Week 1: Activity Based Costing - Discussions
Workout Room (graded)
This week we will work and discuss several of the following problems from Chapter 5: 5.28 to 5.39.
Responses
Response
Author
RE:
Welcome to
Instructor Louviere
the Work
Out Room!
Date/Time
8/27/2011 6:17:54 PM
Modified:8/29/2011 6:28 PM
Class,
We are going to use this discussion each week to work through the homework ES
problems and to be sure that we are well prepared for the homework ES quiz. Please note
that you must post comments or solutions in this discussion on three separate days to
receive full credit for frequency. You will receive credit for quality by commenting on a
posted solution or by posting your own solution to the homework ES problems and the
assigned textbook problems. So, any suggestions on how to approach the first homework
ES problem?
Who wants to start?
RE:
Welcome
to the
Ahmed Abdelrazig
Work Out
Room!
9/1/2011 11:46:20 PM
As for accounting in general, it has always been my weak point and I have
always struggled with it. I took my last accounting course more than a year ago
and we had Homework ES but did not have the TDA's as an assisting tool. I will
sleep much better tonight knowing that I will have some sort of help during these
8 weeks and I just hope that this time around I'm not killed by the monster of
numbers and formulas that have never been friendly to me.
RE:
Welcome
to the
Janet Knowlden
Work Out
Room!
8/31/2011 1:53:56 PM
I am really glad we can work through the Homework Es because it is making me
lose sleep. I am not an accountant and have no desire to be one. My last
accounting class was a year ago. For the most part my formulas are working, but
when I get to the part where I have to figure out the overhead, I get really stuck.
I'm going to build a spreadsheet from the examples in the textbook to see if that
helps, otherwise, I am in for a rough ride.
RE:
Welcome
to the
Travis Carroll
Work
Out
Room!
8/31/2011 8:33:17 PM
Janet, I know exactly what you mean about being an accountant. This id
not information that some of us will carry on through but I must say as
this is my third accountant class it does help in a lot of different
situations that you will be encountering at some point in your career or
it will be advice that can be given from your experience!! If you need
help where all here for each other!!
RE:
Welcome
to the
Jason Hall
Work
Out
Room!
9/2/2011 9:18:43 PM
This is my third accounting class as well and although I am just getting the
basics of accounting but it is interesting to see how the actions taken where I
work come into play in terms of accounting. I see the down sides of
numbers, where the amount of something is weighed more than the quality
of something, and the good side of numbers, where the amount of something
is taken into account even when that something may be minimal, and find it
interesting how those numbers come into play when decisions are made on
the direction of the company and more importantly, my department.
RE:
Welcome
to the
Frank Martinez
Work
Out
Room!
8/31/2011 10:47:19 PM
Same here guys, the last accountant class I took I barley made it
out alive since (well to start off) I' am really not a math person,
then understanding how to do those formulas can sometimes be
a little bit confusing. But communication has always helped, so
seeing how in these discussions we will be discussing and
talking about the homework es assignments kind of releases
some pressure, I have never seen this before so I' am actually
excited.
RE:
Welcome
to the
Brandon Green
Work
Out
Room!
8/31/2011 11:44:26
PM
Hello folks. Similar to your experiences with
accounting a few of the accounting classes I had to
take are now behind me although fairly recent. Within
the last semester or two, but I still get a little
bewildered on occasion. There's a lot of stuff to try and
remember for accounting, and some of the rules are a
might bit fuzzy and difficult to get used to. I like
Janet's comment about making a spreadsheet/cheat
sheet to help keep track of things. Cheat sheets are
great, and fairly recently I've been putting similar
things together for my various classes. It helps a lot
and you can make a table of contents in Word,
hyperlink the table of contents items to the
corresponding spreadsheet, and you've got a boiled
down version of some of the more important and hard
to remember things. Wish I had started sooner though
as I have about a semester or two worth of classes to
catch up on and reorganize in such a way on top
keeping up with current classes. Good thought though.
I recommend it.
RE:
Welcome
to the
Frank Martinez
Work
Out
Room!
9/3/2011 11:37:47
PM
This is a good thing to have in our discussions,
I can’t tell you guy’s how this is actually a
different strategy towards others that I have
recently had in my most recent classes. I had
just had this one class in which we had our
normal discussions, and then had a separate
discussion in which that was all dedicated
towards us as the students to ask questions and
find out solutions to any problems we had in
our way or etc. But probably half of the
students probably didn’t even realize this
option was available, and thanks to this there
were no good results. Hopefully here it can
make a better influence to all of us. I’ am
really looking forward to it!
RE:
Welcome
to the
Instructor Louviere
Work
Out
Room!
9/2/2011 3:26:29
AM
I recommend that you spread the work in this
course into daily tasks, using a calculator
when working through the examples in the
reading, and making crib sheets out of the
material covered.
RE:
Welcome
to the
Janet Knowlden
Work
Out
Room!
9/2/2011 11:11:55
AM
Yeah, doing that helps, but there are
areas in the work that still does not
click in my head.
RE:
Welcome
to the
Brandon Green
Work
Out
Room!
9/2/2011
11:55:03 AM
Same here. It's not
uncommon unfortunately it
seems to take more time than
is desirable for some sort of
connection or realization to
occur. Sometimes it never
does, at least in the way it
seems to have been intended
to be understood, but what
can you say. Hop a long as
best you can.
RE:
Welcome
to the
Dominique Fryer
Work
Out
Room!
9/4/2011 11:34:10
AM
This is very difficult for me because I
cannot do the work in this class
everyday. I have to work my classes
out between my family and my job so
it gets done more in chunks than
anything else. It makes the time that I
am working on the class last forever.
I have to see if there's something that
I can do to spread it out better. I also
agree that some of the concepts are
not sinking in like they seem to be
intended to.
RE:
Welcome
to the
Instructor Louviere
Work
Out
Room!
9/4/2011 6:53:48
PM
When I was in school I paced
the floor memorizing key
word definitions and
formulas.
RE:
Welcome
to the
Ahmed Abdelrazig
Work
Out
Room!
9/4/2011 8:52:44
PM
Accounting classes online can be
quite 'different' to say the least and
just to add to the Professors
recommendations, from past
experience I have seen that all the
accounting quizzes focus more on
definitions and descriptive questions,
while the homework part of the
course is more of the hands on
number crunching. With that being
said I found it quite useful throughout
my previous course and even for the
final exam to keep two sets of
notes/folders (depending where you
do most of your work). I have two
folders on my laptop for this class one
is more descriptive with all of the
factors, conditions, and definitions I
run into during my week of reading
and another folder where I keep all
the formulas and each with
a relevant example or part of a
question to refer back to. This works
for me and I just thought I would
share with you all. Good luck to
everyone this session :)
RE:
Welcome
to the
Brandon Green
Work
Out
Room!
9/4/2011
11:56:35 PM
I'd be a little cautious in
making it sound as though
accounting quizzes and such
are all the same. By and large
I agree with you from what
I've seen in most of the
classes I've taken, however,
my last accounting class,
Managerial Accounting, the
Midterm multiple-choice
questions, while being
multiple-choice, were all
crunch the numbers type
problems. So, you had to
crunch the numbers in order
to choose a multiple choice
question on top of the
"official calculation"
problems mention as being
part of the quiz. Best to be
ready for both.
RE:
Welcome
to the
Kristian Archer
Work
Out
Room!
9/3/2011 11:34:55
PM
I am the same way Frank. I just barely made it out of
my last accounting class, I found it so hard how to
remember all of the formulas and when to use each
one, but it think this work out room should help me
understand better.
RE:
Welcome
to the
Samantha Lack
Work
Out
Room!
8/31/2011 9:54:18 PM
Ah a kindred spirit, how refreshing. Thanks for sharing Janet, I feel the
same way, I am so intimidated by this class in general that I am pushing
myself to try and excel in it.
RE:
Welcome
to the
Daniel Arriagada
Work Out
Room!
Modified:8/30/2011 9:41 PM
Problem
5-28
8/30/2011 9:38:30 PM
1.- It is important to understand the costs associated with individuals jobs so you
will have a fair estimate of how much money a job will costs and that way you
don’t lose the job because you price it too high or in the contrary , you don’t
lose money on a job because you priced it too low.
2.Costs for Widnes Coal
Professional labor
Indirect Costs
Total Costs
104 @ $70 an hour = $7,280
104 @ $105 an hour = $10,920
= $18,200
Costs for St. Helen’s Glass
Professional labor
Indirect Costs
Total Costs
96 @ $70 an hour = $6,720
96 @ $105 an hour = $10,080
= $16,800
Grand Total Costs for Widnes Coal & St. Helen’s Glass = $35,000
Question
5.28
Alvin Larkins
8/28/2011 3:21:25 PM
5.28


1. Why is it important for Wigan Associates to understand the costs associated
with individual jobs? Wigan Associates want to understand the cost associated to
make sure that they are not under or over costing a particular service.
2. Compute the costs of the Widnes Coal and St. Helen’s Glass jobs using
Wigan’s simple costing system.
o Widnes Coal
 Direct Labor =104 hours*$70/hour=$7280
 Indirect cost=104 hours*$105/hour=$10,920

o
Total Cost=$7280+$10,920=$18,200
St Helen’s Glass
 Direct Labor =96hours*$70/hour=$6,720
 Indirect cost=96 hours*$105/hour=$10,020
 Total Cost=$6,720+$10,020=$16,800
RE:
Question
5.28
Instructor Louviere
8/30/2011 2:04:49 AM
Alvin and Class:
When looking at direct labor, what costs would be estimated to determine the
hourly rate?
RE:
Question Brandi Williams
5.28
8/31/2011 6:33:15 PM
Costs estimated to determine the hourly rate (for direct labor manufacturing costs) would be the cost of labor directly traceable to
items produced or labor costs not directly traceable that would be
indirect labor. (2009, Horngren, p. 140-142)
RE:
Question Dominique Fryer
5.28
8/31/2011 9:22:55 PM
So if I'm right this basically means that the costs of the people
who are working to build the product or complete the service is
what determines the direct labor costs. So the more people
needed or the more they get paid, the higher the direct labor
costs. To estimate this, one would have to be able to determine
how many people it would take and how much they make per
hour. Then they can estimate the direct labor costs.
RE:
Question Samantha Lack
5.28
9/2/2011 7:53:06 PM
Well done Dominique, I agree people working to
directly build the product or service would be
considered direct labor, if it were a shop supervisor
then it would be indirect labor. The part I am confused
on is where depreciation on machinery is placed in the
equation. Per our module i don't believe that this is a
period cost so I think that would make it a production
cost but not a direct cost. What do you think?
RE:
Question Brandi Williams
5.28
9/1/2011 9:22:22 PM
Yes ma'am, that sounds about right to me, at least
according to my understanding.
RE:
Question Instructor Louviere
5.28
9/2/2011 3:35:59
AM
Hi Brandi, Dominique, and Class:
What costs would you accumulate for each
person? How much you pay the person is one
cost. What else?
