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Chapter 4: Accumulating and Assigning Costs to Products
Chapter 4
Accumulating and
Assigning Costs to
Products
QUESTIONS
4-1
The two cost management systems that have been traditionally used to cost
products and services are job order costing and process costing. Many
companies still use these two systems. However, since the mid-1980s, many
companies have been adopting activity-based costing for products, customers,
and services.
4-2
Manufacturing organizations face greater challenges in product costing,

especially the assignment of overhead costs, than retail or service
organizations do. The basic idea behind all manufacturing costing systems is
to determine the costs that products accumulate as they consume organization
resources during manufacturing, as described above in 4-1. In retail
organizations, goods are purchased rather than manufactured; the cost of the
goods purchased is entered into an account that accumulates the cost of
merchandise inventory in the store. Stores incur various overhead costs such
as labor, depreciation on the store, lighting, and heating. The primary focus in
retail operations is the profitability of product lines or departments. Therefore,
retail organizations, like manufacturing operations, face the issue of how to
allocate various overhead costs to determine, for example, the cost of
purchasing and selling products, or department costs.
Service organizations that undertake major projects, such as in a consultancy,
focus on determining the cost of a project. In such situations, the major direct
cost, employee pay, is often a large proportion of the projects cost. The
organization will also assign various overhead costs to determine project
profitability
4.3
4-4
A cost object is anything for which a cost is computed. Four examples of cost
objects are activities, products, product lines, and departments.
The defining characteristic of a consumable (flexible) resource is that its cost
depends on the amount of resource that is used. Examples of consumable
resources are wood in a furniture factory, fabric in a clothing factory, and iron
65
Atkinson, Solutions Manual t/a Management Accounting, 6E
ore in a steel mill. The cost of a consumable resource is often called a

variable cost because the total cost depends on how much of the resource is
consumed. The contrasting defining characteristic of a capacity-related
resource is that its cost depends on the amount of resource capacity that is
acquired and not on how much of the capacity is used. As the size of a
proposed factory or warehouse increases, the associated capacity-related cost
will increase. Examples of capacity-related costs are depreciation on
production equipment (the capacity-related resource) and salaries paid to
employees (the capacity-related resource) in a consultancy. The cost of a
capacity-related resource is often called a fixed cost because the cost of the
resource is independent of how much of the resource is used.
4-5
Direct and indirect costs are specified in relation to distinct cost objects. A
direct cost is a cost that is uniquely and unequivocally attributable to a single
cost object. If the cost fails the test of being direct it is classified as indirect
with respect to the designated cost object. For example, if the cost object is a
unit of product, then direct material (e.g., wood, steel) and direct labor are
direct costs, and manufacturing overhead costs (e.g., factory rent,
supervisors salaries) are indirect costs. However, if a department within a
plant is the chosen cost object, then the department managers salary is a
direct cost for the department (assuming the manager only manages that
department) and the cost of heat for the plant is an indirect cost.
4-6
The attributes of direct cost are:

The resource involved is a consumable resource;
The total cost of resource is proportional to the amount of the resource
consumed;
It is consumed by the production process.
4-7
Once the cost driver is chosen, the expected indirect factory costs are divided
by the number of cost driver units to compute a rate called the predetermined
indirect cost rate, or predetermined overhead rate, or cost driver rate. When a
single predetermined cost driver rate is used for the entire factory it is called a
single cost driver rate.
4-8
In practice, predetermined indirect cost rates are commonly called

