# Document

```EXERCISE 5-26 (15 MINUTES)
1.
Material-handling cost per mirror:
\$90,000
 250  \$1,500
[(30)(250)  (30)(250)] *
*The total number of direct-labor hours.
An alternative calculation, since both types of product use the same amount of the
cost driver, is the following:
\$90,000
 \$1,500
60 *
*The total number of units (of both types) produced.
2.
Material-handling cost per lens = \$1,500. The analysis is identical to that given for
requirement (1).
3.
Material-handling cost per mirror:
\$90,000
 4†
(4  16) *
 \$600
30
*The total number of material moves.
†The number of material moves for the mirror product line.
4.
Material-handling cost per lens:
\$90,000
 16 *
(4  16)
 \$2,400
30
*The number of material moves for the lens product line.
EXERCISE 5-32
The activities of the Seneca Falls Winery may be classified as follows:
U: Unit-level
B: Batch-level
P: Product-sustaining-level
F: Facility-level
Activity
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Classification
P
P
P
P
P
P
P
B
B
B
Activity
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
Classification
B
B
U
U
U
U
B
F
F
EXERCISE 5-33 (30 MINUTES)
1.
ZODIAC MODEL ROCKETRY COMPANY
COMPUTATION OF SELLING COSTS
BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE
Small
Order Size
Medium
Large
Sales
(Unit cost: \$675,000/225,000
= \$3.00 per box)....................................................
\$ 6,000
\$135,000
box)
Total
commissionsa
\$534,000
\$ 675,000
Catalogsb
(Unit cost: \$295,400/590,800
= \$.50 per catalog) ...............................................
127,150
105,650
catalog) 62,600
295,400
Costs of catalog salesc
(Unit cost: \$105,000/175,000
= \$.60 per motor) ..................................................
47,400
31,200
skein)
26,400
105,000
Credit and collectiond
(Unit cost: \$60,000/6,000
= \$10.00 per order) ...............................................
4,850
24,150
order)
31,000
60,000
Total cost for all orders of a
given size .....................................................................
\$185,400
\$296,000
\$654,000
\$1,135,400
Units (motors) solde ....................................................
103,000
592,000
2,180,000
Unit cost per order of a given
sizef ..............................................................................
\$1.80
\$.50
\$.30
aRetail
2.
sales in boxesunit cost:
Small, 2,000\$3
Medium, 45,000\$3
Large, 178,000\$3
bCatalogs distributedunit cost
cCatalog salesunit cost
dNumber of retail ordersunit cost
eSmall: (2,00012) + 79,000 = 103,000
Medium: (45,00012) + 52,000 = 592,000
Large: (178,00012) + 44,000 = 2,180,000
fTotal cost for all orders of a given size &divide; units sold
The analysis of selling costs shows that small orders cost more than large orders.
This fact could persuade management to market large orders more aggressively
and/or offer discounts for them.
PROBLEM 5-45 (35 MINUTES)
1.
Activity-based costing results in improved costing accuracy for two reasons. First,
companies that use ABC are not limited to a single driver when allocating costs to products
and activities. Not all costs vary with units, and ABC allows users to select a host of
nonunit-level cost drivers. Second, consumption ratios often differ greatly among activities.
No single cost driver will accurately assign costs for all activities in this situation.
2.
Allocation of administrative cost based on billable hours:
E-commerce consulting: 2,700 &divide; 6,750 = 40%; \$424,800 x 40% = \$169,920
Information systems: 4,050 &divide; 6,750 = 60%; \$424,800 x 60% = \$254,880
E-Commerce
Consulting
Billings:
4,050 hours x \$160…………
2,700 hours x \$160…………
Less: Professional staff cost:
4,050 hours x \$60
2,700 hours x \$60
Income……………………………
Income &divide; billings……………….
Information
Systems
Services
\$648,000
\$432,000
(243,000)
(162,000)
(169,920)
\$100,080
( 254,880)
\$150,120
23.17%
23.17%
3. Activity-based application rates:
Activity
Activity
Driver
Cost
Staff support
In-house
computing
\$243,000
150,000
Miscellaneous
office charges
31,800
Application
Rate
&divide; 405 clients
=
\$600 per client
&divide; 3,750 computer
hours (CH)
=
\$40 per CH
&divide; 1,060 client
transactions (CT)
=
\$30 per CT
Staff support, in-house computing, and miscellaneous office charges of e-commerce
consulting and information systems services:
Activity
Staff support:
305 clients x \$600…………...
100 clients x \$600…………...
In-house computing:
2,150 CH x \$40……………….
1,600 CH x \$40……………….
Miscellaneous office charges:
420 CT x \$30……………........
640 CT x \$30…………....…....
Total ……………………………….
E-Commerce
Consulting
Information
Systems
Services
\$183,000
\$ 60,000
86,000
64,000
12,600
19,200
\$143,200
\$281,600
Profitability e-commerce consulting and information systems services:
E-Commerce
Consulting
Billings:
4,050 hours x \$160………..
2,700 hours x \$160………..
Less: Professional staff cost:
4,050 hours x \$60
2,700 hours x \$60
Income…………………………..
Income &divide; billings……………...
Information
Systems
Services
\$648,000
\$432,000
(243,000)
(162,000)
(143,200)
\$ 126,800
29.35%
( 281,600)
\$123,400
19.04%
4.
Yes, his attitude should change. Even though both services are needed and professionals
are paid the same rate, the income percentages show that e-commerce consulting provides
a higher return per sales dollar than information systems services (29.35% vs. 19.04%).
