Professional Documents
Culture Documents
1.
Order Size
Medium
Large
Total
Sales commissions
(Unit cost: $675,000/225,000
= $3.00 per box)....................................................
$ 6,000
$135,000
box)...........................................................................
$534,000
$ 675,000
62,600
295,400
26,400
105,000
31,000
60,000
$654,000
$1,135,400
2,180,000
Catalogsb
(Unit cost: $295,400/590,800
= $.50 per catalog)................................................
127,150
105,650
catalog)....................................................................
Costs of catalog salesc
(Unit cost: $105,000/175,000
= $.60 per motor)..................................................
47,400
31,200
skein)........................................................................
Credit and collectiond
(Unit cost: $60,000/6,000
= $10.00 per order)...............................................
4,850
24,150
order)........................................................................
$.30
The analysis of selling costs shows that small orders cost more than large orders.
This fact could persuade management to market large orders more aggressively
and/or offer discounts for them.
Activity Description
Value-Added
or Non-ValueAdded
Taking reservations
VA
Customer calls on
phone
Customer desires
reservation
Customers waiting
for a table
NVA
Seating customers
VA
Table becomes
available
Taking orders
VA
Customers indicate
readiness to order
Serving meals to
customers
VA
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Activity Trigger
Root Cause
Returning meal to
kitchen for revised
preparation
NVA
Customer complains
about meal
Customers eating
meal
VA
VA
Customers are
finished
VA
Customers are
finished ordering and
eating
Collecting payment
VA
Customers have
produced cash or
credit card
airline:
(a)
(b)
(c)
(d)
(e)
(2)
restaurant
(a)
(b)
(c)
(d)
(e)
(3)
fitness club:
(a)
(b)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
(c)
(d)
(e)
bank:
(a)
(b)
(c)
(d)
(e)
(5) hotel:
(a)
(b)
(c)
(d)
(e)
(6)
(a)
(b)
(c)
(d)
(e)
(4)
hospital:
McGraw-Hill/Irwin
Managerial Accounting, 8/e
solutions to Problems
PROBLEM 5-45 (35 MINUTES)
1.
Activity-based costing results in improved costing accuracy for two reasons. First,
companies that use ABC are not limited to a single driver when allocating costs to
products and activities. Not all costs vary with units, and ABC allows users to select
a host of nonunit-level cost drivers. Second, consumption ratios often differ greatly
among activities. No single cost driver will accurately assign costs for all activities
in this situation.
2.
Information
Systems
Services
Billings:
3,600 hours x $140
2,400 hours x $140
Less: Professional staff cost:
3,600 hours x $50
2,400 hours x $50
Administrative cost.
Income
(120,000)
(152,704)
$ 63,296
( 229,056)
$ 94,944
Income billings.
18.84%
18.84%
McGraw-Hill/Irwin
Managerial Accounting, 8/e
$504,000
$336,000
(180,000)
Activity
Driver
Cost
Staff support
In-house
computing
$207,000
145,000
Miscellaneous
office charges
29,760
Application
Rate
300 clients
5,000 computer
hours (CH)
$29 per CH
1,200 client
transactions (CT)
$24.80 per CT
Activity
Staff support:
240 clients x $690...
60 clients x $690.
In-house computing:
2,900 CH x $29.
2,100 CH x $29.
Miscellaneous office charges:
480 CT x $24.80...
720 CT x $24.80...
Total .
McGraw-Hill/Irwin
Managerial Accounting, 8/e
E-Commerce
Consulting
Information
Systems
Services
$165,600
$ 41,400
84,100
60,900
11,904
17,856
$120,156
$261,604
Information
Systems
Services
$504,000
$336,000
(180,000)
(120,000)
(120,156)
$ 95,844
28.53%
( 261,604)
$ 62,396
12.38%
4.
Yes, his attitude should change. Even though both services are needed and
professionals are paid the same rate, the income percentages show that e-commerce
consulting provides a higher return per sales dollar than information systems
services (28.53% vs. 12.38%). Thus, all other things being equal, professionals
should spend more time with e-commerce.
