ACCT 215 Problems Solutions, Fall 2011

Chapter 07 Activity-Based Costing: A Tool to Aid Decision Making Exercise 7-1 (10 minutes) a. Various individuals manage the parts inventories. Product-level b A clerk in the factory issues purchase orders for a job. Batch-level c. The personnel department trains new production workers. Organization -sustaining d The factory’s general manager meets with other department heads, such as marketing, to coordinate plans. Organization -sustaining e. Direct labor workers assemble products. Unit-level f. Engineers design new products. Product-level g The materials storekeeper issues raw materials to be used in jobs. Batch-level h The maintenance department performs periodic preventative maintenance on general-use equipment. Organization -sustaining Some of these classifications are debatable and may depend on the specific circumstances found in particular companies. 7-1 Exercise 7-5 (15 minutes) Sales ($1,650 per standard model glider × 10 standard model gliders + $2,300 per custom designed glider × 2 custom designed gliders)..... $21,10 0 Costs: Direct materials ($462 per standard model glider × 10 standard model gliders + $576 per custom designed glider × 2 custom designed gliders). . $5,77 2 Direct labor ($19 per direct labor-hour × 28.5 direct labor-hours per standard model glider × 10 standard model gliders + $19 per direct labor-hour × 32 direct labor-hours per custom designed glider × 2 custom designed gliders). . 6,631 Supporting direct labor ($18 per direct labor- hour × 28.5 direct labor-hours per standard model glider × 10 standard model gliders + $18 per direct labor-hour × 32 direct labor-hours per custom designed glider × 2 custom designed gliders)................................................... 6,282 Order processing ($192 per order × 3 orders)..... 576 Custom designing ($261 per custom design × 2 custom designs).................................................... 522 Customer service ($426 per customer × 1 customer)............................................................ 426 20,209 Customer margin........................................................ $         891 7-2 Exercise 7-7 (10 minutes) Teller wages................................... $150,000 Assistant branch manager salary........................................... $70,000 Branch manager salary................ $85,000 Distribution of Resource Consumption Across Activities Opening Accounts Processing Deposits and Withdrawals Processing Other Customer Transactions Other Activities Totals Teller wages................................... 0% 75% 15% 10% 100% Assistant branch manager salary........................................... 10% 15% 25% 50% 100% Branch manager salary................ 0% 0% 20% 80% 100% Opening Accounts Processing Deposits and Withdrawals Processing Other Customer Transactions Other Activities Totals Teller wages................................... $      0 $112,500 $22,500 $ 15,000 $150,000 Assistant branch manager salary............................................ 7,000 10,500 17,500 35,000 70,000 Branch manager salary................ 0 0 17,000 68,000 85,000 Total cost........................................ $7,000 $123,000 $57,000 $118,000 $305,000 7-3 Teller wages are $150,000 and 75% of the tellers’ time is spent processing deposits and withdrawals: $150,000 × 75% = $112,500 Other entries in the table are similarly determined. 7-4 Exercise 7-8 (20 minutes) 1. Computation of activity rates: Activity Cost Pools (a) Total Cost (b) Total Activity (a) ÷ (b) Activity Rate Opening accounts............... $7,000 200 accounts opened $35.00 per account opened Processing deposits and withdrawals....................... $123,000 50,000 deposits and withdrawals $2.46 per deposit or withdrawal Processing other customer transactions....................... $57,000 1,000 other customer transactions $57.00 per other customer transaction 2. The cost of opening an account at the Avon branch is much higher than at the lowest cost branch ($35.00 versus $24.35). On the other hand, the cost of processing deposits and withdrawals is lower than at the lowest cost branch ($2.46 versus $2.72). And the cost of processing other customer transactions is somewhat higher at the Avon branch ($57.00 versus $48.90). The other branches may have something to learn from Avon concerning processing