Chapter 5 Solutions

Chapter 5 Solutions

5-6 Activity cost driver is the unit of measurement for the level (or quantity) of the activity performed. Activity cost drivers identify the linkage between activities and cost objects, such as products, services, and customers. Activity cost driver rate is the ratio of the cost of the resources required to provide an activity to the level of the capacity made available by those resources.

5-17 The activity cost driver rate should reflect the underlying efficiency of the process - the cost of resources to handle each production order - and this efficiency is measured better by using the capacity of the resources supplied (practical capacity) as the denominator when calculating activity cost driver rates. The numerator in an activity cost driver rate calculation represents the costs of supplying resource capacity to do work. The denominator should match the numerator by representing the quantity of work the resources can perform. The cost of unused capacity should be used as feedback to managers for decision-making.

5-20 (a) Number of machine hours (g) Number of square feet

(b) Number of setup hours (h) Number of square feet

or number of kilowatt hours (j) Number of workers

(d) Number of inspections (k) Number of square feet

(e) Number of orders (l) Number of workers

(f) Number of production runs

5-23 (a) / Activity / Estimated Costs / Activity Cost Drivers / Planned Cost Driver Level / Activity Rate
Process deposits / $29,630 / # of deposits processed / 33,250 / $0.89
Process withdrawals / 26,080 / # of withdrawals processed / 22,750 / 1.15
Answer inquiries / 24,860 / # of inquiries / 45,000 / 0.55
Sell negotiable
Instruments / 4,860 / # of instruments sold / 1,100 / 4.42
Balance drawers / 4,290 / # of drawers balanced / 1,300 / 3.30
$89,720
(b) / Activity / Average Monthly Rate / Activity Cost Driver Rate / Total Support Costs
Process deposits / 2.3 / $0.89 / $2.05
Process withdrawals / 6.0 / 1.15 / 6.90
Answer customer inquiries / 2.1 / 0.55 / 1.16
Sell negotiable instruments / 0.5 / 4.42 / 2.21
$12.32
5-24 / Cost Pool / Activity Costs / Cost Drivers / Overhead Rate
Machine setups / $360,000 / 6,000 setup hours / $60 per hour
Material handling / 100,000 / 50,000 pounds of materials / $2 per pound
Electric power / 40,000 / 80,000 kilowatt hours / $0.5 per hour
V203 / G179
Direct materials cost / $25,000 / $33,000
Direct labor cost / 14,000 / 16,000
Support costs:
Machine setups / $60 * 120 / 7,200 / $60 * 150 / 9,000
Materials handling / $2 * 5,000 / 10,000 / $2*10,000 / 20,000
Electric power / $.5* 2,000 / 1,000 / $.5* 3,000 / 1,500
Total mfg costs / $57,200 / $79,500
# of units produced / 5,000 / 15,000
Unit cost / $11.44 / $5.30

5-29

(a) Budgeted support costs $250,000

Predetermined cost driver rate $5 per machine hour

Direct materials costs $20,000

Direct labor costs 18,000

Support Costs ($5 * 1,800) 9,000

Total Manufacturing Costs $47,000

Number of units 1,000

Unit costs $ 47.00

(b) / Cost Pool / Activity Costs / Cost Drivers / Overhead Rate
Electric power / $40,000 / 20,000 kilowatt hours / $2
Material handling / 90,000 / 5,000 material moves / $18
Setups / 80,000 / 1,000 machine setups / $80
Quality inspection / 40,000 / 2,000 inspections / $20

5-29 – Continued

Direct materials costs $20,000

Direct labor costs 18,000

Support Costs:

Electric Power ($2 * 2,000) $4,000

Material Handling ($18 * 40) 720

Setups ($80 * 5) 400

Quality Inspections ($20 * 20) 400 5,520

Total Manufacturing Costs $43,520

Number of units 1,000

Unit costs $ 43.52

5-30

(a) / J101 / J102
Direct materials cost / $10,000 / $7,500
Direct labor cost / 8,000 / 5,500
Support costs / 7,000a / 6,500b
Total mfg costs / $25,000 / $19,500
Number of units / 2,000 / 1,500
Unit cost / $12.50 / $13.00

a ($100,000/10,000) * 700

b ($100,000/10,000) * 650

(b) / J101 / J102
Direct materials cost / $10,000 / $7,500
Direct labor cost / 8,000 / 5,500
Support costs:
Maintenance / $2 * 700 / 1,400 / $2 * 650 / 1,300
Material moves / $100 * 40 / 4,000 / $100 * 15 / 1,500
Machine setups / $30 * 80 / 2,400 / $30 * 40 / 1,200
Inspection / $50 * 35 / 1,750 / $50 * 15 / 750
Total mfg costs / $27,550 / $17,750
Number of units / 2,000 / 1,500
Unit cost / $13.78 / $11.83

(c ) Activity-based costing produces more accurate estimates of job costs because it takes into account the cost drivers that give rise to support costs.