predetermined overhead rates or cost driver rates.
4-9
Costs need to be estimated for individual jobs in order to bid for them and to
price them competitively. Costs may differ across individual jobs because
jobs may differ in their materials content, the hours of labor required to
manufacture them, and in the demand they place on capacity-related
66
resources. Estimated costs are also useful for comparison with actual costs
for management control purposes.
4-10 Indirect cost rates (also called predetermined indirect cost rates,
predetermined overhead rates, or cost driver rates) are determined by dividing
expected indirect factory costs by the number of cost driver units.
4-11 Overhead cost for a job is estimated by multiplying the cost driver rate(s) by
the number of units of the cost driver(s) associated with the job.
4-12 Indirect cost pools collect overhead costs into separate groups, for each of
which a separate cost driver rate is associated.
4-13 Most organizations use multiple indirect cost pools in order to improve
costing. Cost distortions arise when an indirect cost pool includes costs with
different cost drivers and where different products use the capacities
underlying the indirect costs differentially. (The increase in measurement
costs for a more detailed cost system, however, must be traded off against the
benefit of increased accuracy in estimating product costs.)
4-14 Determination of cost driver rates based on planned or actual short-term
usage will result in rates that are too high in periods of low demand and that
are too low in periods of high demand. Thus, product costs are distorted in
such a costing system. If management uses cost-plus pricing, a death spiral
can result, as follows. If expected demand goes down, the cost driver rate will
increase, causing the cost-plus price to increase. Increasing prices cause
demand to fall, which leads to further price increases as the cost driver rate
increases the cost-plus price.
4-15 Unlike direct material costs and direct labor costs, overhead costs cannot be
traced easily to each job. When actual costs are recorded for a job during the
course of a fiscal period, the total overhead costs for the period and
consequently, the actual cost driver rate is not yet determined. Therefore,
costs are applied to jobs using predetermined rates.
4-16 Yes. A separate cost driver rate should be determined for each cost pool when
multiple cost drivers (where cost driver refers to a cause of costs, as
discussed in Chapter 3) are involved, or else job cost estimates may be
distorted. The increase in measurement costs for a more detailed cost system,
however, must be traded off against the benefit of increased accuracy in
estimating product costs. Though not covered in the textbook, students may
note that if the different cost drivers vary together in the same proportion (for
example, if machine hours and direct labors hours are used in the same
67
proportions as the total number of units increases), then any one of them will
be sufficient.
4-17 The three options for dealing with the difference between actual and applied
capacity (overhead) costs are: (1) Charge the difference to cost of goods sold;
(2) Prorate the difference to work in process, finished goods, and cost of goods
sold; (3) Decompose the difference into two parts: the difference between
actual and budgeted indirect costs, and the difference between budgeted and
applied indirect costs.
4-18 Computing the cost driver rate by using the planned level of the cost driver
will result in rates that are too high in periods of low demand and that are too
low in periods of high demand. If management uses cost-plus pricing, a death
spiral can result, as follows. If expected demand goes down, the cost driver
rate will increase, causing the cost-plus price to increase. Increasing prices
cause demand to fall, which leads to further price increases as the cost driver
rate increases the cost-plus price. This cycle can continue until there is no
further demand, hence the term death spiral.
4-19 Estimating practical capacity begins with an estimate of theoretical capacity.
Suppose a machine is nominally available for 100 hours each week. That is,
theoretical capacity is 100 hours each week. A common rule of thumb is to
allow about 20% of theoretical capacity or, in this case, 20 hours for activities
such as maintenance, setup, and repair. In the case of labor hired for the year,
theoretical capacity is 2,080 hours (52 weeks, 40 hours per week). However,
workers on average have 3 weeks off and, with breaks, work about 35 hours
per week. Therefore, practical capacity is 1,715 hours (49 weeks, 35 hours
per week). In this case practical capacity is about 82% (1,715/2,080) of
theoretical capacity. Alternatively, for both machines and labor, detailed
records of nonproductive time may provide a more accurate level of practical
capacity.
4-20 Job order costing is an approach to costing that estimates costs for specific
customer orders because the orders vary from customer to customer. The
purpose of the job order costing system is to accumulate the cost of the job
because costs will vary across jobs. Each job will have a cost that is
computed by summing the direct and indirect costs of each department or
activity that was used to complete the job.
Two situations in which job order costing might be used are
providing a meal from a restaurant menu;
treating a patient in a hospital.
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4-21 Continuous processing plants are characterized by the fact that production
flows continuously, semi-continuously, or in large batches from one process
stage to the next. At each successive process stage, further progress is made
toward converting the raw materials into finished products. Therefore, the
product costing system must accumulate conversion costs assigned to
individual products for successive process stages. Product costs must also
reflect the input materials in each process stage.
The total cost of all products is determined by adding up all material and
conversion costs used to produce the products and then dividing by the
number of products produced to get a cost per unit. More specifically, the
steps are:
1. Identify the physical flow of units
2. Compute the equivalent units for materials and conversion costs
3. Identify the costs of materials and conversion costs
4. Compute the cost per equivalent unit.
4-22 Multistage process costing systems have the same objective as job order
costing systems. Both types of systems assign material, labor, and
manufacturing overhead costs to products to determine product costs. The
two types of systems differ, however, on some dimensions. In a job order
environment, production requirements vary across different jobs, so
production occurs job by job and costs are measured for individual jobs. In a
multistage process environment, production requirements are homogeneous
across products or jobs, so production occurs continuously, semicontinuously, or in large batches, and costs are measured for individual
process stages.
4-23 Production departments are those directly responsible for transforming raw
materials into finished products or for providing services for customers.
Service departments do not directly produce goods or services for customers,
but instead provide services to the departments or activities that produce
goods or services. In a manufacturing setting, production engineering and
machine maintenance are service departments for the production departments.
EXERCISES
4-24 (a) Famous Flanges previous cost driver rate was $4,000,000 100,000 = $40 per
machine hour. With the drop in demand, the cost driver rate is now
$4,000,000 80,000 = $50 per machine hour. The company will consequently
raise its prices because the products will have higher reported costs. If demand
decreases further and the company continues to use the same method to
69
determine its cost driver rate, the rate will continue to increase, and the
company will want to raise its prices even more. However, the rising
prices may contribute to further declines in demand, leading the company
into a downward spiral.
(b)Famous Flange should use the practical capacity quantity of machine hours
to determine the cost driver rate in order to avoid the fluctuations
described in part (a) and to understand the cost driver rates at the point
where the cost of the resources provided (the numerator) is matched with
the practical capacity usage provided (the denominator). If resource usage
is less than practical capacity, the company should monitor the cost of
unused capacity. Famous Flange may be able to reduce the capacity costs
or to find other profitable uses for the capacity.
4-25 Theoretical Capacity:
Theoretical capacity of each machine per week:
6 hours per shift X 3 shifts per day X 6 days per week = 108 hours
Theoretical capacity of the company per week:
108 hours X 120 machines = 12,960 hours
Practical Capacity:
Practical capacity of each machine per week:
[6 1.5] hours per shift X 3 shifts per day X 6 days per week
= 81 hours
Practical capacity of the company per week:
81 hours X 120 machines
= 9,720 hours i.e. 75% of theoretical capacity
4-26 Theoretical capacity: 52 weeks X 38 hours per week = 1,976 hours
Practical capacity: (52 6) weeks X 38 hours per week = 1,824 hours i.e.
about 92.3% of theoretical capacity.
70
4-27 (a)
Direct material
Part A327
Part B149
Total direct material cost
Direct labor
Assembly
Inspection
Total direct labor cost
Quantity
1,000 units
1,000 units
Price
$60
120
Amount
$60,000
120,000
$180,000
Hours
6,000
1,000
7,000
Rate
$10
12
Amount
$60,000
12,000
$72,000
Overhead costs
7,000 Direct labor hours
$5 per hour
Amount
$35,000
Total cost
(b)
$287,000
Number of units produced
1,000
Selling price per monitor
$350
Cost per monitor
287
Gross margin per monitor

