53

Chapter 3
Traditional Cost
Management
Systems



QUESTIONS

3-1 Costs need to be estimated for individual jobs in order to bid for them and to
price them competitively. Estimated costs are also useful for comparison
with actual costs for management control purposes. Costs may differ across
individual jobs because jobs may differ in their materials content, the hours
of labor required to manufacture them and in the demand they place on
support activity resources.

3-2 A typical job bid sheet has the following five distinct parts:

1. The name of the customer, product and quantity required.
2. Estimated quantity and current price for different materials.
3. The wage rate and hours required for direct labor.
4. Estimated manufacturing support cost.
5. Estimated total cost, bid price, unit cost and unit price.

3-3 Two types of information are required to estimate direct material cost for a
job. The quantity required for each item of material is estimated based on
standard engineering specifications. Information on the price of each item of
material is obtained from the purchasing department.

3-4 Two types of information are required to estimate direct labor cost. Direct
labor hours are estimated based on industrial engineering specifications
(e.g. work and motion studies) or by analogy with comparable standard
products. Wage rates for each grade of labor required for the operations
performed are obtained from personnel records.

Atkinson, Solution Manual t/a Management Accounting, 4E
54
3-5 Cost driver rates are determined by dividing the cost of the resources
committed to the support activity, by the capacity made available by the
resources committed to the activity.

3-6 Support cost for a job is estimated by multiplying the cost driver rate(s) by
the number of units of the support cost driver(s) associated with the job.

3-7 Markup rate is the percentage addition to the estimated job cost to calculate
the bid price. The markup rate depends on a variety of factors, including:

Proportion of indirect costs excluded from the numerator in the
computation of the cost driver rate
Target rate of return desired by the firm
Past bidding strategies of key competitors
Demand conditions
Overall product-market strategies

3-8 Each cost pool is a portion of the total support costs associated with a
distinct cost driver. Multiple cost pools are required when support costs are
driven by more than one factor (cost driver).

3-9 Determination of cost driver rates based on planned or actual short-term
usage will result in rates that are too high in periods of low demand and that
are too low in periods of high demand. As a consequence, job costs are
distorted in such a job costing system.

3-10 Yes. A separate cost driver rate must be determined for each cost pool when
there are multiple cost drivers involved, or else job cost estimates may be
distorted. However, if the different cost drivers vary together in the same
proportion then any one of them will be sufficient.

3-11 Cost pools collect support costs into separate groups, for each of which a
separate cost driver rate is used. The general principle in determining the
number of cost pools is that a separate cost pool should be used for the cost
of an activity if the pattern of demand for it varies across products in
proportions different from those reflected in existing cost pool drivers. The
increase in measurement costs for a more detailed cost system, however,
must be traded off against the benefit of increased accuracy in estimating
product costs.

Chapter 3: Traditional Cost Management Systems
55
3-12 Tracking the actual cost of individual jobs allows managers to compare the
actual cost against the estimated cost and determine if there are unexpected
variations in the efficiency in using activity resources. Such comparisons
between actual and estimated costs help managers bid more accurately on
future jobs and take corrective actions to alleviate unfavorable variations in
costs.

3-13 Unlike direct material costs and direct labor costs, support costs cannot be
traced easily to each job. When actual costs are recorded for a job during the
course of a fiscal period, the total support costs for the period and
consequently the actual cost driver is not yet determined. Therefore, costs
are applied to jobs using predetermined rates.

3-14 Conversion costs are the costs of converting raw materials into finished
products. They include the costs of production labor and support activities
at each process stage.

3-15 Continuous processing plants are characterized by the fact that production
flows continuously, semi-continuously, or in large batches from one process
stage to the next. At each successive process stage, further progress is made
toward converting the raw materials into finished products. Therefore, the
product costing system must accumulate conversion costs assigned to
individual products for successive process stages. Product costs must also
reflect the yield ratesthe fraction of the input materials in a process stage
that is transferred to the next process.

