ACC 350 Exam 1 Study Materail

Page 30

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Solution on p. 178 of textbook

Determining the profitability of customers

Summary:

Same as for determining profitability of products, except use customer related revenues and
customer related costs instead of product related revenues and product-costs.

Blackboard Problems: Ch 5

Textbook​ ​referenced:​ H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Practice Problems

ACC 350 Name _____________________________

Practice problem—chapter 5

The Oakland plant uses a normal cost system and has the following overhead pool cost estimates for the

coming year:

Machine maintenance costs $240,000
Set-up costs $200,000
Inspection costs $500,000

Total $940,000

Total expected machine hours are 60,000.
Total expected set-ups are 500 (one per batch).
Total expected inspections are 4,000.

Overhead is currently applied using direct labor hours, with an expected and normal capacity of 100,000
direct labor hours.

The following data has been assembled for a proposed job which would require the production of 1,000
units of a product. Bid prices normally reflect a 20% mark-up on cost.

Proposed Job (1,000 units) $ 10,000
1,000
Direct material 900
Direct labor hours ($12 per hour) 100
Machine hours 60
Batch size
Number of inspections

Required:
a. Determine the bid price per unit for the proposed job using the current costing system.
b. Determine the bid price per unit for the proposed job using activity based costing.

Solutions

ACC 350 Name _____________________________

Practice problem solution—chapter 5

The Oakland plant uses a normal cost system and has the following overhead pool cost estimates for the

coming year:

Machine maintenance costs $240,000
Set-up costs $200,000
Inspection costs $500,000

Total $940,000

Total expected machine hours are 60,000.
Total expected set-ups are 500 (one per batch).
Total expected inspections are 4,000.

Overhead is currently applied using direct labor hours, with an expected and normal capacity of 100,000
direct labor hours.

The following data has been assembled for a proposed job which would require the production of 1,000
units of a product. Bid prices normally reflect a 20% mark-up on cost.

Proposed Job (1,000 units) $ 10,000
1,000
Direct material 900
Direct labor hours ($12 per hour) 100
Machine hours 60
Batch size
Number of inspections

Required:
a. Determine the bid price per unit for the proposed job using the current costing system.
b. Determine the bid price per unit for the proposed job using activity based costing.

1. $940,000 of Ovhd / 100,000 DLH = $9.40 per hour
DLH = 1,000 X $9.40 = 9,400 of applied overhead
Total Cost = DM + DL + MOH = $10,000 + $12,000 + $9,400 = $31,400
Bids are marked up 20% over cost - $31,400 X 120% = $37,680 Total Bid Price
$37,680 total bid price / 1,000 units = $37.68 per unit bid price

2. Maintenance-related activity rate = $240,000 / 60,000 MH = $4 per MH
Set-up-related activity rate = $200,000/ 500 setups = $400 per setup
Inspection-related activity rate = $500,000/4,000 inspections = $125 per inspection

Maintenance-related ovhd on job = $4 per MH X 900 MH = $3,600
Set-up related ovhd on job = $400 per setup X 10 setups = $4,000
(NOTE – each batch is 100 units; total job is 1,000 units; therefore, there are 10 setups)
Inspection-related activity rate = $125 per inspection X 60 inspections = $7,500
Total overhead applied to job = $3,600 + $4,000 + $7,500 = $15,100

Total Cost = DM + DL + MOH = $10,000 + $12,000 + $15,100 = $37,100
Bids are marked up 20% over cost - $37,100 X 120% = $44,520 Total Bid Price
$44,520 total bid price / 1,000 units = $44.52 per unit bid price

In - Class Problems

ACC 350
In-Class Problems – Chapter 5

Problem #1 – Identify Activity Level
The company below manufactures trucks and has the following activities:

Activity Potential Activity Driver
Level

1. Work on assembly line

2. Set-up production machinery

3. Operate production machines

4. Maintenance of production machinery

5. Inspect products

6. Receive Raw Materials

7. Factory heating, lighting & air
conditioning

8. Set up an inventory part number in the
information system.

9. Prepare a production order

10. Advertising the product

11. Customer returns

12. Rent on manufacturing plant

13. Move materials

14. Prepare an engineering change order

15. Provide a “help” line for ten largest
customers.

For each activity, identify the activity level (unit, batch, product, customer or facility) and list a
potential activity driver.

Problem #2 – Activity Based Costing Problem
The Manhattan Company manufactures two models of compact disc players, deluxe and regular.
The company has manufactured the regular model for years; the deluxe model was introduced
recently to tap a new segment of the market. Although sales of the deluxe model have been
increasing rapidly, the company’s profits have steadily declined. Management has become
increasingly concerned about the accuracy of its costing system.

