Atkinson, Solutions Manual t/a Management Accounting, 6E
Chapter 4
Accumulating and
Assigning Costs to
Products
QUESTIONS
4-1
The cost of the raw materials entered into production is moved from the raw
materials account to the work-in-process inventory account. The cost of
manufacturing labor and overhead items are assigned to production by
adding them to the work-in-process inventory account. Overhead costs are
assigned (or allocated or apportioned) as determined by the cost system.
When manufacturing is completed, work is transferred to finished goods
inventory, and costs are moved from the work-in-process inventory account
to the finished goods inventory account. Finally, when goods are sold their
costs are moved from the finished goods inventory account to cost of goods
sold.
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
– 102 –
Chapter 4: Accumulating and Assigning Costs to Products
project’s cost. The organization will also assign various overhead costs to
determine project profitability
4-3
A cost object is anything for which a cost is computed. Examples of cost
objects are activities, products, product lines, customers, patients,
departments, or even entire organizations.
4-4
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 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 manager’s 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
From the time of the Industrial Revolution until the early 20th century,
manufacturing operations were mainly labor paced and direct costs
comprised the majority of product costs. Since then indirect costs in the
form of automation have gradually replaced labor costs and, for many
products, are now the major component of total product costs. This
increased use of indirect costs in manufacturing has increased the need for
costing systems to deal adequately with indirect manufacturing costs.
– 103 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
4-7
In the context of computing a predetermined indirect cost rate, a cost driver
is the basis used to allocate indirect costs to production. Once the cost driver
is chosen, cost analysts divide expected indirect factory costs by the number
of cost driver units to compute the predetermined indirect cost rate. Cost
analysts try to choose a cost driver that best explains the long-run behavior
of the indirect cost. In a labor-intensive environment the cost driver of
indirect costs in the factory might be labor hours as factory workers use
factory space, utilities, and other overhead resources to make products. In a
machine-intensive environment the cost driver of indirect costs in the
factory might be machine hours because machines consume electricity,
lubricant, and other supplies to make products.
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
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
– 104 –
Chapter 4: Accumulating and Assigning Costs to Products
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 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
– 105 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
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 Conversion costs are the costs of converting raw materials into finished
products. They include all manufacturing costs that are not direct materials
costs; that is, conversion costs consist of production labor and factory
overhead costs.
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.
– 106 –
Chapter 4: Accumulating and Assigning Costs to Products
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 Flange’s 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
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 The practical capacity number of machine hours per month is (6.5 hours per
shift) × (2 shifts per day) × (22 days per month) × (40 machines) = 11,440.
4-26 The practical capacity number of labor hours per year is (34 hours per
worker per week) × (30 workers per shift) × (2 shifts per day) × (48 weeks
per year) = 97,920.
– 107 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
4-27 (a)
Direct material
Part A327
Part B149
Total direct material 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
Direct labor
Assembly
Inspection
Total direct labor cost
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 material
Engine oil
Lubricant
Total direct material cost
Quantity
11 ounces
2 ounces
Direct labor
Direct labor
Hours
3
Overhead costs
3 Direct labor hours  $10 per hour
Total cost
4-29 (a)
$ 63
Price
$2
3
Amount
$22
6
$28
Rate
$15
Amount
$45
Amount
$ 30
$103
Cost driver rate:
$5,000,000
$2,500,000 direct labor cost
 2  direct labor cost
– 108 –
Chapter 4: Accumulating and Assigning Costs to Products
(b)
Consulting engagement cost:
Labor cost
Overhead cost
2  labor cost
Total cost
4-30 (a)
$25,000
50,000
$75,000
Cost driver rate for the machine department:
$350,000/14,000 machine hrs = $25/machine hr
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
4-31 (a)
$1,250 = $25 × 50
$640 = 80% of 800
Plantwide cost driver rate:
$60,000
4,000 direct labor hours
 $15 per direct labor hour
(b)
Departmental cost driver rates:
Cutting Department:
$25,000
4,000 machine hours
 $6.25 per machine hour
– 109 –
Finishing
Department
$1,400
800
640b
$2,840
Total
$9,400
1,050
1,890
$12,340
Atkinson, Solutions Manual t/a Management Accounting, 6E
Assembly Department:
$35,000
3,000 direct labor hours
 $11.67 per direct labor hour
(c)
4-32 (a)
(b)
The company may favor the method in (b) if overhead costs in the
cutting department have a cause-and-effect relationship with machine
hours, while those in the assembly department have a cause-andeffect 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.