5-31 (a)

Manufacturing Support Cost Driver Rate

Costs Per Unit / Product X21 / Product Y37
Direct materials cost / $120.00 / $140.00
Direct labor cost / 20.00 / 45.00
Manufacturing support cost / 28.75 ´ 2.00 / 28.75 ´ 3.00
Unit cost / $197.50 / $271.25
(b) / Costs Allocated to Products
Activity / Activity Costs / Cost Driver Level / Cost Driver Rate / X21 / Y37
Handling / $3,000,000 / 60,000 / 50 / 50 ´ 40,000 / 50 ´ 20,000
Number of Parts / 2,400,000 / 20,000 / 120 / 120 ´ 12,000 / 120 ´ 8,000
Design changes / 3,300,000 / 3,000 / 1,100 / 1,100 ´ 2,000 / 1,100 ´ 1,000
Setups / 2,800,000 / 14,000 / 200 / 200 ´ 8,000 / 200 ´ 6,000
Total / $11,500,000 / $7,240,000 / $4,260,000
Costs Per Unit / X21 / Y21
Direct materials cost / $120.00 / $140.00
Direct labor cost / 20.00 / 45.00
Manufacturing support cost / 144.80 / 42.60
Unit cost / $284.80 / $227.60

5-38

(a) Total manufacturing support costs = $1,000,000

Total direct labor hours = (5,000*2 + 40,000*1) = 50,000

Manufacturing support cost rate = $20 per direct labor hour

(b) / Costs Per Unit / Deluxe / Regular
Direct materials cost / $45 / $30
Direct labor cost / 20 / 10
Manufacturing support cost / 40 / 20
Unit cost / $105 / $60

5-38 – Continued

Cost Driver

/ Rate / Deluxe / Regular
Purchase orders / $180,000 / 600 / 300 / 220 ´ 300 / 400 ´ 300
Quality control / 250,000 / 2,000 / 125 / 1,000 ´ 125 / 1,000 ´ 125
Prod. setups / 220,000 / 200 / 1,100 / 100 ´ 1,100 / 100 ´ 1,100
Machine maint. / 350,000 / 35,000 / 10 / 20,000 ´ 10 / 15,000 ´ 10
Totals / $1,000,000 / $495,000 / $505,000
# of units / 5,000 / 40,000
Unit support / $99 / $12.625
Deluxe / Regular
Direct Material / $45 / $30
Direct Labor / $20 / $10
Support Costs / $99 / $12.625
Unit Cost / $164 / $52.625
(d) /

Activity

/ Deluxe / Regular / Ratio
Purchase order / 200/5,000= .04 / 400/40,000=.01 / 4:1
Quality control / 1,000/5,000= .2 / 1,000/40,000=.025 / 8:1
Prod. Setups / 100/5,000= .02 / 100/40,000= .0025 / 8:1
Machine maint / 20,000/5,000= 4 / 15,000/40,000=.375 / 10.67:1

Unit costs are distorted by the old system because it assigns manufacturing support costs to products using direct labor hours as a base. Although the deluxe model requires twice as much labor time as the regular model, it was not allocated adequate support overhead costs. When the company’s activity costs are analyzed, it becomes obvious that the deluxe model is very expensive to manufacture compared to the regular model because (i) the deluxe model requires 4 times as many purchase orders as the regular model, (ii) the deluxe model requires 8 times as many inspections and setups as the regular model, and (iii) the deluxe model requires over 10 times as many machine hours as the regular model.

(e) No. The deluxe model is not as profitable as the company thinks. Under ABC, the following profitability analysis for each product can be performed:

Deluxe / Regular
Sales Price / $140 / $80
Unit Cost / 164 / 52.625
Gross Margin / ($24) / $27.375

5-38 – Continued

(f) Recommendation to marketing staff: The regular model is more profitable than the deluxe model. Therefore, (i) push the regular model (increase commissions on the regular model, and decrease commissions on the deluxe model) and (ii) raise the price of the deluxe model.

Recommendation to production staff: Re-engineer the deluxe product to decrease its high demand for activity resources.