Chapter 1
Managerial Accounting and Cost Concepts
Exercise 1-3 (15 minutes)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Depreciation on salespersons’ cars ........................
Rent on equipment used in the factory ..................
Lubricants used for machine maintenance .............
Salaries of personnel who work in the finished
goods warehouse ..............................................
Soap and paper towels used by factory workers at
the end of a shift ...............................................
Factory supervisors’ salaries..................................
Heat, water, and power consumed in the factory ...
Materials used for boxing products for shipment
overseas (units are not normally boxed) .............
Advertising costs ..................................................
Workers’ compensation insurance for factory
employees.........................................................
Depreciation on chairs and tables in the factory
lunchroom .........................................................
The wages of the receptionist in the administrative
offices ...............................................................
Cost of leasing the corporate jet used by the
company's executives ........................................
The cost of renting rooms at a Florida resort for the
annual sales conference .....................................
The cost of packaging the company’s product ........
Product Period
Cost
Cost
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Exercise 1-14 (30 minutes)
Name of the Cost
Rental revenue forgone, $30,000
per year .....................................
Direct materials cost, $80 per unit ..
Rental cost of warehouse, $500
per month ..................................
Rental cost of equipment, $4,000
per month ..................................
Direct labor cost, $60 per unit ........
Depreciation of the annex space,
$8,000 per year ..........................
Advertising cost, $50,000 per year .
Supervisor's salary, $3,500 per
month ........................................
Electricity for machines, $1.20 per
unit ............................................
Shipping cost, $9 per unit ..............
Return earned on investments,
$3,000 per year ..........................
(1)
Predicting
Cost
behavior
Cost Classifications for:
(3)
Preparing
(2)
Financial
Manufacturers
Statements
None
Variable
None
Direct materials
None
Product
Fixed
Period
Variable
Variable
None
Manufacturing
overhead
Direct labor
Manufacturing
overhead
None
Manufacturing
overhead
Manufacturing
overhead
None
None
None
Fixed
Variable
Fixed
Fixed
Fixed
(4)
Decision
Making
Opportunity cost
Product
Product
Product
Period
Sunk cost
Product
Product
Period
None
Opportunity cost
Case 1-26 (45 minutes)
1.
Cost Item
Direct labor ................................
Advertising.................................
Factory supervision ....................
Property taxes, factory building ...
Sales commissions......................
Insurance, factory ......................
Depreciation, administrative
office equipment......................
Lease cost, factory equipment.....
Indirect materials, factory ...........
Depreciation, factory building ......
Administrative office supplies ......
Administrative office salaries .......
Direct materials used ..................
Utilities, factory ..........................
Total costs .................................
Cost Behavior
Variable
Fixed
$118,000
80,000
6,000
3,000
94,000
20,000
$321,000
$50,000
40,000
3,500
2,500
4,000
12,000
10,000
60,000
$182,000
Selling or
Administrative
Cost
$50,000
Product Cost
Direct
Indirect
$118,000
$40,000
3,500
80,000
2,500
4,000
3,000
60,000
$197,000
12,000
6,000
10,000
94,000
$212,000
20,000
$94,000
Case 1-26 (continued)
2. The average product cost for one patio set would be:
Direct .................................................
Indirect ..............................................
Total ..................................................
$306,000 ÷ 2,000 sets = $153 per set
$212,000
94,000
$306,000
3. The average product cost per set would increase if the production drops. This is because the fixed costs
would be spread over fewer units, causing the average cost per unit to rise.
4. a. Yes, the president may expect a minimum price of $153, which is the average cost to manufacture one
set. He might expect a price even higher than this to cover a portion of the administrative costs as well.
The brother-in-law probably is thinking of cost as including only direct materials, or, at most, direct
materials and direct labor. Direct materials alone would be only $47 per set ($94,000 ÷ 2,000 = $47 per
set), and direct materials and direct labor would be only $106 per set (($94,000 + $118,000) ÷ 2,000 =
$106 per set).
b. The term is opportunity cost. The full, regular price of a set might be appropriate here, because the
company is operating at full capacity, and this is the amount that must be given up (benefit forgone) to
sell a set to the brother-in-law.
