Assign overhead using traditiona l costing and ABC;
calculate unit costs;
classify activities as value
added or nonvalue
added.
P543B VidPlayers, Inc. manufactures two types of DVD players, a deluxe model and a standard model. The deluxe model is a multiformat progressivescan DVD player with networking capability, Dolby digital, and DTS decoder. The standard model's primary feature is progressivescan. Annual production is 20,000 units for the deluxe and 50,000 units for the standard.
Both products require two hours of direct labour for completion. Therefore, total annual direct labour hours are 140,000 or . Expected annual manufacturing overhead is $980,000. Thus, the predetermined overhead rate is $7 or per direct labour hour. The direct materials cost per unit is
$11 for the deluxe model and $42 for the standard model. The direct labour cost is $18 per unit for both the deluxe and the standard models.
The company's managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.
Expected Use of Drivers by Product
Activity Cost
Pool Cost Driver Estimated
Overhead
Expected Use of Cost
Drivers Deluxe Standard
Purchasing Orders $130,000 500 150 350
Receiving Kilograms 30,000 20,000 4,000 16,000
Assembling Number of parts
370,000 74,000 20,000 54,000
Testing Number of
tests 115,000 23,000 10,000 13,000
Finishing Units 140,000 70,000 20,000 50,000
Packing and
shipping Kilograms 195,000 78,000 17,000 61,000
$980,000
(a) Under traditional product costing, calculate the total unit cost of both products.
Prepare a simple comparative schedule of the individual costs by product.
(b) Under ABC, prepare a schedule showing the calculations of the activitybased overhead rates (per cost driver).
(c) Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Include a calculation of overhead cost per unit, rounding to the nearest cent.)
(d) Calculate the total cost per unit for each product under ABC.
(e) Classify each of the activities as a valueadded activity or a non–valueadded activity.
(f) Comment on 1.
the comparative overhead cost per unit for the two products under ABC, and 2.
the comparative total costs per unit under traditional costing and ABC.
Assign overhead to products using ABC and evaluate decision.
P544B
Tough Thermos, Inc. manufactures two plastic thermos containers at its plastic moulding facility in Lethbridge, Alberta. Its large container, called the Ice House, has a volume of five litres, side carrying handles, a snapdown lid, and a side drain and plug. Its smaller
container, called the Cool Chest, has a volume of two litres, an overthetop carrying handle, which is part of a tilting lid, and a removable shelf. Both containers and their parts are made entirely of hardmoulded plastic. The Ice House sells for $35 and the Cool Chest sells for
$24. The production costs calculated per unit under traditional costing for each model in 2012 were as follows:
Traditional Costing Ice House Cool Chest
Direct materials $ 9.50 $ 6.00
Direct labour ($10 per hour) 8.00 5.00
Manufacturing overhead ($17.08 per direct labour
hour) 13.66 8.54
Total per unit cost $31.16 $19.54
In 2012, Tough Thermos manufactured 50,000 units of the Ice House and 20,000 units of the Cool Chest. The overhead rate of $17.08 per direct labour hour was determined by dividing total expected manufacturing overhead of $854,000 by the total direct labour hours (50,000) for the two models.
Under traditional costing, the gross profit on the two containers was $3.84 for the Ice House or , and $4.46 for the Cool Chest or . The gross margin rates on cost are 12% for the Ice House or , and 23% for the Cool Chest or . Because Tough Thermos can earn a gross margin rate on the Cool Chest that is nearly twice as great as that earned on the Ice House, with less investment in inventory and labour costs, its management is urging its sales staff to put its efforts into selling the Cool Chest over the Ice House.
