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EXERCISE 5-33 (30 MINUTES) 1.
ZODIAC MODEL ROCKETRY COMPANY COMPUTATION OF SELLING COSTS BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE Small
Order Size Medium Large
Total
a
Sales commissions (Unit cost: $675,000/225,000 = $3.00 per box).................................................... $ 6,000 $135,000 box)...........................................................................
$534,000
$ 675,000
62,600
295,400
26,400
105,000
31,000
60,000
Total cost for all orders of a given size..................................................................... $185,400 $296,000
$654,000
$1,135,400
Units (motors) solde.................................................... 103,000 592,000
2,180,000
Catalogsb (Unit cost: $295,400/590,800 = $.50 per catalog)................................................ 127,150 105,650 catalog).................................................................... Costs of catalog salesc (Unit cost: $105,000/175,000 = $.60 per motor).................................................. 47,400 31,200 skein)........................................................................ Credit and collectiond (Unit cost: $60,000/6,000 = $10.00 per order)............................................... 4,850 24,150 order)........................................................................
Unit cost per order of a given sizef............................................................................... $1.80 $.50
$.30
a
Retail sales in boxesunit cost: Small, 2,000$3 Medium, 45,000$3 Large, 178,000$3 b Catalogs distributedunit cost c Catalog salesunit cost McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-1
d
Number of retail ordersunit cost Small: (2,00012) + 79,000 = 103,000 Medium: (45,00012) + 52,000 = 592,000 Large: (178,00012) + 44,000 = 2,180,000 f Total cost for all orders of a given size ÷ units sold e
EXERCISE 5-33 (CONTINUED) 2.
The analysis of selling costs shows that small orders cost more than large orders. This fact could persuade management to market large orders more aggressively and/or offer discounts for them.
EXERCISE 5-40 (40 MINUTES, PLUS TIME AT RESTAURANT) Several restaurant activities are listed in the following table, along with the required characteristics for each activity. Many other possibilities could be listed, depending on the level of detail.
Activity Description
Value-Added or Non-ValueAdded
Taking reservations
VA
Customer calls on phone
Customer desires reservation
Customers waiting for a table
NVA
Customer arrives, but no table is ready
An error was made in reservation; service is slow; customers are slow; customers arrive without reservations
Seating customers
VA
Table becomes available
Customer's reservation (or turn in line) comes up; table becomes ready
Taking orders
VA
Customers indicate readiness to order
Kitchen staff needs to know what to prepare
Serving meals to customers
VA
Meals are ready
Meals are ready; customers are hungry
McGraw-Hill/Irwin Managerial Accounting, 8/e
Activity Trigger
Root Cause
© 2009 The McGraw-Hill Companies, Inc. 5-2
Returning meal to kitchen for revised preparation
NVA
Customer complains about meal
An error was made in explaining the menu; there is an error in the printed menu description; meal was prepared wrong; customer is picky
Customers eating meal
VA
Meals are served and are satisfactory
Customers are hungry
Clearing the table
VA
Customers are finished
Customers have finished eating
EXERCISE 5-40 (CONTINUED) Delivering check to table
VA
Customers are finished ordering and eating
Customers need to know amount of bill
Collecting payment
VA
Customers have produced cash or credit card
Restaurant needs to collect payment for services rendered
EXERCISE 5-44 (20 MINUTES) There are many key activities that can be suggested for each business. Some possibilities are listed below. After each activity, a suggested cost driver is given in parentheses. (1)
airline:
(a) (b) (c) (d) (e)
reservations (reservations booked) baggage handling (pieces of baggage handled) flight crew operations (air miles flown) aircraft operations (air miles flown) in-flight service (number of passengers)
(2)
restaurant
(a) (b) (c) (d) (e)
purchasing (pounds or cost of food purchased) kitchen operations (meals prepared) table service (meals served) table clearing (meals served) dish washing (dishes washed)
(3)
fitness club:
(a) (b)
front desk operations (number of patrons) membership records (number of records)
McGraw-Hill/Irwin Managerial Accounting, 8/e
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(c) (d) (e)
personnel (number of employees) equipment maintenance (maintenance hours) fitness consultation (hours of service)
bank:
(a) (b) (c) (d) (e)
teller window operations (number of customers) loan processing (loan applications) check processing (checks processed) personnel (number of employees) security (number of customers)
(5) hotel:
(a) (b) (c) (d) (e)
front desk operations (number of guests) bell service (pieces of luggage handled) housekeeping service (number of guest-days) room service (meals delivered) telephone service (phone calls made)
(6)
(a) (b) (c) (d) (e)
admissions (patients admitted) diagnostic lab (tests performed) nursing (nursing hours) surgery (hours in operating room) general patient care (patient-days of care)
(4)
hospital:
McGraw-Hill/Irwin Managerial Accounting, 8/e
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solutions to Problems PROBLEM 5-45 (35 MINUTES) 1.
Activity-based costing results in improved costing accuracy for two reasons. First, companies that use ABC are not limited to a single driver when allocating costs to products and activities. Not all costs vary with units, and ABC allows users to select a host of nonunit-level cost drivers. Second, consumption ratios often differ greatly among activities. No single cost driver will accurately assign costs for all activities in this situation.
2.
Allocation of administrative cost based on billable hours: E-commerce consulting: 2,400 ÷ 6,000 = 40%; $381,760 x 40% = $152,704 Information systems: 3,600 ÷ 6,000 = 60%; $381,760 x 60% = $229,056 E-Commerce Consulting
Information Systems Services
Billings: 3,600 hours x $140………… 2,400 hours x $140………… Less: Professional staff cost: 3,600 hours x $50 2,400 hours x $50 Administrative cost……. Income……………………………
(120,000) (152,704) $ 63,296
( 229,056) $ 94,944
Income ÷ billings……………….
