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Solution Manual Managerial Accounting Hansen Mowen 8th Editions CH 4 PDF
Solution Manual Managerial Accounting Hansen Mowen 8th Editions CH 4 PDF
9. If some products are undercosted and others are overcosted, a firm can make a number of competitively bad decisions. For example, the firm might select the wrong
product mix or submit distorted bids.
3. An actual overhead rate is rarely used because of problems with accuracy and timeliness. Waiting until the end of the year to ensure accuracy is rejected because of the
need to have timely information. Timeliness
of information based on actual overhead
costs runs into difficulty (accuracy problems)
because overhead is incurred nonuniformly
and because production also may be nonuniform.
4. For plantwide rates, overhead is first collected in a plantwide pool, using direct tracing. Next, an overhead rate is computed and
used to assign overhead to products.
5. First stage: Overhead is assigned to production department pools using direct tracing,
driver tracing, and allocation. Second stage:
Individual departmental rates are used to
assign overhead to products as they pass
through the departments.
10.
11.
Product diversity is present whenever products have different consumption ratios for
different overhead activities.
12.
13.
14.
75
15. Activity-based product costing is an overhead costing approach that first assigns
costs to activities and then to products. The
assignment is made possible through the
identification of activities, their costs, and the
use of cost drivers.
16. An activity dictionary is a list of activities
accompanied by information that describes
each activity (called attributes)
76
EXERCISES
41
1.
Units produced
Prime costs
Overhead costs
Unit cost:
Prime
Overhead
Total
$20
15
$35
$20
45
$65
$20
5
$25
$20
10
$30
2.
Actual costing can produce wide swings in the overhead cost per unit. The
cause appears to be nonuniform incurrence of overhead and nonuniform
production (seasonal production is a possibility).
3.
77
42
1.
2.
3.
Applied overhead
Actual overhead
Overrapplied overhead
4.
Predetermined rates allow the calculation of unit costs and avoid the problems of nonuniform overhead incurrence and nonuniform production associated with actual overhead rates. Unit cost information is needed throughout
the year for a variety of managerial purposes.
$ 27,300,000
27,200,000
$ 100,000
43
1.
2.
3.
Applied overhead
Actual overhead
Underapplied overhead
4.
Unit cost:
Prime costs
Overhead costs
Total
Units
Unit cost
$ 4,387,500
4,466,250
$ (78,750)
$ 6,750,000
4,387,500
$ 11,137,500
750,000
$
14.85
78
44
1.
2.
3.
Applied overhead
Actual overhead
Overapplied overhead
4.
Unit cost:
Prime costs
Overhead costs
Total
Units
Unit cost
$ 4,509,000
4,466,250
$
42,750
$ 6,750,000
4,509,000
$ 11,259,000
750,000
$
15.01*
*Rounded
5.
79
45
1.
Predetermined rates:
Drilling Department:
Rate = $600,000/280,000 = $2.14* per MHr
Assembly Department: Rate = $392,000/200,000
= $1.96 per DLH
*Rounded
2.
Applied overhead:
Drilling Department: $2.14 288,000 = $616,320
Assembly Department: $1.96 196,000 = $384,160
Overhead variances:
Actual overhead
Applied overhead
Overhead variance
3.
Drilling
$602,000
616,320
$ (14,320) over
Assembly
$ 412,000
384,160
$ 27,840 under
80
Total
$ 1,014,000
1,000,480
$13,520 under
46
1.
Activity rates:
Machining = $632,000/300,000
= $2.11* per MHr
Inspection = $360,000/12,000
= $30 per inspection hour
*Rounded
Unit overhead cost = [($2.11 4,000) + ($30 800)]/8,000
= $32,440/8,000
= $4.055
2.
47
1.
Inspection hours
Setup hours
Machine hours
Number of moves
Scented Cards
0.20a
0.50b
0.25c
0.75d
Regular Cards
0.80a
0.50b
0.75c
0.25d
a.
