing firm. However, the products and
activities may be much harder to define, making it less like a manufacturing
environment.
9-12.
False. Activity-based costing is most useful when the first-stage allocation is to activities,
not departments. Further, an activity-based costing system also uses cost drivers that
form a hierarchy of costs, as appropriate, whereas most department allocation costing
systems use volume-based cost drivers.
9-13.
There is no rule that the price charged for a product has to exceed its cost. There may
be important marketing or strategic reasons why a company wants to be in a particular
market. However, to ensure that this is a good decision, the firm should have the best
information on cost that it can get. Managing a company by fooling yourself into thinking
something costs less than it does is not smart.
9-14.
Activity-based costing is like any other information system; it has its benefits and its
costs. It is not appropriate in all situations and the benefits may not justify its costs in
others.
9-15.
False. The lesson learned from activity-based costing is that costs are a function not
only of output volume, but also of other factors such as complexity. For example, a
complex multiproduct operation will cost more than a simple single-product operation.
9-16.
False. activity-based costing breaks down the costs into cost pools according to the
activities that cause the costs. While several departments may have the same cost
drivers, each department should individually determine which activities cause their
costs.
9-17.
There are two important characteristics you should look for. Are the first-stage cost
pools activities? Second, do the cost drivers in the second stage form a cost hierarchy
(e.g., volume related, batch related, etc.) or are they all volume-related costs?
9-18.
Without information on the use of overhead resources by products, it is difficult for
managers to make decisions that appropriately account for the use of these resources
by the products. Although the specific allocation base to be used may not be clear,
products that require more handling, perhaps because of toxicity, use more overhead
resources. Allocating no overhead costs to a product is as likely to distort decision
making as allocating costs based on an arbitrary allocation base.
9-3
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-19.
Disagree. The cost of implementing activity-based costing for inventory valuation
generally is not worth the small benefits that might be realized. It is most worthwhile
when managers use product cost data to make decisions at the product level.
9-20.
Answers will vary. The function selected will determine the activities, but some examples
of activities are processing payments, processing job applications, checking
backgrounds, processing bills, answering customer questions, and so on. Some
examples of cost drivers are number of payments, number of applications, time spent,
number of questions, and so on. Example cost objects might be departments or
divisions, if the function provides support, or products or services, if the departments
provide service to customer activities.
9-21.
Answers will vary. Elements of the system that suggest it is an ABC system include cost
pools that are activities, multiple cost pools, and multiple cost drivers. However, the two
drivers are both volume-based, meaning there really is no cost hierarchy. The system
will suffer from many of the problems of a traditional system, including the assignment of
costs to products based on volume alone.
Solutions to Exercises
922.
a. Sales revenue......................................................
$2,700,000
$1,800,000
Direct Labor.........................................................
500,000
250,000
Direct Materials....................................................
1,100,000
550,000
Overhead.............................................................
1,000,000 a
500,000 b
Profit....................................................................
$100,000
$500,000
a $1,000,000
b $500,000
Sales revenue......................................................
$2,700,000
$1,800,000
Direct Labor.........................................................
500,000
250,000
Direct Materials....................................................
1,100,000
550,000
Overhead.............................................................
750,000 a
750,000 b
Profit....................................................................
$350,000
$250,000
a $750,000
b $750,000
c.The plantwide allocation method allocates overhead at 200% of direct labor for both
types of equipment. While this is the simplest method, it is usually not very accurate. It
assumes that overhead in both departments has the same rate. When overhead costs
are broken down into department cost pools, we see that Department B is allocated a
smaller share of the overhead. Each department should try to assess what causes its
overhead, and use that as its allocation base.
9-23. (35 min.)Plantwide versus Department Allocation: Main Street Ice Cream
Company.
Strawberry
Vanilla
Chocolate
a. Direct Labor (per 1,000 gallons)..........................
$750
Raw Materials (per 1,000 gallons)......................
800
Overhead.............................................................
150 a
Total cost (per 1,000 gallons)..............................
$1,700
a$150
b$165
c$225
$825
500
165 b
$1,490
$1,125
600
225 c
$1,950
9-5
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
c.
Strawberry
Direct Labor (per 1,000 gallons)..........................
$750
Raw Materials (per 1,000 gallons)......................
800
Overhead.............................................................
210 a
Total cost (per 1,000 gallons)..............................
$1,760
a$210
b$231
c$99
Vanilla
Chocolate
$825
$1,125
500
600
231 b
99 c
$1,556
$1,824
d. Charlene was correct in her belief that she was being allocated some of Department
SVs overhead. Plantwide allocation does not correctly allocate the overhead by
department; it simply uses one allocation rate for all products in all departments.
Under plantwide allocation, 1,000 gallons of chocolate cost $1,950. Once the
overhead was reallocated into department cost pools, the cost of chocolate fell to
$1,824. Although it requires more time and skill to collect and process the
information, department allocation generally yields more accurate product cost
information.
Illinois
Ohio
Employees...........................................................
1,200
300
Rate per employee..............................................
$500
$500
Allocated cost......................................................
$600,000
$150,000
9-6
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b.
Illinois
Ohio
Employees...........................................................
1,200
300
Rate per employee..............................................
$200
$200
Allocated cost......................................................
$240,000
$60,000
Transitions...........................................................
30
50
Rate per transition...............................................
$5,625
$5,625
Allocated cost......................................................
$168,750
$281,250
$
Total allocated cost..............................................
$408,750
$341,250
$
925. (30 min.) Unit wide versus Department Allocation: Drumm Corporation.
a. First, note that the total to be allocated is $750,000 (= $600,000 + $150,000 in the
current system or $408,750 + $341,250 in the revised system). Then we just need to
compute the variable cost to be allocated to Ohio; the difference between this and
$750,000 will be allocated to Illinois.
