CHAPTER 7

Exercise 7-1

Total Fabrication Cost:

Wages and salaries: 20% × P320,000 ....... P 64,000
Depreciation: 15% × P220,000 .................. 33,000
Occupancy: 5% × P120,000 ...................... 6,000
Total ............................................................. P103,000

(a) ÷ (b)
(a) (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Fabrication P103,000 10,000 machine-hours P10.30 per machine-hour

Exercise 7-2

A. (a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly P1,137,360 84,000 machine- P13.54 per
hours machine-hour
Processing Orders 28,479 1,100 orders P25.89 per order
Inspection 97,155 1,270 inspection- P76.50 per
hours inspection-hour
B.
Calculation of Overhead Costs:
(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Total Activity ABC Cost
Assembly P13.54 per MH 660 MHs P8,936.40
Processing Orders P25.89 per order 50 orders P1,294.50
Inspection P76.50 per IH 40 IHs P3,060.00

C.

Sales ..................................................... P55,460.00

Costs:
Direct materials (470 × P40.30) ..... P18,941.00
Direct labor (470 × P42.22) ............ 19,843.40
Assembly ......................................... 8,936.40
Processing ....................................... 1,294.50
Inspection........................................ 3,060.00 52,075.30
Product margin .................................. P 3,384.70

Exercise 7-3

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly P228,060 18,000 machine- P12.67 per
hours machine-hour
Processing Orders 34,068 1,200 orders P28.39 per order
Inspection 125,560 1,720 inspection- P73.00 per inspection-
hours hour

Average Cost of Product D28K:

Direct materials ........................................... P48.96
Direct labor .................................................. 25.36
Exercise 7-4

A. Total Direct Labor-Hours

Wall Mirrors: 6,000 units × 6 DLHs per unit 36,000 DLHs
Specialty Mirrors: 3,000 units × 9 DLHs per unit 27,000 DLHs
Total 63,000 DLHs

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Direct labor-hours P6,123.60 63,000 DLHs P.0972 per DLH

Materials Handling Cost for Wall Mirrors:

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Direct labor-hours P.0972 per DLH 36,000 DLHs P3,499

B.
(a) (b) (a) ÷ (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Material moves P6,123.60 600 moves* P10.206 per move
*500 + 100 = 600 moves

Materials Handling Cost for Specialty Mirrors:

(a) (b) (a) × (b)

Activity Cost Pool Activity Rate Total Activity ABC Cost
Material moves P10.206 per move 100 moves P1,021

Exercise 7-5

All three parts can be answered using a first-stage allocation of costs.

Working On Business
Engagements Development Other Total
Wages and salaries .. P372,000 P 62,000 P186,000 P620,000
Travel expenses ........ 70,000 56,000 14,000 140,000
Other expenses ........ 42,000 30,000 48,000 120,000
Total ........................... P484,000 P148,000 P248,000 P880,000

Exercise 7-6

1. F
2. T
3. F
4. F
5. F
6. T
7. T
8. F
9. T
10. F
11. F
12. T
13. T
14. T
15. T

Exercise 7-7
7. L
8. K
9. G
10. H

Exercise 7-8
1. UL
2. BL
3. PL
4. UL
5. PL
6. UL
7. BL
8. BL
9. UL
10. BL
11. PL
12. UL
13. BL
14. BL
15. UL

Exercise 7-9
1. F
2. F
3. T
4. T
5. F
6. T
7. T
8. F
9. F
10. F

Exercise 7-10
1. D
2. C
3. B
4. B
5. D
6. B
7. D
8. D
9. C
10. B

Exercise 7-11
1. B
2. C
3. B
4. B
5. B
6. B
7. A
8. A
9. D
10. C

Exercise 7-12
1. D
2. C
3. B
4. B
5. A
6. D
7. C
15. B
16. B
17. B
18. B
19. D
20. D

Exercise 7-13
1. D
2. C
3. D
4. B
5. C
6. E
7. A
8. D
9. B
10. C
11. C
12. C
13. D
14. B
15. C
16. D
17. C
18. B
19. D
20. B
21. C
22. C
23. A
24. A
25. B
26. B
27. E
28. E
29. A
30. E

Problem 7-A

A. Predetermined overhead rate = P2,264,000 ÷ 40,000 DLHs = P56.60 per DLH

Applied overhead per unit =

P56.60 per DLH × 0.80 DLHs per unit = P45.28 per unit

B.

