EXERCISE 5-33 (30 MINUTES) 1.

ZODIAC MODEL ROCKETRY COMPANY COMPUTATION OF SELLING COSTS BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE Small Sales commissions (Unit cost: $675,000/225,000 = $3.00 per box).................... box)........................................... Catalogsb (Unit cost: $295,400/590,800 = $.50 per catalog)................ catalog)..................................... Costs of catalog salesc (Unit cost: $105,000/175,000 = $.60 per motor).................. skein)........................................ Credit and collectiond (Unit cost: $60,000/6,000 = $10.00 per order)................ order)........................................ Total cost for all orders of a given size..................................... Units (motors) solde..................... Unit cost per order of a given sizef............................................... Retail sales in boxes unit cost: Small, 2,000 $3 Medium, 45,000 $3 Large, 178,000 $3 b Catalogs distributed unit cost c Catalog sales unit cost
a a

Order Size Medium Large $135,000 $534,000

Total $ 675,000

$ 6,000

127,150

105,650

62,600

295,400

47,400

31,200

26,400

105,000

4,850

24,150

31,000

60,000

$185,400 103,000 $1.80

$296,000 592,000 $.50

$654,000 2,180,000 $.30

$1,135,400

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Number of retail orders unit cost Small: (2,000 12) + 79,000 = 103,000 Medium: (45,000 12) + 52,000 = 592,000 Large: (178,000 12) + 44,000 = 2,180,000 f Total cost for all orders of a given size units sold
d e

EXERCISE 5-33 (CONTINUED) 2. The analysis of selling costs shows that small orders cost more than large orders. This fact could persuade management to market large orders more aggressively and/or offer discounts for them.

EXERCISE 5-40 (40 MINUTES, PLUS TIME AT RESTAURANT) Several restaurant activities are listed in the following table, along with the required characteristics for each activity. Many other possibilities could be listed, depending on the level of detail. Value-Added or Non-ValueAdded VA NVA

Activity Description Taking reservations Customers waiting for a table

Activity Trigger Customer calls on phone Customer arrives, but no table is ready

Root Cause Customer desires reservation An error was made in reservation; service is slow; customers are slow; customers arrive without reservations Customer's reservation (or turn in line) comes up; table becomes ready Kitchen staff needs to know what to prepare Meals are ready; customers are hungry
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Seating customers

VA

Table becomes available Customers indicate readiness to order Meals are ready

Taking orders Serving meals to customers

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VA VA

Returning meal to kitchen for revised preparation

NVA

Customer complains about meal

An error was made in explaining the menu; there is an error in the printed menu description; meal was prepared wrong; customer is picky Customers are hungry Customers have finished eating

Customers eating meal Clearing the table

VA VA

Meals are served and are satisfactory Customers are finished

EXERCISE 5-40 (CONTINUED) Delivering check to table Collecting payment VA Customers are finished ordering and eating Customers have produced cash or credit card Customers need to know amount of bill Restaurant needs to collect payment for services rendered

VA

EXERCISE 5-44 (20 MINUTES) There are many key activities that can be suggested for each business. Some possibilities are listed below. After each activity, a suggested cost driver is given in parentheses. (1) airline: (a) (b) (c) (d) (e) (a) (b) (c) (d) (e) (a) (b) reservations (reservations booked) baggage handling (pieces of baggage handled) flight crew operations (air miles flown) aircraft operations (air miles flown) in-flight service (number of passengers) purchasing (pounds or cost of food purchased) kitchen operations (meals prepared) table service (meals served) table clearing (meals served) dish washing (dishes washed) front desk operations (number of patrons) membership records (number of records)
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(2)

restaurant

(3)

fitness club:

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(c) (d) (e) (4) bank: (a) (b) (c) (d) (e) (a) (b) (c) (d) (e) (a) (b) (c) (d) (e)

personnel (number of employees) equipment maintenance (maintenance hours) fitness consultation (hours of service) teller window operations (number of customers) loan processing (loan applications) check processing (checks processed) personnel (number of employees) security (number of customers) front desk operations (number of guests) bell service (pieces of luggage handled) housekeeping service (number of guest-days) room service (meals delivered) telephone service (phone calls made) admissions (patients admitted) diagnostic lab (tests performed) nursing (nursing hours) surgery (hours in operating room) general patient care (patient-days of care)

(5) hotel:

(6)

hospital:

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solutions to Problems
PROBLEM 5-45 (35 MINUTES) 1. Activity-based costing results in improved costing accuracy for two reasons. First, companies that use ABC are not limited to a single driver when allocating costs to products and activities. Not all costs vary with units, and ABC allows users to select a host of nonunit-level cost drivers. Second, consumption ratios often differ greatly among activities. No single cost driver will accurately assign costs for all activities in this situation. Allocation of administrative cost based on billable hours: E-commerce consulting: 2,400 6,000 = 40%; $381,760 x 40% = $152,704 Information systems: 3,600 6,000 = 60%; $381,760 x 60% = $229,056 E-Commerce Consulting Billings: 3,600 hours x $140 2,400 hours x $140 Less: Professional staff cost: 3,600 hours x $50 2,400 hours x $50 Administrative cost. Income Income billings. $336,000 (180,000) (120,000) (152,704) $ 63,296 18.84% ( 229,056) $ 94,944 18.84% Information Systems Services $504,000

2.