RE:
Question Brandi Williams
5.28
9/3/2011 11:29:20
AM
I'm not sure what you mean about
what "costs" accumulate for each
person, unless you mean the fixed and
variable costs or direct and indirect
costs.
As for how much to pay a person, at
what costs, well it would depend upon
how much labor or output was
produced. By this I mean, if a certain
person worked (8) hours and
produced (4) units of "product", than
they should be pay accordingly.
RE:
Question Instructor Louviere
5.28
9/2/2011 5:02:32
AM
Modified:9/2/2011 5:05 AM
Here is the publisher's solution:
5-28
(15 min.) Job costing with single
direct-cost category, single indirect-cost pool,
law firm.
1.
Pricing decisions at Wigan Associates
are heavily influenced by reported cost
numbers. Suppose Wigan is bidding against
another firm for a client with a job similar to
that of Widnes Coal. If the costing system
overstates the costs of these jobs, Wigan may
bid too high and fail to land the client. If the
costing system understates the costs of these
jobs, Wigan may bid low, land the client, and
then lose money in handling the case.
2.
Widnes
St. Helen’s
Coal
Glass
Total
Direct professional labor,
7,280
$70 × 104; $70 × 96
$ 6,720
$14,000
Indirect costs allocated,
10,920
$105 × 104; $105 × 96
10,080
21,000
Total costs to be billed
$
$18,200
RE:
Question Deborah Kieffer
5.28
$16,800
$35,000
9/3/2011 3:50:14 PM
When looking at direct labor associated for this law firm, you should
consider what touch-labor is associated to that particular client/case.
Law firms will typically bill by the hour and it may be more than just
one attorney "touching" or contributing to the case. There may be other
attorneys, researchers, paralegals, etc. that may be billing their direct
time to the case. The case can either be billed in actuals for each labor
category or the firm may choose to determine a "blended" labor rate that
is comprised of averaged proportions of those labor categories for one
direct labor hour. Since this is a small firm with only two clients, I
would bet that they are billing actual direct labor hours.
Question
5.29
Ellen LaChance
8/28/2011 6:16:50 PM
1. What is the revised indirect-cost allocation rate per professional labor-hour for Wigan
Associates when total indirect costs are $7,000?
The revised indirect-cost allocation rate is $35 per hour ($7,000 / 200 total hours =
$35/hour).
2. Compute the costs of the Widnes and St. Helen’s jobs if Wigan Associates had used its
refined costing system with multiple direct-cost categories and one indirect-cost pool.
Widnes Col:



Direct Cost: $3,150
Indirect Cost: $35 x 104 hours = $3,640.
Total Cost: $6,790
St. Helen's Glass:


Direct Cost: $10,850
Indirect Cost: $35 x 96 hours = $3,360

Total Cost: $14,210
3. Compare the costs of Widnes and St. Helen’s jobs in requirement 2 with those in
requirement 2 of Problem 5-28. Comment on the results.
The difference between the cost of Widnes and St. Helen's jobs in the 2 different
problems are as follows
DIRECT
INDIRECT TOTAL
Widnes 1st
$7,280 $10,920
$18,200
Widnes 2nd
$3,150
$3,640
$6,790
DIFFERENCE
$4,130 $7,280
$11,410
St. Helen's 1st
$6,720 $10,080
$16,800
St. Helen's 2nd
$10,850
$3,360
$14,210
DIFFERENCE
$3,570 $6,440
$10,010
I can understand why Widnes lodged a complaint with their total bill under the 1st
problem using the simply costing system. The 2nd approach using the multiple directcost categories and single indirect cost pool brought down the cost applied to Widnes
from $18,200 to $6,790 - a difference of $11,410. This is a dramatic decrease.
RE:
Question
5.29
Ellen LaChance
8/28/2011 6:24:58 PM
My answer to problem #3 came through all over the place as I tried to create a
table. Here are my responses to the question.
Widnes:



1st approach = Direct $7,280, Indirect $10,920, TOTAL = $18,200
2nd approach = Direct $3,150, Indirect $3,640, TOTAL = $6,790
DIFFERENCE is $11,410
St. Helen's:



1st approach - Direct $6,720, Indirect $10,080, TOTAL = $16,800
2nd approach - Direct $10,850, Indirect $3,360, TOTAL = $14,210
DIFFERENCE = $2,590
RE:
Question Michael Coleman
5.29
8/29/2011 10:15:49 PM
I am still reading the chapter.
But from what i am reading We add the direct and the indirect of both
approches correct.
Then subtract the 2 solutions from each other and compare the
differences between the two problems correct.
the reasn i am asking this dumb question is that i am alittle confused
about the accounting process and it is allittle confusing. I am reading the
chapter and tring to do the calculations as i see them in te chapter.
Accounting is hard for me to understand. sorry.
But direct cost has a direct impact on the product like parts, creation and
time.
Indirect cost are cost that do not effect the product directly like pay to
managers and rent of the buliding and water etc.
RE:
Question Instructor Louviere
8/31/2011 2:10:22 AM
5.29
Hello Michael:
Yes, you are on the right track. Also, my advice is to use your
calculator when reading the chapters and make sure you
understand the math in the examples. When I was a student, I
tried to reduce the examples to formulas and memorized the
formulas for exams. Accounting did not come easy for me.
RE:
Question Michael Coleman
5.29
8/31/2011 8:56:17
PM
1. What is the revised indirect-cost allocation rate per professional
labor-hour for Wigan Associates when total indirect costs are
$7,000?
I got the 35 dollars from this formula 105 - 70 = 35
2. Compute the costs of the Widnes and St. Helen’s jobs if Wigan
Associates had used its refined costing system with multiple directcost categories and one indirect-cost pool.
Widnes Coal
ST Helens
Direct Cost:
$3,150
$10,850
Indirect Cost: $35 x 104 hours =
$3,640
$3,360 .
Total Cost:
$6,790
Cost: $14,210
Direct Cost:
Indirect Cost: $35 x 96 hours =
Total
3. Compare the costs of Widnes and St. Helen’s jobs in requirement
2 with those in requirement 2 of Problem 5-28. Comment on the
results.
DIRECT INDIRECT TOTAL
Widnes 1st $7,280 $10,920 $18,200
Widnes 2nd $3,150 $3,640 $6,790
DIFFERENCE $4,130 $7,280 $11,410
St. Helen's 1st $6,720 $10,080 $16,800
St. Helen's 2nd $10,850 $3,360 $14,210
DIFFERENCE $3,570 $6,440 $10,010
Please tell ne if i did it correct or where i went wrong. I can
understand why Widnes lodged a complaint with their total bill under
the 1st problem using the simply costing system. The 2nd approach
using the multiple direct-cost categories and single indirect cost pool
brought down the cost applied to Widnes from $18,200 to $6,790 - a
difference of $11,410. It is a savings but it is not as drastic as i
thought.
RE:
Question Deborah Kieffer
5.29
9/3/2011 4:44:29
PM
Problem 5-28:
ORIGINAL DIRECT & INDIRECT COSTS
Billed Direct Hours
Direct Professional Labor ($70/hr)
Original Indirect Rate ($21,000/200 hrs = $105/hr)
TOTAL BILLED COST (ORIGINAL)
Widnes Coal
104
$
7,280
$ 10,920
$ 18,200
St. Helen's Glass
96
$
6,720
$
10,080
$
16,800
Problem 5-29:
REVISED DIRECT AND INDIRECT COSTS
Billed Direct Hours
Direct Professional Labor ($70/hr)
Other Direct Costs
Revised Indirect Rate ($7,000/200 hrs = $35/hr)
TOTAL BILLED COST (REVISED)
Widnes Coal
104
$
7,280
$
3,150
$
3,640
$ 14,070
St. Helen's Glass
96
$
6,720
$
10,850
$
3,360
$
20,930
Widnes Coal
104
$
$
3,150
$ (7,280)
$ (4,130)
DECREASE
St. Helen's Glass
96
$
$
10,850
$
(6,720)
$
4,130
INCREASE
COMPARISON BETWEEN ORIGINAL & REVISED
Billed Direct Hours
Direct Professional Labor ($70/hr)
Other Direct Costs
Revised Indirect Rate ($7,000/200 hrs = $35/hr)
DIFFERENCES
Required:
1. What is the revised indirect-cost allocation rate per
professional labor-hour for Wigan Associates when total $7000/200 = $35/hr
indirect costs are $7,000?
2. Compute the costs of the Widnes and St. Helen’s jobs
if Wigan Associates had used its refined costing system
$
with multiple direct-cost categories and one indirect-cost
pool.
14,070 $
20,930
After the reallocation of the direct costs, the
3. Compare the costs of Widnes and St. Helen’s jobs in direct costs for Widnes increased by $3,150,
requirement 2 with those in requirement 2 of Problem 5- but their indirect costs were reduced by
28. Comment on the results.
$7,280 resulting in an overall cost reduction
of $4,130
After the reallocation of the direct costs, the
direct costs for St. Helen's increased by
$10,850 and their indirect costs were reduced
by $6,720 resulting in an overall cost increase
of $4,130
RE:
Question Janet Knowlden
5.29
8/31/2011 1:57:52 PM
Michael, you seem to have a better handle on it then I do. Even
as I try to work through the problems with the textbook, I am
still very confused. You are not alone in this by any means.
Actually, your statement above is very helpful, thanks.
RE:
Question Instructor Louviere
5.29
9/2/2011 3:46:22 AM
Class:
Do you think the time that was spent by the employee
to reclassify these costs was worth it?
RE:
Question Ellen LaChance
5.29
9/3/2011 10:05:04
AM
Yes, I absolutely think the time that was spent by the
employee to reclassify these costs was worth it. To me
the change in costs associated with each individual
account was drastic. I think the time invested
researching and reclassifying the indirect costs will
change the way they cost in the future. It may also have
kept them from losing a valuable client and give them
the ability to plan future costs.
RE:
Question Tara Sparks
5.29
9/3/2011 5:43:49
PM
Any time that major discrepancies are found in
costing, the time spent to find them is worth
more than is paid. Accuracy in costing is
paramount to achieving success as a
company. If your costing is off, you are either
losing money, or you are losing opportunities.
Both of those situations are losses, and cannot
be sustained in the long-term.
RE:
Question Jason Hall
5.29
9/4/2011 9:11:15
PM
I agree, finding any problems in a systems is
paramount to the viability of that systems,
and as a result the business, since a mistake in
a process will continue to cause problems
every time the process is used.
RE:
Question Deborah Kieffer
5.29
9/4/2011 11:49:57
PM
Very much so! The analysis and
reclassification may go a long way in keeping
his/her company viable and competitive, at
least cost/price-wise. Also, since this
company is just starting out, it's good that they
caught this early and were able to refine their
cost/pricing model.