18.84%
18.84%
McGraw-Hill/Irwin Managerial Accounting, 8/e
$504,000 $336,000 (180,000)
© 2009 The McGraw-Hill Companies, Inc. 5-5
PROBLEM 5-45 (CONTINUED) 3. Activity-based application rates: Activity
Activity Driver
Cost
Staff support In-house computing
$207,000 145,000
Miscellaneous office charges
29,760
Application Rate
÷ 300 clients
=
$690 per client
÷ 5,000 computer hours (CH)
=
$29 per CH
÷ 1,200 client transactions (CT)
=
$24.80 per CT
Staff support, in-house computing, and miscellaneous office charges of e-commerce consulting and information systems services:
Activity Staff support: 240 clients x $690…………... 60 clients x $690……………. In-house computing: 2,900 CH x $29………………. 2,100 CH x $29………………. Miscellaneous office charges: 480 CT x $24.80……………... 720 CT x $24.80……………... Total ……………………………….
McGraw-Hill/Irwin Managerial Accounting, 8/e
E-Commerce Consulting
Information Systems Services $165,600
$ 41,400 84,100 60,900 11,904 17,856 $120,156
$261,604
© 2009 The McGraw-Hill Companies, Inc. 5-6
PROBLEM 5-45 (CONTINUED) Profitability e-commerce consulting and information systems services: E-Commerce Consulting Billings: 3,600 hours x $140……….. 2,400 hours x $140……….. Less: Professional staff cost: 3,600 hours x $50 2,400 hours x $50 Administrative cost……. Income………………………….. Income ÷ billings……………...
Information Systems Services $504,000
$336,000 (180,000) (120,000) (120,156) $ 95,844 28.53%
( 261,604) $ 62,396 12.38%
4.
Yes, his attitude should change. Even though both services are needed and professionals are paid the same rate, the income percentages show that e-commerce consulting provides a higher return per sales dollar than information systems services (28.53% vs. 12.38%). Thus, all other things being equal, professionals should spend more time with e-commerce.
5.
Probably not. Although both services produce an attractive return for Clark and Shiffer, the firm is experiencing a very tight labor market and will likely have trouble finding qualified help. In addition, the professional staff is currently overworked, which would probably limit the services available to new clients.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-7
PROBLEM 5-46 (60 MINUTES) 1.
The predetermined overhead rate is calculated as follows: Predetermined overhead rate = Budgeted manufacturing overhead/budgeted directlabor hours = $1,224,000/102,000* = $12 per hour *Direct labor, budgeted hours: REG: 5,000 units 9 hours..................................... ADV: 4,000 units 11 hours.................................... SPE: 1,000 units 13 hours.................................... Total direct-labor hours........................................................
McGraw-Hill/Irwin Managerial Accounting, 8/e
45,000 hours 44,000 hours 13,000 hours 102,000 hours
© 2009 The McGraw-Hill Companies, Inc. 5-8
PROBLEM 5-46 (CONTINUED) 2. Activity-based-costing analysis:
Activity
Activity Cost Pool
Cost Driver Machine Hours
Cost Driver Quantity
Pool Rate
$ 115,000 2.70
Machine Related
$310,500
Material Hand.
52,500
Prod. Runs
100 525.00
Purch.
75,000
Purch. Orders
300 250.00
Setup
85,000
Prod. Runs
100 850.00
Inspect.
27,500
Inspect. Hours
1,100
25.00
Ship.
66,000
Ship.
1,100
60.00
Eng.
32,500
Eng. Hours
650
50.00
Fac.
575,000
115,000
5.00
Grand Total
$1,224,000
Machine Hours
McGraw-Hill/Irwin Managerial Accounting, 8/e
Product Line REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total Grand Total
Cost Driver Quantity for Product Line 50,000 48,000 17,000 115,000 40 40 20 100 100 96 104 300 40 40 20 100 400 400 300 1,100 500 400 200 1,100 250 200 200 650 50,000 48,000 17,000 115,000
Activity Cost for Product Line $135,000 129,600 45,900 $310,500 $ 21,000 21,000 10,500 $ 52,500 $ 25,000 24,000 26,000 $ 75,000 $ 34,000 34,000 17,000 $ 85,000 $ 10,000 10,000 7,500 $ 27,500 $ 30,000 24,000 12,000 $ 66,000 $ 12,500 10,000 10,000 $ 32,500 $250,000 240,000 85,000 $575,000
Product Line Prod. Volume 5,000 4,000 1,000
Activity Cost per Unit of Product $27.00 32.40 45.90
5,000 4,000 1,000
4.20 5.25 10.50
5,000 4,000 1,000
5.00 6.00 26.00
5,000 4,000 1,000
6.80 8.50 17.00
5,000 4,000 1,000
2.00 2.50 7.50
5,000 4,000 1,000
6.00 6.00 12.00
5,000 4,000 1,000
2.50 2.50 10.00
5,000 4,000 1,000
50.00 60.00 85.00
$1,224,000
© 2009 The McGraw-Hill Companies, Inc. 5-9
PROBLEM 5-46 (CONTINUED) 3.
Calculation of new product costs under ABC.
Direct material................................. Direct labor (not including set-up time)................................. Total direct costs per unit...............