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 Morrison’s 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
Morrison’s overhead costs are caused by multiple variables (cost
– 110 –
Chapter 4: Accumulating and Assigning Costs to Products
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
Disposal costs of waste product
Total costs
Number of pounds of Goody
Cost per pound of Goody
$4,000
12,000
$16,000
$16,500
$32,500
27,000
$1.204
$232,000
120,000
60,000
20,000
$432,000
200,000
$2.16
4-35
Materials Conversion
Completed and transferred out
gallons
6000  100%
Ending work-in-process gallons 4000  25%; 4000  10%
Equivalent units of production
4-36 (a)
Allocation of machine setup costs:
300
Assembly Dept.: $40,000 
 $30,000
300  100
Finishing Dept.: $40,000 
(b)
6000
1000
7000
100
 $10,000
300  100
Allocation of inspection costs:
Assembly Dept.: $15,000 
200
 $4,285.71
200  500
Finishing Dept.: $15,000 
500
 $10,714.29
200  500
– 111 –
6000
400
6400
Atkinson, Solutions Manual t/a Management Accounting, 6E
Service Departments
S1
S2
4-37
Overhead costs
$65,000
Allocation of S1 costs
(65,000)
Allocation of S2 costs
—
Total allocated
overhead costs
$0
4-38 (a)
Production Departments
P1
P2
$55,000 $160,000
15,000
20,000
30,000
(70,000)
33,600
36,400
$0 $213,600
$306,400
P1
P2
S1: $300,000 
30
 $150,000
30  30
$300,000 
30
 $150,000
30  30
S2: $300,000 
25
 $100,000
25  50
$300,000 
50
 $200,000
25  50
$250,000
(b)
S1
Directly
identified
costs
Allocation of
S1 costs
$350,000
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)
$240,000
$0
S1  $300,000  025
. S2
S2  $300,000  0.4S1
– 112 –
Chapter 4: Accumulating and Assigning Costs to Products
Therefore,
S1  $300,000  0.25$300,000  0.4S1
 $375,000  01
. S1
0.9S1  $375,000
$375,000
 $416,667
0.9
S2  $300,000  0.4  $416,667  $466,667
S1 
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
Allocation of S2 costs 116,667
(466,667)
116,667
233,333
$0
$241,667
$358,333
Directly identified
costs
Total
$0
– 113 –
P1
P2
Atkinson, Solutions Manual t/a Management Accounting, 6E
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
– 114 –
Chapter 4: Accumulating and Assigning Costs to Products
revise the overhead budget or explore new product opportunities to
use the idle capacity.
