financial accounting mglmod4

Activity – Based CostingDemonstration Problem 1

MacLean Appliances manufactures and sells two types of blenders, 8 speed and 16 speed. MacLean Appliances manufactures 80,000 units of the 8 speed blender and 20,500 units of the 16 speed blender. Manufacturing overhead costs total $804,000 each year. Factory overhead is currently assigned based on direct labor hours. Costs for materials and labor for one unit of each product are given below:

Product

8 speed 16 speedDirect materials per unit $8 $12Direct labor (at $12 per hour) $6 $6

MacLean Appliances has recently decided to switch over to an activity-based costing system. The following information has been collected about overhead costs and cost drivers for each product.

Estimated Estimated ActivityOverhead

Activity Center (and Cost Drivers) Costs Total 8 speed 16 speed

Machine setups (number of setups) 44,000 1,100 600 500Purchase Orders (number of orders) 120,000 600 400 200Material handling (material moves) 192,000 8,000 3,000 5,000Maintenance(machine-hours) 448,000 32,000 20,000 12,000

$804,000Required1. Calculate the cost per unit for each product using direct labor hours to assign overhead.2. Calculate (a) the overhead cost per unit for each product and (b) total cost per unit, using activity based costing to assign overhead.

Solution:1.Direct labor hour for each unit of the 8 speed blender = $6/12 =0.5Total direct labor hours for the 8 speed blender = 0.5 x 80,000 = 40,000Direct labor hour for each unit of the 16 speed blender = $6/12 =0.5Total direct labor hours for the 16 speed blender = 0.5 x 20,500 = 10,250Total direct labor hours for both products = 50,250

Manufacturing overhead costs, $804,000 = $16 per direct labor-hourDirect labor-hours, 50250

Cost per unit for each product using direct labor hours to assign overhead.

8-speed 16-speedDirect materials $8 $12Direct labor 6 6Manufacturing overhead applied: 8-speed: 0.5 hrs x $16 per hour 8 16-speed: 0.5 hrs x $16 per hour 8Total unit product cost $22 $26

2. a.Overhead Activity Estimated

Overhead CostsTotal Expected

ActivityOverhead Rate

Machine Setups $ 44,000 1,100 $40 per setupPurchase Orders 120,000 600 $200 per orderMaterials Handling 192,000 8,000 $24 per moveMaintenance 448,000 32,000 $14 per machine hourTotal costs $804,000

Activity Center Predetermined Overhead Rate

8 speed blenderActivity

8 speed blenderAmount

16 speed blenderActivity

16 speed blenderAmount

Machine Setups $40 per setup 600 24,000 500 20,000Purchase Orders $200 per order 400 80,000 200 40,000Materials Handling

$24 per move 3,000 72,000 5,000 120,000

Maintenance 14/machine hour

20,000 280,000 12,000 168,000

456,000 348,000

Overhead per unit for 8 speed blender = $456,000/80,000 = $5.70Overhead per unit for 8 speed blender =$348,000/20,500 = $16.98

b. Cost per unit using activity based costing

8-speed 16-speedDirect materials $8.00 $12.00Direct labor 6.00 6.00Manufacturing overhead (see above) 5.70 16.98Total unit product cost $19.70 $34.98

Practice Problem 1Cost Classification

I. Classify the following as unit level, batch level, product level or facility level costs:

Engineering costs product levelSetup costs batch levelSalary of Accounting Staff facility levelDirect materials unit levelSupervision costs (Each supervisor is responsible for one product line)

product level

Purchase orders batch levelReceiving materials batch levelInsurance on factory facility levelWarehouse Costs (Each product line has a separate warehouse)

product level

Landscaping facility level

Cost of Quality

The following quality costs are incurred by a software company. Classify each of following costs as (1) prevention costs (2) appraisal costs (3) internal failure costs and (4) external failure costs.