REG $129.00
ADV $151.00
GMT $203.00
171.00 (9 hr. @ $19) $300.00
209.00 (11 hr. @ $19) $360.00
247.00 (13 hr. @ $19) $450.00
$ 32.40 5.25 6.00 8.50 2.50 6.00 2.50 60.00
$ 45.90 10.50 26.00 17.00 7.50 12.00 10.00 85.00
$123.15 $483.15
$213.90 $663.90
Manufacturing overhead (based on ABC): Machine-related.......................... $ 27.00 Material handling....................... 4.20 Purchasing.................................. 5.00 Setup........................................... 6.80 Inspection................................... 2.00 Packing/shipping....................... 6.00 Engineering design.................... 2.50 Facility......................................... 50.00 Total ABC overhead cost per unit................................ $103.50 Total product cost per unit............. $403.50
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PROBLEM 5-46 (CONTINUED) 4.
Comparison of costs and target prices under two alternative product-costing systems:
Reported unit overhead cost: Traditional, volume-based costing system ................................................................................... Activity-based costing system ................................................................................... Reported unit product cost (direct material, direct labor and overhead): Traditional, volume-based costing system ................................................................................... Activity-based costing system ................................................................................... Sales price data: Original target price (130% of product cost based on traditional, volume-based costing system) ................................................................................... New target price (130% of product cost based activity-based costing system) ................................................................................... Actual current selling price.......................................... 5.
REG
ADV
GMT
$108.00
$132.00
$156.00
103.50
123.15
213.90
408.00
492.00
606.00
403.50
483.15
663.90
530.40
639.60
787.80
524.55
628.10
863.07
525.00
628.00
800.00
The REG and ADV products were overcosted by the traditional system, and the GMT product was undercosted by the traditional system
Reported unit product cost: Traditional, volume-based costing system ................................................................................... Activity-based costing system ................................................................................... Cost distortion: REG and ADV overcosted by traditional system ................................................................................... GMT undercosted by traditional system................
$408.00
$492.00
$606.00
403.50
483.15
663.90
$ 4.50
$ 8.85 ($ 57.90)
6. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-48 (30 MINUTES) 1.
Deluxe manufacturing overhead cost: 32,000 machine hours x $80 = $2,560,000 $2,560,000 ÷ 16,000 units = $160 per unit Executive manufacturing overhead cost: 45,000 machine hours x $80 = $3,600,000 $3,600,000 ÷ 30,000 units = $120 per unit Deluxe
Executive
$ 40 25 160 $225
$ 65 25 120 $210
Direct material………………. Direct labor………………….. Manufacturing overhead…. Unit cost………………… 2. Activity-based application rates:
Activity Driver
Application Rate
Activity
Cost
Manufacturing setups
$1,344,000
÷ 160 setups (SU)
= $8,400 per SU
Machine processing
3,696,000
÷ 77,000 machine hours (MH)
= $48 per MH
Product shipping
1,120,000
÷ 350 outgoing = $3,200 per OS shipments (OS)
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-48 (CONTINUED) Manufacturing setup, machine processing, and product shipping costs of a Deluxe unit and an Executive unit: Activity Manufacturing setups: 100 SU x $8,400…………….. 60 SU x $8,400…………….. Machine processing: 32,000 MH x $48…………... 45,000 MH x $48…………... Product shipping: 200 OS x $3,200…………… 150 OS x $3,200…………….. Total …………………………….
Deluxe
Executive
$ 840,000 $ 504,000 1,536,000 2,160,000 640,000 $3,016,000
480,000 $3,144,000
Production volume (units)….
16,000
30,000
Cost per unit…………………..
$188.50*
$104.80**
* $3,016,000 ÷ 16,000 units = $188.50 ** $3,144,000 ÷ 30,000 units = $104.80 The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured cost of an Executive cabinet is $194.80. The calculations follow:
Direct material………………………………… Direct labor……………………………………. Manufacturing setup, machine processing, and outgoing shipments.. Total cost……………………………………….
Deluxe
Executive
$ 40.00 25.00
$ 65.00 25.00
188.50 $253.50
104.80 $194.80
3. The Deluxe storage cabinet is undercosted. The use of machine hours produced a unit cost of $225; in contrast, the more accurate activity-based-costing approach shows a unit cost of $253.50. The difference between these two amounts is $28.50.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-48 (CONTINUED) 4. Cost distortion: The Deluxe cabinet product line is undercosted by $456,000, and the Executive cabinet product line is overcosted by $456,000. Supporting calculations follow: Deluxe
5.
Executive
$28.50* 16,000 = $456,000
$(15.20)† 30,000 = $(456,000)
*$253.50 $225.00
†
$194.80 $210.00
No, the discount is not advisable. The regular selling price of $270, when compared against the more accurate ABC cost figure, shows that each sale provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30 discount will actually produce a loss of $13.50 ($253.50 - $240.00), and the more units that are sold, the larger the loss. Notice that with the less-accurate, machine-hourbased figure ($225), the marketing manager will be misled, believing that each discounted unit sold would boost income by $15 ($240 - $225).
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-49 (25 MINUTES) 1.
a.
Manufacturing overhead costs include all indirect manufacturing costs (all production costs except direct material and direct labor). Typical overhead costs include:
Indirect labor (e.g., a lift-truck driver, maintenance and inspection labor, engineering labor, and supervisors).
Indirect material. Other indirect manufacturing costs (e.g., building maintenance, machine and tool maintenance, property taxes, insurance, depreciation on plant and equipment, rent, and utilities). b.
Companies develop overhead rates before production to facilitate the costing of products as they are completed and shipped, rather than waiting until actual costs are accumulated for the period of production.
2.