Chapter 2
Job-Order Costing: Calculating Unit Product Costs
Exercise 2-9 (30 minutes)
1. The estimated total overhead cost is computed as follows:
Y = $1,980,000 + ($2.00 per MH)(165,000 MHs)
Estimated
Estimated
165,000
Estimated
fixed overhead ....................................... $1,980,000
variable overhead: $2.00 per MH ×
MHs ......................................................
330,000
total overhead cost ................................ $2,310,000
The plantwide predetermined overhead rate is computed as follows:
Estimated total overhead (a) ......................
Estimated total machine-hours (b) .............
Predetermined overhead rate (a) ÷ (b).......
$2,310,000
165,000 MHs
$14.00 per MH
2. Total manufacturing cost assigned to Job P90:
Direct materials .......................................................
Direct labor .............................................................
Overhead applied ($14 per MH × 72 MHs) ................
Total manufacturing cost ..........................................
$1,150
830
1,008
$2,988
3a. Given that the company is operating at 50% of its manufacturing
capacity, an argument can be made that the company should
pursue any business opportunities that generate a positive a
contribution margin. Based on the information provided, it appears
that Job P90 does generate a positive contribution margin as shown
below:
Sales...............................................................
Direct materials ...............................................
Direct labor .....................................................
Variable overhead applied ($2.00 per MH × 72
MHs) ............................................................
Contribution margin .........................................
$1,150
830
$2,500
144 2,124
$ 376
Exercise 2-9 (continued)
3b. The CFO’s argument is based on the assertion that Job P90 does not
generate enough revenue to cover the cost of the manufacturing
resources that it consumes. However, given that the company is
operating at 50% of its manufacturing capacity, the overhead costs
applied to Job P90 in requirement 2 do not represent the cost of the
overhead resources consumed making Job P90. In other words, the
overhead applied in requirement 2 includes a charge for used and
unused capacity. This reality provides instructors an opportunity to
introduce students to the main idea underlying Appendix 2B.
If we estimate a capacity-based overhead rate for the company and
apply overhead costs to Job P90 using this rate, it reveals that the
revenue generated by the job ($2,500) is still insufficient to cover its
manufacturing costs of $2,556, as computed below:
The estimated total overhead cost (at capacity) is computed as follows
(keep in mind that 165,000 MHs ÷ 50% = 330,000 MHs):
Y = $1,980,000 + ($2.00 per MH)(330,000 MHs)
Estimated
Estimated
330,000
Estimated
fixed overhead ....................................... $1,980,000
variable overhead: $2.00 per MH ×
MHs ......................................................
660,000
total overhead cost ................................ $2,640,000
The predetermined capacity-based overhead rate is computed as
follows:
Estimated total overhead (a) ......................
Estimated total machine-hours (b) .............
Predetermined overhead rate (a) ÷ (b).......
$2,640,000
330,000 MHs
$8.00 per MH
The total manufacturing cost assigned to Job P90 (using a capacitybased overhead rate):
Direct materials .......................................................
Direct labor .............................................................
Overhead applied ($8 per MH × 72 MHs) ..................
Total manufacturing cost ..........................................
$1,150
830
576
$2,556
Exercise 2-11 (30 minutes)
Note to the instructor: This exercise can be used as a launching pad
for a discussion of Appendix 2B.
1. The estimated total fixed manufacturing overhead can be computed
using the data from any of quarters 1-3. For illustrative purposes,
we’ll use the first quarter as follows:
Total overhead cost (First quarter) ........................... $300,000
Variable cost element ($2.00 per unit × 80,000 units) 160,000
Fixed cost element .................................................. $140,000
2. The fixed and variable cost estimates from requirement 1 can be
used to estimate the total manufacturing overhead cost for the fourth
quarter as follows:
Y = $140,000 + ($2.00 per unit)(60,000 units)
Estimated fixed manufacturing overhead ..................
Estimated variable manufacturing overhead
$2.00 per unit × 60,000 units................................
Estimated total manufacturing overhead cost ............
$140,000
120,000
$260,000
The estimated unit product cost for the fourth quarter
is computed as follows:
Direct materials ....................................................
Direct labor ........................................................
Manufacturing overhead ........................................
Total manufacturing costs (a) ..............................
Number of units to be produced (b) .....................
Unit product cost (rounded) (a) ÷ (b) ..................
