chapter 5 solutions comm 305

Brief Exercises

Identify differences between costing systems.

BE5-1Infotrac Inc. sells a high-speed retrieval system for information. It provides the following information for the year.BudgetedActual

Overhead cost$500,000$450,000

Machine hours50,00040,000

Direct labour hours100,00090,000

Overhead is applied on the basis of machine hours.(a)Calculate the predetermined overhead rate.

(b)Determine the amount of overhead applied for the year.

(c)Explain how an activity-based costing system might differ in terms of calculating a predetermined overhead rate.

Identify differences between costing systems.

BE5-2Sassafras Inc. has conducted an analysis of overhead costs related to one of its product lines using a traditional costing system (volume-based) and an activity-based costing system. Following are its results:Traditional CostingABC

Sales revenues$1,000,000$1,000,000

Overhead costs:

Product RX3$68,000$100,000

Product Y1272,00040,000

$140,000$140,000

Explain how a difference in the overhead costs between the two systems may have occurred.

Identify cost drivers.

BE5-3Altex Co. identifies the following activities that pertain to manufacturing overhead: materials handling, machine set-ups, factory machine maintenance, factory supervision, and quality control. For each activity, identify an appropriate cost driver.

Identify cost drivers.

BE5-4Ayala Company manufactures four products in a single production facility. The company uses activity-based costing. The company has identified the following activities through its activity analysis: (a) inventory control, (b) machine set-ups, (c) employee training, (d) quality inspections, (e) material ordering, (f) drilling operations, and (g) building maintenance.For each activity, name a cost driver that might be used to assign overhead costs to products.

Calculate activity-based overhead rates.

BE5-5XOX Co. produces three products, Products Red, Black, and Yellow. Product Red requires 180 machine set-ups, Product Black requires 240 set-ups, and Product Yellow requires 540 set-ups. XOX has identified an activity cost pool with allocated manufacturing overhead of $960,000 for which the cost driver is machine set-ups. How much manufacturing overhead is assigned to each product?


BE5-6Coats Galore, Inc. uses activity-based costing as the basis for information to set prices for its six lines of seasonal coats. Calculate the activity-based overhead rates using the following budgeted data for each of the activity cost pools.Activity Cost PoolsEstimated OverheadExpected Use of Cost Drivers per Activity

Designing$ 450,00012,000 designer hours

Sizing and cutting4,000,000160,000 machine hours

Stitching and trimming1,440,00080,000 labour hours

Wrapping and packing336,00032,000 finished units


BE5-7Computer Parts, Inc., a manufacturer of computer chips, employs activity-based costing. The following budgeted data for each of the activity cost pools are provided below for the year 2012.Activity Cost PoolsEstimated OverheadExpected Use of Cost Drivers per Activity

Ordering and receiving$ 90,00015,000 orders

Etching480,00060,000 machine hours

Soldering1,760,000440,000 labour hours

For 2012, the company had 11,000 orders and used 50,000 machine hours, and labour hours totalled 500,000. What is the total overhead applied?

Classify activities as value-added or non-value-added.

BE5-8Hirani Novelty Company identified the following activities in its production and support operations. Classify each of these activities as either value-added or nonvalue-added.(a)Purchasing

(b)Receiving

(c)Design engineering

(d)Storing inventory

(e)Cost accounting

(f)Moving work in process

(g)Inspecting and testing

(h)Painting and packing

Classify service company activities as value-added or non-value-added.

BE5-9Wu and Martin is an architectural firm that is contemplating the installation of activity-based costing. The following activities are performed daily by staff architects. Classify these activities as value-added or nonvalue-added: (a) designing and drafting, 3 hours; (b) staff meetings, 1 hour; (c) on-site supervision, 2 hours; (d) lunch, 1 hour; (e) consultation with client on specifications, 1.5 hours; (f) entertaining a prospective client for dinner, 2 hours.

Classify activities according to level.

BE5-10Quick Pix is a large digital processing centre that serves 130 outlets in grocery stores, service stations, camera and photo shops, and drug stores in 16 nearby towns. Quick Pix operates 24 hours a day, six days a week. Classify each of the following activity costs of Quick Pix as either unit-level, batch-level, product-level, or facility-level.(a)Colour printing materials

(b)Photocopy paper

(c)Depreciation of machinery

(d)Set-ups for enlargements

(e)Supervisor's salary

(f)Ordering materials

(g)Pickup and delivery

(h)Commission to dealers

(i)Insurance on the building

(j)Loading developing machines


BE5-11Tool Time, Inc. operates 20 injection moulding machines in the production of tool boxes of four different sizes, named the Apprentice, the Handyman, the Journeyman, and the Professional. Classify each of the following costs as unit-level, batch-level, product-level, or facility-level.(a)First-shift supervisor's salary

(b)Powdered raw plastic

(c)Dies for casting plastic components

(d)Depreciation on injection moulding machines

(e)Changing dies on machines

(f)Moving components to the assembly department

(g)Engineering design

(h)Employee health and medical insurance coverage

Calculate rates and activity levels.

BE5-12Montreal Inc.'s chief financial officer is not satisfied with the traditional method of allocating manufacturing overhead. He believes that most of the manufacturing overhead costs relate to the V-120 product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs:Activity Cost PoolsExpected Use of Cost DriversEstimated Overhead Costs

Setting up machines1,500set-ups$ 300,000

Assembling50,000labour hours1,500,000

Inspection60inspections300,000

(a)Calculate the predetermined overhead rate for each activity.

