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PROBLEM 3-12B Contrasting ABC and Conventional Product Costs (L02,

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

The company is considering implementing an activity-based costing system that


distributes all of its manufacturing overhead to four activities as shown below:
Activity
Activity Cost Pool
(and Activity Measure)
Machining (machine-hours)
Setups (setup hours)
Product-level (number of
products)
General factory (direct labor
dollars)
Total manufacturing overhead
cost

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?

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Chapter 3 Alternate Problems

PROBLEM 3-13B ABC Cost Hierarchy (LO1)


CHECK FIGURE
None
Federer Company manufactures a variety of products in a single facility. Consultants
hired by the company to do an activity-based costing analysis have identified the
following activities carried out in the company on a routine basis:
a. A percentage of all completed goods are inspected on a random basis.
b. Employees are trained in general procedures.
c.
Machines are set up between batches of different products.
d. Material is received on the receiving dock and moved to the production area.
e. Milling machines are used to make components for products.
f. Production orders are issued for jobs.
g. Purchase orders are issued for materials required in production.
h. The companys grounds crew maintains planted areas surrounding the factory.
i. The engineering department makes modifications in the designs of products.
j. The human resources department screens and hires new employees.
k.
The maintenance crew does routine periodic maintenance on generalpurpose equipment.
l. The plant controller prepares periodic accounting reports.
Required:
1. Classify each of the above activities as a unit-level, batch-level, product-level, or
facility-level activity.
2. For each of the above activities, suggest an activity measure that could be used
to allocate its costs to products.

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Introduction to Managerial Accounting, 6th edition

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

Serving a Party Serving a Diner Serving Drinks


Total
$3,100
$25,600
$22,800
$51,500
1,000 parties
4,000 diners
12,000 drinks

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?

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Chapter 3 Alternate Problems

PROBLEM 3-15B Contrasting ABC and Conventional Product Costs (LO2,


LO3, LO4)
CHECK FIGURE
(3b) Regular: $83.24 per unit
Weston Corporation manufactures a product that is available in both a deluxe and a
regular model. The company has made the regular model for years; the deluxe
model was introduced several years ago to tap a new segment of the market. Since
introduction of the deluxe model, the companys profits have steadily declined.
Sales of the deluxe model have been increasing rapidly.
Overhead is applied to products on the basis of direct labor-hours. At the beginning
of the current year, management estimated that $3,080,000 in overhead costs
would be incurred and the company would produce and sell 10,000 units of the
deluxe model and 50,000 units of the regular model. The deluxe model requires 2.0
hours of direct labor time per unit, and the regular model requires 1.0 hours.
Materials and labor costs per unit are given below:
Deluxe Regular
Direct materials cost per
unit
Direct labor cost per unit

$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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Introduction to Managerial Accounting, 6th edition

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?

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Chapter 3 Alternate Problems

PROBLEM 3-16B Contrasting ABC and Conventional Product Costs (LO2,


LO3, LO4)
CHECK FIGURE
(3a) Mono-Relay overhead cost per unit: $18.00
For many years, Yelena Company manufactured a single product called a MonoRelay. Then three years ago, the company automated a portion of its plant and at
the same time introduced a second product called a Bi-Relay that has become
increasingly popular. The Bi-Relay is a more complex product, requiring 1.00 hour of
direct labor time per unit to manufacture and extensive machining in the automated
portion of the plant. The Mono-Relay requires only 0.50 hour of direct labor time per
unit and only a small amount of machining. Manufacturing overhead costs are
currently assigned to products on the basis of direct labor-hours.
Despite the growing popularity of the companys new Bi-Relay, profits have been
declining steadily. Management is beginning to believe that there may be a problem
with the companys costing system. Material and labor costs per unit are as follows:

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

Management estimates that the company will incur $643,200 in manufacturing


overhead costs during the current year and 18,000 units of the Mono-Relay and
7,000 units of the Bi-Relay will be produced and sold.
Required:
1. Compute the predetermined manufacturing overhead rate assuming that the
company continues to apply manufacturing overhead cost on the basis of direct
labor-hours. Using this rate and other data from the Problem, determine the unit
product cost of each product.
2. Management is considering using activity-based costing to apply manufacturing
overhead cost to products for external financial reports. The activity-based
costing system would have the following four activity cost pools:

Activity Cost Pool


Maintaining parts
inventory
Processing purchase
orders
Quality control
Machine related

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

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Introduction to Managerial Accounting, 6th edition

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.

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Chapter 3 Alternate Problems

PROBLEM 3-17B Contrast Activity-Based Costing and Conventional


Product Costs (LO2, LO3, LO4)
CHECK FIGURE
(2b) X200 unit product cost: $305.00
Murphy Corporation manufactures two models of ultra-high fidelity speakers, the
X200 model and the X99 model. Data regarding the two products follow:
Direct LaborHours
Per Unit
Model
X200
Model X99

2.5
1.2

Annual
Production
(Units)
1,000
10,000

Total
Direct
LaborHours
2,500
12,000
14,500

Additional information about the company follows:


a. Model X200 requires $100 in direct materials per unit, and Model X99 requires
$60.
b. The direct labor wage rate is $20 per hour.
c.
The company has always used direct labor-hours as the base for applying
manufacturing overhead cost to products.
d. Model X200 is more complex to manufacture than Model X99 and requires the
use of special equipment. Consequently, the company is considering the use of
activity-based costing to apply manufacturing overhead cost to products. Three
activity cost pools have been identified as follows:

Activity Cost Pool Activity Measure


Machine setups
Number of setups
Special
processing
Machine-hours
General factory
Direct labor-hours

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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Introduction to Managerial Accounting, 6th edition

b. Compute the unit product cost of each model.


2. Assume that the company decides to use activity-based costing to apply
manufacturing overhead cost to products.
a. Compute the predetermined overhead rate for each activity cost pool and
determine the amount of overhead cost that would be applied to each model
using the activity-based costing system.
b. Compute the unit product cost of each model.
3. Explain why manufacturing overhead cost shifts from Model X99 to Model X200
under activity-based costing.

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Chapter 3 Alternate Problems

PROBLEM 3-18B Cost flows and Unit Product Costs in Activity-Based


Costing (LO2, LO3, LO5)
CHECK FIGURE
(2) Total overhead cost for Product D: $85,020
Fisher Company uses activity-based costing to determine product costs for external
financial reports. At the beginning of the year, management made the following
estimates of cost and activity in the companys five activity cost pools:

Activity Cost Pool


Labor related
Production orders
Material receipts
Relay assembly
General factory

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:

Activity Cost Pool


Labor related (DLHs)
Production orders
(orders)
Material receipts
(receipts)
Relay assembly (relays)
General factory (MHs)

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.

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Introduction to Managerial Accounting, 6th edition