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
Markup
Cost driver rate
$120,000
54,000
18,000
42,000
$234,000
 4,500
$52.00
 1.25
$65.00 per DL hr
(b) Job 254:
Job 254
Materials
Conversion cost plus markup: 0.7 DL hours  $65
Total price
– 115 –
$47.40
45.50
$92.90
Atkinson, Solutions Manual t/a Management Accounting, 6E
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
Direct labora
Manufacturing
overheadb
Driver
Driver
500 DL hrs
$40,000
6,000
$40,000 DM
60,000
Driver
200 DL hrs
1200 mh
$3,000
3,600
9,600
1500 DL hrs
$22,500 DL
45,000
a
Direct labor rates:
Department 1: $12 per DL hr
Department 2: $18 per DL hr
Department 3: $15 per DL hr
b
Cost driver rates:
Department 1: 150% of DM cost
Department 2: $8 per machine hr
Department 3: 200% of DL cost
400 DL hrs
$26,000
4,800
300 DL hrs
$58,000
3,600
$26,000 DM
39,000
$58,000 DM
87,000
Driver
250 DL hrs
$5,000
4,500
350 DL hrs
1500 mh
12,000
2700 mh
Driver
$0
22,500
$14,000
6,300
21,600
Driver
1800 DL hrs
$0
27,000
2500 DL hrs
$0
37,500
$27,000 DL
54,000
$37,500 DL
75,000
$215,200
$204,700
(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
– 116 –
Job 103
$0
Driver
Driver
Driver
Total Costs
Job 102
$32,400
$303,000
Chapter 4: Accumulating and Assigning Costs to Products
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
*
1,500
2,400
**
Boston
$4,800
4,500*
5,118
5,200**
5,100
 7,200  $4,500
1,700
2,550
(b)
Cambridge
$2,400
2,700
2,482
2,600
2,100
 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.
– 117 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
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 
4-43 (a)
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

20,000 direct labor hours
 $14 per direct labor hour
Plantwide cost driver rate 
Job Cost Sheet: Job #714
Direct materials
Milling
Assembly
Total direct material cost
$800
50
Direct labor
Milling
Assembly
Total direct labor cost
$100
600
$850
700
Manufacturing Overhead
50 Direct labor hours  $14 per hour
Total cost
– 118 –
700
$2,250
Chapter 4: Accumulating and Assigning Costs to Products
(b)
Cost driver rate  Milling 
$120,000
12,000 machine hours
 $10 per machine hour
Cost driver rate  Assembly 
$160,000
12,000 direct labor hours
 $13.33 per direct labor hour
Job Cost Sheet: Job #714
Direct materials
Milling
Assembly
Total direct material cost
$800
50
Direct labor
Milling
Assembly
Total direct labor cost
$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-andeffect 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.
– 119 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
Cutting
4-44 (a)
Overhead
cost
Direct
labor hours
Grinding
$504,000
Drilling
Total
$2,304,000 $2,736,000 $5,544,000
60,000
96,000
144,000
300,000
Plantwide cost driver rate:
$5,544,000
 $18.48 per direct labor hour
300,000 direct labor hours
Overhead cost applied to Job ST101:
$18.48 × (2,000 + 2,500 + 3,000) = $138,600.
(b)
Cost driver rate: Cutting
$504,000
 $0.525 per machine hour
960,000
Cost driver rate: Grinding
$2,304,000
 $24 per direct labor hour
96,000 direct labor hours
Cost driver rate: Drilling
$2,736,000
 $19 per direct labor hour
144,000 direct labor hours
Overhead cost applied to Job ST101:
Dept
Cutting
Grinding
Drilling
Rate
$0.525
$24.00
$19.00
Units of Driver Used
20,000 MH
2,500 DLH
3,000 DLH
– 120 –
Overhead Cost
$10,500
60,000
57,000
$127,500
Chapter 4: Accumulating and Assigning Costs to Products
(c)
4-45 (a)
The company may favor departmental cost driver rates if overhead 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. The company
may use a plantwide cost driver rate because it is simpler than using
multiple departmental rates, though the departmental rate method is
potentially more accurate.
Cost driver rate for machining:
$500,000
 $25 per machine hour
20,000 machine hours
Cost driver rate for finishing:
$400,000
 80% of direct labor cost.
$500,000
(b)
Direct material cost
Direct labor cost
Manufacturing
overhead
Total costs of Job 511
a
b
(c)
Machining
Department
$12,000
300
2,000a
$14,300
Finishing
Department
$2,000
1,200
960b
Total
$14,000
1,500
2,960
$4,160
$18,460
2,000  $25  80
$960  80% of 1,200
Gonzalez Company likely believes that its manufacturing overhead costs
are driven by different factors in each manufacturing department.
Specifically, overhead costs in the machining department have a causeand-effect relationship with machine hours, while those in the finishing
department have a cause-and-effect relationship with direct labor costs.
