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COURSE READER SOLUTIONS

Danny S. Litt

Student Name: ___________________________________________

Student ID Number: _______________________________________

ManagementAccounting

Management

122

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Class Problem

Superior Manufacturing Company has the following cost and expense data for the year endingDecember 31, 2009.

Raw materials, 1/1/09 $30,000 Insurance, factory $14,000Raw materials, 12/31/09 20,000 Property taxes, factory building 6,000

Raw materials purchased 220,000 Sales (net) 1,500,000Indirect materials used 15,000 Delivery expenses 100,000Work in process, 1/1/09 80,000 Sales commissions 150,000Work in process, 12/31/09 50,000 Indirect labor 90,000Finished goods, 1/1/09 110,000 Factory machinery rent 40,000Finished goods, 12/31/09 120,000 Factory utilities 65,000Direct labor 350,000 Depreciation, factory building 24,000Factory managers salary 35,000 Administrative expenses 300,000

Requirements1. Prepare a cost of goods manufactured schedule for Superior Company for 2009.

2. Prepare an income statement for Superior Company for 2009.

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Solution

COST OF GOODS MANUFACTURED

Raw Materials, 1/1/09 30,000

Plus: Raw Material Purchased 220,000

Raw Material Available 250,000

Less: Ending Raw Materials 20,000Total Material Used 230,000

Less: Indirect Material Used 15,000

Direct Material Used 215,000

Work in Process, 1/1/09 80,000

Direct Material 215,000

Direct Labor 350,000

Indirect Material 15,000

Indirect Labor 90,000

Factory Manager's Salary 35,000

Factory machinery rent 40,000

Factory utilities 65,000Depreciation, factory building 24,000

Insurance, Factory 14,000

Property Taxes, factory building 6,000

Work in process, available 934,000 Sales 1,500,000

Less: Ending Work-in-process, 12/31/09 50,000 Cost of goods sold 874,000

Cost of goods manufactured 884,000 Gross Profit 626,000

Finished goods, 1/1/09 110,000 Sales commissions 150,000

Cost of goods manufactured 884,000 Administrative expenses 300,000

Goods available for sale 994,000 Delivery expenses 100,000

Less: Ending finished goods, 12/31/09 120,000 550,000

Cost of goods sold 874,000Net Income 76,000

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Problem

The information below relates to Derby Manufacturing Company's operations for a recentmonth. (Assume that all raw materials are direct materials.):

Purchases of raw materials ........................ $91,000Direct labor cost ........................................ $122,000

Selling costs (total) .................................... $42,000Administrative costs (total) ....................... $56,000Manufacturing overhead costs (total) ........ $340,000Raw materials inventory, beginning ......... $22,000Work in process inventory, beginning ...... $27,000Finished goods inventory, beginning ........ $42,000Raw materials inventory, ending ............... $7,000Work in process inventory, ending ........... $35,000Finished goods inventory, ending ............. $15,000

Requirements

What was Derby's cost of goods manufactured for the month?

Solution

Derby Manufacturing Company

Schedule of Cost of Goods ManufacturedDirect materials:

Beginning raw materials inventory ................ $ 22,000Add: Purchases of raw materials .................... 91,000Raw materials available for use ..................... 113,000

Deduct: Ending raw materials inventory ....... 7,000Raw materials used in production .................. $106,000

Direct labor ........................................................ 122,000Manufacturing overhead .................................... 340,000Total manufacturing costs ................................. 568,000

Add: Beginning work in process inventory ....... 27,000

595,000Deduct: Ending work in process inventory ....... 35,000Cost of goods manufactured .............................. $560,000

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Class Problem

During the month of August, direct labor cost totaled $13,000 and direct labor cost was 20% ofprime cost. If total manufacturing costs during August were $88,000, the manufacturingoverhead was:

Requirements

Manufacturing overhead for August was:

Solution:

0.20 x Prime cost = Direct labor0.20 x Prime cost = $13,000Prime cost = $65,000Prime cost = Direct materials + Direct labor$65,000 = Direct materials + $13,000Direct materials = $52,000

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Class Problem

At the beginning of the year, manufacturing overhead for the year was estimated to be $702,450.At the end of the year, actual direct labor-hours for the year were 33,100 hours, the actualmanufacturing overhead for the year was $697,450, and manufacturing overhead for the yearwas overapplied by $40,680.

RequirementsIf the predetermined overhead rate is based on direct labor-hours, then the estimated direct labor-hours at the beginning of the year used in the predetermined overhead rate must have been:

Solution:

Applied manufacturing overhead - Actual manufacturing overhead= Overapplied manufacturingoverhead

Applied manufacturing overhead - $697,450 = $40,680

Applied manufacturing overhead = $738,130

Applied manufacturing overhead= Predetermined overhead rate x Actual direct labor-hours

$738,130 = Predetermined overhead rate x 33,100

Predetermined overhead rate = $22.30 per direct labor-hour

Predetermined overhead rate= Estimated manufacturing overhead Estimated direct labor-hours

$22.30 = $702,450 Estimated direct labor-hours

Estimated direct labor-hours = 31,500 direct labor-hours

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Class Problem

Bakers Delight has been in the food-processing business 3 years. For its first 2 years (2008 and2009), its sole product was raisin cake. All cakes were manufactured and packaged in 1-poundunits. The company used a normal costing system. The two direct-cost categories were directmaterials and direct manufacturing labor. The sole indirect manufacturing cost categorymanufacturing overheadwas allocated to products using a unit of production allocation base.

In its third year, (2010), the company added a second productlayered carrot cakethat waspackaged in 1-pound units. This product differs from raisin cake in several ways:

More expensive ingredients are used More direct manufacturing labor time is required More complex manufacturing is required

In 2010, the company continued to use its existing costing system where a unit of production ofeither cake was weighted the same. Direct materials costs in 2010 were $0.60 per pound of raisincake and $0.90 per pound of layered carrot cake. Direct manufacturing labor cost in 2010 was$0.14 per pound of raisin cake and $0.20 per pound of layered carrot cake.

During 2010, the companys sales people reported greater than expected sales of layered carrotcake and less than expected sales of raisin cake. The budgeted and actual sales volume for 2010was as follows:

Budgeted Actual

Raisin cake 160,000 pounds 120,000 poundsLayered carrot cake 40,000 pounds 80,000 pounds

The budgeted manufacturing overhead for 2010 was $210,800.

RequirementsCompute the 2010 unit product cost of raisin cake and layered carrot cake with the normalcosting system used in the 2008 to 2009 period. Determine the selling price based on the fullmanufacturing cost plus a 20% markup.

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Solution

Job Costing

Plantwide Overhead Rate CalculationEstimated Overhead Cost 210,800$

Budgeted Actual

Pounds Pounds

Raisin Cake 160,000 120,000Layered Carrot Cake 40,000 80,000

200,000 200,000

Overhead Rate per Direct Labor Hour 1.05$ per pound

Cost of Products per Pound: Raisin Layered

Direct Materials 0.60 0.90Direct Labor 0.14 0.20Overhead 1.05 1.05 Total Production Costs 1.79 2.15

Markup 0.36 0.43 20%

Selling Price 2.15 2.58

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Class Problem

DSL Company manufactures a product that is available in both a deluxe model and a regularmodel. The company has manufactured the regular model for years. The deluxe model wasintroduced several years ago to tap a new segment of the market. Since introduction of thedeluxe model, the companys profits have steadily declined, and management has becomeconcerned about the accuracy of its costing system. Sales of the deluxe model have been

increasing rapidly.

