ch03sm

53

Chapter 3 Traditional Cost Management Systems

QUESTIONS 3-1 Costs need to be estimated for individual jobs in order to bid for them and to

price them competitively. Estimated costs are also useful for comparison with actual costs for management control purposes. Costs may differ across individual jobs because jobs may differ in their materials content, the hours of labor required to manufacture them and in the demand they place on support activity resources.

3-2 A typical job bid sheet has the following five distinct parts:

1. The name of the customer, product and quantity required. 2. Estimated quantity and current price for different materials. 3. The wage rate and hours required for direct labor. 4. Estimated manufacturing support cost. 5. Estimated total cost, bid price, unit cost and unit price.

3-3 Two types of information are required to estimate direct material cost for a

job. The quantity required for each item of material is estimated based on standard engineering specifications. Information on the price of each item of material is obtained from the purchasing department.

3-4 Two types of information are required to estimate direct labor cost. Direct

labor hours are estimated based on industrial engineering specifications (e.g. work and motion studies) or by analogy with comparable standard products. Wage rates for each grade of labor required for the operations performed are obtained from personnel records.

Atkinson, Solution Manual t/a Management Accounting, 4E

54

3-5 Cost driver rates are determined by dividing the cost of the resources committed to the support activity, by the capacity made available by the resources committed to the activity.

3-6 Support cost for a job is estimated by multiplying the cost driver rate(s) by

the number of units of the support cost driver(s) associated with the job. 3-7 Markup rate is the percentage addition to the estimated job cost to calculate

the bid price. The markup rate depends on a variety of factors, including:

Proportion of indirect costs excluded from the numerator in the computation of the cost driver rate

Target rate of return desired by the firm Past bidding strategies of key competitors Demand conditions Overall product-market strategies

3-8 Each cost pool is a portion of the total support costs associated with a distinct cost driver. Multiple cost pools are required when support costs are driven by more than one factor (cost driver).

3-9 Determination of cost driver rates based on planned or actual short-term

usage will result in rates that are too high in periods of low demand and that are too low in periods of high demand. As a consequence, job costs are distorted in such a job costing system.

3-10 Yes. A separate cost driver rate must be determined for each cost pool when

there are multiple cost drivers involved, or else job cost estimates may be distorted. However, if the different cost drivers vary together in the same proportion then any one of them will be sufficient.

3-11 Cost pools collect support costs into separate groups, for each of which a

separate cost driver rate is used. The general principle in determining the number of cost pools is that a separate cost pool should be used for the cost of an activity if the pattern of demand for it varies across products in proportions different from those reflected in existing cost pool drivers. The increase in measurement costs for a more detailed cost system, however, must be traded off against the benefit of increased accuracy in estimating product costs.

Chapter 3: Traditional Cost Management Systems

55

3-12 Tracking the actual cost of individual jobs allows managers to compare the actual cost against the estimated cost and determine if there are unexpected variations in the efficiency in using activity resources. Such comparisons between actual and estimated costs help managers bid more accurately on future jobs and take corrective actions to alleviate unfavorable variations in costs.

3-13 Unlike direct material costs and direct labor costs, support costs cannot be

traced easily to each job. When actual costs are recorded for a job during the course of a fiscal period, the total support costs for the period and consequently the actual cost driver is not yet determined. Therefore, costs are applied to jobs using predetermined rates.

3-14 Conversion costs are the costs of converting raw materials into finished

products. They include the costs of production labor and support activities at each process stage.

3-15 Continuous processing plants are characterized by the fact that production

flows continuously, semi-continuously, or in large batches from one process stage to the next. At each successive process stage, further progress is made toward converting the raw materials into finished products. Therefore, the product costing system must accumulate conversion costs assigned to individual products for successive process stages. Product costs must also reflect the yield ratesthe fraction of the input materials in a process stage that is transferred to the next process.

3-16 Multistage process costing systems have the same objective as job order

costing systems. Both types of systems assign material, labor, and manufacturing support activity costs to products. The two types of systems differ, however, on some dimensions. In a job order environment, production requirements vary across different jobs, so production occurs job by job and costs are measured for individual jobs. In addition, cost reports that compare actual to estimated costs may be determined for individual jobs. In a multistage process environment, production requirements are homogeneous across products or jobs, so production occurs continuously, semi-continuously, or in large batches, and costs are measured for individual process stages. Because of the homogeneous production, cost reports that compare actual to estimated costs are likely to be determined only for individual process stages.


