PROBLEM 5-48 (30 MINUTES) 1.

Deluxe manufacturing overhead cost: 32,000 machine hours x $80 = $2,560,000 $2,560,000 16,000 units = $160 per unit Executive manufacturing overhead cost: 45,000 machine hours x $80 = $3,600,000 $3,600,000 30,000 units = $120 per unit Deluxe Executive

Direct material. $ 40 $ 65 Direct labor.. 25 25 Manufacturing overhead. 160 120 Unit cost 2. $225 $210

Activity-based application rates:

Activity Cost Activity Driver Application Rate Manufacturing setups $1,344,000

160 setups (SU)

$8,400 per SU

Machine processing 3,696,000 hours (MH) = $48 per MH Product shipping $3,200 per OS 1,120,000

77,000 machine

350 outgoing shipments (OS)

PROBLEM 5-48 (CONTINUED)

Manufacturing setup, machine processing, and product shipping costs of a Deluxe unit and an Executive unit: Activity Deluxe Executive Manufacturing setups: 100 SU x $8,400.. 60 SU x $8,400.. Machine processing: 32,000 MH x $48... 45,000 MH x $48... Product shipping: 200 OS x $3,200 150 OS x $3,200.. Total .

840,000 $ 504,000 1,536,000 2,160,000

640,000 480,000 $3,016,000 $3,144,000 30,000

Production volume (units). 16,000 Cost per unit.. *

$188.50* $104.80**

$3,016,000 16,000 units = $188.50

** $3,144,000 30,000 units = $104.80 The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured cost of an Executive cabinet is $194.80. The calculations follow:

Deluxe

Executive 40.00 $ 25.00 65.00 25.00

Direct material $ Direct labor.

Manufacturing setup, machine processing, and outgoing shipments.. 188.50 104.80 Total cost. $253.50 $194.80 3. The Deluxe storage cabinet is undercosted. The use of machine hours

produced a unit cost of $225; in contrast, the more accurate activity-based-costing approach shows a unit cost of $253.50. The difference between these two amounts is $28.50.

PROBLEM 5-48 (CONTINUED) 4. Cost distortion: The Deluxe cabinet product line is undercosted by $456,000, and the Executive cabinet product line is overcosted by $456,000. Supporting calculations follow: Deluxe $28.50* *$253.50 Executive 16,000 = $456,000 $225.00 $(15.20) $194.80 30,000 = $(456,000)

$210.00

5. No, the discount is not advisable. The regular selling price of $270, when compared against the more accurate ABC cost figure, shows that each sale provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30 discount will actually produce a loss of $13.50 ($253.50 - $240.00), and the more units that are sold, the larger the loss. Notice that with the less-accurate, machine-hour-based figure ($225), the marketing manager will be misled, believing that each discounted unit sold would boost income by $15 ($240 - $225).

PROBLEM 5-49 (25 MINUTES) 1. a. Manufacturing overhead costs include all indirect manufacturing costs (all production costs except direct material and direct labor). Typical overhead costs include: Indirect labor (e.g., a lift-truck driver, maintenance and inspection labor, engineering labor, and supervisors). Indirect material. Other indirect manufacturing costs (e.g., building maintenance, machine and tool maintenance, property taxes, insurance, depreciation on plant and equipment, rent, and utilities).

b.

Companies develop overhead rates before production to facilitate the

costing of products as they are completed and shipped, rather than waiting until actual costs are accumulated for the period of production. 2. The increase in the overhead rate should not have a negative impact on the company, because the increase in indirect costs was offset by a decrease in direct labor. 3. Rather than using a plantwide overhead rate, Digital Light could implement separate activity cost pools. Examples are as follows: Separate costs into departmental overhead accounts (or other relevant pools), with one account for each production and service department. Each department would allocate its overhead to products on the basis that best reflects the use of these overhead services. Treat individual machines as separate cost centers, with the machine costs collected and charged to the products using machine hours. 4. An activity-based costing system might benefit Digital Light because it assigns costs to products according to their usage of activities in the production process. More accurate product costs are the result.