Replacement of defective products external failureLost sales external failureCosts of preparing error reports by quality control personnel appraisal Cost of technical support department that handles complaints external failureAuthor time on testing software prevention Design review for new products prevention Costs of correcting errors found by quality control internal failure Costs of production runs for producing product revised to address customer complaints

external failure

Cost of telephone hotline to handle customer complaints external failureCosts of distributing corrected software to existing users after product has been revised to address customer complaints

external failure

Practice Problem 2Melody Company

Melody Company, manufactures and sells two types of keyboards, A and B. Each year, Melody Company manufactures 60,000 units of the keyboard A and 20,000 units of keyboard B. Manufacturing overhead costs are estimated to be $2,940,000 each year. Factory overhead is currently assigned based on direct labor hours. Costs for materials and labor for one unit of each product are given below:

ProductA B

Direct materials $30 $45Direct labor (at $10 per hour) 35 42

Melody Company has recently decided to switch over to an activity-based costing system. The following information has been collected about overhead costs and cost drivers for each product.

Estimated Expected ActivityOverhead

Activity and Cost Driver Costs Total Product A Product B

Material receipts (receipts) $495,000 3,300 1,000 2,300Machine setups (number of setups) 405,000 162 84 78Packing(number of orders) 540,000 30,000 20,000 10,000Machining(machine-hours) 1,176,000 12,000 7,000 5,000Engineering design (inspections) 324,000 10,125 6,125 4,000

Required1. Calculate the cost per unit for each product using direct labor hours to assign overhead.2. Calculate the overhead cost per unit and the total cost per unit for each product using activity based costing is used to assign overhead.

1.Direct labor hour for each unit of product A = $35/10 = 3.5Total direct labor hours for product A = 3.5 x 60,000 = 210,000Direct labor hour for each unit of product B= $42/10 = 4.2Total direct labor hours for product B = 4.2 x 20,000 = 84,000Total direct labor hours for both products = 294,000 (210,000 + 84,000)

Manufacturing overhead costs, $2,940,000 = $10 per direct labor-hourDirect labor-hours, 294,000

Cost per unit for each product using direct labor hours to assign overhead. A B

Direct materials $30 $45Direct labor 35 42Manufacturing overhead applied: Product A: 3.5 hrs x $10 per hour 35 Product B: 4.2 hrs x $10 per hour 42Total unit product cost $100 $129

2.Activity Center Estimated


ActivityOverhead Rate

Material Receipts $ 495,000 3,300 $150/receiptMachine Setups 405,000 162 $2,500 per setupPacking 540,000 30,000 $18 per orderMachining 1,176,000 12,000 $98 per machine hourEngineering Design 324,000 10,125 $32 per inspectionTotal Costs $2,940,000


Activity Amount Activity Amount

Material receipts $150 per receipt 1,000 150,000 2,300 345,000Machine Setups $2,500 per setup 84 210,000 78 195,000Packing Orders $18 per order 20,000 360,000 10,000 180,000Machining $98 per m/c hour 7,000 686,000 5,000 490,000Engineering $32 per inspection 6,125 196,000 4,000 128,000Total costs $1,602,000 $1,338,000

Overhead per unit for product A = $1,602,000/60,000 =$26.70Overhead per unit for product B = $1,338,000/20,000= $66.90

3. Cost per unit for each product using direct labor hours to assign overhead. A B

Direct materials $30.00 $45.00Direct labor 35.00 42.00Manufacturing overhead (see above) 26.70 66.90Total unit product cost $91.70 $153.90

Homework Problems

Exercsies

I. Multiple Choice

1. Haley company uses a traditional cost system and applies overhead on the basis of direct labor hours. Haley Company is considering using an activity-based costing approach for computing overhead. How does a change to activity-based costing typically affect unit costs? 2. unit cost of high-volume products decrease; unit costs of low-volume

products increase3. unit cost of high-volume products increase; unit costs of low-volume products

decrease4. unit costs of all products decrease5. unit costs of all products increase

6. The labor time used to assemble a stereo system is an example of7. batch-level activity8. facility-level activity9. unit-level activity10. product-level activity

3. You have been asked to prepare a report on costs of different products for management decision-making. Costs associated with which of the following costs should not be assigned to individual products?