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PROBLEM 5-45 (CONTINUED) 3. Activity-based application rates: Activity Staff support In-house computing Miscellaneous office charges Cost $207,000 145,000 29,760 Activity Driver 300 clients 5,000 computer hours (CH) 1,200 client transactions (CT) = = = Application Rate $690 per client $29 per CH $24.80 per CT

Staff support, in-house computing, and miscellaneous office charges of e-commerce consulting and information systems services: E-Commerce Consulting Information Systems Services $165,600 $ 41,400 84,100 60,900 11,904 17,856 $120,156 $261,604

Activity Staff support: 240 clients x $690... 60 clients x $690. In-house computing: 2,900 CH x $29. 2,100 CH x $29. Miscellaneous office charges: 480 CT x $24.80... 720 CT x $24.80... Total .

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PROBLEM 5-45 (CONTINUED) Profitability e-commerce consulting and information systems services: E-Commerce Consulting Billings: 3,600 hours x $140.. 2,400 hours x $140.. Less: Professional staff cost: 3,600 hours x $50 2,400 hours x $50 Administrative cost. Income.. Income billings... 4. $336,000 (180,000) (120,000) (120,156) $ 95,844 28.53% ( 261,604) $ 62,396 12.38% Information Systems Services $504,000

Yes, his attitude should change. Even though both services are needed and professionals are paid the same rate, the income percentages show that e-commerce consulting provides a higher return per sales dollar than information systems services (28.53% vs. 12.38%). Thus, all other things being equal, professionals should spend more time with e-commerce. Probably not. Although both services produce an attractive return for Clark and Shiffer, the firm is experiencing a very tight labor market and will likely have trouble finding qualified help. In addition, the professional staff is currently overworked, which would probably limit the services available to new clients.

5.

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PROBLEM 5-46 (60 MINUTES) 1. The predetermined overhead rate is calculated as follows: Predetermined overhead rate = Budgeted manufacturing overhead/budgeted directlabor hours = $1,224,000/102,000* = $12 per hour *Direct labor, budgeted hours: REG: 5,000 units 9 hours..................................... ADV: 4,000 units 11 hours................................... SPE: 1,000 units 13 hours.................................... Total direct-labor hours........................................................ 45,000 hours 44,000 hours 13,000 hours 102,000 hours

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PROBLEM 5-46 (CONTINUED) 2. Activity-based-costing analysis:

Cost Driver Quantity for Product Line 50,000 48,000 17,000 115,000 40 40 20 100 100 96 104 300 40 40 20 100 400 400 300 1,100 500 400 200 1,100 250 200 200 650 50,000 48,000 17,000 115,000 Activity Cost for Product Line $135,000 129,600 45,900 $310,500 $ 21,000 21,000 10,500 $ 52,500 $ 25,000 24,000 26,000 $ 75,000 $ 34,000 34,000 17,000 $ 85,000 $ 10,000 10,000 7,500 $ 27,500 $ 30,000 24,000 12,000 $ 66,000 $ 12,500 10,000 10,000 $ 32,500 $250,000 240,000 85,000 $575,000 $1,224,000 Product Line Prod. Volume 5,000 4,000 1,000 5,000 4,000 1,000 5,000 4,000 1,000 5,000 4,000 1,000 5,000 4,000 1,000 5,000 4,000 1,000 5,000 4,000 1,000 5,000 4,000 1,000 Activity Cost per Unit of Product $27.00 32.40 45.90 4.20 5.25 10.50 5.00 6.00 26.00 6.80 8.50 17.00 2.00 2.50 7.50 6.00 6.00 12.00 2.50 2.50 10.00 50.00 60.00 85.00

Activity Machine Related Material Hand. Purch.

Activity Cost Pool $310,500

Cost Driver Machine Hours Prod. Runs Purch. Orders Prod. Runs Inspect. Hours Ship.

Cost Driver Quantity 115,000

Pool Rate $ 2.70

Product Line REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total REG ADV GMT Total Grand Total

52,500

100

525.00

75,000

300

250.00

Setup

85,000

100

850.00

Inspect.

27,500

1,100

25.00

Ship.

66,000

1,100

60.00

Eng.

32,500

Eng. Hours Machine Hours

650

50.00

Fac.

575,000

115,000

5.00

Grand Total

$1,224,000

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2009 The McGraw-Hill Companies, Inc. 5-9

PROBLEM 5-46 (CONTINUED) 3. Calculation of new product costs under ABC.

REG $129.00 171.00 (9 hr. @ $19) $300.00 ADV $151.00 209.00 (11 hr. @ $19) $360.00 GMT $203.00 247.00 (13 hr. @ $19) $450.00

Direct material................................. Direct labor (not including set-up time)................................. Total direct costs per unit..............

Manufacturing overhead (based on ABC): Machine-related.......................... $ 27.00 Material handling....................... 4.20 Purchasing.................................. 5.00 Setup........................................... 6.80 Inspection................................... 2.00 Packing/shipping....................... 6.00 Engineering design.................... 2.50 Facility......................................... 50.00 Total ABC overhead cost per unit................................ $103.50 Total product cost per unit............. $403.50

$ 32.40 5.25 6.00 8.50 2.50 6.00 2.50 60.00 $123.15 $483.15

$ 45.90 10.50 26.00 17.00 7.50 12.00 10.00 85.00 $213.90 $663.90

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2009 The McGraw-Hill Companies, Inc. 5-10