(b)Classify each of these activities as unit-level, batch-level, product-level, or facility-level.

Do It!Review

Identify characteristics of traditional and ABC costing systems.

D5-13InstructionsIndicate whether the following statements are true or false.(a)The reasoning behind ABC cost allocation is that products consume activities and activities consume resources.

(b)Activity-based costing is an approach for allocating direct labour to products.

(c)In today's increasingly automated environment, direct labour is never an appropriate basis for allocating costs to products.

(d)A cost driver is any factor or activity that has a direct cause-effect relationship with resources consumed.

(e)Activity-based costing segregates overhead into various cost pools in an effort to provide more accurate cost information.

Calculate activity based overhead rates and assign overhead using ABC.

D5-14Weber Industries has three activity cost pools and two products. It expects to produce 3,000 units of Product BC113 and 1,400 of Product AD908. Having identified its activity cost pools and the cost drivers for each pool, Weber accumulated the following data relative to those activity cost pools and cost drivers.Annual Overhead DataExpected Use of Cost Drivers per Product

Activity Cost PoolCost DriversEstimated OverheadExpected Use of Cost Drivers per ActivityProduct BC113Product AD908

Machine set-upSet-ups$ 20,000402515

MachiningMachine hours110,0005,0001,0004,000

PackingOrders30,000500150350

Instructions(a)Prepare a schedule showing the calculations of the activity-based overhead rates per cost driver.

(b)Prepare a schedule assigning each activity's overhead cost to the two products.

(c)Calculate the overhead cost per unit for each product. (Round to nearest cent.)

(d)Comment on the comparative overhead cost per product.


D5-15InstructionsClassify each of the following activities within a tax-preparation business as value-added (VA) or nonvalue-added (NVA).(a)Advertising

(b)Completing tax returns

(c)Cleaning the office

(d)Billing clients

(e)Answering client questions

(f)Accompanying clients to audit proceedings


D5-16Good Harvest Company manufactures four lines of garden tools. As a result of an activity analysis, the accounting department has identified eight activity cost pools. Each of the product lines is produced in large batches, with the whole plant devoted to one product at a time.InstructionsClassify each of the following activities or costs as unit-level, batch-level, product-level, or facility-level.(a)Machining parts

(b)Product design

(c)Plant maintenance

(d)Machine set-up

(e)Assembling parts

(f)Purchasing raw materials

(g)Property taxes

(h)Painting

Exercises

Assign overhead using traditional costing and ABC.

E5-17Elle Inc. has two types of handbags: standard and custom. The controller has decided to use a plant-wide overhead rate based on direct labour costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine set-up. Presented below is information related to the company's operations.StandardCustom

Direct labour costs$50,000$100,000

Machine hours5001,000

Set-up hours100400

Total estimated overhead costs are $277,500. The overhead cost allocated to the machining activity cost pool is $177,000, and $100,500 is allocated to the machine set-up activity cost pool.Instructions(a)Calculate the overhead rate using the traditional (plant-wide) approach.

(b)Calculate the overhead rate using the activity-based costing approach.

(c)Determine the difference in allocation between the two approaches.

Explain the difference between traditional and activity-based costing.

E5-18Perdon Inc. has conducted the following analysis related to its product lines using a traditional costing system (volume-based) and an activity-based costing system. Both the traditional and the activity-based costing systems include direct materials and direct labour costs.Total Costs

ProductsSales RevenueTraditionalABC

Product 440X$200,000$50,000$40,000

Product 137Y160,00060,00045,000

Product 249S80,00020,00045,000

Instructions(a)For each product line, calculate operating income using the traditional costing system.

(b)For each product line, calculate operating income using the activity-based costing system.

(c)Using the following formula, calculate the percentage difference in operating income for each of Perdon's product lines:. (Round the percentage to two decimals.)

(d)Provide a rationale for why the costs for Product 440X are approximately the same using either the traditional or activity-based costing system.


E5-19International Fabrics has budgeted overhead costs of $955,000. It has allocated overhead on a plant-wide basis to its two products (wool and cotton) using direct labour hours, which are estimated to be 477,500 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are cutting (the cost driver is machine hours) and design (the cost driver is the number of set-ups). Overhead allocated to the cutting cost pool is $400,000 and $555,000 is allocated to the design cost pool. Additional information related to these pools is as follows:WoolCottonTotal

Machine hours100,000100,000200,000

Number of set-ups1,0005001,500

(a)Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.

(b)What is the difference between the allocation of overhead to the wool and cotton product lines using activity-based costing versus the traditional approach, assuming direct labour hours were incurred evenly between the wool and cotton?


E5-20Alonzo Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, YuYu Ortega, has developed the following information:CarTruck

Estimated wheels produced40,00010,000

Direct labour hours per wheel26

Total estimated overhead costs for the two product lines are $840,000.(a)Calculate the overhead cost assigned to the car wheels and truck wheels, assuming that direct labour hours is used to allocate overhead costs.

(b)YuYu is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the truck wheel product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs:Activity Cost PoolsExpected Use of Cost DriversEstimated Overhead Costs

Setting up machines500set-ups$260,000

Assembling35,000labour hours280,000

Inspection600inspections300,000

Calculate the activity-based overhead rates for these three cost pools.