4.28 Direct Materials:
Engine Oil (15 X $4)
Lubricant (3 X $5)
$ 63
60
15
75
Direct Labor (6 labor hours X $20)
Overheads (6 labor hours X $ 25)
4-29 (a)
(b)
4-30 (a)
120
150
345
Support cost driver rate:

=
$ 7,500,000
$ (25,000 X 12)
= 2.5 X Direct labor cost
Consulting engagement cost:
Labor cost
$100,000
Support cost
2.5 labor cost $250,000
Total cost
$350,000
Cost driver rate for the machine department:
$350,000/14,000 machine hrs = $25/machine hr
71
Cost driver rate for the finishing department:

$280,000/$350,000 = 80% of DL cost
(b)
Machining
Department
$8,000
250
1,250a
$9,500
Direct materials cost

Direct labor cost
Manufacturing overhead
Total costs of Job 101
a
b
Finishing
Department
$1,400
800
640b
$2,840
Total
$9,400
1,050
1,890
$12,340
$1,250 = $25 50
$640 = 80% of 800
4-31
(a) Plantwide cost driver rate:
$ 100,000
.
8,000 direct labor hours
= $ 12.5 per direct labor hour
(b) Departmental cost driver rates:
Cutting Department:
$ 40,000
.
4,000 machine hours
= $ 10 per machine hour
Assembly Department:
$ 60,000
.
= $ 10 per direct labor hour
(c) The company may favor the method in (b) if support activity costs in the
cutting department have a cause-and-effect relationship with machine hours,
while those in the assembly department have a cause-and-effect relationship
with direct labor hours. The company may use the method in (a) because it is
simpler than the method in (b), which is potentially more accurate.
72
4-32 (a)
(b)
Month
January
February
March
April
May
June
July
August
September
October
November
December
Total Hours
Actual Machine Hours

1,350
1,400
1,500
1,450
1,450
1,400
1,400
1,400
1,500
1,600
1,600
1,600
17,650
Monthly Overhead Costs

$51.85
$50.00
$46.67
$48.28
$48.28
$50.00
$50.00
$50.00
$46.67
$43.75
$43.75
$43.75
The cost driver rate should be determined as the ratio of the estimated
cost accumulated in the cost pool to the practical capacity of the cost
driver (the basis for assigning overhead). For Morrisons machinerelated overhead costs, the computation is:
$70,000 12 months
$46.67 per machine hour
1,500 machine hours 12 months
If the cost driver rate is based instead on actual or budgeted activity
quantities that fluctuate over time, then overhead costs assigned to
products will be understated in periods of high demand and overstated
in periods of low demand, as shown in part (a). If Morrisons overhead
costs are caused by multiple variables (cost drivers, as defined in
Chapter 3), the company may develop a more accurate cost system by
using multiple cost driver rates.
4-33 Ingredient A: $0.40 10,000

Ingredient B: $0.60 20,000
Conversion costs: $0.55 30,000
Total costs
Number of gallons of blended vegetable juice
Cost per gallon of blended vegetable juice
4-34 Direct materials
Direct labor
Overhead costs
$232,000
120,000
60,000
73
$4,000
12,000
$16,000
$16,500
$32,500
27,000
$1.204
Disposal costs of waste product

Total costs
Number of pounds of Goody
Cost per pound of Goody
20,000
$432,000
200,000
$2.16
4-35
Materials Conversion
Completed and transferred out
6000 100%
gallons
Ending work-in-process gallons 4000 25%; 4000 10%
Equivalent units of production
4-36 (a)
Allocation of machine setup costs:

300
$30,000
Assembly Dept.: $40,000
300 100
Finishing Dept.: $40,000
(b)
100
$10,000
300 100
Allocation of inspection costs:

Assembly Dept.: $15,000
Finishing Dept.: $15,000
200
$4,285.71
200 500
500
$10,714.29
200 500
74
6000
1000
7000
6000
400
6400
Service Departments
S1
S2
4-37
Overhead costs
$65,000
Allocation of S1 costs
(65,000)
Total allocated
overhead costs
$0
4-38 (a)
$55,000
Production Departments
P1
P2
$160,000 $240,000
15,000
20,000
30,000
(70,000)
33,600
36,400
$0
$213,600 $306,400
P1
S1: $300,000
P2
30
$150,000
30 30
25
S2: $300,000
$100,000
25 50
$300,000
30
$150,000
30 30
$300,000
50
$200,000
25 50
$250,000
(b)
S1
Directly
identified
costs
Allocation of
S1 costs
S2
P1
P2
$300,000
$300,000
($300,000)
120,000
$90,000
$90,000
(420,000)
140,000
280,000
$0
$230,000
$370,000
Allocation of
S2 costs
Totals
(c)
$350,000
$0
S1 $300,000 0.25S2
S2 $300,000 0.4S1
75
Therefore,
S1 $300,000 0.25$300,000 0.4S1
$375,000 01
. S1
0.9S1 $375,000
$375,000
S1
$416,667
0.9
S2 $300,000 0.4 $416,667 $466,667
Allocation of S1 and S2 costs to P1 and P2
P1
S1: $416,667 30%
S2: $466,667 25%
$125,000
P2
$416,667 30%
$125,000
$116,667
$466,667 50%
$233,333
$241,667
$358,333
The summary below incorporates the allocation of 0.25 S2 =