Total inspection hours = 200 (40+160); 40/200 for Scented and 160/200 for Regular
b.
Total Setup hours = 100 (50+50); 50/100 for Scented and 50/100 for Regular
c.
Total Machine hours = 800 (200+600); 200/800 for Scented and 600/800 for Regular
d.
Total Number of moves = 300 (225+75); 225/300 for Scented and 75/300 for Regular
2. The consumption ratios vary significantly from driver to driver. Using, for example, only machine hours to assign the overhead may create accuracy problems. Both setup hours and number of moves have markedly different consumption ratios.
48
1. Rates:
Inspecting products: $2,000/200 = $10 per inspection hour
Setting up equipment: $2,500/100 = $25 per setup hour
Machining: $4,000/800 = $5 per machine hour
Moving materials: $900/300 = $3.00 per move
Note: The denominator is the total driver amount (sum of the demand of the two
products).
81
2.
Rate = Cost/hours
Inspection hours = Cost/Rate = $2,000/$20 = 100 inspection hours
49
1.
Normal
Treating patients:
$4.00 5,000
$4.00 20,000
Providing hygienic care:
$5.00 5,000
$5.00 11,000
Responding to requests:
$2.00 30,000
$2.00 50,000
Monitoring patients:
$0.75 20,000
$0.75 180,000
Cost Assigned
Intensive
$ 20,000
$ 80,000
25,000
55,000
60,000
100,000
15,000
135,000
$370,000
$120,000
Normal
$12.00
Intensive
$46.25
410
1. Yes. Because direct materials and direct labor are directly traceable to
each product, their cost assignment should be accurate.
2. The consumption ratios for each (using machine hours and setup hours
as the activity drivers) are as follows:
Machining
Setups
3.
Elegant
0.10
0.50
Fina
0.90 (500/5,000 and 4,500/5,000)
0.50 (100/200 and 100/200)
Fina:
Elegant
$ 1,800
Fina
$16,200
1,500
$ 3,300
3,000
$ 1.10
83
1,500
$17,700
3,000
$ 5.90
4-11
1.
Resource
Equipment
Fuel
Operating
Labor*
Total
412
Activity dictionary:
Activity
Name
Activity
Description
Primary/
Secondary
Activity
Driver
Providing nursing
care
Satisfying patient
needs
Primary
Nursing hours
Supervising
nurses
Coordinating
nursing activities
Secondary
Number of nurses
Feeding patients
Providing meals
to patients
Primary
Number of meals
Laundering
bedding and
clothes
Cleaning and
delivering clothes
and bedding
Primary
Pounds of laundry
Providing
physical
therapy
Therapy treatments
directed by
physician
Primary
Hours of therapy
Monitoring
patients
Using equipment to
monitor patient
conditions
Primary
Monitoring hours
84
413
1.
$20,000
10,000
$30,000
2.
Activity rates:
Receiving:
Setup:
Grinding:
Inspecting:
Overhead:
Setup:
$200 150
$200 150
Inspecting:
$10 1,500
$10 500
Grinding:
$5 7,200
$5 10,800
Receiving:
$0.50 20,000
$0.50 40,000
Total costs assigned
3.
Subassembly B
$ 30,000
$ 30,000
15,000
5,000
36,000
54,000
10,000
$91,000
20,000
$109,000
85
Approximating assignment:
Subassembly A
Setup:
$266.67 150
$266.67 150
Grinding:
$6.67 7,200
$6.67 10,800
Total costs assigned
4.
Subassembly B
$40,000
$ 40,000
48,024
$88,024
72,036
$112,036
The error is small and so the approach may be desirable as it reduces the
complexity and size of the system, making it more likely to be accepted by
management.
414
1.
Unit-level activities:
Batch-level activities:
Product-level activities:
Facility-level activities:
Machining
Setups and packing
Receiving
None
2.