5.
Probably not. Although both services produce an attractive return for Clark and
Shiffer, the firm is experiencing a very tight labor market and will likely have trouble
finding qualified help. In addition, the professional staff is currently overworked,
which would probably limit the services available to new clients.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
McGraw-Hill/Irwin
Managerial Accounting, 8/e
45,000 hours
44,000 hours
13,000 hours
102,000 hours
Activity
Activity
Cost Pool
Cost
Driver
Machine
Hours
Cost
Driver
Quantity
Pool
Rate
$
115,000 2.70
Machine
Related
$310,500
Material
Hand.
52,500
Prod.
Runs
100 525.00
Purch.
75,000
Purch.
Orders
300 250.00
Setup
85,000
Prod.
Runs
100 850.00
Inspect.
27,500
Inspect.
Hours
1,100
25.00
Ship.
66,000
Ship.
1,100
60.00
Eng.
32,500
Eng.
Hours
650
50.00
Fac.
575,000
115,000
5.00
Grand
Total
$1,224,000
Machine
Hours
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Product
Line
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
Grand
Total
Cost
Driver
Quantity
for
Product
Line
50,000
48,000
17,000
115,000
40
40
20
100
100
96
104
300
40
40
20
100
400
400
300
1,100
500
400
200
1,100
250
200
200
650
50,000
48,000
17,000
115,000
Activity
Cost for
Product
Line
$135,000
129,600
45,900
$310,500
$ 21,000
21,000
10,500
$ 52,500
$ 25,000
24,000
26,000
$ 75,000
$ 34,000
34,000
17,000
$ 85,000
$ 10,000
10,000
7,500
$ 27,500
$ 30,000
24,000
12,000
$ 66,000
$ 12,500
10,000
10,000
$ 32,500
$250,000
240,000
85,000
$575,000
Product
Line
Prod.
Volume
5,000
4,000
1,000
Activity
Cost per
Unit of
Product
$27.00
32.40
45.90
5,000
4,000
1,000
4.20
5.25
10.50
5,000
4,000
1,000
5.00
6.00
26.00
5,000
4,000
1,000
6.80
8.50
17.00
5,000
4,000
1,000
2.00
2.50
7.50
5,000
4,000
1,000
6.00
6.00
12.00
5,000
4,000
1,000
2.50
2.50
10.00
5,000
4,000
1,000
50.00
60.00
85.00
$1,224,000
Direct material.................................
Direct labor (not including
set-up time).................................
Total direct costs per unit...............
REG
$129.00
ADV
$151.00
GMT
$203.00
$ 32.40
5.25
6.00
8.50
2.50
6.00
2.50
60.00
$ 45.90
10.50
26.00
17.00
7.50
12.00
10.00
85.00
$123.15
$483.15
$213.90
$663.90
McGraw-Hill/Irwin
Managerial Accounting, 8/e
REG
ADV
GMT
$108.00
$132.00
$156.00
103.50
123.15
213.90
408.00
492.00
606.00
403.50
483.15
663.90
530.40
639.60
787.80
524.55
628.10
863.07
525.00
628.00
800.00
The REG and ADV products were overcosted by the traditional system, and the
GMT product was undercosted by the traditional system
$408.00
$492.00
$606.00
403.50
483.15
663.90
$ 4.50
$ 8.85
($ 57.90)
6.
The electronic version of the Solutions Manual BUILD A SPREADSHEET
SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Executive
$ 40
25
160
$225
$ 65
25
120
$210
Direct material.
Direct labor..
Manufacturing overhead.
Unit cost
2. Activity-based application rates:
Activity
Driver
Application
Rate
Activity
Cost
Manufacturing
setups
$1,344,000
= $8,400 per SU
Machine
processing
3,696,000
77,000 machine
hours (MH)
= $48 per MH
Product
shipping
1,120,000
350 outgoing
= $3,200 per OS
shipments (OS)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Deluxe
Executive
$ 840,000
$ 504,000
1,536,000
2,160,000
640,000
$3,016,000
480,000
$3,144,000
16,000
30,000
$188.50*
$104.80**
Direct material
Direct labor.