$116,667 to S1 and 0.4 S1= $166,667 to S2.
S1
$300,000
S2
$300,000
Allocation of S1 costs (416,667)
166,667
$125,000
$125,000
116,667
(466,667)
116,667
233,333
$0
$0
$241,667
$358,333
Directly identified
costs
Total
76
P1
P2
PROBLEMS
4-39 (a)
Plantwide cost driver rate = $15,000,000/100,000 machine hours

= $150 per machine hour
Applied overhead = $150 90,000 = $13,500,000
(b)
Actual overhead applied overhead

= $14,200,000 $13,500,000 = $700,000
Overhead is underapplied, so an adjustment will be made to increase
the previously recorded cost of goods sold by $700,000.
(c)
Work in process, finished goods, and cost of goods sold will be

increased by $700,000 times 20%, 45%, and 35%, respectively. These
increases are $140,000, $315,000, and $245,000, respectively.
(d)
Actual overhead estimated overhead

= $14,200,000 $15,000,000 = $800,000
Estimated overhead applied overhead
= $15,000,000 $13,500,000 = $1,500,000
(e)
The approach in part (d) develops information that helps identify the
reasons for the difference between actual and applied costs, and is
therefore relevant for internal decision making purposes. The difference
between actual and estimated overhead cost is $800,000. The lower
actual cost creates a favorable effect on income, relative to the
budgeted cost. The difference between estimated and applied overhead
cost results from idle capacity. Recall that the machine hour practical
capacity was 100,000 while the actual machine hours used totaled
90,000. This means that idle capacity was 10,000 (100,000 90,000)
machine hours with an associated idle capacity cost of $1,500,000
(10,000 $150). Management will likely seek explanations for why
actual overhead differed from estimated overhead, and why applied
overhead differed from estimated overhead. In response to these
explanations, management might revise the overhead budget or explore
new product opportunities to use the idle capacity.
77
4-40 (a) Cost driver rate:

Salaries of mechanics
Fringe benefits
General and administrative
Depreciation
Total conversion costs
Billable hours
Conversion cost per billable hour
Mark-up
Cost driver rate
$225,000
$ 65,000
$ 16,000
54,000
$360,000
6,000
$60.00
1.30
$78.00 per DL hr
(b) Job 123:

Job 123
Materials
Conversion cost plus mark-up: 0.8 DL hours $78
Total price
$52.50
62.40
$114.9
0
4-41
Job 101
$25,500
Beginning Work in Process

Department 1
Direct materials
Direct labora
Manufacturing
overheadb
Department 2
Direct materials
Direct labora
Manufacturing
overheadb
Department 3
Direct materials
Driver
500 DL hrs
$40,000 DM
Driver
$40,000
6,000
60,000
Driver
200 DL hrs
1200 mh
Job 102
$32,400
400 DL hrs
$26,000 DM
Driver
$26,000
4,800
39,000
Driver
$3,000
3,600
9,600
Driver
78
300 DL hrs
$58,000 DM
$58,000
3,600
87,000
Driver
250 DL hrs
$5,000
4,500
350 DL hrs
1500 mh
12,000
2700 mh
Driver
$0
Job 103
$0
$14,000
6,300
21,600
Driver
$0
$0
Direct labora
Manufacturing
overheadb
1500 DL hrs
22,500
1800 DL hrs
27,000
2500 DL hrs
37,500
$22,500 DL
45,000
$27,000 DL
54,000
$37,500 DL
75,000
Total Costs
a
Direct labor rates:

Department 1: $12 per DL hr
Cost driver rates:

Department 1: 150% of DM cost
Department 2: $8 per machine hr
Department 3: 200% of DL cost
$215,200
(a)
Total cost of completed Job 101 $215,200
(b)
Total cost of completed Job 102 $204,700
(c)
Work-in-process for Job 103 at June 30 $303,000
79
$204,700
$303,000
4-42 (a)
Allocating costs in proportion to the number of actual passengers can

be justified by the argument that the service center costs should be
spread equally over all passengers because each passenger uses
approximately the same amount of service center resources.
Week
1
2
3
4
5
*
**
(b)
1,500
2 ,400
Boston
$4,800
4,500*
5,118
5,200**
5,100
Cambridge
$2,400
2,700
2,482
2,600
2,100
7,200 $4,500
1,700
2 ,550
7,800 $5,200
Another alternative is to allocate $3 = $7,200/2,400 per passenger.

Using this approach to allocate service center costs is justified by the
argument that the service center costs are caused primarily by the
capacity that is made available rather than the actual usage of the
committed resources.
Week
1
2
3
4
5
Boston
$4,800*
4,500
4,950
5,100
5,100
Cambridge Unallocated
$2,400
2,700
2,400
$250
2,550
150
2,100
* 1,600 passengers $3 per passenger
Another alternative is to allocate normal costs 2:1 (1,600:800) based

on long run demand and additional help costs in the proportion of
additional demand. This method best reflects the factors that cause the
costs to be incurred.
80
Week
1
2
3
4
5
Boston
$4,800
4,800
5,200*
5,200**
4,800
Cambridge
$2,400
2,400
2,400
2,600
2,400
* 5,200 = 4,800 + (7,600 7,200)