$180,000
96,000
260,000
$536,000
60,000
$8.93
Exercise 2-11 (continued)
3. The fixed portion of the manufacturing overhead cost is causing the
unit product costs to fluctuate. The unit product cost increases as the
level of production decreases because the fixed overhead is spread
over fewer units.
4. The unit product cost can be stabilized by using a predetermined
overhead rate that is based on expected activity for the entire year.
The cost formula created in requirement 1 can be adapted to
compute the annual predetermined overhead rate. The annual fixed
manufacturing overhead is $560,000 ($140,000 per quarter × 4
quarters). The variable manufacturing overhead per unit is $2.00.
The cost formula is as follows:
Y = $560,000 + ($2.00 per unit × 200,000 units)
Estimated fixed manufacturing overhead ..................
Estimated variable manufacturing overhead
$2.00 per unit × 200,000 units ..............................
Estimated total manufacturing overhead cost ............
$560,000
400,000
$960,000
The annual predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead (a)
Estimated total units produced (b) ..............
Predetermined overhead rate (a) ÷ (b) .......
$960,000
200,000
$4.80 per unit
Using a predetermined overhead rate of $4.80 per unit, the unit
product costs would stabilize as shown below:
Direct materials.................
Direct labor.......................
Manufacturing overhead:
at $4.80 per unit ............
Total cost (a) ....................
Number of units produced
(b) .................................
Unit product cost (a) ÷ (b)
First
Quarter
Second
Third
Fourth
$240,000 $120,000 $ 60,000 $180,000
128,000
64,000
32,000
96,000
384,000 192,000
96,000 288,000
$752,000 $376,000 $188,000 $564,000
80,000
$9.40
40,000
$9.40
20,000
$9.40
60,000
$9.40
Case 2A-6 (90 minutes)
1. a. The predetermined overhead rate would be computed as follows:
Expected manufacturing overhead cost
$2,200,000
=
Estimated direct labor-hours
50,000 DLHs
= $44 per DLH
b. The unit product cost per pound, using the company’s present
costing system, would be:
Direct materials (given) .........
Direct labor (given) ...............
Manufacturing overhead:
0.02 DLH × $44 per DLH.....
Total unit product cost...........
Kenya
Dark
$4.50
0.34
Viet
Select
0.88
$5.72
$2.90
0.34
0.88
$4.12
2. a. Overhead rates for each activity cost pool:
Activity Cost
Pools
(a)
Estimated
Overhead
Costs
(b)
Expected
Activity
Purchasing ........... $560,000
2,000 orders
Material handling .. $193,000
1,000 setups
Quality control ......
$90,000
500 batches
Roasting............... $1,045,000 95,000 hours
Blending............... $192,000 32,000 hours
Packaging ............ $120,000 24,000 hours
(a) ÷ (b)
Activity Rate
$280
$193
$180
$11
$6
$5
per
per
per
per
per
per
order
setup
batch
hour
hour
hour
Case 2A-6 (continued)
Before we can determine the amount of overhead cost to assign to
the products, we must first determine the activity for each of the
products in the six activity centers. The necessary computations
follow:
Number of purchase orders:
Kenya Dark: 80,000 pounds ÷ 20,000 pounds per order = 4 orders
Viet Select: 4,000 pounds ÷ 500 pounds per order = 8 orders
Number of setups:
Kenya Dark: (80,000 pounds ÷ 5,000 pounds per batch) × 2 setups
per batch = 32 setups
Viet Select: (4,000 pounds ÷ 500 pounds per batch) × 2 setups per
batch = 16 setups
Number of batches:
Kenya Dark: 80,000 pounds ÷ 5,000 pounds per batch = 16 batches
Viet Select: 4,000 pounds ÷ 500 pounds per batch = 8 batches
Roasting hours:
Kenya Dark: 1.5 hours × (80,000 pounds ÷ 100 pounds) = 1,200
hours
Viet Select: 1.5 hours × (4,000 pounds ÷ 100 pounds) = 60 hours
Blending hours:
Kenya Dark: 0.5 hour × (80,000 pounds ÷ 100 pounds) = 400 hours
Viet Select: 0.5 hour × (4,000 pounds ÷ 100 pounds) = 20 hours
Packaging hours:
Kenya Dark: 0.3 hour × (80,000 pounds ÷ 100 pounds) = 240 hours
Viet Select: 0.3 hour × (4,000 pounds ÷ 100 pounds) = 12 hours
Case 2A-6 (continued)
The overhead applied to each product can be determined as follows:
Kenya Dark
Activity Cost Pool
Purchasing ...............