Ohio
Employees...........................................................
300
Rate per employee..............................................
$50
Allocated cost......................................................
$15,000
Transitions...........................................................
50
Rate per transition...............................................
$2,000
Allocated cost......................................................
$100,000
$
Total allocated cost..............................................
$115,000
$
The amount allocated to Illinois will be $635,000 ($750,000 $115,000).
b. Kurt is correct that the incremental cost to Drumm from the activities of Ohio is
measured by the $115,000. There is a danger that as Ohio grows relative to Illinois, the
costs and activities of Personnel will be more highly influenced by the Ohio unit.
9-7
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
J25P
J40X
$1,500,000
$2,400,000
$ 750,000
990,000
$1,740,000
$3,240,000
$ 600,000
360,000
$960,000
$3,360,000
$ 180,000 $
27,000
24,000
300,000
132,000
$ 663,000
$3,903,000
100,000
$39.03
900,000
270,000
120,000
114,000
264,000
$1,668,000
$5,028,000
40,000
$125.70
75% of the amounts in Exhibit 9.16. ($27,000 = .75 $36,000; $270,000 = .75
$360,000).
a
9-8
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9-26. (continued)
b. Kris could have made the reductions he planned, but the effect on the product costs
would have been different. The $99,000 reduction in setup costs (25% of $396,000),
would have been spread between the two products based on labor or machinehours.
ABC provides more detailed measures of costs than do plantwide or department
allocation methods. In this case, ABC shows the costs of machining, setting up
equipment, handling materials, inspecting, packaging products, and shipping. The
plantwide and department allocation methods did not reveal any of these detailed
cost drivers. With ABCs more detailed information, management has an opportunity
to manage costs by managing cost drivers. For example, are there less costly ways
to inspect and package products? Or perhaps spending additional resources to
improve quality would more than pay for itself with reduced inspections.
ABC also provides better measures of product costs than plantwide and department
allocation methods, which leads to better decisions about product pricing and
whether to keep or drop products.
ABC requires more record keeping than plantwide or department allocation methods.
ABC also requires more teamwork among accountants, production people,
marketing, and management, which can be both costly and beneficial. In the end,
management must decide whether the benefits of ABC, outlined above, are worth
these costs.
9-9
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
160 c
240 d
Food (guests)...........................................
320 e
480 f
Total...........................................................
a
$980
$1,600
c. If Cathy wants to cover her costs she should charge $49 per guest for the picnic
($980 20 guests), and $80.00 per guest for the formal dinner ($1,600 20 guests).
9-10
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bData
c$6,600
d$9,900
e$620
f$132,000
g$59,400
h$31,000
i$5.00
j$8.27
Reading from the table above, we can see that the total overhead assigned is $222,400
and $137,600 for Wired and Wireless, respectively. The total cost per unit is the total
cost per product divided by the total units produced; $5.00 per Wired mouse and $8.37
per Wireless mouse.
9-11
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-28. (continued)
b.
Rate
Wired
Direct labora........................................................
$290,100
Direct materialsb..................................................
187,500
Total overhead.....................................................
90% c
261,090 d
Total costs...........................................................
$738,690
Total unit cost......................................................
$5.28 e
Wireless
Total
$109,900
171,000
98,910
$379,810
$7.60
$400,000
358,500
360,000
$1,118,500
aData
bData
c90%
d$261,090
e$5.28
= $290,100 0.90
From the table above, total overhead allocated to Wired and Wireless is $261,090 and
$98,910 respectively. The unit cost for Wired and Wireless is $5.28 and $7.60
respectively.
c. By allocating overhead on the basis of direct labor, Rodent has been understating
the cost to manufacture Wireless mice thereby overstating the profits on the Wireless
model.
9-12
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
bData
c$15
d$3,500
e$1,500
f$75,000
g$35,000
h$30,000
i$28.33
j$130
Reading from the table above, we can see that the total overhead assigned is $140,000
for both M-008 and M-123. The total cost per unit is the total cost per product divided by
the total units produced; $28.33 per M-008 and $130 per M-123.
9-13
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-29. (continued)
b.
Rate
M-008
Direct materialsa..................................................
$100,000
Direct laborb........................................................
100,000
Total overhead.....................................................
200% c
200,000 d
Total costs...........................................................
$400,000
Total unit cost......................................................
$33.33 e
aData
bData
c200%
M-123
$80,000
40,000
80,000
$200,000
$100.00
Total
$180,000
140,000
280,000
$600,000
d$200,000
e$33.33
= $100,000 2.0.
From the table above, total overhead allocated to M-008 and M-123 is $200,000 and
$80,000 respectively. The unit cost for M-008 and M-123 is $33.33 and $100.00
respectively.
c. By allocating overhead on the basis of direct labor, Doaktown Products has been
understating the cost to manufacture M-123, thereby overstating the profits on M123.
9-14
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Commercial
Revenuea.............................................................
$378,000
Direct Laborb.......................................................
210,000
Overheadc...........................................................
43,400
Profit....................................................................
$124,600
Residential
Total
$910,000
390,000
80,600
$439,400
$1,288,000
600,000
124,000
$ 564,000
a$378,000
= 14,000 hours x $27 per hour; $910,000 = 26,000 hours x $35 per hour.
b$210,000
= 14,000 hours x $15 per hour; $390,000 = 26,000 hours x $15 per hour.
c$43,400
b.
Rate
Commercial
Residential
Revenue..............................................................
$378,000
$910,000
Direct Labor.........................................................