56

3-17 Production departments are those directly responsible for transforming raw materials into finished products. Service departments are departments that perform support activities, such as production engineering and machine maintenance.

3-18 Conventional product costing systems assign indirect costs to jobs or

products in two stages. In the first stage, indirect costs are identified with various production and service departments, and all the service department costs are then allocated to production departments. In the second stage, the accumulated indirect costs for the production departments are assigned to individual jobs or products based on predetermined departmental cost driver rates.

3-19 Because jobs are worked on only in a production department, conventional

costing systems assume that we cannot obtain direct measures of the use of service department resources on individual jobs as conveniently as we can of production department resources. Therefore, these costing systems allocate service department costs first to the production departments before assigning them to individual jobs.

3-20 The direct method is used when service department activities only benefit

production departments. This method assumes no interaction among service departments and assigns their costs directly to production departments. The sequential method is used when there are no reciprocal interactions between service departments. Costs are allocated one at a time to other service departments in a sequential order. The reciprocal method recognizes reciprocal interactions between different service departments and allocates costs between service departments simultaneously.

3-21 Conventional two-stage cost allocation systems are likely to systematically

distort product costs because they break the link between the cause for the costs and the basis for assignment of the cost to the individual products.

3-22 Two factors that contribute to cost distortions when using conventional two-

stage cost accounting systems are (1) the use of unit-related measures and (2) differences in relative consumption ratios. Unit-related measures are used to allocate support costs to products, but the demand for activities might be driven by batch-related and product-sustaining cost drivers. Also, costs distortions tend to be greater when the differences between relative proportions of the activity cost drivers and the base for second-stage assignment are greater.


57

EXERCISES 3-23 (a) Support cost driver rate:

labor cost direct labor cost

$5, ,$2, ,

000 000500 000 direct

2=

(b) Consulting engagement cost:

Labor cost $20,000 Support cost 2 labor cost 40,000 Total cost $60,000

3-24 (a) Plantwide cost driver rate:

$60,000

4,000 direct labor hours $15 per direct labor hour=

(b) Departmental cost driver rates: Cutting Department:

$25,000

4,000 machine hours per machine hour= $6.25

Assembly Department:

labor hours $11.67 per direct labor hour

$35,,

0003 000 direct

=

(c) The company may favor the method in (b) if support activity costs in

the cutting department have a cause-and-effect relationship with machine hours, while those in the assembly department have a cause-and-effect relationship with direct labor costs. The company may use


58

the method in (a) because it is simpler than the method in (b), which is potentially more accurate.

3-25 (a) Month Actual Machine Hours Monthly SupportCosts January 1,350 $51.85 February 1,400 $50.00 March 1,500 $46.67 April 1,450 $48.28 May 1,450 $48.28 June 1,400 $50.00 July 1,400 $50.00 August 1,400 $50.00 September 1,500 $46.67 October 1,600 $43.75 November 1,600 $43.75 December 1,600 $43.75

Total Hours 17,650

(b) The support cost driver rate should be determined as the ratio of the cost of a support activity accumulated in the cost pool to the cost driver quantity for the activity. For Tokis machine-related support costs, the computation is:

$70, $46.000 1212

67 = months

1,500 machine hours months per machine hour

If the cost driver rate is based instead on actual or budgeted activity quantities that fluctuate over time, then support activity costs will be understated in periods of high demand and overstated in periods of low demand, as shown in part (a). If Tokis support costs are caused by multiple cost drivers, the company may develop a more accurate cost system by using multiple cost driver rates.