Overhead is assigned to the products on the basis of direct labor-hours. For the current year, thecompany has estimated that it will incur $6,000,000 in overhead cost and produce 15,000 units ofthe deluxe model and 120,000 units of the regular model. The direct labor rate is $10 per hour.The deluxe model requires 1.6 hours of direct labor time per unit, and the regular model requires0.8 hour. Materials and labor costs per unit are as follows:

Deluxe Regular

Direct materials $154 $112

Direct labor $16 $8

RequirementsUsing direct labor-hours as the base for assigning overhead cost to products, compute thepredetermined overhead rate. Using this rate and other data from the problem, determine the unitproduct cost of each model. Determine the selling price based on the full manufacturing cost plusa 20% markup.

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Solution

Job Costing

Plantwide Overhead RateEstimated Overhead Cost 6,000,000$

Units DLH/Unit DL Hours

Deluxe 15,000 1.6 24,000Regular 120,000 0.8 96,000

120,000

Overhead Rate per Direct Labor Hour 50.00$ per DLH

Cost of Products: Deluxe Regular

Direct Materials 154.00 112.00Direct Labor 16.00 8.00Overhead 80.00 40.00

Total Production Costs 250.00 160.00Markup 50.00 32.00 20%

Selling Price 300.00 192.00

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Class Problem

KML Company uses the weighted-average method in its process costing system. The followingdata concerning the operations of the companys first processing department for a recent month.

Work in process, beginning:Units in process 800

Stage of completion with respect to materials 50%Stage of completion with respect to conversion 20%Costs in the beginning inventory:

Material costs $2,440Conversion costs $4,928

Units started into production during the month 15,000Units completed and transferred out 15,600

Costs added to production during this month:Materials cost $96,470

Conversion cost 476,362

Work in process, ending:Units in process 200Stage of completion with respect to materials 50%Stage of completion with respect to conversion 90%

Requirements

a. Determine the equivalent units of production for materials and conversion costs.b. Determine the cost per equivalent unit for materials and conversion costs.c. Determine the cost of units transferred out of the department during the month.

d. Determine the cost of ending work in process inventory in the department.e. Redo this problem using the FIFO method.

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SolutionWeighted Average Method

Production Report - Weighted Average Method

Equivalent Units

Units to be accounted for: Work in process, beginning 800

Started into production 15,000

Total units 15,800

Units to be accounted for:

Units completed and transferred out 15,600Work in process, ending 200

Total units 15,800

Materials ConversionUnits accounted for as follows:

Transferred to the next dept. 15,600 15,600 15,600Work in process, ending 200 100 180

Total Equivalent Units (EU's) 15,800 15,700 15,780

Cost per Equivalent Unit Total Cost Materials ConversionCost to be accounted for: Work in process, beginning 7,368 2,440 4,928

Cost added during month 572,832 96,470 476,362Total Cost 580,200$ 98,910 481,290

Equivalent units of production 15,700 15,780

Costs per Equivalent Unit 36.80 6.30 30.50

Cost Reconci l iat ion

Total Cost Material ConversionCost accounted for as follows:

574,080$ 15,600 15,600

Work in process, ending Materials, at cost per EU 630$ 100

Conversion, at cost per EU 5,490$ 180Total work in process, ending 6,120$

Total cost 580,200$

Equivalent Units

Equivalent Units

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SolutionFIFO Method

Production Report - FIFO Method

Equivalent Units

Units to be accounted for: Work in process, beginning 800

Started into production 15,000

Total units 15,800

Units to be accounted for:

Units completed and transferred out 15,600Work in process, ending 200

Total units 15,800

Materials Conversion

Units accounted for as follows: From the beginning inventory 800 400 640

Started and completed 14,800 14,800 14,800

Work in process, ending 200 100 180Total Equivalent Units (EU's) 15,800 15,300 15,620

Cost per Equivalent Unit Total Cost Materials Conversion

Cost to be accounted for: Work in process, beginning 7,368

Cost added during month 572,832 96,470 476,362Total Cost 580,200$ 96,470 476,362

Equivalent units of production 15,300 15,620

Costs per Equivalent Unit 36.80 6.31 30.50

Cost Reconc il iat ion

Total Cost Material Conversion

Cost accounted for as follows: Transferred out: Cost in the beginning inventory 7,368

Cost to complete these units: Materials 2,522 400

Conversion 19,518 640Total Cost 29,408

Units started and completed 544,672$ 14,800 14,800

Total cost transferred 574,080

Work in process, ending Materials, at cost per EU 631$ 100

Conversion, at cost per EU 5,489$ 180

Total work in process, ending 6,120$Total cost 580,200$

Equivalent Units

Equivalent Units

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Class Problem

Arrow Space Corporation manufactures military equipment. Its Santa Fe plant manufactures theInterceptor missile under contract to the U.S. government and other countries. All Interceptors gothrough an identical manufacturing process. Every effort is made to ensure that all Interceptorsare identical and meet many demanding performance specifications. The product-costing systemat the Santa Fe plant has a single direct-cost category (direct materials) and a single indirect-cost

category (conversion costs). Each Interceptor passes through two departmentsthe AssemblyDepartment and the Testing Department. Direct materials are added at the beginning of theprocess in Assembly. Conversion costs are added evenly throughout the two departments. Whenthe Assembly Department finishes work on each Interceptor, it is immediately transferred toTesting.Arrow Space uses the weighted-average method of process costing. Data for the AssemblyDepartment for August 2007 are:

Physical Units

(Missiles)

Direct

Materials

Conversion

Costs

Work in process, August 1* 2007 20 $460,000 $120,000

Started during August 2007 80Completed during August 2007 90

Work in process, August 31** 2007 10

Costs added during August 2007 $2,000,000 $935,000

*Degree of completion: direct materials, ?%; conversion costs, 60%**Degree of completion: direct materials, ?%; conversion costs, 70%

Requirementsa) For each cost element, compute equivalents units of work done in August 2007 in the

Assembly Department. Show physical units in the first column.

b) For each cost element, calculate cost per equivalent unit of beginning work in process and ofwork done in August 2007.

c) Summarize the total Assembly Department costs for August 2007, and assign these costs tounits completed (and transferred out) and to units in ending work in process using theweighted-average method.

d) Rework the above sections based on the FIFO method of process costing.e) Explain any difference between the cost of work completed and transferred out and cost of

ending work in process in the Assembly Department under the weighted-average method andthe FIFO method.

