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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
75
15. Activity-based product costing is an over- ties are those that are performed each time a
head costing approach that first assigns batch of products is produced. Product-level
costs to activities and then to products. The or sustaining activities are those that are
assignment is made possible through the performed as needed to support the various
identification of activities, their costs, and the products produced by a company. Facility-
use of cost drivers. level activities are those that sustain a facto-
ry’s general manufacturing process
16. An activity dictionary is a list of activities
accompanied by information that describes 20. Rates can be reduced by building a system
each activity (called attributes) that approximates the cost assignments of a
fully specified ABC system. One way to do
17. A primary activity is consumed by the final this is by using only the most expensive ac-
cost objects such as products and custom- tivities to assign costs. If the most expensive
ers, whereas secondary activities are con- activities represent a large percentage of the
sumed by other activities (ultimately con- total costs, then most of the costs are as-
sumed by primary activities). signed using a cause-and-effect relation-
18. Costs are assigned using direct tracing and ship, thus creating a good level of accuracy
resource drivers. while reducing the complexity of the ABC
system.
19. Unit-level activities are those that occur each
time a product is produced. Batch-level activi-
76
EXERCISES
4–1
1.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Units produced 400,000 160,000 80,000 560,000 1,200,000
Prime costs $8,000,000 $3,200,000 $1,600,000 $11,200,000 $24,000,000
Overhead costs $3,200,000 $2,400,000 $3,600,000 $2,800,000 $12,000,000
Unit cost:
Prime $20 $20 $20 $20 $20
Overhead 8 15 45 5 10
Total $28 $35 $65 $25 $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).
77
4–2
4. Predetermined rates allow the calculation of unit costs and avoid the prob-
lems of nonuniform overhead incurrence and nonuniform production asso-
ciated with actual overhead rates. Unit cost information is needed throughout
the year for a variety of managerial purposes.
4–3
4. Unit cost:
Prime costs $ 6,750,000
Overhead costs 4,387,500
Total $ 11,137,500
Units ÷ 750,000
Unit cost $ 14.85
78
4–4
4. Unit cost:
Prime costs $ 6,750,000
Overhead costs 4,509,000
Total $ 11,259,000
Units ÷ 750,000
Unit cost $ 15.01*
*Rounded
79
4–5
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:
Drilling Assembly Total
Actual overhead $602,000 $ 412,000 $ 1,014,000
Applied overhead 616,320 384,160 1,000,480
Overhead variance $ (14,320) over $ 27,840 under $13,520 under
80
4–6
1. Activity rates:
Machining = $632,000/300,000
= $2.11* per MHr
Inspection = $360,000/12,000
= $30 per inspection hour
*Rounded
4–7
1.
Scented Cards Regular Cards
Inspection hours 0.20a 0.80a
Setup hours 0.50b 0.50b
Machine hours 0.25c 0.75c
Number of moves 0.75d 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 ex-
ample, only machine hours to assign the overhead may create accuracy prob-
lems. Both setup hours and number of moves have markedly different consump-
tion ratios.
4–8
1. Rates:
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
4–9
1.
Normal Intensive
Treating patients:
$4.00 × 5,000 $ 20,000
$4.00 × 20,000 $ 80,000
Providing hygienic care:
$5.00 × 5,000 25,000
$5.00 × 11,000 55,000
Responding to requests:
$2.00 × 30,000 60,000
$2.00 × 50,000 100,000
Monitoring patients:
$0.75 × 20,000 15,000
$0.75 × 180,000 135,000
Cost Assigned $120,000 $370,000
Normal Intensive
$120,000/10,000 $12.00
$370,000/8,000 $46.25
4–10
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:
Elegant Fina
Machining 0.10 0.90 (500/5,000 and 4,500/5,000)
Setups 0.50 0.50 (100/200 and 100/200)
82
Fina: (1.75 × $3,000)/3,000 = $1.75 per briefcase
There are more machine and setup costs assigned to Elegant than Fina.
This is clearly a distortion because the production of Fina is automated
and uses the machine resources much more than the handcrafted Ele-
gant. In fact, the consumption ratio for machining is 0.10 and 0.90 (us-
ing machine hours as the measure of usage). Thus, Fina uses 9 times
the machining resources as Elegant. Setup costs are similarly dis-
torted. The products use an equal number of setup hours. Yet if direct
labor dollars are used, then the Elegant briefcase receives three times
more machining costs than the Fina briefcase.
