Thomas Carapaica

ID: 100832

9-33

Materials inventory
WIP inventory (3,750 x $18)
Transfer to WIP inventory

Debit

Credit
$67,500

Balance
$67,500
$67,500

Wages Payable
WIP inventory (50% of the
material)
Transfer to WIP inventory

Debit

Credit

Balance
$33,750
$33,750

Work in Process Inventory

Materials handling activity
Inspection ($225 x 750) activity
Setups (40 x $2,700) activity
Running machines (15,000 hrs x
$22.50) activity

Debit
$67,500
$168,75
0
$108,00
0
$337,50
0

Credit

$33,750

Wages payable
Transfer to finished goods inventory
Finished goods inventory
WIP inventory

Debit
$715,50
0

Credit

Balance
$715,50
0
$715,50
0

Debit

Credit

Balance

$67,500

$67,500
$67,500

Credit
$168,75
0

Balance
$168,75
0
$168,75
0

Total cost
Materials handling
activity
WIP inventory
Actual cost
Quality inspection activity
WIP inventory
Actual cost

Debit

Balance
$67,500
$236,35
0
$344,25
0
$681,75
0
$715,50
0
$715,50
0

Thomas Carapaica

ID: 100832

Machine setups activity

Debit

Credit
$108,00
0

Balance
$108,00
0
$108,00
0

Debit

Credit
$337,50
0

Balance
$337,50
0
$337,50
0

WIP
Actual cost
Running machine activity
WIP inventory
Actual cost
9-36
a)

Accounts
receivable
departmen
t
Billing
Dispute
resolution

Allocation
base

Total
cost

Number of bills
prepared
Number of bills
prepared

$48,0
00
$36,0
00
$84,0
00

Total

Total
number of
bills
prepared/dis
putes

Personal
600
bills
600
bills

1,000
1,000

$28,8
00
$21,6
00
$50,4
00

Business
400
bills
400
bills

$19,2
00
$14,4
00
$33,6
00

b)

Activity

Billing
Dispute
resolution
Total

Cost driver
Number of bills
prepared
Number of
disputes

Total
cost
$48,00
0
$36,00
0
$84,00
0

9-37a

Chair Manufacturer

Volum
e of
cost
driver
s

Each
driver

1,000

48

72

500

Cost driver volume

Perso
nal

Busine
ss

$28,80
0
$30,00
0
$58,00
0

$19,20
0
$6,000
$25,00
0

Total
$48,0
00
$36,0
00
$84,0
00

Thomas Carapaica

ID: 100832

Income Statement
Rat
Standa
Activity
Ergo
e
rd
$2,925, $2,760,
Sales revenue
000
000
Direct
$550,0
$500,0
materials
00
00
$400,0
$200,0
Direct labor
00
00
Overhead
costs
Administrati
$312,0
$156,0
78%
on
00
00
Production
$7,2 $360,0
$720,0
setup
00
00
00
Quality
$1,8 $360,0
$360,0
control
00
00
00
$19
$288,0 $1,152,
Distribution
2
00
000
Total overhead
$1,320, $2,388,
costs
000
000
Operating
$655,0 ($328,
profit
00
000)

Total
$5,685,
000
$1,050,
000
$600,0
00
$468,0
00
$1,080,
000
$720,0
00
$1,440,
000
$3,708,
000
$327,0
00

$468,000 / $600,000 = 78%

$1,080,000 / 150 runs = $7,200 per run
$720,000 / 400 inspections = $1,800 per inspection
$1,440,000 / 7,500 units = $192 per unit

9-40

Activity
Processing orders
Setting up production
Handling materials
Using machines
Performing quality control
Packing
Total est. overhead

Cost
Driver
No. of
orders
No. of runs
Pounds
Machinehrs.
No. of insp.
No. of units

Est. Costs

Driver
Units

Rate

$54,000

200

$270

$216,000
$360,000

100
120,000

$2,160
$3

$288,000

12,000

$24

$72,000
$144,000
$1,134,00
0

45
480,000

$1,600
$0.30

Thomas Carapaica

ID: 100832

Predetermined rate for Direct labor-hour = Estimated activity / Estimated allocation base
Predetermined rate for Direct labor-hour = $1,134,000 / 7,500 hours = $151.20 per hour
Production costs using direct labor-hour