5.29
8/30/2011 12:00:57 PM
Deyanira Barbosa
1) Difference of $11, 410 for Widnes Coal
Direct $7280
Indirect $10920
Total $18200
Direct 3150
Indirect $3640
Total 6790
18200-6790 = 11410
Difference of $2590 for St. Helen
Direct 6720
Indirect 10080
Total $16800
Direct 10850
Indirect 3360
Total 14210
16800 – 14210 = 2590
* i was able to calculate #3 thanks to Avlin homework answer, I took his answers
and compared them to the answers I got on #2.
RE:
5.29
Here
9/2/2011 5:04:45 AM
Instructor Louviere
is
the
publisher's
solution:
5-29 (20–25 min.) Job costing with multiple direct-cost categories, single indirect-cost pool,
law firm (continuation of 5-28).
1.
Indirect costs = $7,000
Total professional labor-hours = 200 hours (104 hours on Widnes
+ 96 hours on St. Helen’s Glass)
Coal
Indirect cost allocated per professional labor-hour (revised) = $7,000 ÷ 200 = $35 per hour
Widnes
St. Helen’s
Coal
Glass
Total
$ 7,280
$ 6,720
$14,000
1,600
3,400
5,000
Computer time
500
1,300
1,800
Travel and allowances
600
4,400
5,000
Telephones/faxes
200
1,000
1,200
Photocopying
250
750
1,000
10,430
17,570
28,000
3,640
3,360
7,000
2.
Direct costs:
Direct professional labor,
$70 × 104; $70 × 96
Research support labor
Total direct costs
Indirect costs allocated,
$35 × 104; $35 × 96
Total costs to be billed
$14,070
$20,930
3.
Widnes
St. Helen’s
Coal
Glass
Total
Problem 5-28
$18,200
$16,800
$35,000
Problem 5-29
14,070
20,930
35,000
$35,000
The Problem 5-29 approach directly traces $14,000 of general support costs to the individual
jobs. In Problem 5-28, these costs are allocated on the basis of direct professional labor-hours.
The averaging assumption implicit in the Problem 5-28 approach appears incorrect—for
example, the St. Helen’s Glass job has travel costs over seven times higher than the Widnes Coal
case despite having lower direct professional labor-hours.
Question
5.28
Patricia Neal-Williams
8/30/2011 3:14:31 PM
1. Why is it important for Wigan Associates to understand the costs associated with
individual jobs?
Wigan Associates pricing decisions are heavily influenced by reported cost numbers.
Suppose Wigan's was bidding against another firm for a client with a job similiar to that
of Widnes Coal. If the costing system overstates the costs of these jobs, Wigan may bid
too high and fail to land the client. If the costing system understates the costs of these
jobs, Wigan may bid low, land the client, and then lose money handling the case.
2. Compute tthe costs of Widnes Coal and St. Helen's Glass
Widnes Coal
St. Helen's Glass
Direct Labor: $70hr * 104hr= 7,280
Direct Labor: $70hr*96hr=
6,720
Indirect Cost: $105hr*104hr= 10,920
Indirect Costs: $105*96hr=
10,080
Total Costs: 18,200
Total Costs: 16,800
Total Direct Labor Costs: 14,000
Total Indirect Costs: 21,000
(35,000)
RE:
Question
5.28
Instructor Louviere
8/31/2011 2:12:26 AM
What if he bidded too low? Would you advise him to try to resubmit a bid or
just take the loss and move on?
RE:
Question Michael Hayward
8/31/2011 8:00:28 PM
5.28
Depending on how big the loss may be it could be wise to rebid if the
loss is small, if it's big then he should cut the ties and take the loss and
move on. Determining to stay or go also depends on the company
financial situation as well and how big of an hit it may cause.
RE:
Question Jason Hall
5.28
9/3/2011 9:28:13 PM
Sometimes taking a loss is needed to keep a business going. If a business
had to shutdown every time they found something not showing profit they
could lose future business which would give the company problems for
future bids.
RE:
Question Richard Burger
5.28
8/31/2011 9:57:51 PM
Well it depends, the scope of the project should have given a good basis
to submit the bid, if the scope was not fully developed then I'd say resubmit. If on the other hand it was just an error and the loss wont be to
big then eat it and save your reputation, if it's to big to eat pull the bid
and move on.
Rich
RE:
Question Patricia Neal-Williams
5.28
8/31/2011 2:20:56 PM
I would have to say, take his loss and move on. The costing system
understated the costs, and in the long run it will probably cost the firm
more to represent them than to just cut their losses.
RE:
Question Ellen LaChance
5.28
8/31/2011 2:06:33 PM
Before reconsidering whether or not to take a loss or resubmit a bid I would need to
have more information like how much of a loss would I incur? Would the loss
potentially give me access to new contracts down the road? Do I know how low the
bid was - if it was extremely low and I determined that I made a HUGE mistake with
my calculations I may find it necessary to resubmit. It all depends on what's at stake
for future bids.
RE:
Question Deborah Kieffer
5.28
9/1/2011 12:38:54 AM
I agree with Ellen ... you would need more information before
making a decision to re-bid.
Since it seems this firm does not have a very large client base,
it's important to carefully nurture the relationships that got
you started. Re-bidding a contract for a client you have been
over-costing might seem like the logical choice. At the same
time, you are losing money on your other client that you undercosted. Seems to me you would want to get more clients on
board as soon as possible to offset your costing errors with your
original clients. Chalk it up to growing pains and experience
gained (lessons learned.).
RE:
Question Instructor Louviere
5.28
9/2/2011 3:54:08 AM
Hello Michael, Richard, Patricia, Ellen, Deborah, and
Class:
Excellent points. Would you recommend revamping
the cost system used by the firm? If so, how would
you change it?
RE:
Question Michael Hayward
5.28
9/3/2011 12:01:53
PM
I think it should be revamp to fit with modern
day cost system. You can start with finding the
indiscretions with the old system and how it
may be improved and transition into the new
system.
RE:
Question David Bair
5.28
9/1/2011 5:57:49 PM
If a project is bid two low, I always would recommend that a revised bid
be submitted. Your revised bid may still be the lowest on the table,
however, it's not in the copanies best interest to manufacturer the
product for a loss - unless, the situation was approached with this in
mind; it's a repeat, or good customer and there can be some profit
recovered in a future order. As co-founder and co-owner in a company
named Mountek, Inc, I deal with our fab houes in China, "Jet Gain".
They ordered the wrong resin for our product by mistake, in order to
work with them, we suggested we would use the resin but for a reduced
cost; that was unacceptable, what ended up happening was we recieved
a double shipment" or a full container for 1/2 the price or the correct
resin after the order was filled with the incorrect resin. Jet Gain, lost
money on the second order, but the end result is we're still a customer...
RE:
Question Daniel Arriagada
5.28
9/1/2011 8:12:52 PM
I learned the hard way and if you know now that the bid is too low than
you should resubmit the bid and explain in detail why you are rising the
bid. Otherwise do not take the loss unless you can afford it and it would
land you a bigger job, but you must be certain thet you will land the
bigger job.
RE:
Question Tara Sparks
5.28
8/31/2011 11:03:10 PM
If the bid was too low, part of the decision would have to include what
the contract stipulates for early termination. There are many factors
which would play into the decision of whether to accept the loss, or
whether to resubmit, and contractual obligations are going to be a
primary consideration. Another thing to consider would be if this is a
contract which has the potential to lead to more contracts in the future.
Sometimes it is worth it to take a loss on the first contract with a buyer,
if they are going to be needing the same types of services in the future.
There are times when a company will hire a known factor, even if the
price increases, because they are comfortable with the quality and style
of work done.
RE:
Question Instructor Louviere
5.28
9/2/2011 3:55:37 AM
Hi David, Daniel, Tara, and Class:
Excellent conversation. Anyone else?
Question
5.29
8/30/2011 5:37:39 PM
Thomas Carter
I tried to paste information from excel and word for question 5.29 and had no results so attached file
instead.
Ch 5 Inclass Problems.xlsx
RE:
Question
5.29
9/4/2011 12:27:22 PM
Kanchi Patel
Job costing with multiple direct-cost categories, single indirect-cost pool, law
firm.
1.
Indirect
costs
=
$7,000
Total professional labor-hours = 200 hours (104 hours on Widnes Coal + 96
hours
on
St.
Helen’s
Glass)
Indirect cost allocated per professional labor-hour (revised) = $7,000 ÷ 200 =
$35
per
hour
Widnes
Coal
Direct
Direct
$70 × 104; $70 × 96
St.
2.
Helen’s
Glass
professional
$ 7,280
$
6,720
Total
costs:
labor,
$14,000
Research support labor
Computer time
Travel and allowances
Telephones/faxes
Photocopying
Total direct costs
Indirect
$35 × 104; $35 × 96
Total costs to be billed
1,600
3,400
5,000
500
1,300
1,800
600
4,400
5,000
200
1,000
1,200
250
750
1,000
10,430
17,570
28,000
costs
allocated,
3,640
3,360
7,000
$14,070
$20,930
$35,000
3. Widnes
St. Helen’s
Coal
Glass
Total
Problem 5-28
$18,200
$16,800
$35,000
Problem 5-29
14,070
20,930
35,000
The Problem 5-29 approach directly traces $14,000 of general support costs to
the individual jobs. In Problem 5-28, these costs are allocated on the basis of
direct professional labor-hours. The averaging assumption implicit in the
Problem 5-28 approach appears incorrect—for example, the St. Helen’s Glass
job has travel costs over seven times higher than the Widnes Coal case despite
having lower direct professional labor-hours.
5.28
Michael Coleman
8/30/2011 9:53:59 PM
1. Why is it important for Wigan Associates to understand the costs associated with
individual jobs?
When Wigan Associates says that they will do a job for a specific amount they must stay at
that amount. The reason for this is that if they price it to high they may lose the job because
someone else may be able to do it for a cheaper price. If they price it to low they may get the
job but lose money on the job because it actually cost more for them to do the job. Wigan
must be as accurate as posible. They may be alittle high or a little low either way if their
price is in the general bal park as everyone else they have a good chance of getting the job.
Pricing them selves to high the company can go out of business for not having any business.
Pricing themselves to low and they lose money and the same result they go out of business
because they make no profit to pay bills.
2. Compute the costs of the Widnes Coal and St. Helen’s Glass jobs using Wigan’s simple
costing system.
Widnes
Coal
Helen’s Glass
Professional costs (Direct Costs) is 70per hour * 104 hours =
St.
$7280
Professional costs (Direct Costs) is 70per hour * 96
hours = 6720
Indirect costs 105 per hour * 104 hours =
10920
Indirect costs 105 per hour * 96
hours = 10080
Direct cost + indirect cost = Total
Cost
Direct cost + indirect cost =
Total Cost
7280 + 10920 =
18200
6720 +
10080 = 16800
Total Direct Cost= 7280 + 6720 = 14000
Total Indirect Cost= 10920 + 10080 = 21000
Complete Total Cost= 35000
RE: 5-33
Choosing
cost
drivers,
8/31/2011 9:31:13 AM
Janet Knowlden
Modified:8/31/2011 1:32 PM
5-33 Choosing cost drivers, activity-based costing, activity-based
management. Annie Warbucks runs a dance studio with childcare and
adult fitness classes. Annie’s budget for the upcoming year is as
follows:
(Cost Accounting, 13th Edition. Pearson Learning Solutions p. 173).