Manufacturing setup, machine
processing, and outgoing shipments..
Total cost.
Deluxe
Executive
$ 40.00
25.00
$ 65.00
25.00
188.50
$253.50
104.80
$194.80
3. The Deluxe storage cabinet is undercosted. The use of machine hours produced
a unit cost of $225; in contrast, the more accurate activity-based-costing
approach shows a unit cost of $253.50. The difference between these two
amounts is $28.50.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
5.
Executive
*$253.50 $225.00
$194.80 $210.00
No, the discount is not advisable. The regular selling price of $270, when
compared against the more accurate ABC cost figure, shows that each sale
provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30 discount
will actually produce a loss of $13.50 ($253.50 - $240.00), and the more units that
are sold, the larger the loss. Notice that with the less-accurate, machine-hourbased figure ($225), the marketing manager will be misled, believing that each
discounted unit sold would boost income by $15 ($240 - $225).
McGraw-Hill/Irwin
Managerial Accounting, 8/e
a.
Indirect material.
Other indirect manufacturing costs (e.g., building maintenance, machine and
tool maintenance, property taxes, insurance, depreciation on plant and
equipment, rent, and utilities).
b.
2.
The increase in the overhead rate should not have a negative impact on the
company, because the increase in indirect costs was offset by a decrease in direct
labor.
3.
Rather than using a plantwide overhead rate, Digital Light could implement
separate activity cost pools. Examples are as follows:
Separate costs into departmental overhead accounts (or other relevant pools),
with one account for each production and service department. Each
department would allocate its overhead to products on the basis that best
reflects the use of these overhead services.
Treat individual machines as separate cost centers, with the machine costs
collected and charged to the products using machine hours.
4.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Direct material.................................
Direct labor:
3 hours x $15.............................
4 hours x $15.............................
Manufacturing overhead:
3 hours x $35.50........................
4 hours x $35.50........................
Total cost.........................................
2.
Medform
Procel
$ 30.00
$ 45.00
45.00
60.00
106.50
$181.50
142.00
$247.00
Cost
Activity Cost
Driver
Application
Rate
Order
processing
$120,000
600 orders
processed (OP)
= $200 per OP
Machine
processing
500,000
50,000 machine
hrs. (MH)
= $10 per MH
Product
inspection
90,000
15,000 inspection
hrs. (IH)
= $6 per IH
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Medform
Procel
$ 70,000
$ 50,000
230,000
270,000
24,000
$324,000
66,000
$386,000
2,500
$129.60*
3,125
$123.52**
Direct material.
Direct labor:
3 hours x $15
4 hours x $15
Order processing, machine processing,
and product inspection..
Total cost.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Medform
Procel
$ 30.00
$ 45.00
45.00
60.00
129.60
$204.60
123.52
$228.52
a.
b.
4.
Yes, especially since Meditechs selling prices are based heavily on cost.
An overcosted product will result in an inflated selling price, which could
prove detrimental in a highly competitive marketplace. Customers will be
turned off and will go elsewhere, which hurts profitability. With
undercosted products, selling prices may be too low to adequately cover a
products more accurate (higher) cost. This situation is also troublesome
and will result in lower income reported for the company.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is
applied on the basis of direct-labor dollars. In general, a plantwide manufacturingoverhead rate is acceptable only if a similar relationship between overhead and direct
labor exists in all departments or the company manufactures products that receive the
same proportional services from each department
In most cases, departmental overhead rates are preferable to plantwide
overhead rates because plantwide overhead rates do not provide the following:
Because the company uses a plantwide overhead rate applied on the basis of directlabor dollars, the elimination of direct labor in the Molding Department through the
introduction of robots may appear to reduce the overhead cost of the Molding
Department to zero. However, this change will not reduce fixed manufacturing costs
such as depreciation and plant supervision. In reality, the use of robots is likely to
increase fixed costs because of increased depreciation. Under the current method of
allocating overhead costs, these costs merely will be absorbed by the remaining
departments.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
a.