(a) (b) (a) ÷ (b)

Estimated Estimated
Activity Cost Pool Cost Activity Activity Rate
Supporting direct labor P1,160,000 40,000 DLHs P29 per DLH
Setting up machines P288,000 2,400 setups P120 per setup
Parts administration P816,000 2,720 part types P300 per part type

Total Overhead applied to Product C43S:

(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Expected Activity ABC Cost
Supporting direct labor P29 per DLH 12,000 DLHs P348,000
Setting up machines P120 per setup 920 setups 110,400
Parts administration P300 per part type 840 part types 252,000
Problem 7-B

a. First-stage allocation
Job
Making Drapes Support Other Total
Production overhead ... P84,000 P28,000 P28,000 P140,000
Office expense .............. 21,000 77,000 42,000 140,000
Total ................................ P105,000 P105,000 P70,000 P280,000
Activity ............................ 3,000 yards 140 jobs

b. Activity rates (costs divided by activity)

Making Job
Drapes Support
Activity ............................ 3,000 yards 140 jobs

Production overhead ... P28.00 P200.00

Office expense .............. 7.00 550.00
Total ................................ P35.00 P750.00

c. Overhead cost of the job.

Making Drapes Job Support Total

Activity .................................. 85 1
Production overhead ......... P2,380 P200 P2,580
Office expense .................... 595 550 1,145
Total ...................................... P2,975 P750 P3,725

Sales ................................................... P6,000

Green costs:
Direct materials and labor ........... 2,990
Green margin ................................... 3,010
Yellow costs:
Office expense ............................. 1,145
Yellow margin ................................... 1,865
Red costs:
Production overhead ................... 2,580
Red margin ....................................... (P 715)

Problem 7-C

a. P120,000/(376hrs+224hrs)x376hrs=P75,200
b. P120,000/(376hrs+224hrs)x224hrs=P44,800
c.
Standard
Set Ups (P40,000/(22+28)x22) 17,600
Components (P80,000/(8+12)x8) 32,000
Overhead Cost 49,600
d.
De Luxe
Set Ups (P40,000/(22+28)x28) 22,400
Components (P80,000/(8+12)x12) 48,000
Overhead Cost 70,400
Problem 7-D

Problem 7-E
Problem 7-F

Problem 7-G
A. Cost pool rates:
Application processing: P1,800,000 ÷ 8,000 = P225 per application
Loan underwriting: P1,600,000 ÷ 32,000 = P50 per underwriting hour
Loan closure: P1,760,000 ÷ 16,000 = P110 per legal hour
Application no. 7439: Application (P225) + underwriting (7 x P50 = P350) + closure (3 x P110 =
P330) = P905
Application no. 7809: Application (P225) + underwriting (4 x P50 = P200) + closure (6 x P110 =
P660) = P1,085

B. Total labor hours: Application processing (8,000 x 18 = 144,000) + underwriting (32,000) +

closure (16,000) = 192,000
Average rate per hour: P5,160,000 ÷ 192,000 = P27 per hour
Application no. 7439: (9 + 5) x P27 = P378
Application no. 7809: (9 + 5) x P27 = P378
5

C. Yes. The traditional system results in an average cost per hour of P27; yet, Heartland’s hourly
charges vary greatly based on the function being performed. Rates range from P25 per hour
(P225 ÷ 9) for application processing, to P50 per hour for underwriting, to P110 for legal
services. ABC produces a more accurate determination of cost because three separate drivers
are used rather than just one.

Problem 7-H
Problem 7-I

Problem 7-J

1. Traditional: 3,000MH/60,000MHxP500,000= P25,000

ABC: 60/2000 work ordersxP500,000= 15,000
Overstatement P10,000

Problem 7-K

1. Traditional: P250,000/P1,000,000xP200,000 =P50,000

ABC: P250,000/400x12 subassemblies= 7,500
Overstatement P42,500
Problem 7-L