3-16 Multistage process costing systems have the same objective as job order
costing systems. Both types of systems assign material, labor, and
manufacturing support activity costs to products. The two types of systems
differ, however, on some dimensions. In a job order environment,
production requirements vary across different jobs, so production occurs job
by job and costs are measured for individual jobs. In addition, cost reports
that compare actual to estimated costs may be determined for individual
jobs. In a multistage process environment, production requirements are
homogeneous across products or jobs, so production occurs continuously,
semi-continuously, or in large batches, and costs are measured for
individual process stages. Because of the homogeneous production, cost
reports that compare actual to estimated costs are likely to be determined
only for individual process stages.

Atkinson, Solution Manual t/a Management Accounting, 4E
56
3-17 Production departments are those directly responsible for transforming raw
materials into finished products. Service departments are departments that
perform support activities, such as production engineering and machine
maintenance.

3-18 Conventional product costing systems assign indirect costs to jobs or
products in two stages. In the first stage, indirect costs are identified with
various production and service departments, and all the service department
costs are then allocated to production departments. In the second stage, the
accumulated indirect costs for the production departments are assigned to
individual jobs or products based on predetermined departmental cost driver
rates.

3-19 Because jobs are worked on only in a production department, conventional
costing systems assume that we cannot obtain direct measures of the use of
service department resources on individual jobs as conveniently as we can
of production department resources. Therefore, these costing systems
allocate service department costs first to the production departments before
assigning them to individual jobs.

3-20 The direct method is used when service department activities only benefit
production departments. This method assumes no interaction among service
departments and assigns their costs directly to production departments. The
sequential method is used when there are no reciprocal interactions between
service departments. Costs are allocated one at a time to other service
departments in a sequential order. The reciprocal method recognizes
reciprocal interactions between different service departments and allocates
costs between service departments simultaneously.

3-21 Conventional two-stage cost allocation systems are likely to systematically
distort product costs because they break the link between the cause for the
costs and the basis for assignment of the cost to the individual products.

3-22 Two factors that contribute to cost distortions when using conventional two-
stage cost accounting systems are (1) the use of unit-related measures and
(2) differences in relative consumption ratios. Unit-related measures are
used to allocate support costs to products, but the demand for activities
might be driven by batch-related and product-sustaining cost drivers. Also,
costs distortions tend to be greater when the differences between relative
proportions of the activity cost drivers and the base for second-stage
assignment are greater.

Chapter 3: Traditional Cost Management Systems
57
EXERCISES

3-23 (a) Support cost driver rate:



labor cost
direct labor cost
$5, ,
$2, ,
000 000
500 000 direct
2 =



(b) Consulting engagement cost:

Labor cost $20,000
Support cost
2 labor cost 40,000
Total cost $60,000

3-24 (a) Plantwide cost driver rate:



$60,000
4,000 direct labor hours
$15 per direct labor hour =


(b) Departmental cost driver rates:

Cutting Department:



$25,000
4,000 machine hours
per machine hour = $6.25


Assembly Department:



labor hours
$11.67 per direct labor hour
$35,
,
000
3 000 direct
=


(c) The company may favor the method in (b) if support activity costs in
the cutting department have a cause-and-effect relationship with
machine hours, while those in the assembly department have a cause-
and-effect relationship with direct labor costs. The company may use
Atkinson, Solution Manual t/a Management Accounting, 4E
58
the method in (a) because it is simpler than the method in (b), which
is potentially more accurate.

3-25 (a) Month Actual Machine Hours Monthly SupportCosts
January 1,350 $51.85
February 1,400 $50.00
March 1,500 $46.67
April 1,450 $48.28
May 1,450 $48.28
June 1,400 $50.00
July 1,400 $50.00
August 1,400 $50.00
September 1,500 $46.67
October 1,600 $43.75
November 1,600 $43.75
December 1,600 $43.75
Total Hours 17,650

(b) The support cost driver rate should be determined as the ratio of the
cost of a support activity accumulated in the cost pool to the cost
driver quantity for the activity. For Tokis machine-related support
costs, the computation is:


$70,
$46.
000 12
12
67

=
months
1,500 machine hours months
per machine hour

If the cost driver rate is based instead on actual or budgeted activity
quantities that fluctuate over time, then support activity costs will be
understated in periods of high demand and overstated in periods of
low demand, as shown in part (a). If Tokis support costs are caused
by multiple cost drivers, the company may develop a more accurate
cost system by using multiple cost driver rates.