3-26 Ingredient A: $0.40 10,000 $4,000 Ingredient B: $0.60 20,000 12,000 $16,000 Conversion costs: $0.55 30,000 $16,500 Total costs $32,500 Number of gallons of blended vegetable juice 27,000 Cost per gallon of blended vegetable juice $1.204


59

3-27 Direct materials $232,000 Direct labor 120,000 Support costs 60,000 Disposal costs of waste product 20,000 Total costs $432,000 Number of pounds of Goody 200,000 Cost per pound of Goody $2.16 3-28 (a) Allocation of setup costs:

Assembly Dept.: $40, $30,000 300300 100

000 + =

Finishing Dept.: $40, $10,000 100300 100

000 + = (b) Allocation of inspection costs:

Assembly Dept.: $15, $4, .000 200200 500

28571 + =

Finishing Dept.: $15, $10, .000 500200 500

714 29 + = 3-29 Service Departments Production Departments S1 S2 P1 P2 Directly identified

costs

$65,000

$55,000

$160,000

$240,000

Allocation of S1 costs (65,000) 15,000 20,000 30,000

Allocation of S2 costs (70,000) 33,600 36,400

Total allocated support costs $0 $0 $213,600 $306,400


60

3-30 (a) P1 P2

S1 $300: , $150,00030

30 30000 + =

$300, $150,000 3030 30

000 + =

S2 : $300, $100,00025

25 50000 + =

$300, $200,000 5025 50

000 + =

$250,000 $350,000

(b) S1 S2 P1 P2 Directly

identified $300,000 $300,000

Allocation of S1 costs ($300,000) 120,000 $90,000 $90,000

Allocation of S2 costs (420,000) 140,000 280,000

Totals $0 $0 $230,000 $370,000

(c) S S21 000 025= +$300, . S2 S= +$300, .000 0 4 1 Therefore,

S1 S1S

S1

S1

S2

= + +( )= +== == + =

$300, . $300, .$375, .

. $375,$375,

.$416,

$300, . $416, $466,

000 025 000 04000 01 1

09 000000

09667

000 04 667 667


61

Allocation of S1 and S2 costs to P1 and P2 P1 P2 S1: $416,667 30% $125,000 $416,667 30% $125,000

S2: $466,667 25% $116,667 $466,667 50% $233,333

$241,667 $358,333

The summary below incorporates the allocation of 0.25 S2 = $116,667 to S1 and 0.4 S1= $166,667 to S2.

S1 S2 P1 P2 Directly identified $300,000 $300,000

Allocation of S1 costs (416,667) 166,667 $125,000 $125,000

Allocation of S2 costs 116,667 (466,667) 116,667 233,333

Total $0 $0 $241,667 $358,333


62

PROBLEMS 3-31 Job 101 Job 102 Job 103 Beginning work- in-process:

$25,500

$32,400

$0

Direct materials: Dept. 1 $40,000 $26,000 $58,000 Dept. 2 3,000 5,000 14,000 Dept. 3 0 0 0 $43,000 $31,000 $72,000

Direct labor: Dept. 1 $12 $6, =500 000 $12 $4, =400 800 $12 $3, =300 600 Dept. 2 $18 $3, =200 600 $18 $4, =250 500 $18 $6, =350 300 Dept. 3 $15 , $22, =1 500 500 $15 , $27, =1 800 000 $15 , $37, =2 500 500 $32,100 $36,300 $47,400

Mfg. support: Dept. 1 150% 000 500 =$43, $64, 150% 000 500 =$31, $46, 150% 000 000 =$72, $108, Dept. 2 $8 , , =1 200 9 600 $8 , , =1 500 12 000 $8 , , =2 700 21 600 Dept. 3 200% 100 200 =$32, $64, 200% 300 600 =$36, $72, 200% 400 800 =$47, $94, $138,300 $131,100 $224,400

Total costs $238,900 $230,800 $343,800

(a) Total cost of completed Job 101 = $238,900

(b) Total cost of completed Job 102 = $230,800

(c) Work-in-process for Job 103 at April 30 = $343,800


63

3-32 A good case can be made for any of the three alternatives presented below: Alternative 1: Allocate in the proportion of actual passengers Week Boston Cambridge 1 $4,800 $2,400 2 4,500 * 2,700 3 5,118 2,482 4 5,200 ** 2,600 5 5,100 2,100

* 1 5002 400

7 200 500,,

, $4, =

** 1 7002 550

7 800 200,,

, $5, = This method is justified by the argument that all costs should be spread

equally over all passengers.