210,000
390,000
Overhead
Traveling...........................................................
$250.00 a
$ 4,250 b
$ 11,750 c
Equipment........................................................
6.00 d
22,500 e
13,500 f
Supplies...........................................................
0.36 g
46,800 h
25,200 i
Total Overhead....................................................
$ 73,550
$ 50,450
Profit....................................................................
$94,450
$469,550
a $250
e $22,500
f $13,500
h
i
16,000
36,000
72,000
$ 124,000
$ 564,000
c $11,750
g $0.36
b $4,250
d $6.00
Total
$1,288,000
600,000
9-15
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-30. (continued)
c. The recommendation to Ms. Lodge is that she should reconsider dropping residential
services in favor of the commercial business. From the table in part b of the solution,
we can show Ms. Lodge that commercial work has a profit margin of 25%, while the
residential business has a profit margin of greater than 50%. We can explain the
differences in profits under the two cost methods by showing Ms. Lodge that there is
little correlation in costs between direct labor and the overhead costs.
9-31. (35 min.)Activity-Based versus Traditional Costing: Isadores Implements,
Inc.
a. Cost Driver
Rate
Setting up............................................................
$1,440 a
Inspecting............................................................
2,160 b
Packaging and Shipping......................................
0.36 c
Total Overhead....................................................
a $1,440
b $2,160
c $0.36
e $8,640
= $1,440 x 20 setups.
= $2,160 x 4 parts.
f $16,200
Pencils
Pens
Direct Labor Hours..............................................
4,500 a
15,000
Overhead.............................................................
$31,569 b
$105,231
a 4,500
Pens
$ 43,200
12,960
27,000
$83,160
d $28,800
b.
Pencils
$28,800 d
8,640 e
16,200 f
$53,640
Total
19,500
$136,800
b $31,569
9-16
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c $12.50
d $24,000
e $14,400
f $11,250
b.
Teen
Account
Rate Counseling
Revenue..............................................................
$66,000
Expenses.............................................................
$143.2836 a
31,522 b
Profit....................................................................
$34,478
Executive
Coaching
$135,000
64,478
$ 70,522
Total
$201,000
96,000
$105,000
c. Under labor-based costing, teen counseling and executive coaching appear equally
profitable (relative to revenues), so Wendy will not emphasize one or the other.
However, using ABC, executive coaching appears to be much more profitable.
d. ABC and traditional costing systems generally yield comparable product-line profits
when overhead is a small portion of costs, or when cost drivers are highly correlated
with the volume-related allocation base. In this case, labor-hours were distributed
32.8% to Teen Counseling and 67.2% to Executive Coaching. If Wendys three cost
9-17
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
drivers were each also distributed 32.8% to Teen Counseling and 67.2% to
Executive Coaching, the labor-hour allocation and ABC would have been identical.
9-32. (continued)
e. Activity-based costing assigns higher costs to teen counseling than the traditional
method does, so using this would increase the chances of receiving the grant. If teen
counseling uses more activities and these activities generate higher costs, there is
nothing unethical about using and reporting ABC costs. Choosing to use ABC simply
to increase the chances of receiving the grant, if there is no reason to believe these
activities actually increase the costs, could be unethical.
9-33.
Overhead Applied:
Quality Inspections
750 inspections x
$225 per inspection
= $168,750 to WIP
Overhead Applied:
Machine Setups
40 setups x $2,700
per setup =
$108,000 to WIP
Overhead Applied:
9-18
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Running Machines
15,000 hours x
$22.50 per hour =
$337,500 to WIP
9-33. (continued)
Work in Process (WIP) Inventory
Fabrication Department
Direct Materials
300,000
Direct Labor
150,000
Material Handling OH
67,500
Quality Inspect. OH
168,750
Machine Setup OH
108,000
Running Machines OH 337,500 1,131,750
Finished Goods Inventory
1,131,750
9-19
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Overhead Applied:
Quality Inspections
800 inspections x
$100 per inspection
= $80,000 to WIP
Overhead Applied:
Machine Setups
100 setups x $800
per setup = $80,000
to WIP
Overhead Applied:
Running Machines
20,000 hours x $10
per hour = $200,000
to WIP
9-34. (continued)
Work in Process (WIP) Inventory
Building S
Direct Materials
200,000
Direct Labor
100,000
Material Handling
40,000
Quality Inspect.
80,000
Machine Setup
80,000
Running Machines
200,000 700,000
9-20
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b $220,000
c $55,000
b.
LaidBack
Employee maintenancea.....................................
$6,000
$60,000 b
Payrolld................................................................
$140
28,000 e
Total allocated costs............................................
$88,000
StressOut
$180,000 c
7,000 f
$187,000
Total
$240,000
35,000
$275,000
a $6,000
b 60,000
c 180,000
d $140
e $28,000
f
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$84 per bill = $84,000 Accounts receivable cost 1,000 bills prepared.
b $50,400
c $33,600
b.
Rate
Personal
Billinga.................................................................
$48
$28,800 b
Dispute resolutiond..............................................
$500
30,000 e
Total allocated costs............................................
$58,800
a $48
$19,200 c
6,000 f
$25,200
Total
$48,000
36,000
$84,000
b 28,800
c 19,200
d $500
e $30,000
f
Business
= $500 60 disputes.
9-22
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Solutions to Problems
9-37. (40 min.)Comparative Income Statements and Management Analysis: EZSeat, Inc.
a. EZ-Seat, Inc. Income Statement
Account
Rate
Ergo
Sales revenue......................................................
$2,925,000
Direct materials....................................................
$ 550,000
Direct labor..........................................................
400,000
Overhead costs:
Administration..................................................