In order to improve the allocation of overhead costs in the Cutting and Finishing
departments, management should move toward an activity-based costing system.
The firm should:
b.
Establish a separate overhead pool and rate for the Molding Department.
Identify fixed and variable overhead costs and establish fixed and variable
overhead rates.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Pool
Rate
$4,000 per setup
$4 per pound
$10 per pound
$150 per inspection
$20 per machine
hour
Level of
Cost Driver
6 setups
9,000 pounds
2,100 pounds
8 inspections
550 machine hours
Total
Assigned
Overhead
Cost
$24,000
36,000
21,000
1,200
11,000
$93,200
2.
$93,200
$93.20 per box
1,000 boxes
3.
Predetermined
overhead rate
$2,500,000
total budgeted overhead cost
b.
5.
$34,375
$34.375 per box
1,000 boxes
McGraw-Hill/Irwin
Managerial Accounting, 8/e
6.
(b)
Level of
Cost Driver
4 setups
800 pounds
400 pounds
4 inspections
60 machine hours
Assigned
Overhead
Cost
$16,000
3,200
4,000
600
1,200
$25,000
$25,000
$250
100 plates
$210
60
250
$520
McGraw-Hill/Irwin
Managerial Accounting, 8/e
2.
Type of Activity
Unit-level
Batch-level
Product-sustaining-level
Facility-level
I: Machine-related costs:
$1,800,000
18,000 machine hrs.
III. Engineering:
$360,000
200 change orders
McGraw-Hill/Irwin
Managerial Accounting, 8/e
III: Engineering:
Odds:
=
Ends:
$90,000
= $18 per unit
5,000 units
=
Ends:
McGraw-Hill/Irwin
Managerial Accounting, 8/e
$76,800
= $15.36 per unit
5,000 units
5.
200.00
72.00
18.00
15.36
$725.36
6.
Ends
$240.00
180.00
Ends
$725.36
120%
$870.43 (rounded)
Ends
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Cost distortion:
Odds
Traditional volume-based costing system:
reported product cost...................................................
Activity-based costing system:
reported product cost...................................................
Amount of cost distortion per unit......................................
Ends
664.00
$996.00
2,017.20
$(1,353.20)
725.36
$270.64
Traditional
system
undercosts
odds by
$1,353.20
per unit
Production volume............................................................... 1,000
Total amount of cost distortion for entire
product line.................................................................... $(1,353,200)
Traditional
system
overcosts
ends by
$270.64
per unit
5,000
$1,353,200
McGraw-Hill/Irwin
Managerial Accounting, 8/e
2.
Again, based on the product costs reported by the firm's traditional, volume-based
product-costing system, product W appears to be very profitable. As in requirement
(1), however, the validity of this assessment depends on the accuracy of the reported
product costs.
3.
Gigabyte's competitors have moved aggressively into the market for gismos (product
G), but they have abandoned the whatchamacallit (product W) market to Gigabyte.
These competing firms apparently believe they can sell gismos at a much
lower price than Gigabyte's management feels is feasible. This evidence suggests that
Gigabyte's competitors may believe their product cost for gismos is below Gigabyte's
reported product cost. In contrast, Gigabyte's competitors apparently believe that
they cannot afford to sell whatchamacallits at Gigabyte's current price of $600.
Perhaps the competing firms' reported production costs for product W are higher than
the cost reported by Gigabyte's product-costing system.
The danger to Gigabyte is that the company will be forced out of the market for
its second largest selling product. This could be disastrous to Gigabyte, Inc.
4.
