chapter 9 exercise solutions

7/22/2019 Chapter 9 Exercise Solutions

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9Activity-Based Costing

Solutions to Review Questions

9-1.Common allocation bases are direct labor-hours, direct labor costs, and machine-hours.Somewhat less common is direct material costs.

9-2.False. Department allocation is a two-stage process, so the first-stage assignment of

costs and the choice of cost drivers affects the allocation of costs to products. The totalproduct costs are the same under either approach, but the individual product costsdiffer. This can affect the decisions managers make regarding individual products.

9-3.Most companies produce multiple products and simply adding them up does notaccount for differences in complexity of the use of resources. As an extreme example,suppose a company produced airplanes and staplers. Allocating overhead on the basisof units would assign the same overhead cost to a stapler and a plane.

9-4.The costs include the systems and the software, but the most important cost ismanagers time. Managers need tomake many decisions about the activities and thecost drivers and managers need to make many of the first-stage allocations. Thebenefits come from having better information about the use of resources and betterinformation for decisions.

9-5.1. Identify activities that consume resources.

2. Identify the cost driver associated with each activity.

3. Compute a cost rate per activity unit (e.g., rate per setup, rate per part, rate permachine-hour).

4. Allocate costs to products by multiplying the activity rate times the volume ofactivity consumed by the product.


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False. While the total cost allocated is the same, the reported costs for individualproducts will differ. Because managers make decisions at the product level, it isimportant that the reported costs reflect, to the extent possible, the use of resources bythe products.

9-7.Activity-based costing will benefit most companies with high overhead costs and diverseproducts and processes. If there is little overhead or if there is a single product, theallocation process will not result in significantly different product costs. (Even if there areonly a few, relatively homogeneous products, activity-based costing may be useful forcost management. See chapter 10 for a discussion.)

9-8.A personnel department provides its services by completing a set of activities usingresources. In this way, implementing activity-based costing in an administrative function

is the same as implementing it in a manufacturing firm. However, the products andactivities may be much harder to define, making it less like a manufacturingenvironment.


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9-15.False. The lesson learned from activity-based costing is that costs are a function notonly of output volume, but also of other factors such as complexity. For example, acomplex multiproduct operation will cost more than a simple single-product operation.

9-16.False. activity-based costing breaks down the costs into cost pools according to theactivities that cause the costs. While several departments may have the same costdrivers, each department should individually determine which activities cause theircosts.

9-17.There are two important characteristics you should look for. Are the first-stage costpools activities? Second, do the cost drivers in the second stage form a cost hierarchy(e.g., volume related, batch related, etc.) or are they all volume-related costs?

9-18.Without information on the use of overhead resources by products, it is difficult formanagers to make decisions that appropriately account for the use of these resourcesby the products. Although the specific allocation base to be used may not be clear,products that require more handling, perhaps because of toxicity, use more overheadresources. Allocating no overhead costs to a product is as likely to distort decisionmaking as allocating costs based on an arbitrary allocation base.

9-19.Disagree. The cost of implementing activity-based costing for inventory valuationgenerally is not worth the small benefits that might be realized. It is most worthwhilewhen managers use product cost data to make decisions at the product level.

9-20.Answers will vary. The function selected will determine the activities, but someexamples of activities are processing payments, processing job applications, checkingbackgrounds, processing bills, answering customer questions, and so on. Someexamples of cost drivers are number of payments, number of applications, time spent,number of questions, and so on. Example cost objects might be departments or

divisions, if the function provides support, or products or services, if the departmentsprovide service to customer activities.


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Solutions to Exercises

9-21. (30 min.) Plantwide versus Department Allocation: Munoz SportingEquipment.