Material handling ......
Quality control ..........
Roasting ...................
Blending ...................
Packaging.................
Total ........................
Viet Select
Activity Cost Pool
Purchasing ...............
Material handling ......
Quality control ..........
Roasting ...................
Blending ...................
Packaging.................
Total ........................
$280
$193
$180
$11
$6
$5
$280
$193
$180
$11
$6
$5
Activity Rate
Expected Activity
Amount
Activity Rate
Expected Activity
Amount
per
per
per
per
per
per
per
per
per
per
per
per
order
4 orders
setup
32 setups
batch
16 batches
roasting hour
1,200 roasting hours
blending hour
400 blending hours
packaging hour
240 packaging hours
order
setup
batch
roasting hour
blending hour
packaging hour
8
16
8
60
20
12
orders
setups
batches
roasting hours
blending hours
packaging hours
$ 1,120
6,176
2,880
13,200
2,400
1,200
$26,976
$2,240
3,088
1,440
660
120
60
$7,608
Case 2A-6 (continued)
b. According to the activity-based absorption costing system, the
manufacturing overhead cost per pound is:
Total overhead cost assigned (above) (a) ...
Number of pounds manufactured (b) ..........
Cost per pound (a) ÷ (b) ...........................
Kenya
Dark
$26,976
80,000
$0.34
Viet
Select
$7,608
4,000
$1.90
c. The unit product costs according to the activity-based absorption
costing system are:
Direct materials (given) ............
Direct labor (given) ..................
Manufacturing overhead ...........
Total unit product cost..............
Kenya
Dark
$4.50
0.34
0.34
$5.18
Viet
Select
$2.90
0.34
1.90
$5.14
3. MEMO TO THE PRESIDENT: Analysis of JSI’s data shows that several
activities other than direct labor drive the company’s manufacturing
overhead costs. These activities include purchase orders issued,
number of setups for material processing, and number of batches
processed. The company’s present costing system, which relies on
direct labor time as the sole basis for assigning overhead cost to
products, significantly undercosts low-volume products, such as the
Viet Select coffee, and significantly overcosts high-volume products,
such as our Kenya Dark coffee.
An implication of the activity-based approach is that our low-volume
products may not be covering the costs of the manufacturing
resources they use. For example, Viet Select coffee is currently priced
at $5.15 per pound ($4.12 plus 25% markup), which is only one cent
higher than its activity-based cost of $5.14 per pound. Under our
present costing and pricing system, our high-volume products, such
as our Kenya Dark coffee, may be subsidizing our low-volume
products. Some adjustments in prices may be required.
Case 2A-6 (continued)
ALTERNATIVE SOLUTION:
Most students will compute the manufacturing overhead cost per
pound of the two coffees as shown above. However, the per pound
cost can also be computed as shown below. This alternative approach
provides additional insight into the data and facilitates emphasis of
some points made in the chapter.
Purchasing ...........
Material handling..
Quality control .....
Roasting ..............
Blending ..............
Packaging ............
Total ...................
Kenya Dark
Per Pound
Total
(÷ 80,000)
$ 1,120
6,176
2,880
13,200
2,400
1,200
$26,976
$0.014
0.077
0.036
0.165
0.030
0.015
$0.337
Viet Select
Per Pound
Total
(÷ 4,000)
$2,240
3,088
1,440
660
120
60
$7,608
$0.560
0.772
0.360
0.165
0.030
0.015
$1.902
Note particularly how batch size impacts unit cost data. For example, the
cost to the company to process a purchase order is $280, regardless of
how many pounds of coffee are contained in the order. Twenty
thousand pounds of the Kenya Dark coffee are purchased per order
(with four orders per year), and just 500 pounds of the Viet Select
coffee are purchased per order (with eight orders per year). Thus, the
purchase order cost per pound for the Kenya Dark coffee is just 1.4
cents, whereas the purchase order cost per pound for the Viet Select
coffee is 40 times as much, or 56 cents. As stated in the text, this is one
reason why unit costs of low-volume products, such as the Viet Select
coffee, increase so dramatically when activity-based costing is used.