PROBLEM 5-46 (CONTINUED) 4. Comparison of costs and target prices under two alternative product-costing systems: REG Reported unit overhead cost: Traditional, volume-based costing system ................................................................................... Activity-based costing system ................................................................................... Reported unit product cost (direct material, direct labor and overhead): Traditional, volume-based costing system ................................................................................... Activity-based costing system ................................................................................... Sales price data: Original target price (130% of product cost based on traditional, volume-based costing system) ................................................................................... New target price (130% of product cost based activity-based costing system) ................................................................................... Actual current selling price.......................................... 5. $108.00 103.50 ADV $132.00 123.15 GMT $156.00 213.90

408.00 403.50 530.40 524.55 525.00

492.00 483.15 639.60 628.10 628.00

606.00 663.90 787.80 863.07 800.00

The REG and ADV products were overcosted by the traditional system, and the GMT product was undercosted by the traditional system $408.00 403.50 $ 4.50 $492.00 483.15 $ 8.85 ($ 57.90) $606.00 663.90

Reported unit product cost: Traditional, volume-based costing system ................................................................................... Activity-based costing system ................................................................................... Cost distortion: REG and ADV overcosted by traditional system ................................................................................... GMT undercosted by traditional system................

6. The electronic version of the Solutions Manual BUILD A SPREADSHEET SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.

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2009 The McGraw-Hill Companies, Inc. 5-11

PROBLEM 5-48 (30 MINUTES) 1. Deluxe manufacturing overhead cost: 32,000 machine hours x $80 = $2,560,000 $2,560,000 16,000 units = $160 per unit Executive manufacturing overhead cost: 45,000 machine hours x $80 = $3,600,000 $3,600,000 30,000 units = $120 per unit Deluxe Direct material. Direct labor.. Manufacturing overhead. Unit cost 2. Activity-based application rates: Activity Manufacturing setups Machine processing Product shipping Cost $1,344,000 3,696,000 1,120,000 Activity Driver 160 setups (SU) 77,000 machine hours (MH) Application Rate = $8,400 per SU = $48 per MH $ 40 25 160 $225 Executive $ 65 25 120 $210

350 outgoing = $3,200 per OS shipments (OS)

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2009 The McGraw-Hill Companies, Inc. 5-12

PROBLEM 5-48 (CONTINUED) Manufacturing setup, machine processing, and product shipping costs of a Deluxe unit and an Executive unit: Activity Manufacturing setups: 100 SU x $8,400.. 60 SU x $8,400.. Machine processing: 32,000 MH x $48... 45,000 MH x $48... Product shipping: 200 OS x $3,200 150 OS x $3,200.. Total . Production volume (units). Cost per unit.. Deluxe $ 840,000 $ 504,000 1,536,000 2,160,000 640,000 $3,016,000 16,000 $188.50* 480,000 $3,144,000 30,000 $104.80** Executive

* $3,016,000 16,000 units = $188.50 ** $3,144,000 30,000 units = $104.80 The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured cost of an Executive cabinet is $194.80. The calculations follow: Deluxe Direct material Direct labor. Manufacturing setup, machine processing, and outgoing shipments.. Total cost. $ 40.00 25.00 188.50 $253.50 Executive $ 65.00 25.00 104.80 $194.80

3. The Deluxe storage cabinet is undercosted. The use of machine hours produced a unit cost of $225; in contrast, the more accurate activity-based-costing approach shows a unit cost of $253.50. The difference between these two amounts is $28.50.

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2009 The McGraw-Hill Companies, Inc. 5-13

PROBLEM 5-48 (CONTINUED) 4. Cost distortion: The Deluxe cabinet product line is undercosted by $456,000, and the Executive cabinet product line is overcosted by $456,000. Supporting calculations follow: Deluxe $28.50* 16,000 = $456,000 *$253.50 $225.00 5. Executive $(15.20) 30,000 = $(456,000)

$194.80 $210.00

No, the discount is not advisable. The regular selling price of $270, when compared against the more accurate ABC cost figure, shows that each sale provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30 discount will actually produce a loss of $13.50 ($253.50 - $240.00), and the more units that are sold, the larger the loss. Notice that with the less-accurate, machine-hourbased figure ($225), the marketing manager will be misled, believing that each discounted unit sold would boost income by $15 ($240 - $225).

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2009 The McGraw-Hill Companies, Inc. 5-14

PROBLEM 5-49 (25 MINUTES) 1. a. Manufacturing overhead costs include all indirect manufacturing costs (all production costs except direct material and direct labor). Typical overhead costs include:

Indirect labor (e.g., a lift-truck driver, maintenance and inspection labor,

engineering labor, and supervisors).

Indirect material. Other indirect manufacturing costs (e.g., building maintenance, machine and
tool maintenance, property taxes, insurance, depreciation on plant and equipment, rent, and utilities). b. Companies develop overhead rates before production to facilitate the costing of products as they are completed and shipped, rather than waiting until actual costs are accumulated for the period of production. The increase in the overhead rate should not have a negative impact on the company, because the increase in indirect costs was offset by a decrease in direct labor. Rather than using a plantwide overhead rate, Digital Light could implement separate activity cost pools. Examples are as follows:

2.

3.

Separate costs into departmental overhead accounts (or other relevant pools),
with one account for each production and service department. Each department would allocate its overhead to products on the basis that best reflects the use of these overhead services.

Treat individual machines as separate cost centers, with the machine costs
collected and charged to the products using machine hours. 4. An activity-based costing system might benefit Digital Light because it assigns costs to products according to their usage of activities in the production process. More accurate product costs are the result.