The increase in the overhead rate should not have a negative impact on the company, because the increase in indirect costs was offset by a decrease in direct labor.
3.
Rather than using a plantwide overhead rate, Digital Light could implement separate activity cost pools. Examples are as follows:
Separate costs into departmental overhead accounts (or other relevant pools), with one account for each production and service department. Each department would allocate its overhead to products on the basis that best reflects the use of these overhead services.
Treat individual machines as separate cost centers, with the machine costs collected and charged to the products using machine hours. 4.
An activity-based costing system might benefit Digital Light because it assigns costs to products according to their usage of activities in the production process. More accurate product costs are the result.
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© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-50 (30 MINUTES) 1.
Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours = $710,000 ÷ 20,000* = $35.50 per direct labor hour *20,000 budgeted direct-labor hours = (2,500 units of Medform)(3 hrs./unit) + (3,125 units of Procel)(4 hrs./unit)
Direct material................................. Direct labor: 3 hours x $15............................. 4 hours x $15............................. Manufacturing overhead: 3 hours x $35.50........................ 4 hours x $35.50........................ Total cost......................................... 2.
Medform
Procel
$ 30.00
$ 45.00
45.00 60.00 106.50 $181.50
142.00 $247.00
Activity-based overhead application rates: Activity
Cost
Activity Cost Driver
Application Rate
Order processing
$120,000
÷ 600 orders processed (OP)
= $200 per OP
Machine processing
500,000
÷ 50,000 machine hrs. (MH)
= $10 per MH
Product inspection
90,000
÷ 15,000 inspection hrs. (IH)
= $6 per IH
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-50 (CONTINUED) Order processing, machine processing, and product inspection costs of a Medform unit and an Procel unit: Activity Order processing: 350 OP x $200........................ 250 OP x $200........................ Machine processing: 23,000 MH x $10.................... 27,000 MH x $10.................... Product inspection: 4,000 IH x $6........................ 11,000 IH x $6........................ Total Production volume (units) Cost per unit
Medform
Procel
$ 70,000 $ 50,000 230,000 270,000 24,000 $324,000
66,000 $386,000
2,500 $129.60*
3,125 $123.52**
* $324,000 ÷ 2,500 units = $129.60 ** $386,000 ÷ 3,125 units = $123.52 The manufactured cost of a Medform unit is $204.60, and the manufactured cost of a Procel unit is $228.52:
Direct material………………………………. Direct labor: 3 hours x $15…………………………… 4 hours x $15…………………………… Order processing, machine processing, and product inspection……………….. Total cost…………………………………….
McGraw-Hill/Irwin Managerial Accounting, 8/e
Medform
Procel
$ 30.00
$ 45.00
45.00 60.00 129.60 $204.60
123.52 $228.52
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-50 (CONTINUED) 3.
a.
The Procel product is overcosted by $18.48 ($247.00 - $228.52) under the traditional product-costing system. The labor-hour application base resulted in a $247 unit cost; in contrast, the more accurate ABC approach yielded a lower unit cost of $228.52. The opposite situation occurs with the Medform product, which is undercosted by $23.10 under the traditional approach ($181.50 vs. $204.60 under ABC). The traditional costing system overcosts the Procel product line by a total of $57,750 ($18.48 x 3,125 units), and it undercosts the Medform product line by the same amount, $57,750 ($23.10 x 2,500 units).
b.
4.
Yes, especially since Meditech’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 lower income reported for the company.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-51 (30 MINUTES) 1.
Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is applied on the basis of direct-labor dollars. In general, a plantwide manufacturingoverhead rate is acceptable only if a similar relationship between overhead and direct labor exists in all departments or the company manufactures products that receive the same proportional services from each department In most cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide the following:
A framework for reviewing overhead costs on a departmental basis, identifying departmental cost overruns, or taking corrective action to improve departmental cost control.
Sufficient information about product profitability, thus increasing the difficulties associated with management decision making. 2.
Because the company uses a plantwide overhead rate applied on the basis of directlabor dollars, the elimination of direct labor in the Molding Department through the introduction of robots may appear to reduce the overhead cost of the Molding Department to zero. However, this change will not reduce fixed manufacturing costs such as depreciation and plant supervision. In reality, the use of robots is likely to increase fixed costs because of increased depreciation. Under the current method of allocating overhead costs, these costs merely will be absorbed by the remaining departments.
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© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-51 (CONTINUED) 3.
a.
In order to improve the allocation of overhead costs in the Cutting and Finishing departments, management should move toward an activity-based costing system. The firm should:
Establish activity-cost pools for each significant activity. Select a cost driver for each activity that best reflects the relationship of the activity to the overhead costs incurred.
b.
In order to accommodate the automation of the Molding Department in its overhead accounting system, the company should:
Establish a separate overhead pool and rate for the Molding Department. Identify fixed and variable overhead costs and establish fixed and variable overhead rates.
Apply overhead costs to the Molding Department on the basis of robot or machine hours.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-52 (40 MINUTES) 1.
Overhead to be assigned to development chemical order: Activity Cost Pool Machine setups Material handling Hazardous waste control Quality control Other overhead costs
Pool Rate $4,000 per setup $4 per pound $10 per pound $150 per inspection $20 per machine hour
Level of Cost Driver 6 setups 9,000 pounds 2,100 pounds 8 inspections 550 machine hours
Total
Assigned Overhead Cost $24,000 36,000 21,000 1,200 11,000 $93,200
2.
Overhead cost per box of chemicals
=
$93,200 $93.20 per box 1,000 boxes
3.