Activity rates:
(1) Machining: $80,000/40,000 = $2 per MHr
(2) Setups: $32,000/400 = $80 per setup
(3) Receiving: $18,000/600 = $30 per receiving order
(4) Packing: $48,000/3,200 = $15 per packing order
Overhead assignment:
Infantry
Activity 1: $2 20,000 = $ 40,000
Activity 2: $80 300 =
24,000
Activity 3: $30 200 =
6,000
Activity 4: $15 2,400 =
36,000
Total
$106,000
86
Special forces
Activity 1: $2 20,000 =
Activity 2: $80 100 =
Activity 3: $30 400 =
Activity 4: $15 800 =
Total
$ 40,000
8,000
12,000
12,000
$ 72,000
$ 40,000
20,000
12,000
$ 72,000
The assignments are the same and this happens because the consumption ratios of activities 2 and 4 are identical. Thus, rate reduction can
occur by combining all activities with identical rates.
3. The two most expensive activities are the first and the combined 2 and 4
activities. Each has $80,000 of cost. Thus if the cost of activity 3 is allocated in proportion to the cost, each of the expensive activities would
receive 50% of the $18,000 or $9,000. This yields the following pool
rates:
Activity (pool 1) 1: ($80,000 + $9,000)/40,000 = $2.225 per machine hour
Activities 2 and 4 (pool 2): ($80,000 + $9,000)/400 = $222.50 per setup
87
Overhead assignment:
Infantry
Pool 1: $2.225 20,000 = $ 44,500
Pool 2: $222.50 300 =
66,750
Total
$111,250
Special forces
Pool 1: $2.225 20,000 = $ 44,500
Pool 2: $222.5 100 =
22,250
Total
$ 66,750
415
1.
Unit-level:
2.
Batch-level:
3.
4.
Facility-level:
88
PROBLEMS
416
1.
2.
3.
89
4.
Duffel Bags
$0.48
$1.92
0.72
2.88
$1.20
$4.80
This problem allows us to see what the accounting cost per unit should
be by providing the ability to calculate the cost with and without the
duffel bags. With this perspective, it becomes easy to see the benefits
of the activity-based approach over those of the functional-based approach. The activity-based approach provides the same cost per unit as
the single-product setting. The functional-based approach used transactions to allocate accounting costs to each producing department,
and this allocation probably reflects quite well the consumption of accounting costs by each producing department. The problem is the
second-stage allocation. Direct labor hours do not capture the consumption pattern of the individual products as they pass through the
departments. The distortion occurs, not in using transactions to assign
accounting costs to departments, but in using direct labor hours to assign these costs to the two products.
In a single-product environment, ABC offers no improvement in product-costing accuracy. However, even in a single-product environment,
it may be possible to increase the accuracy of cost assignments to other cost objects such as customers.
417
1. Plantwide rate = $1,320,000/440,000 = $3.00 per DLH
Overhead cost per unit:
Model A: $3.00 140,000/30,000 = $14.00
Model B: $3.00 300,000/300,000 = $3.00
90
Driver
Prod. runs
Insp. hours
Mach. Hours
Maint. hours
Activity Rate
$360,000/100 = $3,600 per run
$280,000/2,000 = $140 per hour
$320,000/220,000 = $1.454 per hr
$360,000/100,000 =$3.60 per hr
Overhead assignment:
Model A
Setups
$3,600 40
$3,600 60
Inspections
Model B
$ 144,000
$216,000
$140 800
112,000
$140 1,200
Machining
$1.454 20,000
$1.454 200,000
Maintenance
$3.60 10,000
$3.60 90,000
Total overhead
Units produced
Overhead per unit
3.
168,000
29,080
290,800
36,000
----$321,080
30,000
324,000
$998,800
300,000
10.70
3.33
Departmental rates:
Overhead cost per unit:
Model A: [($4.66 10,000) + ($1.20 130,000)]/30,000 = $6.76
Model B: [($4.66 170,000) + ($1.20 270,000)]/300,000 = $3.72
4.
A common justification is that of using machine hours for machineintensive departments and labor hours for labor-intensive departments.