Chapter 3
Job-Order Costing: Cost Flows and External Reporting
Exercise 3-3 (20 minutes)
1. Schedule of cost of goods manufactured
Beginning work in process inventory........................
Direct materials:
Beginning raw materials inventory ......................
Add: Purchases of raw materials .........................
Total raw materials available ..............................
Deduct: Ending raw materials inventory ..............
Raw materials used in production .......................
Deduct: indirect materials used in production ......
Direct materials used in production .........................
Direct labor ............................................................
Manufacturing overhead applied to work in process..
Total manufacturing costs added to production ........
Total manufacturing costs to account for .................
Deduct: Ending work in process inventory ...............
Cost of goods manufactured ...................................
$56,000
$12,000
30,000
42,000
18,000
24,000
5,000
$19,000
58,000
87,000
164,000
220,000
65,000
$155,000
Exercise 3-3 (20 minutes)
2. Schedule of Cost of Goods Sold:
Beginning finished goods inventory ...................
Add: Cost of goods manufactured .....................
Cost of goods available for sale ........................
Deduct: Ending finished goods inventory ...........
Unadjusted cost of goods sold ..........................
Add: Underapplied overhead ............................
Adjusted cost of goods sold ..............................
$ 35,000
155,000
190,000
42,000
148,000
4,000
$152,000
Problem 3-17 (60 minutes)
1. and 2.
Bal.
(l)
Bal.
Cash
63,000 (m)
850,000
128,000
Bal.
(a)
Bal.
Raw Materials
30,000 (b)
185,000
15,000
Bal.
(b)
(f)
(i)
Bal.
Videos in Process
45,000 (j)
550,000
170,000
82,000
290,000
37,000
Bal.
Studio and Equipment
730,000
(b)
(c)
(d)
(f)
(g)
(n)
785,000
200,000
Studio Overhead
30,000 * (i)
290,000
72,000
63,000
110,000
5,600
Bal.
9,400
9,400
Bal.
(k)
Bal.
Accounts Receivable
102,000 (l)
850,000
925,000
177,000
Bal.
Bal.
Prepaid Insurance
9,000 (g)
2,000
Bal.
(j)
Bal.
Finished Goods
81,000 (k)
600,000
550,000
31,000
Accumulated Depreciation
Bal.
210,000
(d)
84,000
Bal.
294,000
(d)
Depreciation Expense
21,000
(g)
Insurance Expense
1,400
* $280,000 ÷ 7,000 hours = $40 per hour;
7,250 hours × $40 per hour = $290,000
(e)
Advertising Expense
130,000
7,000
(h)
Miscellaneous Expense
8,600
Problem 3-17 (continued)
Administrative Salaries Expense
(f)
95,000
(k)
Cost of Goods Sold
600,000 (n)
Bal.
590,600
9,400
Sales
(k)
(m)
925,000
Accounts Payable
500,000 Bal.
160,000
(a)
185,000
(c)
72,000
(e)
130,000
(h)
8,600
Bal.
55,600
Salaries & Wages Payable
(m) 285,000 (f)
287,000
Bal.
2,000
Capital Stock
Bal.
420,000
Retained Earnings
Bal.
270,000
3. Overhead is overapplied for the year by $9,400. Entry (n) above
records the closing of this overapplied overhead balance to Cost of
Goods Sold.
Chapter 5
Cost-Volume-Profit Relationships
Problem 5-21 (30 minutes)
Product
Fragrant
Loonzain
24%
$180,000 100%
36,000 20%
$144,000 80%
36%
$270,000 100%
108,000 40%
$162,000 60%
1.
White
Percentage of total
sales .....................
40%
Sales ....................... $300,000 100%
Variable expenses .... 216,000 72%
Contribution margin.. $ 84,000 28%
Fixed expenses ........
Net operating
income (loss).........