Before finalizing its decision, management asks the controller Sven Meza to prepare a product costing analysis using activitybased costing (ABC). Meza accumulates the following information about overhead for the year ended December 31, 2012:
Estimated Expected Use of ActivityBased
Activities Cost Drivers Estimated
Overhead Expected Use of
Cost Drivers ActivityBased Overhead Rate Machine set
ups Number of set
ups 195,000 780 $250 per setup
Extruding Machine hours 320,000 80,000 $4 per machine hour
Quality
control Tests and
inspections 160,000 8,000 $20 per test
The cost drivers used for each product were the following:
Cost Drivers Ice House Cool Chest Total Purchase orders 2,500 1,975 4,475
Machine setups 480 300 780
Machine hours 60,000 20,000 80,000 Tests and inspections 5,000 3,000 8,000
Instructions
( a )
Assign the total 2012 manufacturing overhead costs to the two products using activitybased costing (ABC).
( b )
What was the cost per unit and gross profit of each model using ABC costing?
( c )
Are management's future plans for the two models sound?
Assign overhead costs using traditional costing and ABC;
compare results.
P545B
Mars Company has four categories of overhead: purchasing and receiving materials, machine operating costs, materials handling, and shipping. The costs expected for these categories for the coming year are as follows:
Purchasing and receiving
materials $ 300,000
Machine operating costs 900,000
Materials handling 160,000
Shipping 140,000
Total $1,500,000
The plant currently applies overhead using machine hours and expected annual capacity.
Expected capacity is 300,000 machine hours. Pragya, the financial controller, has been asked to submit a bid on job #287, on which she has assembled the following data:
Direct materials per unit $1.35
Direct labour per unit $1.85
Applied overhead $ ?
Number of units produced 6,000
Number of purchases and receipts 3
Number of machine hours 3,000
Number of material moves 300
Number of kilometres to ship to the customer 2,300
Pragya has been told that Arrow Company, a major competitor, is using activitybased costing and will bid on job #287 with a price of $6.75 per unit. Before submitting her bid, Pragya wants to assess the effects of this alternative costing approach. She estimates that 850,000 units will be produced next year, 3,000 purchases and receipts will be made, 400,000 moves will be performed plantwide, and the delivery of finished goods will require
280,000 kilometres. The bid price policy is full manufacturing cost plus 25%.
Instructions
( a )
Calculate the bid price per unit of job #287 using machine hours to assign overhead.
(b )
Using an activitybased approach, determine whether Mars or Arrow will produce the most competitive bid and obtain the contract. Show all your calculations.
(adapted from CGACanada)
Assign overhead costs using traditional costing and ABC;
compare results.
P546B Prime Furniture designs and builds factorymade, premium, wood armoires for homes. All are made of white oak. Its budgeted manufacturing overhead costs for the year 2012 are as follows.
Overhead Cost Pools Amount
Purchasing $ 40,000
Handling materials 45,000
Production (cutting, milling, finishing) 130,000
Setting up machines 50,000
Inspecting 60,000
Inventory control (raw materials and finished goods) 80,000
Utilities 105,000
Total budget overhead costs $510,000
For the last four years, Prime Furniture has been charging overhead to products on the basis of materials cost. For the year 2012, materials cost of $500,000 were budgeted.
Wei Huang, ownermanager of Prime Furniture, recently directed her accountant, Tom Turkel, to implement the activitybased costing system that he has repeatedly proposed.
At Wei Huang's request, Tom and the production manager identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
Overhead Cost Pools Activity Cost
Drivers Expected Use of Cost
Drivers
Purchasing Number of orders 500
Handling materials Number of moves 5,000
Production (cutting, milling, finishing) Direct labour hours 65,000
Overhead Cost Pools Activity Cost
Drivers Expected Use of Cost
Drivers
Setting up machines Number of setups 1,000
Inspecting Number of
inspections 4,000
Inventory control (raw materials and finished goods)
Number of components
40,000
Utilities Square metres
occupied 5,000
Maria Carvalho, sales manager, has received an order for 10 luxury armoires from Cohn's Interior Design. At Maria's request, Tom prepares cost estimates for producing components for 10 armoires so Maria can submit a contract price per armoire to Cohn's. He accumulates the following data for the production of 10 armoires.