The current cost accounting system allocates manufacturing support costs to the two products on
the basis of direct labor hours. Information for deluxe and regular products for the next year is
shown below:

Selling Price Deluxe Regular
Number of Units Produced & Sold
Direct Material per unit $140 $80
Direct Labor per unit 5,000 45,000
DLH per unit
MH per unit $45 $30
Units per batch $20 $20
Inspection hrs/batch
Vendors of components 2 2
3 0.5
50 450
1 0.25
6
4

A machine is setup once for each batch and the setup is the same regardless of the type of
product. There is one inspection performed for each batch and the inspection time is 1 hour for
the deluxe product and ¼ hour for the regular product. The company has a JIT inventory system
and purchases raw materials by batch. For each batch, the purchasing agent has to order from the
various vendors for the appropriate direct material components. There are six different vendors
for various components of the deluxe model (and therefore six purchase orders per batch) and 4
different vendors for components for the regular product (and therefore four purchase orders per
batch).

The company is considering switching to an ABC system. A recent cost study revealed the
company expects $1,000,000 of overhead next year from the following activities:

Activity Annual Cost

Purchasing $180,000

Quality Control $250,000

Production Set-ups $220,000

Machine Maintenance $350,000

TOTAL $1,000,000

Requirements:
1. Determine the plant-wide overhead rate using the current costing system.

2. Determine the gross margin (per unit) of the regular and deluxe models using the current costing

system.

Deluxe Regular

3. For each activity, identify an activity driver and calculate the activity driver rates.

4. Determine the gross margin (per unit) of the regular and deluxe models using the ABC

information.

Deluxe Regular

5. Is the deluxe model as profitable as the company thinks it is? Why or why not?

6. What can Manhattan Company do to improve its profitability? Should the company drop the
Deluxe model? Why or why not?

Problem #3 – Activity Based Costing Problem
Anderson Company uses a conventional cost system with overhead allocated to products on the
basis of direct labor hours. The company manufactures two products, for which the following
estimated information for next year is available.

Selling Price Standard Unique
Number of Units Produced
Prime Cost per Unit $125 $195
DLH per unit 15,000 5,000
# of units produced each MH $125
Units per batch $85
Hours to setup a batch 2 1
Number of moves per batch 7.5 2.5
Engineering Support Hours 30 10
4 6
2 3
2,000
1,000

Total overhead for the current year was estimated to be $402,500 from the following activities:

Activity Cost
Material Handling $ 30,000
Machine Set-ups $100,000
Engineering Support $150,000
Power for Machines $ 80,000
Providing Space $ 42,500
Total $402,500

If the company adopts an ABC system, they will allocate facility-level costs equally to each
product line.

Requirements:
1. Estimate the cost per unit of the two products using the current cost system.

2. For each activity, identify an activity driver and calculate the activity driver rates.
3. Calculate the cost of the two products using ABC.

4. How did the cost of the two products change and why?
5. Discuss how the company would go about improving profitability.

solutions

ACC 350
In-Class Problems – Chapter 5

Problem #1 – Identify Activity Level
The company below manufactures trucks and has the following activities:

1. Work on assembly line Activity Potential Activity Driver
Level Labor hours

Unit

2. Set-up production machinery Batch # of Setups/Setup hours

3. Operate production machines Unit Machine hours

4. Maintenance of production machinery Unit Machine hours

5. Inspect products Batch* # of Inspections/Inspection hours

6. Receive Raw Materials Batch # of Receipts

7. Factory heating, lighting & air Facility Square footage
conditioning

8. Set up an inventory part number in the Product # of different parts
information system.

9. Prepare a production order Batch # of production orders
10. Advertising the product Product # of different products

11. Customer returns Customer # of returns

12. Rent on manufacturing plant Facility Square Footage

13. Move materials Batch # of moves

14. Prepare an engineering change order Product # of different products

15. Provide a “help” line for ten largest Customer # of calls/# of hours on the phone
customers.

For each activity, identify the activity level (unit, batch, product, customer or facility) and list a potential
activity driver.

*This (as well as other batch activities) would be a unit-level activity if each unit required inspection.

Problem #2 – Activity Based Costing Problem
The Manhattan Company manufactures two models of compact disc players, deluxe and regular.
The company has manufactured the regular model for years; the deluxe model was introduced
recently to tap a new segment of the market. Although sales of the deluxe model have been
increasing rapidly, the company’s profits have steadily declined. Management has become
increasingly concerned about the accuracy of its costing system.