3-26 Ingredient A: $0.40 10,000 $4,000
Ingredient B: $0.60 20,000 12,000 $16,000
Conversion costs: $0.55 30,000

$16,500
Total costs $32,500
Number of gallons of blended vegetable juice 27,000
Cost per gallon of blended vegetable juice $1.204

Chapter 3: Traditional Cost Management Systems
59

3-27 Direct materials $232,000
Direct labor 120,000
Support costs 60,000
Disposal costs of waste product 20,000
Total costs $432,000
Number of pounds of Goody 200,000
Cost per pound of Goody $2.16

3-28 (a) Allocation of setup costs:
Assembly Dept.: $40, $30, 000
300
300 100
000
+
=

Finishing Dept.: $40, $10, 000
100
300 100
000
+
=

(b) Allocation of inspection costs:
Assembly Dept.: $15, $4, . 000
200
200 500
28571
+
=

Finishing Dept.: $15, $10, . 000
500
200 500
714 29
+
=

3-29 Service Departments Production Departments
S1 S2 P1 P2

Directly identified
costs

$65,000

$55,000

$160,000

$240,000

Allocation of S1 costs (65,000) 15,000 20,000 30,000

Allocation of S2 costs (70,000) 33,600 36,400


Total allocated
support costs $0 $0 $213,600 $306,400


Atkinson, Solution Manual t/a Management Accounting, 4E
60

3-30 (a) P1 P2

S1 $300 : , $150, 000
30
30 30
000
+
=

$300, $150, 000
30
30 30
000
+
=



S2 : $300, $100, 000
25
25 50
000
+
=

$300, $200, 000
50
25 50
000
+
=

$250,000 $350,000


(b) S1 S2 P1 P2
Directly
identified $300,000 $300,000


Allocation of
S1 costs ($300,000) 120,000 $90,000 $90,000

Allocation of
S2 costs (420,000) 140,000 280,000

Totals $0 $0 $230,000 $370,000


(c) S S2 1 000 025 = + $300, .
S2 S = + $300, . 000 04 1

Therefore,

S1 S1
S
S1
S1
S2
= + + ( )
= +
=
= =
= + =
$300, . $300, .
$375, .
. $375,
$375,
.
$416,
$300, . $416, $466,
000 025 000 04
000 01 1
09 000
000
09
667
000 04 667 667

Chapter 3: Traditional Cost Management Systems
61
Allocation of S1 and S2 costs to P1 and P2

P1 P2
S1:
$416,667 30%
$125,000
$416,667 30%
$125,000

S2:
$466,667 25%
$116,667
$466,667 50%
$233,333


$241,667 $358,333


The summary below incorporates the allocation of 0.25 S2 =
$116,667 to S1 and 0.4 S1= $166,667 to S2.

S1 S2 P1 P2
Directly identified $300,000 $300,000

Allocation of S1 costs (416,667) 166,667 $125,000 $125,000

Allocation of S2 costs 116,667 (466,667) 116,667 233,333

Total $0 $0 $241,667 $358,333


Atkinson, Solution Manual t/a Management Accounting, 4E
62
PROBLEMS

3-31
Job 101 Job 102 Job 103
Beginning
work-
in-process:

$25,500

$32,400

$0

Direct
materials:
Dept. 1 $40,000 $26,000 $58,000
Dept. 2 3,000 5,000 14,000
Dept. 3 0 0 0
$43,000 $31,000 $72,000

Direct
labor:
Dept. 1 $12 $6, = 500 000 $12 $4, = 400 800 $12 $3, = 300 600
Dept. 2 $18 $3, = 200 600 $18 $4, = 250 500 $18 $6, = 350 300
Dept. 3
$15 , $22, = 1 500 500 $15 , $27, = 1 800 000 $15 , $37, = 2 500 500