Product
G
T
W
Total
Raw-Material
Cost per Unit
$105.00
157.50
52.50
Annual
Volume
8,000
15,000
4,000
Annual
Raw-Material
Cost
$ 840,000
2,362,500
210,000
$3,412,500
Percentage
of Total
Raw-Material
Cost*
25%
69%
6%
100%
McGraw-Hill/Irwin
Managerial Accounting, 8/e
$105.00
48.00
110.25
.43
31.50
82.03
45.25
$422.46
Product
T
Product
W
$157.50
36.00
122.50
.32
46.20
120.75
6.90
$490.17
$52.50
24.00
238.88
1.89
157.50
39.38
142.21
$656.36
Machinery:
Product G: ($3,675,000 24%)
Product T:
($3,675,000 50%)
Product W: ($3,675,000 26%)
b
Machine setup:
Product G: ($15,750 22%)
Product T:
($15,750 30%)
Product W: ($15,750 48%)
c
Inspection:
Product G: ($1,575,000 16%)
Product T:
($1,575,000 44%)
Product W: ($1,575,000 40%)
d
Material handling:
Product G: ($2,625,000 25%)
Product T:
($2,625,000 69%)
Product W: ($2,625,000 6%)
e
Engineering:
Product G: ($1,034,250 35%)
Product T:
($1,034,250 10%)
Product W: ($1,034,250 55%)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
8,000 units =
15,000 units =
4,000 units =
$110.25
$122.50
$238.88
8,000 units =
15,000 units =
4,000 units =
$.43
$.32
$1.89
8,000 units =
15,000 units =
4,000 units =
$ 31.50
$ 46.20
$157.50
8,000 units =
15,000 units =
4,000 units =
$ 82.03
$120.75
$ 39.38
8,000 units =
15,000 units =
4,000 units =
$ 45.25
$ 6.90
$142.21
Comparison of reported product costs, new target prices, and actual selling prices:
Product
G
Reported product costs:
Traditional, volume-based costing system
Activity-based costing system
Target price based on new product costs
(150%new product cost)
Current actual selling price
Product
T
Product
W
$573.00
422.46
$508.50
490.17
$286.50
656.36
633.69
639.00
735.26
762.75
984.54
600.00
7.
THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL BUILD A
SPREADSHEET SOLUTIONS IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE
HILTON, 8E WEBSITE: WWW.MHHE.COM/HILTON8E.
Today
To:
From:
I.M. Student
Subject:
Implement the new activity-based costing system and revise its database frequently.
2.
Lower the target price of gismos to $639, the current actual selling price. This price is
slightly over our usual 50 percent markup over product cost.
3.
Consider lowering the price of thingamajigs to $736 in order to increase demand. The
lower price still yields Gigabyte a 50 percent markup over product cost.
4.
Raise the price of whatchamacallits to $985. If the product does not sell at that price,
consider discontinuing the product line.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Process View
Activity analysis
1
7
11
2
8
3
9
12
13
ROOT
CAUSES
4
10
14
15
16
ACTIVITY
TRIGGERS
Activity evaluation
ACTIVITIES
PERFORMANCE
MEASURES
(see req. (4) for examples)
Assignment of activity
costs to cost objects
using second-stage
cost drivers
COST OBJECTS
(Product lines: cooking
utensils, tableware,
flatware)
McGraw-Hill/Irwin
Managerial Accounting, 8/e
3.
(9)
Realization by purchasing personnel that the ordered part will be (or may
be) late in arriving
(11)
Receipt of order
(12)
(13)
Vendor delay
Delay in placing order
Failure by purchasing personnel to make deadline clear
(11)
Use of vendor that has not been fully certified as a reliable supplier
Critical importance of parts
(12)
Misspecification of parts
Error by purchasing personnel in placing order
Vendor error
Inspector error
(13)
Misspecification of parts
Incomplete specifications
Poor product design
Error by purchasing personnel in placing order
Vendor error
*This list is not necessarily complete. Other root causes may exist.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Number of vendors
Number of vendors that are precertified as dependable
(10)
(12)
(16)
Customer-profitability analysis:
Sales revenue......................................................................
Cost of goods sold..............................................................
Gross margin.......................................................................