83
4-11
1.
Resource Unloading Counting Inspecting
Equipment $12,000 $ 800
Fuel 2,400
Operating 1,000 500
Labor* 48,000 30,000 42,000
Total $63,400 $30,000 $43,300
2. Direct tracing and driver tracing are used. When the resource is used only by
one activity, then direct tracing is possible. When the activities are shared, as in
the case of labor, then resource drivers must be used.
4–12
Activity dictionary:
84
4–13
2.
Activity rates:
Receiving: $30,000/60,000 = $0.50 per part
Setup: $60,000/300 = $200 per setup
Grinding: $90,000/18,000 = $5 per MHr
Inspecting: $20,000/2,000 = $10 per inspection
Subassembly A Subassembly B
Overhead:
Setup:
$200 × 150 $ 30,000
$200 × 150 $ 30,000
Inspecting:
$10 × 1,500 15,000
$10 × 500 5,000
Grinding:
$5 × 7,200 36,000
$5 × 10,800 54,000
Receiving:
$0.50 × 20,000 10,000
$0.50 × 40,000 20,000
Total costs assigned $91,000 $109,000
Pool rates:
Setup = $80,000/300
= $266.67/setup
Grinding = $120,000/18,000
= $6.67/ Mhr
85
Approximating assignment:
Subassembly A Subassembly B
Setup:
$266.67 × 150 $40,000
$266.67 × 150 $ 40,000
Grinding:
$6.67 × 7,200 48,024
$6.67 × 10,800 72,036
Total costs assigned $88,024 $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.
4–14
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 = $ 40,000
Activity 2: $80 × 100 = 8,000
Activity 3: $30 × 400 = 12,000
Activity 4: $15 × 800 = 12,000
Total $ 72,000
Overhead assignment:
Infantry
Activity 1: $2 × 20,000 = $ 40,000
Activity 2*: $200 × 300 = 60,000
Activity 3: $30 × 200 = 6,000
Total $106,000
*Combined activities 2 and 4
Special forces
Activity 1: $2 × 20,000 = $ 40,000
Activity 2: $200× 100 = 20,000
Activity 3: $30 × 400 = 12,000
Total $ 72,000
The assignments are the same and this happens because the consump-
tion 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 allo-
cated 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:
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
The error is less than 10% for both products. Using machine hours
would have produce a rate of $178,000/40,000 = $4.45 per Mhr and an
assignment of $89,000 to each product ($4.45 × 20,000). The error for
the plantwide rate would be
Thus, the plantwide rate produces product costing errors that are more
than three times the magnitude of the approximately relevant ABC as-
signments. Clearly, the approximation produces a more reasonable and
useful outcome and is less complex than the full ABC system.
4–15
88
PROBLEMS
4–16
Stage 1:
Stage 2:
Overhead applied:
Backpacks: $1.50 × 40,000* = $60,000
Duffel bags: $1.50 × 40,000 = $60,000
*80,000 transactions/2 = 40,000 (number of transactions had
doubled)
Unit cost:
Backpacks: $60,000/100,000 = $0.60 per unit
Duffel bags: $60,000/25,000 = $2.40 per unit
89
Unit cost computation:
Backpacks Duffel Bags
Patterns:
$4.80 × 0.1 $0.48
$4.80 × 0.4 $1.92
Finishing:
$3.60 × 0.2 0.72
$3.60 × 0.8 2.88
Total per unit $1.20 $4.80
4. 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 ap-
proach. The activity-based approach provides the same cost per unit as
the single-product setting. The functional-based approach used trans-
actions to allocate accounting costs to each producing department,
and this allocation probably reflects quite well the consumption of ac-
counting costs by each producing department. The problem is the
second-stage allocation. Direct labor hours do not capture the con-
sumption 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 as-
sign these costs to the two products.