$32,100 $36,300 $47,400

Mfg.
support:
Dept. 1 150% 000 500 = $43, $64, 150% 000 500 = $31, $46, 150% 000 000 = $72, $108,
Dept. 2 $8 , , = 1 200 9 600 $8 , , = 1 500 12 000 $8 , , = 2 700 21 600
Dept. 3
200% 100 200 = $32, $64, 200% 300 600 = $36, $72, 200% 400 800 = $47, $94,
$138,300 $131,100 $224,400

Total
costs $238,900 $230,800 $343,800


(a) Total cost of completed Job 101 = $238,900

(b) Total cost of completed Job 102 = $230,800

(c) Work-in-process for Job 103 at April 30 = $343,800

Chapter 3: Traditional Cost Management Systems
63
3-32 A good case can be made for any of the three alternatives presented below:
Alternative 1: Allocate in the proportion of actual passengers

Week Boston Cambridge
1 $4,800 $2,400
2 4,500 * 2,700
3 5,118 2,482
4 5,200 ** 2,600
5 5,100 2,100

*
1 500
2 400
7 200 500
,
,
, $4, =
**
1 700
2 550
7 800 200
,
,
, $5, =

This method is justified by the argument that all costs should be spread
equally over all passengers.

Alternative 2: Charge capacity cost of $3 =
7,200
2,400
per passenger

Week Boston Cambridge Unallocated
1 $4,800 * $2,400
2 4,500 2,700
3 4,950 2,400 $250
4 5,100 2,550 150
5 5,100 2,100

* 1,600 passengers $3 per passenger

Using capacity cost per passenger to allocate service center costs is justified
by the argument that the service center costs are caused primarily by the
capacity that is made available rather than the actual usage of the committed
resources.

Atkinson, Solution Manual t/a Management Accounting, 4E
64
Alternative 3: Allocate normal costs 2:1 (1,600:800) based on long run
demand and additional help costs in the proportion of additional demand.

Week Boston Cambridge
1 $4,800 $2,400
2 4,800 2,400
3 5,200 * 2,400
4 5,200 ** 2,600
5 4,800 2,400

*
5 200 4 800 7 600 7 200 , , , , = + a f

** 5 200
7 800 1 700 1 600
1 700 1 600 850 800
,
, , ,
, ,
=

+
a f
a f a f

This method best reflects the factors that cause the costs to be incurred.

3-33 (a) Portland Electronics, Inc.: Job Cost Sheet
Customer: Video Shack
Product: Computer Monitors, 1,000 units
Direct material Quantity Price Amount
Part A327 1,000 units $60 $60,000
Part B149 1,000 units 120 120,000
Total direct material cost $180,000

Direct labor Hours Rate Amount
Assembly 6,000 $10 $60,000
Inspection 1,000 12 12,000
Total direct labor cost 7,000 $72,000

Support costs Amount

7,000 Direct labor hours
@ $5 per hour $35,000

Total cost $287,000

Number of units produced 1,000

(b) Cost per monitor $287


Chapter 3: Traditional Cost Management Systems
65
3-34 Baker Auto Shop: Job Cost Sheet for Job #379
Direct material Quantity Price Amount
Engine oil 11 ounces $2 $22
Lubricant 2 ounces 3 6
Total direct material cost $28

Direct labor Hours Rate Amount
Direct labor 3 $15 $45

Support costs Amount
3 Direct labor hours @ $10 per hour $ 30

Total cost $103


3-35 (a) Plantwide cost driver rate

=
+
+
=
=
$120, $160,
( , )
$280,
,
$14
000 000
8 000 12,000
000
20 000 direct
direct labor hours
labor hours
per direct labor hour


Job Cost Sheet: Job #691

Direct materials Amount
Milling $800
Assembly 50
Total direct material cost $850

Direct labor Amount
Milling $100
Assembly 600
Total direct labor cost $700

Manufacturing Support Amount
50 Direct labor hours @ $14 per hour $ 700
Total cost $2,250


Atkinson, Solution Manual t/a Management Accounting, 4E
66
(b)
Cost driver rate Milling
machine hours
per machine hour
=
=
$120,
$10
000
12,000