(c)Calculate the cost that is assigned to the car and truck product lines using an activity-based costing system, given the following information:Expected Use of Cost Drivers per Product

CarTruck

Number of set-ups100400


Number of inspections50550

(d)What do you believe YuYu should do?


E5-21Shady Lady sells window coverings to both commercial and residential customers. The following information relates to its budgeted operations for the current year:CommercialResidential

Revenues$300,000$480,000

Direct material costs$30,000$70,000

Direct labour costs100,000300,000

Overhead costs55,000185,000162,000532,000

Operating income (loss)$115,000$ (52,000)

The controller, Susan Chan, is concerned about the residential product line. She cannot understand why this line is not more profitable given that window coverings are less complex to install for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Following are the three activity cost pools and related information she developed:Activity Cost PoolsEstimated OverheadCost Drivers

Scheduling and travel$84,000Hours of travel

Set-up time77,000Number of set-ups

Supervision56,000Direct labour cost

Expected Use of Cost Drivers per Product

CommercialResidential

Scheduling and travel1,000680

Set-up time450250

Instructions(a)Calculate the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line.

(b)Calculate the operating income for each product line, using the activity-based overhead rates.

(c)What do you believe Susan Chan should do?


E5-22M-Y Company manufactures two products, Standard and Deluxe. M-Y's manufacturing overhead costs consist of setting up machines, $400,000; machining, $1,500,000; inspecting, $450,000; material handling $750,000; and purchasing orders $150,000. Information on the two products is:StandardDeluxe


Machine setups300200

Machine hours48,00052,000

Inspections800700

Material handling5,00010,000

Purchasing orders300200

Instructions(a)Assign the total manufacturing overhead costs to the two products using traditional costing.

(b)Assign the total manufacturing overhead costs to the two products using activity-based costing (ABC).

Identify activity cost pools.

E5-23Quik Prints Company is a small printing and copying firm with three high-speed offset printing presses, five copiers (two colour and three black and white), one collator, one cutting and folding machine, and one fax machine. To improve its pricing practices, owner-manager Damon Whitebone is installing activity-based accounting. Damon employs five employees: two printers/designers, one receptionist/bookkeeper, one salesperson/copy-machine operator, and one janitor/delivery clerk. Damon can operate any of the machines and, in addition to managing the entire operation, performs the training, designing, selling, and marketing functions.InstructionsAs Quik Prints' independent accountant who prepares tax forms and quarterly financial statements, you have been asked to identify the activities that would be used to accumulate overhead costs for assignment to jobs and customers. Using your knowledge of a small printing and copying firm (and some imagination), identify at least 12 activity cost pools as the start of an activity-based costing system for Quik Prints Company.

Identify activity cost pools and cost drivers.

E5-24Galavic Corporation manufactures snowmobiles in its Blue Mountain plant. It has budgeted the following costs for the first quarter's operations.Machine set-up, indirect materials$ 4,000Property taxes$ 29,000

Inspections16,000Oil, heating19,000

Tests4,000Electricity, plant lighting21,000

Insurance, plant110,000Engineering prototypes60,000

Engineering design140,000Depreciation, plant210,000

Depreciation, machinery520,000Electricity, machinery36,000

Machine set-up, indirect labour20,000Custodial (machine maintenance) wages19,000

Classify the above costs of Galavic Corporation into activity cost pools using the following: engineering, machinery, machine set-up, quality control, factory utilities, and maintenance. Then identify a cost driver that may be used to assign each cost pool to each line of snowmobiles.

Identify activity cost drivers.

E5-25Peter Catalano's Verde Vineyards, in the Niagara Peninsula, produces three varieties of wine: merlot, viognier, and pinot noir. His winemaster, Kyle Pohle, has identified the following activities as cost pools for accumulating overhead and assigning it to products.

1. Culling and replanting. Dead or overcrowded vines are culled, and new vines are planted or relocated. (Each variety has a separate vineyard.)

2. Tying. The posts and wires are reset, and vines are tied to the wires for the dormant season.

3. Trimming. At the end of the harvest, the vines are cut and trimmed back in preparation for the next season.

4. Spraying. The vines are sprayed with chemicals for protection against insects and fungi.

5. Harvesting. The grapes are hand-picked, placed in carts, and transported to the crushers.

6. Stemming and crushing. Cartfuls of bunches of grapes of each variety are separately loaded into machines, which remove stems and gently crush the grapes.

7. Pressing and filtering. The crushed grapes are transferred to presses, which mechanically remove the juices and filter out bulk and impurities.

8. Fermentation. The grape juice, by variety, is fermented in either stainless-steel tanks or oak barrels.

9. Aging. The wines are aged in either stainless-steel tanks or oak barrels for one to three years, depending on the variety.

10. Bottling and corking. Bottles are machine-filled and corked.

11. Labelling and boxing. Each bottle is labelled, as is each nine-bottle case, with the name of the vintner, vintage, and variety.

12. Storing. Packaged and boxed bottles are stored awaiting shipment.

13. Shipping. The wine is shipped to distributors and private retailers.

14. Heating and air-conditioning of plant and offices.

15. Maintenance of buildings and equipment. Printing, repairs, replacements, and general maintenance are performed in the off-season.

For each of Verde's 15 activity cost pools, identify a probable cost driver that might be used to assign overhead costs to its three wine varieties.