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2009 The McGraw-Hill Companies, Inc. 5-15

PROBLEM 5-50 (30 MINUTES) 1. Predetermined overhead rate = budgeted overhead budgeted direct-labor hours = $710,000 20,000* = $35.50 per direct labor hour *20,000 budgeted direct-labor hours = (2,500 units of Medform)(3 hrs./unit) + (3,125 units of Procel)(4 hrs./unit) Medform Direct material................................. Direct labor: 3 hours x $15............................. 4 hours x $15............................. Manufacturing overhead: 3 hours x $35.50........................ 4 hours x $35.50........................ Total cost......................................... 2. Activity-based overhead application rates: Activity Order processing Machine processing Product inspection Cost $120,000 500,000 90,000 Activity Cost Driver 600 orders processed (OP) 50,000 machine hrs. (MH) 15,000 inspection hrs. (IH) Application Rate = $200 per OP = $10 per MH = $6 per IH $ 30.00 45.00 60.00 106.50 $181.50 142.00 $247.00 Procel $ 45.00

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2009 The McGraw-Hill Companies, Inc. 5-16

PROBLEM 5-50 (CONTINUED) Order processing, machine processing, and product inspection costs of a Medform unit and an Procel unit: Activity Order processing: 350 OP x $200........................ 250 OP x $200........................ Machine processing: 23,000 MH x $10.................... 27,000 MH x $10.................... Product inspection: 4,000 IH x $6........................ 11,000 IH x $6........................ Total Production volume (units) Cost per unit * $324,000 2,500 units = $129.60 ** $386,000 3,125 units = $123.52 The manufactured cost of a Medform unit is $204.60, and the manufactured cost of a Procel unit is $228.52: Medform Direct material. Direct labor: 3 hours x $15 4 hours x $15 Order processing, machine processing, and product inspection.. Total cost. $ 30.00 45.00 60.00 129.60 $204.60 123.52 $228.52 Procel $ 45.00 Medform $ 70,000 $ 50,000 230,000 270,000 24,000 $324,000 2,500 $129.60* 66,000 $386,000 3,125 $123.52** Procel

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PROBLEM 5-50 (CONTINUED) 3. a. The Procel product is overcosted by $18.48 ($247.00 - $228.52) under the traditional product-costing system. The labor-hour application base resulted in a $247 unit cost; in contrast, the more accurate ABC approach yielded a lower unit cost of $228.52. The opposite situation occurs with the Medform product, which is undercosted by $23.10 under the traditional approach ($181.50 vs. $204.60 under ABC). The traditional costing system overcosts the Procel product line by a total of $57,750 ($18.48 x 3,125 units), and it undercosts the Medform product line by the same amount, $57,750 ($23.10 x 2,500 units). b. Yes, especially since Meditechs selling prices are based heavily on cost. An overcosted product will result in an inflated selling price, which could prove detrimental in a highly competitive marketplace. Customers will be turned off and will go elsewhere, which hurts profitability. With undercosted products, selling prices may be too low to adequately cover a products more accurate (higher) cost. This situation is also troublesome and will result in lower income reported for the company.

4.

The electronic version of the Solutions Manual BUILD A SPREADSHEET SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.

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2009 The McGraw-Hill Companies, Inc. 5-18

PROBLEM 5-51 (30 MINUTES) 1. Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is applied on the basis of direct-labor dollars. In general, a plantwide manufacturingoverhead rate is acceptable only if a similar relationship between overhead and direct labor exists in all departments or the company manufactures products that receive the same proportional services from each department In most cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide the following:

A framework for reviewing overhead costs on a departmental basis, identifying

departmental cost overruns, or taking corrective action to improve departmental cost control.

Sufficient information about product profitability, thus increasing the difficulties

associated with management decision making. 2. Because the company uses a plantwide overhead rate applied on the basis of directlabor dollars, the elimination of direct labor in the Molding Department through the introduction of robots may appear to reduce the overhead cost of the Molding Department to zero. However, this change will not reduce fixed manufacturing costs such as depreciation and plant supervision. In reality, the use of robots is likely to increase fixed costs because of increased depreciation. Under the current method of allocating overhead costs, these costs merely will be absorbed by the remaining departments.

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PROBLEM 5-51 (CONTINUED) 3. a. In order to improve the allocation of overhead costs in the Cutting and Finishing departments, management should move toward an activity-based costing system. The firm should:

Establish activity-cost pools for each significant activity. Select a cost driver for each activity that best reflects the relationship of the
activity to the overhead costs incurred.

b.

In order to accommodate the automation of the Molding Department in its overhead accounting system, the company should:

Establish a separate overhead pool and rate for the Molding Department. Identify fixed and variable overhead costs and establish fixed and variable
overhead rates.

Apply overhead costs to the Molding Department on the basis of robot or

machine hours.

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2009 The McGraw-Hill Companies, Inc. 5-20

PROBLEM 5-52 (40 MINUTES) 1. Overhead to be assigned to development chemical order: Activity Cost Pool Machine setups Material handling Hazardous waste control Quality control Other overhead costs Total 2. 3. Overhead cost per box of chemicals Predetermined overhead rate = =
$93,200 = $93.20 per box 1,000 boxes
$2,500,000 total budgeted overhead cost = total budgeted machine hours 40,000

Pool Rate $4,000 per setup $4 per pound $10 per pound $150 per inspection $20 per machine hour

Level of Cost Driver 6 setups 9,000 pounds 2,100 pounds 8 inspections 550 machine hours

Assigned Overhead Cost $24,000 36,000 21,000 1,200 11,000 $93,200

= $62.50 per machine hr. 4. Overhead to be assigned to film development chemical order, given a single predetermined overhead rate: a. Total overhead assigned = $62.50 per machine hr. 550 machine hr. = $34,375 b. Overhead cost per box of chemicals =
$34,375 = $34.375 per box 1,000 boxes

5.

