Chapter 6
1.
Benjamin Tools produces a variety of cutting instruments at its
Amarillo manufacturing plant. The plant is highly automated and
uses an ABC system to allocate overhead costs to its various product
lines. The company expects to produce 48,000 total units during the
current period. The costs and cost drivers associated with the four
activity cost pools are given below:
Activities:
Unit
Level
Batch
Level
Product
Level
Facility
Level
Cost
$100,000
$12,000
$20,000
$240,000
Cost Driver
8,000 DLH 100 set ups % of use
48,000 units
Production of 3,000 units of a pipe-cutting tool required 800 labor
hours, 25 setups, and consumed 20% of the product sustaining
activities. What amount of total overhead was allocated to the pipecutting tool?
Answer: $32,000
Unit Level = $100,000 / 8,000 * 800 = $10,000
Product Level = 20% * $20,000 = $4,000
Batch Level = $12,000 / 100 * 25 = $3,000
Facility Level = $240,000 / 48,000 * 3,000 = $15,000
$10,000 + 4,000 +3,000+ 15,000 = $32,000
2.
Jones Company allocates overhead on the basis of direct labor hours.
It allocates overhead costs of $12,800 to two different jobs as follows:
Job 1: (10 hours) = $6,400
Job 2: (10 hours) = $6,400
The production process for Job 1 is automated. Now Job 1 only
requires 5 hours of direct labor but 4 hours of mechanical processing.
As a result, total overhead increases to $15,000. How much overhead
will be assigned to Job 2 after automation?
Answer: $10,000
Total Hours after Automation = 5 for Job 1 and 10 for Job 2
$15,000 / 15 hours * 10 hrs = $10,000
3.
Teed Off makes steel and graphite shafts for golf clubs. It requires
approximately 2 hours of labor to make one shaft of either kind.
During the year, the company made 12,000 graphite shafts and 8,000
steel shafts. Setup costs amounted to $62,000 for 36 total batches (20
for graphite and 16 for steel). What is the amount of setup cost
assigned to the graphite shafts if activity-based costing is used?
Answer: $34,444
Cost Driver = Batches
$62,000 / 36 * 20 = $34,444
4. Smith Company makes golf balls and baseballs. Making golf balls
requires 5,000 hours of labor and making baseballs requires 8,000
hours of labor. Smith undertakes an automation process that reduces
the consumption of labor required for baseballs to only 2,000 hours of
labor. Overhead cost prior to the automation totaled $15,000. After
automation, overhead cost amounted to $25,000. Assuming Smith
uses direct labor as a company-wide allocate base before and after
automation, what is the amount of overhead cost allocated to each
product?
Before Automation
After Automation
Baseballs
$15,000 / 13,000 * 8,000
= $9,231
$25,000 / 7,000 * 2,000
= $7,143
Golf Balls
$15,000 / 13,000 * 5,000
= $5,769
$25,000 / 7,000 * 5,000
= $17,857
5. The Carolina Furniture Company manufactures kitchen cabinets. The company has
always used direct labor cost to allocate overhead to its two cabinet lines, Heritage
and Contemporary. The manufacture of both lines has been labor intensive.
Recently, the company automated production of its Contemporary line of cabinets. It
continues to use labor dollars as the overhead allocation base for both lines. This
practice will likely result in which of the following?
a. Overhead cost will be allocated accurately between the two lines.
b.
c.
d.
Too much overhead cost will be allocated to the Heritage line.
Too much overhead cost will be allocated to the Contemporary line.
b and c.
6. Pacific Northwest Ski Company makes both traditional skis and new parabola-shaped
skis that are less stable but turn more easily. During 2003 the company produced
10,000 pairs of traditional skis and 7,000 pairs of new skis. Materials handling costs
to transfer material to different workstations amounted to $20,000. The traditional
skis used 150 hours of materials handling time and the new skis used 170 hours.
Both types of skis required 3 hours of direct labor per pair of skis. Assuming that all
overhead cost is allocated using an activity-based cost system, the amount of
materials handling overhead cost assigned to the new skis would be
a. $10,000.
$20,000 / 320 = $62.50 * 170 = $10,625
b. $10,625.
c. $9,375.
d. $20,000.
7. Setup costs for XYZ’s two products amounted to $2,000. The company used 1,200
direct labor hours to produce product A and 2,000 direct labor hours to produce
product B. Both products required the same number of setups. XYZ uses a
company-wide overhead rate to allocate overhead based on direct labor hours. Based
on this information
a. Product A is undercosted by $750.
b. Product A is overcosted by $1,250.
c. Product B is overcosted by $250.
d. Product B is undercosted by $500.
Product A
Using DLH: ($2,000 / 3200 = 0.625) .625*1200 = $750
Using ABC: ($2,000 / 2 = $1000)
$1000
Too Little
Product B
.625*2000 = $1,250
$1000
Too Much