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SolutionWeighted Average Method

Production Report - Weighted Average Method

Equivalent Units

Units to be accounted for: Work in process, beginning 20

Started into production 80

Total units 100

Units to be accounted for: Units completed and transferred out 90

Work in process, ending 10Total units 100

Materials ConversionUnits accounted for as follows:

Transferred to the next dept. 90 90 90

Work in process, ending 10 10 7Total Equivalent Units (EU's) 100 100 97

Cost per Equivalent Unit Total Cost Materials ConversionCost to be accounted for: Work in process, beginning 580,000 460,000 120,000

Cost added during month 2,935,000 2,000,000 935,000Total Cost 3,515,000$ 2,460,000 1,055,000

Equivalent units of production 100 97

Costs per Equivalent Unit 35,476.29 24,600.00 10,876.29

Cost Reconci l iat ion

Total Cost Material ConversionCost accounted for as follows:

3,192,866$ 90 90

Work in process, ending Materials, at cost per EU 246,000$ 10

Conversion, at cost per EU 76,134$ 7Total work in process, ending 322,134$

Total cost 3,515,000$

Equivalent Units

Equivalent Units

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SolutionFIFO

Production Report - FIFO Method

Equivalent Units

Units to be accounted for: Work in process, beginning 20

Started into production 80

Total units 100

Units to be accounted for: Units completed and transferred out 90

Work in process, ending 10Total units 100

Materials Conversion

Units accounted for as follows: From the beginning inventory 20 - 8

Started and completed 70 70 70

Work in process, ending 10 10 7Total Equivalent Units (EU's) 100 80 85

Cost per Equivalent Unit Total Cost Materials Conversion

Cost to be accounted for: Work in process, beginning 580,000

Cost added during month 2,935,000 2,000,000 935,000Total Cost 3,515,000$ 2,000,000 935,000

Equivalent units of production 80 85

Costs per Equivalent Unit 36,000.00 25,000.00 11,000.00

Cost Reconci l iat ion

Total Cost Material Conversion

Cost accounted for as follows: Transferred out: Cost in the beginning inventory 580,000

Cost to complete these units: Materials - -

Conversion 88,000 8Total Cost 668,000

Units started and completed 2,520,000$ 70 70

Total cost transferred 3,188,000

Work in process, ending Materials, at cost per EU 250,000$ 10

Conversion, at cost per EU 77,000$ 7Total work in process, ending 327,000$

Total cost 3,515,000$

Equivalent Units

Equivalent Units

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Class Problem

Lahania Corporation uses a FIFO process costing system to collect costs related to production.The following selected information relates to production for April:

Equivalent units: Materials ConversionUnits in process, April 1 0 2,500

Units started and completed during April 32,000 32,000Units in process, April 31 8,000 1,500Total equivalent units 40,000 36,000

Materials ConversionCosts in work in process on April 1 $ 50,400 $126,000Costs added to production during April 169,600 529,200Total cost $220,000 $655,200

All materials at Lahania are added at the beginning of the production process. Conversion costsare incurred uniformly over the production process. During April, Lahania completed 44,000

units.

RequirementsWhat totalamount of cost should be assigned to the units completed and transferred out?

SolutionEquivalent Units of Production Materials Conversion

To complete beginning work in process .................................. 0 2,500

Units started and completed during the period ........................ 32,000 32,000

Ending work in process ........................................................... 8,000 1,500

Equivalent units of production ................................................. 40,000 36,000

Cost per Equivalent Unit Materials Conversion

Cost added during the period (a).............................................. $169,600 $529,200

Equivalent units of production (b) ........................................... 40,000 36,000

Cost per equivalent unit (a) (b) ............................................. $4.24 $14.70

Units transferred out:

Cost in beginning inventory ..................................................... $50,400 $126,000

Cost to complete the units in beginning inventory:

Equivalent units of production required to complete the

beginning inventory ............................................................. 0 2,500

Cost per equivalent unit ........................................................... $4.24 $14.70

Cost to complete the units in beginning inventory .................. $0 $36,750

Cost of units started and completed this period:

Units started and completed this period ................................... 32,000 32,000

Cost per equivalent unit ........................................................... $4.24 $14.70

Cost of units started and completed this period ....................... $135,680 $470,400

Cost of units transferred out..................................................... $186,080 $633,150

Total cost of units transferred out = $186,080 + $633,150 =$819,230

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Class Problem

DSL Corporation manufactures a plastic gasket that is used in automobile engines. The gaskets gothrough three processing departments: mixing, forming and stamping. The companys accountant (who isvery inexperienced) has prepared a summary of production and costs for the forming department asfollows for July:

DSL Corporation

SUMMARY OF PRODUCTION AND COSTS

FORMING DEPARTMENT

For the Month of July

Forming department costs:Work in process inventory, July 1, 8,000 units; all materials added; 7/8 complete asto conversion costs

$ 22,420*

Costs transferred in from the mixing department 81,480Material added during July (added when processing is 50% complete in the formingdepartment)

27,600

Conversion costs added during July 96,900Total departmental costs $228,400

Forming department costs assigned to:

Units completed and transferred to the stamping department, 100,000 units at $2.284each

$228,400

Work in process inventory, July 31, 5,000 units, 2/5 complete as to conversion costs 0Total departmental costs assigned $228,400

*Consists of cost transferred in, $8,820; materials cost, $3,400; and conversion costs, $10,200

After mulling over the data above, DSLs president commented, I cant understand whats happeninghere. Despite a concentrated effort at cost reduction, our unit cost actually went up in the formingdepartment last month. With that kind of performance, year-end bonuses are out of the question for the

people in that department.

The company uses the weighted-average method to account for units and costs.

Requirements:

a) Prepare a revised production report for the forming department for July using the weighted-averagemethod. Redo using the FIFO method and compare the results.

b) Explain to the president why the unit cost figure appearing on the report prepared by the accountant isso high.

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Production Report - Weighted Average Method

Equivalent Units

Units to be accounted for: Work in process, beginning 8,000

Started into production 97,000Total units 105,000

Units to be accounted for: Units completed and transferred out 100,000

Plus: Work in process, ending 5,000

Total units 105,000

Transferred In Materials ConversionUnits accounted for as follows: Transferred to the next dept. 100,000 100,000 100,000 100,000

Work in process, ending 5,000 5,000 - 2,000Total Equivalent Units (EU's) 105,000 105,000 100,000 102,000

Cost per Equivalent Unit Total Cost Transferred In Materials Conversion

Cost to be accounted for: Work in process, beginning 22,420 8,820 3,400 10,200

Cost added during month 205,980 81,480 27,600 96,900Total Cost 228,400$ 90,300 31,000 107,100

Equivalent units of production 105,000 100,000 102,000Costs per Equivalent Unit 2.22$ 0.86 0.31 1.05

Cost Recon ci l iat ion

Total Cost Transferred In Material ConversionCost accounted for as follows: Total cost transferred out 222,000$ 105,000 100,000 100,000

Work in process, ending Transferred in cost 4,300$ 5,000

Materials, at cost per EU -$ -Conversion, at cost per EU 2,100$ 2,000

Total work in process, ending 6,400$Total cost accounted for 228,400$

Equivalent Units

Equivalent Units

The unit cost figure on the report prepared by the accountant is high because none of the costincurred during the month was assigned to the units in the ending work in process inventory.