The radiological development chemicals entail a relatively large number of machine setups, a large amount of hazardous materials, and several inspections. Thus, they are quite costly in terms of driving overhead costs. Use of a single predetermined overhead rate obscures this characteristic of the production job. Underestimating the overhead cost per box could have adverse consequences for Rapid City Radiology, Inc. For example, it could lead to poor decisions about product pricing. The activitybased costing system will serve management much better than the system based on a single, predetermined overhead rate.

PROBLEM 5-52 (CONTINUED)

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6.

The electronic version of the Solutions Manual BUILD A SPREADSHEET SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.

PROBLEM 5-53 (20 MINUTES) 1. Calculation of unit cost: (a) Overhead assigned to plates: Activity Cost Pool Pool Rate Machine setups $4,000 per setup Material handling $4 per pound Hazardous waste control $10 per pound Quality control $150 per inspection Other overhead costs $20 per machine hour Total
Overhead cost per unit = $25,000 = $250 100 plates

Level of Cost Driver 4 setups 800 pounds 400 pounds 4 inspections 60 machine hours

Assigned Overhead Cost $16,000 3,200 4,000 600 1,200 $25,000

(b)

Unit cost per plate: Direct material................................ Direct labor.................................... Manufacturing overhead............... Total cost per plate........................ $210 60 250 $520

2. The electronic version of the Solutions Manual BUILD A SPREADSHEET SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website: WWW.MHHE.COM/HILTON8E.

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2009 The McGraw-Hill Companies, Inc. 5-22

PROBLEM 5-54 (50 MINUTES) 1. Activity Cost Pool I: Machine-related costs II: Setup and inspection III: Engineering IV: Plant-related costs Calculation of pool rates: I: Machine-related costs:
$1,800,000 18,000 machine hrs.

Type of Activity Unit-level Batch-level Product-sustaining-level Facility-level

2.

= $100 per machine hr.

II. Setup and inspection:

$720,000 80 runs

= $9,000 per run

III. Engineering:
$360,000 200 change orders

= $1,800 per change order

IV. Plant-related costs:

$384,000 3,840 sq. ft.

= $100 per sq. ft.

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PROBLEM 5-54 (CONTINUED) 3. Unit costs for odds and ends: I: Machine-related costs: Odds: $100 per machine hr. 8 machine hr. per unit Ends: $100 per machine hr. 2 machine hr. per unit II: Setup and inspection: Odds: $9,000 per run 25 units per run Ends: $9,000 per run 125 units per run III: Engineering: Odds: = $360 per unit = $72 per unit = $800 per unit = $200 per unit

$1,800 per change order 200 change orders 75% 1,000 units

= Ends:

$270,000 = $270 per unit 1,000 units $1,800 per change order 200 change orders 25% 5,000 units $90,000 = $18 per unit 5,000 units

= IV. Plant-related costs: Odds:

$100 per sq. ft. 3,840 sq. ft. 80% 1,000 units

= Ends:

$307,200 = $307.20 per unit 1,000 units $100 per sq. ft. 3,840 sq. ft. 20% 5,000 units $76,800 = $15.36 per unit 5,000 units

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PROBLEM 5-54 (CONTINUED) 4. New product cost per unit using the ABC system: Direct material............................................... Direct labor.................................................... Manufacturing overhead: Machine-related...................................... Setup and inspection............................. Engineering............................................. Plant-related............................................ Total cost per unit......................................... 5. New target prices: New product cost (ABC)............................... Pricing policy................................................. New target price............................................ 6. Full assignment of overhead costs: Odds Manufacturing overhead costs: Machine-related...................................... Setup and inspection............................. Engineering............................................. Plant-related............................................ Total overhead cost per unit......................... Production volume.................................... Total overhead assigned.............................. Ends Odds $2,017.20 120% $2,420.64 Ends $725.36 120% $870.43 (rounded) Odds $ 160.00 120.00 800.00 360.00 270.00 307.20 $2,017.20 Ends $240.00 180.00 200.00 72.00 18.00 15.36 $725.36

$ 800.00 $ 200.00 360.00 72.00 270.00 18.00 307.20 15.36 $1,737.20 $ 305.36 1,000 5,000 $1,737,200 $1,526,800 Total = $3,264,000

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2009 The McGraw-Hill Companies, Inc. 5-25

PROBLEM 5-54 (CONTINUED) 7. Cost distortion: Odds Traditional volume-based costing system: reported product cost................................................ Activity-based costing system: reported product cost................................................ Amount of cost distortion per unit.................................. $ 664.00 Ends $996.00 725.36 $270.64 Traditional system overcosts ends by $270.64 per unit 5,000 $1,353,200

2,017.20 $(1,353.20) Traditional system undercosts odds by $1,353.20 per unit

Production volume.......................................................... Total amount of cost distortion for entire product line...............................................................

1,000 $(1,353,200)

Sum of these two amounts is zero.

