PROBLEM SET B
Problem 17-1B (45 minutes)
1.Plantwide overhead rate:
Engineering support$ 56,250
Electricity 112,500
Setup costs 41,250
Total overhead cost$ 210,000
÷ machine hours÷150,000* MH
Plantwide overhead rate/MH$ 1.40/MH
x machine hours/unitx 3 MH/unit
Overhead cost per unit$ 4.20/unit
*Standard:40,000 units x 3 MH/unit =120,000 MH
Deluxe:10,000 units x 3 MH/unit = 30,000 MH
Total machine hours150,000 MH
StandardDeluxe
Direct materials cost per unit$ 4.00$ 8.00
Direct labor cost per unit
Standard: 4 DLH x $20/DLH 80.00
Deluxe: 5 DLH x $20/DLH 100.00
Overhead cost per unit 4.20 4.20
Manufacturing cost per unit$ 88.20$112.20
Selling price per unit$ 92.00$125.00
Manufacturing cost per unit 88.20 112.20
Gross profit per unit$ 3.80$ 12.80
2.Profit per customerStandardDeluxe
Gross profit per unit$3.80$ 12.80
x units per customer
Standard (40,000 units/1,000 cust.) x 40 units/cust.
Deluxe (10,000 units/1,000 cust.)______x 10 units/cust.
Gross profit per customer$152.00$128.00
Service cost per customer ($250,000/2,000) 125.00 125.00
Profit per customer$ 27.00$ 3.00
This comparison shows that gross profit per customer exceeds service cost per customer for both products. Thus, both products appear to be profitable.
Problem 17-1B (concluded)
3.Eng. support$56,250/(50 + 25) modifications = $750/modification
Electricity$112,500/150,000* machine hours = $0.75/machine hour
Setup $41,250/(175 + 75) batches = $165/batch
* From part 1
Standard / DeluxeEngineering / 50 mods. x $750 / $37,500 / 25 mods. x $750 / $ 18,750
Electricity / 120,000 MH x $0.75 / 90,000 / 30,000 MH x $0.75 / 22,500
Setups / 175 batches x $165 / 28,875 / 75 batches x $165 / 12,375
Total overhead / $156,375 / $53,625
÷ units / ÷ 40,000 / ÷ 10,000
Overhead/unit / $ 3.91 / $ 5.36
Direct material / 4.00 / 8.00
Direct labor / 80.00 / 100.00
Mfg. cost/unit / $ 87.91 / $ 113.36
Selling price / $ 92.00 / $ 125.00
Mfg. cost/unit / 87.91 / 113.36
Gross profit/unit / $ 4.09 / $ 11.64
4.StandardDeluxe
Gross profit per unit$ 4.09$ 11.64
x units per customer*x 40 unitsx 10 units
Gross profit per customer$ 163.60$ 116.40
Gross profit per customer$ 163.60$ 116.40
Service cost per customer* 125.00 125.00
Profit (loss) per customer$ 38.60$ (8.60)
*From Part 2
This analysis shows that the Standard product is in fact profitable, but the high cost of production and service for the small volume of the Deluxe product is unprofitable.
5.ABC gives more appropriate information to managers because it identifies the resources consumed by each product line, and assigns the costs of these activities accordingly. Using volume-based methods such as the plantwide rate distorts product cost because the focus of these methods is on the number of units of output, which may not be the primary factor causing costs to be incurred.
Problem 17-2B (25 minutes)
1. The major costs of making the boxes are designing the boxes, setting up machines to make the right cuts, cutting the cardboard, printing the boxes, obtaining the cardboard material, labor, and utilities, and shipping the boxes. Some of the costs, such as design and setup, are not related to volume, but are related to number of different products or number of batches. Some of the costs, such as materials and labor, are volume-driven.
2. Midwest has taken on more custom-made boxes for smaller-volume customers.
3.Yes. Midwest’s old customers bought the same type of boxes over and over, so the design costs were spread over many units. The new customers need different boxes for each different need, which means that design and machine configuration costs should be spread over a smaller number of units.
4.Possibly. If ABC had been used rather than a volume-based system, Midwest would have realized that small customers who want custom-designed and custom-made boxes require different activities than than those required by existing large-volume customers. With ABC the costs of activities associated with the special orders would be assigned only to those orders, rather than being shared by all orders. Midwest might have been using inaccurate cost information in setting its selling prices.