<vbk:9781256083375#outline(9.16.3)>
Annie Warbuck's Dance Studio
Budgeted costs and Activities
For the Year Ended June 30, 2010
Dance teacher Salaries - school year
$ 48,600
Dance teacher salaries - summer program
$ 13,500
Child care teacher salaries
$ 24,300
Fitness instructor salaries
$ 39,060
Total salaries
Direct Cost:
Supplie
Indirect cost:
Dance
Childca
$ 125,460
Fitness
Supplies (art, dance accessories, fitness)
$ 21,984
Rent, maintenance and utilities
$ 97,511
Cost driver:
teachin
Administration salaries
$ 50,075
Cost per unit:
Dance
Marketing expenses
$ 21,000
Childca
Total
$ 316,030
Fitness
Other Information:
Dance classes
3per hour
Hours of operation (Dance, Childcare and Fitness) - 2 p.m. to 8 p.m. M-School year (36 weeks)
Hours of operation (Dance, Childcare and Fitness) - 9 a.m. to noon; 1 p.m. to 4 p.m. M-F summer program (10 weeks)
Other Information:
Dance
Childcare
Fitness
Total
Square footage
6,000
3,150
2,500
11,650
Number of participants
1,485
450
270
2,205
Teachers per hour
Number of advertisements
3
3
1
7
26
24
20
70
I chose teaching hours as the cost driver because of the Teachers per hour and
teachers/instructors are the cost pool.
This information will help Annie with salary adjustment and fees if they are done correctly.
RE: 5-33
Choosing
cost
drivers,
Patricia Neal-Williams
8/31/2011 2:15:59 PM
Janet, this was a great example. I was a little bit confused as to the cost driver,
and you helped me understand the problem much clearer
RE: 5-33
Choosing
Lisa Marie Johnson
cost
drivers,
8/31/2011 8:32:26 PM
With the ABC approach, companies identify the major activities that case overhead
costs to be incurred. Some of these activities are related to production volume, but
others are not. The costs of the resources consumed performing these activities are
grouped into cost pools. Finally, the costs are assigned to products using a measure of
activity referred to as a cost driver (an allocation base in an ABC system).
A great example of cost driver:
Major activity: packing customer orders
Cost driver: number of boxes shipped
Jiambalvo, J. (2010). Managerial Accounting, 4E. John Wiley & Sons, Inc., Hoboken,
NJ., pg. 210
RE: 5-33
Choosing
cost
drivers,
9/1/2011 12:00:14 AM
Samantha Lack
Janet, great thoughts. I am curious if you are correct, my guess would have been the same.
I have also been reviewing the first question from the homework ES.
- Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies:
macaroon, sugar, and buttercream. The batch size for the cookies is limited to 1,000 cookies
based on the size of the ovens and cookie molds owned by the company. Based on budgetary
projections, the information listed below is available:
Buttercream
Macaroon
Sugar
Projected sales in units
500,000
800,000
600,000
PER UNIT data:
Selling price
$0.80
Direct materials
$0.20
Direct labor
$0.75
$0.15
$0.04
$0.02
$0.60
$0.14
$0.02
Hours per 1,000-unit batch:
Direct labor hours
2
1
1
Oven hours
1
1
1
Packaging hours
0.5
0.5
0.5
Total overhead costs and activity levels for the year are estimated as follows:
Activity
Overhead costs
Direct labor
$210,000
Oven
$150,000
Activity levels
2,400 hours
1,900 hours
Packaging
$360,000
950 hours
Questions:
1. Determine the activity-cost-driver rate for packaging costs (three points). I am still
pretty lost on this because I am not sure if the "cost driver" is the same as a "cost
driver rate". I have reviewed the chapter for this week and I just can't seem to find
anything concrete. I believe the cost driver would be, oh I don't know maybe batch
level activity. Since the batches are limited to 1000.
RE: 5-33
Choosing
Thomas Carter
cost
drivers,
9/2/2011 7:34:09 AM
In this weeks home work # 1) Determine the activity-cost driver rate for packaging
costs is:
Total Packaging Cost = $360,000
Total Packaging Hours = 950
Cost driver rate = Total packaging cost / Total packaging hours; $360,000 / 950 =
$378.95
RE: 5-33
Choosing
Janet Knowlden
cost
drivers,
9/1/2011 10:10:25 AM
Modified:9/1/2011 10:11 AM
Samantha, what really confuses me about this problem is that I think I
need more data. I am still working it out though. I sat down for the first
couple of days and tried to figure it out by hand to the point that I woke
up dreaming about it one morning. I put the examples from the textbook
in Excel and though that helped with some things, the book makes
assumptions I can't follow. And reverse engineering the numbers isn't
working either. Some of the terminology gets mixed up or used
somewhat differently from what I can tell, or maybe it's just me, but I'm
sure cost driver and cost driver rate are different.
For the first question you have to figure out the activity-cost-driver rate
which I determined to be the same as the Overhead Allocation Rate
based on the formula and terminology from other accounting sources.
(estimated overhead / estimated activity level)
As far as 5-33, I followed the book and did what I could, though I am
sure I am missing something. I tried working it out long hand, then with
Excel.
RE: 5-33
Choosing
cost
drivers,
Craig Bemis
8/31/2011 5:39:53 PM
#1 on this one asks us to determine which costs are direct costs and which costs
are indirect costs.
Direct costs: Dance teachers' salaries (summer and school year); Child care
teachers' salaries; Fitness instructors' salaries; Supplies
Indirect costs: Rent, maintenance, and utilities; Administration salaries;
Marketing expenses
I am going to have to read some more about cost drivers. I assumed that a cost
driver for this question would be the number of children attending because this
would determine the amount of supplies used and the number of teachers that
need to be employed.
RE: 5-33
Choosing
Instructor Louviere
cost
drivers,
9/2/2011 4:15:11 AM
Class:
How often would you recommend that the budget be reviewed?
RE: 5-33
Choosing
Richard Burger
cost
drivers,
9/3/2011 10:24:19 PM
It really depends on your business and how the marketplace is
doing. If the business is in a rapidly evolving market then once
a month, after the months financial are in, if it is a less volatile
area then once a year may be sufficient. In all circumstances the
budget should not be set and ignored or you may find out to late
there are problems.
Rich
RE: 5-33
Choosing
Elena Brechler
cost
drivers,
9/4/2011 7:12:44 PM
I think it depends on the business. If it is a daycare, then every
3 months or so to determine how many more teachers need
hired to keep the ratio legal. If it is a service company, I would
say every six months unless a large influx of clients start
pouring in.
RE: 5-33
Choosing
Patricia Neal-Williams
cost
drivers,
9/2/2011 5:22:48 AM
Reviewing the budget is a daily task, just like you keeping
account of your household budget. You have to always plan for
the what if's and paying attention to the budget will not only
help you avoid problems, but it will help you in the long run in
deciding which companies to use on future projects.
RE: 5-33
Choosing
Travis Carroll
cost
drivers,
9/3/2011 7:36:15 PM
Patricia, I agree with you 100% here. I believe that it is
very important to keep track of the budget as many
companies do this with data software that is capable of
tracking larger budget rather it be on daily, weekly,
monthly, or even annual budget.
RE: 5-33
Choosing
Instructor Louviere
cost
drivers,
9/2/2011 5:13:32 AM
5-33
(30 min.) Choosing cost drivers, activity-based costing, activity-based management.
1.
Direct costs = Dance teacher salaries, Child care teacher salaries, Fitness instructor salaries
Indirect costs = Supplies; Rent, maintenance, and utilities; Administration salaries; Marketing expenses
1.
Indirect Cost
Supplies
Rent, maintenance, and utilities
Administration salaries
Marketing expenses
Cost Driver
Number of participants
Square footage
Number of participants
Number of advertisements
Budgeted Cost Driver Rate
$21,984 ÷ 2,205 = $9.97 per participant
$97,511÷ 11,650 = $8.37 per square foot
$50,075 ÷ 2,205 = $22.71 per participant
$21,000 ÷ 70 = $300 per advertisement
Supplies – Larger programs with more participants will require more supplies. For example, as the number of
dance participants increases, so will the cost of dance accessories.
Rent, maintenance and utilities are all building-related costs. Square-footage is the only space-oriented cost
driver available.
Administration salaries – Larger programs require more time to enroll students and collect fees. Consequently,
the number of participants appears to be a reasonable cost driver.
Marketing expenses – Marketing expenses include the cost of advertising the studio. As the number of ads
increases so do total marketing costs.
3.
Dance
$ 62,100
Childcare
$ 24,300
Fitness
$ 39,060
Total
$ 125,460
($9.97×1,485; 450; 270)
Rent, maintenance, and utilities
14,805
4,487
2,692
21,984
($8.37×6,000; 3,150; 2,500)
Administration salaries
50,220
26,366
20,925
97,511
($22.71×1,485; 450; 270)
33,724
10,219
6,132
50,075
Salaries
Allocated costs:
Supplies
Marketing expenses
($300×26; 24; 20)
Budgeted total costs
÷ Number of participants
Budgeted cost per participant
7,800
$ 168,649
÷ 1,485
$ 113.57
7,200
$ 72,572
÷450
$ 161.27
6,000
$ 74,809
÷270
$ 277.07
21,000
$ 316,030
4. By dividing the full cost of each service line by the number of participants, Annie can see that fitness classes
should be charged a higher price. Most of the higher unit cost is attributable to the cost of Aerobic instructors.
Besides cost data, Annie should also consider a variety of other factors before setting the price for each service.
Examples of other issues she should consider include the actions of competitors in her market, and the quality of
her facilities and instructors.
RE: 5-33
Choosing
Craig Bemis
cost
drivers,
9/2/2011 5:57:04 PM
Professor Louviere,
I am confused about why supplies would be an indirect
cost. In a factory, for example, the materials to make
the product would be a direct cost. How are the
supplies in the case different? The supplies directly
contribute to the classes.
RE: 5-33
Choosing
Janet Knowlden
cost
drivers,
9/2/2011 11:22:34
AM
Thank you. This is helping. I see that I did not consider
the direct or indirect cost in my computations and
missed a few. This is opening my eyes to take note of
the cost drivers and to include them as well.
RE: 5-33
Choosing
cost
Samantha Lack
9/2/2011 9:32:37 PM
drivers,
Thank you for this example. I have had to ask for some tutoring help but I think I
have the answer to #1 on the ES Homework, I would appreciate feedback to
know if I am correct.
Activity
Direct Labor
Oven
Packaging
OH Costs
Activity
levels in
Hours
$
210,000
$
150,000
$
360,000
Activity rate/hr
$
87.50
$
1900
78.95
$
950
378.95
2400
In this spreadsheet I took the activity levels O.H costs and divided them by the
total activity levels in hours and this totalled that actual activity rate/hr. I am
assuming the cost driver rate is based on hours for each activity level.