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Production Report - FIFO Method

Equiva len t Uni ts

Units to be accounted for: Work in process, beginning 8,000

Started into production 97,000Total units 105,000

Units to be accounted for: Units completed and transferred out 100,000

Plus: Work in process, ending 5,000

Total units 105,000

Transferred In Materials ConversionUnits accounted for as follows: From the beginning inventory 8,000 - 1,000

Started and completed 92,000 92,000 92,000 92,000Work in process, ending 5,000 5,000 - 2,000

Total Equivalent Units (EU's) 105,000 97,000 92,000 95,000

Cost per Equ iva len t Uni t Total Cost Transferred In Materials ConversionCost to be accounted for: Work in process, beginning -

Cost added during month 205,980 81,480 27,600 96,900Total Cost 205,980 81,480 27,600 96,900

Equivalent units of production 97,000 92,000 95,000

Costs per Equivalent Unit 2.16 0.84 0.30 1.02

Cost Recon c i l iat ion

Total Cost Transferred In Materials ConversionCost accounted for as follows:

Transferred out: Cost in the beginning inventory - - - -

Cost to complete these units: -Materials - -Conversion 1,020 1,000

Total Cost 1,020Units started and completed 198,720$ 92,000 92,000

Total cost transferred out 199,740$

Work in process, ending Transferred in cost 4,200$ 5,000

Materials, at cost per EU -$ -Conversion, at cost per EU 2,040$ 2,000

Total work in process, ending 6,240$

Total cost 205,980$

Equivalent Units

Equivalent Units

The effects of the cost-cutting will tend to show up more under the FIFO method. The reason isthat the FIFO method keeps the costs of the current period separate from the costs of the priorperiod. Thus, under the FIFO method, the company will be able to compare unit costs of thecurrent period to those of the prior period to see how effective the cost-cutting program has been.Under the weighted-average method, however, costs carried over from the prior period areaveraged in with costs of the current period, which will tend to mask somewhat the effects of thecost-cutting effort.

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Class Problem

Plant InformationMaintenance Services Machining Assembly Total

Departmental costs $600,000 $116,000 $400,000 $200,000 $1,316,000Services provided by:Plant Maintenance 1,600 hours 2,400 hours 4,000 hours 8,000 hoursInformation Services 200 hours 1,600 hours 200 hours 2,000 hours

Calculate the plant maintenance and information services cost to the operating departments bythe direct method, step method and reciprocal method. Assuming 4,000 hours of machiningand 3,000 hours of assembly, calculate the overhead rates for these operating departments.

Direct Method

Support Departments Operating Departments

Maintenance

Information

Services Machining Assembly Total Budget

Overhead Budgetbefore allocations 600,000 116,000 400,000 200,000 1,316,000

Services Provided by

Maintenance

Labor Hours 2,400 4,000 6,400

Percentage 38% 63% 100%

Allocation (600,000) 225,000 375,000

Information ServicesComputer Time in hours 1,600 200 1,800

Percentage 89% 11% 100%

Allocation (116,000) 103,111 12,889

Total Allocation - - 728,111 587,889 1,316,000

Activity Driver 4,000 3,000Overhead Rate 182.03 195.96

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Step Method

If Maintenance is the major service department:

Support Departments Operating Departments

Maintenance

Information

Services Machining Assembly Total BudgetOverhead Budget

before allocations 600,000 116,000 400,000 200,000 1,316,000

Services Provided by

Maintenance

Labor Hours 1,600 2,400 4,000 8,000

Percentage 20% 30% 50% 100%

Allocation (600,000) 120,000 180,000 300,000 -

Information Services

Computer Time in hours 1,600 200 1,800

Percentage 89% 11% 100%Allocation (236,000) 209,778 26,222

Total Allocation - - 789,778 526,222 1,316,000

Activity Driver (DLHs) 4,000 3,000

Overhead Rate 197.44 175.41

If Information Services is the major service department:

Support Departments Operating Departments

MaintenanceInformation

Services Machining Assembly Total BudgetOverhead Budget

before allocations 600,000 116,000 400,000 200,000 1,316,000

Services Provided by

Maintenance

Labor Hours 2,400 4,000 6,400

Percentage 38% 63% 100%

Allocation (611,600) - 229,350 382,250 -

Information ServicesComputer Time in hours 200 1,600 200 2,000

Percentage 10% 80% 10% 100%

Allocation 11,600 (116,000) 92,800 11,600 -

Total Allocation - - 722,150 593,850 1,316,000

Activity Driver 4,000 3,000

Overhead Rate 180.54 197.95

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Reciprocal Method

Step 1: express support department costs and support department reciprocal relationships inlinear form.

Plant Maintenance cost = PM = $600,000 + 0.1 IS (equation1)Information Services cost = IS = 116,000 + 0.2 PM (equation 2)

Step 2: solve the system of simultaneous equations to find the cost of each supportdepartment.

Put equation 1 into equation 2:

PM = 600,000 + 0.1 (116,000 + 0.2PM)PM = 600,000 + 11,600 + 0.02PM

0.98PM = 611,600PM = 624,082IS = 240,816

Step 3: allocate the complete allocated service department costs to all other departments.

Support Departments Operating Departments

Maintenance

Information

Services Machining Assembly Total BudgetOverhead Budget

before allocations 600,000 116,000 400,000 200,000 1,316,000

Services Provided by

MaintenanceLabor Hours 1,600 2,400 4,000 8,000

Percentage 20% 30% 50% 100%

Allocation (624,082) 124,816 187,224 312,041 -

Information ServicesComputer Time in hours 200 1,600 200 2,000

Percentage 10% 80% 10% 100%

Allocation 24,082 (240,816) 192,653 24,082

Total Allocation 0 - 779,878 536,122 1,316,000

Activity Driver 4,000 3,000Overhead Rate 194.97 178.71

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Using Matrix Algebra we can solve n equations with n unknowns:

1.0000 (0.1000) 0 0(0.2000) 1.0000 0 0(0.3000) (0.8000) 1.0000 0

(0.5000) (0.1000) 0 1.0000

x = 600,000

116,000

400,000

200,000

=

1.020408163 0.102040816 0 0

0.204081633 1.020408163 0 0

0.469387755 0.846938776 1.0000 00.530612245 0.153061224 0 1.0000x

600,000

116,000

400,000200,000

= 0

0

779,877.55

536,122.45

Summary of Overhead Rates Machining AssemblyNo Allocation 100.00 66.67

Direct Method 182.03 195.96Step Method - Maintenance 197.44 175.41Step Method - Info Services 180.54 197.95

Reciprocal Method 194.97 178.71

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Class Problem

LittAir flies a medium-sized passenger jet on a route between Washington, D.C., and Cape Cod.The manager of the airline would like to estimate the relationship between the plane's payload(i.e., total weight of passengers and cargo) and total fuel costs. On five recent flights, the payloadvaried between 22 tons and 35 tons.

Payload Fuel(tons) Cost

Flight 1 35 $780Flight 2 26 $720Flight 3 33 $765Flight 4 28 $735Flight 5 22 $700

Requirement

Using the least-squares regression method, estimate the variable cost per ton and the fixed costper flight in the form ofy=a+bx. (Round off the variable cost per ton to the nearest cent and thefixed cost per flight to the nearest dollar.)

The cost formula is about $562 per flight plus $6.18 per ton.

