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acc 311- week3- 3-1 MyAccountingLab Homework -Chapter 5

1. Question 1, E5-19

Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity.
Under its current simple costing system, Hopkinton aggregates all operating costs of $1,200,000 into a
single overhead cost pool. Hopkinton calculates a rate per test-hour of $16 ($1,200,000 ÷ 75,000
total test-hours). HT uses 50,000 test-hours, and ST uses 25,000 test-hours. Gary O'Loughlin, Hopkinton
’s controller, believes that there is enough variation in test procedures and cost structures to establish
separate costing and billing rates for HT and ST. The market for test services is becoming competitive.
Without this information, any miscosting and mispricing of its services could cause Hopkinton to lose
business. O'Loughlin divides Hopkinton’s costs into four activity-cost categories.

Requirement 1. Classify each activity cost as output unit-level, batch-level, product- or service-

sustaining, or facility-sustaining. Explain each answer.
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Requirement 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these
numbers differ from the $16 per test-hour that calculated using its simple costing system.

Activity hours per test type × Activity rate = Cost per activity
Calculate the cost of each activity and the total cost of the heat testing and stress testing.

Equipment =450000/(25000+50000) = $6/ hour

Setup =425000/(12000+5000) = $25/ hour

Designing =270000/(2000+2500) = 60$ / hour

Stress Test (ST)

  Heat Test (HT)

 
Total Cost
  Total Cost

$30,000
Direct labor $75,000

150,000 = 6*25000
Equipment 300,000 = 6* 50000

125,000 = 25*5000
Setup 300,000 = 25* 12000

120,000 = 60*2000
Design 150,000 = 60 * 2500

$425,000
Total $825,000

The cost per test-hour for HT and ST differs from the cost per test-hour using the simple rate because:

HT is allocated a higher proportion of indirect costs because it uses more resources.

HT and ST use different amounts of overhead resources. The simple method does not take that
into account.
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Indirect costs are subdivided into 4 activity-cost categories to more accurately determine cost
drivers of indirect costs.
Requirement 3. Explain the accuracy of the product costs calculated using the simple costing system
and the ABC system. How might Hopkinton's management use the cost hierarchy and ABC information
to better manage its business?

The accuracy of the product costs will be higher with the ABC system instead of the simple costing
system. The ABC product costs will better reflect the utilization of indirect resources by both products.
Management can use the ABC costs to more accurately determine product costs.
The cost hierarchy enables management to more accurately determine the cost drivers of indirect costs.
2. Question 2, E5-20

Requirement 1. What amounts did WG bill to Sacramento Dominion and Dublin Enterprises for May
2017?
Determine the formula needed to calculate the total cost per professional for each client when WG
allocates support costs at 30% of direct professional costs.

Direct professional labor + ( Direct professional labor × Support allocation rate ) = Cost per
professional
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Complete the table below to determine the amounts that WG billed to Dominion and Enterprises for
May 2017. Begin with Dominion.

Matthew = $480 *24 h = $ 11520; 11520 * 30% = 3456

Same calculation for others

dominion dublin
hours DLabor Support total DLabor Support total
30% 30%
Matthew 24 11520 3456 14976 3 1440 432 1872
Waterston
480
Avery Bennet 5 850 255 1105 13 2210 663 2873
170
Jesper Alonso 36 3240 972 4212 49 4410 1323 5733
90
Total 65 20293 65 10478

Requirement 2. Determine the formula needed to calculate the total cost per professional for each client
when WG allocates support costs at $70 per professional labor-hour, (instead of 30% of professional
labor costs)
Direct professional labor +(Direct hrs. by professional × Support cost per hour ) = Cost per
professional
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dominion dublin

hours DL 70 total DL 70

Matthew Waterston 24 11520 1680 13200 3 1440 210 1650

480

Avery Bennet 5 850 350 1200 13 2210 910 3120

170

Jesper Alonso 36 3240 2520 5760 49 4410 3430 7840

90

Total 65 20160 65 12610

Both clients use the same amount of professional labor time. Sacramento Dominion uses a higher
proportion of Waterston's time, which is more costly. This attracts the highest support-services
charge when allocated on the basis of direct professional labor costs. 

Requirement 3. How would you determine whether professional labor costs or professional labor-hours is
the more appropriate allocation base for WG's support services?
In order to determine whether professional labor costs or professional labor-hours is the more appropriate
allocation base for support services, WG should
gather more information by conducting interviews with personnel and analyzing tasks undertaken for
certain clients.

3. E5-21

Wheeler Place (WP) designs and produces automotive parts. In 2017, actual manufacturing overhead
is $296,100. WP's simple costing system allocates manufacturing overhead to its three customers based
on machine-hours and prices its contracts based on full costs. One of its customers has regularly
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complained of being charged noncompetitive prices, so WP's controller Devon Smith realizes that it is
time to examine the consumption of overhead resources more closely. He knows that there are three
main departments that consume overhead resources: design, production, and engineering. Interviews
with the department personnel and examination of time records yield the following detailed information:

Requirement 1. Compute the manufacturing overhead allocated to each customer in 2017

using the simple costing system that uses machine-hours as the allocation base.