Calculate overhead rates, assign overhead using ABC, and discuss the advantages of ABC.

E5-26Fontillas Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, it produced 50 range instruments and 300 pressure gauges and incurred estimated overhead costs of $85,500. An analysis of estimated overhead costs reveals the following activities:ActivitiesCost DriversTotal Cost

1. Materials handlingNumber of requisitions$33,000

2. Machine set-upsNumber of set-ups27,900

3. Quality inspectionsNumber of inspections24,600

The cost driver volume for each product was as follows:Cost DriversInstrumentsGaugesTotal

Number of requisitions4006001,000



Instructions(a)Determine the overhead rate for each activity.

(b)Assign the manufacturing overhead costs for April to the two products using activity-based costing.

(c)Write a memorandum to the president of Fontillas Instrument explaining the benefits of activity-based costing.

Calculate overhead rates and assign overhead using ABC.

E5-27H&Y Company uses four activity pools to apply overhead to its products. Each activity has a cost driver used to allocate the overhead costs to the product. The activities and related overhead costs are as follows:ActivityTotal CostsVolume of Cost Driver

Material handling$ 200,000100,000 parts

Purchase orders210,00035 orders

Set-up hours300,000150 hours

Machining480,0003,000 machine hours

Total costs$1,190,000

The above activities are used by the two different products as follows:PC-21WX-34

Material handling75,000 parts25,000 parts

Purchase orders per product1520

Set-up hours100 hours50 hours

Number of machine hours2,000 machine hours1,000 machine hours

(a)Calculate how much of the material handling cost will be allocated to PC-21.

(b)Determine the ABC allocation rate for Purchase orders.

(c)Calculate how much of the Set-up costs will be allocated to WX-34.

(d)Calculate how much of the total activity costs will be allocated to PC-21.

Assign overhead using traditional costing and ABC; classify activities as value-added or non-value-added.

E5-28Lim Clothing Company manufactures its own designed and labelled sports attire and sells its products through catalogue sales and retail outlets. While Lim has used activity-based costing in its manufacturing activities for years, it has always used traditional costing in assigning its selling costs to its product lines. Selling costs have traditionally been assigned to Lim's product lines at a rate of 80% of direct material costs. Its direct material costs for the month of March for Lim's high-intensity line of attire are $400,000. The company has decided to extend activity-based costing to its selling costs. Data relating to the high-intensity line of products for the month of March are as follows:Activity Cost PoolsCost DriversOverhead RateNumber of Cost Drivers Used per Activity

Sales commissionsDollar sales$0.06per dollar sales$950,000

AdvertisingTV/RadioMinutes$300per minute250

AdvertisingNewspaperColumn inches$10per column inch2,000

CataloguesCatalogues mailed$2.50per catalogue6,000

Cost of catalogue salesCatalogue orders$1per catalogue order9,000

Credit and collectionDollar sales$0.04per dollar sales$950,000

Instructions(a)Calculate the selling costs to be assigned to the high-intensity line of attire for the month of March using

1. the traditional product costing system (direct material cost is the cost driver), and

2. activity-based costing.

(b)By what amount does the traditional product costing system under-cost or over-cost the high-intensity product line?

(c)Classify each of the activities as value-added or nonvalue-added.

Assign overhead using traditional costing and ABC; classify activities as value-added or non-value-added.

E5-29Healthy Products, Inc. uses a traditional product costing system to assign overhead costs uniformly to all products. To meet Canadian Food Inspection Agency (CFIA) requirements and to assure its customers of safe, sanitary, and nutritious food, Healthy Products engages in a high level of quality control. It assigns its quality-control overhead costs to all products at a rate of 17% of direct labour costs. Its direct labour cost for the month of June for its low-calorie dessert line is $55,000. In response to repeated requests from its vice-president, finance, Healthy's management agrees to adopt activity-based costing. Data relating to the low-calorie dessert line for the month of June are as follows:Activity Cost PoolsCost DriversRateNumber of Cost Drivers Used per Activity

Inspections of material receivedNumber of kilograms$0.60per kilogram6,000kilograms

In-process inspectionsNumber of servings$0.33per serving10,000servings

CFIA certificationCustomer orders$12.00per order420orders

Instructions(a)Calculate the quality-control overhead cost to be assigned to the low-calorie dessert product line for the month of June using

1. the traditional product costing system (direct labour cost is the cost driver), and

2. activity-based costing.

(b)By what amount does the traditional product costing system under-cost or over-cost the low-calorie dessert line?

(c)Classify each of the activities as value-added or nonvalue-added.

Classify activities ad value-added or non-value-added.

E5-30In an effort to expand the usefulness of its activity-based costing system, Peter Catalano's Verde Vineyards decides to adopt activity-based management techniques (AMB). One of these ABM techniques is classifying its activities as either value-added or nonvalue-added.InstructionsUsing Verde's list of 15 activity cost pools in E5-25, classify each of the activities as either value-added or nonvalue-added.


E5-31Anna Bellatorre, Inc. is interested in using its activity-based costing system to improve its operating efficiency and its profit margins by applying activity-based management techniques. As part of this undertaking, you have been asked to classify its plant activities as value-added or nonvalue-added.InstructionsUsing the list of activities below, classify each activity as either value-added or nonvalue-added.