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PROBLEM 5-60 (60 MINUTES) 1. Based on the cost data from Gigabyte's traditional, volume-based product-costing system, product G is the firm's least profitable product. Its reported actual gross margin is only $66.00, as compared with $254.25 and $313.50 for products T and W, respectively. However, the validity of this conclusion depends on the accuracy of the product costs reported by Gigabyte's product-costing system. Again, based on the product costs reported by the firm's traditional, volume-based product-costing system, product W appears to be very profitable. As in requirement (1), however, the validity of this assessment depends on the accuracy of the reported product costs. Gigabyte's competitors have moved aggressively into the market for gismos (product G), but they have abandoned the whatchamacallit (product W) market to Gigabyte. These competing firms apparently believe they can sell gismos at a much lower price than Gigabyte's management feels is feasible. This evidence suggests that Gigabyte's competitors may believe their product cost for gismos is below Gigabyte's reported product cost. In contrast, Gigabyte's competitors apparently believe that they cannot afford to sell whatchamacallits at Gigabyte's current price of $600. Perhaps the competing firms' reported production costs for product W are higher than the cost reported by Gigabyte's product-costing system. The danger to Gigabyte is that the company will be forced out of the market for its second largest selling product. This could be disastrous to Gigabyte, Inc. 4. Percentages for raw-material costs: Annual Raw-Material Cost $ 840,000 2,362,500 210,000 $3,412,500 Percentage of Total Raw-Material Cost* 25% 69% 6% 100%

2.

3.

Product G T W Total

Raw-Material Cost per Unit $105.00 157.50 52.50

Annual Volume 8,000 15,000 4,000

*Percentages rounded to nearest whole percent.

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PROBLEM 5-60 (CONTINUED) 5. Product costs based on an activity-based costing system: Product G Direct material................................................ Direct labor..................................................... Machinerya...................................................... Machine setupb............................................... Inspectionc...................................................... Material handlingd.......................................... Engineeringe................................................... Total................................................................
a

Product T $157.50 36.00 122.50 .32 46.20 120.75 6.90 $490.17

Product W $52.50 24.00 238.88 1.89 157.50 39.38 142.21 $656.36

$105.00 48.00 110.25 .43 31.50 82.03 45.25 $422.46

Machinery: Product G: ($3,675,000 24%) Product T: ($3,675,000 50%) Product W: ($3,675,000 26%) b Machine setup: Product G: ($15,750 22%) Product T: ($15,750 30%) Product W: ($15,750 48%) c Inspection: Product G: ($1,575,000 16%) Product T: ($1,575,000 44%) Product W: ($1,575,000 40%) d Material handling: Product G: ($2,625,000 25%) Product T: ($2,625,000 69%) Product W: ($2,625,000 6%) e Engineering: Product G: ($1,034,250 35%) Product T: ($1,034,250 10%) Product W: ($1,034,250 55%)

8,000 units = 15,000 units = 4,000 units = 8,000 units = 15,000 units = 4,000 units = 8,000 units = 15,000 units = 4,000 units = 8,000 units = 15,000 units = 4,000 units = 8,000 units = 15,000 units = 4,000 units =

$110.25 $122.50 $238.88 $.43 $.32 $1.89 $ 31.50 $ 46.20 $157.50 $ 82.03 $120.75 $ 39.38 $ 45.25 $ 6.90 $142.21

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PROBLEM 5-60 (CONTINUED) 6. Comparison of reported product costs, new target prices, and actual selling prices: Product G Reported product costs: Traditional, volume-based costing system Activity-based costing system Target price based on new product costs (150% new product cost) Current actual selling price $573.00 422.46 633.69 639.00 Product T $508.50 490.17 735.26 762.75 Product W $286.50 656.36 984.54 600.00

7. THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL BUILD A SPREADSHEET SOLUTIONS IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE HILTON, 8E WEBSITE: WWW.MHHE.COM/HILTON8E.

PROBLEM 5-61 (20 MINUTES) MEMORANDUM Date: To: From: Subject: Today President, Gigabyte, Inc. I.M. Student Gigabyte's competitive position

Gigabyte's product-costing system has been providing misleading product cost information. Our traditional, volume-based costing system overcosted gismos and thingamajigs, but it substantially undercosted whatchamacallits. As a result Gigabyte has been overpricing gismos and thingamajigs and underpricing whatchamacallits. The company has been losing money on every sale in the product W market. Our competitors have taken advantage of our mispricing by moving aggressively into the gismo market and abandoning the whatchamacallit market to Gigabyte. As a result, our profitability has suffered. I recommend the following courses of action: 1. 2. 3. 4. Implement the new activity-based costing system and revise its database frequently. Lower the target price of gismos to $639, the current actual selling price. This price is slightly over our usual 50 percent markup over product cost. Consider lowering the price of thingamajigs to $736 in order to increase demand. The lower price still yields Gigabyte a 50 percent markup over product cost. Raise the price of whatchamacallits to $985. If the product does not sell at that price, consider discontinuing the product line.

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PROBLEM 5-65 (45 MINUTES) 1. Two dimensional ABC: Cost Assignment View RESOURCE COSTS Assignment of resource costs to activity cost pools associated with significant activities
6

Process View
1 7 11

Activity analysis
2 8 3 9 4 10 5 12 13 14 15 16

Activity evaluation PERFORMANCE MEASURES

(see req. (4) for examples)

ROOT CAUSES

(see req. (3) for (see req. (2) for examples) examples)

ACTIVITY TRIGGERS

ACTIVITIES

Assignment of activity costs to cost objects using second-stage cost drivers COST OBJECTS (Product lines: cooking utensils, tableware, flatware)

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PROBLEM 5-65 (CONTINUED) 2. Triggers for selected activities: Activity Number Trigger (2) Realization by purchasing personnel that they do not fully understand the part specifications (9) (11) (12) (13) 3. Realization by purchasing personnel that the ordered part will be (or may be) late in arriving Receipt of order Discovery during inspection that parts do not meet specifications Discovery that parts do not satisfy intended purpose

Possible root causes: Activity Number Possible Root Causes* (2) Unclear specifications Incomplete specifications Clear, but apparently wrong, specifications Undertrained purchasing personnel (9) Vendor delay Delay in placing order Failure by purchasing personnel to make deadline clear Use of vendor that has not been fully certified as a reliable supplier Critical importance of parts Misspecification of parts Error by purchasing personnel in placing order Vendor error Inspector error Misspecification of parts Incomplete specifications Poor product design Error by purchasing personnel in placing order Vendor error

(11) (12)

(13)

*This list is not necessarily complete. Other root causes may exist.