** 5,200
7,800 (1,700 1,600)

(1,700 1,600) (850 800)
$120,000 $160,000
(8,000 12,000) direct labor hours
$280,000

Plantwide cost driver rate
$14 per direct labor hour
4-43 (a)
Job Cost Sheet: Job #714

Direct materials
Milling
Assembly
$800
50
Direct labor
Milling
Assembly
$100
600
$850
700
Manufacturing Overhead
50 Direct labor hours $14 per hour
Total cost
81
700
$2,250
(b)
$120,000
12,000 machine hours
$10 per machine hour
Cost driver rate Milling
$160,000
$13.33 per direct labor hour
Cost driver rate Assembly
Job Cost Sheet: Job #714

Direct materials
Milling
Assembly
$800
50
Direct labor
Milling
Assembly
$100
600
$850.00
700.00
Overhead
$180.00
Milling: 18 machine hours $10 per hour
Assembly: 40 direct labor hours $13.33 per hour 533.20
Total overhead cost
Total cost
713.20
$2,263.20
(c)
Part (a)
$2,250.00
562.50
$2,812.50
Manufacturing cost
25% markup
Bid price
(d)
Part (b)
$2,263.20
565.80
$2,829.00
The company may favor the method in (b) if overhead costs in the
milling department have a cause-and-effect relationship with machine
hours, while those in the assembly department have a cause-and-effect
relationship with direct labor hours. In this case, the computed total
manufacturing cost in part (a) is of similar magnitude to the cost in part
(b), and therefore the bid prices are also of similar magnitude. Given
this result, one might be inclined to use the simpler method in part (a)
rather than the more accurate but more complex method in part (b).
However, comparisons across different products may produce greater
differences in computed costs and bid prices.
82
4-44
(a)
Support
cost
Cutting
Grinding
Drilling
$700,000
$2,400,000
$2,750,000 $5,850,000
100,000
125,000
Direct
labor hours 75,000
Total
300,000
Plantwide cost driver rate:

$ 5,850,000
. = $ 19.50 per direct labor hour
Support cost applied to Job ST101:
$19.50 (2,400 + 3,000 + 5,000) = $202,800.
(b)
Cost driver rate: Cutting

$700,000 = $0.70 per machine hour
1,000,000
Cost driver rate: Grinding
$2,400,000 = $24 per labor hour
1,00,000
Cost driver rate: Drilling
$2,750,000 = $22 per labor hour
1,25,000
Support cost applied to Job ST101:
Dept
Cutting
Grinding
Drilling
Rate
$0.70
$24.00
$22.00
Units of Driver Used

24,000 MH
3,000 DLH
5,000 DLH
Support Cost
$16,800
$ 72,000
$ 110,000
$198,800
(c) The company may favor departmental support cost driver rates if
support activity costs in the cutting department have a cause-and-effect
relationship with machine hours, while those in the grinding and drilling
departments have a cause-and-effect relationship with direct labor hours.
83
The company may use a plant-wide cost driver rate because it is simpler
than using multiple departmental rates, though the departmental rate
method is potentially more accurate.
4-45
(a) Cost driver rate for machining:
$750,000
. = $30 per machine hour
Cost driver rate for finishing:
$450,000 = 75% of direct labor cost
$600,000
(b)
Direct material cost
Direct labor cost
Manufacturing support
Total costs of Job 134
Machining
Department
$15,000
1,000
3,000a
$19,000
Finishing
Department
$5,000
1,600
1,200b
$7,800
Total
$20,000
2,600
4,200
$26,800
a $3,000 = $30 X 100

b $1200 $1,600 X 75%
(c)
Gonzalez Company probably believes that its manufacturing support costs

are driven by different factors. Specifically, support activity costs in the
machining department have a cause-and-effect relationship with machine
hours, while those in the finishing department have a cause-and-effect
relationship with direct labor costs.
4-46 (a)

Total number of process hours
84
Mixing and Reaction Pulverizing

Blending Chambers and Packing
$437,500 $1,575,000
$528,000
8,750
35,000
8,800
Conversion cost per process hour
$50
$45
$60
(b)
Costs
Materials:
Raw materials
Packing materials
C206
$1,525
$215
8 hrs x $60
Total cost
$1,525
$300
$1,740
$1,825
500
900
500
900
Conversion costs:
Mixing and blending: 10 hrs x $50
Reaction chamber: 20 hrs x $45
Pulverizing and packing: 4 hrs x $60,
C208
240
480
$1,640 $1,880
$3,380 $3,705
4-47 (a)
Completed and
transferred out units 8000 100%
4000 40%; 4000 25%
Ending WIP units
EUs of production
8,000
1,600
9,600
8,000
1,000
9,000
(b)
Costs, beginning of October
Added during October
To be accounted for
EUs of production
Cost per equivalent unit
Materials Conversion Total

$1,050
$3,240 $4,290
8,200
22,620 30,820
$9,250
$25,860 $35,110
9,600
9,000
$0.96
$2.87
$3.83
(c)
Costs, beginning of October
85
$1,050
$3,240
Corresponding equivalent units

1,400
$0.75
1,200
$2.70
Costs added during October

Corresponding equivalent units*
$8,200
8,200
$1.00
$22,620
7,800
$2.90
*Equivalent units:
Completed during October from
beginning WIP
Equivalent units in ending WIP
Started and completed during
October:
(12,000 2,000 4,000) 100%
Total EU s in October
Materials
Conversion
2000 30% = 600