Chapter 5:
Kanchi Patel
5.28
8/31/2011 1:41:16 PM
Job costing with single direct-cost category, single indirect-cost pool, law firm.
1. Pricing decisions at Wigan Associates are heavily influenced by reported cost numbers. Suppose Wigan
is bidding against another firm for a client with a job similar to that of Widnes Coal. If the costing system
overstates the costs of these jobs, Wigan may bid too high and fail to land the client. If the costing system
understates the costs of these jobs, Wigan may bid low, land the client, and then lose money in handling the
case.
2.
Widnes
St. Helen’s
Coal
Glass
Total
$ 7,280
$ 6,720
$14,000
10,920
10,080
21,000
$18,200
$16,800
$35,000
Direct professional labor,
$70 × 104; $70 × 96
Indirect costs allocated,
$105 × 104; $105 × 96
Total costs to be billed
WorkOut
Room
Freddy Rodriguez
8/31/2011 4:39:09 PM
I have the soulution for 5.28.2 as a workbook attached...
Solution 5.28.2.xlsx
RE:
WorkOut
Room
Freddy Rodriguez
9/1/2011 6:01:42 PM
It would benefit to use Widnes's further refined system, with multiple direct-cost
categories and multiple indirect-cost pools to reduce cost!
Exercise 5.30.1.xlsx
RE:
WorkOut Freddy Rodriguez
Room
9/3/2011 4:28:59 PM
Pumpkin Bags
Budget for costs and Activities For the year ended February 28,
2009
Direct materials—purses $ 362,000
Direct materials—backpacks 427,000
Direct manufacturing labor—purses 98,000
Direct manufacturing labor—backpacks 115,597
Setup
64,960
Shipping 72,065
Design 167,000
Plant utilities and administration 225,000
Total $1,531,622
Other information:
Backpacks
Purses
Total
Number of bags
6,000
3,150
9,150
Hours of production
1,560
2,600
4,160
70
203
Number of batches
Number of designs
1)
133
3
2
Identify the cost hierarchy level for each category.
a) Direct Materials-purses (Output cost)
b) Direct Materials-backpacks (Output costs)
c) Direct Manufacturing labor – purses (Output costs)
d) Direct Manufacturing labor –backpacks (Output costs)
e) Set-up (batch costs)
f)
Shipping (batch costs)
g) Design (product costs)
h) Plant Utilities and administration (facility sustaining costs)
2)
Identify the most appropriate cost dicer for each category
a) Direct Materials-purses/# of bags
b) Direct Materials-backpacks/# of bags
c) Direct Manufacturing labor – purses/# of bags
d) Direct Manufacturing labor –backpacks/# of bags
e) Set-up/# of batches
f)
Shipping/# of batches
g) Design/# of designs
5
h) Plant Utilities and administration/# of production
5-34
(Questions 1
& 2)
Dawn Baker
8/31/2011 8:06:54 PM
1. Compute the 2008 gross-margin percentage for each of Pharmacare’s three market segments.
General Supermarket Chains = (3,708,000 – 3,600,000) / 3,708,000 = .029
Drugstore Chains = (3,150,000 – 3,000,000) / 3,150,000 = .048
Mom and Pop = (1,980,000 – 1,800,000) / 1,980,000 = .091
2. Compute the cost driver rates for each of the five activity areas.
I am confused about this question. I'm not sure what is involved with computing this, but the following
table was provided in the question Order processing
Number of customer purchase orders
Line-item processing
Number of line items ordered by customers
Delivering to stores
Number of store deliveries
Cartons shipped to store
Number of cartons shipped
Stocking of customer store shelves Hours of shelf-stocking
Can anybody help me to figure this problem?
RE: 5-34
(Questions
1 & 2)
Tyrone Labad
8/31/2011 9:53:30 PM
Ms Dawn, just a friendly suggestion, I would express the gross margin as a percentage for each
department. Here's what I came up with for the remainder of the question. I attached my solution
in this spreadsheet.
5-34.xlsx
RE: 5-34
(Questions
1 & 2)
Janet Knowlden
9/1/2011 10:21:31 AM
From what I read and understand, more then one activity can be lumped into a
cost pool, so I guess the next step would be figuring out what goes with what. I
would have to sit down and put pen to paper on this one. Wow, this is a tough
one.
RE: 5-34
(Questions Janet Knowlden
1 & 2)
9/1/2011 11:16:08 AM
Ok, here's my two cents on the first two questions.
I calculated the gross margin percentage for each one the a total of them all.
Pharmacare
General
Activity-Based Cost Data
Supermarket
drugstore
Mom-and-Pop
chains
Chains
Single Stores
Pharmacare
Revenues
$ 3,708,000
$ 3,150,000
$
1,980,000
$ 8,838,000
Activity
Cost of Goods Sold
$ 3,600,000
$ 3,000,000
$
1,800,000
$ 8,400,000
Orders Processed (number)
Gross Margin
$
$
$
180,000
$
438,000
Line-Items Ordered (number)
301,080
Store Deliveries made (number)
136,920
Cartons Shipped to Stores (number)
108,000
150,000
Pharmacare
Other Operating Costs
Operating Income
Gross Margin Percentage
$
2.91%
4.76%
9.09%
4.96%
Shelf Stocking (hours)
Activity Area
Order Processing
Line-item processing
Delivering to stores
Cartons shipped to store
Stocking of customer store shelves
I figured out the total activity level for all fi
RE: 5-34
(Questions Instructor Louviere
1 & 2)
9/2/2011 4:17:25 AM
Why is the fact that the company is operating at capacity
important?
RE: 5-34
(Questions Instructor Louviere
1 & 2)
5-34
(30–40 min.)
Activity-based costing, merchandising.
1.
General
Drugstore
Mom-and-Pop
Supermarket
Chains
Single
Chains
Revenues
Cost of goods sold
Gross margin
Total
Stores
$3,708,000
$3,150,000
$1,980,000
$8,838,000
3,600,000
3,000,000
1,800,000
8,400,000
$ 108,000
$ 150,000
$ 180,000
$ 438,000
Other operating costs
301,080
Operating income
Gross margin %
9/2/2011 5:15:33
AM
$ 136,920
2.91%
4.76%
9.09%
The gross margin of Pharmacare, Inc., was 4.96% ($438,000 ÷ $8,838,000). The operating income
margin of Pharmacare, Inc., was 1.55% ($136,920 ÷ $8,838,000).
2.
The per-unit cost driver rates are:
1. Customer purchase order processing,
$80,000 ÷ 2,000 (140 + 360 + 1,500) orders
= $40 per order
2. Line item ordering,
$63,840 ÷ 21,280 (1,960 + 4,320 + 15,000) line items
= $ 3 per line item
3. Store delivery,
$71,000 ÷ 1,480 (120 + 360 + 1,000) deliveries
= $47.973 per delivery
4. Cartons shipped,
$76,000 ÷ 76,000 (36,000 + 24,000 + 16,000) cartons
= $ 1 per carton
5. Shelf-stocking,
$10,240 ÷ 640 (360 + 180 + 100) hours
= $16 per hour
1.
The activity-based costing of each distribution market for August 2008 is:
General
Supermarket
Mom-and-Pop
Drugstore
Chains
Chains
Single Stores
Total
1. Customer purchase order processing
($40 ´ 140; 360; 1,500)
$ 5,600
$14,400
$ 60,000
$ 80,000
5,880
12,960
45,000
63 ,840
5,757
17,270
47,973
71,000
36,000
24,000
16,000
76,000
5,760
$58,997
2,880
$71,510
1,600
$170,573
10,240
$301,080
2. Line item ordering
($3 ´ 1,960; 4,320; 15,000)
3. Store delivery,
($47.973 ´ 120; 360; 1,000)
4. Cartons shipped
($1 ´ 36,000; 24,000; 16,000)
5. Shelfstocking
($16 ´ 360; 180; 100)
The
revised operating income statement is:
General
Revenues
Cost of goods sold
Supermarket
Drugstore
Single
Chains
Chains
Stores
$3,708,000
$3,150,000
$1,980,000
$8,838,000
3,600,000
3,000,000
1,800,000
8,400,000
108,000
150,000
180,000
438,000
58,997
71,510
170,573
301,080
9,427
$ 136,920
Gross margin
Operating costs
Operating income
Mom-and-Pop
$
49,003
$
Operating income margin 1.32%
4.
The ranking of the three markets are:
78,490
2.49%
$
0.48%
Total
1.55%
Using Gross Margin
Using Operating Income
1. Mom-and-Pop Single Stores
9.09%
1. Drugstore Chains
2.49%
2. Drugstore Chains
4.76%
2. General Supermarket Chains
1.32%
3. General Supermarket Chains
2.91%
3. Mom-and-Pop Single Stores
0.48%
The activity-based analysis of costs highlights how the Mom-and-Pop Single Stores use a larger amount of
Pharmacare’s resources per revenue dollar than do the other two markets. The ratio of the operating costs to
revenues across the three markets is:
General Supermarket Chains
1.59%
($58,997 ÷ $3,708,000)
Drugstore Chains
2.27%
($71,510 ÷ $3,150,000)
Mom-and-Pop Single Stores
8.61%
($170,573 ÷ $1,980,000)
This is a classic illustration of the maxim that “all revenue dollars are not created equal.” The analysis indicates
that the Mom-and-Pop Single Stores are the least profitable market. Pharmacare should work to increase profits
in this market through: (1) a possible surcharge, (2) decreasing the number of orders, (3) offering discounts for
quantity purchases, etc.
Other issues for Pharmacare to consider include
a. Choosing the appropriate cost drivers for each area. The problem gives a cost driver for each chosen
activity area. However, it is likely that over time further refinements in cost drivers would occur. For example,
not all store deliveries are equally easy to make, depending on parking availability, accessibility of the
storage/shelf space to the delivery point, etc. Similarly, not all cartons are equally easy to deliver––their weight,
size, or likely breakage component are factors that can vary across carton types.
b. Developing a reliable data base on the chosen cost drivers. For some items, such as the number of
orders and the number of line items, this information likely would be available in machine readable form at a
high level of accuracy. Unless the delivery personnel have hand-held computers that they use in a systematic
way, estimates of shelf-stocking time are likely to be unreliable. Advances in information technology likely will
reduce problems in this area over time.
c. Deciding how to handle costs that may be common across several activities. For example, (3) store
delivery and (4) cartons shipped to stores have the common cost of the same trip. Some organizations may treat
(3) as the primary activity and attribute only incremental costs to (4). Similarly, (1) order processing and (2) line
item ordering may have common costs.
d. Behavioral factors are likely to be a challenge to Flair. He must now tell those
salespeople who specialize in Mom-and-Pop accounts that they have been less profitable than
previously thought.