78% a
312,000
Production setup..............................................
$7,200 b
360,000
Quality control..................................................
$1,800 c
360,000
Distribution.......................................................
$192 d
288,000
Total overhead costs...........................................
1,320,000
Operating profit....................................................
$655,000
a78%
Standard
$2,760,000
$ 500,000
200,000
Total
$5,685,000
$1,050,000
600,000
156,000
f
720,000
g
360,000
h
1,152,000
2,388,000
$ (328,000)
468,000
1,080,000
720,000
1,440,000
3,708,000
$327,000
b$7,200
c$1,800
d$192
e$312,000
f$360,000
g$360,000
h$288,000
b. Activity-based costing highlights the activities that cause costs, and provides insight
into which costs could be reduced. For example, management may be able to
operate with fewer but larger production runs, thereby reducing setup costs.
Focusing on activities can identify non-value-adding activities that can be eliminated
without reducing the products value.
9-23
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9-37. (continued)
c. EZ-Seat, Inc. Income Statement
Account
Rate
Ergo
Standard
Sales revenue......................................................
$2,925,000
$2,760,000
Direct Materials....................................................
550,000
500,000
Direct Labor.........................................................
400,000
200,000
Overhead Costs..................................................
618% a
2,472,000 b
1,236,000
Operating Profit...................................................
$ (497,000 ) $824,000
a 618%
Total
$5,685,000
1,050,000
600,000
3,708,000
$327,000
b $2,472,000
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Total
$456,000
40,000
120,000
18,000
30,000
20,000
60,000
7,500
30,000
14,400
24,000
59,900
144,000
$ 88,100 $152,000
b $2,000
c $375
Standard
$240,000
20,000
72,000
d $0.12
e $12,000
f $40,000
g $22,500
h $9,600
b. Activity-based costing highlights the activities that cause costs, and provides insight
into which costs may be reduced. For instance, Bobs Baskets management has
identified three cost driving activities; production setups, quality control inspections,
and distribution. Setups cost $2,000 each and inspections cost $375 each.
Therefore, between setups and inspections, the effort of making a one unit reduction
in an activity should be directed at setups, as the savings would be greater than the
same effort would produce if directed at inspections.
9-25
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-38. (continued)
c.
a 120%
b $57,600
9-26
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-39. (15 min.) Ethics and Choice of Accounting Methods: Bobs Baskets, Inc.
Yes, you should show the results to management. You have an ethical responsibility
to communicate information fairly and objectively. Recall that the Institute of
Management Accountants requires its members to Disclose fully all relevant
information that could be reasonably expected to influence an intended users
understanding of the reports, comments, and recommendations presented.
9-40. (50 min.)Activity-Based Costing and Predetermined Overhead Allocation
Rates: Kitchen Supply, Inc.
a. Computing overhead allocation rates
Cost
Est.
Activity
Driver
Costs
Processing orders.......... No. of orders
$54,000
Setting up production.....
No. of runs
216,000
Handling materials.........
Pounds
360,000
Using machines............. Machine-hrs.
288,000
Performing quality control No. of insp.
72,000
Packing..........................
No. of units
144,000
Total est. overhead........
$1,134,000
Predetermined rate
for direct labor-hour
Driver
Units
200
100
120,000
12,000
45
480,000
=
=
=
=
=
=
Rate
$270
2,160
3.00
24
1,600
0.30
b Number
Silver
$15,000
9,000
90,720
$114,720
Total
$ 78,000
22,500
226,800
$327,300
9-27
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-40. (continued)
c. Production Costs using ABC
Account
Institutional
Standard
Direct materials....................................................
$39,000
$24,000
Direct labor..........................................................
6,750
6,750
Indirect costs
Processing orders.............................................
3,240
2,430
Setting up production........................................
6,480
6,480
Handling materials.............................................
45,000
18,000
Using machines.................................................
13,920
3,360
Performing quality control.................................
4,800
4,800
Packing..............................................................
18,000
7,200
Total cost.............................................................
$137,190
$73,020
Silver
$15,000
9,000
Total
$78,000
22,500
1,620
12,960
9,000
1,920
4,800
2,700
$57,000
7,290
25,920
72,000
19,200
14,400
27,900
$267,210
d. Internal Memorandum
The discrepancy between our product costs using direct-labor hours as the
allocation base versus activity-based costing is found in the way overhead costs are
allocated. Our existing direct-labor cost method distorts our product costs because
there is little correlation between our direct-labor costs and overhead. Activity-based
overhead is more accurate. It allocates the individual components of our overhead to
our products based upon the products use of that overhead component.
With the more accurate product costs, we should begin to concentrate our efforts
upon reducing the costs of our more expensive overhead operations. As seen in the
activity-based costing report, a large share of our total overhead is comprised of
materials handling and maintenance costscosts, which were not visible under the
direct-labor approach. Reducing our materials handling and machine depreciation
and maintenance costs should be a new priority.
We recommend assessing the cost of using an activity-based system in our
company. We will proceed with activity-based costing if we find the cost of the new
system is less than the benefits of the more accurate information we will receive.
9-28
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Activity
Recommended Base
Setting up production. . .
No. of runs
Processing orders........
No. of orders
Handling materials........
Lbs. of material
Using machines............
Machine-hours
Performing quality
management................ No. of inspections
Packing & shipping.......
Units shipped
Direct labor hour rate....
b.
Allocation Rate
$360 per run ($36,000 100 runs)
$300 per order ($60,000 200 orders)
$3.00 per lb. ($24,000 8,000 lbs.)
$7.20 per hour ($72,000 10,000 hrs.)
$1,500 per insp. ($60,000 40 insp.)