Calculate the overhead allocated to each customer using the simple costing method.

Requirement 2. Compute the manufacturing overhead allocated to each customer in 2017

using department-based manufacturing overhead rates.

Manufacturing overhead per Manufacturing overhead rate by

dept. ÷ Total hours per dept. = dept.
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Calculate the overhead allocated to each customer, by department, using the departmental manufacturing
overhead rates calculated in the previous step. Calculate the total overhead cost for each department and
each customer.

Requirement 3. Comment on your answers in requirements 1 and 2. Which customer do you think was
complaining about being overcharged in the simple system? If the new department-based rates are used
to price contracts, which customer(s) will be unhappy? How would you respond to these concerns?

Under the simple-costing system, Caufield was likely unhappy about their bill, because the
contract appears to have been overcosted If the new department-based rates are used to
price contracts,
Caufield will likely be happier about their bill.
If the new department-based rates are used to price contracts, United and Lowell will likely be
unhappy. This is because their bills under the simple-costing system appear to have been
undercosted
Using the department-based rates, their bills will be higher.
If the new department-based rates are used, WP should explain to the unhappy customers how
the calculation was done, and point out their high use of design and engineering resources
relative to production machine hours
Requirement 4. How else might WP use the information available from its department-by-department
analysis of manufacturing overhead costs? (Select all that apply.)
Other than for pricing, WP can also use the information from the department-based system
A. to provide incentives to professional staff.
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B. to reevaluate employee pay scales.

C. to set targets over time to reduce both the consumption of each indirect resource and the
unit costs of the resources.

D. to examine and streamline its own operations so that there is maximum value-added from all
indirect resources.

Requirement 5. WP's managers are wondering if they should further refine the department-by-
department costing system into an ABC system by identifying different activities within each department.
Under what conditions would it not be worthwhile to further refine the department costing system into an
ABC system?
A. If significant costs are incurred on different activities within a department, but each activity has
the same cost driver.
B. If there wasn't much variation among contracts in the consumption of activities within a
department.
C. If a single activity accounts for a sizable proportion of the department's costs.
D. All of the above.
4. Question 4, P5-31

Ellsbury Associates is a recently formed law partnership. Claire Halloway, the managing partner of
Ellsbury Associates, has just finished a tense phone call with Percy Naden, president of Naden
Enterprises. Percy strongly complained about the price Ellsbury charged for some legal work done for
his company.
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Requirement 1. Why is it important for Ellsbury Associates to understand the costs associated with
individual jobs?

A. Operating at or above capacity for the company lowers overall costs to individual jobs.
B. Overstaffing any job would be detrimental to the company's bottom line.
C. Pricing decisions are heavily influenced by reported cost numbers.
D. All of the above.
Requirement 2. Compute the costs of the Naden Enterprises and Quartz Inc. jobs using Ellsbury's
simple costing system. (Abbreviation used: prof. = professional.)

Question 5, P5-32
Ellsbury Associates is a recently formed law partnership. Ellsbury Associates operates at capacity and
uses a cost-based approach to pricing (billing) each job. Currently it uses a simple costing system with a
single direct-cost category (professional labor-hours) and a single indirect-cost pool (general support).
Indirect costs are allocated to cases on the basis of professional labor-hours per case. The job files for
two of Ellsbury's clients, Jabar Enterprises and Clinical Inc., show the following:
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professional labor-hours base.
Requirement 1. Calculate the revised indirect-cost allocation rate per professional labor-hour for
Ellsbury Associates when total indirect costs are $200,000.
First determine the formula used to calculate the indirect-cost rate. Then enter the amounts in the formula
and calculate the rate per hour. (Abbreviation used: prof. = professional.)

Indirect costs ÷ Total prof. labor hours = Indirect-cost rate per hour

$200,000 ÷ 5,000 = $40 per professional labor hour

Requirement 2. Compute the costs of the Jabar Enterprises and Clinical Inc. jobs if Ellsbury
Associates had used its refined costing system with multiple direct-cost categories and one indirect-cost
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pool. Begin by determining the formula used to allocate indirect costs. (Abbreviation used: prof. =
professional.)

Indirect cost rate per hour × Prof. labor hours for job = Indirect costs allocated to job

Now compute the total costs of each job.

Indirect cost = 40*2600 = 104000; 40*2400 = 96000

Requirement 3. Compare the costs of Jabar Enterprises and Clinical Inc. jobs in requirement 2 with
those calculated using the simple costing system. Comment on the results.
It appears that using a simple costing system does not give an accurate representation of costs.
Although Clinical Inc. uses less professional hours, they have a higher proportion of the reclassified
costs. This leads us to believe that the job is undercosted using the simple costing system.