Homework Chapter 4
1-a. Compute the plantwide overhead rate that would be used in the company's conventional cost system.
$3.13 per DL Under the traditional direct labor-dollar based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows: Predetermined overhead rate = Estimated total manufacturing overhead cost Estimated total direct labor dollars = $508,625/$162,500 = $3.13 per DL
2. Compute the total activity costs that would be assigned to City General and County General.
ABC Cost Activity Cost Pool City General County General Customer deliveries $800 $1,600selected answer correct Manual order processing $0 $3,000 Electronic order processing $160 $0 Line item picking $125 $325 Total activity costs $1,085 $4,925 City General: Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost Customer deliveries $80.00 per delivery 10 deliveries $800 Manual order processing $75.00per order 0 orders $0 Electronic order processing $16.00per order 10orders $160 Line item picking $1.25per line item 100line items $125 Total activity costs $1,085 County General: Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost Customer deliveries $80.00per delivery 20 deliveries $1,600 Manual order processing $75.00per order 40 orders $3,000 Electronic order processing $16.00 per order 0 orders $0 Line item picking $1.25 per line item 260 line items $325 Total activity costs $4,925
1. Compute the activity rate for each activity cost pool.
Activity Cost Pool Activity Rate Customer deliveries $80.00 per delivery Manual order processing $75.00 per manual order Electronic order processing $16.00 per electronic order Line item picking $1.25 per line item picked Activity Rates: Activity Cost Pool (a) Estimated Overhead Cost (b) Expected Activity (a) ÷ (b) Activity Rate Customer deliveries $ 400,000 5,000 deliveries $ 80.00 per delivery Manual order processing $ 300,000 4,000 orders $ 75.00 per manual order Electronic order processing $ 200,000 12,500 orders $ 16.00 per electronic order Line item picking $ 500,000 400,000 line items $ 1.25 per line item picked
1. Compute the activity rate for each of the activity cost pools.
Activity Cost Pool Activity Rate Labor-related $5 per DLH Purchase orders $2 per order Material receipts $11 per receipt Relay assembly $7 per relay General factory $6 per MH The activity rates are computed as follows: Activity Cost Pool (a)Expected OverheadCost (b)Expected Activity (a) ÷ (b) Activity Rate Labor-related $35,000 (a) 7,000DLHs (b) $5per DLH (a) ÷ (b) Purchase orders $4,000 (a) 2,000 orders (b) $2 per order (a) ÷ (b) Material receipts $10,450 (a) 950 receipts (b) $11 per receipt (a) ÷ (b) Relay assembly $7,000 (a) 1,000 relays (b) $7 per relay (a) ÷ (b) General factory $240,000 (a) 40,000 MHs (b) $6 per MH (a) ÷ (b)
2-a. Compute the activity rate for each activity cost pool.
Activity Cost Pools Activity Rate Machining $1.30 per MHR Setups $400 per setup hr. Product-level $50,125 per product General factory $0.37 per DL$ The activity rates are computed as follows: Activity Cost Pools (a) Total Cost (b) Total Activity (a) ÷ (b) Activity Rate Machining $198,250 152,500 MHR $ 1.30 per MHR Setups $ 150,000 375 setup hrs. $ 400 per setup hr. Product-level $ 100,250 2 products $ 50,125 per product General factory $ 60,125 162,500 DL$ $ 0.37 per DL$
Problem 4-18 Contrasting Activity-Based Costing and Conventional Product Costing [LO4-2, LO4-3, LO4-4] [The following information applies to the questions displayed below.] Adria Company recently implemented an activity-based costing system. At the beginning of the year, management made the following estimates of cost and activity in the company's five activity cost pools: Activity Cost Pool Activity Measure Expected Overhead Cost Expected Activity Labor-related Direct labor-hours $35,000 7,000 DLHs Purchase orders Number of orders $4,000 2,000 orders Material receipts Number of receipts $10,450 950 receipts Relay assembly Number of relays $7,000 1,000 relays General factory Machine-hours $240,000 40,000 MHs
Problem 4-18 Part 1 Required: 1. Compute the activity rate for each of the activity cost pools. Problem 4-18 Part 2 2. The expected activity for the year was distributed among the company's four products as follows: Expected Activity Activity Cost Pool Product A Product B Product C Product D Labor-related (DLHs) 2,400 500 3,500 600 Purchase orders (orders) 100 350 800 750 Materials receipts (receipts) 400 208 342 0 Relay assembly (relays) 170 170 300 360 General factory (MHs) 12,000 7,000 8,000 13,000 Using the ABC data, determine the total amount of overhead cost assigned to each product.