Alternative 2: Charge capacity cost of $3 = 7,2002,400

per passenger Week Boston Cambridge Unallocated 1 $4,800 * $2,400 2 4,500 2,700 3 4,950 2,400 $250 4 5,100 2,550 150 5 5,100 2,100

* 1,600 passengers $3 per passenger

Using capacity cost per passenger to allocate service center costs is justified by the argument that the service center costs are caused primarily by the capacity that is made available rather than the actual usage of the committed resources.


64

Alternative 3: Allocate normal costs 2:1 (1,600:800) based on long run demand and additional help costs in the proportion of additional demand.

Week Boston Cambridge 1 $4,800 $2,400 2 4,800 2,400 3 5,200 * 2,400 4 5,200 ** 2,600 5 4,800 2,400

* 5 200 4 800 7 600 7 200, , , ,= + a f ** 5 200

7 800 1 700 1 600

1 700 1 600 850 800,

, , ,

, ,= +

a fa f a f

This method best reflects the factors that cause the costs to be incurred. 3-33 (a) Portland Electronics, Inc.: Job Cost Sheet

Customer: Video Shack Product: Computer Monitors, 1,000 units

Direct material Quantity Price Amount Part A327 1,000 units $60 $60,000 Part B149 1,000 units 120 120,000 Total direct material cost $180,000

Direct labor Hours Rate Amount Assembly 6,000 $10 $60,000 Inspection 1,000 12 12,000 Total direct labor cost 7,000 $72,000

Support costs Amount

7,000 Direct labor hours @ $5 per hour $35,000

Total cost $287,000

Number of units produced 1,000

(b) Cost per monitor $287


65

3-34 Baker Auto Shop: Job Cost Sheet for Job #379 Direct material Quantity Price Amount Engine oil 11 ounces $2 $22 Lubricant 2 ounces 3 6 Total direct material cost $28

Direct labor Hours Rate Amount Direct labor 3 $15 $45

Support costs Amount 3 Direct labor hours @ $10 per hour $ 30

Total cost $103

3-35 (a) Plantwide cost driver rate

= ++==

$120, $160,( , )

$280,,

$14

000 0008 000 12,000

00020 000 direct

direct labor hours

labor hours per direct labor hour

Job Cost Sheet: Job #691

Direct materials Amount Milling $800 Assembly 50 Total direct material cost $850

Direct labor Amount Milling $100 Assembly 600 Total direct labor cost $700

Manufacturing Support Amount 50 Direct labor hours @ $14 per hour $ 700 Total cost $2,250


66

(b) Cost driver rate Millingmachine hours

per machine hour

==

$120,

$10

00012,000

Cost driver rate Assemblydirect labor hours

per direct labor hour

==

$160,

$13.

00012,000

33

Job Cost Sheet: Job #691

Direct materials Amount Milling $800 Assembly 50 Total direct material cost $850

Direct labor Amount Milling $100 Assembly 600 Total direct labor cost $700

Support Amount Milling: 18 machine hours @ $10 per hour $180 Assembly: 40 direct labor hours @ $13.33 per hour 533 Total overhead cost $713 Total cost $2,263

(c)

Part (a) Part (b) Manufacturing cost $2,250.00 $2,263.00 25% markup 562.50 565.75 Bid price $2,812.50 $2,828.75

(d) The company may favor the method in (b) if support activity costs in

the milling department have a cause-and-effect relationship with machine hours, while those in the assembly department have a cause-and-effect relationship with direct labor costs. In this case, the computed total manufacturing cost in part (a) is of similar magnitude to the cost in part (b), and therefore the bid prices are also of similar magnitude. Given this result, one might be inclined to use the simpler method in part (a) rather than the more accurate but more complex method in part (b). However, comparisons across different products may produce greater differences in computed costs and bid prices.


67

3-36 (a) Cutting Grinding Drilling Total

Support cost $504,000 $2,304,000 $2,736,000 $5,544,000

Direct labor hours 60,000 96,000 144,000 300,000

Plantwide cost driver rate:

$5,

,$18.544,000

300 000 direct48 per dir

labor hoursect labor hour=

Support cost applied to Job ST101: $18.48 (2,000 + 2,500 + 3,000) = $138,600.