*$390,000 ÷ $750,000 = 52%
2. Break-even sales would be:
Dollar sales to = Fixed expenses
break even
CM ratio
=
$449,280
= $864,000
0.52
Total
100%
$750,000 100%
360,000 48%
390,000 52% *
449,280
$ (59,280)
Problem 5-21 (continued)
3. Memo to the president:
Although the company met its sales budget of $750,000 for the month, the mix of products changed
substantially from that budgeted. This is the reason the budgeted net operating income was not met, and the
reason the break-even sales were greater than budgeted. The company’s sales mix was planned at 20%
White, 52% Fragrant, and 28% Loonzain. The actual sales mix was 40% White, 24% Fragrant, and 36%
Loonzain.
As shown by these data, sales shifted away from Fragrant Rice, which provides our greatest contribution per
dollar of sales, and shifted toward White Rice, which provides our least contribution per dollar of sales.
Although the company met its budgeted level of sales, these sales provided considerably less contribution
margin than we had planned, with a resulting decrease in net operating income. Notice from the attached
statements that the company’s overall CM ratio was only 52%, as compared to a planned CM ratio of 64%.
This also explains why the break-even point was higher than planned. With less average contribution margin
per dollar of sales, a greater level of sales had to be achieved to provide sufficient contribution margin to
cover fixed costs.
Problem 5-25 (60 minutes)
1. The break-even point is calculated as follows:
Profit = Unit CM × Q − Fixed expenses
$0 = ($3 − $1) × Q − $22,000
$0 = ($2) × Q − $22,000
$2Q = $22,000
Q = $22,000 ÷ $2
Q = 11,000 units
2a. If Neptune produces and sells 18,000 units, it will earn net
operating income of $14,000, calculated as follows:
Sales (18,000 units × $3.0) ......................
Variable expenses (18,000 units × $1.00) ..
Contribution margin .................................
Fixed expenses ........................................
Net operating income ...............................
$54,000
18,000
36,000
22,000
$14,000
2b. If Neptune buys 18,000 units from its supplier and then resells
them, it will earn net operating income of $7,500, calculated as
follows:
Sales (18,000 units × $3.00).....................
Variable expenses (18,000 units × $1.75) ..
Contribution margin .................................
Fixed expenses ........................................
Net operating income ...............................
$54,000
31,500
22,500
15,000
$ 7,500
Problem 5-25 (continued)
3.
In this scenario, the total fixed expenses are $37,000 ($22,000 +
$15,000), the contribution margin per unit for the first 18,000 units
produced in-house is $2.00 per unit, and the contribution margin
per unit for each unit produced by the supplier is $1.25 per unit.
Thus, the break-even point of 18,800 units is computed as follows:
Fixed expenses ($22,000 + $15,000) ..............
Contribution margin from in-house production
(18,000 units × $2.00).................................
Contribution margin that must be earned on
outsourced units to cover fixed expenses ......
Contribution margin that must be earned on
outsourced units to cover fixed expenses (a) .
Contribution margin per unit from supplier (b) .
Unit sales needed from supplier to break-even
(a) ÷ (b) .....................................................
$37,000
36,000
$ 1,000
$1,000
$1.25
800
The total unit sales required to break-even is 18,000 units produced
in-house plus 800 units provided by the supplier, or a total of 18,800
units.
4a. In this scenario, the total fixed expenses plus target profit is
$51,000 ($22,000 + $15,000 +$14,000), the contribution margin
per unit for the first 18,000 units produced in-house is $2.00 per
unit, and the contribution margin per unit for each unit produced by
the supplier is $1.25 per unit. Thus, the required unit sales is
computed as follows:
Fixed expenses plus target profit ($22,000 +
$15,000 +$14,000)......................................
Contribution margin from in-house production
(18,000 units × $2.00).................................
Contribution margin that must be realized on
outsourced units to earn target profit............
$51,000
36,000
$15,000
Problem 5-25 (continued)
Contribution margin that must be realized on
outsourced units to earn target profit (a) ......
Contribution margin per unit from supplier (b) .
Unit sales needed from supplier to earn target
profit (a) ÷ (b) ............................................
$15,000
$1.25
12,000
The total unit sales required to earn the target profit is 30,000 units,
which includes 18,000 units produced in-house plus 12,000 units
provided by the supplier.
4b. This scenario is identical to requirement 4a except the target profit
changes from $14,000 to $16,500; hence, the required unit sales is
calculated as follows:
Fixed expenses plus target profit ($22,000 +
$15,000 +$16,500)......................................