$2.40 per unit ($48,000 20,000
units)
$150 per hour ($300,000 2,000 hrs.)
Short
Direct materials....................................................
$6,000
Direct labora........................................................
3,000
Overheadb...........................................................
15,000
Total costs...........................................................
$24,000
a Number
b Number
Medium
Tall
$3,750
3,600
18,000
$25,350
$3,000
3,300
16,500
$22,800
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9-41 (continued)
c.
Short
Direct materials....................................................
$6,000
Direct labor..........................................................
3,000
Setting up production..........................................
720 a
Processing orders...............................................
2,400 b
Handling materials...............................................
1,200 c
Using machines...................................................
3,600 d
Performing quality management.........................
3,000 e
Shipping...............................................................
2,400 f
Total cost.............................................................
$22,320
a $720
Medium
$3,750
3,600
1,440
2,400
2,400
2,160
3,000
1,200
$19,950
Tall
$3,000
3,300
2,880
1,200
600
2,160
3,000
720
$16,860
b $2,400
c $1,200
d $3,600
e $3,000
f $2,400
d. Internal Memorandum
Re: Product Cost Discrepancy
The discrepancy between our product costs using direct labor-hours as the allocation
base versus activity-based costing is found in the way overhead costs are allocated.
Our existing direct-labor cost method distorts our product costs because there is little
correlation between our direct-labor costs per product and overhead. Activity-based
overhead is more accurate. It allocates the individual components of our overhead to
our products based upon the products use of that overhead component.
With the more accurate product costs, we should begin to concentrate our efforts
upon reducing the costs of our more expensive overhead operations. As seen in the
activity-based costing report, a large share of our total overhead is comprised of
order processing, quality management, equipment maintenance, and shipping costs
costs that were not visible under the direct-labor approach. Reducing these
overhead costs should be a top priority.
We should use activity-based costing if we find the benefits from the new system
exceed its costs.
9-30
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-42.
a.
Route 66
Main Street
Alley Cat
Sales revenue......................................................
$7,600,000 $11,200,000 $9,500,000
Direct costs:
Direct material..................................................
3,000,000
4,800,000
4,000,000
Direct labor......................................................
288,000
480,000
1,080,000
Var. OHa...........................................................
939,600
1,503,360
2,255,040
Cont. margin....................................................
$3,372,400 $4,416,640 $2,164,960
Fixed OH:
Plant admin. ....................................................
Other................................................................
Gross profit..........................................................
a
Total
$28,300,000
11,800,000
1,848,000
4,698,000
$ 9,954,000
1,760,000
2,800,000
$ 5,394,000
9-31
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-42. (continued)
b.
Pickle Motorcycles
Income Statement
Route 66
Main Street
Sales revenue......................................................
$7,600,000 $11,200,000
Direct costs:
Direct material..................................................
3,000,000
4,800,000
Direct labor
288,000
480,000
Var. OH:
Mach. setup.....................................................
102,960 a
159,120
Order proc........................................................
288,000 b
432,000
Warehousing....................................................
418,500 c
418,500
Energy..............................................................
151,200 d
241,920
Shipping...........................................................
43,200 e
172,800
Cont. margin........................................................
$3,308,140
$4,495,660
Fixed OH:
Plant admin......................................................
Other................................................................
Gross profit..........................................................
a $4,680
b $720
Back Alley
$9,500,000
Total
$28,300,000
4,000,000
1,080,000
11,800,000
1,848,000
205,920
432,000
837,000
362,880
432,000
$ 2,150,200
468,000
1,152,000
1,674,000
756,000
648,000
$ 9,954,000
1,760,000
2,800,000
$ 5,394,000
c $2,092.50
d $15.12
e $43.20
(= $648,000 15,000 units) per unit shipped x 1,000 units shipped = $43,200
c. The activity-based costing method provides a more detailed breakdown of the costs.
This additional information should enable PMIs management to make better
decisions. For example, if PMI wants to reduce costs then activity-based costing will
list the activities on which management should focus its cost-reducing efforts. Also,
the company will probably have more accurate product cost information for pricing
and other decisions.
d. Some costs may have no relationship to any volume or activity base. To artificially
allocate these costs would distort the accounting information used for pricing,
evaluation, etc. A preferable method of handling such costs might be to require a
contribution margin from each product that must cover a portion of these costs.
9-32
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Oval
$ 80,000
672,000
$752,000
Round
$ 80,000
378,000
$458,000
Number of units...............................
Unit cost..........................................
4,000
$188
2,000
$229
Square
$ 80,000
1,050,000
$1,130,00
0
6,000
$188.33
9-33
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-43. (continued)
b.
c.
Utilities............................... $450,000 60,000 MH
Scheduling and setup........ $450,000 600 Setups
Material handling...............$1,200,000 1,600,000 lbs.
9-34
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-43. (continued)
d.
Unit Costs:
Oval
Direct Costs.............................................$ 80,000
Overhead:
Utilities................................................225,000a
Scheduling and setup......................... 60,000b
Material handling................................375,000c
Total costs................................................$740,000
Number of units....................................... 4,000
Unit cost................................................... $185.00
Round
$ 80,000
Square
$ 80,000
75,000
225,000
225,000
$605,000
2,000
$302.50
150,000
165,000
600,000
$995,000
6,000
$165.83
9-35
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
510
$216,000
1,710,000
$1,926,000
18,000
$107.00
9-36
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-44. (continued)
b.
Inspection...........................
$170,000 $68,000 material dollars
Production..........................
$1,500,000 150,000 machine-hours
Machine setup....................
$700,000 140 Setups
Shipping.............................