2. The expected activity for the year was distributed among the company's four products as follows: Expected Activity Activity Cost Pool Product A Product B Product C Product D Labor-related (DLHs) 2,400 (a) 500 (b) 3,500 (c) 600 (d) Purchase orders (orders) 100 (a) 350 (b) 800 (c) 750 (d) Materials receipts (receipts) 400 (a) 208 (b) 342 (c) 0 (d) Relay assembly (relays) 170 (a) 170 (b) 300 (c) 360 (d) General factory (MHs) 12,000 (a) 7,000 (b) 8,000 (c) 13,000 (d)
Product A $89,790 Product B $48,678 Product C $72,962 Product D $85,020 Overhead cost is assigned to the products as follows: Product A: Activity Cost Pool (a) Activity Rate (b) Actual Activity (a) × (b) ABC Cost Labor-related $5 per DLH 2,400DLHs $12,000 Purchase orders $2 per order 100 orders 200 Material receipts $11 per receipt 400 receipts 4,400 Relay assembly $ 7 per relay 170 relay 1,190 General factory $ 6 per MH 12,000 MHs 72,000 Total $ 89,790 Product B: Activity Cost Pool (a) Activity Rate (b) Actual Activity (a) × (b) ABC Cost Labor-related $ 5 per DLH 500 DLHs $ 2,500 Purchase orders $ 2 per order 350 orders 700 Material receipts $ 11 per receipt 208 receipts 2,288 Relay assembly $ 7 per relay 170 relay 1,190 General factory $ 6 per MH 7,000 MHs 42,000 Total $ 48,678 Product C: Activity Cost Pool (a) Activity Rate (b) Actual Activity (a) × (b) ABC Cost Labor-related $5 per DLH 3,500 DLHs $17,500 Purchase orders $ 2 per order 800 orders 1,600 Material receipts $ 11 per receipt 342 receipts 3,762 Relay assembly $ 7 per relay 300 relay 2,100 General factory $ 6 per MH 8,000 MHs 48,000 Total $ 72,962 Product D: Activity Cost Pool (a) Activity Rate (b) Actual Activity (a) × (b) ABC Cost Labor-related $5 per DLH 600 DLHs $3,000 Purchase orders $2 per order 750 orders 1,500 Material receipts $11 per receipt 0 receipts 0 Relay assembly $7 per relay 360 relay 2,520 General factory $6 per MH 13,000 MHs 78,000 Total $ 85,020
1-b. Compute the total amount of overhead cost that would be applied to each product.
Product H Product L Total Manufacturing overhead applied per unit 0.40 DLH per unit × $85.00 per DLH $34.00 $34.00 Number of units produced 40,000 8,000 Total manufacturing overhead applied $1,360,000 $272,000 $1,632,000 Product H - $1,360,000 Product L - $272,000 Total - $1,632,000
Problem 4-12 Contrasting ABC and Conventional Product Cost [LO4-2, LO4-3, LO4-4] Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It annually produces 60,000 units of EX300 and 12,500 units of TX500. The company's conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company's two product lines is shown below: EX300 TX500 Total Direct materials $ 366,325 $ 162,550 $ 528,875 Direct labor $ 120,000 $ 42,500 $ 162,500 The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below: Activity Activity Cost Pool (and Activity Measure) Manufacturing Overhead EX300 TX500 Total Machining (machine-hours) $ 198,250 90,000 62,500 152,500 Setups (setup hours) 150,000 75 300 375 Product-level (number of products) 100,250 1 1 2 General factory (direct labor dollars) 60,125 $ 120,000 $ 42,500 $ 162,500 Total manufacturing overhead cost $ 508,625
Required: 1-a. Compute the plantwide overhead rate that would be used in the company's conventional cost system. 1-b. Using the plantwide rate, compute the unit product cost for each product. 2-a. Compute the activity rate for each activity cost pool. 2-b. Using the activity rates, compute the unit product cost for each product.