5.ABC gives managers information about the activities and the costs of these activities that will help them make strategic decisions and improve the accuracy of cost assignment.
Problem 17-3B (45 minutes)
1.Control levels
WrappingUnit level
AssemblingUnit level
Product designProduct level
Obtaining business licensesFacility level
CookingBatch level
2.Wrapping$500,000/100,000 units$5/unit
Assembling*$400,000/20,000 direct labor hours$20/DLH
Product design$180,000/3,000 design hours $60/des. hr.
Obtaining license*$100,000/20,000 direct labor hours$5/DLH
Cooking$270,000/1,000 batches$270/batch
*The costs of Assembling and Obtaining business licenses should NOT be combined because they are different with respect to their control level. From part 1, assembling is a unit level activity while obtaining business licenses is a facility level activity. (Management can control assembly costs by changing the number of direct labor hours, but the cost of obtaining business licenses cannot be controlled by changing the number of direct labor hours.) Obtaining business licenses is not really driven by the number of direct labor hours, but this basis is used in order to assign this facility level cost to units of product.
3.
Holiday Basket / Executive BasketWrapping / 8,000 units x$5...... / $ 40,000 / 1,000 units x$5...... / $ 5,000
Assembling / 2,000 DLH x$20...... / 40,000 / 500 DLH x$20...... / 10,000
Product design / 40 design hrs x$60.... / 2,400 / 40 design hrs x$60... / 2,400
Obtaining Lic. / 2,000 DLH x$5...... / 10,000 / 500DLH x$5...... / 2,500
Cooking / 80 batches x$270.... / 21,600 / 200 batches x$270... / 54,000
Total ovhd. cost / $114,000 / $73,900
Problem 17-3B (concluded)
4.Cost per unitHoliday BasketExecutive Basket
Total overhead cost$114,000$73,900
÷ Units produced÷8,000 units÷1,000 units
Overhead cost per unit$14.25$73.90
5.Plantwide overhead rate
Wrapping ($300,000 + $200,000)$ 500,000
Assembling 400,000
Product Design 180,000
Obtaining business license 100,000
Cooking ($150,000 + $120,000) 270,000
Total overhead$ 1,450,000
÷ Total direct labor hours÷20,000 DLH
Overhead rate per DLH$ 72.50
Holiday Basket
Overhead assigned (2,000 DLH x $72.50/DLH)$ 145,000
÷ units÷8,000 units
Overhead cost per unit (rounded)$ 18.13
Executive Basket
Overhead assigned (500 DLH x $72.50/DLH)$ 36,250
÷ units÷1,000 units
Overhead cost per unit$ 36.25
6.
Holiday BasketExecutive Basket
Activity based cost per unit$14.25$73.90
Plantwide cost per unit$18.13$36.25
The plantwide overhead rate assigns too much cost to the Holiday Basket (which is a comparatively high-volume product) and understates the cost of the Executive Basket because it is a low-volume product. The ABC costs more accurately reflect the costs of these products because activity-based costing focuses on the consumption of resources and assigns costs accordingly, whereas volume-based costing (such as the plantwide rate) assigns costs based on measures associated with number of units of output.
Problem 17-4B (30 minutes)
1.Components$495,000/(450,000 + 100,000) parts$0.90/part
Assembly labor$244,800/(15,000 + 2,000) DLH$14.40/DLH
Maintenance$100,800/(5,000 + 2,000) MH$14.40/MH
Packaging materials$460,800/(150,000 + 10,000) boxes$2.88/box
Shipping$27,360/1,900* cartons $14.40/ctn.
Machine setup$187,200/(52 + 52) setups$1,800/setup
*Fun with Fractions:150,000 units/100 units per carton = 1,500 cartons
Count Calculus: 10,000 units/ 25 units per carton = 400 cartons
Total cartons 1,900 cartons
Fun with Fractions / Count CalculusComponents / 450,000 parts x$0.90. / $ 405,000 / 100,000 parts x $0.90 / $ 90,000
Assembly / 15,000 DLH x$14.40. / 216,000 / 2,000 DLH x $14.40.. / 28,800
Maintenance / 5,000 MH x$14.40... / 72,000 / 2,000 MH x $14.40... / 28,800
Packaging / 150,000 boxes x$2.88 / 432,000 / 10,000 boxes x $2.88 / 28,800
Shipping / 1,500 cartons x$14.40 / 21,600 / 400 cartons x $14.40. / 5,760
Set-ups / 52 set-ups x $1,800.. / 93,600 / 52 set-ups x $1,800.. / 93,600
Total cost / $1,240,200 / $275,760
2.Cost per unit Fun with FractionsCount Calculus
Total manufacturing cost$1,240,200$275,760
÷ number of units÷150,000 units÷10,000 units
Average manufacturing cost per unit$8.27$27.58
3.Selling price of Count Calculus$59.95
Cost/unit 27.58
Profit/unit$32.37
4.Since the cost associated with Fun with Fractions is $8.27, the price should be at least $8.27 to cover these costs. A higher price would make the product profitable.