$480,000 48,000 units
=
=
=
=
c.
Unit Costs:
308
Direct Costs.............................................$216,000
Overhead:
Incoming inspection............................125,000a
Production...........................................600,000b
Machine setup....................................250,000c
Shipping..............................................300,000d
Total costs................................................
$1,491,000
Number of units....................................... 30,000
Unit cost................................................... $49.70
510
$216,000
45,000
900,000
450,000
180,000
$1,791,000
18,000
$99.50
9-37
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Deluxe
$405,000
3,200,000
$3,605,000
5,000
$721.00
9-45. (continued)
b.
Receiving...........................
$600,000 $400,000 material dollars
Production..........................
$5,500,000 250,000 machine-hours
Machine setup....................
$900,000 200 Setups
Shipping.............................
$1,000,000 25,000 units
=
=
=
=
9-38
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Unit Costs:
Standard
Direct Costs.............................................$895,000
Overhead:
Receiving............................................367,500a
Manufacturing.....................................
3,300,000b
Machine setup....................................337,500c
Shipping..............................................800,000d
Total costs................................................
$5,700,000
Number of units....................................... 20,000
Unit cost................................................... $285.00
Deluxe
$405,000
232,500
2,200,000
562,500
200,000
$3,600,000
5,000
$720.00
c. If these results are typical, it will probably not be worth adopting the ABC system.
The difference in the reported product costs are not significant, meaning they would
be unlikely to distort any decisions. It is important to note that this is true as long as
these results (number of units, costs, and so on) remain in roughly these
proportions. If there are large changes in the relative proportions, the two costs
systems might no longer report similar results.
=
=
=
=
=
9-39
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Unit Costs:
Standard
Direct Costs.............................................$895,000
Overhead:
Receiving............................................367,500a
Manufacturing.....................................
1,980,000b
Engineering........................................825,000c
Machine setup....................................337,500d
Shipping..............................................800,000e
Total costs................................................
$5,205,000
Number of units....................................... 20,000
Unit cost................................................... $260.25
Deluxe
$405,000
232,500
1,320,000
1,375,000
562,500
200,000
$4,095,000
5,000
$819.00
c $825,000
b. If these results are typical, it will probably be worth adopting the ABC system. The
difference in the reported product costs is now significant, meaning they could be
distort decisions.
9-41
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Total
$37,500,000
10,800,000
3,300,000
8,700,000
$14,700,000
6,000,000
$8,700,000
Cost
$2,400,000
$1,800,000
$2,400,000
$1,200,000
$900,000
Activity Volume
50 runs
800 orders
400 units
25,000 machine-hrs
37,500 units shipped
=
=
=
=
=
Unit Rate
$48,000 per run
2,250 per order
6,000 per unit
48 per machine-hr.
24 per unit shipped
9-42
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-48. (continued)
Income Statement
M3100
M4100
M6100
Sales revenue......................................................
$9,000,000 $15,000,000 $13,500,000
Direct costs:
Direct material..................................................
3,000,000
4,500,000
3,300,000
Direct labor......................................................
600,000
900,000
1,800,000
Var. overhead......................................................
Setting up machines............................................
480,000 a
960,000
960,000
Processing orders ..............................................
405,000 b
900,000
495,000
Warehousing.......................................................
600,000 c
1,200,000
600,000
Operating machines............................................
288,000 d
432,000
480,000
Shipping...............................................................
240,000 e
420,000
240,000
Cont. margin........................................................
$3,387,000 $5,688,000 $ 5,625,000
Plant admin......................................................
Gross profit..........................................................
a
Total
$37,500,000
10,800,000
3,300,000
2,400,000
1,800,000
2,400,000
1,200,000
900,000
$14,700,000
6,000,000
$8,700,000
c. Although both methods yield similar product costs, the activity-based costing method
provides a more detailed breakdown of the costs. This additional information should
enable MTI management to make better decisions. For example, if MTI wants to
reduce costs, then activity-based costing will list the activities on which management
should focus its cost-reducing efforts. Further, activity-based costing should increase
the accuracy of product costs, which would help decision making (e.g., pricing,
make-or-buy decision).
d. If plant administration costs were to be allocated to products, the costs should be
allocated in some manner that bears a relationship to the benefits received by the
products. In this case, we would want to know more about the contents of the plant
administration costs. If the costs are mainly personnel costs, for example, such as
the costs of a training program or of a plant cafeteria, we could allocate the costs
based upon direct labor-hours.
9-43
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Total
Sales revenue........................
$270,000
$165,000
$305,000
$740,000
65,000
145,000
280,000
12,000
28,000
60,000
Manufacturing overhead........
240,000
Operating profit......................
$160,000
Sales revenue..........................................$270,000
$165,000
$305,000
65,000
145,000
12,000
28,000
48,000
112,000
$40,000
$20,000
24%
7%
Profit margin............................................
37%
9-44
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-49. (continued)
c.
A
Total
Sales revenue........................
$270,000
$165,000
$435,000
65,000
135,000
12,000
32,000
Manufacturing overhead........
208,000
Operating profit......................
$60,000
Sales revenue..........................................$270,000
$165,000
65,000
12,000
78,000
$10,000
Profit margin............................................
19%
6%
9-45
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-49. (continued)
e.
A
Total
Sales revenue........................
$270,000
$270,000
70,000
20,000
Manufacturing overhead........
190,000
Operating profit......................
$(10,000)
f. The problem is that some part of the overhead is unavoidable, so that when products
are dropped, the overhead does not decline proportionately. The reported profit
margin, computed by using an overhead rate that includes both fixed and variable
overhead costs is not useful for decision making.