Selling and administrative costs:
General selling costs....................................................
General administrative costs.......................................
Customer-related costs:
Sales activity...........................................................
Order taking.............................................................
Special handling......................................................
Special shipping......................................................
Total selling and administrative costs...............................
Operating income................................................................
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Caltex
Computer
Trace
Telecom
$380,000
160,000
$220,000
$247,600
124,000
$123,600
$ 48,000
38,000
$ 36,000
32,000
16,000
6,000
80,000
18,000
$206,000
$ 14,000
12,000
8,000
60,000
20,000
$168,000
$ (44,400)
2.
Customers*
McGraw-Hill/Irwin
Managerial Accounting, 8/e
Customer
Numbera
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Customer
Network-All, Inc.
Golden Gate Service Associates
Graydon Computer Company
Mid-State Computing Company
Caltex Computerb
The California Group
Tele-Install, Inc.
Trace Telecomc
Operating
Income
Cumulative
Operating
Income
$186,000
142,000
120,000
84,000
14,000
12,000
(36,000)
(44,400)
$186,000
328,000
448,000
532,000
546,000
558,000
522,000
477,600
Cumulative
Operating
Income as a
Percentage of
Total
Operating
Income
39%
69%
94%
111%
114%
117%
109%
100%
2.
Memorandum
Date:
Today
To:
From:
I. M. Student
Subject:
Customer-profitability profile
The attached customer-profitability profile shows that two of our customer relationships
are unprofitable (Tele-Install, Inc. and Trace Telecom). As the profile shows, over half of
our operating income is generated by our two most profitable customer relationships,
and 94 percent of our operating profit is generated by our three most profitable
customers.
An activity-based costing analysis of customer-related costs provided the data for the
customer-profitability analysis portrayed in the profile.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
SOLUTIONS TO CASES
CASE 5-68 (45 MINUTES)
1.
Activity-based costing (ABC) differs from traditional costing in that it focuses on activities
that consume resources as the fundamental cost drivers. ABC is a two-stage cost
assignment process focused on causality and the determination of cost drivers. It usually
uses several different activities to assign costs to products or services. Therefore, it is
more detailed and more accurate than traditional costing. It also helps managers
distinguish between value added and non-value added activities.
2.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
JY-63
Estimated
20x5
Product
Cost
Direct material:
No cost increase.........................
Direct labor:
Direct labor
$370,370
1.08 cost increase*...............
Material handling:
Number of parts
5
units produced.....................
5,000
25,000
$1.60 per unit........................
Inspection:
Inspection hours
5,000
$20 per hour.........................
Machining:
Machining activity in
15,000
hours
$20 per hour.........................
Assembly:
Assembly activity in
6,000
hours
$40 per hour.........................
Total cost......................................
RX-67
20x4
Cost
Data
$2,000,000
RX-67
Estimated
20x5
Product
Cost
$3,500,000
$185,186
400,000
200,000
10
5,000
50,000
40,000
80,000
7,500
100,000
150,000
30,000
300,000
600,000
5,500
240,000
220,000
$3,080,000
$4,750,000
McGraw-Hill/Irwin
Managerial Accounting, 8/e
JY-63
$3,621,000
RX-67
$4,459,000
Total
$8,080,000
$ 480,000
2,000,000
400,000
40,000
100,000
300,000
240,000
$3,560,000
431,200
$3,128,800
$ 492,200
$ 600,000
3,500,000
200,000
80,000
150,000
600,000
220,000
$5,350,000
665,000
$4,685,000
$ (226,000)
$1,080,000
5,500,000
600,000
120,000
250,000
900,000
460,000
$8,910,000
1,096,200
$7,813,800
$ 266,200
McGraw-Hill/Irwin
Managerial Accounting, 8/e
2.
Regular
Model
Advanced
Model
Deluxe
Model
$210.00
110%
$231.00
$430.00
110%
$473.00
$464.00
110%
$510.40
Advanced
Model
$50.00
40.00
416.00
Deluxe
Model
$84.00
40.00
153.60
Direct material..................................................