Predetermined overhead rate
=
$2,500,000 total budgeted overhead cost total budgeted machine hours 40,000
= $62.50 per machine hr. 4.
Overhead to be assigned to film development chemical order, given a single predetermined overhead rate: a.
Total overhead assigned
= $62.50 per machine hr. 550 machine hr. = $34,375
b.
5.
Overhead cost per box of chemicals
=
$34,375 $34.375 per box 1,000 boxes
The radiological 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 Rapid City Radiology, Inc. For example, it could lead to poor decisions about product pricing. The activitybased costing system will serve management much better than the system based on a single, predetermined overhead rate.
PROBLEM 5-52 (CONTINUED)
McGraw-Hill/Irwin Managerial Accounting, 8/e
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6.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.
PROBLEM 5-53 (20 MINUTES) 1. Calculation of unit cost: (a)
Overhead assigned to plates: Activity Cost Pool Pool Rate Machine setups $4,000 per setup Material handling $4 per pound Hazardous waste control $10 per pound Quality control $150 per inspection Other overhead costs $20 per machine hour Total Overhead cost per unit
(b)
Level of Cost Driver 4 setups 800 pounds 400 pounds 4 inspections 60 machine hours
Assigned Overhead Cost $16,000 3,200 4,000 600 1,200 $25,000
$25,000 $250 100 plates
Unit cost per plate: Direct material................................ Direct labor.................................... Manufacturing overhead............... Total cost per plate........................
$210 60 250 $520
2. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: WWW.MHHE.COM/HILTON8E.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-54 (50 MINUTES) 1.
Activity Cost Pool I: Machine-related costs II: Setup and inspection III: Engineering IV: Plant-related costs
2.
Calculation of pool rates:
Type of Activity Unit-level Batch-level Product-sustaining-level Facility-level
I: Machine-related costs: $1,800,000 18,000 machine hrs.
= $100 per machine hr.
II. Setup and inspection: $720,000 80 runs
= $9,000 per run
III. Engineering: $360,000 200 change orders
= $1,800 per change order
IV. Plant-related costs: $384,000 3,840 sq. ft.
McGraw-Hill/Irwin Managerial Accounting, 8/e
= $100 per sq. ft.
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-54 (CONTINUED) 3.
Unit costs for odds and ends: I: Machine-related costs: Odds: $100 per machine hr.8 machine hr. per unit
= $800 per unit
Ends: $100 per machine hr.2 machine hr. per unit
= $200 per unit
II: Setup and inspection: Odds: $9,000 per run ÷ 25 units per run
= $360 per unit
Ends: $9,000 per run ÷ 125 units per run
= $72 per unit
III: Engineering: Odds:
$1,800 per change order 200 change orders 75% 1,000 units $270,000 = $270 per unit 1,000 units $1,800 per change order 200 change orders 25% 5,000 units
= Ends:
=
$90,000 = $18 per unit 5,000 units
IV. Plant-related costs: Odds:
$100 per sq. ft. 3,840 sq. ft. 80% 1,000 units $307,200 = $307.20 per unit 1,000 units $100 per sq. ft. 3,840 sq. ft. 20% 5,000 units
= Ends:
=
McGraw-Hill/Irwin Managerial Accounting, 8/e
$76,800 = $15.36 per unit 5,000 units
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-54 (CONTINUED) 4.
New product cost per unit using the ABC system: Odds Direct material...................................................................... $ 160.00 Direct labor........................................................................... 120.00 Manufacturing overhead: Machine-related............................................................. 800.00 Setup and inspection.................................................... 360.00 Engineering................................................................... 270.00 Plant-related.................................................................. 307.20 Total cost per unit................................................................ $2,017.20
5.
200.00 72.00 18.00 15.36 $725.36
New target prices: Odds New product cost (ABC)...................................................... $2,017.20 Pricing policy........................................................................ 120% New target price................................................................... $2,420.64
6.
Ends $240.00 180.00
Ends $725.36 120% $870.43 (rounded)
Full assignment of overhead costs: Odds
Ends
Manufacturing overhead costs: Machine-related............................................................. $ 800.00 $ 200.00 Setup and inspection.................................................... 360.00 72.00 Engineering.................................................................... 270.00 18.00 Plant-related................................................................... 307.20 15.36 Total overhead cost per unit................................................ $1,737.20 $ 305.36 Production volume........................................................... 1,000 5,000 Total overhead assigned...................................................... $1,737,200 $1,526,800 Total = $3,264,000
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-54 (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......................................
$
Ends
664.00
$996.00
2,017.20 $(1,353.20)
725.36 $270.64
Traditional system undercosts odds by $1,353.20 per unit Production volume............................................................... 1,000 Total amount of cost distortion for entire product line.................................................................... $(1,353,200)
Traditional system overcosts ends by $270.64 per unit 5,000 $1,353,200
Sum of these two amounts is zero.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-60 (60 MINUTES) 1.
Based on the cost data from Gigabyte's traditional, volume-based product-costing system, product G is the firm's least profitable product. Its reported actual gross margin is only $66.00, as compared with $254.25 and $313.50 for products T and W, respectively. However, the validity of this conclusion depends on the accuracy of the product costs reported by Gigabyte's product-costing system.
2.
Again, based on the product costs reported by the firm's traditional, volume-based product-costing system, product W appears to be very profitable. As in requirement (1), however, the validity of this assessment depends on the accuracy of the reported product costs.
3.