(b) Cost driver rate: Cutting

$504,,

$0.000960 000

525= per machine hour

Cost driver rate: Grinding

$2,,

$24304,00096 000 direct labor hours

per direct labor hour=

Cost driver rate: Drilling

$2, , $19736 000144,000 direct labor hours

per direct labor hour=


68

Support cost applied to Job ST101: Dept Rate Units of Driver Used Support Cost Cutting $0.525 20,000 MH $10,500 Grinding $24.00 2,500 DLH 60,000 Drilling $19.00 3,000 DLH 57,000 $127,500

(c) The company may favor departmental support cost driver rates if support

activity costs in the cutting department have a cause-and-effect relationship with machine hours, while those in the grinding and drilling departments have a cause-and-effect relationship with direct labor costs. The company may use the method a plantwide cost driver rate because it is simpler than using multiple departmental rates, though the departmental rate method is potentially more accurate.

3-37 (a) Cost driver rate for machining:

$500,,

$2500020 000 machine hours

per machine hour= Cost driver rate for finishing:

$400,$500,

.000000

80%= of direct labor cost

(b) Machining

Department Finishing

Department

Total Direct material cost $12,000 $2,000 $14,000 Direct labor cost 300 1,200 1,500 Manufacturing support 2,000a 960b 2,960 Total costs of Job 134 $14,300 $4,160 $18,460

a 2 000 80, $25= b $960 ,= 80% 1 200of


69

(c) Gonzalez Company likely believes that its manufacturing support costs

are driven by different factors. Specifically, support activity costs in the machining department have a cause-and-effect relationship with machine hours, while those in the finishing department have a cause-and-effect relationship with direct labor costs.

3-38 (a) Brumelle Electronic Company: Job bid sheet

Job Bid Sheet Customer: Takayama, Inc.

Product: ICB371 Number of units: 1,000

Quantity Price Amount Direct material 2,000 units $10 per unit $20,000 Direct labor 1,000 hours $10 per hour 10,000 Manufacturing support

$6a per direct labor hour 6,000

Total estimated costs $36,000 Markup (20%) 7,200 Bid price $43,200

a $300,000 50,000 = $6 per direct labor hour

(b) Brumelle Electronic Company: Job cost sheet

Job Cost Sheet Customer: Takayama, Inc.

Product: ICB371 Number of units: 1,000

Quantity Price Amount Direct material 2,100 units $9.75 per unit $20,475 Direct labor 1,000 hours $11 per hour 11,000 Manufacturing support

$6 per direct labor hour 6,000

Total actual costs $37,475


70

(c) The differences between actual and estimated material quantity and material price per unit could reflect poorer quality materials (for example, a higher percentage of defects) that resulted in requisitioning a larger number of units of material than expected. Although the job required the same number of labor hours as estimated, the hourly rate was higher than estimated. This may be because there are several grades of labor with differing wage rates, while a single common rate is used for estimating labor costs on jobs.

3-39 (a) Service Departments Production Departments Personnel Maintenance Machining Assembly Directly identified

costs $100,000 $200,000 $400,000 $300,000 Allocation of

Personnel Dept. costs

(100,000)

11,111a

88,889b

Allocation of Maintenance Dept. costs (200,000)

176,471c

23,529d $0 $0 $587,582 $412,418

a $100,000545

c $200, ,,

0007 5008 500

b $100,0004045

d $200, ,,

0001 0008 500

(b) Cost driver rate: Machining ==

$587,,

$58.

58210 000 machin

7582e hours

per machine hour

Cost driver rate: Assembly ==

$412,,

$41.

41810 000 direct

2418 per d labor hours

irect labor hour


71

Direct materials and labor costs: $ 450.00

Support costs from Machining Department ($58.7582 3 machine hours)

176.27

Support costs from Assembly Department ($41.2418 5 direct labor hours)

206.21

Total unit cost $ 832.48

Markup (30%) 249.74

Bid price $1,082.22 (c) Service Departments Production Departments Personnel Maintenance Machining Assembly Directly

identified costs $100,000 $200,000 $400,000 $300,000

Allocation of Personnel Dept. costs

30,000a

(200,000)

150,000b

20,000c

Allocation of Maintenance Dept. costs (130,000)

14,444d

115,556e

$0 $0 $564,444 $435,556

a $200, ,,

0001 500

10 000 d $130,000 5

45

b $200,,,

0007 500

10 000 e $130,000 40

45

c $200,,,

0001 000

10 000

(d) Cost driver rate: Machining ==

$ ,,

$ .