Exercise 4-4 Contrast ABC and Conventional Product Costs [LO4-4] Pacifica Industrial Products Corporation makes two products, Product H and Product L. Product H is expected to sell 40,000 units next year and Product L is expected to sell 8,000 units. A unit of either product requires 0.4 direct labor-hours. The company's total manufacturing overhead for the year is expected to be $1,632,000.
Required: 1-a. The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. If this method is followed, how much overhead cost per unit would be applied to each product? 1-b. Compute the total amount of overhead cost that would be applied to each product. 2. Management is considering an activity-based costing system and would like to know what impact this change might have on product costs. For purposes of discussion, it has been suggested that all of the manufacturing overhead be treated as a product-level cost. The total manufacturing overhead would be divided in half between the two products, with $816,000 assigned to Product H and $816,000 assigned to Product L. If this suggestion is followed, how much overhead cost per unit would be assigned to each product?
Exercise 4-9 Compute and Use Activity Rates to Determine the Costs of Serving Customers [LO4-2, LO4-3] Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to dozens of hospitals. In the face of declining profits, Med Max decided to implement an activity-based costing system to improve its understanding of the costs incurred to serve each hospital. The company broke its selling and administrative expenses into four activities as shown below: Activity Cost Pool Activity Measure Total Cost Total Activity Customer deliveries Number of deliveries $ 400,000 5,000 deliveries Manual order processing Number of manual orders 300,000 4,000 orders Electronic order processing Number of electronic orders 200,000 12,500 orders Line item picking Number of line items picked 500,000 400,000 line items Total selling and administrative expenses $ 1,400,000 Med Max gathered the data below for two of the many hospitals that it serves—City General and County General: Activity Activity Measure City General County General Number of deliveries 10 20 Number of manual orders 0 40 Number of electronic orders 10 0 Number of line items picked 100 260
Required: 1. Compute the activity rate for each activity cost pool. 2. Compute the total activity costs that would be assigned to City General and County General.
1-b. Using the plantwide rate, compute the unit product cost for each product.
The unit product costs using the conventional approach would be computed as follows: EX300 TX500 Direct materials $366,325 $162,550 Direct labor 120,000 42,500 Manufacturing overhead applied @ $3.13 per direct labor-dollar 375,600 133,025 Total manufacturing cost (a) $861,925 $338,075 Number of units (b) 60,000 12,500 Unit product cost (a) ÷ (b) $14.37 $27.05
2-b. Using the activity rates, compute the unit product cost for each product.
Under the activity-based costing system, the unit product costs would be computed as follows: EX300 TX500 Direct materials $366,325 $162,550 Direct labor 120,000 42,500 Machining 117,000 81,250 Setups 30,000 120,000 Product sustaining 50,125 50,125 General factory 44,400 15,725 Total cost (a) $727,850 $472,150 Number of units (b) 60,000 12,500 Unit product cost (a) ÷ (b) $12.13 $37.77
1-a. The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. If this method is followed, how much overhead cost per unit would be applied to each product?
Using the company's conventional costing system, the overhead costs applied to the products would be computed as follows: Product H Product L Total Number of units produced (a) 40,000 8,000 Direct labor-hours per unit (b) 0.40 0.40 Total direct labor-hours (a) × (b) 16,000 3,200 19,200 Total manufacturing overhead (a) $ 1,632,000 Total direct labor-hours (b) 19,200 DLHs Predetermined overhead rate (a) ÷ (b) $ 85.00 per DLH Product H - 16,000 Product L - 3,200
2. Management is considering an activity-based costing system and would like to know what impact this change might have on product costs. For purposes of discussion, it has been suggested that all of the manufacturing overhead be treated as a product-level cost. The total manufacturing overhead would be divided in half between the two products, with $816,000 assigned to Product H and $816,000 assigned to Product L. If this suggestion is followed, how much overhead cost per unit would be assigned to each product?
Using the proposed ABC system, overhead costs would be assigned as follows: Product H Product L Total Total manufacturing overhead assigned (a) $816,000 $816,000 $1,632,000 Number of units produced (b) 40,000 8,000 Manufacturing overhead per unit (a) ÷ (b) $20.40 $102.00 Product H - $20.40 Product L - $102.00
