MBA 620 Week 2 Homework ANSWER SHEET:

1. Burns Company incurred costs for the following items.

 Salary of chief financial officer
 Factory insurance
 Salary for salespeople
 Raw materials used in production easily traced to the product
 Insurance for headquarters building
 Production line workers’ wages
a. Indicate whether each item should be categorized as a product or period cost.
b. Indicate whether each item should be categorized as direct materials, direct labor,
manufacturing overhead, selling, or general and administrative.

ANSWER: See on the right, A & B.

Items Answer to Question Answer to Question B

A
Salary of chief financial officer Period Cost General and Administrative

Factory insurance Product Cost Manufacturing Overhead

Salary for salespeople Period Cost Selling

Raw materials used in Product Cost Direct Materials

production easily traced to the
product

Insurance for headquarters Product Cost General and Administrative

building

Production line workers’ wages Product Cost Direct Labor

2. Indicate whether each of the firms listed in the following would use job costing or process
costing.

ANSWER on the Right Side:

a. Oil refinery Process costing

b. Builder of pools Job Costing
c. Cereal producer Process Costing
d. Legal firm Job Costing
3. Manufacturing overhead costs totaling $1,000,000 are expected for this coming year. The
company also expects to use 20,000 in direct labor hours. Calculate the predetermined
overhead rate and provide a one-sentence description of how the rate will be used in a job
costing system.

ANSWER:
Estimated overhead cost
Equation: Predetermined Overhead Rate = ------------------------------------
Estimated activity in allocation base

$1,000,000
Predetermined Overhead Rate = ------------------------------------
20,0000
= $50 per direct labor hour

In summary, for the coming year there will be a $50 estimated overhead cost for every
direct labor charged for the job.

4. Classic Boats, Inc., produces custom wood boats. Each boat is built to customer
specifications. During April, its first month of operations, Classic Boats began production of
a customer order. This order used $38,800 in direct materials and $7,400 in direct labor.
Classic Boats applies overhead using a predetermined rate of $1.60 per direct labor dollar.
The customer order was delivered and billed at $70,000.
a. Calculate the production cost incurred in April for this custom order.
Production cost = Direct materials + Direct labor + Mfg. Overhead *Mfg. OH = $1.60
x $7,400
Production Cost = $38,800 + $7,400 + $11,840
ANSWER: Production cost = $58,040

b. How much gross profit did Classic Boats earn from this custom order?
Gross Profit = Cost – Revenue
Gross Profit = $70,000 - $58,040
ANSWER: Gross Profit = $ 11,960

c. Assume selling costs totaled $2,000 and general and administrative costs totaled $5,500.
Prepare an income statement for Classic Boats for the month of April. (Assume there is
no adjustment to cost of goods sold for underapplied or overapplied overhead.)
 ANSWER:
CLASSIC BOATS, INC.
INCOME STATEMENT
Month end April

SALES $70,000
COST OF GOODS SOLD 58,040
GROSS PROFIT $11,960
LESS OPERATING EXPENSES:
SELLING 2,000
ADMINISTRATIVE COST 5,500
OPERATING PROFIT $4,460

5. Olympia Company incurred actual manufacturing overhead costs of $630,000 during the year
ended December 31, 2012. A total of $570,000 in overhead was applied to jobs. At
December 31, 2012, work-in-process inventory totals $200,000, and finished goods inventory
totals $400,000. Cost of goods sold before adjustments totals $1,400,000 for the year. Is
overhead underapplied or overapplied? By how much?

ANSWER: Underapplied, by $60,000

6. Ehrman Company identified the activities listed in the following as being most important
(step 1 and step 2 of activity-based costing), and it formed cost pools for each activity.
Perform step 3 of the activity-based costing process by identifying a possible cost driver for
each activity.

ANSWER:
ACTIVITY COST DRIVER
Purchasing raw materials Purchase requisitions
Maintaining production equipment Maintenance requisitions
Setting up machines to produce batches of Machine setups
product
Testing finished products Testing hours

7. Novak Corporation manufactures custom-made kayaks and accessories. The company

performs the following activities. Label each activity as value-added or non-value-added.
ACTIVITY ANSWER
Assembling kayaks Value-added
Waiting for materials to arrive to continue production Non-value added
Painting kayaks Value-added
 Designing kayaks to maximize comfort Non-value added

8. Hodges and Associates is a small firm that provides structural engineering services for its
clients. The company performs structural engineering services for both residential and
commercial buildings. Last year, total overhead costs of $330,000 were allocated based on
direct labor costs. A total of $300,000 in direct labor costs were incurred in the following
areas: $120,000 in the residential segment and $180,000 in the commercial segment. Direct
materials used were negligible and are included in overhead costs. Sales revenue totaled
$450,000 for residential services and $330,000 for commercial services.
The management of Hodges and Associates would like to use activity-based costing to
allocate overhead rather than a plantwide rate based on direct labor costs. The following
estimates are for the activities and related cost drivers identified as having the greatest impact
on overhead costs.

a. Using the plantwide allocation method, calculate the total cost and the profit for each
product. (Hint: Don’t forget to include all types of product costs in your total cost
calculation, similar to #4a above. Product costs for this service company include
direct labor and overhead.)
ANSWER:
Commercial Residential

Direct labor cost $180,000 $120,000

Overhead cost 330,000 330,000

Total cost: $510,000 $450,000

Commercial Residential

Sales Revenue $330,000 $450,000

Total Cost 510,000 450,000

Profit $-180,000 $0
 b. Using activity-based costing, calculate the predetermined overhead rate for each
activity. (Hint: Step 1 through step 3 in the activity-based costing process have
already been done for you; this is step 4.) Round results to the nearest cent.
c.
ANSWER:
Activity Cost Driver (a) Estimat (b) Estimat Predetermined
ed ed Cost Overhead
Overhe Driver
ad Cost Activity
Scheduling and data Direct Labor hours $100,000 8,000 $12.50 per
entry labor hours
Computer Number of computer 70,000 20,000 3.5 per
Maintenance hours computer hour
Processing Permits Number of applications 160,000 800 200 per
applications applications
Total: $1,050,000

d. Using activity-based costing, calculate the amount of overhead assigned to each

product. (Hint: This is step 5 in the activity-based costing process.)
ANSWER: Commercial Residential
Activity Predetermined Cost Overhead Cost Driver Overhead
overhead Driver Allocated activity Allocated
activity
Scheduling and $12.50 per labor 3,500 43,750 4,500 56,250
data entry hours
Computer 3.50 per 12,000 42,000 8,000 28,000
Maintenance computer hour
Processing 200 per 400 80,000 400 80,000
Permits applications
applications
Total overhead $165,750 164,250
cost allocated
Total Companywide overhead cost $330,000

Overhead cost per unit each product $414.38 $410.63

e. Using activity-based costing, calculate the total cost and the profit for each product.
(see the hint from part a)
ANSWER: TOTAL COST

Commercial Residential

Direct labor cost $180,000 $120,000

Overhead cost 165,750 164,250

Total cost $345,750 $284,250

ANSWER: PROFIT
Commercial Residential

Sales Revenue $330,000 $450,000

Total Cost 345,750 284,250
$-15,750 $165,750
Profit

f. What caused the shift of overhead costs to the residential product using activity-based
costing? How might management use this information to make improvements within
the company?
ANSWER:
Based on answer B, the shift was caused by the (A) Activity: scheduling and data
entry per labor hours. 
The management can make a better decision if the information provided is accurate.
Also, the ABC system helps to identify the activities that can be improved that might
lead to better production and reduced cost.