1. Designing new models

2. Purchasing raw materials and parts

3. Storing and managing inventory

4. Receiving and inspecting raw materials and parts

5. Interviewing and hiring new personnel

6. Machine forming sheet steel into appliance parts

7. Manually assembling parts into appliances

8. Training all employees of the company

9. Insuring all tangible fixed assets

10. Supervising production

11. Maintaining and repairing machinery and equipment

12. Painting and packaging finished appliances

Classify service company activities as value-added or non-value-added.

E5-32Duplessis and Najarali is a law firm that is initiating an activity-based costing system. Rjean Duplessis, the senior partner and a strong supporter of ABC, has prepared the following list of activities performed by a typical lawyer in a day at the firm:ActivitiesHours

Writing contracts and letters1.0

Attending staff meetings0.5

Taking depositions1.0

Doing research1.0

Travelling to/from court1.0

Contemplating legal strategy1.0

Eating lunch1.0

Litigating a case in court2.5

Entertaining a prospective client2.0

InstructionsClassify each of the activities listed by Rjean Duplessis as value-added or nonvalue-added and defend your classification. How much time was value-added and how much was nonvalue-added?

Classify activities by level.

E5-33Having itemized its costs for the first quarter of next year's budget, Galavic Corporation wants to install an activity-based costing system. First, it identified the activity cost pools in which to accumulate factory overhead; second, it identified the relevant cost drivers. (This was done in E5-24.)InstructionsUsing the activity cost pools identified in E5-24, classify each of those cost pools as either unit-level, batch-level, product-level, or facility-level.

Classify activities by level.

E5-34Otto Dieffenbach & Sons, Inc. is a small manufacturing company that uses activity-based costing. Dieffenbach & Sons accumulates overhead in the following activity cost pools.

1. Hiring personnel

2. Managing parts inventory

3. Purchasing

4. Testing prototypes

5. Designing products

6. Setting up equipment

7. Training employees

8. Inspecting machine parts

9. Machining

10. Assembling

InstructionsFor each activity cost pool, indicate whether the activity cost pool would be unit-level, batch-level, product-level, or facility-level.

Problems: Set A

Assign overhead using traditional costing and ABC; calculate unit costs; classify activities as value-added or non-value-added.

P5-35AFireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-litre cylinder that holds 2.5 kilograms of multi-purpose dry chemical at 480 PSI (pounds per square inch). The commercial model is a low-volume (10,200 units), two-litre cylinder that holds 10 kilograms of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labour for completion. Therefore, total annual direct labour hours are 96,300 or. Expected annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is $15.60 orper direct labour hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labour cost is $19 per unit for both the home and the commercial models.The company's managers identified six activity cost pools and related cost drivers, and accumulated overhead by cost pool as follows:Activity Cost PoolsCost DriversEstimated Over-headExpected Use of Cost DriversExpected Use of Drivers by Product

HomeCommercial

ReceivingKilograms$70,350335,000215,000120,000

FormingMachine hours150,50035,00027,0008,000

AssemblingNumber of parts390,600217,000165,00052,000

TestingNumber of tests51,00025,50015,50010,000

PaintingLitres52,5805,2583,6801,578

Packing and shippingKilograms787,250335,000215,000120,000

$1,502,280

Instructions(a)Under traditional product costing, calculate the total unit cost of each product. Prepare a simple comparative schedule of the individual costs by product (similar to Illustration5-4).

(b)Under ABC, prepare a schedule showing the calculations of the activity-based 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 value-added activity or a nonvalue-added 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 costs using traditional costing and ABC; compare results.

P5-36AAllen Inc. is a manufacturer of quality shoes. The company has always used a plant-wide allocation rate for allocating manufacturing overhead to its products. The plant manager believes it is time to change to a better method of cost allocation. The accounting department has established the following relationships between production activities and manufacturing overhead costs:ActivitiesCost DriversAllocation Rate

Material handlingNumber of parts$ 8 per part

AssemblyLabour hours80 per hour

InspectionTime spent by item at inspection station12 per minute

The previous plant-wide allocation rate method was based on direct manufacturing labour hours, and if that method is used, the allocation rate is $800 per labour hour.Instructions(a)Assume that a batch of 1,000 pairs of shoes requires 4,000 parts, 50 direct manufacturing labour hours, and 60 minutes of inspection time. What are the indirect manufacturing costs per pair of shoes to produce a batch of 1,000 pairs of shoes, assuming the previous plant-wide allocation rate method is used?

(b)What are the indirect manufacturing costs per pair of shoes to produce a batch of 1,000 pairs of shoes, assuming the activity-based method of allocation is used?

(c)Comment on the results.(adapted from CMA Canada)

Assign overhead to products using ABC and evaluate the decision.

P5-37AJacobson Electronics manufactures two HD television models: the Royale, which sells for $1,400, and a new model, the Majestic, which sells for $1,100. The production costs calculated per unit under traditional costing for each model in 2012 were as follows:Traditional CostingRoyaleMajestic

Direct materials$600$320

Direct labour ($20 per hour)10080

Manufacturing overhead ($35 per direct labour hour)175140

Total per unit cost$875$540

In 2012, Jacobson manufactured 20,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $35 per direct labour hour was determined by dividing total expected manufacturing overhead of $4.9 million by the total direct labour hours (140,000) for the two models.Under traditional costing, the gross profit on the models was $525 for the Royale or, and $560 for the Majestic or. Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model.Before finalizing its decision, management asks Jacobson's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2012:Activity Cost PoolsCost DriversEstimated OverheadExpected Use of Cost DriversActivity-Based Overhead Rate

PurchasingNumber of orders$ 750,00025,000$30per order

Machine set-upsNumber of set-ups600,00020,00030per set-up

MachiningMachine hours3,100,000100,00031per hour

Quality controlNumber of inspections450,0005,00090per inspection

The cost drivers used for each product were as follows:Cost DriversRoyaleMajesticTotal

Purchase orders11,25013,75025,000

Machine set-ups10,00010,00020,000

Machine hours40,00060,000100,000

Inspections2,2502,7505,000

Instructions(a)Assign the total 2012 manufacturing overhead costs to the two products using activity-based 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? Explain.