Account
Direct materials
Direct labor
Indirect costs
Total costs

Institutional
$39,000
$6,750
$68,040
$113,790

Standard
$24,000
$6,750
$68,040
$98,790

Silver
$15,000
$9,000
$90,720
$114,720

Total
$78,000
$22,500
$226,800
$327,300

Production costs using ABC

Account
Direct materials
Direct labor
Indirect costs
Processing orders
Setting up production
Handling materials
Using machines
Performing quality
control
Packing
Total cost

Institutio
nal

Standa
rd

$39,000

$24,000

$6,750

$6,750

$3,240

$2,430

$6,480

$6,480

$45,000
$13,920

$18,000
$3,360

$1,620
$12,96
0
$9,000
$1,920

$4,800

$4,800

$4,800

$14,400

$18,000

$7,200

$137,190

$73,020

$2,700
$57,00
0

$27,900
$267,21
0

Silver
$15,00
0
$9,000

Total
$78,000
$22,500
$7,290
$25,920
$72,000
$19,200

The discrepancy between our product costs using direct-labor hours as the allocation base versus
activity-based costing is because the way that overhead costs are allocated. The ABC method is
more precise than our existing direct labor cost method.
9-41
$36,000 / 100 runs = $360 per run
$60,000 / 200 orders = $300 per order
$24,000 / 8,000 pounds = $3.00 per pound
$72,000 / 10,000 machine hours = $7.20 per machine hour
$60,000 / 40 inspections = $1,500 per inspection
$48,000 / 20,000 units = $2.40 per unit

Thomas Carapaica

ID: 100832

$300,000 / 2,000 labor hours = $150 per labor hour

Direct materials
Direct labor
Overhead
Total costs

Short
$6,000
$3,000
$15,000
$24,00
0

Direct materials
Direct labor
Setting up production
Processing orders
Handling materials
Using machines
Providing quality
management
Packaging and
shipping
Total Costs

Medium
$3,750
$3,600
$18,000
$25,350

Shor
t
$6,00
0
$3,00
0
$720
$2,40
0
$1,20
0
$3,60
0
$3,00
0
$2,40
0
$22,
320

Medi
um
$3,75
0
$3,60
0
$1,44
0
$2,40
0
$2,40
0
$2,16
0
$3,00
0
$1,20
0
$19,9
50

Tall
$3,000
$3,300
$16,500
$22,80
0

Tall
$3,00
0
$3,30
0
$2,88
0
$1,20
0
$600
$2,16
0
$3,00
0
$720
$16,
860

Explanation

The discrepancy between our product costs using direct-labor hours as the allocation base versus
activity-based costing is because the way that overhead costs are allocated. The ABC method is
more precise than our existing direct labor cost method.
9-42

Activity
Sales
Direct costs

Income Statement
Main
Route 66
Alley Cat
Street
$7,600,00 $11,200,00 $9,500,00
0
0
0

Total
$28,300,00
0

Thomas Carapaica

ID: 100832

Direct
material

$3,000,00
0

$4,800,000

Direct labor

$288,000

$480,000

Variable OH

$939,600

$1,503,360

Contr. Margin

$3,372,40
0

$4,416,640

$4,000,00
0
$1,080,00
0
$2,255,04
0
$2,164,96
0

Fixed OH:
Plant admin.
Other

$11,800,00
0
$1,848,000
$4,698,000
$9,954,000
$1,760,000
$2,800,000
$5,394,00
0

Gross Profit

$4,698,000 / 50,000 machine hours = $93.96 per machine hour

Income Statement
Main
Route 66
Alley Cat
Street
$7,600,00 $11,200,00 $9,500,00
0
0
0

$28,300,00
0

Direct costs
Direct
material

$3,000,00
0

$4,800,000

$11,800,00
0

Direct labor

$288,000

$480,000

$4,000,00
0
$1,080,00
0

$102,960
$288,000
$418,500
$151,200
$43,200

$159,120
$432,000
$418,500
$241,920
$172,800

$205,920
$432,000
$837,000
$362,880
$432,000

$468,000
$1,152,000
$1,674,000
$756,000
$648,000

Activity
Sales

Variable OH
Mach. Setup
Order proc.
Warehousing
Energy
Shipping
Fixed OH:
Plant admin.
Other
Gross Profit

Total

$1,848,000

$1,760,000
$2,800,000
$5,394,00
0

The ABC method provides more accurate information than other methods. So, as
well as the CFO said, Products have to bear a fair share of all overhead or we wont
be covering all of our costs. By doing this, they would be able to take better
decision due to the accuracy of this method.