Payload (tons) Fuel costFlight x y xy x2 y2

Flight 1 35.00 780.00 27,300.00 1,225.000 608,400.00

Flight 2 26.00 720.00 18,720.00 676.000 518,400.00

Flight 3 33.00 765.00 25,245.00 1,089.000 585,225.00

Flight 4 28.00 735.00 20,580.00 784.000 540,225.00

Flight 5 22.00 700.00 15,400.00 484.000 490,000.00

144.00 3,700.00 107,245.00 4,258.000 2,742,250.00

a= 561.95

b= 6.18

r2= 0.999983848

22

2

XXn

XYXXYa

22

XXn

YXXYnb

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Class Problem

The management of Hamano Corporation would like for you to analyze their overhead costs as a functionof direct labor hours, which are listed below:

DLHs OH Cost

Month x yJan 840 25,200Feb 830 24,800

Mar 740 20,800Apr 1,130 27,500May 770 23,300

Jun 910 26,900Jul 950 24,800Aug 1,170 26,100

Sep 1,160 29,100Oct 1,030 27,300

Nov 1,200 27,600Dec 780 21,100Jan 750 21,700Feb 1,290 30,200

Mar 1,060 27,300

Management believes that overhead cost is a mixed cost that depends on the number of direct labor hours.Using the least-squares regression method, estimate the variable overhead cost per direct labor hour andthe fixed cost in the form ofy=a+bx. (Round off the variable cost per direct labor hour to the nearest centand the fixed cost per month to the nearest dollar.)

Requirement

Use linear regression to estimate the formula for overhead cost

The solution using Microsoft Excel functions is:

slope = $13.64 per direct labor hour

intercept = $12,290.13 per month

22

2

XXn

XYXXYa

22

XXn

YXXYnb

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Solution

DLHs OH Cost

Month x y xy x2 y2Jan 840 25,200 21,168,000 705,600 635,040,000

Feb 830 24,800 20,584,000 688,900 615,040,000Mar 740 20,800 15,392,000 547,600 432,640,000Apr 1,130 27,500 31,075,000 1,276,900 756,250,000May 770 23,300 17,941,000 592,900 542,890,000Jun 910 26,900 24,479,000 828,100 723,610,000Jul 950 24,800 23,560,000 902,500 615,040,000Aug 1,170 26,100 30,537,000 1,368,900 681,210,000Sep 1,160 29,100 33,756,000 1,345,600 846,810,000Oct 1,030 27,300 28,119,000 1,060,900 745,290,000Nov 1,200 27,600 33,120,000 1,440,000 761,760,000Dec 780 21,100 16,458,000 608,400 445,210,000Jan 750 21,700 16,275,000 562,500 470,890,000Feb 1,290 30,200 38,958,000 1,664,100 912,040,000

Mar 1,060 27,300 28,938,000 1,123,600 745,290,00014,610 383,700 380,360,000 14,716,500 9,929,010,000

Number of observations= 15Functions

a= 12,290.13 12290.13488b= 13.64463 13.64462538

r2= 0.967809464 0.891367303r= 0.983773075

y = 12,290.13 + 13.6446 x

The solution using Microsoft Excel functions is:

slope = $13.64 per direct labor hour

intercept = $12,290.13 per month

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Lockheed TriStar

Lockheed has been known for their extensive line ofmilitary products. In 1966, Lockheed started workingon what would become their first commercial jetliner:the L-1011 TriStar. The TriStar was considered theworlds most technologically-advanced airliner at the

time of the introduction. In 1966, more than four yearsbefore the venerable Boeing 747 inaugurated service,many airlines were already showing interest in asmaller, medium-range wide body jetliner. WhileLockheed came to settle with the L-1011, McDonnell Douglas was also finalizing their designson what would become the DC-10. The third competitor for a wide-bodied commercial jetaircraft with a capacity of up to 400 passengers was the A-300B airbus.

By the beginning of 1968, both Lockheed and McDonnell Douglas had their designs refined, inanticipation of large orders from major U.S. airlines. In an effort to attract orders, Lockheedagreed to sell under favorable terms if Eastern Airlines and Trans World Airlines (TWA)

selected the L-1011. Finally, on the evening of March 28, TWA came to an agreement withLockheed, and it was only few hours later when Eastern followed suit. On the morning of March29, letters of intent for a total of 144 commitments valued at $2.16 billion were signed and the L-1011 program officially came to a launch. Within a month of the launch date, the L-1011 hadattracted a total of 176 commitments (firm orders plus options-to-buy) worth $2.74 billion.

Lockheeds financial staff has gathered together the followingestimates:

The cost of developing the TriStar is forecast at $900 millionand this investment can be depreciated in six equal annualamounts.

Production of the plane is expected to take place at a steadyannual rate over the following six years.

The average price of the TriStar is expected to be $15.5million.

Fixed costs are forecast at $175 million a year.

Variable costs are forecast at $8.5 million a plane.

QBE= (FC + Depr) / (P-VC) = (175+150)/(15.5-8.5) = 46.4 planes per year or 279 for the 6

years.

The actual number turned out to be more than 400 planes.

$64 (Jan 1967) drops to $11 (Jan 1971).($64 - $11) (11.3 Million shares) = -$599M.

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Class Problem

In 1988, Pittsburghs city government and corporate leaders togetherbought the Pirates, the citys baseball team, to keep major leaguebaseball in Pittsburgh. Operating in a small metropolitan area with apopulation of about two million, the Pirates faced financial problems inthe 1980s and 1990s. The 1988 buyout contract provides for the

ownership to revert to the city if the team amasses operating losses of$10 million or more in any consecutive three-year period. The city is expected to sell the team inthis case.

In 1988, the Pirates had a breakeven point of 1.4 million tickets. With a steep increase in theteams payroll, the Pirates had to sell more than two million tickets in 1990 to break even. Howwere the breakeven points estimated?

The teams payroll in 1988 was $6.2 million. Administrative and other fixed operating costsamounted to $4.1 million. Revenues from television and radio broadcast rights and fromconcessions were $1.9 million. The contribution margin was $6 per ticket. The Pirates break

even if the total revenues from ticket sales and broadcast rights equal the total payroll andadministrative costs:

Breakeven Point = (Payroll Costs + Administrative CostsBroadcast Revenues) / Contributionmargin per ticket

= ($6.2 million + $4.1 million - $1.9 million) / $6 per ticket

= 1.4 million tickets

RequirementsDetermine how the breakeven point would change if the Pirates add high-priced talented players

to strengthen their roster and increase their payroll by 58% to $9.8 million? (Answer: Thebreakeven point increases to two million tickets)

Breakeven Point = (Payroll Costs + Administrative CostsBroadcast Revenues) / Contributionmargin per ticket

= ($9.8 million + $4.1 million - $1.9 million) / $6 per ticket

= 2.0 million tickets

Determine how many tickets the Pirates (with the $9.8 million payroll) must sell to keep their

annual operating losses under $3.333 million? (Answer: 1.445 million tickets)

Breakeven Point = (Payroll Costs + Administrative CostsBroadcast Revenues + Profit goal) /Contribution margin per ticket

= ($9.8 million + $4.1 million - $1.9 million - $3.333 million) / $6 per ticket

= 1.445 million tickets

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Class Problem

This article is from Business Week, June 30, 2003.

RequirementCalculate the breakeven and determine the number of incremental books needed to be sold inorder to achieve breakeven. Does this correspond to the incremental breakeven quantity in thearticle?