Baseball

Bats

Tennis

rackets

a. Revenue ....................... $1,350,000 $900,000

Direct Labor .................. 250,000 125,000

Direct Materials ............. 550,000 275,000

Overhead ...................... 500,000 a 250,000 b

Profit ............................. $50,000 $ 250,000a $500,000 = $250,000 direct labor x 200%.

b $250,000 = $125,000 direct labor x 200%.

b. Maria was wrong; Baseball bats were more profitable.Baseball

BatsTennisrackets

Revenue ....................... $1,350,000 $900,000

Direct Labor .................. 250,000 125,000

Direct Materials ............. 550,000 275,000

Overhead ...................... 375,000 a 375,000 b

Profit ............................. $175,000 $ 125,000a $375,000 = $250,000 direct labor x 150%.b $375,000 = $125,000 direct labor x 300%.

c. The plantwide allocation method allocates overhead at 200% of direct labor forboth types of equipment. While this is the simplest method, it is usually not veryaccurate. It assumes that overhead in both departments has the same rate. Whenoverhead costs are broken down into department cost pools, we see that Department Bis allocated a smaller share of the overhead. Each department should try to assesswhat causes its overhead, and use that as its allocation base.


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9-22. (35 min.) Plantwide versus Department Allocation: Main Street Ice Cream.Strawberry Vanilla Chocolate

a. Direct Labor (per 1,000 gallons) ..... $750 $825 $1,125

Raw Materials (per 1,000 gallons) .. 800 500 600Overhead ........................................ 150 a 165 b 225 c

Total cost (per 1,000 gallons) ......... $1,700 $1,490 $1,950

a$150 = 50 labor-hours x $3 per hour

b$165 = 55 labor-hours x $3 per hour

c$225 = 75 labor-hours x $3 per hour

b. Department SV has an overhead allocation rate of $4.20 per machine-hour($105,840 25,200 machine hours). Department C has an overhead allocation rateof $1.32 per labor-hour ($23,760 18,000 labor-hours).

c.

Strawberry Vanilla Chocolate

Direct Labor (per 1,000 gallons) ..... $750 $825 $1,125

Raw Materials (per 1,000 gallons) .. 800 500 600

Overhead ........................................ 210 a 231 b 99 c

Total cost (per 1,000 gallons) ......... $1,760 $1,556 $1,824

a$210 = 50 machine-hours x $4.20 per machine-hour

b$231 = 55 machine-hours x $4.20 per machine-hour

c$99 = 75 labor-hours x $1.32 per labor-hour

d. Charlene was correct in her belief that she was being allocated some of DepartmentSVs overhead. Plantwide allocation does not correctly allocate the overhead bydepartment; it simply uses one allocation rate for all products in all departments.Under plantwide allocation, 1,000 gallons of chocolate cost $1,950. Once theoverhead was reallocated into department cost pools, the cost of chocolate fell to$1,824. Although it requires more time and skill to collect and process theinformation, department allocation generally yields more accurate product costinformation.


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9-23. (30 min.) Activity-Based Costing: Joplin Industries.a.

J25P J40X

Direct material .............................................................. $1,500,000 $2,400,000

Direct labor

Assembly ................................................................. $ 750,000 $ 600,000

Packaging ............................................................... 990,000 360,000

Total direct labor .................................................. $1,740,000 $960,000

Direct costs .................................................................. $3,240,000 $3,360,000

Overhead

Assembly building

Assembling (@ $30/mh) .......................................... $ 180,000 $ 900,000

Setting up machine (@$900/setup-hour)a............... 27,000 270,000

Handling material (@$3,000/run) ............................ 24,000 120,000

Packaging building

Inspecting and Packaging (@$5/direct labor-hour) . 300,000 114,000

Shipping (@$1,320/shipment) ................................. 132,000 264,000

Total ABC O/H...................................................... $ 663,000 $1,668,000

Total ABC cost ............................................................. $3,903,000 $5,028,000

Number of units ............................................................ 100,000 40,000Unit cost ....................................................................... $39.03 $125.70

a75% of the amounts in Exhibit 9.16. ($27,000 = .75 $36,000; $270,000 = .75 $360,000)