Gigabyte's competitors have moved aggressively into the market for gismos (product G), but they have abandoned the whatchamacallit (product W) market to Gigabyte. These competing firms apparently believe they can sell gismos at a much lower price than Gigabyte's management feels is feasible. This evidence suggests that Gigabyte's competitors may believe their product cost for gismos is below Gigabyte's reported product cost. In contrast, Gigabyte's competitors apparently believe that they cannot afford to sell whatchamacallits at Gigabyte's current price of $600. Perhaps the competing firms' reported production costs for product W are higher than the cost reported by Gigabyte's product-costing system. The danger to Gigabyte is that the company will be forced out of the market for its second largest selling product. This could be disastrous to Gigabyte, Inc.
4.
Percentages for raw-material costs:
Product G T W Total
Raw-Material Cost per Unit $105.00 157.50 52.50
Annual Volume 8,000 15,000 4,000
Annual Raw-Material Cost $ 840,000 2,362,500 210,000 $3,412,500
Percentage of Total Raw-Material Cost* 25% 69% 6% 100%
*Percentages rounded to nearest whole percent.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-60 (CONTINUED) 5.
Product costs based on an activity-based costing system: Product G Direct material................................................ Direct labor..................................................... Machinerya...................................................... Machine setupb............................................... Inspectionc...................................................... Material handlingd.......................................... Engineeringe................................................... Total................................................................
$105.00 48.00 110.25 .43 31.50 82.03 45.25 $422.46
Product T
Product W
$157.50 36.00 122.50 .32 46.20 120.75 6.90 $490.17
$ 52.50 24.00 238.88 1.89 157.50 39.38 142.21 $656.36
a
Machinery: Product G: ($3,675,000 24%) Product T: ($3,675,000 50%) Product W: ($3,675,000 26%) b Machine setup: Product G: ($15,750 22%) Product T: ($15,750 30%) Product W: ($15,750 48%) c Inspection: Product G: ($1,575,000 16%) Product T: ($1,575,000 44%) Product W: ($1,575,000 40%) d Material handling: Product G: ($2,625,000 25%) Product T: ($2,625,000 69%) Product W: ($2,625,000 6%) e Engineering: Product G: ($1,034,250 35%) Product T: ($1,034,250 10%) Product W: ($1,034,250 55%)
McGraw-Hill/Irwin Managerial Accounting, 8/e
8,000 units = 15,000 units = 4,000 units =
$110.25 $122.50 $238.88
8,000 units = 15,000 units = 4,000 units =
$ .43 $ .32 $ 1.89
8,000 units = 15,000 units = 4,000 units =
$ 31.50 $ 46.20 $157.50
8,000 units = 15,000 units = 4,000 units =
$ 82.03 $120.75 $ 39.38
8,000 units = 15,000 units = 4,000 units =
$ 45.25 $ 6.90 $142.21
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-60 (CONTINUED) 6.
Comparison of reported product costs, new target prices, and actual selling prices: Product G Reported product costs: Traditional, volume-based costing system Activity-based costing system Target price based on new product costs (150%new product cost) Current actual selling price
Product T
Product W
$573.00 422.46
$508.50 490.17
$286.50 656.36
633.69 639.00
735.26 762.75
984.54 600.00
7. THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL “BUILD A SPREADSHEET SOLUTIONS” IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE HILTON, 8E WEBSITE: WWW.MHHE.COM/HILTON8E.
PROBLEM 5-61 (20 MINUTES) MEMORANDUM Date:
Today
To:
President, Gigabyte, Inc.
From:
I.M. Student
Subject:
Gigabyte's competitive position
Gigabyte's product-costing system has been providing misleading product cost information. Our traditional, volume-based costing system overcosted gismos and thingamajigs, but it substantially undercosted whatchamacallits. As a result Gigabyte has been overpricing gismos and thingamajigs and underpricing whatchamacallits. The company has been losing money on every sale in the product W market. Our competitors have taken advantage of our mispricing by moving aggressively into the gismo market and abandoning the whatchamacallit market to Gigabyte. As a result, our profitability has suffered. I recommend the following courses of action: 1.
Implement the new activity-based costing system and revise its database frequently.
2.
Lower the target price of gismos to $639, the current actual selling price. This price is slightly over our usual 50 percent markup over product cost.
3.
Consider lowering the price of thingamajigs to $736 in order to increase demand. The lower price still yields Gigabyte a 50 percent markup over product cost.
4.
Raise the price of whatchamacallits to $985. If the product does not sell at that price, consider discontinuing the product line.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-65 (45 MINUTES) 1.
Two dimensional ABC: Cost Assignment View RESOURCE COSTS Assignment of resource costs to activity cost pools associated with significant activities
Process View Activity analysis
1 7 11
2 8
3 9
12 13
ROOT CAUSES
4 10
5
14
15 16
6
ACTIVITY TRIGGERS
Activity evaluation
ACTIVITIES
PERFORMANCE MEASURES (see req. (4) for examples)
(see req. (3) for (see req. (2) for examples) examples)
Assignment of activity costs to cost objects using second-stage cost drivers COST OBJECTS (Product lines: cooking utensils, tableware, flatware)
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-65 (CONTINUED) 2.
Triggers for selected activities: Activity Number Trigger (2) Realization by purchasing personnel that they do not fully understand the part specifications
3.
(9)
Realization by purchasing personnel that the ordered part will be (or may be) late in arriving
(11)
Receipt of order
(12)
Discovery during inspection that parts do not meet specifications
(13)
Discovery that parts do not satisfy intended purpose
Possible root causes: Activity Number Possible Root Causes* (2) Unclear specifications Incomplete specifications Clear, but apparently wrong, specifications Undertrained purchasing personnel (9)
Vendor delay Delay in placing order Failure by purchasing personnel to make deadline clear
(11)
Use of vendor that has not been fully certified as a reliable supplier Critical importance of parts
(12)
Misspecification of parts Error by purchasing personnel in placing order Vendor error Inspector error
(13)
Misspecification of parts Incomplete specifications Poor product design Error by purchasing personnel in placing order Vendor error
*This list is not necessarily complete. Other root causes may exist.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-65 (CONTINUED) 4.
