China Chapter 7 Homework Solutions

China Chapter 7 Homework Solutions

Exercise 7-3

Exercise7-3(10 minutes)

ActivityCostPool

EstimatedOverhead

CostExpectedActivityActivityRate

Caringforlawn...... $72,000150,000

square feet of lawn

$0.48persquarefootof lawn

Caringforgarden beds–

lowmaintenance......

Caringforgarden beds–high maintenance......

$26,40020,000square feet of low

maintenancebeds

$41,40015,000square feet of high

maintenancebeds

$1.32persquarefootoflow

maintenancebeds

$2.76per squarefootofhigh maintenancebeds

Traveltojobs...... $3,25012,500miles$0.26permile Customerbilling andservice.. $8,750 25customers $350per customer

Theactivity ratefor each activity cost pooliscomputed bydividingits estimated overheadcostbyits expectedactivity.

Exercise 7-4

ActivityCostPool / ActivityRate / Activity / ABCCost
Supportingdirect labor...... / $6 / perdirectlabor-hour / 80 / direct labor-hours / $480
Machineprocessing...... / $4 / permachine-hour / 100 / machine-hours / 400
Machinesetups...... / $50 / persetup / 1 / setups / 50
Productionorders...... / $90 / perorder / 1 / order / 90
Shipments...... / $14 / pershipment / 1 / shipment / 14
Productsustaining...... / $840 / perproduct / 1 / product / 840
Total...... / $1,874
M67
ActivityCostPool / ActivityRate / Activity / ABCCost
Supportingdirect labor...... / $6 / perdirectlabor-hour / 500 / directlabor-hours / $3,000
Machineprocessing...... / $4 / permachine-hour / 1,500 / machine-hours / 6,000
Machinesetups...... / $50 / persetup / 4 / setups / 200
Productionorders...... / $90 / perorder / 4 / orders / 360
Shipments...... / $14 / pershipment / 10 / shipments / 140
Productsustaining...... / $840 / perproduct / 1 / product / 840
Total...... / $10,540

Problem7B-3(60 minutes)

1.The company’s estimated direct labor-hours can be computed as fol- lows:

Deluxe model:5,000 units× 2 DLHs per unit....10,000DLHs Regular model: 40,000 units × 1 DLH per unit.. 40,000DLHs Totaldirectlaborhours...... 50,000DLHs

Using just direct labor-hoursas the base, the predetermined overhead rate would be:

Estimated overhead cost =

$900,000

=$18per DLH

Estimated direct labor-hours50,000DLHs

The unitproduct cost of eachmodel usingthecompany’straditional costing systemwouldbe:

Deluxe / Regular
Direct materials...... / $40 / $25
Direct labor...... / 14 / 7
Manufacturing overhead:
$18perDLH×2DLHs...... / 36
$18perDLH×1DLH...... / 18
Totalunitproduct cost...... / $90 / $50

2.Predetermined overhead rates are computed below:

(a)

ActivityCostPool

EstimatedOverheadCost

(b)Expected

Activity

(a)÷(b)

PredeterminedOverheadRate

Purchasing...... $204,000600purchase

orders

$340per purchase order

Processing...... $182,00035,000machine- $5.20 per

hours

machine-hour

Scrap/rework...... $379,0002,000 orders$189.50 per order Shipping...... $135,000900shipments $150pershipment

Problem7B-3 (continued)

3.a.The overhead applied to eachproduct can be determined as follows:

TheDeluxeModel

ActivityCostPool

(a)PredeterminedOverheadRate

(b)Activity

(a)×(b)

OverheadApplied

Purchasing...... $340per PO200POs$ 68,000

Processing...... $5.20per MH20,000MHs104,000

Scrap/rework...... $189.50per order1,000tests189,500

Shipping...... $150per shipment250shipments37,500 Totaloverheadcost(a)...... $399,000

Number of unitsproduced(b).....5,000

Overheadcostper unit (a) ÷(b).$79.80

TheRegularModel

ActivityCostPool

(a)PredeterminedOverheadRate

(b)Activity

(a)×(b)

OverheadApplied

Purchasing...... $340perPO400POs$136,000

Processing...... $5.20perMH15,000MHs78,000

Scrap/rework...... $189.50per order1,000orders189,500

Shipping...... $150per shipment650shipments97,500 Totaloverheadcost(a)...... $501,000

Number of unitsproduced(b).....40,000

Overheadcostper unit (a) ÷(b).$12.53

b.Usingactivity-based costing,theunitproduct cost of eachmodel would be:

Deluxe / Regular
Direct materials...... / $40.00 / $25.00
Directlabor...... / 14.00 / 7.00
Manufacturingoverhead (above) / 79.80 / 12.53
Total unitproduct cost...... / $133.80 / $44.53

4.Itisriskytodrawanydefinite conclusions based on the above analysis.

The activity-based costing system used inthis companyis not com- pletelysuitableformakingdecisions. Product costsprobably include costs of idle capacity andorganization-sustaining costs. They alsoex-

clude nonmanufacturing costs that may be caused by the products. Nevertheless, the above analysis is suggestive.

Unit costs appear to be distorted asa resultof usingdirectlabor-hours asthe base for assigning overhead cost to products. Althoughthe de- luxemodelrequires twiceas muchlabor time as the regular model,it still is notbeing assignedenoughoverhead cost, as shown in theanaly- sis inpart 3(a).

Whenthecompany’s overhead costs are analyzedonan activitiesbasis, it appears that thedeluxe model ismoreexpensivetomanufacturethan the company realizes. Note that the deluxe model accounts foramajor- ity ofthemachine-hours worked,even thoughit accounts for only20% of thecompany’s direct labor-hours.Also, it requires just as many scrap/reworkordersastheregular model,andscrap/reworkordersare very costly to the company.

Whenactivity-based costingis usedand the company’s transactions are analyzed by product, the overhead cost increases for the deluxemodel from $36.00per unitto$79.80perunit.This suggests that less than halftheoverhead cost isbeingassignedtothedeluxemodelthatought to be assigned, andunitcosts for the deluxemodelare understated.If these costs are being used as a basisfor pricing,then the selling price forthedeluxemodel maybetoolow.Thismay be the reasonwhy prof- its have beensteadilydecliningoverthe last severalyears. It may also be the reasonwhy sales of the deluxe model have been increasingrap- idly.