RE: 5-34
(Questions Dawn Baker
1 & 2)
9/3/2011 6:49:36
PM
Thank you, this helps so much! So for #2, the
per unit cost driver rates are figured by taking
the Total Cost of Activity / Total Orders
processed for all market segments.
RE: 5-34
(Questions Janet Knowlden
1 & 2)
9/2/2011 11:45:26
AM
I think it will help them decide if they should expand
the facility. Operating at capacity means you can't
bring in more students or staff and your profit will
remain the same, if any.
RE: 5-34
(Questions Elena Brechler
1 & 2)
9/3/2011 9:30:56 PM
It is important because the company is working at its
maximum capacity with maximum output. In other
words all resources are being used.
RE: 5.34 #1
Compute the
2008 grossmargin
percentage for
each of
Pharmacare’s
three market
segments.
Deyanira Barbosa
8/31/2011 11:04:01 PM
Modified:8/31/2011 11:04 PM
Gross Margin Percent: (revenue-cost of goods sold) / revenue
1) General Super Market Chains
$3,708,000 - $3,600,000 / $3,708,000 = .29%
Drug Store Chains
$3,150,000 – $3,000,000/ $3,150,000 = .48%
Mom and Pop Single Store Pharmacies
$1,980,000 – $1,800,000/ $1,980,000 = .91%
RE: 5.34 #1
Compute the
2008 grossmargin
percentage for Kanchi Patel
each of
Pharmacare’s
three market
segments.
9/3/2011 11:31:34 PM
2)
The
per-unit
cost
driver
rates
are:
1.
Customer
purchase
order
processing,
$80,000
÷
2,000
(140
+
360
+
1,500)
orders
=
$40
per
order
2.
Line
item
ordering,
$63,840
÷
21,280
(1,960
+
4,320
+
15,000)
line
items
=
$
3
per
line
item
3.
Store
delivery,
$71,000
÷
1,420
(120
+
300
+
1,000)
deliveries
=
$50
per
delivery
4.
Cartons
shipped,
$76,000
÷
76,000
(36,000
+
24,000
+
16,000)
cartons
=
$
1
per
carton
5.
Shelf-stocking,
$10,240
÷
640
(360
+
180
+
100)
hours
= $16 per hour
RE:
Question
5.32
Tyrone Labad
9/1/2011 9:42:58 PM
Modified:9/1/2011 9:43 PM
5.32 Calculations for part 1 (see attached file for report)
1. overhead costs = $20,610 + $247,320 + $196,180 + $134,350
= $598,460
Budgeted overhead rate = $598,460/368,040
= $1.626 per direct technician labor
*Allocation Overhead cost X rays = 61,440 x 1.626
= $99,901
*Allocation Overhead cost Ultras = 105,600 x 1.626
=$171,706
*Allocation Overhead cost CT = 96,000 x 1.626
= $156,096
* Allocation Overhead cost MRI= 105,000 x 1.626
= 170,730
Budget cost per
service
X rays
215,661/3840
56.16
Ultras
561,806/4400
127.68
CT
715,096/3000
238.37
MRI
1,204,480/2500
481.79
5-32.xlsx
5.30
Instructor Louviere
9/2/2011 5:07:17 AM
Here is the publisher's solution:
5-30
(30 min.)
Job costing with multiple direct-cost categories,
multiple indirect-cost pools, law firm (continuation of 5-28 and 5-29).
Widnes
St. Helen’s
Coal
Glass
Total
$ 2,400
$ 5,600
$ 8,000
$50 × 80; $50 × 40
4,000
2,000
6,000
Research support labor
1,600
3,400
5,000
Computer time
500
1,300
1,800
Travel and allowances
600
4,400
5,000
Telephones/faxes
200
1,000
1,200
Photocopying
250
750
1,000
9,550
18,450
28,000
1,380
3,220
4,600
1,600
800
2,400
2,980
4,020
7,000
$12,530
$22,470
$35,000
Widnes
St. Helen’s
Coal
Glass
1.
Direct costs:
Partner professional labor,
$100 × 24; $100 × 56
Associate professional labor,
Total direct costs
Indirect costs allocated:
Indirect costs for partners,
$57.50 × 24; $57.50 × 56
Indirect costs for associates,
$20 × 80; $20 × 40
Total indirect costs
Total costs to be billed
Comparison
Single direct cost/
Total
Single indirect cost pool
$18,200
$16,800
$35,000
$14,070
$20,930
$35,000
Multiple indirect cost pools $12,530
$22,470
$35,000
Multiple direct costs/
Single indirect cost pool
Multiple direct costs/
The higher the percentage of costs directly traced to each case, and the greater the number of homogeneous
indirect cost pools linked to the cost drivers of indirect costs, the more accurate the product cost of each
individual case.
The Widnes and St. Helen’s cases differ in how they use “resource areas” of Wigan Associates:
Widnes
St.
Helen’s
Coal
Glass
Partner professional labor
30.0%
70.0%
Associate professional labor
66.7
33.3
Research support labor
32.0
68.0
Computer time
27.8
72.2
Travel and allowances
12.0
88.0
Telephones/faxes
16.7
83.3
Photocopying
25.0
75.0
The Widnes Coal case makes relatively low use of the higher-cost partners but relatively higher use of the
lower-cost associates than does St. Helen’s Glass. As a result, it also uses less of the higher indirect costs
required to support partners compared to associates. The Widnes Coal case also makes relatively lower use
of the support labor, computer time, travel, phones/faxes, and photocopying resource areas than does the St.
Helen’s Glass case.
2.
The specific areas where the multiple direct/multiple indirect (MD/MI) approach can provide better
information for decisions at Wigan Associates include:
Pricing and product (case) emphasis decisions. In a bidding situation using single direct/single indirect
(SD/SI) or multiple direct/single indirect (MD/SI) data, Wigan may win bids for legal cases on which it
will subsequently lose money. It may also not win bids on which it would make money with a lower-priced
bid.
From a strategic viewpoint, SD/SI or MD/SI exposes Wigan Associates to cherry-picking by
competitors. Other law firms may focus exclusively on Widnes Coal-type cases and take sizable amounts
of “profitable” business from Wigan Associates. MD/MI reduces the likelihood of Wigan Associates losing
cases on which it would have made money.
Client relationships. MD/MI provides a better “road map” for clients to understand how costs are
accumulated at Wigan Associates. Wigan can use this road map when meeting with clients to plan the work
to be done on a case before it commences. Clients can negotiate ways to get a lower-cost case from Wigan,
given the information in MD/MI—for example, (a) use a higher proportion of associate labor time and a
lower proportion of a partner time, and (b) use fax machines more and air travel less. If clients are informed
in advance how costs will be accumulated, there is less likelihood of disputes about bills submitted to them
after the work is done.
Cost control. The MD/MI approach better highlights the individual cost areas at Wigan Associates than
does the SD/SI or MD/SI approaches:
MD/MI
Number of direct cost categories
SD/SI
7
MD/SI
1
7
Number of indirect cost categories
2
1
1
Total
9
2
8
MD/MI is likely to promote better cost-control practices than SD/SI or MD/SI, as the nine cost categories
in MD/MI give Wigan a better handle on how to effectively manage different categories of both direct and
indirect costs.
RE:
5.30
Daniel Arriagada
9/2/2011 5:15:35 PM
St. Helen’s Glass
Widnes Coal
Multiple Direct-cost
Direct Costs
Partner @ $100 Hour
Associate @ $50 Hour
24
80
total Partner Labor
Total Associate Labor
2400
4000
categories
56
20
Other Direct Costs
Research support labor
Multiple Indirect-
Computer time
$
1,600
$
$
3,400
$
cost pools
Travel and allowances
Telephones/faxes
Photocopying
Total Direct Costs
500
1,300
$
600
$
200
$
250
$
9,550
$
4,400
$
1,000
$
750
$
18,450
$
57.5
$
20
$
24
$
57.5
$
20
$
56
indirect cost pool per
hour
Attributable to Partner
Attributable to
Associate
Partner Hours
Associates Hours
2.-
Hours
80
indirect cost attributable
to partner
$
1,380
$
3,220
indirect cost attributable
to associate
$
1,600
$
800
Total Indirect Costs
$
2,980
$
4,020
total costs
$
12,530
$
22,470
Grand Total
$
35,000
the multiple direct costs categories and the multiple indirect-cost pools are definitelly more accurate th
would have a better
approach to cost related clients in the future if they use the last system. The cost control of MD/MI is
5.32
Instructor Louviere
9/2/2011 5:12:16 AM
5-32
(30-40 min.) Department and activity-cost rates service sector.
1. Overhead costs = $20,610 + $247,320 + $196,180 + $134,350 = $598,460
=
Technician labor
Depreciation
Materials
Allocated overhead*
Total budgeted costs
Budgeted number of procedures
Budgeted cost per service
X-rays
$ 61,440
32,240
22,080
99,901
$215,661
÷3,840
$ 56.16
Ultrasound
$105,600
268,000
16,500
171,706
$561,806
÷4,400
$ 127.68
CT scan
$ 96,000
439,000
24,000
156,096
$715,096
÷3,000
$ 238.37
MRI
$ 105,000
897,500
31,250
170,730
$1,204,480
÷2,500
$ 481.79
Total
$ 368,040
1,636,740
93,830
598,433
$2,697,043
* Allocated overhead = Budgeted overhead rate × Technician labor costs
2. Budgeted Information
X-rays
Number of procedures
Ultrasound
CT scan
MRI
Total
13,740
3,840
4,400
3,000
2,500
×5
×5
×15
×35
Total cleaning minutes
19,200
22,000
45,000
87,500
173,700
Number of procedures
3,840
4,400
3,000
2,500
13,740
×5
×15
×20
×45
60,000
112,500
Cleaning minutes per procedure
Minutes for each procedure
Total procedure minutes
Budgeted Cost
19,200
66,000
Units of
Cost Driver
Cost Driver
(3)
13,740
257,700
Activity Rate
Activity
Administration
(1)
$ 20,610
(2)
Total number
(4) = (1) ÷ (3)
$1.50 per procedure
Maintenance
$247,320
of procedures
Total dollars
Sanitation
$196,180
of depreciation
Total cleaning
173,700
$1.12942 per cleaning minute
Utilities
$134,350
minutes
Total procedure
257,700
$0.52134 per procedure minute
$1,636,740 $0.151105 per dollar of depreciation
minutes
Technician labor
X-rays
$ 61,440
Ultrasound
$105,600
CT scan
$ 96,000
MRI
$ 105,000
Total
$ 368,040
Depreciation
Materials
Allocated activity costs:
Administration
($1.50×3,840; 4,400; 3,000; 2,500)
Maintenance
32,240
22,080
268,000
16,500
439,000
24,000
897,500
31,250
1,636,740
93,830
5,760
6,600
4,500
3,750
20,610
4,872
40,496
66,335
135,617
247,320
21,685
24,847
50,824
98,824
196,180
10,010
$158,087
÷3,840
$ 41.17
34,409
$496,452
÷4,400
$ 112.83
31,280
$711,939
÷3,000
$ 237.31
58,651
$1,330,592
÷2,500
$ 532.24
134,350
$2,697,070
($0.151105×$32,240; $268,000;
$439,000; $897,500)
Sanitation
($1.12942×19,200; 22,000; 45,000; 87,500)
Utilities
($0.52134×19,200; 66,000; 60,000; 112,500)
Total budgeted cost
Budgeted number of procedures
Budgeted cost per service
3. Using the disaggregated activity-based costing data, managers can see that the MRI actually costs
substantially more and x-rays and ultrasounds substantially less than the traditional system indicated. In
particular, the MRI activity generates a lot of maintenance activity and sanitation activity. Managers should
examine the use of these two activities to search for ways to reduce the activity consumption and ultimately its
cost.