Suggested performance measures: Activity Performance Number Measures (5) Average price paid (6)
Number of vendors Number of vendors that are precertified as dependable
(10)
Percentage of orders received on time Average delay for delinquent orders
(12)
Number of orders returned Percentage of orders returned
(16)
Average dollar value tied up in parts inventory
PROBLEM 5-66 (40 MINUTES) 1.
Customer-profitability analysis:
Sales revenue...................................................................... Cost of goods sold.............................................................. Gross margin....................................................................... Selling and administrative costs: General selling costs.................................................... General administrative costs....................................... Customer-related costs: Sales activity........................................................... Order taking............................................................. Special handling...................................................... Special shipping...................................................... Total selling and administrative costs............................... Operating income................................................................
McGraw-Hill/Irwin Managerial Accounting, 8/e
Caltex Computer
Trace Telecom
$380,000 160,000 $220,000
$247,600 124,000 $123,600
$ 48,000 38,000
$ 36,000 32,000
16,000 6,000 80,000 18,000 $206,000 $ 14,000
12,000 8,000 60,000 20,000 $168,000 $ (44,400)
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-66 (CONTINUED)
2.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.
PROBLEM 5-67 (45 MINUTES) 1.
Customer-profitability profile (supporting details in the table following the profile):
Cumulative Operating Income as a Percentage of Total Operating Income
Customers*
*Customers ranked by operating income.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
PROBLEM 5-67 (CONTINUED) Supporting details for customer-profitability profile:
Customer Numbera (1) (2) (3) (4) (5) (6) (7) (8)
Customer Network-All, Inc. Golden Gate Service Associates Graydon Computer Company Mid-State Computing Company Caltex Computerb The California Group Tele-Install, Inc. Trace Telecomc
Operating Income
Cumulative Operating Income
$186,000 142,000 120,000 84,000 14,000 12,000 (36,000) (44,400)
$186,000 328,000 448,000 532,000 546,000 558,000 522,000 477,600
Cumulative Operating Income as a Percentage of Total Operating Income 39% 69% 94% 111% 114% 117% 109% 100%
a
Customer numbers are ranked by operating income. From solution to preceding problem. c From solution to preceding problem. b
2.
Memorandum
Date:
Today
To:
I. Sellit, Vice President for Marketing
From:
I. M. Student
Subject:
Customer-profitability profile
The attached customer-profitability profile shows that two of our customer relationships are unprofitable (Tele-Install, Inc. and Trace Telecom). As the profile shows, over half of our operating income is generated by our two most profitable customer relationships, and 94 percent of our operating profit is generated by our three most profitable customers. An activity-based costing analysis of customer-related costs provided the data for the customer-profitability analysis portrayed in the profile.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
SOLUTIONS TO CASES CASE 5-68 (45 MINUTES) 1.
Activity-based costing (ABC) differs from traditional costing in that it focuses on activities that consume resources as the fundamental cost drivers. ABC is a two-stage cost assignment process focused on causality and the determination of cost drivers. It usually uses several different activities to assign costs to products or services. Therefore, it is more detailed and more accurate than traditional costing. It also helps managers distinguish between value added and non-value added activities.
2.
Calculations of total activity cost pools and pool rates: Material handling...... ($113,208 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)] = $120,000* (25,000 parts + 50,000 parts) = $120,000 75,000 parts = $1.60 per part *Rounded Inspection................. ($235,850 1.06) (5,000 hours + 7,500 hours) = $250,000* 12,500 hours = $20 per inspection hour *Rounded Machining................. ($849,056 1.06) (15,000 hours + 30,000 hours) = $900,000* 45,000 hours = $20 per machine hour *Rounded Assembly.................. ($433,962 1.06) (6,000 hours + 5,500 hours) = $460,000* 11,500 hours = $40 per assembly hour *Rounded
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
CASE 5-68 (CONTINUED) 3. JY-63 20x4 Cost Data
JY-63 Estimated 20x5 Product Cost
Direct material: No cost increase......................... Direct labor: Direct labor $370,370 1.08 cost increase*............... Material handling: Number of parts 5 units produced..................... 5,000 25,000 $1.60 per unit........................ Inspection: Inspection hours 5,000 $20 per hour......................... Machining: Machining activity in 15,000 hours $20 per hour......................... Assembly: Assembly activity in 6,000 hours $40 per hour......................... Total cost......................................
RX-67 20x4 Cost Data
$2,000,000
RX-67 Estimated 20x5 Product Cost $3,500,000
$185,186 400,000
200,000 10 5,000 50,000
40,000
80,000 7,500
100,000
150,000 30,000
300,000
600,000 5,500
240,000
220,000
$3,080,000
$4,750,000
*$400,000 and $200,000 are both rounded.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
CASE 5-68 (CONTINUED) 4.
CINCINNATI CYCLE COMPANY BUDGETED STATEMENT OF GROSS MARGIN FOR 20X5 Sales revenue.................................................. Cost of goods manufactured and sold: Beginning finished-goods inventory............. Add: Direct material..................................... Direct labor.......................................... Material handling................................. Inspection............................................ Machining............................................ Assembly............................................. Cost of goods available for sale.................... Less: Ending finished-goods inventory*.... Cost of goods sold......................................... Gross margin...................................................