– 121 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
4-46 (a)
Mixing and Reaction
Pulverizing
Blending Chambers and Packing
Total conversion costs
$424,600 $1,551,000
$559,900
Total number of process hours
8,760
35,040
8,760
Conversion cost per process hour
$48.470
$44.264
$63.916
(b)
Costs
Materials:
Raw materials
Packing materials
C206
Conversion costs:
Mixing and blending: 6 hrs  $48.470
Reaction chamber: 24 hrs  $44.264
Pulverizing and packing: 4 hrs  $63.916,
8 hrs  $63.916
Total conversion costs
Total cost
C208
$1,488.00
$175.20
$1,663.20
$1,488.00
$280.80
$1,768.80
290.82
1,062.34
255.66
290.82
1,062.34
$1,608.82
$3,272.02
511.33
$1,864.49
$3,633.29
4-47 (a)
Materials Conversion
Completed and
transferred out units 8000  100%
Ending WIP units
4000  40%; 4000  25%
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
– 122 –
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
Chapter 4: Accumulating and Assigning Costs to Products
(c)
Costs, beginning of October
Corresponding equivalent units
Cost per equivalent unit
Costs added during October
Corresponding equivalent units*
Cost per equivalent unit
*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
$1,050
$3,240
1,400
1,200
$0.75
$2.70
$8,200
8,200
$1.00
$22,620
7,800
$2.90
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.
– 123 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
4-48 (a)
Service Departments Production Departments
Personnel Maintenance Machining Assembly
Directly identified
costs
$100,000
Allocation of
Personnel Dept.
costs
(100,000)
Allocation of
Maintenance
Dept. costs
—
$0
a
b
(b)
$100,000 
$100,000 
5
c
45
40
45
d
$200,000
$400,000
$300,000
—
11,111a
88,889b
(200,000)
$0
176,471c
$587,582
23,529d
$412,418
$200,000 
7,500
$200,000 
1,000
8,500
8,500
$587,582
10,000 machine hours
 $58.7582 per machine hour
Cost driver rate: Machining 
$412,418
10,000 direct labor hours
 $41.2418 per direct labor hour
Cost driver rate: Assembly 
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
– 124 –
Chapter 4: Accumulating and Assigning Costs to Products
(c)
Service Departments Production Departments
Personnel Maintenance Machining Assembly
a
b
c
(d)
Directly
identified costs $100,000
$200,000
$400,000
$300,000
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
d
e
$130,000 
$130,000 
10,000
5
45
40
45
1,000
10,000
$564, 444
10, 000 machine hours
 $56. 4444 per machine hour
Cost driver rate: Machining 
$435, 556
10, 000 direct labor hours
 $43.5556 per direct labor hour
Cost driver rate: Assembly 
Direct materials and labor costs:
$450.00
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
$1,088.24
– 125 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
4-49 (a)
Service Departments Production Departments
Maintenance Grounds Fabricating 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
a
b
$18,000 
12,000
$18,000 
6,000
c
18,000
d
18,000
(b)
—
(14,000)
6,000c
8,000d
$0
$0
$63,000
$39,000
$14,000 
15,000
$14,000 
20,000
35,000
35,000
Service Departments Production Departments
Maintenance Grounds Fabricating Assembly
Directly
identified costs
Allocation of
Maintenance
Dept. costs
Allocation of
Grounds
Dept. costs
a
b
c
$18,000 
1,500
$18,000
$14,000
(18,000)
1,385a
11,077b
5,538c
—
(15,385)
6,594d
8,791e
$0
$0
d
19,500
$18,000 
12,000
$18,000 
6,000
19,500
e
$15,385 
15,000
$15,385 
20,000
19,500
– 126 –
35,000
35,000
$45,000
$62,671
$25,000
$39,329
Chapter 4: Accumulating and Assigning Costs to Products
(c)
Service Departments
Maintenance
Grounds
Directly
identified
costs
Production Departments
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
11,828.9206b
1,221.9959d (15,478.6151)
$0
$0
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
1,500
 $19,221.995927
19,500
G = $15,478.61507
G  $14,000 
– 127 –
5,914.4603c
Atkinson, Solutions Manual t/a Management Accounting, 6E