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PROBLEM 5-65 (CONTINUED) 4. Suggested performance measures: Activity Performance Number Measures (5) Average price paid (6) (10) (12) (16) Number of vendors Number of vendors that are precertified as dependable Percentage of orders received on time Average delay for delinquent orders Number of orders returned Percentage of orders returned Average dollar value tied up in parts inventory

PROBLEM 5-66 (40 MINUTES) 1. Customer-profitability analysis: Caltex Computer Sales revenue...................................................................... Cost of goods sold.............................................................. Gross margin....................................................................... Selling and administrative costs: General selling costs.................................................... General administrative costs....................................... Customer-related costs: Sales activity........................................................... Order taking............................................................. Special handling...................................................... Special shipping...................................................... Total selling and administrative costs............................... Operating income................................................................ $380,000 160,000 $220,000 $ 48,000 38,000 16,000 6,000 80,000 18,000 $206,000 $ 14,000 Trace Telecom $247,600 124,000 $123,600 $ 36,000 32,000 12,000 8,000 60,000 20,000 $168,000 $ (44,400)

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PROBLEM 5-66 (CONTINUED)

2.

The electronic version of the Solutions Manual BUILD A SPREADSHEET SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.

PROBLEM 5-67 (45 MINUTES) 1. Customer-profitability profile (supporting details in the table following the profile):

Cumulative Operating Income as a Percentage of Total Operating Income

120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5 6 7 8

Customers*

*Customers ranked by operating income.

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PROBLEM 5-67 (CONTINUED) Supporting details for customer-profitability profile: Cumulative Operating Income as a Percentage of Total Operating Income 39% 69% 94% 111% 114% 117% 109% 100%

Customer Numbera (1) (2) (3) (4) (5) (6) (7) (8)
a b

Customer Network-All, Inc. Golden Gate Service Associates Graydon Computer Company Mid-State Computing Company Caltex Computerb The California Group Tele-Install, Inc. Trace Telecomc

Operating Income $186,000 142,000 120,000 84,000 14,000 12,000 (36,000) (44,400)

Cumulative Operating Income $186,000 328,000 448,000 532,000 546,000 558,000 522,000 477,600

Customer numbers are ranked by operating income. From solution to preceding problem. c From solution to preceding problem. 2. Date: Memorandum Today I. Sellit, Vice President for Marketing I. M. Student Customer-profitability profile

To:
From: Subject:

The attached customer-profitability profile shows that two of our customer relationships are unprofitable (Tele-Install, Inc. and Trace Telecom). As the profile shows, over half of our operating income is generated by our two most profitable customer relationships, and 94 percent of our operating profit is generated by our three most profitable customers. An activity-based costing analysis of customer-related costs provided the data for the customer-profitability analysis portrayed in the profile.

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SOLUTIONS TO CASES
CASE 5-68 (45 MINUTES) 1. Activity-based costing (ABC) differs from traditional costing in that it focuses on activities that consume resources as the fundamental cost drivers. ABC is a two-stage cost assignment process focused on causality and the determination of cost drivers. It usually uses several different activities to assign costs to products or services. Therefore, it is more detailed and more accurate than traditional costing. It also helps managers distinguish between value added and non-value added activities. Calculations of total activity cost pools and pool rates: Material handling..... ($113,208 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)] = $120,000* (25,000 parts + 50,000 parts) = $120,000 75,000 parts = $1.60 per part *Rounded Inspection................. ($235,850 1.06) (5,000 hours + 7,500 hours) = $250,000* 12,500 hours = $20 per inspection hour *Rounded Machining................. ($849,056 1.06) (15,000 hours + 30,000 hours) = $900,000* 45,000 hours = $20 per machine hour *Rounded Assembly.................. ($433,962 1.06) (6,000 hours + 5,500 hours) = $460,000* 11,500 hours = $40 per assembly hour *Rounded

2.

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CASE 5-68 (CONTINUED) 3. JY-63 20x4 Cost Data Direct material: No cost increase.............. Direct labor: Direct labor $370,370 1.08 cost increase*.... Material handling: Number of parts 5 units produced.......... 5,000 25,000 $1.60 per unit............. Inspection: Inspection hours 5,000 $20 per hour............... Machining: Machining activity in 15,000 hours $20 per hour............... Assembly: Assembly activity in 6,000 hours $40 per hour............... Total cost........................... *$400,000 and $200,000 are both rounded. JY-63 Estimated 20x5 Product Cost $2,000,000 $185,186 400,000 10 5,000 50,000 40,000 7,500 100,000 30,000 300,000 5,500 240,000 $3,080,000 220,000 $4,750,000 600,000 150,000 80,000 200,000 RX-67 20x4 Cost Data RX-67 Estimated 20x5 Product Cost $3,500,000

