Brief Exercise 3-1 (10 minutes)

a. Receive raw materials from suppliers: Batch-level

b. Manage parts inventories: Product-level
c. Do rough milling work on products: Unit-level
d. Interview and process new employees in the personnel department:
Facility-level
e. Design new products: Product-level
f. Perform periodic preventive maintenance on general-use equipment:
Facility-level
g. Use the general factory building: Facility-level
h. Issue purchase orders for a job: Batch-level
Some of these classifications are debatable and depend on the specific
circumstances found in particular companies.

3-1

Brief Exercise 3-2 (15 minutes)

1. The activity rates are computed as follows:

Activity Cost Pool

Labor related ...................
Machine related ................
Machine setups ................
Production orders .............
Product testing .................
Packaging ........................
General factory.................
Total ...............................

(a)
Estimated
Overhead
Cost
$ 48,000
67,500
84,000
112,000
58,500
90,000
672,000
$1,132,000

(b)
Expected
Activity
20,000 DLHs
45,000 MHs
600 setups
400 orders
900 tests
6,000 packages
20,000 DLHs

(a) (b)
Activity
Rate
$2.40 per DLH
$1.50 per MH
$140.00 per setup
$280.00 per order
$65.00 per test
$15.00 per package
$33.60 per DLH

2. The predetermined overhead rate based entirely on direct labor-hours would be computed as follows:
Total estimated overhead cost (a) ...........
Total expected direct labor-hours (b) .......
Predetermined overhead rate (a) (b) ....

$1,132,000
20,000 DLHs
$56.60 per DLH

3-2

Brief Exercise 3-3 (30 minutes)

The overhead costs assigned to each product would be computed as follows:

Labor related, at $6.00 per direct labor-hour ......

Machine related, at $4.00 per machine-hour .......
Machine setups, at $50.00 per setup..................
Production orders, at $90.00 per order...............
Shipments, at $14.00 per shipment ...................
General factory, at $9.00 per direct labor hour ....
Total overhead cost assigned (a) .......................
# of units produced
Overhead cost per unit

K425
Expected
Activity
Amount
80
$ 480
100
400
1
50
1
90
1
14
80
720
$1,754
200
$8.77

M67
Expected
Activity
Amount
500
$ 3,000
1,500
6,000
4
200
4
360
10
140
500
4,500
$14,200
2,000
$7.10

The product costs combine direct materials, direct labor, and overhead costs as follows:

Direct materials ..........................................

Direct labor ................................................
Manufacturing overhead (see above) ............
Unit product cost ........................................

K425
$13.00
5.60
8.77
$27.37

3-3

M67
$56.00
3.50
7.10
$66.60

Brief Exercise 3-4 (30 minutes)

1. Using the company's conventional costing system, the overhead costs applied to the products would
be computed as follows:

Number of units produced (a) .........

Direct labor-hours per unit (b) .........
Total direct labor-hours (a) (b) ....

Product H
50,000
0.20
10,000

Total manufacturing overhead (a) ............

Total direct labor-hours (b) ......................
Predetermined overhead rate (a) (b) .....

Product L
10,000
0.20
2,000

12,000

$1,920,000
12,000 DLHs
$160.00 per DLH
Product H

Manufacturing overhead applied per unit

0.20 DLH per unit $160.00 per DLH ...
Number of units produced .......................
Total manufacturing overhead applied ......

Total

32.00
50,000
$1,600,000

Product L

Total

$ 32.00
10,000
$320,000 $1,920,000

2. Using the proposed ABC system, overhead costs would be applied as follows:
Product H Product L
Total
Total manufacturing overhead applied (a) ......
$960,000 $960,000 $1,920,000
Number of units produced (b) ........................... 50,000
10,000
Manufacturing overhead per unit (a) (b) ......... $19.20
$96.00

3-4

Brief Exercise 3-4 (continued)

3. Under the companys old method of allocating overhead costs, the highvolume product, Product H, was allocated most of the overhead cost.
This occurred simply because the high-volume product is responsible for
most of the direct labor-hours. When the overhead is split evenly
between the two products, $640,000 of overhead cost is shifted from
the high-volume product, Product H, to the low-volume product, Product
L. Consequently, the shift from direct labor-hours as an allocation base
to an even split of the overhead costs between the two products favors
the high-volume product, Product H, and penalizes the low-volume
product, Product L. Note that on a per unit basis, the impact is much
greater for the low-volume product, Product L, than for the high-volume
product, Product H. This is because the impact per unit of shifting the
$640,000 in overhead costs is much greater for the low-volume product
than for the high-volume product.