4000 40% = 1600
2000 40% = 800

4000 25% = 1000
6000
8200
6000
7800
The costs per equivalent increased in October (materials increased

from $0.75 to $1 and conversion cost increased from $2.70 to $2.90).
The weighted average method produces weighted average equivalent
unit costs of $0.96 and $2.87 for materials and conversion cost,
respectively.
86
4-48 (a)
Service Departments Production Departments

Personnel Maintenance Machining Assembly
Directly identified
costs
$100,000 $200,000
$400,000
Allocation of
Personnel Dept.
costs
(100,000)
11,111a
Allocation of
Maintenance
Dept. costs
(200,000) 176,471c
$0
$0
$587,582
a
(b)
$100,000
$100,000
45
40
45
$200,000
$200,000
$300,000
88,889b
23,529d
$412,418
7,500
8,500
1,000
8,500
$587,582
Cost driver rate: Machining 10,000 machine hours
$412,418
Cost driver rate: Assembly 10,000 direct labor hours
Direct materials and labor costs:
$ 450.00
Overhead costs from Machining Department

($58.7582 3 machine hours)
176.27
Overhead costs from Assembly Department

($41.2418 5 direct labor hours)
206.21
Total unit cost
$ 832.48
Markup (30%)
249.74
Bid price
$1,082.22
87
(c)

Personnel Maintenance Machining Assembly
Directly
identified costs $100,000
$200,000
Allocation of
Maintenance
Dept. costs
30,000a
(200,000)
150,000b
20,000c
Allocation of
Personnel
Dept. costs
(130,000)
14,444d
115,556e
$0
$0
$564,444 $435,556
$200,000
$200,000
$200,000
1,500
10,000
7 ,500
10,000
$130,000
$130,000
$400,000 $300,000
5
45
40
45
1,000
10,000
$564, 444
10, 000machinehours
Cost driver rate: Machining $56. 4444 permachinehour
(d)
$435, 556
10, 000directlaborhours
Cost driver rate: Assembly $43.5556perdirectlaborhour
Direct materials and labor costs:

Overhead costs from Machining Department
($56.4444 3 machine hours)
169.33
Overhead costs from Assembly Department

($43.5556 5 direct labor hours)
217.78
Total unit cost
$837.11
Markup (30%)
251.13
Bid price
4-49 (a)
$450.00
$1,088.24
Service Departments
88
Maintenance Grounds
Assembly
Directly
identified costs
$18,000
$14,000
$45,000
$25,000
Allocation of
Maintenance
Dept. costs
(18,000)
12,000a
6,000b
Allocation of
Grounds Dept.
costs
Fabricating
$18,000
$18,000
12,000
18,000
6,000
18,000
(b)
(14,000)
6,000c
8,000d
$0
$0
$63,000
$39,000
$14,000
$14,000
15,000
35,000
20,000
35,000

Maintenance Grounds Fabricating Assembly
Directly
identified costs
Allocation of
Maintenance
Dept. costs
Allocation of
Grounds
Dept. costs
$18,000
$18,000
$18,000
1,500
$18,000
$14,000
(18,000)
1,385a
11,077b
5,538c
(15,385)
6,594d
8,791e
$0
$0
$62,671
19,500
12 ,000
19 ,500
$15,385
$15,385
6,000
19,500
89
15,000
35,000
20,000
35,000
$45,000
$25,000
$39,329
(c)
Directly
identified
costs
Service Departments
Maintenance
Grounds
Fabricating
Assembly
$18,000.0000 $14,000.0000
$45,000.0000 $25,000.0000
Allocation of
Maintenance
Dept. costs
($19,221.9959) ($19,221.9959)
Allocation of
Grounds
Dept. costs
($15,478.6151)
1,478.6151a
1,221.9959d (15,478.6151)
$0
$0
11,828.9206b
5,914.4603c
6,109.9796e
8,146.6395f
$62,938.9002 $39,061.0998
Note: These calculations were done by spreadsheet and rounded.

a
b
c
1,500
19,500
12,000
$19,221.9959
19,500
6,000
$19,221.9959
19,500
$19,221.9959
d
e
f
3,000
38,000
15,000
$15,478.6151
38,000
20,000
$15,478.6151
38,000
$15,478.6151
3,000
G
38,000
1,500
G $14,000
M
19,500
M $18,000
Therefore,
M $18,000
3,000
1,500
M
$14,000
38,000
19,500
0.993927126 M = $19,105.26316
M = $19,221.995927
G $14,000
1,500
$19,221.995927
19,500
G = $15,478.61507
4-50 (a) Service Dept. Cost Allocation: Direct Method
Service Departments
Maintenance
Power
90
Casting
Assembly
Directly
identified
costs
$750,000
$450,000
$150,000
$110,000
Allocation of
Maint. Dept.
Costsa
(750,000)
500,000a
0a0a
250,000
Allocation of
Power Dept.
Costsb
(450,000)
250,000
200,000
$0
$0
$900,000
$560,000
80,000
40,000
500,000; 750,000
250,000
80,000 40,000
80,000 40,000
750,000
b
200,000
160,000
250,000; 450,000
200,0
200,000 160,000
200,000 160,000
450,000
$900,000
Cost driver rate: Casting
$560,000
Cost driver rate: Assembly
91
Direct labor and material costs
$32.000
Overhead costs:
$11.250
Casting (1 $11.25)
Assembly (0.5 $9.33)
4.665
Unit cost
$47.915
Number of units per month
(b)
15.915
1,000.000
Total manufacturing costs per month
$47,915.000
Mark up (25%)
$11,978.750
Bid price (per month)
$59,893.750
Service Dept. Cost Allocation: Sequential Method