PROBLEM 5-50 (30 MINUTES) 1. Predetermined overhead rate = budgeted overhead budgeted direct-labor hours = $710,000 20,000* = $35.50 per direct labor hour *20,000 budgeted direct-labor hours = (2,500 units of Medform)(3 hrs./unit) + (3,125 units of Procel)(4 hrs./unit) Medform Procel Direct material Direct labor: $ 30.00 $ 45.00

3 hours x $15 45.00 4 hours x $15 60.00 Manufacturing overhead: 3 hours x $35.50 106.50 4 hours x $35.50 142.00 Total cost $181.50 $247.00

2.

Activity-based overhead application rates:

Activity Cost Activity Cost Driver Rate

Application

Order processing $120,000 600 orders processed (OP) = $200 per OP Machine hrs. (MH) = Product inspection hrs. (IH) processing $10 per MH 500,000 50,000 machine

90,000 $6 per IH

15,000 inspection

PROBLEM 5-50 (CONTINUED) Order processing, machine processing, and product inspection costs of a Medform unit and an Procel unit: Activity Medform Procel Order processing: 350 OP x $200 $ 250 OP x $200 Machine processing: 23,000 MH x $10 27,000 MH x $10 Product inspection:

70,000 $ 50,000 230,000 270,000

4,000 IH x $6 24,000 11,000 IH x $6 66,000 Total $324,000 $386,000 Production volume (units) 2,500 Cost per unit $129.60* $123.52** 3,125

* $324,000 2,500 units = $129.60 ** $386,000 3,125 units = $123.52 The manufactured cost of a Medform unit is $204.60, and the manufactured cost of a Procel unit is $228.52: Medform Procel Direct material. Direct labor: $ 30.00 $ 45.00

3 hours x $15 45.00 4 hours x $15 60.00 Order processing, machine processing, and product inspection.. 129.60 123.52 Total cost. $204.60 $228.52

PROBLEM 5-50 (CONTINUED) 3. a. The Procel product is overcosted by $18.48 ($247.00 - $228.52) under the

traditional product-costing system. The labor-hour application base resulted in a $247 unit cost; in contrast, the more accurate ABC approach yielded a lower unit cost of $228.52. The opposite situation occurs with the Medform product, which is undercosted by $23.10 under the traditional approach ($181.50 vs. $204.60 under ABC). The traditional costing system overcosts the Procel product line by a total of $57,750 ($18.48 x 3,125 units), and it undercosts the Medform product line by the same amount, $57,750 ($23.10 x 2,500 units).

b. Yes, especially since Meditechs selling prices are based heavily on cost. An overcosted product will result in an inflated selling price, which could prove detrimental in a highly competitive marketplace. Customers will be turned off and will go elsewhere, which hurts profitability. With undercosted products, selling prices may be too low to adequately cover a products more accurate (higher) cost.

This situation is also troublesome and will result in lower income reported for the company. 4. In the electronic version of the solutions manual, press the CTRL key and click on the following link: BUILD A SPREADSHEET

PROBLEM 5-51 (30 MINUTES) 1. Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is applied on the basis of direct-labor dollars. In general, a plantwide manufacturing-overhead rate is acceptable only if a similar relationship between overhead and direct labor exists in all departments or the company manufactures products that receive the same proportional services from each department In most cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide the following: A framework for reviewing overhead costs on a departmental basis, identifying departmental cost overruns, or taking corrective action to improve departmental cost control. Sufficient information about product profitability, thus increasing the difficulties associated with management decision making. 2. Because the company uses a plantwide overhead rate applied on the basis of

direct-labor dollars, the elimination of direct labor in the Molding Department through the introduction of robots may appear to reduce the overhead cost of the Molding Department to zero. However, this change will not reduce fixed manufacturing costs such as depreciation and plant supervision. In reality, the use of robots is likely to increase fixed costs because of increased depreciation. Under the current method of allocating overhead costs, these costs merely will be absorbed by the remaining departments.

PROBLEM 5-51 (CONTINUED) 3. a. In order to improve the allocation of overhead costs in the Cutting and Finishing departments, management should move toward an activity-based costing system. The firm should: Establish activity-cost pools for each significant activity.

Select a cost driver for each activity that best reflects the relationship

of the activity to the overhead costs incurred. b. In order to accommodate the automation of the Molding Department in its overhead accounting system, the company should: Establish a separate overhead pool and rate for the Molding Department. Identify fixed and variable overhead costs and establish fixed and variable overhead rates. Apply overhead costs to the Molding Department on the basis of robot or machine hours.

