PROBLEM 5-32 (30 MINUTES) 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 Direct material……………. Direct labor: 3 hours x $12………… 4 hours x $12………… Manufacturing overhead: 3 hours x $32………… 4 hours x $32………… Total cost…………………. 2. $ 25 36 96 $157 Enhanced $ 40 48 128 $216
Activity-based overhead application rates: Activity Order processing Machine processing Product inspection Cost $150,000 560,000 90,000 Activity Cost Driver ÷ 500 orders processed (OP) ÷ 40,000 machine hrs. (MH) ÷ 10,000 inspection hrs. (IH) Application Rate = $300 per OP = $14 per MH = $9 per IH
PROBLEM 5-32 (CONTINUED) 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……………... Machine processing: 18,000 MH x $14…………... 252,000 22,000 MH x $14…………... Product inspection: 2,000 IH x $9……………….. 18,000 8,000 IH x $9………………. Total $360,000 Production volume (units) 3,000 Cost per unit $120* * $360,000 ÷ 3,000 units = $120 ** $440,000 ÷ 4,000 units = $110
$ 60,000 308,000 72,000 $440,000 4,000 $110**
The manufactured cost of a Standard unit is $181, and the manufactured cost of an Enhanced unit is $198: Standard Direct material………………………………. Direct labor: 3 hours x $12…………………………… 4 hours x $12…………………………… Order processing, machine processing, and product inspection……………….. Total cost……………………………………. 3. a. $ 25 36 120 $181 Enhanced $ 40 48 110 $198
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).
PROBLEM 5-32 (CONTINUED) 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.
4.
In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet
PROBLEM 5-37 (40 MINUTES) 1. Overhead to be assigned to film development chemical order: Activity Cost Pool Machine setups Material handling Hazardous waste control Quality control Other overhead costs Total 2. Overhead cost per box of chemicals Predetermined overhead rate = Pool Rate $2,000 per setup $2 per pound $5 per pound $75 per inspection $10 per machine hour Level of Cost Driver 5 setups 10,000 pounds 2,000 pounds 10 inspections 500 machine hours Assigned Overhead Cost $10,000 20,000 10,000 750 5,000 $45,750
× × × × ×
45,750 = $45.75 per box 1,000 boxes
total budgeted overhead cost $625,000 = total budgeted machine hours 20,000
3.
=
4.
= $31.25 per machine hr. Overhead to be assigned to film development chemical 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 box of chemicals =
$15,625 = $15.625 per box 1,000 boxes
5.
The film development chemicals entail a relatively large number of machine setups, a large amount of hazardous materials, and several inspections. Thus, they are 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.
6. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet
PROBLEM 5-39 (45 MINUTES) 1. An ABC system is a two-stage process of assigning costs to products. In stage one, activity-cost pools are established. In stage two a cost driver is identified for each activity-cost pool. Then the costs in each pool are assigned to each product line in proportion to the amount of the cost driver consumed by each product line. Montreal Electronics should not continue with its plans to emphasize the Royal model and phase out the Nova model. As shown in the following activity-based costing analysis, the Royal model has a contribution margin of less than 3 percent, while the Nova model generates a contribution margin of nearly 43 percent. Cost per event for each cost driver: Soldering.................... Shipments .................. Quality control........... Purchase orders........ Machine power .......... Machine setups ......... Costs per model: $ 942,000 860,000 1,240,000 950,400 57,600 750,000
÷ ÷ ÷ ÷ ÷ ÷
2.
1,570,000 20,000 77,500 190,080 192,000 30,000
= = = = = =
$ .60 43.00 16.00 5.00 .30 25.00
per solder joint per shipment per inspection per order per hour per setup Nova $ 4,576,000 396,000 3,168,000 $ 8,140,000 $ 711,000 696,600 899,200 400,500 52,800 400,000 $ 3,160,100 $11,300,100
Royal Direct costs: Materiala ...................................................................... Direct laborb................................................................ Machine hoursc .......................................................... Total direct costs............................................................... Assigned costs: Solderingd ................................................................... Shipmentse ................................................................. Quality controlf ........................................................... Purchase ordersg ....................................................... Machine powerh.......................................................... Machine setupsi ......................................................... Total assigned costs......................................................... Total cost ........................................................................... Calculations follow. $2,336,000 168,000 288,000 $2,792,000 $ 231,000 163,400 340,800 549,900 4,800 350,000 $1,639,900 $4,431,900
PROBLEM 5-39 (CONTINUED)
Calculations:
aMaterial ......................................... bDirect
Royal 4,000 × $584 4,000 × $42 4,000 × $72 385,000 × $.60 3,800 × $43 21,300 × $16 109,980 × $5 16,000 × $.30 14,000 × $25
Nova 22,000 × $208 22,000 × $18 22,000 × $144 1,185,000 × $.60 16,200 × $43 56,200 × $16 80,100 × $5 176,000 × $.30 16,000 × $25
labor................................... hours ............................. dSoldering ...................................... eShipments .................................... fQuality control.............................. gPurchase orders .......................... hMachine power............................. iMachine setups ............................