Using activity-based costs as the standard, we can say that departmental rates decreased the accuracy of the overhead cost assignment (over
91
the plantwide rate) for both products. Looking at Department 1, this departments costs are assigned at a 17:1 ratio which overcosts B and
undercosts A in a big way. This raises some doubt about the conventional wisdom regarding departmental rates.
418
1.
2.
3.
Deluxe
$320.00
16.50
$336.50
Activity rates:
Maintenance
Engineering
Material handling
Setting up
Purchasing
Receiving
Paying suppliers
Providing space
92
4-18 (continued)
Unit cost:
Prime costs
Overhead:
Maintenance
$28.50 1,000
$28.50 3,000
Engineering
$20 1,500
$20 4,500
Material Handling
$30 1,200
$30 4,800
Setting up
$1,200 16
$1,200 64
Purchasing
$200 100
$200 200
Receiving
$53.33 250
$53.33 500
Paying Suppliers
$40 250
$40 500
Providing space
$2 5,000
$2 5,000
Total
Units produced
Unit cost (ABC)
Unit cost (traditional)
Basic
$6,400,000
Deluxe
$6,400,000
28,500
85,500
30,000
90,000
36,000
144,000
19,200
76,800
20,000
40,000
13,333
26,665
10,000
20,000
10,000
$6,567,033
40,000
$
164.18
$
168.25
10,000
$6,892,965
20,000
$ 344.65
$ 336.50
The ABC costs are more accurate (better tracingcloser representation of actual resource consumption). This shows that the basic model
was overcosted and the deluxe model undercosted when the plantwide
overhead rate was used.
93
4-18 (continued)
4. Consumption ratios:
Maint. Eng. Mat. H. Setups Purch. Receiving Pay. Sup Space
5.
Basic 0.25
0.25
0.20
0.20
0.33
0.33
0.33
0.50
Delux 0.75
0.75
0.80
0.80
0.67
0.67
0.67
0.50
When products consume activities in the same proportion, the activities with the same proportions can be combined into one pool. This is
so because the pooled costs will be assigned in the same proportion as
the individual activity costs.
Using these consumption ratios as a
guide, we create four pools, reducing the number of rates from 8 to 4.
Pool 1:
Maintenance
Engineering
Total
Maintenance hours
Pool rate
$114,000
120,000
$234,000
4,000
$ 58.50
$180,000
96,000
$276,000
6,000
$
46
Note: Material handling and setups have the same consumption ratios:
(0.20, 0.80). The number of setups could also be used as the pool driver.
94
4-18 (concluded)
Pool 4: Purchasing
Receiving
Paying suppliers
Total
Orders processed
Pool rate
$ 60,000
40,000
30,000
$130,000
750
$ 173.33
Note: The three activities are all product-level activities and have the
same consumption ratios: (0.33, 0.67)
Pool 5: Providing space
Machine hours
Pool rate
$ 20,000
10,000
$
2
$ 2,400,000
1,600,000
800,000
400,000
$ 5,200,000
2.
$ 3,600,000
1,600,000
800,000
400,000
$ 6,400,000
The unit-based costs increase because these costs vary with the number of
units produced. Because the batches and engineering orders did not change,
the batch-level costs and product-level costs remain the same, behaving as
fixed costs with respect to the unit-based driver. The facility-level costs are
fixed costs and do not vary with any driver.
3.
$ 3,600,000
2,400,000
960,000
400,000
$ 7,360,000
95
Batch-level costs increase as the number of batches changes, and the costs
of engineering support change as the number of orders change. Thus,
batches and orders increased, increasing the total cost of the model.
4.
420
1.
The total cost of care is $1,950,000 plus a $50,000 share of the cost of supervision [(25/150) $300,000]. The cost of supervision is computed as follows:
Salary of supervisor (direct)
Salary of secretary (direct)
Capital costs (direct)
Assistants (3 0.75 $48,000)
Total
$ 70,000
22,000
100,000
108,000
$ 300,000
First, the cost of the secondary activity (supervision) must be assigned to the
primary activities (various nursing care activities) that consume it (the driver
is the number of nurses):
Maternity nursing care assignment:
(25/150) $300,000 = $50,000
Thus, the total cost of nursing care is $950,000 + $50,000 = $1,000,000.