PROBLEM 5-52 (40 MINUTES) 1. Overhead to be assigned to development chemical order:

Activity Cost Pool Pool Rate Level of Cost Driver Assigned Overhead Cost Machine setups $4,000 per setup 6 setups $24,000 Material handling $4 per pound 9,000 pounds 36,000 Hazardous waste control$10 per pound 2,100 pounds 21,000 Quality control $150 per inspection 8 inspections 1,200 Other overhead costs $20 per machine hour 550 machine hours 11,000 Total 2. Overhead cost per $93,200

box of chemicals =

3. Predetermined overhead rate

= = $62.50 per machine hr. 4. Overhead to be assigned to film development chemical order, given a single predetermined overhead rate: a. Total overhead assigned = = b. = $34,375 $62.50 per machine hr. 550 machine hr.

Overhead cost per

box of chemicals

5. The radiological development chemicals entail a relatively large number of machine setups, a large amount of hazardous materials, and several inspections. Thus, they are quite costly in terms of driving overhead costs. Use of a single predetermined overhead rate obscures this characteristic of the production job. Underestimating the overhead cost per box could have adverse consequences for Rapid City Radiology, Inc. For example, it could lead to poor decisions about product pricing. The activity-based costing system will serve management much better than the system based on a single, predetermined overhead rate. PROBLEM 5-52 (CONTINUED) 6. In the electronic version of the solutions manual, press the CTRL key and click on the following link: BUILD A SPREADSHEET D A SPREADSHEET

PROBLEM 14-45 (50 MINUTES) 1. Sets result in a 20% increase, or 1,500 dresses (1,250 Total Number of Percent

1.20 = 1,500).

of Total Dresses Accessory Capes

Handbags

Total

Complete sets 70% 1,050 1,050 1,050 Dress and accessory cape 6% 90 90 Dress and handbag 15% 225 225 Dress only 9% 135 Total units if additional items are introduced 100% 1,500 1,140 1,275 Less: Unit sales if additional items are not introduced 1,250 -Incremental sales 250 1,140 1,275 Incremental contribution margin per unit (excluding material and cutting costs) $192.00 Total incremental contribution margin $48,000 $14,592 $6,120 $68,712 $12.80 $4.80

--

Additional costs: Additional cutting cost (1,500 91% $14.40) Additional material cost (250 $80.00) Lost remnant sales [(1,250 135) $8.00] Incremental cutting for extra dresses (250 $32.00) Incremental profit $12,136 20,000

$19,656

8,920 8,000 56,576

2. Qualitative factors that could influence the companys management team in its decision to manufacture matching accessory capes and handbags include: accuracy of forecasted increase in dress sales. accuracy of forecasted product mix. PROBLEM 14-45 (CONTINUED) company image of a dress manufacturer versus a more extensive supplier of womens apparel. competition from other manufacturers of womens apparel. whether there is adequate capacity (labor, facilities, storage, etc.). PROBLEM 14-46 (25 MINUTES)

1. Blender Food Processor Unit cost if purchased from an outside supplier Incremental unit cost if manufactured: Direct material $18 $ 33 Direct labor 12 27 Variable overhead $48 $30 per hour fixed 18 $96 (2)($30 per hour fixed) Total $48 $ 96 Unit cost savings if manufactured $12 $ 18 Machine hours required per unit 1 2 Cost savings per machine hour if manufactured $12 1 hour $12 $18 2 hours $ 9 $60 $114

36

Therefore, each machine hour devoted to the production of blenders saves the company more than a machine hour devoted to food processor production. Machine hours available 50,000 Machine hours needed to manufacture 20,000 blenders Remaining machine hours 30,000 15,000

20,000

Number of food processors to be produced (30,000 2)

Conclusion: Manufacture 20,000 blenders Manufacture 15,000 food processors Purchase 13,000 food processors PROBLEM 14-46 (CONTINUED) 2. If the companys management team is able to reduce the direct material cost per food processor to $18 ($15 less than previously assumed), then the cost savings from manufacturing a food processor are $33 per unit ($18 savings computed in requirement (1) plus $15 reduction in material cost): Blender Food Processor New unit cost savings if manufactured $12.00 $33.00 Machine hours required per unit 1 MH 2 MH Cost savings per machine hour if manufactured