5.35
Instructor Louviere
9/2/2011 5:17:38 AM
5-35 (30-40 min.) Choosing cost drivers, activity-based costing, activity-based management.
1.
Direct materials—purses
Direct materials—backpacks
Direct manufacturing labor—purses
Direct manufacturing labor—backpacks
Setup
Shipping
Design
Plant utilities and administration
Output unit-level costs
Output unit-level costs
Output unit-level costs
Output unit-level costs
Batch-level costs
Batch-level costs
Product-sustaining costs
Facility-sustaining costs
2.
Direct materials—purses
Direct materials—backpacks
Direct manufacturing labor—purses
Number of bags
Number of bags
Number of bags
Direct manufacturing labor—backpacks
Setup
Shipping
Design
Plant utilities and administration
Number of bags
Number of batches
Number of batches
Number of designs
Hours of production
Direct material and direct manufacturing labor are costs that can be easily traced to output, which in this case is
the number of bags produced.
Setup and shipping are both a function of the number of batches produced.
Design is related to the number of designs created for each product.
Plant utilities and administration result from general activity level in the plant. Thus, hours of production seems
to be an appropriate cost driver.
3.
Direct materials—purses
Direct materials—backpacks
Direct manufacturing labor—purses
Direct manufacturing labor—backpacks
Setup
Shipping
Design
Plant utilities and administration
$362,000 ÷ 3,150 purses = $114.92 per purse
$427,000 ÷ 6,000 backpacks = $71.17 per backpack
$98,000 ÷ 3,150 purses = $31.11 per purse
$115,597 ÷ 6,000 backpacks = $19.27 per backpack
$64,960 ÷ 203 = $320 per batch
$72,065 ÷ 203 = $355 per batch
$167,000 ÷ 5 = $33,400 per design
$225,000 ÷ 4,160 hours = $54.0865 per hour
4.
Backpacks
$427,000
115,597
Purses
$362,000
98,000
Total
$ 789,000
213,597
($320×133; 70)
Shipping
42,560
22,400
64,960
($355×133; 70)
Design
47,215
24,850
72,065
($33,400×3; 2)
Plant utilities and administration
100,200,
66,800
167,000
($54.0865×1,560; 2,600)
Budgeted total costs
÷ Number of bags
Budgeted cost per bag
84,375
$816,947
÷ 6,000
$ 136.16
140,625
$714,675
÷ 3,150
$ 226.88
225,000
$1,531,622
Direct materials
Direct manufacturing labor
Setup
5. Based on this analysis, over 50% of product cost relates to direct material. Managers should determine
whether the material costs can be reduced. Producing in small lots increases the setup and shipping costs.
While both are relatively small components of product cost, management may want to evaluate ways to reduce
the number of setups and the cost per setup. Of the indirect costs, the product- and facility-sustaining costs are
the highest. Management should review the design process for cost savings and examine why it takes so long to
produce purses relative to backpacks.
5.31
Alvin Larkins
9/2/2011 11:31:47 AM
Calculate the cost per unit of Trophies, Plaques and Medallions based on a single
plantwide overhead rate, if total overhead is allocated based on total direct costs.
Trophies=$9
Plaques=$6.20
Meddallions=$2.05
RE:
5.31
Samantha Lack
9/3/2011 10:28:45 AM
Modified:9/3/2011 10:30 AM
Hi Alvin,
I have been working on the Homework ES problems. I thought I did the ABC costing correctly
but then I see the next two questions ask us to figure the same costs but using a tradional method.
I found a website that kind of explains the differences between traditional and ABC methods. "
The example in this website is using a manufacturer that produces both solid center balls and
hollow center balls. I believe the different methods are to generate the same general outcome of
information but the ABC method is apparently more accurate because each item is broken down
by individual activities and then calculated against each activity rate. Whereas I believe the
traditional method uses "allocated overhead costs based on direct labor dollars, the total cost for
all balls would be divided by total direct labor dollars for all balls to determine the per unit cost"
http://www.cliffsnotes.com/study_guide/Activity-Based-vs-Traditional-Costing.topicArticleId21248,articleId-21226.html. My concern is that now I am wondering why I can't figure out how
to do a basic traditional method on the HOmework ES if I did the ABC costing question
correctly. Take a look at what i have done below, I will attach it and post my answers here. In
the Excel sheet the black is what was given to us in the problem and the green is the math I have
done. Thanks for the input, hope this helps everyone.
1.
Determine the activity-cost-driver rate for packaging costs (three points).
$378.95/hr
Using the ABC system, for the sugar cookie, compute the estimated overhead costs
per 1,000 cookies (three points). 87.50 +78.90 +189.50= $355.90
2.
Using the ABC system, for the sugar cookie, compute the estimated operating profit
per 1,000 cookies (three points). 600.00 – 515.90= $84.10
3.
Using a traditional system (with direct labor hours as the overhead allocation base)
for the sugar cookie, compute the estimated overhead costs per 1,000 cookies (three
points). Not sure how to do this if I did the ABC questions properly.
4.
Using a traditional system (with direct labor hours as the overhead allocation base)
for the sugar cookie, compute the estimated operating profit per 1,000 cookies (3
points). Not sure how to do this if I did the ABC questions properly.
5
Explain the difference between the profits obtained from the traditional system and
the ABC system. Which system provides a better estimate of profitability? Why? (three
points). Since I don't have the numbers for both Traditional and ABC I am unsure
how to answer this. However I would imagine that the ABC system is a better
estimate for profitability, in that it is probably more accurate. The other method
might show more profit but not necessarily be as accurate.
6
Sam(1) Week 1 Homework ES.xls
RE:
5.31 Alvin Larkins
9/4/2011 8:51:48 AM
This might be a little late but I used the instructor's explanation in the
bottom of the thread. I hope that this works.
Week1account hw_Larkins.docx
Exercise
5.29
Daniel Arriagada
9/2/2011 4:19:39 PM
Chapter
5-29
Job costing with multiple direct-cost categories, single indirect-cost pool, law firm (continuation of 5-28). Han
the $21,000 indirect-cost pool that can be traced to each individual job. After analysis, Wigan is able to reclass
Other Direct Costs
Research support
labor
Computer time
Travel and
allowances
Telephones/faxes
Photocopying
Total
Widnes Coal
$
1,600
500
St. Helen’s Glass
$
3,40
1,300
600
4,400
200
250
1,000
750
$
3,150
$
10,85
Hanley decides to calculate the costs of each job as if Wigan had used six direct cost-pools and a single indirec
costs and would be allocated to each case using the professional labor-hours base.
1. What is the revised indirect-cost allocation rate per professional labor-hour for Wigan Associates when total
2. Compute the costs of the Widnes and St. Helen’s jobs if Wigan Associates had used its refined costing syste
3. Compare the costs of Widnes and St. Helen’s jobs in requirement 2 with those in requirement 2 of Problem
1.-the revised indirect-cost allocation rate per professional labor-hour is
Indirect Costs
Revised indirect cos
2.Widnes Coal
Direct costs @ 70 Hr
104
Direct Costs
$
7,28
$
1,60
Other Direct Costs
Research support labor
$
500
$
600
$
200
$
250
Computer time
Travel and allowances
Telephones/faxes
Photocopying
Total Direct Costs
$
indirect cost pool per
hour
$
35
Hours
10,43
10
indirect costs
$
3,64
total costs
$
14,07
Grand Total
$
35,00
3.-This result is more accurate and it could compromise the client for overcharging Widnes Coal and on the ot
the
client
I said it before and I would repeat it again, I like the ABC system much better than the allocation system bec
531
Daniel Arriagada
9/2/2011 7:43:51 PM
Chapter 5-31
Plantwide, department, and activity-cost rates. Tarquin’s Trophies makes trophies, plaques, and medallions an
large custom orders,
for example the participant trophies for the Mishawaka Little League. The Controller has asked you to compar
based cost allocation.
Tarquin’s
Trophies Budgeted Information per unit
For the year ended 30 November 2009
Forming Department
Direct
materials
Direct labor
Total
Assembly
Department
Direct
materials
Direct labor
Total
Packaging
Department
Direct
materials
Direct labor
Total
Trophies Plaques
Medallions
2.50
1.50
0.50
3.00
5.50
1.20
2.70
0.60
1.10
Trophies Plaques
Medallions
0.5
1.25
0.25
1.50
2
1.50
2.75
0.50
0.75
Trophies Plaques
Medallions
0.75
0.50
0.10
0.75
1.50
0.25
0.75
0.10
0.20
Number of
units produced
5,200
7,500
16,700
The overhead cost for each department is:
Forming
Department
Materials
handling
Quality
inspection
Utilities
5,700
6,300
10,386
22,386
Assembly
Department
Materials
handling
Quality
inspection
Utilities
9,200
13,800
10,960
33,960
Packaging
Department
Materials
handling
Quality
inspection
Utilities
18,315
14,985
8,934
42,234
Other information:
Materials handling and quality inspection costs vary with the number of batches processed in each de
each product line in each department is as follows:
Forming
department
Assembly
department
Packaging
department
Trophies Plaques
Medallions
116
40
44
63
83
84
80
100
190
Utilities costs vary with direct labor costs in each department.
Required
1. Calculate the cost per unit of Trophies, Plaques and Medallions based on a single plantwide overhead rate, i
total direct costs.
2. Calculate the cost per unit of Trophies, Plaques and Medallions based on departmental overhead rates, wher
are allocated based on direct labor costs
of the forming department, assembly department overhead costs are allocated based on total direct costs of the
department overhead costs are
allocated based on direct materials costs of the packaging department.
3. Calculate the cost per unit of Trophies, Plaques and Medallions if Tarquin allocates overhead costs in each d
costing.