3-5

Brief Exercise 3-5 (45 minutes)

1. The journal entries are:
a. Raw Materials .......................
Accounts Payable ................

854,000

b. Work in Process ....................

Manufacturing Overhead ........
Raw Materials .....................

780,000
68,000

c. Work in Process ....................

Manufacturing Overhead ........
Wages Payable ...................

330,000
55,000

d. Manufacturing Overhead ........

Accumulated Depreciation....

225,000

e. Manufacturing Overhead ........

Accounts Payable ................

194,000

854,000

848,000

385,000

225,000

194,000

f. Compute the amount of overhead applied.

Activity Cost Pool
Machine related................
Purchase orders ...............
Machine setups ................
General factory ................
Total ...............................

Activity
Rate
$24
$85
$175
$16

Actual Overhead
Activity
Applied
3,800
$ 91,200
700
59,500
400
70,000
22,000
352,000
$572,700

Work in Process ....................

Manufacturing Overhead......

572,700

g. Finished Goods ......................

Work in Process ..................

1,690,000

572,700

1,690,000

3-6

Brief Exercise 3-5 (continued)

2.
Bal.
(a)
Bal.

Raw Materials
18,000 (b)
854,000
24,000

Bal.
(g)

Finished Goods
46,000
1,690,000

848,000

Bal.
(b)
(c)
(f)
Bal.

Work in Process
24,000 (g)
1,690,000
780,000
330,000
572,700
16,700
Accumulated Depreciation
(d)
225,000

Accounts Payable
(a)
854,000
(e)
194,000

Wages Payable
(c)
385,000

Manufacturing Overhead
(b)
68,000 (f)
572,700
(c)
55,000
(d)
225,000
(e)
194,000
Bal.
30,700
3. The overhead overapplied or underapplied can be computed as follows:
Actual overhead incurred ...............
Overhead applied .........................
Overhead overapplied ...................

3-7

$542,000
572,700
$(30,700)

Exercise 3-6 (30 minutes)

1. Entry (a) is the amount of actual manufacturing overhead cost incurred
during the year. Debits to Manufacturing Overhead represent actual
overhead costs incurred and credits represent overhead applied to
products.
2. The activity rates would be computed as follows:

Activity Cost Pool

Labor related ...........
Purchase orders .......
Parts management ...
Board etching ...........
General factory.........

(a)
Estimated
Overhead
Cost
$280,000
$90,000
$120,000
$360,000
$400,000

(b)
(a) (b)
Expected
Activity
Activity
Rate
40,000 DLHs
$7 per DLH
1,500 orders
$60 per order
400 part types $300 per part type
2,000 boards
$180 per board
80,000 MHs
$5 per MH

3. Computation of the manufacturing overhead cost applied to production:

Activity Cost Pool

Labor related ..........
Purchase orders ......
Parts management ..
Board etching .........
General factory .......
Total......................

(a)
(b)
Activity
Actual
Rate
Activity
$7 per DLH
41,000 DLHs
$60 per order
1,300 orders
$300 per part type
420 part types
$180 per board
2,150 boards
$5 per MH
82,000 MHs

(a) (b)
Applied
Overhead
$ 287,000
78,000
126,000
387,000
410,000
$1,288,000

4. The overhead overapplied or underapplied can be computed as follows:

Actual overhead incurred .......
Overhead applied .................
Overhead underapplied .........

$1,302,000
1,288,000
$ 14,000

3-8

Exercise 3-7 (30 minutes)

The overhead applied to each product can be computed as follows:
Product A

Activity Cost Pool

Labor related .........
Purchase orders .....
Parts management .
Board etching ........
General factory ......
Total .....................