deposits and withdrawals and Avon may benefit from learning about how some of the other branches open accounts and process other transactions. It may be particularly instructive to compare the details of the activity rates. For example, is the cost of opening accounts at Avon apparently high because of the involvement of the assistant branch manager in this activity? Perhaps tellers open new accounts at other branches. The apparent differences in the costs of the activities at the various branches could be due to inaccuracies in employees’ reports of the amount of time they devote to the activities. The differences in costs may also reflect different strategies. For example, the Avon branch may purposely spend more time with new customers to win their loyalty. The higher cost of opening 7-5 new accounts at the Avon branch may be justified by future benefits of having more satisfied customers. Nevertheless, comparative studies of the costs of activities may provide a useful starting point for identifying best practices within a company and where improvements can be made. 7-6 Exercise 7-9 (30 minutes) 1. Total revenue received: City General County General Cost of goods sold to the hospital (a).......... $30,000 $30,000 Markup percentage....................................... × 5% × 5% Markup in dollars (b)..................................... $1,500 $1,500 Revenue received from hospitals (a) + (b). . $31,500 $31,500 2. Activity Rates: Activity Cost Pool (a) Estimated Overhead Cost (b) Expected Activity (a) ÷ (b) Activity rate Customer deliveries........... $400,000 5,000 deliverie s $80.00 per delivery Manual order processing. . $300,000 4,000 orders $75.00 per manual order Electronic order processing........................ $200,000 12,500 orders $16.00 per electronic order Line item picking................. $500,000 400,00 0 line items $1.25 per line item picked 7-7 Exercise 7-9 (continued) 3. Activity costs are assigned to the two hospitals as follows: City General: Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost Customer deliveries........... $80.00 per delivery 10 deliveries $  800 Manual order processing. . $75.00 per order 0 orders 0 Electronic order processing........................ $16.00 per order 10 orders 160 Line item picking................ $1.25 per line item 100 line items 125 Total activity costs.............. $1,085 County General: Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost Customer deliveries........... $80.00 per delivery 20 deliverie s $1,600 Manual order processing. . $75.00 per order 40 orders 3,000 Electronic order processing........................ $16.00 per order 0 orders 0 Line item picking................ $1.25 per line item 260 line items 325 Total activity costs.............. $4,925 7-8 Exercise 7-9 (continued) 4. Customer margins for the two hospitals: City General County General Sales......................................... $31,500 $31,500 Cost of goods sold................. 30,000 30,000 Gross margin.......................... 1,500 1,500 Customer deliveries............... 800 1,600 Manual order processing...... 0 3,000 Electronic order processing.. 160 0 Line item picking.................... 125 325 Total activity costs.................. 1,085 4,925 Customer margin................... $         415 $(3,425) 5. Hospitals that require frequent deliveries, place a high volume of manual orders, and order many line items are likely to be unprofitable. 7-9 Exercise 7-11 (30 minutes) 1. First-stage allocations of overhead costs to the activity cost pools: Distribution of Resource Consumption Across Activity Cost Pools Direct Labor Support Order Processing Customer Support Other Totals Wages and salaries......... 30% 35% 25% 10% 100% Other overhead costs..... 25% 15% 20% 40% 100% Direct Labor Support Order Processing Customer Support Other Totals Wages and salaries......... $105,000 $122,500 $ 87,500 $ 35,000 $350,000 Other overhead costs..... 50,000 30,000 40,000 80,000 200,000 Total cost.......................... $155,000 $152,500 $127,500 $115,000 $550,000 Example: 30% of $350,000 is $105,000. 2. Computation of activity rates: Activity Cost Pools (a) Total Cost (b) Total Activity (a) ÷ (b) Activity Rate Direct labor support....... $155,000 10,000 DLHs $15.50 per DLH Order processing............ $152,500 500 orders $305 per order Customer support.......... $127,500 100 customers $1,275 per customer 7-10 Exercise 7-11 (continued) 3. Computation of the overhead costs for the Indus Telecom order: Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost Direct labor support.............. $15.50 per DLH 50 DLHs* $  775 Order processing $305 per order 1 orders 305 Customer support.............. $1,275 per customer 1 custome r 1,275 Total...................... $2,355 *0.5 DLH per unit × 100 units = 50 DLHs 4. The customer margin for Indus Telecom is computed as follows: Customer Margin—ABC Analysis Sales (100 units × $295 per unit).................. $29,500 Costs: Direct materials ($264 per unit × 100 units)............................................................. $26,400 Direct labor ($25 per DLH × 0.5 DLH per unit × 100 units)........................................... 1,250 Direct labor support overhead (see part 3 above)........................................................... 775 Order processing overhead (see part 3 above)........................................................... 305 Customer support overhead (see part 3 above)........................................................... 1,275 30,005 Customer margin............................................. $( 505 ) 7-11 Exercise 7-12 (30 minutes) 1. Activity rates are computed as follows: Activity Cost Pool (a) Estimated Overhead Cost (b) Expected Activity (a) ÷ (b) Activity Rate Machine setups...... $21,600 180 setup s $120 per setup Special processing.. $180,000 4,000 MHs $45 per MH General factory....... $288,000 24,000 DLHs $12 per DLH 2. Overhead is assigned to the two products as follows: Rims: Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost Machine setups...................... $120 per setup 100 setups $ 12,000 Special processing................. $45 per MH 4,000 MHs 180,000 General factory....................... $12 per DLH 8,000 DLHs 96,000 Total......................................... $288,000 Posts: Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost Machine setups...................... $120 per setup 80 setups $   9,600 Special processing................. $45 per MH 0 MHs 0 General factory....................... $12 per DLH 16,000 DLHs 192,000 Total......................................... $201,600 7-12 Exercise 7-12 (continued) Rims Posts Direct materials..................................... $17.00 $10.00 Direct labor: $16 per DLH × 0.40 DLHs per unit.... 6.40 $16 per DLH × 0.20 DLHs per unit.... 3.20 Overhead: $288,000 ÷ 20,000 units..................... 14.40 $201,600 ÷ 80,000 units..................... 2.52 Unit cost.................................................. $37.80 $15.72 7-13 Exercise 7-13 (15 minutes) Customer Margin—ABC Analysis Sales (2,400 seats × $137.95 per seat).............. $331,080 Costs: Direct materials ($112 per seat × 2,400 seats) $268,800 Direct labor ($14.40 per seat × 2,400 seats).... 34,560 Supporting direct labor ($12 per DLH × 0.8 DLH per seat × 2,400 seats)............................ 23,040 Batch processing ($96 per batch × 4 batches) 384 Order processing ($284 per order × 1 order).. 284 Customer service overhead ($2,620 per customer × 1 customer).................................. 2,620 329,688 Customer margin.................................................. $       1,392 7-14 Problem 7-16 (20 minutes) 1. The cost of serving the local commercial market according to the ABC model can be determined as follows: Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost Animation concept....... $6,000 per proposal 20 proposals $120,000 Animation production.. $7,700 per minute of animation 12 minutes 92,400 Contract administration........... $6,600 per contract 8 contracts 52,800 $265,200 2. The margin earned serving the local commercial market is negative, as shown below: Profitability Analysis Sales.......................................................... $240,000 Costs: Animation concept............................... $120,000 Animation production.......................... 92,400 Contract administration....................... 52,800 265,200 Margin...................................................... $(25,200) 3. It appears that the local commercial market is losing money and the company would be better off dropping this market segment. However, not all of the costs included above may be avoidable. If more than $25,200 of the total costs of $265,200 is not avoidable, then the company really isn’t losing money on the local commercial market and the segment should not be dropped. These issues will be discussed in more depth in later chapters. 