Direct materials $5,200
Direct labour $3,500
Direct labour hours 200
Number of purchase orders 3
Number of material moves 32
Number of machine setups 4
Number of inspections 20
Number of components 640
Number of square metres occupied 32
Instructions
(a) Calculate the predetermined overhead rate using traditional costing with materials cost as the basis.
(b) What is the manufacturing cost per armoire under traditional costing?
(c) What is the manufacturing cost per armoire under the proposed activitybased costing?
(Prepare all of the necessary schedules.)
(d) Determine which of the two costing systems is preferable in pricing decisions and why.
Assign overhead costs using traditional costing and ABC;
compare results.
P547B Quality Paints Inc. uses a traditional cost accounting system to apply qualitycontrol costs uniformly to all its products at a rate of 30% of the direct labour cost. The monthly direct labour cost for the varnish paint line is $100,000. The company is considering activity
based costing to apply qualitycontrol costs. The monthly data for the varnish paint line have been gathered as follows:
Activity Cost Pools Cost Drivers Unit Rates Use of Drivers for Varnish Paint Incoming material
inspection Type of
material $ 25.00 per
type 50 types
Inprocess inspection Number of
units 0.30 per
unit 30,000 units
Product certification Per order 150.00 per
order 80 orders
Instructions
(a) Calculate the monthly qualitycontrol cost to be assigned to the varnish paint line using a traditional costing system that allocates overhead based on the direct labour cost.
(b) Calculate the monthly qualitycontrol cost to be assigned to the varnish paint line using an activitybased costing system.
(c) Comment on the results.
(adapted from CMA Canada)
Assign overhead costs using traditional costing and ABC;
compare results.
P548B
International Steel Company has budgeted manufacturing overhead costs of $2,500,000. It has allocated overhead on a plantwide basis to its two products (Standard Steel and Deluxe Steel) using machine hours, which are estimated to be 100,000 for the current year. The company has decided to experiment with activitybased costing and has created five activity cost pools and related activity cost drivers as follows:
Activity Centre Cost driver Estimated Overhead Expected Activity Material handling Number of moves $250,000 50,000 moves Purchase orders Number of orders $200,000 4,000 orders Product testing Number of tests $450,000 9,000 tests Machine setup Number of setups $600,000 6,000 setups
Machining Machine hours $1,000,000 100,000 machine hours
Each unit of the products requires the following
Standard Steel Deluxe Steel
Direct materials costs $200 $250
Direct labour costs $100 $120
Purchase orders 2 3
Standard Steel Deluxe Steel
Machine setup 5 10
Product testing 3 4
Machining 50 50
Materials handling 5 10
Instructions
(a) Under traditional product costing using machine hours, calculate the total manufacturing cost per unit of both products.
(b) Under ABC, prepare a schedule showing the calculation of the activitybased overhead rates (per cost driver).
(c) Calculate the total manufacturing cost per unit for both products under ABC.
(d) Write a memo to the president of the company discussing the implications of your analysis for the company's plans. In this memo, provide a brief description of ABC, as well as an explanation of how the traditional approach can result in distortions.
Assign overhead costs using traditional costing and ABC;
compare results.