Cost driver rate Assembly
direct labor hours
per direct labor hour
=
=
$160,
$13.
000
12,000
33

Job Cost Sheet: Job #691

Direct materials Amount
Milling $800
Assembly 50
Total direct material cost $850

Direct labor Amount
Milling $100
Assembly 600
Total direct labor cost $700

Support Amount
Milling: 18 machine hours @ $10 per hour $180
Assembly: 40 direct labor hours @ $13.33 per hour 533
Total overhead cost $713
Total cost $2,263


(c)
Part (a) Part (b)
Manufacturing cost $2,250.00 $2,263.00
25% markup 562.50 565.75
Bid price $2,812.50 $2,828.75

(d) The company may favor the method in (b) if support activity costs in
the milling department have a cause-and-effect relationship with
machine hours, while those in the assembly department have a cause-
and-effect relationship with direct labor costs. In this case, the
computed total manufacturing cost in part (a) is of similar magnitude
to the cost in part (b), and therefore the bid prices are also of similar
magnitude. Given this result, one might be inclined to use the simpler
method in part (a) rather than the more accurate but more complex
method in part (b). However, comparisons across different products
may produce greater differences in computed costs and bid prices.
Chapter 3: Traditional Cost Management Systems
67

3-36 (a) Cutting Grinding Drilling Total

Support
cost $504,000 $2,304,000 $2,736,000 $5,544,000


Direct
labor hours 60,000 96,000 144,000 300,000

Plantwide cost driver rate:

$5,
,
$18.
544,000
300 000 direct
48 per dir
labor hours
ect labor hour =

Support cost applied to Job ST101:

$18.48 (2,000 + 2,500 + 3,000) = $138,600.

(b) Cost driver rate: Cutting


$504,
,
$0.
000
960 000
525 = per machine hour

Cost driver rate: Grinding

$2,
,
$24
304,000
96 000 direct labor hours
per direct labor hour =

Cost driver rate: Drilling

$2, ,
$19
736 000
144,000 direct labor hours
per direct labor hour =

Atkinson, Solution Manual t/a Management Accounting, 4E
68
Support cost applied to Job ST101:

Dept Rate Units of Driver Used Support Cost
Cutting $0.525 20,000 MH $10,500
Grinding $24.00 2,500 DLH 60,000
Drilling $19.00 3,000 DLH 57,000
$127,500


(c) The company may favor departmental support cost driver rates if support
activity costs in the cutting department have a cause-and-effect
relationship with machine hours, while those in the grinding and drilling
departments have a cause-and-effect relationship with direct labor costs.
The company may use the method a plantwide cost driver rate because it
is simpler than using multiple departmental rates, though the
departmental rate method is potentially more accurate.

3-37 (a) Cost driver rate for machining:


$500,
,
$25
000
20 000 machine hours
per machine hour =

Cost driver rate for finishing:


$400,
$500,
.
000
000
80% = of direct labor cost

(b) Machining
Department
Finishing
Department

Total
Direct material cost $12,000 $2,000 $14,000
Direct labor cost 300 1,200 1,500
Manufacturing support 2,000
a
960
b
2,960
Total costs of Job 134 $14,300 $4,160 $18,460



a
2 000 80 , $25 =

b
$960 , = 80% 1 200 of
Chapter 3: Traditional Cost Management Systems
69

(c) Gonzalez Company likely believes that its manufacturing support costs
are driven by different factors. Specifically, support activity costs in the
machining department have a cause-and-effect relationship with machine
hours, while those in the finishing department have a cause-and-effect
relationship with direct labor costs.