P5-38AKiddy Company manufactures bicycles. It recently received a request to manufacture 10 units of a mountain bike at a price lower than it normally accepts. Bruce, the sales manager, indicated that if the order were accepted at that price, the company could expect additional orders from the same client. Bruce believes that if Kiddy could offer this price in the market generally, sales of this bike would increase by 30%. Melany, president of Kiddy, is skeptical about accepting the order. The company has a policy of not accepting any order that does not provide a markup of 20% on full manufacturing costs. The price offered is $575 per bike.The controller, Sanjay, has recently researched the possibility of using activity-based multiple overhead rates instead of the single rate currently in use. He has promised more accurate estimated overhead product costing, and Melany is curious about how this approach would affect product costing and pricing of the mountain bike.The plant-wide overhead rate is based on an expected volume of 10,000 direct labour hours and the following budgeted overhead:Machine operating costs$ 75,000

Rework labour45,000

Inspection25,000

Scrap costs35,000

General factory overhead120,000

Total$300,000

Expected activities for selected cost drivers for 2012:Machine hours25,000

Units reworked600

Inspection hours500

Units scrapped140

Direct labour hours12,000

Estimated data for the production of one mountain bike:Direct materials$ 160

Direct labour (7.5 hours/unit)$ 180

Number of machine hours6

Number of units reworked0.25

Number of inspection hours0.10

Number of units scrapped0.05

Instructions(a)Using the single-rate method to assign overhead on a plant-wide basis, determine whether or not Kiddy should accept the order for the 10 mountain bikes. Explain your decision.

(b)Using activity-based costing to assign overhead, determine whether or not Kiddy should accept the order for the 10 mountain bikes. Explain your decision.(adapted from CGA-Canada)


P5-39AStellar Stairs Co. designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are made of white oak wood. The company's budgeted manufacturing overhead costs for 2012 are as follows:Overhead Cost PoolsAmount

Purchasing$ 57,000

Handling materials82,000

Production (cutting, milling, finishing)210,000

Setting up machines85,000

Inspecting90,000

Inventory control (raw materials and finished goods)126,000

Utilities180,000

Total budget overhead costs$830,000

For the last four years, Stellar Stairs Co. has been charging overhead to products on the basis of machine hours. For 2012, it has budgeted 100,000 machine hours.Heather Fujar, owner-manager of Stellar Stairs Co., recently directed her accountant, Kiko Nishikawa, to implement the activity-based costing system that she has repeatedly proposed. At Heather Fujar's request, Kiko and the production foreperson identify the following cost drivers and their usage for the previously budgeted overhead cost pools.Activity Cost PoolsCost DriversExpected Use of Cost Drivers

PurchasingNumber of orders600

Handling materialsNumber of moves8,000

Production (cutting, milling, finishing)Direct labour hours100,000

Setting up machinesNumber of set-ups1,250

InspectingNumber of inspections6,000

Inventory control (raw materials and finished goods)Number of components168,000

UtilitiesSquare metres occupied9,000

Jason Dion, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At Jason's request, Kiko prepares cost estimates for producing components for 280 stairways so Jason can submit a contract price per stair to Community Builders. She accumulates the following data for the production of 280 stairways:Direct materials$103,600

Direct labour112,000

Machine hours14,500

Direct labour hours5,000

Number of purchase orders60

Number of material moves800

Number of machine set-ups100


Number of components16,000

Number of square metres occupied800

Instructions(a)Calculate the predetermined overhead rate using traditional costing with machine hours as the basis.

(b)What is the manufacturing cost per stairway under traditional costing? (Round to the nearest cent.)

(c)What is the manufacturing cost per stairway under the proposed activity-based costing? (Round to the nearest cent. Prepare all of the necessary schedules.)

(d)Which of the two costing systems is preferable in pricing decisions and why?


P5-40AInternational Steel Company has budgeted manufacturing overhead costs of $1,930,000. It has allocated overhead on a plant-wide basis to its two products (soft steel and hard steel) using machine hours, which are estimated to be 90,000 for the current year. The company has decided to experiment with activity-based costing and has created five activity cost pools and related activity cost drivers as follows:Activity CentreCost driverEstimated OverheadExpected Activity

Material handlingNumber of moves$280,00040,000 moves

Purchase ordersNumber of orders$100,0001,200 orders

Product testingNumber of tests$420,0003,500 tests

Machine set-upNumber of set-ups$320,0005000 set-ups

MachiningMachine hours$810,00090,000 machine hours

Each unit of the products requires the following:Soft SteelHard Steel

Direct materials costs$300$200

Direct labour costs$120$60

Purchase orders23

Machine set-up510

Product testing34

Machining5050

Material handling46

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 activity-based 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 of services using traditional costing anad ABC; calculate overhead rates and unit costs; compare results.