Next, calculate the activity rates for the two primary activities:
Occupancy and feeding:
Nursing care:
96
420
Concluded
Daily Rate*
$150
225
500
The Laundry Department cost would increase the total cost of the Maternity
Department by $100,000 [(200,000/1,000,000) $500,000]. This would increase
the cost per patient day by $10 ($100,000/10,000). The activity approach would
need more detailed informationspecifically, the amount of pounds of laundry caused by each patient type. The activity approach will increase the accuracy of the cost assignment if patient types produce a disproportionate share
of laundry. For example, if patients with complications produce 40 percent of
the pounds with only 10 percent of the patient days, then the $10 charge per
day is not a fair assignment.
97
421
1.
Activity classification:
Unit-level:
Batch-level:
Product-level:
Facility-level:
2.
Machining
Material handling, setups, inspection, and receiving
Maintenance and engineering
None
80 setups*
Pool rate
$ 1,950 per setup
*Inspection hours could also be used.
Pool 3, consumption ratios: (0.33, 0.67):
Material handling
$ 120,000
Receiving
30,000
Total
$ 150,000
Activity driver
6,000 material moves
Pool rate
$
25 per move
Pool 4, consumption ratios: (0.67, 0.33):
Engineering
$ 100,000
Maintenance
80,000
Total
$ 180,000
Activity driver
6,000 maintenance hours*
Pool rate
$
30 per maintenance hour
*Number of engineering hours could also be used.
98
421
3.
Concluded
Large Clock
$ 45,000
$ 45,000
Batch-level activities:
Pool 2:
$1,950 60
$1,950 20
117,000
Pool 3:
$25 2,000
$25 4,000
50,000
39,000
100,000
Product-level activities:
Pool 4:
$30 4,000
$30 2,000
Total overhead costs
Units produced
Overhead cost per unit
120,000
$ 332,000
100,000
$
3.32
99
60,000
$ 244,000
200,000
$
1.22
422
1.
S-15
$ 12.00
6.02**
$ 5.98
X-12
$ 15.93
10.68*
$ 5.25
Pools
Setup
Machine
Receiving
Engineering
Material handling
Driver
Runs
Machine hrs.
Orders
Engineering hrs.
Moves
Pool Rate
$240,000/300 = $800 per run
$1,750,000/185,000 = $9.46/per MHr
$2,100,000/1,400 = $1,500/per order
$2,000,000/10,000 = $200/per eng. hour
$900,000/900 = $1,000/per move
100
422
Continued
Overhead assignment:
S-15
X-12
Setup costs:
$800 100
$800 200
Machine costs:
$9.46 125,000
$9.46 60,000
567,600
600,000
1,500,000
Engineering costs:
$200 5,000
$200 5,000
Selling price
Less unit cost
Unit gross margin
160,000
1,182,500
Receiving costs:
$1,500 400
$1,500 1,000
Material-handling costs:
$1,000 500
$1,000 400
Total overhead costs
Units produced
Overhead cost per kg
Prime cost per kg
Unit cost
80,000
1,000,000
1,000,000
500,000
$ 3,362,500
1,000,000
$
3.36
4.27
$
7.63
400,000
$ 3,627,600
200,000
$
18.14
3.13
$
21.27
15.93
7.63
8.30
101
12.00
21.27
(9.27)
422
Concluded
3.
No. The cost of making X-12 is $7.63, much less than the amount indicated by
functional-based costing. The company can compete by lowering its price on
the high-volume product. The $10 price offered by competitors is not out of
line. The concern about selling below cost is unfounded.
4.
The $12 price of compound S-15 is well below its cost of production. This explains why Pearson has no competition and why customers are willing to pay
$15, a price that is probably still way below competitors quotes.
5.