JY-63 $3,621,000
RX-67 $4,459,000
Total $8,080,000
$ 480,000 2,000,000 400,000 40,000 100,000 300,000 240,000 $3,560,000 431,200 $3,128,800 $ 492,200
$ 600,000 3,500,000 200,000 80,000 150,000 600,000 220,000 $5,350,000 665,000 $4,685,000 $ (226,000)
$1,080,000 5,500,000 600,000 120,000 250,000 900,000 460,000 $8,910,000 1,096,200 $7,813,800 $ 266,200
*Ending finished-goods inventory = (total product cost inventory in units:
units produced) ending
JY-63: ($3,080,000 5,000 units) 700 units = $431,200 RX-67: ($4,750,000 5,000 units) 700 units = $665,000
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
CASE 5-69 (60 MINUTES) 1. Product costs based on traditional, volumebased costing system............................... × 110%.............................................................. Target price......................................................
2.
Regular Model
Advanced Model
Deluxe Model
$210.00 110% $231.00
$430.00 110% $473.00
$464.00 110% $510.40
Advanced Model $ 50.00 40.00 416.00
Deluxe Model $ 84.00 40.00 153.60
Product costs based on activity-based costing system:
Direct material.................................................. Direct labor...................................................... Machinery depreciation and maintenancea. . . Engineering, inspection and repair of defectsb........................................ Purchasing, receiving, shipping, and material handlingc...................................... Factory depreciation, taxes, insurance, and miscellaneous overhead costsd........ Total..................................................................
Regular Model $ 20.00 20.00 62.40 34.08
87.00
68.15
30.55
104.00
58.50
24.99 $192.02
178.50 $875.50
51.17 $455.42
a
Pool I: Depreciation, machinery............................................................... Maintenance, machinery............................................................... Total................................................................................................ Regular: Advanced: Deluxe:
McGraw-Hill/Irwin Managerial Accounting, 8/e
($3,200,00039%) 20,000 = ($3,200,00013%) 1,000 = ($3,200,00048%) 10,000 =
$2,960,000 240,000 $3,200,000
$ 62.40 $416.00 $153.60
© 2009 The McGraw-Hill Companies, Inc. 5-
CASE 5-69 (CONTINUED) b
Pool II: Engineering.................................................................................... Inspection and repair of defects.................................................. Total................................................................................................ Regular: Advanced: Deluxe:
($1,450,000 47%) 20,000 = ($1,450,000 6%) 1,000 = ($1,450,000 47%) 10,000 =
$ 700,000 750,000 $1,450,000
$ 34.08 $ 87.00 $ 68.15
c
Pool III: Purchasing, receiving, and shipping........................................... Material handling........................................................................... Total................................................................................................ Regular: Advanced: Deluxe:
($1,300,000 47%) 20,000 = ($1,300,000 8%) 1,000 = ($1,300,000 45%) 10,000 =
$ 500,000 800,000 $1,300,000
$ 30.55 $104.00 $ 58.50
d
Pool IV: Depreciation, taxes, and insurance for factory........................... Miscellaneous manufacturing overhead..................................... Total................................................................................................ Regular: Advanced: Deluxe:
($1,190,000 42%) ($1,190,000 15%) ($1,190,000 43%)
20,000 = 1,000 = 10,000 =
$ 600,000 590,000 $1,190,000
$ 24.99 $178.50 $51.17
3. Regular Model Product costs based on activity-based costing system.................................................. × 110%........................................................................ New target price........................................................
$192.02 110% $211.22
Advanced Model $875.50 110% $963.05
Deluxe Model $455.42 110% $500.96
The new target price of the regular model, $211.22, is lower than the current actual selling price, $220.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
CASE 5-69 (CONTINUED) 4.
MEMORANDUM Date:
Today
To:
President Madison Electric Pump Corporation
From:
I.M. Student
Subject:
Product costing
Based on the cost data from our traditional, volume-based product-costing system, our regular model is not very profitable. Its reported actual contribution margin is only $10 ($220 – $210). However, the validity of this conclusion depends on the accuracy of the product costs reported by our product-costing system. Our competitors are selling motors like our standard model for $212. This price suggests that their product cost is substantially below our previously reported cost of $210. Our new, activity-based costing system reveals serious product cost distortions stemming from our old costing system. The new costing system shows that the regular model costs only $192.02, which implies a target price of $211.22. This price is lower than our current actual selling price and roughly consistent with the price our competitors are charging. In contrast, our new product-costing system reveals that the advanced model's product cost is $875.50 instead of the previously reported cost of $430. The new product cost suggests a target price of $963.05 for the advanced model, rather than $473, which was our previous target price for the advanced model.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
CASE 5-69 (CONTINUED) 5.
The company should adopt and maintain the activity-based costing system. The price of the regular model should be lowered to the $212. Lowering the price should enable the firm to regain its competitive position in the market for the regular model. Further price cuts should be considered if marketing studies indicate such a move will increase demand. The price of the advanced model should be set near the target price of $963.05. If the advanced model does not sell at this price, management should consider discontinuing the product line. Input from the marketing staff should be sought before such an action is taken. An important consideration is the extent to which sales in the regular model and deluxe model markets depend on the firm's offering a complete product line. A slight price reduction should be considered for the deluxe model (from $510.40 down to $500.96). However, the product cost distortion from the old costing system did not affect this model as seriously as it did the other two.
McGraw-Hill/Irwin Managerial Accounting, 8/e
© 2009 The McGraw-Hill Companies, Inc. 5-