P549B
Scalar Manufacturing produces automobile parts in batches in one continuous
manufacturing process. The company uses direct labour hours to assign overhead to each part. Magda, the financial controller, is wondering what the reasons are for the low profits in 2012 and why the gear product line did not attain Scalar's 20% net profit margin target (net profit per unit on sale price). She has calculated the 2012 net profit per unit as follows:
Brake Disk Gear
Sales price per unit $35.00 $43.00
Manufacturing costs per unit:
Direct materials 10.00 7.50
Direct labour
1.20
6.00
Overhead
5.00
Brake Disk Gear
25.00
Total manufacturing cost per unit $16.20 $38.50
Net profit per unit $18.80 $ 4.50
Net profit margin percentage 53.7% 10.5%
Magda intends to implement activitybased costing at Scalar. Each part requires
engineering design activity. Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. The manufacturing process has five activities:
engineering, setups, machining, inspection, and processing. Overhead has been assigned to each activity using direct attribution and resource drivers:
Engineering $ 80,000
Setups 45,000
Machining 120,000
Inspection 60,000
Processing 35,000
Total overhead $340,000
Magda has identified activity drivers for each activity and listed their practical capacities:
Engineering
Hours Number of
Setups Machine
Hours Number of
Inspections Direct Labour Hours
4,000 250 20,000 1,500 7,000
Following are the production data in 2012 for brake disks and gears:
Brake Disk Gear
Number of units produced 5,000 3,000
Engineering hours per unit 0.05 0.15
Number of setups 25 9
Machine hours per unit 2.5 1
Number of inspections 250 125
Instructions
(a) Using the activitybased approach, calculate the activity rates, the net profit per unit, and the net profit margin percentage for both the brake disk and the gear.
(b) Explain why the new profit margin percentages for the brake disk and the gear are different from what they were originally.
(adapted from CGACanada)
Assign overhead costs to service using traditional costing and ABC;
calculate overhead rates;
compare results.
P550B
McDonald and O'Toole is a law firm that serves both individuals and corporations. A controversy has developed between the partners of the two service lines as to who is contributing the greater amount to the bottom line. The area of contention is the assignment of overhead. The individual partners argue for assigning overhead on the basis of 28.125%
of direct labour dollars, while the corporate partners argue for implementing activitybased costing. The partners agree to use next year's budgeted data for purposes of analysis and comparison. The following overhead data are collected to develop the comparison.
Expected Use of Cost Divers per Service
Activity
Cost Pool Cost Driver Estimated Overhead
Expected Use of Cost
Drivers Corporate Individual Employee
training Direct labour
dollars $120,000 $1,600,000 $900,000 $700,000
Expected Use of Cost Divers per Service
Activity
Cost Pool Cost Driver Estimated Overhead
Expected Use of Cost
Drivers Corporate Individual Typing and
secretarial Number of reports and forms
60,000 2,000 500 1,500
Computing Number of
minutes 100,000 40,000 17,000 23,000
Facility rental
Number of employees
100,000 25 14 11
Travel Per expense
reports 70,000 Direct 48,000 22,000
$450,000
Instructions
(a) Using traditional product costing as proposed by the tax partners, calculate the total overhead cost assigned to both services (individual and corporate) of McDonald and O'Toole.
(b) 1.
Using activitybased costing, prepare a schedule showing the calculations of the activitybased overhead rates (per cost driver).
2.
Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers.
(c) Classify each of the activities as a valueadded activity or a non–valueadded activity.
(d) Comment on the comparative overhead cost service line under both traditional costing and ABC.
Assign overhead costs using ABC.
P551B ProDriver Inc. (PDI) recently started operations to obtain a share of the growing market for golf equipment. PDI manufactures two models of specialty drivers: the Thunderbolt model and the Earthquake model. Two professional engineers and a professional golfer, none of whom had any accounting background, formed the company as a partnership. The business has been very successful, and to cope with the increased level of activity, the partners have hired a CGA as their controller. One of the first improvements that the controller wants to make is to update the costing system by changing from a single overhead application rate using direct labour hours to activitybased costing. The controller has identified the following three activities as cost drivers, along with the related cost pools:
Model Number of Material
Requisitions Number of Product
Inspections Number of Orders Shipped
Thunderbolt 46 23 167
Earthquake 62 31 129
Costs per
pool $54,000 $8,200 $103,000
Instructions
(a) Using activitybased costing, prepare a schedule that shows the allocation of the costs of each cost pool to each model. Show your calculations.
(b) Identify three conditions that should be present in PDI in order for the implementation of activitybased costing to be successful.
(adapted from CGACanada)