P5-41AHy and van Lamsweerde is a public accounting firm that offers two primary services, auditing and tax return preparation. A controversy has developed between the partners of the two service lines regarding who is contributing the greater amount to the bottom line. The area of contention is the assignment of overhead. The tax partners argue for assigning overhead on the basis of 40% of direct labour dollars, while the audit partners argue for implementing activity-based costing. The partners agree to use next year's budgeted data for analysis and comparison. The following overhead data are collected:Expected Use of Cost Drivers per Service

Activity Cost PoolsCost DriversEstimated OverheadExpected Use of Cost DriversAuditTax

Employee trainingDirect labour dollars$216,000$1,800,000$1,000,000$800,000

Typing and secretarialNumber of reports and forms76,2002,5006001,900

ComputingNumber of minutes204,00060,00025,00035,000

Facility rentalNumber of employees142,500402218

TravelPer expense reports81,300Direct56,00025,300

$720,000

Instructions(a)Using traditional product costing as proposed by the tax partners, calculate the total overhead cost assigned to both services (audit and tax) of Hy and van Lamsweerde.

(b)

1. Using activity-based costing, prepare a schedule showing the calculations of the activity-based 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 value-added activity or a nonvalue-added activity.

(d)Comment on the comparative overhead cost for the two services under both traditional costing and ABC.


P5-42AGoGo Ltd. manufactures three models of children's swing sets: Standard, Deluxe, and Super. The Standard set is made of steel, the Deluxe set is made of aluminum, and the Super set is made of a titanium-aluminum alloy. Because of the different materials used, production requirements differ significantly across models in terms of machine types and time requirements. However, once the parts are produced, assembly time per set is similar for the three models. For this reason, GoGo has adopted the practice of allocating overhead costs on the basis of machine hours. Last year, the company produced 5,000 Standard sets, 500 Deluxe sets, and 2,000 Super sets. The company had the following revenues and expenses for the year:GOGO LTD.Income StatementYear Ended December 31, 2012

StandardDeluxeSuperTotal

Sales$475,000$380,000$560,000$1,415,000

Direct costs:

Direct materials200,000150,000240,000590,000

Direct labour54,00014,00024,00092,000

Variable overhead costs:

Machine set-ups???25,000

Order processing???60,000

Warehouse???90,000

Shipping???35,000

Contribution margin???523,000

Fixed overhead costs:

Plant administration88,000

Other182,000

Gross profit$ 253,000

The chief financial officer of GoGo has hired a consultant to recommend cost allocation bases. The consultant has recommended the following:Activity Level

ActivitiesCost DriversStandardDeluxeSuperTotal

Machine set-upsNo. of production runs22111750

Sales order processingNo. of sales orders received300200300800

Warehouse costsNo. of units held in inventory200100100400

ShippingNo. of units shipped5,0005002,0007,500

The consultant found no basis for allocating the plant administration and other fixed overhead costs, and recommended that they not be applied to products.Instructions(a)Complete the income statement using the bases recommended by the consultant. Do not allocate any fixed overhead costs.

(b)Explain how activity-based costing might result in better decisions by GoGo's management.

Problems: Set B

Assign overhead using traditional costing and ABC; calculate unit costs; classify activities as value-added or non-value-added.

P5-43BVidPlayers, Inc. manufactures two types of DVD players, a deluxe model and a standard model. The deluxe model is a multi-format progressive-scan DVD player with networking capability, Dolby digital, and DTS decoder. The standard model's primary feature is progressive-scan. 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 orper 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 PoolCost DriverEstimated OverheadExpected Use of Cost DriversDeluxeStandard

PurchasingOrders$130,000500150350

ReceivingKilograms30,00020,0004,00016,000

AssemblingNumber of parts370,00074,00020,00054,000

TestingNumber of tests115,00023,00010,00013,000

FinishingUnits140,00070,00020,00050,000

Packing and shippingKilograms195,00078,00017,00061,000

$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 activity-based 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 value-added activity or a nonvalue-added 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.

P5-44BTough 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 snap-down lid, and a side drain and plug. Its smaller container, called the Cool Chest, has a volume of two litres, an over-the-top carrying handle, which is part of a tilting lid, and a removable shelf. Both containers and their parts are made entirely of hard-moulded 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 CostingIce HouseCool Chest

Direct materials$ 9.50$ 6.00

Direct labour ($10 per hour)8.005.00

Manufacturing overhead ($17.08 per direct labour hour)13.668.54

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 activity-based costing (ABC). Meza accumulates the following information about overhead for the year ended December 31, 2012:ActivitiesCost DriversEstimated OverheadExpected Use of Cost DriversActivity-Based Overhead Rate

PurchasingNumber of orders$179,0004,475$40 per order

Machine set-upsNumber of set-ups195,000780$250 per set-up

ExtrudingMachine hours320,00080,000$4 per machine hour

Quality controlTests and inspections160,0008,000$20 per test

The cost drivers used for each product were the following:Cost DriversIce HouseCool ChestTotal

Purchase orders2,5001,9754,475

Machine set-ups480300780

Machine hours60,00020,00080,000

Tests and inspections5,0003,0008,000

Instructions(a)Assign the total 2012 manufacturing overhead costs to the two products using activity-based 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?