The current cost accounting system allocates manufacturing support costs to the two products on
the basis of direct labor hours. Information for deluxe and regular products for the next year is
shown below:

Selling Price Deluxe Regular
# of Units Produced & Sold
Direct Material per unit $140 $80
Direct Labor per unit 5,000 45,000
DLH per unit
MH per unit $45 $30
Units per batch $20 $20
Inspection hrs/batch
Vendors of components 2 2
3 0.5
50 450
1 0.25
6 4

A machine is setup once for each batch and the setup is the same regardless of the type of
product. There is one inspection performed for each batch and the inspection time is 1 hour for
the deluxe product and ¼ hour for the regular product. The company has a JIT inventory system
and purchases raw materials by batch. For each batch, the purchasing agent has to order from the
various vendors for the appropriate direct material components. There are six different vendors
for various components of the deluxe model (and therefore six purchase orders per batch) and 4
different vendors for components for the regular product (and therefore four purchase orders per
batch).

The company is considering switching to an ABC system. A recent cost study revealed the
company expects $1,000,000 of overhead next year from the following activities:

Activity Annual Cost

Purchasing $180,000

Quality Control $250,000

Production Set-ups $220,000

Machine Maintenance $350,000

TOTAL $1,000,000

Requirements:
1. Determine the plant-wide overhead rate using the current costing system.

$1,000,000/100,000 DLH = $10/DLH

2. Determine the gross margin (in total and per unit) of the regular and deluxe models using the

current costing system.

Deluxe Regular Total

Sales $140 $80

DM 45 30

DL 20 20

OH 20 20

Gross Margin $55 $10

5,000 u. 45,000 u.

Total Gross Margin $275,000 $450,000 $725,000

3. For each activity, identify an activity driver and calculate the activity driver rates.

Purchasing--Purchase Orders

Number of Batches

Deluxe: 5,000 units / 50 u/batch = 100 batches
Regular: 45,000 units / 450 u/batch = 100 batches

200 batches

Number of Purchase Orders

Deluxe: 100 batches * 6 POs / batch = 600 POs
Regular: 100 batches * 4 POs / batch = 400 POs

1,000 POs

$180,000 / 1,000 POs = $180/PO

Quality Control—Inspection Time

Deluxe: 100 batches * 1 hr/batch = 100 hrs
Regular: 100 batches * .25 hr/batch = 25 hrs

125 hrs

$250,000/125 hrs = $2,000/Inspection hr

Set-ups—Number of set-ups (batches)
$220,000 / 200 set-ups = $1,100/Set-up

Machine Maintenance—Machine Hours

Deluxe: 5,000 units * 3 MH/u = 15,000 MHs
Regular: 45,000 units * .5 MH/u = 22,500 MHs

37,500 MHs

$350,000 / 37,500 MHs = $9.33/MH

4. Determine the gross margin (in total and per unit) of the regular and deluxe models using the ABC
information.

Sales (5,000 * $140/u; 45,000 * $80/u) Deluxe Regular Total
DM (5,000 * $45/u; 45,000 * $30/u) $700,000 $3,600,000 $725,000
DL (5,000 * $20/u; 45,000 * $20/u) -225,000 -1,350,000
OH -100,000
Purchasing (600 POs * $180/PO; 400 POs * $180/PO) -900,000
QC (100 hrs. * $2,000/hr; 25 hrs. * $2,000/hr) -108,000
Set-up (100 Batches * $1,100/batch) -200,000 -72,000
Maint. (15,000 MHs * $9.33/MH; 22,500 * 9.33/MH -110,000 -50,000
Gross Margin -140,000 -110,000
$(183,000) -210,000
$908,000

Gross Margin/unit $(36.60) $20.18

5. Is the deluxe model as profitable as the company thinks it is? Why or why not?

No, the deluxe model consumes more resources than was shown under the more traditional method
of product costing.

6. What can Manhattan Company do to improve its profitability? Should the company drop the
Deluxe model? Why or why not?

• Consider increasing the price of the Deluxe model.
• Emphasize (increase sales) of the Regular model and de-emphasize (reduce sales) of the

Deluxe model.
• Improve productivity by reducing the cost of the activities.
• Reduce the activity requirements (activity quantities) associated with the Deluxe model.
• It should only drop the Deluxe model if the avoidable costs associated with the Deluxe

model are greater than the Deluxe model’s contribution margin.