$2.00
8.00
XL-D
$12.00
10.00
12.00
$34.00
$2.00
8.00
XL-C
$14.00
10.00
12.00
$36.00
9-46
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b.
XL-D
$12.00
$2.00
8.00
10.00
Raw material.....................................
Direct labor Production..................
Direct labor Assembly....................
12.00
$34.00
$2.00
8.00
$8.00
4.00
XL-C
$14.00
10.00
12.00
$36.00
c. Since both products use machine time and direct labor time in the same proportion
(in fact, in equal amounts), it is irrelevant whether machine-hours or direct laborhours are used to allocate overhead costs to the final products or whether it is done
by manufacturing department or using a plantwide rate.
9-50. (continued)
d.
Raw material..........................................
Direct labor Production.......................
Direct labor Assembly.........................
Overhead Productiona
Supervision @ $8/direct labor-hour....
Material handling @ 6% matl. cost....
Testing @ $0.40/ test hour..................
Waste treatment @ $0.25/gallon........
Depreciation @ $2/mach. hr...............
Shipping @ $0.05/pound....................
Total production overhead......................
$2.00
8.00
$0.80
0.72
1.20
2.50
3.20
0.05
XL-D
$12.00
10.00
8.47
XL-C
$14.00
$2.00
8.00
10.00
$0.80
0.84
1.20
0.00
3.20
0.08
6.12
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4.00
$34.47
Activity
Activity
Cost
Driver
Driver Volume
Supervision..........................................................
$100,000 Direct
100,000 .1 + 25,000 .1
labor-hrs = 12,500 hours
Materials
93,000 Material 100,000 $12 + 25,000 $14
handling...............................................................
cost
= $1,550,000
Testing.................................................................
150,000 Test
100,000 3 + 25,000 3
hours
= 375,000 hours
Wastewater
250,000 Waste
100,000 10 + 25,000 0
treatment.............................................................
= 1,000,000 gallons
Depreciation........................................................
400,000 Machine 100,000 1.6 + 25,000 1.6
- hours
= 200,000 machine-hours
Shipping...............................................................
7,000 Weight
100,000 1.0 + 25,000 1.6
= 140,000 pounds
b Overhead
4.00
$34.12
Rate
$8.00
6%
$0.40
$0.25
$2.00
$0.05
9-48
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-50. (continued)
e. This question raises the issue of costs that are missing in the typical accounting
records of the firm. In this case, the ABC system suggests that XL-C, the model that
generates no wastewater, is actually less expensive. However, as the calculations
show, the difference is relatively small.
A question that is important to answer is what costs are associated with the
wastewater that are not recorded by the firm. These environmental costs could be
important and might affect the firm indirectly, perhaps through the health of its
employees or because of problems with the community.
It is difficult to argue with the controller that the decision should be made on the basis
of costs. The relevant question is whether the cost system includes all the costs of
production.
9-51. (60 min.)Distortions Caused By Inappropriate Overhead Allocation Base:
Chocolate Bars, Inc.
a.
Almond
Krispy
Creamy
Dream
Krackle
Crunch
Product costs:
Labor-hours per case.......................................7
3
1
Total cases produced.......................................
1,000
1,000
1,000
Material cost per case......................................
$8.00
$2.00
$9.00
Direct labor cost per case................................
$42.00
$18.00
$6.00
Labor-hours per product..................................
7,000
3,000
1,000
Total overhead = $69,500
Total labor-hours = 11,000
Direct labor costs per hour = $6.00
Allocation rate per labor-hour = $6.32 per labor-hour (rounded)
Costs of products:
Material cost per case......................................
$ 8.00
Direct labor cost per case................................
42.00
Allocated overhead per case...........................
44.24
Product cost.....................................................
$94.24
$ 2.00
18.00
18.96
$38.96
$9.00
6.00
6.32
$21.32
Selling price.........................................................
$85.00
Gross profit margin..............................................
(10.87 )%
Drop product?......................................................
Yes
$55.00
29.16 %
No
$35.00
39.09 %
No
From the table above, we can see that the overhead allocation system used by CBI
would lead them to drop Almond Dream and keep the remaining two bars, Krispy
Krackle and Creamy Crunch.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b. Almond Dream has a much higher proportion of direct labor-hours than Krispy
Krackle or Creamy Crunch, so Almond Dream is allocated a greater share of the
overhead costs.
9-51. (continued)
c.
Direct labor cost per hour....................................
Direct labor-hours per case.................................
Total cases produced..........................................
Labor-hours per product......................................
Total labor-hours: 5,000
Krispy
Krackle
$6.00
3
1,000
3,000
Creamy
Crunch
$6.00
1
2,000
2,000
Creamy
Crunch
$9.00
6.00
13.90
$28.90
$35.00
(28.90
$6.10
$6.10 $35.00
= 17.4
%
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-51. (continued)
d.
Direct labor cost per hour....................................
Direct labor hours per case.................................
Total cases produced..........................................
Labor hours per product......................................
Total labor hours: 3,000
Creamy
Crunch
$6.00
1
3,000
3,000
Creamy
Crunch
$9.00
6.00
23.17
$38.17
$35.00
(38.17 )
$ (3.17 )
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Total
11,000 (100%)
15,000 (100%)
10,000 (100%)
Per Case
$21,072
$21.07
26,699
26.70
21,730
21.73
Almond
Krispy
Allocated production costs:
Dream
Krackle
Material cost........................................................
$8.00
$2.00
Direct labor..........................................................
42.00
18.00
Allocated OH.......................................................
21.07
26.70
Production cost per case.....................................
$71.07
$46.70
Creamy
Crunch
$9.00
6.00
21.73
$36.73
Selling price.........................................................