Thus, all other things being equal, professionals should spend more time with e-commerce.
5.
Probably not. Although both services produce an attractive return for Clark and Shiffer, the
firm is experiencing a very tight labor market and will likely have trouble finding qualified
help. In addition, the professional staff is currently overworked, which would probably limit
the services available to new clients.
PROBLEM 5-48 (30 MINUTES)
1.
40,000 machine hours x \$90 = \$3,600,000
\$3,600,000 &divide; 20,000 units = \$180 per unit
50,000 machine hours x \$90 = \$4,500,000
\$4,500,000 &divide; 40,000 units = \$112.50 per unit
Deluxe
Executive
\$ 60
45
180
\$285
\$ 93.75
45.00
112.50
\$ 251.25
Direct material……………….
Direct labor…………………..
Unit cost…………………
2. Activity-based application rates:
Activity
Driver
Application
Rate
Activity
Cost
Manufacturing
setups
\$1,350,000
&divide; 180 setups (SU)
= \$7,500 per SU
Machine
processing
4,950,000
&divide; 90,000 machine
hours (MH)
= \$55 per MH
Product
shipping
2,000,000
&divide; 500 outgoing
= \$4,000 per OS
shipments (OS)
Manufacturing setup, machine processing, and product shipping costs of a Deluxe unit and
an Executive unit:
Activity
Deluxe
Manufacturing setups:
130 SU x \$7,500……………..
70 SU x \$7,500……………..
Machine processing:
40,000 MH x \$55…………...
50,000 MH x \$55…………...
Product shipping:
300 OS x \$4,000……………
200 OS x \$4,000……………..
Total …………………………….
Executive
\$ 975,000
\$ 525,000
2,200,000
2,750,000
1,200,000
\$4,375,000
800,000
\$4,075,000
Production volume (units)….
20,000
40,000
Cost per unit…………………..
\$218.75*
\$101.875**
* \$4,375,000 &divide; 20,000 units = \$218.75
** \$4,075,000 &divide; 40,000 units = \$101.875
The manufactured cost of a Deluxe cabinet is \$323.75, and the manufactured cost of an
Executive cabinet is \$240.625. The calculations follow:
Direct material…………………………………
Direct labor…………………………………….
Manufacturing setup, machine
processing, and outgoing shipments..
Total cost……………………………………….
Deluxe
Executive
\$ 60.00
45.00
\$ 93.750
45.000
218.75
\$323.75
101.875
\$240.625
3. The Deluxe storage cabinet is undercosted. The use of machine hours produced a unit cost
of \$285; in contrast, the more accurate activity-based-costing approach shows a unit cost of
\$323.75. The difference between these two amounts is \$38.75.
4. Cost distortion:
The Deluxe cabinet product line is undercosted by \$775,000, and the Executive
cabinet product line is overcosted by \$425,000. Supporting calculations follow:
Deluxe
Executive
\$38.75*  20,000 = \$775,000
\$(10.625)†  40,000 = \$(425,000)
*\$323.75  \$285.00
†\$240.625
 \$251.25
5.
No, the discount is not advisable. The regular selling price of \$350, when compared against
the more accurate ABC cost figure, shows that each sale provides a profit to the firm of
\$26.25 (\$350.00 - \$323.75). However, a \$40 discount will actually produce a loss of \$13.75
(\$323.75 - \$310.00), and the more units that are sold, the larger the loss. Notice that with the
less-accurate, machine-hour-based figure (\$285), the marketing manager will be misled,
believing that each discounted unit sold would boost income by \$25 (\$310 - \$285).
PROBLEM 5-50 (30 MINUTES)
1.
= \$710,000 &divide; 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)
Direct material .................................
Direct labor:
3 hours x \$15 .............................
4 hours x \$15 .............................
3 hours x \$35.50 ........................
4 hours x \$35.50 ........................
Total cost .........................................
2.
Medform
Procel
\$ 30.00
\$ 45.00
45.00
60.00
106.50
\$181.50
142.00
\$247.00
Activity
Cost
Activity Cost
Driver
Application
Rate
Order
processing
\$120,000
&divide; 600 orders
processed (OP)
= \$200 per OP
Machine
processing
500,000
&divide; 50,000 machine
hrs. (MH)
= \$10 per MH
Product
inspection
90,000
&divide; 15,000 inspection
hrs. (IH)
= \$6 per IH
Order processing, machine processing, and product inspection costs of a Medform unit and
an Procel unit:
Activity
Order processing:
350 OP x \$200 .......................
Medform
\$ 70,000
Procel
250 OP x \$200 .......................
Machine processing:
23,000 MH x \$10 ....................
27,000 MH x \$10 ....................
Product inspection:
4,000 IH x \$6 ........................
11,000 IH x \$6 ........................
Total
\$ 50,000
\$324,000
66,000
\$386,000
Production volume (units)
Cost per unit
2,500
\$129.60*
3,125
\$123.52**
230,000
270,000
24,000
* \$324,000 &divide; 2,500 units = \$129.60
** \$386,000 &divide; 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:
Direct material……………………………….
Direct labor:
3 hours x \$15……………………………
4 hours x \$15……………………………
Order processing, machine processing,
and product inspection………………..
Total cost…………………………………….
3.
a.
Medform
Procel
\$ 30.00
\$ 45.00
45.00
60.00
129.60
\$204.60
123.52
\$228.52
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 Meditech’s 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 product’s 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