4. Explain how the disaggregation of information could improve or reduce decision quality.
1.-
Total overhead rate
Single Plantwide
Overhead Rate
Direct Materials
Forming Department
Assembly
Department
Packaging
Department
Total
Trophies
2.50
Plaques
1.50
0.5
1.25
0.75
0.50
$
3.75
$
3.25
3.00
1.20
1.50
1.50
0.75
0.25
Direct labor
Forming Department
Assembly
Department
Packaging
Department
5.25
Number of
units
produced
5,200
7,500
Direct Materials
$
19,500
$
24,375
Direct Labor
$
27,300
$
total
46,800
$
Grand Total for all units
127,535
Overhead for Forming Department
Overhead for Assembly Department
Overhead for Packaging Department
Total Overhead
Budgeted overhead rate
$
22,125
$
46,500
22,386
33,960
42,234
98,580
$
0.772964
Trophies
(5,200)
allocated overhead
Total direct costs
total costs
cost per unit
grand total
2.-
$
36,175
$
46,800
$
82,975
$
15.96
$
226,115
Plaques (7,5
$
35,943
$
46,500
$
82,443
$
10.99
Budgeted overhead rate for Forming Department
based on direct labor costs of forming dept.
Overhead costs of budgeted forming d
Direct labor
Trophies (5,
Forming Department
total direct labor costs
$
3.00
$
15,600
rate for forming dept. direct labor
Budgeted overhead rate for Assembly Dept.
based on total direct costs of the assembly department
Overhead costs of budgeted forming d
Trophies (5,
Direct costs
assembly dept.
Total Direct Costs
$
2.00
$
10,400
Rate for Assembly dept. Direct Costs
Budgeted overhead rate for Packaging Dept.
based on total direct material costs of the packaging department
Overhead costs of budgeted packaging
dept.
Trophies (5,
Direct
Materials
packaging dept.
Total Direct Costs
$
0.75
$
3,900
Rate for Packaging dept. Direct Mater
Forming Dept.
Direct Labor costs
Trophies Plaques
$
$
15,600 9,000
Medallions
$
10,020
$
10,087
$
6,479
Allocated overhead
rate
$
0.646620
Assembly Dept.
Direct costs
$
5,820
Trophies Plaques
$
$
10,400 20,625
Medallions
$
12,525
$
8,110
$
9,767
Allocated overhead
rate
$
0.779793
Packging Dept.
Direct material costs
Allocated overhead
$
16,083
Trophies Plaques
$
$
3,900
3,750
Medallions
$
1,670
rate
$ 4.5315451
$
17,673
$
16,993
$
7,568
Total
$
35,870
$
38,896
$
23,814
Trophies
(5,200)
Plaques (7,5
allocated overhead
Total direct costs
total costs
cost per unit
grand total
534
9/3/2011 8:13:45 AM
Thomas Carter
Here is how I setup up problem 5-34 in excel, (I also attached excel sheet)
1) The Gross Margin Percentage's for each of Pharmcare Three Market Segements
Gen Supermarket Chain Gross Margin %
2.91%
Drugstore Chains Gross Margin %
4.76%
Mom & Pop Single Stores Gross Margin %
9.09%
Pharmcare Inc., Gross Margin %
4.96%
Pharmcare Inc., Operating Income Margin %
1.55%
2) Compute cost driver rates for each five activity areas
Customer purchase order processing (rate/order)
$40.00
Line Item Ordering (rate/line item)
$3.00
Store delivery (rate/delivery)
$47.97
Cartons shipped (rate/carton)
$1.00
Shelf Stocking (rate/hr)
$16.00
$
35,870
$
46,800
$
82,670
$
15.90
$
226,115
$
38,896
$
46,500
$
85,396
$
11.39
3) Activity based costing of each distribution market for 2008
General Supermarket
Chains
Drugstore Chains
Mom & Pop Single Stores
Total Cost of
Activity in 2008
Customer purchase order processing
$5,600.00
$14,400.00
$60,000.00
$80,000.00
Line item ordering
$5,880.00
$12,960.00
$45,000.00
$63,840.00
Store delivery
$5,756.76
$17,270.27
$47,972.97
$71,000.00
Cartons shipped
$36,000.00
$24,000.00
$16,000.00
$76,000.00
Shelfstocking
$5,760.00
$2,880.00
$1,600.00
$10,240.00
Totals
$58,996.76
$71,510.27
$170,572.97
$301,080.00
General Supermarket
Chains
Drugstore Chains
Mom & Pop Single Stores
Total Cost of
Activity in 2008
Revenues
$3,708,000
$3,150,000
$1,980,000
$8,838,000
Cost of Goods Sold
$3,600,000
$3,000,000
$1,800,000
$8,400,000
Gross Margin
$108,000
$150,000
$180,000
$438,000
Operating Costs
$58,996.76
$71,510.27
$170,572.97
$301,080.00
Operating Income
$49,003.24
$78,489.73
$9,427.03
$136,920.00
Operating Income Margin %
1.32%
2.49%
0.48%
1.55%
Revised Operating Income Statement
Ranking of the Three Markets using Gross Margin
Mom & Pop Single Stores Gross Margin %
9.09%
Drugstore Chains Gross Margin %
4.76%
Gen Supermarket Chain Gross Margin %
2.91%
Ranking of the Three Markets using Operating Income
Drugstore Chains Operating Income Margin %
2.49%
Gen Super Market Operating Income Margin %
1.32%
Mom & Pop Single Stores Operating Income Margin %
0.48%
Ratio of Operating Costs to Revenue Costs for Three Markets
General SupermarketChains
1.59%
Drugstore Chains
2.27%
Mom & Pop Single Stores
8.61%
Based on Operating Income Mom & Pop Single Store are the least profitable stores. Where Drugstore
Chains are the most profitable.
Book Problem 5_34 PG173.xlsx
5.35
#1 &
#2
Deyanira Barbosa
9/3/2011 1:46:21 PM
1) Identify the cost hierarchy level for each category.
Direct Materials-purses (Output unit-level costs)
Direct Materials-backpacks (Output unit-level costs)
Direct Manufacturing labor – purses (Output unit-level costs)
Direct Manufacturing labor –backpacks (Output unit-level costs)
Set-up (batch-level costs)
Shipping (batch level costs)
Design (product-level costs)
Plant Utilities and admin (facility sustaining costs)
2) Identify the most appropriate cost dicer for each category
Direct Materials-purses /# of bags
Direct Materials-backpacks /# of bags
Direct Manufacturing labor – purses/# of bags
Direct Manufacturing labor –backpacks / # of bags
Set-up / # of batches
Shipping /# of batches
Design / # of designs
Plant Utilities and admin / # of production
Homework
ES
Instructor Louviere
9/3/2011 6:46:37 PM
Let's move discuss how we are going to allocate those overhead costs to the three products (cookies).
Although direct labor is listed under overhead costs in the problem, it is a direct cost and not an overhead
cost. Only the hours are provided for direct labor so that overhead allocation can be computed using the
number of direct labor hours which is the traditional method and is one of the questions in the homework
ES.
The company only has two overhead costs: oven costs and packaging costs. We know the
amount of each overhead cost and we know the amount of the activity cost driver
associated with each overhead cost. So, we can calculate the amount of oven cost to be
applied to each type of cookie according to the amount of oven hours used by each type
of cookie by dividing the total oven cost by the total number of oven hours. This is
known as the overhead application rate or, in this case, the amount of oven overhead cost
that will be applied to each type of cookie based on the amount of oven hours they use.
We can also calculate the overhead application rate for the packaging overhead as well.
Question 1: activity cost driver rate = packaging overhead / packaging hours
Question 2: First calculate the activity cost driver rate for the oven activity. The activity
cost driver rate = oven overhead / oven hours. Then calculate the overhead for a 1,000
cookie batch by multiplying the number of activity hours per batch by the appropriate
activity cost driver rate for each of the two overhead activities and sum them to get the
total overhead for the batch.
Question 3: To compute the estimated operating profit for a batch of sugar cookies (using the ABC
system), subtract the costs from the revenues. From question 2 we know the overhead cost. Add the cost of
direct material and direct labor (which are easy to calculate) to the overhead cost and you have the total
cost. Next, calculate the revenue. Subtract the total cost from the total revenue and you have the estimated
operating profit.
Problem 4: First calculate the overhead rate per direct labor hour. Overhead per direct labor hour = Total
Overhead / Total Direct Labor Hours = ___? Since it takes 1 direct labor hour per 1,000 sugar cookies, the
overhead is ___? (You should be able to fill in the blanks.)
Problem 5: To compute the estimated operating profit for a batch of sugar cookies (using the traditional
system), subtract the costs from the revenues. The total cost for all manufactured products consists of three
costs: direct labor, direct materials and overhead. The revenue, direct labor and direct materials cost will be
the same when using either the ABC system or the traditional system. From problem 4 we know the
overhead cost using the traditional system, so we can now calculate the estimated operating profit.
Problems 6 and 7 are discussion questions to demonstrate an understanding of the difference between the
ABC cost system and the traditional cost system. Feel free to comment on those two questions.
RE:
Homework
ES
Tara Sparks
9/4/2011 8:14:34 PM
This was a huge help for me! I was having a very hard time figuring out what
formulas to use for each type of costing, and now it is much more clear to me!
RE:
Homework
ES
Craig Bemis
9/4/2011 10:16:29 AM
Professor, Thank you for posting this. It gives me a much better understanding
of the problem!
RE:
Homework Dominique Fryer
ES
9/4/2011 11:40:50 AM
I agree with Craig. Thank you for this. I had a couple of questions that
I have went over and over and I feel like something was wrong. This
helped me to determine if I was taking the right steps or not. I have
been stressing over this assignment because I know that the homework
is huge part of our grade and when the assignments are graded right and
wrong, you have to be sure you're right in order to have a good outcome
on them.
RE:
Homework
ES
Dawn Baker
9/3/2011 8:07:47 PM
I am confusing the overhead costs that are used in the ABC and traditional systems when
computing the estimated operating profit. So for question 3, the overhead costs are what was
calculated for oven and packaging, and in question 5, the overhead cost is what was calculated
for direct labor? Is this correct?
RE:
Homework Craig Bemis
ES
9/4/2011 10:15:42 AM
Dawn,
The way I understand it is for question 3, the overhead costs are what is
calculated for oven and packaging (as you stated). For question 5, the
overhead cost is the dollar amounts of the overhead for oven and
packaging, only instead of dividing by the hours for these activities you
will divide by direct labor hours because the traditional method is based
on the number of units produced, and not so much how many hours are
used for each activity.
So, no.4, would be (150,000+360,000)/2400=212.50 * 1 (hour of labor
per batch)=212.50
no.5 would be 212.50+direct labor+direct material. This would then be
subtracted from revenue to get the profit based on the traditional
method.
RE:
Homework Dawn Baker
ES
9/4/2011 1:36:36 PM
Thank you for the explanation Craig, this helps so much! I
appreciate it!
RE:
Homework Travis Carroll
ES
9/4/2011 6:28:20 PM
Graig I took Direct Labor Hours times the Overhead rate per
direct labor hours and came up with 1200.00 total . I'm not for
sure if this is correct but I think if we work through the modules
it definitely will give us a better understanding of how to work
with these problems better.
Summary
Instructor Louviere
9/4/2011 6:25:56 PM
Class:
I must admit that this is the first course that I have encountered a Workout Room and I
am trying to think of a way to better organize it. I opened the Week 1 Problem Solutions
in the Doc Sharing area.
Daniel