564 44410 00056 4444

machine hours per machine hour


$ ,,

$ .

435 55610 00043 5556

direct labor hours per direct labor hour


72

Direct materials and labor costs: $450.00

Support costs from Machining Department ($56.4444 3 machine hours)

169.33

Support costs from Assembly Department ($43.5556 5 direct labor hours)

217.78

Total unit cost $837.11

Markup (30%) 251.13

Bid price $1,088.24

3-40 (a) Service Departments Production Departments Maintenance Grounds Machining Assembly Directly

identified costs

$18,000

$14,000

$45,000

$25,000

Allocation of Maintenance Dept. costs

(18,000)

12,000a

6,000b

Allocation of Grounds Dept. costs

(14,000)

6,000c

8,000d

$0 $0 $63,000 $39,000

a $18,,,

00012 00018 000

c $14, ,,

00015 00035 000

b $18,,,

0006 000

18 000 d $14, ,

,000

20 00035 000


73

(b) Service Departments Production Departments Maintenance Grounds Fabricating Assembly Directly


Allocation of Personnel Dept. costs

(18,000)

1,385a

11,077b

5,538c

Allocation of Maintenance Dept. costs

(15,385)

6,594d

8,791e

$0 $0 $62,671 $39,329

a $18,,,

0001 500

19 500 d $15, ,

,385

15 00035 000

b $18,,,

00012 00019 500

e $15, ,,

38520 00035 000

e $18,,,

0006 000

19 500


74

(c) Service Departments Production Departments Maintenance Grounds Fabricating Assembly Directly

identified costs $18,000.000 $14,000.000 $45,000.000 $25,000.000

Allocation of Maintenance Dept. costs ($19,193.481)

($19,193.481)

1,476.422a

11,811.372b

5,905.686c

Allocation of Grounds Dept. costs ($15,515.274)

1,224.890d

(15,515.274)

6,124.450e

8,165.934f

$62,936.000 $39,072.000

round-off errors

a $19, . ,,

193 4811 500

19 500 d $15, . ,

,515 274

3 00038 000

b $19, . ,,

193 48112 00019 500

e $15, . ,,

515 27415 00038 000

c $19, . ,,

193 4816 000

19 500 f $15, . ,

,515 274

20 00038 000

M G

G M

= +

= +

$18, ,,

$14, ,,

000 150019 500

000 3 00038 500

Therefore,

M M

MM

G

= + +FHGIKJ

=== + =

$18, ,,

$14, ,,

. $19, .$19, .

$14, ,,

, .

$15, .

000 150019 500

000 3 00038 000

0 9939272 076 923193481

000 3 00038 000

19 193481

515274


75

3-41 (a) Service Dept. Cost Allocation: Direct Method Service Departments Production Departments Maintenance Power Casting Assembly Directly

identified costs

$750,000

$450,000

$150,000

$110,000

Allocation of Maint. Dept. costs

(750,000)

500,000

250,000

Allocation of Power Dept. costs

(450,000)

250,000

200,000

$0 $0 $900,000 $560,000

Cost driver rate: Casting

machine hours per machine hour

==

$900,,

$11.

00080 000

25

Cost driver rate: Assembly

direct labor hours per direct labor hour

==

$560,,

$9.