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CASE 5-68 (CONTINUED) 4. CINCINNATI CYCLE COMPANY BUDGETED STATEMENT OF GROSS MARGIN FOR 20X5 Sales revenue.................................................. Cost of goods manufactured and sold: Beginning finished-goods inventory............. Add: Direct material..................................... Direct labor.......................................... Material handling................................. Inspection............................................ Machining............................................ Assembly............................................. Cost of goods available for sale.................... Less: Ending finished-goods inventory*.... Cost of goods sold......................................... Gross margin................................................... JY-63 $3,621,000 $ 480,000 2,000,000 400,000 40,000 100,000 300,000 240,000 $3,560,000 431,200 $3,128,800 $ 492,200 RX-67 $4,459,000 $ 600,000 3,500,000 200,000 80,000 150,000 600,000 220,000 $5,350,000 665,000 $4,685,000 $ (226,000) Total $8,080,000 $1,080,000 5,500,000 600,000 120,000 250,000 900,000 460,000 $8,910,000 1,096,200 $7,813,800 $ 266,200

*Ending finished-goods inventory = (total product cost inventory in units:

units produced) ending

JY-63: ($3,080,000 5,000 units) 700 units = $431,200 RX-67: ($4,750,000 5,000 units) 700 units = $665,000

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CASE 5-69 (60 MINUTES) 1. Regular Model Product costs based on traditional, volumebased costing system............................... 110%.............................................................. Target price...................................................... $210.00 110% $231.00 Advanced Model $430.00 110% $473.00 Deluxe Model $464.00 110% $510.40

2.

Product costs based on activity-based costing system: Regular Model $ 20.00 20.00 62.40 34.08 30.55 24.99 $192.02 Advanced Model $50.00 40.00 416.00 87.00 104.00 178.50 $875.50 Deluxe Model $84.00 40.00 153.60 68.15 58.50 51.17 $455.42

Direct material.................................................. Direct labor...................................................... Machinery depreciation and maintenancea. . . Engineering, inspection and repair of defectsb........................................ Purchasing, receiving, shipping, and material handlingc...................................... Factory depreciation, taxes, insurance, and miscellaneous overhead costsd........ Total..................................................................
a

Pool I: Depreciation, machinery............................................................... Maintenance, machinery............................................................... Total................................................................................................ Regular: Advanced: Deluxe: ($3,200,000 39%) 20,000 = ($3,200,000 13%) 1,000 = ($3,200,000 48%) 10,000 = $ 62.40 $416.00 $153.60

$2,960,000 240,000 $3,200,000

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CASE 5-69 (CONTINUED)

b

Pool II: Engineering.................................................................................... Inspection and repair of defects.................................................. Total................................................................................................ Regular: Advanced: Deluxe: ($1,450,000 47%) 20,000 = ($1,450,000 6%) 1,000 = ($1,450,000 47%) 10,000 = $ 34.08 $ 87.00 $ 68.15

$ 700,000 750,000 $1,450,000

Pool III: Purchasing, receiving, and shipping........................................... Material handling........................................................................... Total................................................................................................ Regular: Advanced: Deluxe: ($1,300,000 47%) 20,000 = ($1,300,000 8%) 1,000 = ($1,300,000 45%) 10,000 = $ 30.55 $104.00 $ 58.50

$ 500,000 800,000 $1,300,000

Pool IV: Depreciation, taxes, and insurance for factory........................... Miscellaneous manufacturing overhead..................................... Total................................................................................................ Regular: Advanced: Deluxe: ($1,190,000 42%) ($1,190,000 15%) ($1,190,000 43%) 20,000 = 1,000 = 10,000 = $ 24.99 $178.50 $51.17

$ 600,000 590,000 $1,190,000

3. Regular Model Product costs based on activity-based costing system.................................................. 110%....................................................................... New target price........................................................ $192.02 110% $211.22 Advanced Model $875.50 110% $963.05 Deluxe Model $455.42 110% $500.96

The new target price of the regular model, $211.22, is lower than the current actual selling price, $220.

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CASE 5-69 (CONTINUED) 4. Date: To: From: Subject: Today President Madison Electric Pump Corporation I.M. Student Product costing MEMORANDUM

Based on the cost data from our traditional, volume-based product-costing system, our regular model is not very profitable. Its reported actual contribution margin is only $10 ($220 $210). However, the validity of this conclusion depends on the accuracy of the product costs reported by our product-costing system. Our competitors are selling motors like our standard model for $212. This price suggests that their product cost is substantially below our previously reported cost of $210. Our new, activity-based costing system reveals serious product cost distortions stemming from our old costing system. The new costing system shows that the regular model costs only $192.02, which implies a target price of $211.22. This price is lower than our current actual selling price and roughly consistent with the price our competitors are charging. In contrast, our new product-costing system reveals that the advanced model's product cost is $875.50 instead of the previously reported cost of $430. The new product cost suggests a target price of $963.05 for the advanced model, rather than $473, which was our previous target price for the advanced model.

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CASE 5-69 (CONTINUED) 5. The company should adopt and maintain the activity-based costing system. The price of the regular model should be lowered to the $212. Lowering the price should enable the firm to regain its competitive position in the market for the regular model. Further price cuts should be considered if marketing studies indicate such a move will increase demand. The price of the advanced model should be set near the target price of $963.05. If the advanced model does not sell at this price, management should consider discontinuing the product line. Input from the marketing staff should be sought before such an action is taken. An important consideration is the extent to which sales in the regular model and deluxe model markets depend on the firm's offering a complete product line. A slight price reduction should be considered for the deluxe model (from $510.40 down to $500.96). However, the product cost distortion from the old costing system did not affect this model as seriously as it did the other two.

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