4. batch-level activity5. facility-level activity6. unit-level activity7. product-level activity

8. The cost of designing the graphics for a new software product is an example of a9. batch-level activity10. facility-level activity11. unit-level activity12. product-level activity

5. The cost of training plant employees is a(n): 6. prevention cost7. appraisal cost8. internal failure cost9. external failure cost

6. The cost of product recalls is a(n):7. prevention cost

8. appraisal cost9. internal failure cost10. external failure cost

7. The cost of inspecting products to ensure that they conform to specifications is a(n): 8. prevention cost9. appraisal cost10. internal failure cost11. external failure cost

8. Activity-based costing is a two-stage allocation process in whichA. overhead is assigned to activities in the first stageB. overhead is assigned to products in the first stageC. overhead is assigned to departments in the first stageD. overhead is assigned to jobs in the first stage

9. The cost of purchase orders is an example of10. batch-level activity11. facility-level activity12. unit-level activity13. product-level activity

10. Which of the following statements about activity-based costing is false?11. Activity-based costing uses a single overhead rate for the plant.12. The use of activity-based costing leads to more accurate overhead assignment when

a company produces products that vary significantly in volume and complexity.13. Activity-based costing involves a two stage allocation process.14. Unit cost of high-volume products decrease and unit costs of low-volume products

increase as compared to traditional costing methods.

II. Matching Problem

B System of overhead allocation in which actual costs are accumulated over a period and divided by actual units produced

A. Activity-based costing

D System of overhead allocation in which estimated overhead costs for a period are divided by an estimated activity such as direct labor hours to calculate a predetermined overhead rate

B. Actual Costing System

A Costing system that traces costs to activities such as machine setups, purchase orders, inspections etc. rather than to organizational units

C. Plantwide Rate

C A single predetermined rate for overhead calculation

D. Normal Costing System

G The cost of landscaping E. Batch-level CostE Cost of setting up machines before each

production runF. Appraisal Cost

H Costs are incurred because products do not conform to specifications or customer needs and nonconformance is detected after goods are shipped to customers

G. Facility-level Cost

F The costs incurred to determine whether products or services conform to the requirements

H. External Failure Cost

Homework Problem 1Cost Classification

Classify the following as unit level, batch level, product level or facility level costs:Direct labor unit levelSetup costs batch levelCost of inspecting products at the beginning of a production run

batch level

Property taxes facility levelSupervision costs (Each supervisor is responsible for one product line)

product level

Depreciation on machines unit levelPacking orders batch levelDepreciation on building facility levelCost of designing a product product levelCost of air-conditioning and heating facility levelEnergy costs to run production machinery unit level

Homework Problem 2Chandler Company

Chandler Company manufactures and sells patio furniture. The company makes two product lines, patio swings and wicker chairs. Manufacturing overhead costs total $200,000 each year. Costs for materials and labor for one unit of each product are given below:

Swings Chairs

Number of Units 4,000 12,000Direct materials $32 $24Direct labor (at $10 per hour) $20 $10

Chandler Company has recently decided to switch over to an activity-based costing system. The following information has been collected about overhead costs and cost drivers for each product. .


Activity (and Cost Driver) Costs Total swings chairs

Machine setups (number of setups) 65,000 200 100 100 Purchase Orders (number of orders) 25,000 250 95 155Maintenance (machine-hours) 80,000 6,400 2,400 4,000Inspecting (Inspection Hours) 30,000 3,000 1,200 1,800

Required1. Calculate the cost per unit for each product using direct labor hours to assign overhead.2. Calculate the overhead cost per unit and the total cost per unit for each product using activity based costing is used to assign overhead.