4–17
90
2. Calculation of activity rates:
Overhead assignment:
Model A Model B
Setups
$3,600 × 40 $ 144,000
$3,600 × 60 $216,000
Inspections
$140 × 800 112,000
$140 × 1,200 168,000
Machining
$1.454 × 20,000 29,080
$1.454 × 200,000 290,800
Maintenance
$3.60 × 10,000 36,000
$3.60 × 90,000 ----- 324,000
Total overhead $321,080 $998,800
Units produced ÷ 30,000 ÷300,000
Overhead per unit $ 10.70 $ 3.33
3. Departmental rates:
4.
A common justification is that of using machine hours for machine-
intensive departments and labor hours for labor-intensive departments.
Using activity-based costs as the standard, we can say that departmen-
tal rates decreased the accuracy of the overhead cost assignment (over
91
the plantwide rate) for both products. Looking at Department 1, this de-
partment’s costs are assigned at a 17:1 ratio which overcosts B and
undercosts A in a big way. This raises some doubt about the conven-
tional wisdom regarding departmental rates.
4–18
92
4-18 (continued)
Unit cost:
Basic Deluxe
Prime costs $6,400,000 $6,400,000
Overhead:
Maintenance
$28.50 × 1,000 28,500
$28.50 × 3,000 85,500
Engineering
$20 × 1,500 30,000
$20 × 4,500 90,000
Material Handling
$30 × 1,200 36,000
$30 × 4,800 144,000
Setting up
$1,200 × 16 19,200
$1,200 × 64 76,800
Purchasing
$200 × 100 20,000
$200 × 200 40,000
Receiving
$53.33 × 250 13,333
$53.33 × 500 26,665
Paying Suppliers
$40 × 250 10,000
$40 × 500 20,000
Providing space
$2 × 5,000 10,000
$2 × 5,000 10,000
Total $6,567,033 $6,892,965
Units produced ÷ 40,000 ÷ 20,000
Unit cost (ABC) $ 164.18 $ 344.65
Unit cost (traditional) $ 168.25 $ 336.50
93
4-18 (continued)
4. Consumption ratios:
Maint. Eng. Mat. H. Setups Purch. Receiving Pay. Sup Space
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
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 driv-
er.
94
4-18 (concluded)
Note: The three activities are all product-level activities and have the
same consumption ratios: (0.33, 0.67)
4–19
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.
4–20
1. The total cost of care is $1,950,000 plus a $50,000 share of the cost of super-
vision [(25/150) × $300,000]. The cost of supervision is computed as follows:
Salary of supervisor (direct) $ 70,000
Salary of secretary (direct) 22,000
Capital costs (direct) 100,000
Assistants (3 × 0.75 × $48,000) 108,000
Total $ 300,000
(The total cost of care divided by patient days.) Notice that every maternity
patient—regardless of type—would pay the daily rate of $200.
2. 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):
Next, calculate the activity rates for the two primary activities:
Occupancy and feeding: $1,000,000/10,000 = $100 per patient day
Nursing care: $1,000,000/50,000 = $20 per nursing hour
96
4–20 Concluded
3. 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 information—specifically, the amount of pounds of laun-
dry caused by each patient type. The activity approach will increase the accu-
racy 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
4–21
1. Activity classification:
Unit-level: Machining
Batch-level: Material handling, setups, inspection, and receiving
Product-level: Maintenance and engineering
Facility-level: None
98
4–21 Concluded
Batch-level activities:
Pool 2:
$1,950 × 60 117,000
$1,950 × 20 39,000
Pool 3:
$25 × 2,000 50,000
$25 × 4,000 100,000
Product-level activities:
Pool 4:
$30 × 4,000 120,000
$30 × 2,000 60,000
Total overhead costs $ 332,000 $ 244,000
Units produced ÷ 100,000 ÷ 200,000
Overhead cost per unit $ 3.32 $ 1.22
99
4–22
100
4–22 Continued
Overhead assignment:
X-12 S-15
Setup costs:
$800 × 100 $ 80,000
$800 × 200 $ 160,000
Machine costs:
$9.46 × 125,000 1,182,500
$9.46 × 60,000 567,600
Receiving costs:
$1,500 × 400 600,000
$1,500 × 1,000 1,500,000
Engineering costs:
$200 × 5,000 1,000,000
$200 × 5,000 1,000,000
Material-handling costs:
$1,000 × 500 500,000
$1,000 × 400 400,000
Total overhead costs $ 3,362,500 $ 3,627,600
Units produced ÷ 1,000,000 ÷ 200,000
Overhead cost per kg $ 3.36 $ 18.14
Prime cost per kg 4.27 3.13
Unit cost $ 7.63 $ 21.27
Selling price $ 15.93 $ 12.00
Less unit cost 7.63 21.27
Unit gross margin $ 8.30 $ (9.27)
101
4–22 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 ex-
plains 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.