Service Departments
Maintenance Power
Casting
Assembly
Directly
identified
costs
$750,000
$450,000
$150,000
$110,000
Allocation of
Maint. Dept.
costs
(750,000) $300,000
300,000
150,000
Allocation of
Power Dept.
costs
(750,000)
416,667
333,333
$866,667
$593,333
$0
$0
$866, 667
80, 000
Cost driver rate: Casting $10.833 per machine hour
$593, 333
60, 000
Cost driver rate: Assembly $9.889 per labor hour
92
$32.000
Overhead costs:
Casting (1 $10.833)
$10.833
Assembly (0.5 $9.889)
4.944
Unit cost
$47.777
(c)
15.777
1,000.000
$47,777.000
Mark up (25%)
$11,944.250
$59,721.250
M $750,000 01
.P
P $450,000 0.4 M
Therefore,
M = $750,000 + 0.1 (450,000 + 0.4 M)
M = $795,000 + 0.04 M
0.96 M = $795,000
$795,000
$828,125
0.96
P 450,000 0.4 $828,125 $781,250
M
Casting
Directly
identified
costs
Assembly
$150,000
$110,000
Allocation
of Maint.
Dept. costs $828,125 40% = $331,250 $828,125 20% = $165,625
Allocation
of Power
Dept. costs
$781,250 50% = $390,625 $781,250 40% = $312,500

$871,875
93
$588,125
$871, 875
80, 000
Cost driver rate: Casting $10.8984 per machine hour
$588,125
60, 000
Cost driver rate: Assembly $9.8021 per labor hour
$32.0000
Overhead costs:
Casting (1 $10.8984)
$10.8984
Assembly (0.5 $9.8021)
4.9011
Unit cost
15.7995
$47.7995
1,000.0000
$47,799.5000
Mark up (25%)
$11,949.8750
$59,749.3750
CASES
4-51 (a)
The plantwide cost driver rate is $122,000/(2,400 + 1,440 + 720 +320)

= $25.00 per direct labor hour
Unit gross margins:
Selling Price
A
$ 15.00
B
$18.00
C
$20.00
D
$ 22.00
Materials Cost
Labor Cost
Overheada
Total Cost
4.00
7.20
6.00
$ 17.20
5.00
5.40
4.50
$14.90
6.00
3.60
3.00
$12.60
7.00
2.40
2.00
$ 11.40
Gross Margin
$ (2.20)
a
$25 per direct labor hour
$ 3.10
$ 7.40
$ 10.60
94
Total gross margins:

Selling Price
Materials Cost
Labor Cost
Overhead
Total Cost
Gross Margin
(b)
Total
$ 150,000
$ 144,000
$120,000
$88,000
$502,000
40,000
72,000
60,000
172,000
40,000
43,200
36,000
119,200
36,000
21,600
18,000
75,600
28,000
9,600
8,000
45,600
144,000
146,400
122,000
412,400
$ (22,000)
$ 24,800
$ 44,400
$42,400
$ 89,600
After dropping product A, the plantwide cost driver rate is $122,000/

(1,440 + 720 +320) = $49.1935 per direct labor hour
Unit gross margins:
Selling Price
B
$18.00
C
$20.00
D
$ 22.00
Materials Cost
Labor Cost
Overheada
Total Cost
5.00
5.40
$ 8.85
$19.25
6.00
3.60
$ 5.90
$15.50
7.00
2.40
$ 3.94
$ 13.34
Gross Margin
$ (1.25) $ 4.50
a
$ 8.66

Selling Price
Materials Cost
Labor Cost
Overhead
Total Cost
Gross Margin
Total
$ 144,000
$120,000
$88,000
$352,000
40,000
43,200
70,839
154,039
36,000
21,600
35,419
93,019
28,000
9,600
15,742
53,342
104,000
74,400
122,000
300,400
$ (10,039)
$ 26,981
$34,658
$ 51,600
95
(c)
After further dropping product B, the plantwide cost driver rate is

$122,000/(720 +320) = $117.3077 per direct labor hour
Unit gross margins:
Selling Price
C
$20.00
D
$ 22.00
Materials Cost
Labor Cost
Overheada
Total Cost
6.00
3.60
$14.08
$23.68
7.00
2.40
$ 9.38
$ 18.78
Gross Margin
$ (3.68) $ 3.22
a
Selling Price
Materials Cost
Labor Cost
Overhead
Total
$120,000
$88,000
$208,000
36,000
21,600
28,000
9,600
37,53
8
75,13
8
64,000
31,200
84,462
Total Cost
142,062
Gross Margin
$ (22,062)
122,000
217,200
$ 12,862 $ (9,200)
Now product C appears unprofitable. After further dropping product C,

the plantwide cost driver rate is $122,000/320 = $381.25 per direct
labor hour
96
Unit gross margin for product D, the only remaining product:

D
Selling Price
$ 22.00
Materials Cost
Labor Cost
Overheada
Total Cost
7.00
2.40
$ 30.50
$ 39.90
Gross Margin
$(17.90)
a
Total gross margin for D and for the company:
D
(d)
Selling Price
$88,000
Materials Cost
Labor Cost
Overhead
Total Cost
28,000
9,600
122,000
159,600
Gross Margin
$(71,600)
Youngsborough has encountered a type of death spiral by using

planned levels of direct labor hours in the denominator for the cost
driver rates. In Youngsboroughs situation, the capacity-related
overhead costs are fixed. Dropping unprofitable product A made the
cost driver rate increase, in turn making product B look unprofitable.
This cycle continued until Youngsborough had no products that
appeared profitable.
This situation would likely have been avoided if Youngsborough had
used practical capacity direct labor hours in the denominator for the
cost driver rate. The cost driver rate would then have remained
unchanged when the company dropped product A, so the remaining
products would appear as profitable as they were before. Of course,
the company would then have underapplied overhead (idle capacity
costs), and should explore opportunities to use the idle capacity
productively, such as increasing sales of the remaining products or
developing new profitable products. Chapter 5 addresses activity-based
97
cost systems, which can more accurately assign overhead costs when
there is large variation in overhead resources that products require.
4-52 (a)
Let salaries be denoted as follows: M = manager, S =senior mechanic,

and J = junior mechanic. The estimated total conversion (labor and
overhead) costs are:
Personnel costs (1M + 4S + 4J) + Capacity-related (fixed) costs
= $75,000 + (4 $65,000) + (4 $45,000) + $96,800
= $611,800.
Estimated total number of hours on customer jobs
8 1,750 95% 13,300 hours
Therefore, the cost driver rate
$611,800
$46 per hour
13,300 hours
Furthermore,
51.06 1
x
46
100
so x = 11.
98
(b)
Class A Repairs
Estimated
total
conversion
611800
,
60% $367,080
costs
Estimated
total
hours on
customer
jobs
13,300
1
6,650
2
Conversion
cost
per
customer 367,080 $55.20 per hour
6,650
job hour
Price per
hour
(c)
Class B Repairs
611,800 40% $244,720
13,300
1
6,650
2
244,720
$36.80 per hour
6,650
$55.2 111
. $61.27 per hour $36.8 111
. $40.85 per hour
Job 101: 4.5 A 1.5B

Job 102: 2B
(Note: A Class A repair hours, B Class B repair hours)
Under the present accounting system, costs charged to:
Job 101: 6 51. 06 $306. 36
Job 102: 2 51. 06 $102.12
Under the proposed accounting system, costs charged to:
Job 101: 4.5 61. 27 1.5 40.85 $337. 00
(if all the calculations are performed in Excel; with the rates shown, the
total is $336.99).
Job 102: 2 40.85 $81. 70
Therefore, under the present accounting system:
Job 101 is undercosted and underpriced.
Job 102 is overcosted and overpriced.
99
(d)
Depending on competition for repairs, the proportion of Class B repairs

may increase and the proportion of Class A repairs may decrease
because of the price change.
(e)
The current costing system is simple to administer and results in pricing

at a uniform labor rate (that includes coverage of overhead costs). The
proposed costing system more accurately reflects resource usage, but is
more complex to administer and to communicate to customers in
pricing.
100

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Chapter 4: Accumulating and Assigning Costs to Products

Manufacturing organizations face greater challenges in product costing,

Atkinson, Solutions Manual t/a Management Accounting, 6E

ore in a steel mill. The cost of a consumable resource is often called a

The attributes of direct cost are:

In practice, predetermined indirect cost rates are commonly called

Chapter 4: Accumulating and Assigning Costs to Products

Atkinson, Solutions Manual t/a Management Accounting, 6E

Chapter 4: Accumulating and Assigning Costs to Products

Atkinson, Solutions Manual t/a Management Accounting, 6E

Chapter 4: Accumulating and Assigning Costs to Products

Number of units produced

Selling price per monitor

Cost per monitor

Gross margin per monitor

Support cost driver rate:

Atkinson, Solutions Manual t/a Management Accounting, 6E

Cost driver rate for the finishing department:

Direct materials cost

Chapter 4: Accumulating and Assigning Costs to Products

Actual Machine Hours

Monthly Overhead Costs

4-33 Ingredient A: $0.40 10,000

Atkinson, Solutions Manual t/a Management Accounting, 6E

Disposal costs of waste product

Allocation of machine setup costs:

Allocation of inspection costs:

Chapter 4: Accumulating and Assigning Costs to Products

Atkinson, Solutions Manual t/a Management Accounting, 6E

The summary below incorporates the allocation of 0.25 S2 =

Allocation of S1 costs (416,667)

Chapter 4: Accumulating and Assigning Costs to Products

Plantwide cost driver rate = $15,000,000/100,000 machine hours

Actual overhead applied overhead

Work in process, finished goods, and cost of goods sold will be

Actual overhead estimated overhead

Atkinson, Solutions Manual t/a Management Accounting, 6E

4-40 (a) Cost driver rate:

(b) Job 123:

Beginning Work in Process

Chapter 4: Accumulating and Assigning Costs to Products

Direct labor rates:

Cost driver rates:

Total cost of completed Job 101 $215,200

Total cost of completed Job 102 $204,700

Work-in-process for Job 103 at June 30 $303,000

Atkinson, Solutions Manual t/a Management Accounting, 6E

Allocating costs in proportion to the number of actual passengers can

Another alternative is to allocate $3 = $7,200/2,400 per passenger.

* 1,600 passengers $3 per passenger

Another alternative is to allocate normal costs 2:1 (1,600:800) based

Chapter 4: Accumulating and Assigning Costs to Products

* 5,200 = 4,800 + (7,600 7,200)

7,800 (1,700 1,600)

20,000 direct labor hours

Job Cost Sheet: Job #714

Atkinson, Solutions Manual t/a Management Accounting, 6E

Cost driver rate Milling

Cost driver rate Assembly

Job Cost Sheet: Job #714

Chapter 4: Accumulating and Assigning Costs to Products

Plantwide cost driver rate:

Cost driver rate: Cutting