Print by: Faye Bell
MT425: Managerial Financial Accounting / Chapter 6

/ E6-12
Problems Associated with Too Few Cost Pools [LO 4]
Mott Manufacturing allocates factory overhead using one cost pool with direct labor hours as the allocation base. Mott has two production departments, P1 and P2. The new accountant at Mott estimates that next year, the total factory overhead costs will be $5,000,000, and approximately 500,000 direct labor hours will be worked. The accountant also estimates that P1 will use 150,000 direct labor hours, and there will be about $3,000,000 in overhead costs in P1. P2 will use 350,000 direct labor hours, and there will be $2,000,000 in overhead costs in P2. Mott has two products, A1 and B1. It takes two direct labor hours in P1 and three direct labor hours in P2 to complete one unit of A1. It takes one direct labor hour in P1 and four direct labor hours in P2 to complete one unit of B1.
Which product will be undercosted and which will be overcosted with the one-cost-pool system?
A1 /
B1 /
/

Activity-Based Costing [LO 5]

The following are six cost pools established for a company using activity-based costing. The pools are related to the company's products using cost drivers.

For each of the cost pools, identify a possible cost driver.

1. / Inspection of raw materials
2. / Production equipment repairs and maintenance
3. / Raw materials storage
4. / Plant heat, light, water, and power
5. / Finished product quality control
6. / Production line setups
AP6-6 (a)

Allocating Service Department Costs [LO 3]

World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service department costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departments: (1) domestic flights and (2) international flights. World does not differentiate between fixed and variable costs in making allocations. The following data relate to the allocations:

Budgeted Data
Costs / Air Miles
Ticketing / $5,367,000
Baggage handling / $3,501,000
Engine maintenance / $7,209,000
Domestic flights / 6,108,400
International flights / 24,433,600

Allocate the service department costs to the revenue-producing departments using air miles as the allocation base.

Allocated to
Domestic / International
Total / $ / $
AP6-12

Activity-Based Costing [LO 5]
The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake. It also makes 12 different kinds of cheesecake as well as many other types of bakery items. It has recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to its strawberry cheesecake and the ABC cost pools:
Strawberry Cheesecake:
Annual production / 18,000 units
Direct materials per unit / $7
Direct labor per unit / $4
Cost Pool / Cost / Cost Driver
Materials ordering / $123,200 / Number of purchase orders
Materials inspection / 79,281 / Number of receiving reports
Equipment setup / 140,600 / Number of setups
Quality control / 85,800 / Number of inspections
Other / 200,800 / Direct labor cost
Total mfg. overhead / $629,681
Annual activity information related to cost drivers:
Cost Pool / All Products / Strawberry Cheesecake
Materials ordering / 8,800 orders / 101
Materials inspection / 383 receiving reports / 65
Equipment setup / 3,800 setups / 30
Quality control / 3,300 inspections / 155
Other / $2,008,000 direct labor / $72,000
/
/ Calculate the overhead rate per unit of activity for each of the five cost pools. (Round other cost to 2 decimal places, e.g. 0.50.)
Cost Pools / Overhead rate
Materials ordering / $ / per order
Materials inspection / $ / per receiving report
Equipment setup / $ / per setup
Quality control / $ / per inspection
Other / $ / per direct labor cost
/
/ Calculate the total overhead assigned to the production of the strawberry cheesecake. (Use rounded amount from the previous question while calculating answer for this question.)
$
/
/ Calculate the overhead cost per unit for the strawberry cheesecake. (Round to 2 decimal places, e.g. 5.25.)
$
/
/ Calculate the total unit cost for the strawberry cheesecake. (Round answer to 2 decimal places, e.g. 5.25.)
$
/
/ Suppose that the Divine Cheesecake Shoppe allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the overhead rate per direct labor dollar and the per unit overhead assigned to the strawberry cheesecake. (Round answer to 4 decimal places, e.g. 0.5525. Use the rounded amount for future calculations.)
Overhead rate per direct labor dollar / $
Overhead assigned per unit / $
(Appendix) Activity-Based Management [LO 6]
Primary Savings and Loan of Denver is conducting an ABM study of its teller operations. In this regard, the company has identified the following major activities performed by bank tellers:
1.  Process deposits
2.  Process withdrawals
3.  Process requests for certificates of deposit
4.  Answer customer questions related to balances, overdrafts, interest rates, etc.
5.  Print out customer activity statements
6.  Provide access to safe deposit boxes
7.  Reconcile cash drawer
The company benchmarked its operations against banks in other cities and has found that it has many more tellers in comparison to banks of similar size. Further, the company has a relatively unsophisticated Web site and call center.
/
/ How do the company's Web site and call center affect the demand for teller activities and the cost of teller services?