TR=TC$14Q + 3,000,000 = $2Q + 11,050,000

12Q = 8,050,000Q = 670,833.33

Sell 70,834more books to break even

or

TR=TC$14Q + 3,000,000 = 13,050,000

14Q = 10,050,000Q = 717,857.14

Sell 117,858more books to break even

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Class Problem

Karen Marie picked up the phone and called her boss. Matthew Ryan, the vice president ofmarketing Piedmont Fasteners Corporation: Matt, Im not sure how to go about answering thequestions that came up at the meeting with the president yesterday.

Whats the problem?

Im sure you can handle it, Karen. And, by the way, I need your analysis on my desk tomorrowmorning at 8:00am sharp in time for the follow-up meeting at 9:00am.

Piedmont Fasteners Corporation makes three different clothing fasteners in its manufacturingfacility in North Carolina. Data concerning these products appear below:

Velcro Metal Nylon

Normal annual sales volume 100,000 200,000 400,000

Unit selling price $1.65 $1.50 $0.85

Variable cost per unit $1.25 $0.70 $0.25

Total fixed expenses are $400,000 per year.

All three products are sold in highly competitive markets, so the company is unable to raise itsprices without losing unacceptable numbers of customers. The company has an extremelyeffective just-in-time manufacturing system, so there is no beginning or ending work in processor finished goods inventories.

Requirements:

1. What is the companys over-all breakeven in total sales dollars?2. Of the total fixed costs of $400,000, $20,000 could be avoided if the Velcro product were

dropped, $80,000 if the Metal product were dropped, and $60,000 if the nylon product weredropped. The remaining fixed costs of $240,000 consist of common fixed costs such asadministrative salaries and rent on the factory building that could be avoided only by goingout of business entirely.a) What is the breakeven quantity of each product?b) If the company sells exactly the breakeven quantity of each product, what will be the

overall profit of the company?

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Solution

1. The overall break-even sales can be determined using the CM ratio.

Velcro Metal Nylon Total

Sales ................................ $165,000 $300,000 $340,000 $805,000Variable expenses ........... 125,000 140,000 100,000 365,000

Contribution margin ........ $ 40,000 $160,000 $240,000 440,000Fixed expenses ................ 400,000Net income ...................... $ 40,000

CM ratio=Contribution margin

Sales

$440,$805,

.000000

05466

Break - even point intotal sales dollars

=Fixed expenses

CM ratio$400,0000.5466

$732,000 (rounded)

2. The issue is what to do with the common fixed cost when computing the break-evens for the

individual products. The correct approach is to ignore the common fixed costs. If the commonfixed costs are included in the computations, the break-even points will be overstated forindividual products and managers may drop products that in fact are profitable.

a.The break-even points for each product can be computed using the contribution marginapproach as follows:

Velcro Metal Nylon

Unit selling price .............................................. $1.65 $1.50 $0.85Variable cost per unit ....................................... 1.25 0.70 0.25Unit contribution margin (a) ............................ $0.40 $0.80 $0.60Product fixed expenses (b) ............................... $20,000 $80,000 $60,000

Break-even point in units sold (b)(a) ............. 50,000 100,000 100,000

b.If the company were to sell exactly the break-even quantities computed above, the companywould lose $240,000the amount of the common fixed cost. This can be verified as follows:

Velcro Metal Nylon TotalUnit sales ................................ 50,000 100,000 100,000Sales ...................................... $82,500 $150,000 $85,000 $ 317,500Variable expenses .................. 62,500 70,000 25,000 157,500Contribution margin ............... $20,000 $ 80,000 $60,000 160,000Fixed expenses ....................... 400,000Net income ............................ $(240,000)

At this point, many students conclude that something is wrong with their answer to part (a) sincea result in which the company loses money operating at the break-evens for the individualproducts does not seem to make sense. They also worry that managers may be lulled into a falsesense of security if they are given the break-evens computed in part (a). Total sales at theindividual product break-evens is only $317,500 whereas the total sales at the overall break-evencomputed in part (1) is $732,000.

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Many students (and managers, for that matter) attempt to resolve this apparent paradox byallocating the common fixed costs among the products prior to computing the break-evens forindividual products. Any of a number of allocation bases could be used for this purposesales,variable expenses, product-specific fixed expenses, contribution margins, etc. (We usually take atally of how many students allocated the common fixed costs using each possible allocation basebefore proceeding.) For example, the common fixed costs are allocated below based on sales.

Allocation of common fixed expenses on the basis of sales revenue:

Velcro Metal Nylon Total

Sales ............................................... $165,000 $300,000 $340,000 $805,000Percentage of total sales ................. 20.5% 37.3% 42.2% 100.0%Allocated commonfixed expense* ............................. $49,193 $ 89,441 $101,366 $240,000

Product fixed expenses ................... 20,000 80,000 60,000 160,000Allocated common andproduct fixed expenses (a) ............ $69,193 $169,441 $161,366 $400,000Unit contribution margin (b) ........... $0.40 $0.80 $0.60Break-even point in

units sold (a)(b) ......................... 172,981 211,801 268,944

*Total common fixed expense percentage of total sales

If the company sells 172,981 units of the Velcro product, 211,801 units of the Metal product, and268,944 units of the Nylon product, the company will indeed break even overall. However, theapparent break-evens for two of the products are below their normal annual sales.

Velcro Metal Nylon

Normal annual sales volume ............................ 100,000 200,000 400,000Break-even annual sales ............................... 172,981 211,801 268,944Strategic decision.......................................... drop drop retain

It would be natural for managers to interpret a break-even for a product as the level of salesbelow which the company would be financially better off dropping the product. Therefore, weshould not be surprised if managers, based on the above erroneous break-even calculation, woulddecide to drop the Velcro and Metal products and concentrate on the companys corecompetency, which appears to be thenylon product.

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However, if they were to do that, the company would face a loss of $60,000 computed asfollows:

Velcro Metal Nylon TotalSales ................................ dropped dropped $340,000 $340,000Variable expenses ........... 100,000 100,000Contribution margin ........ $240,000 240,000Fixed expenses* .............. 300,000Net income ...................... $ (60,000)

*By dropping the two products, the company reduces its fixed expenses by only $100,000(=$20,000 + $80,000). Therefore, the total fixed expenses are $300,000 rather than $400,000.

By dropping the two products, the company would go from making a profit of $40,000 tosuffering a loss of $60,000. The reason is that the two dropped products were contributing$100,000 toward covering common fixed expenses and toward profits. This can be verified bylooking at a segmented income statement like the one that will be introduced in a later chapter.

Velcro Metal Nylon Total

Sales $165,000 $300,000 $340,000 $805,000Variable expenses 125,000 140,000 100,000 365,000Contribution margin 40,000 160,000 240,000 440,000Product fixed expenses 20,000 80,000 60,000 160,000Product segment margin $ 20,000 $ 80,000 $180,000 280,000Common fixed expenses ....... 240,000Net income ............................ $ 40,000

$100,000

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Class Problem

Data concerning Borden Company's operations last year appear below:

Units in beginning inventory ......................................................................... -0-Units produced .............................................................................................. 12,000Units sold ....................................................................................................... 11,250

Selling price per unit ..................................................................................... $90

Variable costs per unit:Direct materials ............................................................................................. $20Direct labor .................................................................................................... 10Variable manufacturing overhead ................................................................. 8Variable selling and administrative ............................................................... 5

Fixed costs in total:Fixed manufacturing overhead ...................................................................... $180,000

Fixed selling and administrative .................................................................... 150,000

Requirementsa. Compute the unit product cost under both absorption and variable costing.b. Prepare an income statement for the year using absorption costing.c. Prepare an income statement for the year using variable costing.d. Prepare a report reconciling the difference in net operating income between absorption and

variable costing for the year.