(a)
(b)
(a) (b)
Activity
Actual
Applied
Rate
Activity
Overhead
$7/DLH
8,000 DLHs
$ 56,000
$60/order
100 orders
6,000
$300/part type
20 part types
6,000
$180/board
0 boards
0
$5/MH
16,000 MHs
80,000
$148,000
Product B

Activity Cost Pool

Labor related .........
Purchase orders .....
Parts management .
Board etching ........
General factory ......
Total .....................

(a)
(b)
(a) (b)
Activity
Actual
Applied
Rate
Activity
Overhead
$7/DLH
12,000 DLHs
$ 84,000
$60/order
300 orders
18,000
$300/part type
90 part types
27,000
$180/board
1,500 boards
270,000
$5/MH
24,000 MHs
120,000
$519,000
Product C

Activity Cost Pool

Labor related .........
Purchase orders .....
Parts management .
Board etching ........
General factory ......
Total .....................

(a)
(b)
(a) (b)
Activity
Actual
Applied
Rate
Activity
Overhead
$7/DLH
15,000 DLHs
$105,000
$60/order
400 orders
24,000
$300/part type
200 part types
60,000
$180/board
650 boards
117,000
$5/MH
30,000 MHs
150,000
$456,000

3-9

Exercise 3-7 (continued)

Product D

Activity Cost Pool

Labor related .........
Purchase orders .....
Parts management .
Board etching ........
General factory ......
Total .....................

(a)
(b)
(a) (b)
Activity
Actual
Applied
Rate
Activity
Overhead
$7/DLH
6,000 DLHs
$ 42,000
$60/order
500 orders
30,000
$300/part type
110 part types
33,000
$180/board
0 boards
0
$5/MH
12,000 MHs
60,000
$165,000

Note that the sum of the overhead costs applied to the individual products
($148,000 + $519,000 + $456,000 + $165,000) equals the total amount of
overhead applied ($1,288,000).

3-10

Exercise 3-8 (30 minutes)

1. Activity rates can be computed as follows:
(a)
Estimated
(b)
(a) (b)
Overhead
Expected
Activity
Activity Cost Pool
Cost
Activity
Rate
Machine setups .......
$72,000
400 setups $180 per setup
Special processing ... $200,000 5,000 MHs
$40 per MH
General factory........ $816,000 24,000 DLHs
$34 per DLH
2. The unit product costs would be computed as follows, starting with the
computation of the manufacturing overhead:
Hubs

Sprockets

Machine setups:
$180 per setup 100 setups ............ $ 18,000
$180 per setup 300 setups ............
$ 54,000
Special processing:
$40 per MH 5,000 MHs .................. 200,000
$40 per MH 0 MHs ........................
0
General factory:
$34 per DLH 8,000 DLHs ............... 272,000
$34 per DLH 16,000 DLHs .............
544,000
Total overhead cost (a) ....................... $490,000 $598,000
Number of units produced (b) ..............
10,000
40,000
Overhead cost per unit (a) (b) ..........
$49.00
$14.95

Direct materials ..................................

Direct labor:
$15 per DLH 0.80 DLHs .................
$15 per DLH 0.40 DLHs .................
Manufacturing overhead (see above) ....
Unit product cost ................................

3-11

Hubs
$32.00

Sprockets
$18.00

12.00
49.00
$93.00

6.00
14.95
$38.95

Exercise 3-9 (45 minutes)

1. The unit product costs under the company's conventional costing system
would be computed as follows:
Rascon
Number of units produced (a) ......
20,000
Direct labor-hours per unit (b) .....................
0.40
Total direct labor-hours (a) (b) ................
8,000
Total manufacturing overhead (a) .........
Total direct labor-hours (b) ...................
Predetermined overhead rate (a) (b) ..

Parcel
80,000
0.20
16,000

24,000

$576,000
24,000 DLHs
$ 24.00 per DLH

Rascon
Direct materials ......................................... $13.00
Direct labor ...............................................
6.00
Manufacturing overhead applied:
0.40 DLH per unit $24.00 per DLH ........
9.60
0.20 DLH per unit $24.00 per DLH ........
Unit product cost ....................................... $28.60

3-12

Total

Parcel
$22.00
3.00

4.80
$29.80