The price of X-12 should be lowered to a competitive level and the price of
S-15 increased so that a reasonable return is being earned.
423
1. Activity rates:
Testing products
Purchasing materials
Machining
Receiving
Model B
$168,000
$ 84,000
12,000
24,000
144,000
108,000
18,000
42,000
$342,000 $258,000
102
2.
Testing products:
$1,000 200
$1,000 100
Machining:
$14.29 12,000
$14.29 9,000
Total OH assigned
Model B
$200,000
$100,000
171,480
$371,480
128,610
$228,610
3. Percentage error:
Model A: ($371,480 $342,000)/$342,000 = 0.086 (8.6%)
Model B: ($228,610 $258,000)/$258,000 = 0.114 (11.4%)
The error is not bad and is certainly not in the range that is often seen when
comparing a plantwide rate assignment with the ABC costs. For example, if Model
A is expected to use 30% of the direct labor hours, then it would receive a plantwide assignment of $180,000, producing an error of more than 47%an error almost six times greater than the approximately relevant assignment. In this type of
situation, it may be better to go with two drivers to gain acceptance and get reasonably close to the more accurate ABC cost. It also avoids the data collection
costs of the bigger system.
103
424
1.
Welding
Machining
Setups
Total
$2,000,000
1,000,000
400,000
$3,400,000
Subassembly B
$ 940,800
$1,411,200
354,000
826,000
104
$4,706 45 batches
$4,706 55 batches
Total overhead costs
Units produced
Overhead per unit
3.
211,770
$1,506,570
1,500
$
1,004
258,830
$2,496,030
3,000
$
832
Percentage error:
105
Shipping and warehousing costs are currently assigned using tons of paper
produced, a unit-based measure. Many of these costs, however, are not driven by quantity produced. Many products have special handling and shipping
requirements involving extra costs. These costs should not be assigned to
those products that are shipped directly to customers.
2.
The new method proposes assigning the costs of shipping and warehousing
separately for the low-volume products. To do so requires three cost assignments: receiving, shipping, and carrying. The cost drivers for each cost are
tons processed, items shipped, and tons sold.
Pool rate, receiving costs:
Receiving cost/Tons processed
Pool rate, shipping costs:
Shipping cost per shipping item
= $1,100,000/56,000 tons
= $19.64 per ton processed*
= $2,300,000/190,000
= $12.11 per shipping item*
106
425
3.
Continued
Profit analysis:
Revised profit per ton (LLHC):
Selling price
Less manufacturing cost
Gross profit
Less shipping and warehousing
Loss
$ 2,400.00
1,665.00
$ 735.00
770.41
$ (35.41)
$ 2,400.00
1,665.00
$ 735.00
30.00
$ 705.00
The revised profit, reflecting a more accurate assignment of shipping and warehousing costs, presents a much different picture of LLHC. The product is,
in reality, losing money for the company. Its earlier apparent profitability was
attributable to a subsidy being received from the high-volume products (by
spreading the special shipping and handling costs over all products, using
tons produced as the cost driver). The same effect is also true for the other
low-volume products. Essentially, the system is understating the handling
costs for low-volume products and overstating the cost for high-volume
products.
4.
107
425
5.
Concluded
426
1.
2. and 3.
At first glance, it may seem strange to even ask if Chucks behavior is unethical. After all, what is unethical about expressing an opinion, albeit uninformed? While offering uninformed opinions or recommendations may be of
little consequence in many settings, a serious issue arises when a persons
expertise is relied upon by others to make decisions or take actions that
could be wrong or harmful to themselves or their organizations. This very
well may be the case for Chucks setting, and his behavior may be labeled
professionally unethical.
Chucks lack of knowledge about activity-based systems is a signal of his
failure to maintain his professional competence. Standard I-1 of the IMA
Statement of Ethical Professional Practice indicates that management accountants have a responsibility to continually develop their knowledge and
skills. Failure to do so is unethical.
RESEARCH ASSIGNMENT
427
Answers will vary.
108