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9-23. (continued)

b. Kris could have made the reductions he planned, but the effect on the product costswould have been different. The $99,000 reduction in setup costs (25% of $396,000),would have been spread between the two products based on labor or machine-

hours.ABC provides more detailed measures of costs than do plantwide or departmentallocation methods. In this case, ABC shows the costs of machining, setting upequipment, handling materials, inspecting, packaging products, and shipping. Theplantwide and department allocation methods did not reveal any of these detailedcost drivers. With ABCs more detailed information, management has an opportunityto manage costs by managing cost drivers. For example, are there less costly waysto inspect and package products? Or perhaps spending additional resources toimprove quality would more than pay for itself with reduced inspections.

ABC also provides better measures of product costs than plantwide and department

allocation methods, which leads to better decisions about product pricing andwhether to keep or drop products.

ABC requires more record keeping than plantwide or department allocationmethods. ABC also requires more teamwork among accountants, production people,marketing, and management, which can be both costly and beneficial. In the end,management must decide whether the benefits of ABC, outlined above, are worththese costs.


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9-24. (30 min.) Activity-Based Costing: Cathys Catering.a. & b.

Activitiesa.

Afternoon

Picnic

b.Formal

DinnerAdvertising (parties) ............................... $ 80 $ 80

Planning (parties) ................................... 60 100

Equipment rental (parties, guests) ......... 200 a 380 b

Insurance (parties) ................................. 160 320

Server cost (parties) ............................... 160 c 240 d

Food (guests) ......................................... 320 e 480 f

Total .......................................................... $980 $1,600

a

$200 = $40 + ($8 x 20 guests).b$380 = $60 + ($16 x 20 guests).

c$160 = $40 x 4 servers.

d$240 = $60 x 4 servers.

e$320 = $16 x 20 guests.

f$480 = $24 x 20 guests.

c. If Cathy wants to cover her costs she should charge $49 per guest for the picnic($980 20 guests), and $80.00 per guest for the formal dinner ($1,600 20 guests).


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9-25. (35 min.) Activity-Based versus Traditional Costing: Rodent Corporation.a. Rate Wired Wireless Total

Direct labora............... $261,000 $ 99,000 $360,000

Direct materialsb

........ $187,500 $ 171,000 $358,500Overhead costs

Prod. runs ............... $6,000 c $ 120,000 f $ 30,000 $ 150,000

Quality tests ............ 9,000 d 54,000 g 81,000 135,000

Ship. orders ............ 600 e 30,000 h 15,000 45,000

Total overhead ....... $ 204,000 $ 126,000 $330,000

Total costs .................. $652,500 $396,000 $1,048,500

Total unit cost ............. $4.08 i $7.92 j

aData given in the first table of the exercise in the text.

b

Data given in the first table of the exercise in the text.c$6,000 per run = $150,000 in production run costs 25 total runs.

d$9,000 per test = $135,000 in quality costs 15 total tests.

e$600 per order = $45,000 in shipping costs 75 processed orders.

f$120,000 = $6,000 per production run x 20 runs for Wired.

g$54,000 = $9,000 per quality test x 6 tests for Wired.

h$30,000 = $600 per order shipped x 50 orders shipped for Wired.

i$4.08 = $652,500 total costs for Wired 160,000 units produced (rounded).

j$7.92 = $396,000 50,000 units produced.

Reading from the table above, we can see that the total overhead assigned is $204,000and $126,000 for Wired and Wireless, respectively. The total cost per unit is the totalcost per product divided by the total units produced; $4.08 per Wired mouse and $7.92per Wireless mouse.


