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5-21: Tioga Company manufactures lenses and mirrors used in large optical telescopes.

The company is now preparing its annual profit plan. As part its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the following information. Lenses Units produced............................................ Material moves per product line.................. !irect"labor hours per unit........................... 25 5 2## Mirrors 25 5 2##

The total budgeted material-handling cost is $ 50,000. Required: 1. Under a costing system that allocates overhead on the basis of direct-labor hours, the material-handling costs allocated to one lens would be what amount? . !nswer the same "uestion as in re"uirement #1$, but for mirrors. %. Under activity-base costing the material-handling costs allocated to one lens would be what amount? The cost driver for the material-handling activity is the number of material moves. &. !nswer the same "uestion as in re"uirement #%$, but for mirrors. 5-22: Urban 'lite (osmetics has used a traditional cost accounting system to a))ly "uality-control costs uniformly to all )roducts at a rate of 1&.5 )ercent of direct-labor cost. *onthly direct-labor cost for +atin +heen ma,eu) is $ -,500. .n an attem)t to more e"uitably distribute "ualitycontrol costs, management is considering activity-based costing. The monthly data shown in the following chart have been gathered for +atin +heen ma,eu). Activity base costing of Drivers For Satin S een .ncoming material ins)ection... Ty)e of material.... $11.50 )er ty)e........ .n-)rocess ins)ection............... /umber of units.... 0.1& )er unit......... 1 ty)es 1-,500 units 5 orders Cost Driver Pool rates Quantity

0roduct certification................ 0er order............... --.00 )er order........

Required: 1. (alculate the monthly "uality-control cost to be assigned to the +atin +heen )roduct line under each of the following )roduct-costing systems. #1ound to the nearest dollar$. a. Traditional system, which assigns overhead on the basis of direct-labor cost. b. !ctivity-based costing. . 2oes the traditional )roduct-costing system over-cost or under-cost the +atin +heen )roduct line with res)ect to "uality-control costs? 3y what amount? 5-!": The controller for Tulsa 0hotogra)hic +u))ly (om)any has established the following activity cost )ools and cost drivers. Activity-based costing #udgeted Cost Drivers #udgeted level Pool Rate

$ver ead cost *achine setu)s......... *aterial handling...... 5a6ardous waste control...................... "uality control.......... 7ther overhead cost.. Total....................

for cost Driver $ ,00)ersetu) $ )er )ound

$ 50,000 /umber of setu)s........ 1 5 -5,00 4eight of raw material... %-,500lbs 4eight of ha6ardous 5,000 chemicals used.......... 5,000lbs

$5)er )ound $-5)er ins)ection $10)er machine hrs

-5,000 /umber of ins)ections.. 1000 00,000 *achine hours......... 0,000

$8 5,000

!n order for 1,000 bo9es of film develo)ment chemicals has the following )roduction re"uirements. *achine setu)s................... 1aw material....................... 5a6ardous materials............. .ns)ection........................... *achine hours.................... Required: 1. (om)ute the total overhead that should be assigned to the develo)ment-chemical order. 5 setu)s 10,000 )ounds ,000 )ounds 10 ins)ection 500 machine hours

. 4hat is the overhead cost )er bo9 of chemicals? %. +u))ose Tulsa 0hotogra)hic +u))ly (om)any were to use a single )redetermined overhead rate based on machine hours. (om)ute the rate )er hour. &. Under the a))roach in re"uirement #%$, how much overhead would be assigned to the develo)ment chemical order? a..n total b. 0er bo9 of chemicals 5. '9)lain why these two )roduct-costing systems result in such widely differing costs. 4hich system do you recommended? 4hy? 8. 3uild a s)readsheet: construction an '9cel s)readsheet to solve re"uirements #1$# $#%$ and #&$ above. +how how the solution will change if the following data change. The associated with machine setu)s is $ %-5,000 and there are 500 ins)ection budgeted. %5-!&: *ontreal 'lectronics (om)any manufactures two large-screen television models: the /ova, which has been )roduced for 10 years and sells for $;00, and 1oyal, a new model introduced in early 090, which sells for $1,1&0. 3ased on the following income statement for 091, a decision has been made to concentrate *ontreal resources on the 1oyal model and to begin to )hase out the /ova model. 'ontreal (lectronics Co)*any +nco)e state)ent For t e year ended Dece)ber !%, 2-.% 1oyal +ales............................................ (ost )f goods sold....................... $&,580,000 .%,1; ,000 $1;,<00,000 1 ,5&0,000 /ova $ &,%80,000 15,-% ,000 $<,8 <,000 8,<0<,000 $1,< 0,000 Total

=ross margin................................................ $1,%8<,000 +elling and administrative e9)ense............... /et income.............................................. Units )roduces and sold................................ /et income )er unit sold.............................. ;-<,000 $%;0,000 &000 $;-.50

$-, 80,000 5,<%0,000 $1,&%0,000 ,000 $85.00

The standard unit cost for the 1oyal and /ova models are as follows:

Royal 2irect material.............................................. 2irect labor 1oyal #%.5 hr. > $1<$.................................... /ova #1.5 hr. > $1 $.................................... *achine usage: 1oyal #& hr. > $1<$....................................... /ova #< hr. > $1<$....................................... *anufacturing overhead?............................ +tandard cost...............................................
hour.

/ova $ 0<

$5<&

& 1<

1&& 100 $-;< 100 $5-0

?*anufacturing overhead was a))lied on the basis of machine hours at a )redetermined rate of $ 5 )er *ontreal 'lectronics (om)any@s controller is advocating the use of activity-based costing and activity based management and has gathered the following information about the com)any@s manufacturing-overhead cost for 091. 0 Activity Center 1raceable Costs +oldering................. $;& ,000 #no of solder Aoints$ +hi)ments.............. <80,000 #no of shi)ments$ Buality control........... 1, &0,000 #no of ins)ection$ 0urchase orders......... ;50,&00 #no of orders$ *achine )ower......... 5-,800 #*achine hrs.$ 18,000 1-8,000 1; ,000 10;,;<0 <0,100 1;0,0<0 1,%00 58, 00 --,500 %,<00 18, 00 0,000 Royal %<5,000 /ova 1,1<5,00 1otal 1,5-0,000 /u)ber of (vents 0

*achine setu)s......... -50,000 #no of setu)s$

1&,000

18,000

%0,000

Total traceable costs.... $&,<00,000 Required: 1. 3riefly e9)lain how an activity based costing o)erates . Using activity based costing, determine if *ontreal 'lectronics should continue to em)hasi6e the 1oyal model and )hase out the /ova model.