# Ch. 9 Solutions to assigned problems-

```SOLUTIONS TO
EXERCISES ASSIGNED
FOR CH. 9: ACTIVITYBASED COSTING
EXERCISE 9-23, PART A
EXERCISE 9-23, PART B
• Note that Dept SV has state-of-art machines, and
the overhead is likely driven by machine use.
• Examples of costs?
• Department SV has an overhead allocation rate of
\$4.20 per machine-hour(\$105,840 &divide; 25,200 machine
hours).
• Department C has an overhead allocation rate
• of \$1.32 per DLH (\$23,760 &divide; 18,000 labor-hours).
EXERCISE 9-23, PART B
We expect these to better reflect the OH costs of the three flavors.
EX. 9-23, PART E
• Charlene was correct that she was being allocated
• Plantwide allocation does not correctly allocate the overhead
by department; it simply uses one allocation rate for all
products in all departments.
• Under plantwide allocation, 1,000 gallons of chocolate
cost \$1,950. Once the overhead was reallocated into
department cost pools, the cost of chocolate fell to
\$1,824.
• Although it requires more time and skill to collect and
process the information, department allocation
generally yields more accurate product cost
information.
SOLUTION TO 9-24 (NOT ASSIGNED, BUT
RELATED TO 9/25)
Allocation based on separate pools for routine matters and transitions:
PR. 9-25
• First, note that the total to be allocated is \$750,000
(= \$200*1500 employees + \$5625* 80 transitions).
• If we just compute the variable cost to be allocated
to Ohio, the remainder will be allocated to Illinois.
• 50 transition * \$2000 = \$100,000
• 300 employees* \$50 = \$15,000
\$115,000
• So, Illinois gets \$750,000 – 115,000 = \$635,000
WOULD THE ALLOCATION BE FAIR?
REASONABLE?
• The reason it’s considered an allocation rather than
a traced (direct) cost is that there are multiple ways
to do it---no “correct” way!
• Allocations always are arbitrary (because there is
no provably “correct” way).
• But there does exist a hierarchy of reasons, from
strongest to weakest:
•
•
•
•
Cause-and-effect
Fairness
Ability to bear
CRITERIA FOR COST-ALLOCATION
DECISIONS
• Cause and Effect
• Variables are identified that cause resources to be consumed
• Most credible to operating managers
• Integral part of ABC
• The beneficiaries of the outputs of the cost object are charged
with costs in proportion to the benefits received
14-4
CRITERIA FOR COST-ALLOCATION
DECISIONS
• Fairness (Equity)
• The basis cited for establishing a price satisfactory
to the government, customers and suppliers
• Cost allocation here is viewed as a “reasonable” or “fair”
means of establishing a selling price
• Ability to Bear
• Costs are allocated in proportion to the cost object’s
ability to bear them
• Generally, larger or more profitable objects receive
proportionally more of the allocated costs
14-5
9-27: ACTIVITY-BASED COSTING IN A NONMANUFACTURING
ENVIRONMENT:
CATHY’S CATERING
PER-GUEST CHARGE TO COVER COSTS?
• If Cathy wants to cover her costs she should
charge…
 \$49 per guest for the picnic (\$980 &divide; 20 guests)
 \$80.00/guest for dinner (\$1,600 &divide; 20 guests).
•
Do we know the cost structure? What is her BEP?
c-\$15 per machine-hour = \$120,000 in production run costs &divide;
8,000 machine-hours.
d-\$3,500 per run = \$70,000 in per-run (setup?) costs &divide; 20 total
runs.
e-\$1,500 per inspection = \$90,000 in inspn. costs &divide; 60
inspections.
9-29 CONT’D: ALLOCATED BY DLH
Vs. \$28.33
ABC
and
\$130.00 for
Which product was
“subsidizing” the other?
9-29 CONCLUDED
• By allocating overhead on the basis of direct labor,
Doaktown Products has been understating the cost
to manufacture M-123, thereby overstating the
profits on M-123.
• Perhaps the basic reel was being charged too much of the
overhead costs related to machinery that really is used for
the fancy version.
```