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9-25. (continued)

b. Rate Wired Wireless Total

Direct labora................... $261,000 $ 99,000 $360,000Direct materialsb............ 187,500 171,000 358,500

Total overhead ............... $.917 c 239,250 90,750 330,000

Total costs ...................... $687,750 $360,750 $1,048,500

Total unit cost ................. $4.30 e $7.22

aData given in the first table in the exercise

bData given in the first table in the exercise

c91.7% = $330,000 total overhead $360,000 total direct labor

d$239,250 = $261,000 .9166667

e$4.30 = $687,750 160,000 units produced (rounded).

From the table above, total overhead allocated to Wired and Wireless is$239,250 and $90,750 respectively. The unit cost for Wired and Wireless is $4.30 and$7.22 respectively.

c. By allocating overhead on the basis of direct labor, Rodent has been understatingthe cost to manufacture Wireless mice thereby overstating the profits on theWireless model.


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9-26. (continued)

b. Rate M-008 M-123 Total

Direct materialsa............ $100,000 $ 80,000 $180,000Direct laborb................... 100,000 40,000 140,000

Total overhead ............... 200% c 200,000 80,000 280,000

Total costs ...................... $400,000 $200,000 $600,000

Total unit cost ................. $33.33 e $100.00

aData given in the first table in the exercise

bData given in the first table in the exercise

c200% = $280,000 total overhead $140,000 total direct labor

d$200,000 = $100,000 2.0

e$33.33 = $400,000 12,000 units produced (rounded).

From the table above, total overhead allocated to M-008 and M-123 is $200,000and $80,000 respectively. The unit cost for M-008 and M-123 is $33.33 and $100.00respectively.

c. By allocating overhead on the basis of direct labor, Doaktown Products has beenunderstating the cost to manufacture M-123 thereby overstating the profits on M-123.


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9-27. (30 min.) Activity-Based Costing in a Service Environment: We-Clean, Inc.Note: Answers may vary slightly due to rounding.

a. Commercial Residential TotalRevenuea ................................... $378,000 $910,000 $1,288,000

Direct Laborb............................. 210,000 390,000 600,000

Overheadc................................. 43,400 80,600 124,000

Profit .......................................... $ 124,600 $439,400 $ 564,000a$378,000 = 14,000 hours x $27 per hour; $910,000 = 26,000 hours x $35 per hour.

b$210,000 = 14,000 hours x $15 per hour; $390,000 = 26,000 hours x $15 per hour.

c$43,400 = ($124,000 40,000 hours) x 14,000 hours;$80,600 = ($124,000 40,000 hours) x 26,000 hours.

b. Rate Commercial Residential Total

Revenue ................ $378,000 $910,000 $1,288,000

Direct Labor ........... 210,000 390,000 600,000

Overhead

Traveling ............ $250.00 a $ 4,250 b $ 11,750 c $ 16,000

Equipment .......... 6.00 d 22,500 e 13,500 f 36,000

Supplies ............. 0.36 g 46,800 h 25,200 i 72,000

Total Overhead ...... $ 73,550 $ 50,450 $ 124,000

Profit ...................... $ 94,450 $469,550 $ 564,000a $250 per client = $16,000 64 clients served.

b $4,250 = 17 clients x $250 per client.

c $11,750 = 47 clients x $250 per client.

d $6.00 per hour = $36,000 6,000 equipment hours.

e $22,500 = 3,750 equipment-hours x $6 per equipment-hour.

f $13,500 = 2,250 equipment-hours x $6 per equipment-hour.

g $0.36 per square yard = $72,000/200,000 square yards.

h $46,800 = 130,000 square yards x $0.36 per square yard.

i $25,200 = 70,000 square yards x $0.36 per square yard.


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9-27. (continued)

c. The recommendation to Ms. Lodge is that she should reconsider droppingresidential services in favor of the commercial business. From the table in part b ofthe solution, we can show Ms. Lodge that commercial work has a profit margin of

25%, while the residential business has a profit margin of greater than 50%. We canexplain the differences in profits under the two cost methods by showing Ms. Lodgethat there is little correlation in costs between direct labor and the overhead costs.