1.Direct labor hour for each swing = $20/10 = 2Total direct labor hours for swings = 2 x 4,000 = 8,000Direct labor hour for each chair = $10/10 = 1Total direct labor hours for chairs = 1 x 12,000 = 12,000Total direct labor hours for both products = 20,000 (8,000 + 12,000)

Manufacturing overhead costs, $200,000 = $10 per direct labor-hourDirect labor-hours, 20,000

Cost per unit for each product using direct labor hours to assign overhead. Swings Chairs

Direct materials $32 $24Direct labor 20 10Manufacturing overhead applied: Swings: 2 hrs x $10 per hour 20 Chairs: 1 hrs x $10 per hour 10Total unit product cost $72 $44

2Activity Center Estimated


ActivityPredetermined Overhead Rate

Machine Setups $ 65,000 200 $325 per setupPurchase Orders 25,000 250 $100 per orderMaintenance 80,000 6,400 $12.50 per machine hourInspecting 30,000 3,000 $10 per inspection

$200,000


Swings Chairs

Activity Amount Activity AmountMachine Setups $325 per setup 100 $32,500 100 $ 32,500Purchase Orders $100 per order 95 9,500 155 15,500Maintenance $12.50 per m/c hour 2,400 30,000 4,000 50,000Inspecting 10/inspection 1,200 12,000 1,800 18,000Total costs $84,000 $116,000

Overhead per unit for swings = $84,000/4,000 = $21.00Overhead per unit for chairs = $116,000/12,000 = $9.67

Cost per unit for each product using direct labor hours to assign overhead.Swings Chairs

Direct materials $32.00 $24.00Direct labor 20.00 10.00Manufacturing overhead (see above) 21.00 9.67Total unit product cost $73.00 $43.67

Homework Problem 3Scantex Inc.

Scantex Inc., manufactures and sells two types of flatbed scanners. Scantex Inc. produces 40,000 units of Product X and 20,000 units of product Y during a year. Estimated manufacturing overhead costs total $5,000,000 each year. The breakdown of these costs across different activities is given below. The cost driver for each activity center is shown in parentheses.


Activity Center (and Cost Driver) Costs Total Product X Product Y

Assembly (direct labor hours) 600,000 15,000 10,000 5,000Machine setups (number of setups) 400,000 200 120 80Packing (number of orders) 500,000 25,000 15,000 10,000Machining (machine-hours) 2,800,000 35,000 21,000 14,000Engineering design (inspections) 700,000 20,000 12,000 8,000

RequiredCalculate the overhead cost per unit for each product using activity based costing.

Activity Center Estimated Overhead Costs

Total Expected Activity

Predetermined Overhead Rate

Assembly 600,000 15,000 $ 40 / direct labor hrMachine Setups 400,000 200 $2,000 / setupPacking 500,000 25,000 $20 / orderMachining 2,800,000 35,000 $80 / machine hourEngineering Design 700,000 20,000 $35 / inspection


Product X Product Y

Activity Amount Activity

Amount

Assembly $40/direct labor hr 10,000 400,000 5,000 200,000Machine Setups $2,000 per setup 120 240,000 80 160,000Packing Orders $20 per order 15,000 300,000 10,000 200,000Machining 80machine hour 21,000 1,680,000 14,000 1,120,000Engineering 35/inspection 12,000 420,000 8,000 280,000Total costs $3,040,000 $1,960,000Overhead cost per unit of product X = $3,040,000/40,000 = $76Overhead cost per unit of product Y = $1,960,000/20,000 = $98

Homework Problem 4

Classify each of following costs as (1) prevention costs, (2) appraisal costs, (3) internal failure costs, or (4) external failure costs.

Repairs under warranty external failureProduct recalls external failureQuality inspections appraisal costsDesign review for new products preventionScrap internal failureRework internal failureCustomer complaints department external failurequality training preventionLost market share externalSupplier evaluation prevention

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