4-50 (a) Service Dept. Cost Allocation: Direct Method
Service Departments
Production Departments
Maintenance
Power
Casting
Assembly
Directly
identified
costs
$750,000 $450,000 $150,000
$110,000
a
b
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




750,000  
  500,000; 750,000  
  250,000
 80,000  40,000 
 80,000  40,000 
200,000
160,000




450,000  
  250,000; 450,000  
  200,000
 200,000  160,000 
 200,000  160,000 
$900,000
80,000 machine hours
 $11.25 per machine hour
Cost driver rate: Casting 
$560,000
60,000 direct labor hours
 $9.33 per direct labor hour
Cost driver rate: Assembly 
– 128 –
Chapter 4: Accumulating and Assigning Costs to Products
Direct labor and material costs
$32.000
Overhead costs:
Casting (1  $11.25)
$11.250
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
Production Departments
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
 $10.833 per machine hour
Cost driver rate: Casting 
$593, 333
60, 000
 $9.889 per labor hour
Cost driver rate: Assembly 
– 129 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
Direct labor and material costs
$32.000
Overhead costs:
Casting (1  $10.833)
$10.833
Assembly (0.5  $9.889)
4.944
Unit cost
$47.777
Number of units per month
(c)
15.777
1,000.000
Total manufacturing costs per month
$47,777.000
Mark up (25%)
$11,944.250
Bid price (per month)
$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
– 130 –
$588,125
Chapter 4: Accumulating and Assigning Costs to Products
$871, 875
80, 000
 $10.8984 per machine hour
Cost driver rate: Casting 
$588,125
60, 000
 $9.8021 per labor hour
Cost driver rate: Assembly 
Direct labor and material costs
$32.0000
Overhead costs:
Casting (1  $10.8984)
$10.8984
Assembly (0.5  $9.8021)
4.9011
Unit cost
15.7995
$47.7995
Number of units per month
1,000.0000
Total manufacturing costs per month
$47,799.5000
Mark up (25%)
$11,949.8750
Bid price (per month)
$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
– 131 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
Total gross margins:
Selling Price
Materials Cost
Labor Cost
Overhead
Total Cost
Gross Margin
(b)
A
B
C
D
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
$49.1935 per direct labor hour
$ 8.66
Total gross margins:
Selling Price
Materials Cost
Labor Cost
Overhead
Total Cost
Gross Margin
B
C
D
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
– 132 –
Chapter 4: Accumulating and Assigning Costs to Products
(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
$117.3077 per direct labor hour
Total gross margins:
Selling Price
Materials Cost
Labor Cost
Overhead
C
D
Total
$120,000
$88,000
$208,000
36,000
21,600
28,000
9,600
64,000
31,200
84,462
37,538
122,000
142,062
75,138
217,200
Total Cost
Gross Margin
$ (22,062) $ 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
– 133 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
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
$381.25 per direct labor hour
Total gross margin for D and for the company:
D
Selling Price
$88,000
Materials Cost
Labor Cost
Overhead
Total Cost
28,000
9,600
122,000
159,600
Gross Margin
(d)
$(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 Youngsborough’s 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– 134 –
Chapter 4: Accumulating and Assigning Costs to Products
based 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.
– 135 –
Atkinson, Solutions Manual t/a Management Accounting, 6E
(b)
Class A Repairs
Estimated
total
conversion
costs
611800
,
 60%  $367,080
Estimated
total
hours on
customer
jobs
13,300 
1
 6,650
2
Conversion
cost
per
customer 367,080
 $55.20 per hour
job hour
6,650
Price per
hour
(c)
Class B Repairs
611800
,
 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.
– 136 –
Chapter 4: Accumulating and Assigning Costs to Products
(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.
– 137 –