P12.

LO 5
a.
Cost Pool
Materials ordering
Materials inspection
Equipment setup
Quality control
Other

Overhead rate
$72,000 8,000 = $9 per order
$75,000 375 = $200 per rec. report
$105,000 3,000 = $35 per setup
$69,000 3,000 = $23 per inspection
$100,000 $2,000,000 = $0.05 / labor cost

b. Materials ordering
$9 per order 100 orders =
Materials inspection
$200 per report 60 reports =
Equipment setup
$35 per setup 30 setups =
Quality control
$23 per inspection 150 inspections =
Other
$0.05 per labor dollar $39,000 =
Total overhead assigned to Strawberry Cheesecake

$ 900
12,000
1,050
3,450
1,950
$19,350

c. Overhead rate per unit of strawberry cheesecake = $19,350 19,500 units =

$0.992
d. Total unit costs per unit of Strawberry Cheesecake = $10 + $2 + $0.992 =
$12.992
e. With a traditional system:
The overhead rate per direct labor dollar is:
($421,000 $2,000,000 direct labor cost)

$0.211 per dollar of direct labor

The direct labor cost, per unit, for the Strawberry Cheesecake:
($39,000 19,500 units)
$2.000
Overhead assigned to each unit of Strawberry Cheesecake
($0.211 $2.00 direct labor cost)
$0.422
Under the traditional system, less overhead cost is assigned to each unit of
Strawberry Cheesecake than under the activity-based costing system. The
traditional system allocates overhead to each unit on the basis of one cost driver.
In this case, the cost driver is direct labor. Meanwhile, the activity-based costing
system uses several cost pools to allocating overhead costs to each unit.

P15. LO 5

a.
Cost Pool
Materials ordering
Materials inspection
Equipment setup
Quality control
Other
Total mfg. overhead

Cost pools
$

Total cost
driver activity

840,000
120,000
525,000
2,100
2,500,000
125
1,000,000
5,000
25,000,000 $12,500,000
$29,865,000

Cost pool rate

$7
$250
$20,000
$200
$2

b.
Costs
Materials ordering
Materials inspection
Equipment setup
Quality control
Other
Total mfg. overhead

Activity
Cost pool Total cost
usage
rate
allocated
1,200
$7
$8,400
315
$250
78,750
1
$20,000
20,000
500
$200
100,000
$320,000
$2
640,000
$847,150

c.
ABC overhead cost per unit:
Total overhead
Divide by number of units
ABC overhead cost per unit

$847,150
40,000
$ 21.18

d.
Cost per unit using ABC:
Direct materials
Direct labor
Overhead (calculated above)
Total cost per unit

$37.00
8.00
21.18
$66.18

e.
Traditional Allocation:
Total overhead
Divide by direct labor dollars
Overhead allocation rate per DL $

$29,865,000
12,500,000
$
2.39

Art of Design:
Total DL $
OH rate
Overhead allocated to Art of Design

$ 320,000
2.39
$ 764,800

Traditional overhead cost per unit:

Total overhead
Divide by number of units
Overhead cost per unit

$764,800
40,000
$ 19.12

Cost per unit using Traditional:

Direct materials
Direct labor
Overhead (calculated above)
Total cost per unit

$37.00
8.00
19.12
$64.12

Art of Design is undercosted using traditional costing. It is a specialty product

with relatively low volume. A more accurate product cost is calculated using
ABC.

P1. LO 2
a.
Employee benefits
Proportion
Amount allocated
Rent
20,000
Proportion
Amount allocated

Allocation Base Software

Consulting
Head count
$2,500,000

$1,000,000

375
.75
$1,875,000

125
.25
$625,000

Square feet

20,000

.5
$500,000

.5
$500,000

Telecommunications
Proportion
Amount allocated
General and adm. Costs
Proportion
Amount allocated
Total

Headcount
$500,000
Sales
$3,000,000
$7,000,000

375
.75
$375,000

125
.25
$125,000

$15,000,000
.652174
$ 1,956,522
$ 4,706,522

$8,000,000
.347826
$1,043,478
$2,293,478

Profit Report: (using multiple cost pools/allocation bases)

Software
Sales $15,000,000
Less direct costs
Less allocated costs
Income before taxes

Consulting
$8,000,000

6,000,000
4,706,522
$ 4,293,478

4,000,000
2,293,478
$1,706,522

Using multiple cost pools and multiple allocation bases allocates $543,478
($2,293,478 - $1,750,000) more overhead cost to consulting than a single
allocation base method.
b. Assuming the controllers assumptions are correct (that benefits and
telecommunications costs are driven by headcount while rent is driven by
space occupied and general and administrative costs are driven by relative
sales), then the multiple cost pools provide better information on the resources
consumed and the profitability of the two divisions.

P14. LO 2, 5
a.
Calculate predetermined overhead rate based on DLH:
Estimated MOH
(a)
$1,800,000
Estimated DLH
(b)
120,000
Planned OH rate
ab $15 per DLH
Calculate how much is allocated to Standard and Elite:

Standard
Elite

Usage of Cost Driver

3,000
Usage of Cost Driver
300

Rate
$15
Rate
$15

=
=
=
=

$45,000
$4,500

b.
Calculate individual pool
rates:
Maintenance
Costs
$700,000
Setup Costs
$500,000
Engineering
Costs
$600,000

Standard
Elite

Maintenance
Costs
$17,490
1,749

Cost pool rate

120,000
200

400

=
=

$5.83/DLH
$2,500/setup

= $1,500/design change

Setup Costs
$2,500
35,000

Engineering
$3,000
30,000

Total MOH
$22,990
66,749

c. Using traditional costing, Standard Switches, the high-volume product, are

overcosted, while the low-volume, specialty product, Elite Switches, are
undercosted. ABC will provide more accurate product costs because it does
not make the simplifying assumption that all overhead costs are proportional to
labor hours. Rather, some vary with labor hours, some vary with setups, and
some vary with design changes.