$85.00
$55.00
Product cost.........................................................
(71.07)
(46.70)
Profit (loss)..........................................................
$13.93
$8.30
$35.00
(36.73)
$ (1.73)
15.1%
(4.9)%
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
952.(continued)
b. Based upon the table above and the gross profit margin rule, management would
recommend dropping Creamy Crunch. Two characteristics of Creamy Crunch appear
to make it appear relatively unprofitable: one, the selling price is comparatively low
as compared to the other two products; two, Creamy Crunch uses 50% of the factory
space and, thus, is allocated half of the rent costs.
c.
Almond
Dream
Direct labor hours per case.................................7
Machine hours per case......................................2
Factory space (sq. ft.)a........................................
2,000 (33.3%)
Case of output per month....................................
2,000
Labor hours required...........................................
14,000 (82.4%)
Machine hours required.......................................
4,000 (36.4%)
Total rent for factory space:
Total machine operating costs:
Total other overhead:
Total labor hours/month:
Total cases produced/month:
Total machine hours
Krispy
Krackle
3
7
4,000 (66.7%)
1,000
3,000 (17.6%)
7,000 (63.6%)
9-53
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-52. (continued)
Allocated Cost:
Total
Almond Dream (82.4% x $24,500) +
(36.4% x $30,000) + (33.3% x $15,000)............... = $36,108
Krispy Krackle (17.6% x $24,500) +
(63.6% x $30,000) + (66.7% x $15,000)............... =
33,392
Allocated production costs:
Material cost........................................................
Direct labor..........................................................
Allocated OH.......................................................
Production cost per case.....................................
Selling price.........................................................
Product cost.........................................................
Profit margin ratio:
Ratio = Gross Margin/Price.................................
Per Case
$18.05
33.39
Almond
Dream
$8.00
42.00
18.05
$68.05
Krispy
Krackle
$2.00
18.00
33.39
$53.39
$85.00
(68.05)
$16.95
$55.00
(53.39)
$1.61
19.9%
2.9%
Based on the gross profit margins of Almond Dream and Krispy Krackle,
management should drop Krispy Krackle and continue to produce Almond Dream.
Almond Dream appears to be the most profitable product. In fact, its margin ratio is
only 13.9%, computed as follows:
Cases Produced = 3,000
Overhead Allocation = $69,500 3,000 = $23.17
Allocated production costs:
Material cost........................................................
Direct labor..........................................................
Allocated OH.......................................................
Production cost per case.....................................
Selling price.........................................................
Product cost.........................................................
Profit margin ratio:
Ratio = Gross Margin/Price.................................
Almond
Dream
$8.00
42.00
23.17
$73.17
$85.00
(73.17)
$11.83
13.9%
9-54
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-52. (continued)
If we compute the gross margin for the three products at maximum production, we
find Almond Dream and Krispy Krackle to be equally profitable, computed as follows:
Almond
Krispy
or
or
Dream
Krackle
Cases..................................................................
3,000
3,000
Creamy
Crunch
3,000
Costs
Materials..........................................................
$24,000
$ 6,000
$27,000
Labor...............................................................
126,000
54,000
18,000
Overhead.........................................................
+
69,500 +
69,500 +
69,500
$219,500
$129,500
$114,500
Revenue..............................................................
$255,000
$165,000
$105,000
Total costs...........................................................
219,500
129,500 114,500
Gross margin.......................................................
$35,500
$35,500
$ (9,500)
Moral: Dont make too much of allocated cost numbers in decision making.
9-55
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Runs
Machine
Products
Time
50%
40%
10%
0%
80
20
Machinery depreciation
100
Machinery maintenance
100
Energy
100
Setups
Runs
Machine
Products
Time
$28,000
$14,000
$11,200
$2,800
10,000
8,000
2,000
Machinery depreciation
8,000
8,000
Machinery maintenance
4,000
4,000
Energy
2,000
2,000
Total
$52,000
$14,000
$19,200
$4,800
$14,000
IT
Activity
560 hours
110 runs
$25
$174.55
$1,200
$1.40
9-53. (continued)
b.
Unit Costs on Cola Bottling Line
Materials
Direct labor
Diet
Regular
$ 25,000
$ 20,000
$ 4,680
10,000
8,000
1,800
200
20,000
3,200
720
80
8,000
1,500
6,000
1,500
14,000
5,236
5,236
1,746
19,200
1,200
1,200
1,200
4,800
5,600
1,260
140
14,000
$59,182
$44,736
$20,896
$ 5,416
$130,230
50,000
40,000
9,000
1,000
$1.18
$1.12
$2.32
$5.42
Setup costs
5,000
6,982
Product costs
1,200
Machine costs
7,000
a
b
c
d
Total
$ 50,230
4,000
Volume
Grape
550
Total costs
Cherry
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scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-53. (continued)
c.
Monthly Report on Cola Bottling Line
Diet
Sales revenue
Costs
Gross margin
Regular
Cherry
Grape
Total
$75,000
$60,000
$13,950
$1,650
$150,600
59,182
44,736
20,896
5,416
130,230
$15,818
$15,264
$(6,946)
$(3,766)
$20,370
d. Mr. Rockness:
The activity-based costing analysis shows that Diet and Regular Cola are profitable, but the Cherry and Grape flavors are
unprofitable. The primary cause of their high costs is the large demands they place on setup resources. We recommend
an analysis of whether we can reduce the costs of Cherry and Grape by improving our ability to get the flavors right on
these two products. If that is not possible, we recommend that you consider dropping these products, unless there are
strategic reasons for offering these as part of the product portfolio.
9-58
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scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.