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9-28. (35 min.) Activity-Based versus Traditional Costing: IsadoresImplements.

a. Cost Driver Rate Pencils Pens

Setting up......................................$1,600 a $32,000 d $ 48,000Inspecting ..................................... 2,400 b 9,600 e 14,400

Packaging and Shipping ............... 0.40 c 18,000 f 30,000

Total Overhead ............................. $59,600 $92,400

a $1,600 per setup = $80,000 50 setups.

b $2,400 per part = $24,000 10 parts.

c $0.40 per unit shipped = $48,000 120,000 boxes shipped.

d $32,000 = $1,600 x 20 setups.

e $9,600 = $2,400 x 4 parts.f $18,000 = $0.40 x 45,000 boxes shipped.

b. Pencils Pens Total

Direct Labor Hours ......... 4,500 a 15,000 19,500

Overhead ....................... $35,077 b $116,923 $ 152,000a 4,500 hours = 0.1 hours per box of pencils x 45,000 boxes produced.

b $35,077 = ($152,000 OH 19,500 hours) x 4,500 hours (rounded).

c. Not necessarily. Activity-based costing provides a more accurate allocation ofoverhead costs. However, the more accurate method is also more expensive. TheABC system should be adopted if the benefits from improved information exceed theadditional costs required to obtain the information.


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9-29. (35 min.) Activity-Based versus Traditional CostingEthical Issues:Windy City Coaching.

a.Account Rate

TeenCounseling

ExecutiveCoaching Total

Revenue ............................. $66,000 $135,000 $201,000

Expenses:

Administrative support ..... $4,000 a 24,000 d 16,000 40,000

Transportation ................. 144 b 14,400 e 21,600 36,000

Equipment. ...................... 12.50 c 11,250 f 8,750 20,000

Profit ................................... $ 16,350 $88,650 $105,000a $4,000 per client = $40,000 10 clients.

b $144 per visit = $36,000 250 visits.

c $12.50 per computer hour = $20,000 1,600 hours.

d $24,000 = $4,000 per client x 6 clients.

e $14,400 = $144 per hour x 100 visits.

f $11,250 = $12.50 per computer hour x 900 hours.

b.

Account Rate

TeenCounseling

ExecutiveCoaching Total

Revenue .......................... $66,000 $135,000 $201,000

Expenses ........................ $143.2836 a 31,522 b 64,478 96,000

Profit ................................ $34,478 $ 70,522 $105,000

a$201,000 revenue $300 per hour = 670 hours of labor

$143.2836 per labor hour = $96,000 of expenses 670 hours.

b$31,522 = $143.28 per labor hour x 220 hours of labor.

c. Under labor-based costing, teen counseling and executive coaching appear equallyprofitable (relative to revenues), so Wendy will not emphasize one or the other.However, using ABC, executive coaching appears to be much more profitable.

d. ABC and traditional costing systems generally yield comparable product-line profits

when overhead is a small portion of costs, or when cost drivers are highly correlatedwith the volume-related allocation base. In this case, labor-hours were distributed32.8% to Teen Counseling and 67.2% to Executive Coaching. If Wendys three costdrivers were each also distributed 32.8% to Teen Counseling and 67.2% toExecutive Coaching, the labor-hour allocation and ABC would have been identical.


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9-29. (continued)

e. Activity-based costing assigns higher costs to teen counseling than the traditionalmethod does, so using this would increase the chances of receiving the grant. If teencounseling uses more activities and these activities generate higher costs, there is

nothing unethical about using and reporting ABC costs. Choosing to use ABC simplyto increase the chances of receiving the grant, if there is no reason to believe theseactivities actually increase the costs, could be unethical.


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9-30. (30 min.) Activity-Based CostingCost Flows Through T-accounts: DeltaParts, Inc.