$12 1 hour $33 2 hours

$12.00 $16.50

Therefore, devote all 50,000 hours to the production of 25,000 food processors. Conclusion: Manufacture: 25,000 food processors Purchase: 3,000 food processors and 20,000 blenders 3. In the electronic version of the solutions manual, press the CTRL key and click on the following link: BUILD A SPREADSHEET PROBLEM 14-47 (25 MINUTES) 1. Incremental unit cost if purchased: Purchase price $ Material handling Total $ 54,000 45,000 9,000

Incremental unit cost if manufactured: Direct material $ 3,000 Material handling 600 Direct labor 24,000 Variable manufacturing overhead ($36,000

1/3) $

12,000 14,400

Total $ 39,600 Increase in unit cost if purchased ($54,000 $39,600) 2. Increase in monthly cost of acquiring part RM67 if purchased (10 $14,400, as computed above) $144,000 Less: rental revenue from idle space 75,000 Increase in monthly cost $ 69,000 PROBLEM 14-47 (CONTINUED) 3. Contribution forgone by not manufacturing alternative product $156,000 144,000

Savings in the cost of acquiring RM67 (10 $14,400 as computed in requirement 1)

Net cost of using limited capacity to produce part RM67

12,000

PROBLEM 14-55 (45 MINUTES) RNA-1 is converted into Fastkil. RNA-2 can be sold as is or converted into two new products. a. Managements analysis is incorrect because it incorporates allocated portions of the joint-processing costs of VDB. The weekly cost of VDB ($393,600) will be incurred whether or not RNA-2 is converted through further processing. Thus, any allocation of the common cost of VDB is strictly arbitrary and not relevant to the decision to market DMZ-3 and Pestrol. The decision not to process RNA-2 further is incorrect. This flawed decision resulted in the company failing to earn an incremental $32,000 in gross profit per week, as indicated by the following analysis. b. Revenue from further processing of RNA-2: DMZ-3 (400,000 $92/100) $368,000 Pestrol (400,000 $92/100) 368,000 Total revenue from further processing $736,000 Less revenue from sale of RNA-2 512,000 Incremental revenue $224,000 Less incremental cost* 192,000 Incremental profit $ 32,000 *The cost of VDB is not relevant and therefore is omitted from the solution. PROBLEM 14-56 (30 MINUTES) 1. Costs to be avoided by purchasing (conventional analysis): Direct material $288,000 Direct labor 192,000 Variable overhead 120,000 Fixed overhead: Supervisory salaries 80,000 Machinery depreciation 28,000 Total $708,000 2. Costs to be avoided by purchasing (ABC analysis): Direct material Direct labor Overhead: $288,000 192,000

Product development Supervisory salaries Material handling Purchasing $250 Inspection $300 Setup $400 15 Electricity $1.40 Oil and lubrication Equipment maintenance Machinery depreciation Total $810,750

$600a

10b

6,000

$40 2,000 80,000 $8 6,000 48,000 55 13,750 30 9,000 6,000 70,000 98,000 $.24 70,000 16,800 $.36 70,000 25,200 $.40 70,000 28,000

aPool rates for the Savannah plant from Exhibit 14-20. bLevels of cost drivers associated with canister production (from the information given in the problem).

PROBLEM 14-56 (CONTINUED) 3. Make-or-buy analysis using ABC data: Cost savings if canisters are purchased (ABC analysis) $810,750 Cost to purchase canisters 722,000 Net advantage to purchasing $ 88,750

International Chocolate Company will save almost $89,000 if it accepts Catawbas offer. The final decision, however, should take qualitative factors into account also. Issues such as supplier reliability, product quality, and employee morale should be considered. 4. The relevant costing approach remains valid when ABC data are used. The objective is to determine what costs will be avoided if the canisters are purchased. The ABC analysis is able to more accurately identify the avoidable costs. Costs that are assumed to be fixed and unavoidable under the conventional analysis are shown by the ABC analysis to vary with the appropriate cost drivers. In this light, many of these costs are seen to be avoidable if the canisters are purchased.