P5-45BMars 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 costs900,000

Materials handling160,000

Shipping140,000

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 produced6,000

Number of purchases and receipts3

Number of machine hours3,000


Number of kilometres to ship to the customer2,300

Pragya has been told that Arrow Company, a major competitor, is using activity-based 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 plant-wide, 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 activity-based approach, determine whether Mars or Arrow will produce the most competitive bid and obtain the contract. Show all your calculations.(adapted from CGA-Canada)


P5-46BPrime Furniture designs and builds factory-made, 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 PoolsAmount

Purchasing$ 40,000

Handling materials45,000

Production (cutting, milling, finishing)130,000

Setting up machines50,000

Inspecting60,000

Inventory control (raw materials and finished goods)80,000

Utilities105,000

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, owner-manager of Prime Furniture, recently directed her accountant, Tom Turkel, to implement the activity-based 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 PoolsActivity Cost DriversExpected Use of Cost Drivers

PurchasingNumber of orders500

Handling materialsNumber of moves5,000

Production (cutting, milling, finishing)Direct labour hours65,000

Setting up machinesNumber of set-ups1,000

InspectingNumber of inspections4,000

Inventory control (raw materials and finished goods)Number of components40,000

UtilitiesSquare metres occupied5,000

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 hours200

Number of purchase orders3


Number of machine set-ups4


Number of components640

Number of square metres occupied32

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 activity-based costing? (Prepare all of the necessary schedules.)

(d)Determine which of the two costing systems is preferable in pricing decisions and why.


P5-47BQuality Paints Inc. uses a traditional cost accounting system to apply quality-control 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 quality-control costs. The monthly data for the varnish paint line have been gathered as follows:Activity Cost PoolsCost DriversUnit RatesUse of Drivers for Varnish Paint

Incoming material inspectionType of material$ 25.00 per type50 types

In-process inspectionNumber of units 0.30 per unit30,000 units

Product certificationPer order150.00 per order80 orders

Instructions(a)Calculate the monthly quality-control 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 quality-control cost to be assigned to the varnish paint line using an activity-based costing system.

(c)Comment on the results.(adapted from CMA Canada)


P5-48BInternational Steel Company has budgeted manufacturing overhead costs of $2,500,000. It has allocated overhead on a plant-wide 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 activity-based costing and has created five activity cost pools and related activity cost drivers as follows:Activity CentreCost driverEstimated OverheadExpected Activity

Material handlingNumber of moves$250,00050,000 moves

Purchase ordersNumber of orders$200,0004,000 orders

Product testingNumber of tests$450,0009,000 tests

Machine set-upNumber of set-ups$600,0006,000 set-ups

MachiningMachine hours$1,000,000100,000 machine hours

Each unit of the products requires the followingStandard SteelDeluxe Steel

Direct materials costs$200$250

Direct labour costs$100$120

Purchase orders23

Machine set-up510

Product testing34

Machining5050

Materials handling510

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 activity-based 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.


P5-49BScalar 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 DiskGear

Sales price per unit$35.00$43.00

Manufacturing costs per unit:

Direct materials10.007.50

Direct labour

1.20

6.00

Overhead

5.00

25.00

Total manufacturing cost per unit$16.20$38.50

Net profit per unit$18.80$ 4.50

Net profit margin percentage53.7%10.5%

Magda intends to implement activity-based 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, set-ups, machining, inspection, and processing. Overhead has been assigned to each activity using direct attribution and resource drivers:Engineering$ 80,000

Set-ups45,000

Machining120,000

Inspection60,000

Processing35,000

Total overhead$340,000

Magda has identified activity drivers for each activity and listed their practical capacities:Engineering HoursNumber of Set-upsMachine HoursNumber of InspectionsDirect Labour Hours

4,00025020,0001,5007,000

Following are the production data in 2012 for brake disks and gears:Brake DiskGear

Number of units produced5,0003,000

Engineering hours per unit0.050.15


Machine hours per unit2.51


Instructions(a)Using the activity-based 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 CGA-Canada)

Assign overhead costs to service using traditional costing and ABC; calculate over-head rates; compare results.

P5-50BMcDonald 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 activity-based 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 PoolCost DriverEstimated OverheadExpected Use of Cost DriversCorporateIndividual

Employee trainingDirect labour dollars$120,000$1,600,000$900,000$700,000

Typing and secretarialNumber of reports and forms60,0002,0005001,500

ComputingNumber of minutes100,00040,00017,00023,000

Facility rentalNumber of employees100,000251411

TravelPer expense reports70,000Direct48,00022,000

$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 activity-based costing, prepare a schedule showing the calculations of the activity-based 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 value-added activity or a nonvalue-added activity.

(d)Comment on the comparative overhead cost service line under both traditional costing and ABC.

Assign overhead costs using ABC.

P5-51BProDriver 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 activity-based costing. The controller has identified the following three activities as cost drivers, along with the related cost pools:ModelNumber of Material RequisitionsNumber of Product InspectionsNumber of Orders Shipped

Thunderbolt4623167

Earthquake6231129

Costs per pool$54,000$8,200$103,000

Instructions(a)Using activity-based 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 activity-based costing to be successful.(adapted from CGA-Canada)

chapter 5 solutions comm 305

Documents

activitybased costing

activity ordering

activity analysis

budgetedactual overhead

overhead rates

analysis of overhead

predetermined overhead

appropriate cost driver