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L03, L04)
CHECK FIGURE
(2) Unit product cost for LE100: $10.78
Sandstorm Manufacturing Inc. makes two types of industrial component partsthe
LE100 and the UL600. It annually produces 120,000 units of LE100 and 25,000 units
of UL600. The companys conventional cost system allocates manufacturing
overhead to products using a plantwide overhead rate and direct labor dollars as
the allocation base. Additional information relating to the companys two product
lines is shown below:
Direct
materials
Direct labor
LE100
$720,000
UL600
$357,000
$240,000
$100,000
Total
$1,077,00
0
$340,000
Manufacturi
ng
Overhead
$ 400,000
LE100
UL600
Total
36,000
171,00
0
750
4
$325,0
00
300,000
200,500
150
2
135,00
0
600
2
120,000
$240,0
00
$85,00
0
$1,020,500
Required:
1. Compute the plantwide overhead rate that would be used in the companys
conventional cost system. Using the plantwide rate, compute the unit product
cost for each product.
2. Compute the activity rate for each activity cost pool. Using the activity rates,
compute the unit product cost for each product.
3. Why do the conventional and activity-based cost assignments differ from one
another?
PROBLEM 3-14B Compute and Use Activity Rates to Determine the Costs
of Serving Customers (LO2, LO3, LO4)
CHECK FIGURE
(3b) $7.95 per diner
The Tavern is a popular restaurant located in State College. The owner of the
restaurant has been trying to better understand costs at the restaurant and has
hired a student intern to conduct an activity-based costing study. The intern, in
consultation with the owner, identified the following major activities:
Activity Cost Pool
Serving a party of diner
............................s
Serving a diner
Serving drinks
Activity Measure
Number of parties
served
Number of diners served
Number of drinks
ordered
A group of diners who ask to sit at the same table are counted as a party. Some
costs, such as the costs of cleaning linen, are the same whether one person is at a
table or the table is full. Other costs, such as washing dishes, depend on the
number of diners served.
Data concerning these activities are displayed below.
Total cost
Total activity
Prior to the activity-based costing study, the owner knew very little about the costs
of the restaurant. She knew that the total cost for the month was $51,500 and that
4,000 diners had been served. Therefore, the average cost per diner was $12.88
($51,500 4,000 = $12.88).
Required:
1. Compute the activity rates for each of the three activities.
2. According to the activity-based costing system, what is the total cost of serving
each of the following parties of diners?
a. A party of three diners who order four drinks in total.
b. A party of two diners who do not order any drinks.
c. A lone diner who orders two drinks.
3. Convert the total costs you computed in part (1) above to costs per diner. In
other words, what is the average cost per diner for serving each of the following
parties ?
a. A party of three diners who order four drinks in total.
b. A party of two diners who do not order any drinks.
c. A lone diner who orders two drinks.
4. Why do the costs per diner for the three different parties differ from each other
and from the overall average cost of $12.88 per diner?
$50.00
$30.00
$30.00
$15.00
Required:
1. Compute the predetermined overhead rate using direct labor-hours as the basis
for allocating overhead costs to products. Compute the unit product cost for one
unit of each model.
2. An intern suggested that the company use activity-based costing to cost its
products. A team was formed to investigate this idea. It came back with the
recommendation that four activity cost pools be used. These cost pools and their
associated activities are listed below:
Estimated
Overhead
Activity Cost Pool and Activity
Measure
Purchase orders (number of orders)
Rework requests (number of
requests)
Product testing (number of tests)
Machine-related (machine-hours)
Activity
Cost
Deluxe Regular
$
60,00
0
500
1,000
280,000
240,000
2,500,00
0
$3,080,00
0
Total
1,500
800
7,000
2,000
3,000
2,800
10,000
4,500
8,000
12,500
Compute the activity rate for each of the activity cost pools.
3. Assume that actual activity is as expected for the year. Using activity-based
costing, do the following:
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3-4
a. Determine the total amount of overhead that would be applied to each model
for the year.
b. Compute the unit product cost for one unit of each model.
4. Can you identify a possible explanation for the companys declining profits? If so,
what is it?
Direct materials
Direct labor (0.50 hour and 1.00 hour @ $9.00 per
hour)
MonoRelay
$50.00
BiRelay
$65.00
$4.50
$9.00
Activity Measure
Number of part types
Number of purchase
orders
Number of tests run
Machine-hours
Estimated
Overhead
Cost
$ 88,000
199,200
299,000
57,000
$643,200
Activity Measure
Number of part types
Number of purchase
orders
Number of tests run
Machine-hours
Expected
Activity
MonoBiRelay
Relay
400
700
3,100
5,500
900
Total
1,100
884
3,984
9,450 14,950
1,000
1,900
Determine the activity rate for each of the four activity cost pools.
3. Using the activity rates you computed in part (2) above, do the following:
a. Determine the total amount of manufacturing overhead cost that would be
applied to each product using the activity-based costing system. After these
totals have been computed, determine the amount of manufacturing
overhead cost per unit of each product.
b. Compute the unit product cost of each product.
4. From the data you have developed in parts (1) through (3) above, identify factors
that may account for the companys declining profits.
2.5
1.2
Annual
Production
(Units)
1,000
10,000
Total
Direct
LaborHours
2,500
12,000
14,500
Activity Measure
Number of setups
Machine-hours
Direct labor-hours
Estimated
Overhead
Cost
$ 50,000
95,000
290,000
$435,000
Expected Activity
Model
X200
Model X99
Total
100
400
500
47,500
0
47,500
2,500
12,000
14,500
Required:
1. Assume that the company continues to use direct labor-hours as the base for
applying overhead cost to products.
a. Compute the predetermined overhead rate.
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3-8
Estimated
Overhead
Cost
$200,000
$110,000
Activity Measure
Direct labor-hours
Number of orders
Number of
receipts
$108,000
Number of relays
$960,000
Machine-hours
$1,260,000
Expected
Activity
20,000 DLHs
5,000 orders
1,800 receipts
12,000 relays
70,000 MHs
Required:
1. Compute the activity rate for each of the activity cost pools.
2. The expected activity for the year was distributed among the companys four
products as follows:
Product A
7,000
Expected Activity
Product B Product C Product D
1,000
8,000
4,000
800
900
1,100
2,200
400
3,500
16,000
800
2,000
26,000
300
3,000
17,000
300
3,500
11,000
Using ABC data, determine the total amount of overhead cost applied to each
product.
3. Assume that prior to implementing ABC, Fisher used a conventional cost system
that applied all manufacturing overhead to products based on machine-hours.
Explain how the conventional cost assignments would differ from the activitybased cost assignments with respect to Product C.