4–23
1. Activity rates:
Model A Model B
Testing products:
$840 × 200 $168,000
$840 × 100 $ 84,000
Purchasing materials:
$20 × 600 12,000
$20 × 1,200 24,000
Machining:
$12 × 12,000 144,000
$12 × 9,000 108,000
Receiving:
$24 × 750 18,000
$24 × 1,750 42,000
Total OH assigned $342,000 $258,000
102
2. New cost pools:
Model A Model B
Testing products:
$1,000 × 200 $200,000
$1,000 × 100 $100,000
Machining:
$14.29 × 12,000 171,480
$14.29 × 9,000 128,610
Total OH assigned $371,480 $228,610
3. Percentage error:
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 plant-
wide assignment of $180,000, producing an error of more than 47%—an error al-
most 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 rea-
sonably close to the more accurate ABC cost. It also avoids the data collection
costs of the bigger system.
103
4–24
1.
Welding $2,000,000
Machining 1,000,000
Setups 400,000
Total $3,400,000
2.
Allocation:
Cost pools:
Activity rates:
Overhead assignment:
Subassembly A Subassembly B
Rate 1:
$588 × 1,600 welding hours $ 940,800
$588 × 2,400 welding hours $1,411,200
Rate 2:
$118 × 3,000 machine hours 354,000
$118 × 7,000 machine hours 826,000
Rate 3:
104
$4,706 × 45 batches 211,770
$4,706 × 55 batches 258,830
Total overhead costs $1,506,570 $2,496,030
Units produced ÷ 1,500 ÷ 3,000
Overhead per unit $ 1,004 $ 832
3. Percentage error:
The error is at most 10%. The simplification is simple and easy to implement.
Most of the costs (85%) are assigned accurately. Only three rates are used to as-
sign the costs, representing a significant reduction in complexity.
105
MANAGERIAL DECISION CASES
4–25
1. Shipping and warehousing costs are currently assigned using tons of paper
produced, a unit-based measure. Many of these costs, however, are not dri-
ven 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 assign-
ments: 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 = $1,100,000/56,000 tons
= $19.64 per ton processed*
Pool rate, shipping costs:
Shipping cost per shipping item = $2,300,000/190,000
= $12.11 per shipping item*
Pool rate, carrying cost (an opportunity cost):
Carrying cost per year (LLHC) = 25 × $1,665 × 0.16
= $6,660
Carrying cost per ton sold = $6,660/10 = $666
Shipping and warehousing cost per ton sold:
Receiving $ 19.64
Shipping ($12.11 × 7) 84.77
Carrying 666.00
Total $770.41
*Rounded
106
4–25 Continued
3. Profit analysis:
Revised profit per ton (LLHC):
Selling price $ 2,400.00
Less manufacturing cost 1,665.00
Gross profit $ 735.00
Less shipping and warehousing 770.41
Loss $ (35.41)
Original profit per ton:
Selling price $ 2,400.00
Less manufacturing costs 1,665.00
Gross profit $ 735.00
Less shipping and warehousing 30.00
Profit $ 705.00
The revised profit, reflecting a more accurate assignment of shipping and wa-
rehousing 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.
107
4–25 Concluded
4–26
2. and 3.
At first glance, it may seem strange to even ask if Chuck’s behavior is unethi-
cal. After all, what is unethical about expressing an opinion, albeit unin-
formed? While offering uninformed opinions or recommendations may be of
little consequence in many settings, a serious issue arises when a person’s
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 Chuck’s setting, and his behavior may be labeled
professionally unethical.
Chuck’s 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 ac-
countants have a responsibility to continually develop their knowledge and
skills. Failure to do so is unethical.
RESEARCH ASSIGNMENT
4–27
108