3-38 (a) Brumelle Electronic Company: Job bid sheet

Job Bid Sheet
Customer: Takayama, Inc.
Product: ICB371
Number of units: 1,000
Quantity Price Amount
Direct material 2,000 units $10 per unit $20,000
Direct labor 1,000 hours $10 per hour 10,000
Manufacturing
support
$6
a
per direct
labor hour
6,000
Total estimated costs $36,000
Markup (20%) 7,200
Bid price $43,200


a
$300,000 50,000 = $6 per direct labor hour

(b) Brumelle Electronic Company: Job cost sheet

Job Cost Sheet
Customer: Takayama, Inc.
Product: ICB371
Number of units: 1,000
Quantity Price Amount
Direct material 2,100 units $9.75 per unit $20,475
Direct labor 1,000 hours $11 per hour 11,000
Manufacturing
support
$6 per direct
labor hour
6,000
Total actual costs $37,475


Atkinson, Solution Manual t/a Management Accounting, 4E
70
(c) The differences between actual and estimated material quantity and
material price per unit could reflect poorer quality materials (for
example, a higher percentage of defects) that resulted in requisitioning a
larger number of units of material than expected. Although the job
required the same number of labor hours as estimated, the hourly rate
was higher than estimated. This may be because there are several grades
of labor with differing wage rates, while a single common rate is used for
estimating labor costs on jobs.

3-39 (a) Service Departments Production Departments

Personnel Maintenance Machining Assembly

Directly identified
costs $100,000 $200,000 $400,000 $300,000

Allocation of
Personnel Dept.
costs

(100,000)



11,111
a


88,889
b


Allocation of
Maintenance
Dept. costs (200,000)


176,471
c



23,529
d


$0 $0 $587,582 $412,418



a
$100,000
5
45

c
$200,
,
,
000
7 500
8 500


b
$100,000
40
45

d
$200,
,
,
000
1 000
8 500

(b) Cost driver rate: Machining =
=
$587,
,
$58.
582
10 000 machin
7582
e hours
per machine hour



Cost driver rate: Assembly =
=
$412,
,
$41.
418
10 000 direct
2418 per d
labor hours
irect labor hour

Chapter 3: Traditional Cost Management Systems
71

Direct materials and labor costs: $ 450.00

Support costs from Machining Department
($58.7582 3 machine hours)

176.27

Support costs from Assembly Department
($41.2418 5 direct labor hours)

206.21

Total unit cost $ 832.48

Markup (30%) 249.74

Bid price $1,082.22

(c) Service Departments Production Departments
Personnel Maintenance Machining Assembly
Directly
identified costs $100,000 $200,000 $400,000 $300,000

Allocation of
Personnel
Dept. costs

30,000
a


(200,000)

150,000
b


20,000
c


Allocation of
Maintenance
Dept. costs (130,000)


14,444
d



115,556
e


$0 $0 $564,444 $435,556



a
$200,
,
,
000
1 500
10 000

d
$130,000
5
45


b
$200,
,
,
000
7 500
10 000

e
$130,000
40
45


c
$200,
,
,
000
1 000
10 000


(d) Cost driver rate: Machining
=
=
$ ,
,
$ .
564 444
10 000
56 4444
machine hours
per machine hour


Cost driver rate: Assembly
=
=
$ ,
,
$ .
435 556
10 000
43 5556
direct labor hours
per direct labor hour


Atkinson, Solution Manual t/a Management Accounting, 4E
72
Direct materials and labor costs: $450.00

Support costs from Machining Department
($56.4444 3 machine hours)

169.33

Support costs from Assembly Department
($43.5556 5 direct labor hours)

217.78

Total unit cost $837.11

Markup (30%) 251.13

Bid price $1,088.24


3-40 (a) Service Departments Production Departments
Maintenance Grounds Machining Assembly
Directly
identified costs

$18,000

$14,000

$45,000

$25,000

Allocation of
Maintenance
Dept. costs


(18,000)





12,000
a



6,000
b


Allocation of
Grounds Dept.
costs





(14,000)


6,000
c



8,000
d


$0 $0 $63,000 $39,000



a
$18,
,
,
000
12 000
18 000

c
$14,
,
,
000
15 000
35 000



b
$18,
,
,
000
6 000
18 000

d
$14,
,
,
000
20 000
35 000

Chapter 3: Traditional Cost Management Systems
73

(b) Service Departments Production Departments
Maintenance Grounds Fabricating Assembly
Directly
identified costs $18,000 $14,000 $45,000 $25,000