7-15 7-16 Problem 7-17 (45 minutes) 1. Under the traditional direct labor-dollar based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows: The product margins using the traditional approach would be computed as follows: EX300 TX500 Total Sales....................................... $1,200,00 0 $500,000 $1,700,000 Direct materials..................... 366,325 162,550 528,875 Direct labor............................ 120,000 42,500 162,500 Manufacturing overhead applied @ $3.13 per direct labor-dollar.............. 375,600 133,025 508,625 Total manufacturing cost.... 861,925 338,075 1,200,000 Product margin..................... $     338,075 $161,925 $     500,000 Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system. 7-17 Problem 7-17 (continued) 2. The first step is to determine the activity rates: Activity Cost Pools (a) Total Cost (b) Total Activity (a) ÷ (b) Activity Rate Machining............. $198,25 0 152,500 MHRs $1.30 per MHR Setups.................... $150,00 0 375 setup hrs. $400 per setup hr. Product sustaining $100,00 0 2 products $50,000 per product *The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products. Under the activity-based costing system, the product margins would be computed as follows: EX300 TX500 Total Sales............................. $1,200,00 0 $500,000 $1,700,00 0 Direct materials.......... 366,325 162,550 528,875 Direct labor................. 120,000 42,500 162,500 Advertising expense. . 50,000 100,000 150,000 Machining................... 117,000 81,250 198,250 Setups.......................... 30,000 120,000 150,000 Product sustaining..... 50,000 50,000 100,000 Total cost..................... 733,325 556,300 1,289,625 Product margin.......... $     466,675 $(56,300) $     410,375 7-18 Problem 7-17 (continued) 3. The quantitative comparison is as follows: EX300 TX500 Total Traditional Cost System (a) Amount (a) ÷ (c) % (b) Amount (b) ÷ (c) % (c) Amount Direct materials................................... $366,32 5 69.3% $162,55 0 30.7% $  528,875 Direct labor........................................... 120,000 73.8% 42,500 26.2% 162,500 Manufacturing overhead.................... 375,600 73.8% 133,025 26.2% 508,625 Total cost assigned to products........ $861,92 5 $338,07 5 1,200,000 Selling and administrative.................. 550,000 Total cost.............................................. $1,750,00 0 Activity-Based Costing System Direct costs: Direct materials................................ $366,32 5 69.3% $162,55 0 30.7% $  528,875 Direct labor........................................ 120,000 73.8% 42,500 26.2% 162,500 Advertising expense......................... 50,000 33.3% 100,000 66.7% 150,000 Indirect costs: Machining.......................................... 117,000 59.0% 81,250 41.0% 198,250 Setups................................................ 30,000 20.0% 120,000 80.0% 150,000 Product sustaining........................... 50,000 50.0% 50,000 50.0% 100,000 Total cost assigned to products........ $733,32 5 $556,30 0 1,289,625 7-19 Costs not assigned to products: Selling and administrative............... 400,000 Other.................................................. 60,375 Total cost.............................................. $1,750,00 0 7-20 Problem 7-17 (continued) The traditional and activity-based cost assignments differ for three reasons. First, the traditional system assigns all $508,625 of manufacturing overhead to products. The ABC system assigns only $448,250 of manufacturing overhead to products. The ABC system does not assign the $60,375 of Other activity costs to products because they represent organization-sustaining costs. Second, the traditional system uses one unit-level activity measure, direct labor dollars, to assign 73.9% of all overhead to the EX300 product line and 26.1% of all overhead to the TX500 product line. The ABC system assigns 59.0% of Machining costs to the EX300 product line and 41.0% to the TX500 product line. The ABC system assigns 20.0% of Setup costs (a batch-level activity) to the EX300 product line and 80.0% to the TX500 product line. The ABC system assigns 50% of Product sustaining costs (a product-level activity) to each product line. Third, the traditional system does not trace any advertising expenses to the two products. The ABC system traces $50,000 of advertising to the EX300 and $100,000 of advertising to the TX500 product line. 7-21 Problem 7-18 (45 minutes) 1. Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows: *25,000 units of Xactive @ 1.4 DLH per unit + 75,000 units of the Pathbreaker @ 1.0 DLH per unit = 35,000 DLHs + 75,000 DLHs = 110,000 DLHs Consequently, the product margins using the traditional approach would be computed as follows: Xactive Pathbreaker Total Sales....................................... $3,175,00 0 $6,675,000 $9,850,000 Direct materials..................... 1,620,000 3,825,000 5,445,000 Direct labor............................ 455,000 975,000 1,430,000 Manufacturing overhead applied @ $20.00 per direct labor-hour................ 700,000 1,500,000 2,200,000 Total manufacturing cost.... 2,775,000 6,300,000 9,075,000 Product margin..................... $     400,000 $     375,000 $     775,000 Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system. 7-22 Problem 7-18 (continued) 2. The first step is to determine the activity rates: Activity Cost Pools (a) Total Cost (b) Total Activity (a) ÷ (b) Activity Rate Supporting direct labor.................... $797,50 0 110,000 DLHs $7.25 per DLH Batch setups......... $680,00 0 400 setups $1,700 per setup Product sustaining........... $650,00 0 2 products $325,00 0 per product *The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products. Under the activity-based costing system, the product margins would be computed as follows: Xactive Pathbreaker Total Sales.................................... $3,175,000 $6,675,000 $9,850,000 Direct materials................. 1,620,000 3,825,000 5,445,000 Direct labor........................ 455,000 975,000 1,430,000 Supporting direct labor.... 253,750 543,750 797,500 Batch setups...................... 425,000 255,000 680,000 Product sustaining............ 325,000 325,000 650,000 Total cost............................ 3,078,750 5,923,750 9,002,500 Product margin................. $       96,250 $     751,250 $     847,500 7-23 Problem 7-18 (continued) 3. The quantitative comparison is as follows: Xactive Pathbreaker Total Traditional Cost System (a) Amount (a) ÷ (c) % (b) Amount (b) ÷ (c) % (c) Amount Direct materials........................... $1,620,00 0 29.8% $3,825,00 0 70.2% $5,445,00 0 Direct labor.................................. 455,000 31.8% 975,000 68.2% 1,430,000 Manufacturing overhead........... 700,000 31.8% 1,500,000 68.2% 2,200,000 Total cost assigned to products.................................... $2,775,00 0 $6,300,00 0 $9,075,00 0 Activity-Based Costing System Direct costs: Direct materials........................ $1,620,00 0 29.8% $3,825,00 0 70.2% $5,445,00 0 Direct labor............................... 455,000 31.8% 975,000 68.2% 1,430,000 Indirect costs: Supporting direct labor........... 253,750 31.8% 543,750 68.2% 797,500 Batch setups............................. 425,000 62.5% 255,000 37.5% 680,000 Product sustaining................... 325,000 50.0% 325,000 50.0% 650,000 Total cost assigned to products.................................... $3,078,75 0 $5,923,75 0 9,002,500 Costs not assigned to products: Other.......................................... 72,500 Total cost...................................... $9,075,00 7-24 0 7-25 Problem 7-18 (continued) The traditional and activity-based cost assignments differ for two reasons. First, the traditional system assigns all $2,200,000 of manufacturing overhead to products. The ABC system assigns only $2,127,500 of manufacturing overhead to products. The ABC system does not assign the $72,500 of Other activity costs to products because they represent organization-sustaining and idle capacity costs. Second, the traditional system uses one unit-level activity measure, direct labor hours, to assign 31.8% of all overhead to the Xactive product line and 68.2% of all overhead to the Pathbreaker product line. The ABC system assigns 62.5% of Batch setup costs (a batch-level activity) to the Xactive product line and 37.5% to the Pathbreaker product line. The ABC system assigns 50% of Product sustaining costs (a product-level activity) to each product line. 7-26