Materials Inventory

$300,000

Wages Payable

$150,000

Overhead Applied:Materials Handling

3,750 pounds x$18.00 per pound =$67,500 to WIP

Overhead Applied:Quality Inspections

750 inspections x$225 per inspection= $168,750 to WIP

Overhead Applied:

Machine Setups40 setups x $2,700per setup =$108,000 to WIP

Overhead Applied:Running Machines

15,000 hours x$22.50 per hour =

$337,500 to WIP


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9-30. (continued)

Work in Process (WIP) Inventory

Fabrication Department

Direct Materials 300,000Direct Labor 150,000

Material Handling OH 67,500

Quality Inspect. OH 168,750

Machine Setup OH 108,000

Running Machines OH 337,500 1,131,750

Finished Goods Inventory

1,131,750


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9-31. (30 min.) Activity-Based CostingCost Flows Through T-accounts:Carolina Fashions.

Materials Inventory

$200,000 to WIP

Wages Payable

$100,000 to WIP

Overhead Applied:Materials Handling

40,000 yards x $1per yard = $40,000to WIP

Overhead Applied:Quality Inspections

800 inspections x$100 per inspection= $80,000 to WIP

Overhead Applied:

Machine Setups100 setups x $800per setup = $80,000to WIP

Overhead Applied:Running Machines

20,000 hours x $10per hour = $200,000

to WIP


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9-31. (continued)

Work in Process (WIP) Inventory

Building S

Direct Materials 200,000Direct Labor 100,000

Material Handling 40,000

Quality Inspect. 80,000

Machine Setup 80,000

Running Machines 200,000 700,000

Finished Goods Inventory

700,000


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9-32. (20 min.) Activity-Based Costing for an Administrative Service: LastCallEnterprises.

a. Rate LaidBack StressedOut Total

Allocated costsa......... $1,100 $110,000 b $27,500 c $137,500

a$1,100 per employee = $137,500 Personnel cost 125 average employees.

b $110,000 = $1,100 x 100 employees for LaidBack.

c $27,500 = $1,100 per employee x 25 employees for StressedOut

b. Rate LaidBack StressOut Total

Employee maintenancea... $6,000 $30,000 b

$ 90,000 c $120,000Payrolld............................. $140 14,000 e

3,500 f 17,500

Total allocated costs ......... $44,000 $93,500 $137,500

a $6,000 = $120,000 Employee maintenance costs 20 employees hired/leaving.

b 30,000 = $6,000 5 employees hired/leaving.

c 90,000 = $6,000 15 employees hired/leaving.

d $140 = $17,500 Payroll costs 125 employees (average).

e $14,000 = $140 100 employees (average).

f $3,500 = $140 25 employees (average).

Allocating Personnel costs solely on number of employees understates the costs ofemployee turnover, which is much higher in StressedOut.


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9-33. (20 min.) Activity-Based Costing for an Administrative Service: JohnsCustom Computer Shop.

a. Rate Personal Business Total

Allocated costsa......... $84 $50,400 b $33,600 c $84,000

a$84 per bill = $84,000 Accounts receivable cost 1,000 bills prepared.

b $50,400 = $84 x 600 bills prepared for Personal.

c $33,600 = $84 x 400 bills prepared for Business.

b. Rate Personal Business Total

Billinga............................... $48 $28,800 b

$19,200 c $48,000

Dispute resolutiond............ $500 30,000 e

6,000 f 36,000

Total allocated costs ......... $58,800 $25,200 $84,000

a $48 = $48,000 Billing costs 1,000 bills prepared.

b 28,800 = $48 600 bills prepared.

c 19,200 = $48 400 bills prepared.

d $500 = $36,000 Dispute resolution costs 72 disputes.

e $30,000 = $500 60 disputes.

f $6,000 = $500 12 disputes.

Allocating Accounts Receivable costs solely on number of bills prepared understatesthe costs of billing disputes, which is much higher in Personal.

chapter 9 exercise solutions

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