00060 000

33

Maintenance: Casting

Assembly

= +RST

UVW =

= +RST

UVW =

750 000 80 00080 000 40 000

500 000

750 000 40 00080 000 40 000

250 000

, ,, ,

,

, ,, ,

,

Power: Casting

Assembly

= +RST

UVW =

= +RST

UVW =

450 000 200 000200 000 160 000

250 000

450 000 160 000200 000 160 000

200 000

, ,, ,

,

, ,, ,

,


76

Direct labor and material costs $32.000

Support costs:

Casting (1 $11.25) $11.250

Assembly (0.5 $9.33) 4.665 15.915

Unit cost $47.915

Number of units per month 1,000.000

Total manufacturing costs per month $47,915.000

Mark up (25%) $11,978.750

Bid price (per month) $59,893.750 (b) Service Dept. Cost Allocation: Sequential Method

Service Departments Production Departments Maintenance Power Casting Assembly Directly


Allocation of Maint. Dept. costs

(750,000)

$300,000

300,000

150,000

Allocation of Power Dept. costs (750,000) 416,667 333,333

$0 $0 $866,667 $593,333

Cost driver rate: Casting ==

$ ,,

$ .

866 66780 00010 833 per machine hour


$ ,,

$ .

593 33360 0009 889 per labor hour


77


Support costs:

Casting (1 $10.833) $10.833

Assembly (0.5 $9.889) 4.944 15.777

Unit cost $47.777



Mark up (25%) $11,944.250

Bid price (per month) $59,721.250

(c) M PP M= += +

$750, .$450, .

000 01000 04

Therefore,

M MM MM

= + += +=

$750, . , .$795, .

. $795,

000 01 450 000 0 4000 0 04

0 96 000

a f

M

P

= == + =

$795,.

$828,

, . $828, $781,

000096

125

450 000 04 125 250

Casting Assembly Directly identified costs $150,000 $110,000

Allocation of Maint. Dept. costs $828,125 40% = $331,250 $828,125 20% = $165,625

Allocation of Power Dept. costs $781,250 50% = $390,625 $781,250 40% = $312,500

$871,875 $588,125


78

Cost driver rate: Casting ==

$ ,,

$ .

871 87580 00010 8984 per machine hour


$ ,,

$ .

588 12560 0009 8021 per labor hour


Support costs:

Casting (1 $10.8984) $10.8984

Assembly (0.5 $9.8021) 4.9011 15.7995

Unit cost $47.7995



Mark up (25%) $11,978.7500

Bid price (per month) $59,749.3750

CASES 3-42 (a) Let salaries be denoted as follows: M = manager, S = senior

mechanic, and J = junior mechanic. The estimated total support costs are:

( )Personnel costs 1 4 4 Capacity-related costs

$75,000 (4 $65,000) (4 $45,000) $96,800$611,800

M S J+ + += + + +=

Estimated total number of hours on customer jobs = =8 1 750 95% 13 300, , hours. Therefore, the cost driver rate

hourper 46$hours 300,13800,611$ ==


79

Furthermore,

46100

106.51 +=

x

so x = 11. (b) Class A Repairs Class B Repairs Estimated

total conversion costs 611800 60% 080, $367, = 611800 40% 720, $244, =

Estimated total hours on customer jobs

13 300 12

6 650, , =

13 300 12

6 650, , =

Support cost per customer job hour

367,0806 650

20 per hou,

$55.= r 244,7206 650

80 per hou,

$36.= r

Price per hour $55. . $61.2 111 27 = per hour $36. . $40.8 111 85 = per hour

(c) Job 101: 4 5 1 5. .A B+ Job 102: 2B (Note: A = Class A repair hours, B = Class B repair hours) Under the present accounting system, costs charged to: Job 101: 6 51 06 306 36 =. $ . Job 102: 2 51 06 102 12 =. $ . Under the proposed accounting system, costs charged to: Job 101: 4 5 61 27 1 5 40 85 337 00. . . . $ . + = Job 102: 2 40 85 81 70 =. $ .


80

Therefore, under the present accounting system: Job 101 is undercosted and underpriced. Job 102 is overcosted and overpriced. (d) Depending on competition for repairs, the proportion of Class B

repairs may increase and the proportion of Class A repairs may decrease because of the price change.

(e) The current costing system is simple to administer and results in

pricing at a uniform labor rate (that includes coverage of support costs). The proposed costing system more accurately reflects resource usage, but is more complex to administer and to communicate to customers in pricing.

ch03sm

Documents

estimated job cost

unit cost

total cost

support cost drivers

distinct cost driver

direct labor cost

job cost estimates

separate cost driver