Allocation of
Personnel Dept.
costs

(18,000)

1,385
a


11,077
b


5,538
c


Allocation of
Maintenance
Dept. costs





(15,385)


6,594
d



8,791
e


$0 $0 $62,671 $39,329



a
$18,
,
,
000
1 500
19 500

d
$15,
,
,
385
15 000
35 000


b
$18,
,
,
000
12 000
19 500

e
$15,
,
,
385
20 000
35 000


e
$18,
,
,
000
6 000
19 500

Atkinson, Solution Manual t/a Management Accounting, 4E
74

(c) Service Departments Production Departments
Maintenance Grounds Fabricating Assembly
Directly
identified
costs $18,000.000 $14,000.000 $45,000.000 $25,000.000

Allocation of
Maintenance
Dept. costs
($19,193.481)

($19,193.481)


1,476.422
a



11,811.372
b



5,905.686
c


Allocation of
Grounds
Dept. costs
($15,515.274)

1,224.890
d


(15,515.274)

6,124.450
e


8,165.934
f

$62,936.000 $39,072.000

round-off errors


a
$19, .
,
,
193 481
1 500
19 500

d
$15, .
,
,
515 274
3 000
38 000


b
$19, .
,
,
193 481
12 000
19 500

e
$15, .
,
,
515 274
15 000
38 000


c
$19, .
,
,
193 481
6 000
19 500

f
$15, .
,
,
515 274
20 000
38 000


M G
G M
= +
= +
$18,
,
,
$14,
,
,
000
1500
19 500
000
3 000
38 500


Therefore,


M M
M
M
G
= + +
F
H
G
I
K
J
=
=
= +
=
$18,
,
,
$14,
,
,
. $19, .
$19, .
$14,
,
,
, .
$15, .
000
1500
19 500
000
3 000
38 000
0 9939272 076923
193481
000
3 000
38 000
19 193481
515274

Chapter 3: Traditional Cost Management Systems
75
3-41 (a) Service Dept. Cost Allocation: Direct Method
Service Departments Production Departments
Maintenance Power Casting Assembly
Directly
identified
costs


$750,000


$450,000


$150,000


$110,000

Allocation of
Maint. Dept.
costs


(750,000)





500,000


250,000

Allocation of
Power Dept.
costs





(450,000)


250,000


200,000

$0 $0 $900,000 $560,000



Cost driver rate: Casting
machine hours
per machine hour
=
=
$900,
,
$11.
000
80 000
25



Cost driver rate: Assembly
direct labor hours
per direct labor hour
=
=
$560,
,
$9.
000
60 000
33



Maintenance: Casting
Assembly
=
+
R
S
T
U
V
W
=
=
+
R
S
T
U
V
W
=
750 000
80 000
80 000 40 000
500 000
750 000
40 000
80 000 40 000
250 000
,
,
, ,
,
,
,
, ,
,



Power: Casting
Assembly
=
+
R
S
T
U
V
W
=
=
+
R
S
T
U
V
W
=
450 000
200 000
200 000 160 000
250 000
450 000
160 000
200 000 160 000
200 000
,
,
, ,
,
,
,
, ,
,

Atkinson, Solution Manual t/a Management Accounting, 4E
76

Direct labor and material costs $32.000

Support costs:


Casting (1 $11.25)
$11.250


Assembly (0.5 $9.33)
4.665 15.915

Unit cost $47.915

Number of units per month 1,000.000

Total manufacturing costs per month $47,915.000

Mark up (25%) $11,978.750

Bid price (per month) $59,893.750

(b) Service Dept. Cost Allocation: Sequential Method

Service Departments Production Departments
Maintenance Power Casting Assembly
Directly
identified
costs $750,000 $450,000 $150,000 $110,000

Allocation of
Maint. Dept.
costs

(750,000)