Contribution margin from in-house production
(18,000 units × $2.00).................................
Contribution margin that must be realized on
outsourced units to earn target profit............
Contribution margin that must be realized on
outsourced units to earn target profit (a) ......
Contribution margin per unit from supplier (b) .
Unit sales needed from supplier to earn target
profit (a) ÷ (b) ............................................
$53,500
36,000
$17,500
$17,500
$1.25
14,000
The total unit sales required to earn the target profit is 32,000 units,
which includes 18,000 units produced in-house plus 14,000 units
provided by the supplier.
Problem 5-25 (continued)
4c. The net operating income is computed as follows:
Sales (35,000 units × $3.00).....................
Variable expenses (18,000 units × $1.00)
+ (17,000 units × $1.75) .......................
Contribution margin .................................
Fixed expenses ($22,000 + $15,000) ........
Net operating income ...............................
$105,000
47,750
57,250
37,000
$ 20,250
4d. The net operating income is computed as follows:
Sales (35,000 units × $3.00).....................
Variable expenses (18,000 units × $1.00)
+ (800 units × $1.75) + (16,200 units ×
$1.85)...................................................
Contribution margin .................................
Fixed expenses ($22,000 + $15,000) ........
Net operating income ...............................
5.
$105,000
49,370
55,630
37,000
$ 18,630
The net operating income is computed as follows:
Sales (35,000 units × $3.00).....................
Variable expenses (35,000 units × $1.75) ..
Contribution margin .................................
Fixed expenses ($15,000 × 2)...................
Net operating income ...............................
$105,000
61,250
43,750
30,000
$ 13,750
Chapter 7
Activity-Based Costing: A Tool to Aid
Decision Making
Exercise 7-10 (30 minutes)
1. Total revenue received:
Cost of goods sold to the hospital (a) ...............
Markup percentage .........................................
Markup in dollars (b) .......................................
Revenue received from hospitals (a) + (b)........
2. Activity Rates:
Activity Cost Pool
Customer deliveries .............
Manual order processing ......
Electronic order processing ..
Line item picking .................
(a)
Estimated
Overhead
Cost
University
$30,000
× 5%
$1,500
$31,500
(b)
Expected
Activity
$500,000
5,000
$248,000
4,000
$200,000 12,500
$450,000 450,000
deliveries
orders
orders
line items
Memorial
$30,000
× 5%
$1,500
$31,500
$100.00
$62.00
$16.00
$1.00
(a) ÷ (b)
Activity
rate
per
per
per
per
delivery
manual order
electronic order
line item picked
Exercise 7-10 (continued)
3. Activity costs are assigned to the two hospitals as follows:
University:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Customer deliveries ........... $100.00 per delivery 10
Manual order processing ....
$62.00 per order
0
Electronic order processing
$16.00 per order
15
Line item picking ...............
$1.00 per line item 120
Total activity costs .............
deliveries
orders
orders
line items
$1,000
0
240
120
$1,360
Memorial:
Activity Cost Pool
Customer deliveries ........... $100.00 per delivery
Manual order processing ....
$62.00 per order
Electronic order processing
$16.00 per order
Line item picking ...............
$1.00 per line item
Total activity costs .............
25
30
0
250
deliveries
orders
orders
line items
$2,500
1,860
0
250
$4,610
Exercise 7-10 (continued)
4. Customer margins for the two hospitals:
Sales ....................................................
Cost of goods sold .................................
Gross margin ........................................
Customer deliveries ...............................
Manual order processing ........................
Electronic order processing ....................
Line item picking ...................................
Total activity costs.................................
Customer margin...................................
University
$31,500
30,000
1,500
1,000
0
240
120
1,360
$
140
Memorial
$31,500
30,000
1,500
2,500
1,860
0
250
4,610
$(3,110)
5. Hospitals that require frequent deliveries, place a high volume of manual orders, and order many line items
are likely to be unprofitable.
Problem 7-16 (45 minutes)
1. Under the traditional direct labor-dollar based costing system,
manufacturing overhead is applied to products using the
predetermined overhead rate computed as follows:
Predetermined = Estimated total manufacturing overhead cost
overhead rate
Estimated total direct labor dollars
=
$608,000
= $2.00 per DL$
$304,000
The product margins using the traditional approach would be
computed as follows:
Sales ...................................