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Solution

a. Variable Absorptioncosting costing

Direct materials ....................................................................... $20 $20Direct labor .............................................................................. 10 10

Variable manufacturing overhead ........................................... 8 8Fixed manufacturing overhead ($180,000 12,000 units) ..... - 15Unit product cost ..................................................................... $38 $53

b. Sales .............................................................. $1,012,500Cost of goods sold:Beginning inventory ...................................... $ -0-Add cost of goods manufactured @ $5 ......... 636,000Goods available for sale ................................ 636,000Less ending inventory @ $53 ....................... 39,750 596,250Gross margin 416,250

Selling and administrative expenses* ........... 206,250Net operating income .................................... $ 210,000

* 11,250 units x $5 per unit variable plus $150,000 fixed.

c. Sales $1,012,500Less variable expenses:Variable cost of goods sold:Beginning inventory .............................................. $ -0-Add variable manufacturing costs @ $38 ............. 456,000Goods available for sale ........................................ 456,000

Less ending inventory @ $38 ................................ 28,500Variable cost of goods sold ................................... 427,500Variable selling & admin. @ $5 ............................ 56,250 483,750Contribution margin .............................................. 528,750Less fixed expenses:Fixed manufacturing overhead .............................. 180,000Fixed selling & admin. .......................................... 150,000 330,000Net operating income $ 198,750

d. Variable costing net operating income ............... $198,750Add fixed factory overhead deferred in

inventory under absorption costing (750 unitsx $15 per unit) .................................................... 11,250Absorption costing net operating income .......... $210,000

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Class Problem

A. E. Newman Company, which has only one product, has provided the following data concerning itsmost recent month of operations:

Selling price $123

Units in beginning inventory 300

Units produced 7,600Units sold 7,400

Units in ending inventory 500

Variable costs per unit:

Direct materials $46

Direct labor $26Variable manufacturing overhead $1

Variable selling and administrative $4

Fixed costs:

Fixed manufacturing overhead $235,600

Fixed selling and administrative $88,800

The company produces the same number of units every month, although the sales in units vary frommonth to month. The company's variable costs per unit and total fixed costs have been constant frommonth to month.

Requirements:Determine the net operating income by variable costing and absorption costing.

Contribution Income Statement Absorption Income Statement

Sales $910,200 Sales $910,200Less variable expenses: Less cost of goods sold:

Variable cost of goods sold: Beginning inventory 31,200

Beginning inventory 21,900 Add cost of goods manufactured 790,400Add variable manufacturing cos ts 554,800 Goods available for sale 821,600Goods available for sale 576,700 Less ending inventory 52,000 769,600Less ending inventory 36,500 Gross margin 140,600

Variable cost of goods sold 540,200 Less selling and administrative expenses:Variable selling and administrative 29,600 569,800 Variable selling and administrative 29,600

Contribution margin 340,400 Fixed selling and administrative $88,800 118,400Less fixed expenses: Net operating income 22,200

Fixed manufacturing overhead 235,600Fixed selling and administrative $88,800 324,400

Net operating income 16,000

Product Cost Product CostDirect materials 46 Direct materials 46Direct labor 26 Direct labor 26Variable manufacturing overhead 1 Variable manufacturing overhead 1

73 Fixed manufacturing overhead 31

104

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Class Problem

Karen Company manufacturers a line of high-end exercise equipment of commercial quality.The chief accountant has proposed changing from a traditional costing system to an activity-based costing system. The financial vice president is not convinced of making the changes, soshe requests that the next large order for equipment be costed under both systems for purposes ofcomparison and analysis. An order from Slim-Way Salons, Inc., for 150 low-impact treadmills is

received and identified as the order to be subjected to dual costing. The following cost data relateto the Slim-Way order.

Data relevant to both costing systems

Direct materials $55,500Direct labor hours 820Direct labor rate per hour $18

Data relevant to the traditional costing system

Predetermined overhead rate is 300% of direct labor cost.

Data relevant to the activity-based costing systemActivity Cost Pool Cost Driver Overhead Rate Use of

Cost Driver

Engineering design Engineering hours $30 per hour 330

Machine setup Setups $200 per setup 22

Machining Machine hours $25 per hour 732

Assembly Number of subassemblies $8 per subassembly 1,450

Packaging and Shipping Packaging/shipping hours $15 per hour 152

Building occupancy Machine hours $6 per hour 732

RequirementsCompute the total cost of the order under:a. Traditional costing system.b. Activity-based costing system.

Traditional

Direct Material $55,500

Direct Labor $14,760

Manufacturing Overhead $44,280

$114,540

ABC

Direct Material $55,500Direct Labor $14,760

Engineering Design $9,900

Machine Setup $4,400

Machining $18,300

Assembly $11,600

Packaging and Shipping $2,280

Building occupancy $4,392

$121,132

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Class Problem

Bakers Delight has been in the food-processing business 3 years. For its first 2 years (2006 and2007), its sole product was raisin cake. All cakes were manufactured and packaged in 1-poundunits. The company used a normal costing system. The two direct-cost categories were directmaterials and direct manufacturing labor. The sole indirect manufacturing cost categorymanufacturing overheadwas allocated to products using a unit of production allocation base.

In its third year, (2008), the company added a second productlayered carrot cakethat waspackaged in 1-pound units. This product differs from raisin cake in several ways:

More expensive ingredients are used More direct manufacturing labor time is required More complex manufacturing is required

In 2008, the company continued to use its existing costing system where a unit of production ofeither cake was weighted the same. Direct materials costs in 2008 were $0.60 per pound of raisincake and $0.90 per pound of layered carrot cake. Direct manufacturing labor cost in 2008 was$0.14 per pound of raisin cake and $0.20 per pound of layered carrot cake.

During 2008, the companys sales people reported greater than expected sales of layered carrotcake and less than expected sales of raisin cake. The budgeted and actual sales volume for 2007was as follows:

Budgeted Actual

Raisin cake 160,000 pounds 120,000 poundsLayered carrot cake 40,000 pounds 80,000 pounds

The budgeted manufacturing overhead for 2008 was $210,800. At the end of 2008, the controllerdecided to investigate how use of an activity-based costing system would affect the product costnumbers. After consultation with operating personnel, the single manufacturing overhead cost

pool was subdivided into five activity areas. These activity areas, their driver, their 2008budgeted rate, and the driver units used per pound of each cake are as follows:

Activity Center

(and Cost Driver)

Budgeted

Costs

per Driver

Unit

Driver Units

per Pound

of

Raisin Cake

Driver Units

per Pound of

Layered Carrot

CakeMixing (Labor time) $0.04 5 8Cooking (Oven time) $0.14 2 3Cooling (Cool room time) $0.02 3 5Creaming/icing (Machinetime)

$0.25 0 3

Packaging (Machine time) $0.08 3 7

Requirements1. Compute the 2008 unit product cost of raisin cake and layered carrot cake with the normal

costing system used in the 2006 to 2007 period.2. Compute the 2008 unit product cost per cake under the activity-based normal costing system.3. Explain the differences in unit product costs computed in requirements 1 and 2.4. Describe three uses Bakers Delight might make of the activity-based cost numbers.