$300,000

300,000

150,000

Allocation of
Power Dept.
costs (750,000) 416,667 333,333

$0 $0 $866,667 $593,333

Cost driver rate: Casting =
=
$ ,
,
$ .
866 667
80 000
10 833 per machine hour


Cost driver rate: Assembly =
=
$ ,
,
$ .
593 333
60 000
9 889 per labor hour

Chapter 3: Traditional Cost Management Systems
77

Direct labor and material costs $32.000

Support costs:

Casting (1 $10.833) $10.833

Assembly (0.5 $9.889) 4.944 15.777

Unit cost $47.777

Number of units per month 1,000.000

Total manufacturing costs per month $47,777.000

Mark up (25%) $11,944.250

Bid price (per month) $59,721.250


(c) M P
P M
= +
= +
$750, .
$450, .
000 01
000 04


Therefore,


M M
M M
M
= + +
= +
=
$750, . , .
$795, .
. $795,
000 01 450 000 0 4
000 004
0 96 000
a f



M
P
= =
= + =
$795,
.
$828,
, . $828, $781,
000
096
125
450 000 04 125 250


Casting Assembly
Directly
identified
costs $150,000 $110,000

Allocation
of Maint.
Dept. costs $828,125 40% = $331,250 $828,125 20% = $165,625

Allocation
of Power
Dept. costs $781,250 50% = $390,625 $781,250 40% = $312,500

$871,875 $588,125

Atkinson, Solution Manual t/a Management Accounting, 4E
78
Cost driver rate: Casting =
=
$ ,
,
$ .
871 875
80 000
10 8984 per machine hour


Cost driver rate: Assembly =
=
$ ,
,
$ .
588 125
60 000
9 8021 per labor hour


Direct labor and material costs $32.0000

Support costs:

Casting (1 $10.8984) $10.8984

Assembly (0.5 $9.8021) 4.9011 15.7995

Unit cost $47.7995

Number of units per month 1,000.0000

Total manufacturing costs per month $47,799.5000

Mark up (25%) $11,978.7500

Bid price (per month) $59,749.3750


CASES

3-42 (a) Let salaries be denoted as follows: M = manager, S = senior
mechanic, and J = junior mechanic. The estimated total support costs
are:


( )
Personnel costs 1 4 4 Capacity-related costs
$75,000 (4 $65,000) (4 $45,000) $96,800
$611,800
M S J + + +
= + + +
=


Estimated total number of hours on customer jobs

= = 8 1750 95% 13 300 , , hours.

Therefore, the cost driver rate

hour per 46 $
hours 300 , 13
800 , 611 $
= =

Chapter 3: Traditional Cost Management Systems
79
Furthermore,
46
100
1 06 . 51 + =

x

so x = 11.

(b) Class A Repairs Class B Repairs
Estimated
total
conversion
costs
611800 60% 080 , $367, =

611800 40% 720 , $244, =



Estimated
total
hours on
customer
jobs

13 300
1
2
6 650 , , =

13 300
1
2
6 650 , , =

Support
cost
per
customer
job hour
367,080
6 650
20 per hou
,
$55. = r

244,720
6 650
80 per hou
,
$36. = r


Price per
hour $55. . $61. 2 111 27 = per hour

$36. . $40. 8 111 85 = per hour



(c) Job 101: 4 5 1 5 . . A B +
Job 102: 2B

(Note: A = Class A repair hours, B = Class B repair hours)

Under the present accounting system, costs charged to:

Job 101: 6 51 06 306 36 = . $ .
Job 102: 2 51 06 102 12 = . $ .

Under the proposed accounting system, costs charged to:

Job 101: 4 5 61 27 15 40 85 337 00 . . . . $ . + =
Job 102: 2 40 85 81 70 = . $ .

Atkinson, Solution Manual t/a Management Accounting, 4E
80
Therefore, under the present accounting system:

Job 101 is undercosted and underpriced.
Job 102 is overcosted and overpriced.

(d) Depending on competition for repairs, the proportion of Class B
repairs may increase and the proportion of Class A repairs may
decrease because of the price change.

(e) The current costing system is simple to administer and results in
pricing at a uniform labor rate (that includes coverage of support
costs). The proposed costing system more accurately reflects resource
usage, but is more complex to administer and to communicate to
customers in pricing.