Direct materials ...................
Direct labor .........................
Manufacturing overhead
applied @ $2.00 per direct
labor-dollar .......................
Total manufacturing cost ......
Product margin ....................
B300
T500
Total
$1,400,000
436,300
200,000
$700,000
251,700
104,000
$2,100,000
688,000
304,000
400,000
1,036,300
$ 363,700
208,000
563,700
$136,300
608,000
1,600,000
$ 500,000
Note that all of the manufacturing overhead cost is applied to the
products under the company’s traditional costing system.
Problem 7-16 (continued)
2. The first step is to determine the activity rates:
Activity Cost Pools
(a)
Total
Cost
(b)
Total Activity
Machining .............. $213,500 152,500 MH
Setups ................... $157,500
375 setup hrs
Product sustaining .. $120,000
2 products
(a) ÷ (b)
Activity Rate
$1.40 per MH
$420 per setup hr
$60,000 per product
*The Other activity cost pool is not shown above because it includes
organization-sustaining and idle capacity costs that should not be
assigned to products.
Under the activity-based costing system, the product margins would
be computed as follows:
Sales ..................................
Direct materials ...................
Direct labor .........................
Advertising expense ............
Machining ...........................
Setups ................................
Product sustaining ...............
Total cost ...........................
Product margin ...................
B300
$1,400,000
436,300
200,000
50,000
126,000
31,500
60,000
903,800
$ 496,200
T500
$700,000
251,700
104,000
100,000
87,500
126,000
60,000
729,200
$(29,200)
Total
$2,100,000
688,000
304,000
150,000
213,500
157,500
120,000
1,633,000
$ 467,000
Problem 7-16 (continued)
3. The quantitative comparison is as follows:
Traditional Cost System
Direct materials .........................
Direct labor ...............................
Manufacturing overhead ............
Total cost assigned to products ..
Selling and administrative ..........
Total cost .................................
B300
(a)
(a) ÷ (c)
Amount
%
$436,300
63.4%
200,000
65.8%
400,000
65.8%
$1,036,300
T500
Total
(b)
(b) ÷ (c)
(c)
Amount
%
Amount
$251,700
36.6% $ 688,000
104,000
34.2%
304,000
208,000
34.2%
608,000
$563,700
$1,600,000
550,000
$2,150,000
Activity-Based Costing System
Direct costs:
Direct materials .........................
Direct labor ...............................
Advertising expense ..................
Indirect costs:
Machining .................................
Setups ......................................
Product sustaining .....................
Total cost assigned to products ..
Costs not assigned to products:
Selling and administrative ..........
Other ....................................
Total cost .................................
$436,300
200,000
50,000
63.4%
65.8%
33.3%
$251,700
104,000
100,000
36.6%
34.2%
66.7%
$ 688,000
304,000
150,000
126,000
31,500
60,000
$903,800
59.0%
20.0%
50.0%
87,500
126,000
60,000
$729,200
41.0%
80.0%
50.0%
213,500
157,500
120,000
1,633,000
400,000
117,000
$2,150,000
Problem 7-16 (continued)
The traditional and activity-based cost assignments differ for three
reasons. First, the traditional system assigns all $608,000 of
manufacturing overhead to products. The ABC system assigns only
$491,000 (= $213,500 + $157,500 + $120,000) of manufacturing
overhead to products. The ABC system does not assign the $117,000
of Other activity costs to products because they represent
organization-sustaining costs. Second, the traditional system uses
one unit-level activity measure, direct labor dollars, to assign 65.8%
of all overhead to the B300 product line and 34.2% of all overhead to
the T500 product line. The ABC system assigns 59.0% of Machining
costs to the B300 product line and 41.0% to the T500 product line.
The ABC system assigns 20.0% of Setup costs (a batch-level activity)
to the B300 product line and 80.0% to the T500 product line. The
ABC system assigns 50% of Product sustaining costs (a product-level
activity) to each product line. Third, the traditional system does not
trace any advertising expenses to the two products. The ABC system
traces $50,000 of advertising to the B300 and $100,000 of
advertising to the T500 product line.