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Solution

Job Costing

Plantwide Overhead Rate

Estimated Overhead Cost 210,800$

Budgeted AcutalPounds Pounds

Raisin Cake 160,000 120,000

Layered Carrot Cake 40,000 80,000

200,000 200,000

Overhead Rate per Direct Labor Hour 1.05$ per pound

Cost of Products per Pound: Raisin Layered

Direct Materials 0.60 0.90

Direct Labor 0.14 0.20

Overhead 1.05 1.05

Total Production Costs 1.79 2.15Markup 0.36 0.43 20%

Selling Price 2.15 2.58

Activity Based Costing (ABC)

Budget Cost Activity

Activity Rates: Per Driver Drivers Raisin Layered

Mixing 0.04 Labor time 5 8

Cooking 0.14 Oven time 2 3

Cooling 0.02 Cool room time 3 5

Creaming/Icing 0.25 Machine time 0 3

Packaging 0.08 Machine time 3 7

Cost of Jobs: Activity Raisin Activity Layered

Overhead

Mixing 5 0.20 8 0.32

Cooking 2 0.28 3 0.42

Cooling 3 0.06 5 0.10

Creaming/Icing - - 3 0.75

Packaging 3 0.24 7 0.56

Total Overhead Cost Per Pound 0.78 2.15

Direct Materials 0.60 0.90

Direct Labor 0.14 0.20

Overhead Cost per Unit 0.78 2.15

Total Production Cost/Unit 1.52 3.25

Markup 0.30 0.65

Selling Price 1.82 3.90

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Class Problem

DSL Company manufactures a product that is available in both a deluxe model and a regularmodel. The company has manufactured the regular model for years. The deluxe model wasintroduced several years ago to tap a new segment of the market. Since introduction of thedeluxe model, the companys profits have steadily declined, and management has becomeconcerned about the accuracy of its costing system. Sales of the deluxe model have been

increasing rapidly.

Overhead is assigned to the products on the basis of direct labor-hours. For the current year, thecompany has estimated that it will incur $6,000,000 in overhead cost and produce 15,000 units ofthe deluxe model and 120,000 units of the regular model. The direct labor rate is $10 per hour.The deluxe model requires 1.6 hours of direct labor time per unit, and the regular model requires0.8 hour. Materials and labor costs per unit are as follows:

Deluxe Regular

Direct materials $154 $112

Direct labor $16 $8

Requirements

a. Using direct labor-hours as the base for assigning overhead cost to products, compute thepredetermined overhead rate. Using this rate and other data from the problem, determine theunit product cost of each model. Determine the selling price based on the full manufacturingcost plus a 20% markup.

b. Assume that the companys overhead costs can be traced to four activity centers. Theseactivity centers, cost drivers, and estimated cost and activity data for each center are givenbelow. Determine the overhead rate for each of the four activity centers.

Activity Center

Estimated

Overhead Costs

Total

Activities Deluxe RegularPurchase orders (number of orders) $252,000 1,200 400 800Scrap/rework orders (number of orders) 648,000 900 500 400Product testing (number of units produced) 1,350,000 15,000 6,000 9,000Machine related (machine-hours) 3,750,000 50,000 20,000 30,000

Total $6,000,000

c. Using activity-based costing and the data from (b) above, determine the total amount ofoverhead cost assignable to each model. Determine the amount of overhead cost per unit foreach model. Determine the unit product cost of each model. Determine the selling pricebased on the full manufacturing cost plus a 20% markup.

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Solution

Job Costing

Plantwide Overhead RateEstimated Overhead Cost 6,000,000$

Units DLH/Unit DL HoursDeluxe 15,000 1.6 24,000

Regular 120,000 0.8 96,000120,000

Overhead Rate per Direct Labor Hour 50.00$

Cost of Products: Deluxe Regular Direct Materials 154.00 112.00

Direct Labor 16.00 8.00Overhead 80.00 40.00

Total Production Costs 250.00 160.00Markup 50.00 32.00 20%

Selling Price 300.00 192.00

Activity Based Costing (ABC)Total Cost Activity Overhead

Activity Rates: of Activity Drivers Deluxe Regular Total Rate/Activity Purchase orders 252,000 No. of orders 400 800 1,200 210.00$

Scrap/rework orders 648,000 No. of orders 500 400 900 720.00$

Product testing 1,350,000 Units produced 6,000 9000 15,000 90.00$Machine related 3,750,000 machine hours 20,000 30000 50,000 75.00$

6,000,000

Cost of Jobs: Activity Deluxe Activity Regular Overhead

Purchase orders 400 84,000.00 800 168,000.00Scrap/rework orders 500 360,000.00 400 288,000.00

Product testing 6,000 540,000.00 9 000 810,000.00Machine related 20,000 1,500,000.00 30000 2,250,000.00

Total Overhead 2,484,000.00 3,516,000.00

Number of units produced 15,000.00 120,000.00Overhead Cost per Unit 165.60 29.30

Direct Materials 154.00 112.00Direct Labor 16.00 8.00Overhead Cost per Unit 165.60 29.30

Total Production Cost/Unit 335.60 149.30Markup 67.12 29.86 20%

Selling Price 402.72 179.16

Comparison of selling price: Deluxe Regular Job Costing 300.00 192.00Activity Based Costing 402.72 179.16

Difference (102.72) 12.84

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Class Problem

The Coletti Cleaning Brigade Company provides housecleaning services to its clients. Thecompany uses an activity-based costing system for its overhead costs. The company has providedthe following data from its activity-based costing system.

Activity Cost Pool Total Cost Total Activity

Cleaning $302,993 43,100 hoursJob support 79,100 5,000 jobsClient support 3,348 180 clientsOther 150,000 Not applicableTotal $535,441

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustainingcosts. One particular client, the Tubman family, requested 26 jobs during the year that required atotal of 104 hours of housecleaning. For this service, the client was charged $1,420.

Requirements

Using the activity-based costing system, compute the customerprofit for the Tubman family. Round off all calculations to thenearest whole cent.

$258.96

Assume the company decides instead to use a traditional costingsystem in which ALL costs are allocated to customers on the basisof cleaning hours. Compute the customer profit for the Tubmanfamily. Round off all calculations to the nearest whole cent.

$128.32

Solution:

Client - Tubman ABC Job Costing

Total charges $1,420.00 $1,420.00Less:

Cleaning 104 $731.12

Number of jobs 26 $411.32

Client 1 $18.60

$1,161.04 $1,291.68

Customer Profit $258.96 $128.32

Computations for costs:Cleaning: 104 hours x $7.03 per hour = $731.12

Job support: 26 jobs x $15.82 per job = $411.32Client support: 1 client x $18.60 per client = $18.60The margin if all costs are allocated on the basis of cleaning hours:Predetermined overhead rate = $535,441 43,100 hours = $12.42 per hour