Problem 17-5B (50 minutes)
1.Total overhead = $215,630 + $399,480 + $515,600
Total direct labor hours2,600 DLH + 1,600 DLH
= $1,130,710 = $269.22/DLH (rounded)
4,200 DLH
Pup TentPop-Up Tent
Overhead cost by product line
Pup:2,600 DLH @ $269.22/DLH$699,972*
Pop-Up: 1,600 DLH @ $269.22/DLH$430,752*
÷ Number of units produced15,200 units7,600 units
Overhead cost per unit (rounded)$46.05$56.68
*($699,972 + 430,752 = $1,130,724; $14 rounding error)
2.Total manufacturing cost per unit:
Direct materials and direct labor$25.00$32.00
Manufacturing overhead 46.05 56.68
Total manufacturing cost per unit$71.05$88.68
3.Gross profit per unit
Selling price per unit$65.00$200.00
Manufacturing cost per unit 71.05 88.68
Gross profit (loss) per unit$ (6.05)$111.32
It appears that the Pup Tent is not profitable and management may decide to eliminate this product line if it cannot reduce cost (or raise the selling price) to generate a profit.
Problem 17-5B (continued)
4.Pattern alignment$64,400/560 batches$115/batch
Cutting$50,430/12,300 machine hours$4.10/MH
Moving product$100,800/2,400 moves$42/move
Sewing$327,600/4,200 direct labor hours$78/DLH
Inspecting$24,000/600 inspections$40/inspection
Folding$47,880/22,800 units$2.10/unit
Design$280,000/280 mod. orders$1,000/mod.order
Providing space$51,600/8,600 square feet$6/sq. ft.
Material handling$184,000/920,000 square yards$0.20/sq. yd.
Pup Tent / Pop-Up TentPattern alignment / 140 batches x $115..... / $ 16,100 / 420 batches x $115..... / $ 48,300
Cutting / 7,000 MH x $4.10...... / 28,700 / 5,300 MH x $4.10...... / 21,730
Moving product / 800 moves x $42...... / 33,600 / 1,600 moves x $42..... / 67,200
Sewing / 2,600 DLH x $78...... / 202,800 / 1,600 DLH x $78...... / 124,800
Inspecting / 240 insp. x $40...... / 9,600 / 360 insp. x $40...... / 14,400
Folding / 15,200 units x $2.10.... / 31,920 / 7,600 units x $2.10..... / 15,960
Designing / 70 mods. x $1,000..... / 70,000 / 210 mods. x $1,000..... / 210,000
Providing space / 4,300 sq. ft. x $6...... / 25,800 / 4,300 sq. ft. x $6...... / 25,800
Material handling / 450,000 sq.yd. x $0.20... / 90,000 / 470,000 sq.yd. x $0.20... / 94,000
Total overhead / $508,520 / $622,190
÷ units / ÷ 15,200 / ÷ 7,600
Overhead per unit* / $ 33.46 / $ 81.87
DM and DL per unit / 25.00 / 32.00
Mfg. cost per unit / $ 58.46 / $ 113.87
*rounded
Problem 17-5B (concluded)
5.
Pup TentPop-Up Tent
Selling price $65.00$200.00
Manufacturing cost per unit 58.46 113.87
Gross profit per unit$ 6.54$ 86.13
Both product lines are profitable without any cost cutting. The ABC cost assignment method more accurately reflects the costs associated with each product line because it is based on the consumption of the activities that cause costs to be incurred, whereas the plantwide overhead rate bases cost assignment on volume-related factors.
6.Departmental overhead rates based on direct labor hours and machine hours are still volume-based measures and would not improve the accuracy of cost assignment relative to ABC. Departmental overhead rates may be an improvement over a plantwide rate because the departmental rates at least recognize differences in drivers between departments.
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Solutions Manual, Chapter 17