cMachine
Profitability analysis: Sales............................................................... Less: Cost of goods sold............................. Gross margin................................................. Units sold....................................................... Per-unit calculations: Selling price ........................................... Less: Cost of goods sold...................... Contribution margin .............................. Contribution margin percentage..........
a$32.02/$1,140.00 b$386.36/$900.00
Royal Nova $4,560,000 $19,800,000 4,431,900 11,300,100 $ 128,100 $ 8,499,900 4,000 22,000 $1,140.00 1,107.98 $ 32.02 2.8%a $900.00 513.64 $386.36 42.9%b
Total $24,360,000 15,732,000 $ 8,628,000
= 2.8% = 42.9%
PROBLEM 5-42 (50 MINUTES) 1. Activity Cost Pool I: Machine-related costs II: Setup and inspection III: Engineering IV: Plant-related costs Calculation of pool rates: I: Machine-related costs:
$450,000 9,000 machine hrs.
Type of Activity Unit-level Batch-level Product-sustaining-level Facility-level
2.
= $50 per machine hr.
II. Setup and inspection:
$180,000 40 runs
= $4,500 per run
III. Engineering:
$90,000 100 change orders
= $900 per change order
IV. Plant-related costs:
$96,000 1,920 sq. ft.
= $50 per sq. ft.
3.
Unit costs for odds and ends: I: Machine-related costs: Odds: $50 per machine hr. × 4 machine hr. per unit Ends: $50 per machine hr. × 1 machine hr. per unit II: Setup and inspection: Odds: $4,500 per run ÷ 50 units per run = $90 per unit Ends: $4,500 per run ÷ 250 units per run = $18 per unit = $200 per unit = $50 per unit
PROBLEM 5-42 (CONTINUED) III: Engineering: Odds:
$900 per change order × 100 change orders × 75% 1,000 units
=
$67,500 = $67.50 per unit 1,000 units
Ends:
$900 per change order × 100 change orders × 25% 5,000 units
=
$22,500 = $4.50 per unit 5,000 units
IV. Plant-related costs: Odds:
$50 per sq. ft. × 1,920 sq. ft. × 80% 1,000 units
=
$76,800 = $76.80 per unit 1,000 units
Ends:
$50 per sq. ft. × 1,920 sq. ft. × 20% 5,000 units =
$19,200 = $3.84 per unit 5,000 units
PROBLEM 5-42 (CONTINUED) 4. New product cost per unit using the ABC system: Direct material .................................................. Direct labor ....................................................... Manufacturing overhead: Machine-related......................................... Setup and inspection................................ Engineering ............................................... Plant-related .............................................. Total cost per unit............................................ 5. New target prices: New product cost (ABC).................................. Pricing policy ................................................... New target price ............................................... 6. Full assignment of overhead costs: Odds Manufacturing overhead costs: Machine-related......................................... Setup and inspection ............................... Engineering ............................................... Plant-related .............................................. Total overhead cost per unit........................... × Production volume ....................................... Total overhead assigned................................. Ends Odds $504.30 × 120% $605.16 Ends $181.34 × 120% $217.61 (rounded) Odds $ 40.00 30.00 200.00 90.00 67.50 76.80 $504.30 Ends $ 60.00 45.00 50.00 18.00 4.50 3.84 $181.34
$200.00 $50.00 90.00 18.00 67.50 4.50 76.80 3.84 $434.30 $76.34 × 1,000 × 5,000 $434,300 $381,700 Total = $816,000
PROBLEM 5-42 (CONTINUED) 7. Cost distortion: Odds Traditional volume-based costing system: reported product cost ................................................. Activity-based costing system: reported product cost ................................................. Amount of cost distortion per unit.................................... $ 166.00 504.30 $(338.30) Traditional system undercosts odds by $338.30 per unit Production volume ............................................................. Total amount of cost distortion for entire product line .................................................................. × 1,000 Ends $249.00 181.34 $ 67.66 Traditional system overcosts ends by $67.66 per unit × 5,000 $338,300
$(338,300)
Sum of these two amounts is zero.