EXERCISE 5-27

1. a. Quality-control costs assigned to the Satin Sheen line under the traditional system:

Quality-control costs = 14.5%  direct-labor cost

Quality-control
costs assigned to
Satin Sheen line = 14.5%  $27,500
= $3,988 (rounded)

b. Quality-control costs assigned to the Satin Sheen line under activity-based costing:

Quantity for Assigned

Activity Pool Rate Satin Sheen Cost
Incoming material inspection........... $11.50 per type...... 12 types......... $  138
In-process inspection....................... .14 per unit 17,500 units.... 2,450
Product certification......................... 77.00 per order..... 25 orders........ 1,925
Total quality-control costs assigned................................................................ $4,513

2. The traditional product-costing system undercosts the Satin Sheen product line, with respect to
quality-control costs, by $525 ($4,513 – $3,988).
PROBLEM 5-46

1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours

 = $800,000 ÷ 25,000* = $32 per direct labor hour

*25,000 budgeted direct-labor hours = (3,000 units of Standard)(3 hrs./unit) +

(4,000 units of Enhanced)(4 hrs./unit)

Standard Enhanced

Direct material……………. $ 25 $ 40
Direct labor:
3 hours x $12………… 36
4 hours x $12………… 48
Manufacturing overhead:
3 hours x $32………… 96
4 hours x $32………… 128
Total cost…………………. $157 $216

2. Activity-based overhead application rates:

Activity Cost Driver Application

Activity Cost Rate

Order $150,000 ÷ 500 orders = $300 per OP

processing processed (OP)

Machine 560,000 ÷ 40,000 machine = $14 per MH

processing hrs. (MH)

Product 90,000 ÷ 10,000 inspection = $9 per IH

inspection hrs. (IH)

Order processing, machine processing, and product inspection costs of a Standard unit and an
Enhanced unit:

Activity Standard Enhanced

Order processing:
300 OP x $300……………... $ 90,000
200 OP x $300……………... $ 60,000
Machine processing:
18,000 MH x $14…………... 252,000
22,000 MH x $14…………... 308,000
Product inspection:
2,000 IH x $9……………….. 18,000
8,000 IH x $9………………. 72,000
Total $360,000 $440,000
 Production volume (units) 3,000 4,000
Cost per unit $120* $110**

* $360,000 ÷ 3,000 units = $120

** $440,000 ÷ 4,000 units = $110

The manufactured cost of a Standard unit is $181, and the manufactured cost of an Enhanced unit is
$198:

Standard Enhanced

Direct material………………………………. $ 25 $ 40
Direct labor:
3 hours x $12…………………………… 36
4 hours x $12…………………………… 48
Order processing, machine processing,
and product inspection……………….. 120 110
Total cost……………………………………. $181 $198

3. a. The Enhanced product is overcosted by the traditional product-costing system. The labor-
hour application base resulted in a $216 unit cost; in contrast, the more accurate ABC
approach yielded a lower unit cost of $198. The opposite situation occurs with the Standard
product, which is undercosted by the traditional approach ($157 vs. $181 under ABC).
b. Yes, especially since the company’s selling prices are based heavily on cost. An overcosted
product will result in an inflated selling price, which could prove detrimental in a highly
competitive marketplace. Customers will be turned off and will go elsewhere, which hurts
profitability. With undercosted products, selling prices may be too low to adequately cover a
product’s more accurate (higher) cost. This situation is also troublesome and will result in a
lower income being reported for the company.
PROBLEM 5-52

1. Overhead to be assigned to medical-testing agent order:

Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $2,000 per setup  5 setups $10,000
Material handling $2 per pound  10,000 pounds 20,000
Hazardous waste control $5 per pound  2,000 pounds 10,000
Quality control $75 per inspection  10 inspections 750
Other overhead costs $10 per machine hour  500 machine hours   5,000
Total $45,750
2. Overhead cost per 45,750
= =$45 . 75 per box
box of agent 1,000 boxes

3. Predetermined
=
total budgeted overhead cost $625,000
overhead rate =
total budgeted machine hours 20,000
= $31.25 per machine hr.
4. Overhead to be assigned to medical-testing agent order, given a single predetermined
overhead rate:

a. Total overhead assigned = $31.25 per machine hr.  500 machine hr.
= $15,625

b. Overhead cost per $15,625

= =$15 . 625 per box
box of agent 1,000 boxes

5. The medical-testing agent production entails a relatively large number of machine setups, a
large amount of hazardous materials, and several inspections. Thus, it is quite costly in terms
of driving overhead costs. Use of a single predetermined overhead rate obscures this
characteristic of the production job. Underestimating the overhead cost per box could have
adverse consequences for the company. For example, it could lead to poor decisions about
product pricing. The activity-based costing system will serve management much better than
the system based on a single, predetermined overhead rate.

PROBLEM 5-53

1. Unit cost calculation:

(a) Overhead assigned to specially coated plates used in cancer testing:
 Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $2,000 per setup  3 setups $ 6,000
Material handling $2 per pound  900 pounds 1,800
Hazardous waste control $5 per pound  300 pounds 1,500
Quality control $75 per inspection  3 inspections 225
Other overhead costs $10 per machine hour  50 machine hours 500
Total $10,025

$10,025
Overhead cost per unit = =$100 .25
100 plates

(b) Unit cost per plate:

Direct material................................. $120.00

Direct labor...................................... 40.00
Manufacturing overhead..................  100.25
Total cost per plate.......................... $260.25