Direct labor......................................................
Machinery depreciation and maintenancea. . .
Engineering, inspection and
repair of defectsb........................................
Purchasing, receiving, shipping, and
material handlingc......................................
Factory depreciation, taxes, insurance,
and miscellaneous overhead costsd........
Total..................................................................
Regular
Model
$ 20.00
20.00
62.40
34.08
87.00
68.15
30.55
104.00
58.50
24.99
$192.02
178.50
$875.50
51.17
$455.42
Pool I:
Depreciation, machinery...............................................................
Maintenance, machinery...............................................................
Total................................................................................................
Regular:
Advanced:
Deluxe:
McGraw-Hill/Irwin
Managerial Accounting, 8/e
($3,200,00039%) 20,000 =
($3,200,00013%) 1,000 =
($3,200,00048%) 10,000 =
$2,960,000
240,000
$3,200,000
$ 62.40
$416.00
$153.60
Pool II:
Engineering....................................................................................
Inspection and repair of defects..................................................
Total................................................................................................
Regular:
Advanced:
Deluxe:
$ 700,000
750,000
$1,450,000
$ 34.08
$ 87.00
$ 68.15
Pool III:
Purchasing, receiving, and shipping...........................................
Material handling...........................................................................
Total................................................................................................
Regular:
Advanced:
Deluxe:
$ 500,000
800,000
$1,300,000
$ 30.55
$104.00
$ 58.50
Pool IV:
Depreciation, taxes, and insurance for factory...........................
Miscellaneous manufacturing overhead.....................................
Total................................................................................................
Regular:
Advanced:
Deluxe:
($1,190,000 42%)
($1,190,000 15%)
($1,190,000 43%)
20,000 =
1,000 =
10,000 =
$ 600,000
590,000
$1,190,000
$ 24.99
$178.50
$51.17
3.
Regular
Model
Product costs based on activity-based
costing system..................................................
110%........................................................................
New target price........................................................
$192.02
110%
$211.22
Advanced
Model
$875.50
110%
$963.05
Deluxe
Model
$455.42
110%
$500.96
The new target price of the regular model, $211.22, is lower than the current actual
selling price, $220.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
MEMORANDUM
Date:
Today
To:
From:
I.M. Student
Subject:
Product costing
Based on the cost data from our traditional, volume-based product-costing system,
our regular model is not very profitable. Its reported actual contribution margin is only
$10 ($220 $210). However, the validity of this conclusion depends on the accuracy of
the product costs reported by our product-costing system. Our competitors are
selling motors like our standard model for $212. This price suggests that their product
cost is substantially below our previously reported cost of $210.
Our new, activity-based costing system reveals serious product cost
distortions stemming from our old costing system. The new costing system shows
that the regular model costs only $192.02, which implies a target price of $211.22. This
price is lower than our current actual selling price and roughly consistent with the
price our competitors are charging.
In contrast, our new product-costing system reveals that the advanced model's
product cost is $875.50 instead of the previously reported cost of $430. The new
product cost suggests a target price of $963.05 for the advanced model, rather than
$473, which was our previous target price for the advanced model.
McGraw-Hill/Irwin
Managerial Accounting, 8/e
The company should adopt and maintain the activity-based costing system. The price
of the regular model should be lowered to the $212. Lowering the price should enable
the firm to regain its competitive position in the market for the regular model. Further
price cuts should be considered if marketing studies indicate such a move will
increase demand.
The price of the advanced model should be set near the target price of $963.05.
If the advanced model does not sell at this price, management should consider
discontinuing the product line. Input from the marketing staff should be sought before
such an action is taken. An important consideration is the extent to which sales in the
regular model and deluxe model markets depend on the firm's offering a complete
product line.
A slight price reduction should be considered for the deluxe model (from
$510.40 down to $500.96). However, the product cost distortion from the old costing
system did not affect this model as seriously as it did the other two.
McGraw-Hill/Irwin
Managerial Accounting, 8/e