Problem #3 – Activity Based Costing Problem
Anderson Company uses a conventional cost system with overhead allocated to products on the
basis of direct labor hours. The company manufactures two products, for which the following
estimated information for next year is available.

Selling Price Standard Unique
Number of Units Produced
Prime Cost per Unit $125 $195
DLH per unit 15,000 5,000
# of units produced each MH $125
Units per batch $85
Hours to setup a batch 2 1
Number of moves per batch 7.5 2.5
Engineering Support Hours 30 10
4 6
2 3
2,000
1,000

Total overhead for the current year was estimated to be $402,500 from the following activities:

Activity Cost
Material Handling $ 30,000
Machine Set-ups $100,000
Engineering Support $150,000
Power for Machines $ 80,000
Providing Space $ 42,500
Total $402,500

If the company adopts an ABC system, they will allocate facility-level costs equally to each
product line.

Requirements:
1. Estimate the cost per unit of the two products using the current cost system.
OH costs / DLH = $402,500/35,000 DLH = $11.50/DLH

Prime costs (DM & DL) Standard Unique
OH (2 * $11.50; 1 * $11.50) $85.00 $125.00
23.00 11.50
Total $108.00 $136.50

2. For each activity, identify an activity driver and calculate the activity driver rates.

Material Handling-- # of moves (in batches)
Number of batches:
Standard: 15,000 units / 30 units/batch = 500 batches
Unique: 5,000 units / 10 units/batch = 500 batches

Number of moves:
Standard: 500 batches * 2 moves/batch = 1,000 moves
Unique: 500 batches * 3 moves/batch = 1,500 moves

2,500 moves
$30,000 / 2,500 moves = $12/move

Machine Set-up—Set-up hours
Number of set-up hours:
Standard: 500 batches * 4 hrs/batch = 2,000 hrs
Unique: 500 batches * 6 hrs/batch = 3,000 hrs

5,000 hrs
$100,000 / 5,000 hrs = $20/set-up hr

Engineering Support—Engineering hours
$150,000 / 3,000 hrs = $50/hr

Power for Machines—Machine hours
Number of machine hours
Standard: 15,000 units / 7.5 units/MH = 2,000 MHs
Unique: 5,000 units / 2.5 units/MH = 2,000 MHs

4,000 MHs
$80,000 / 4,000 MHs = $20/MH

Providing Space—Equally to each product line

Standard: ($42,500 * .50) / 15,000 units = $1.42/unit Standard Unique
Unique: ($42,500 * .50) / 5,000 units = $4.25/unit
$12,000 $18,000
3. Calculate the cost of the two products using ABC. 40,000 60,000
50,000 100,000
OH 40,000 40,000
Mtl handling ($12/move * 1,000; $12/move * 1,500) 21,250 21,250
Set-ups ($20/hr * 2,000; $20/hr * 3,000) $163,250 239,250
Engin. Support ($50/hr * 1,000; $50/hr * 2,000)
Power ($20/MH * 2,000MH; $20/MH * 2,000MH) 15,000 5,000
Space
$10.88 $ 47.85
Total OH Costs 85.00 125.00
$95.88 $172.85
Number of units

OH Cost/Unit
Prime Costs (DM & DL)

Total Cost/Unit

4. How did the cost of the two products change and why?
Using ABC, the cost of the Standard product declined and the cost of the Unique product
increased. The traditional method of product costing did not take into account all of the resources
consumed by the Unique product, and overestimated the resources consumed by the Standard
product.

5. Discuss how the company would go about improving profitability.

• Improve productivity by reducing the cost of the activities.
• Reduce the activity requirements (activity quantities) associated with the Unique product.
• While we don’t have pricing information, we should consider:

o Increasing the price of the Unique product.
o Emphasize (increase sales) of the Standard product and de-emphasize (reduce

sales) of the Unique product.
o Drop the Unique product if the avoidable costs associated with the Unique

product are greater than the Unique product’s contribution margin

Milwaukee Problem

Milwaukee Company ABC Problem

The Milwaukee Company manufactures two models of scooters, deluxe and regular. The
company has manufactured the regular model for years; the deluxe model was introduced
recently to tap a new segment of the market. Although sales of the deluxe model have been
increasing rapidly, the company’s profits have steadily declined. Management has become
increasingly concerned about the accuracy of its costing system.

The current cost accounting system allocates manufacturing support costs to the two products on

the basis of direct labor hours. For 2006, the company has estimated that it will incur $2,581,000

in manufacturing support costs and produce 20,000 units of the deluxe model and 500,000 units

of the regular model. The deluxe model requires one hour of direct labor and the regular model

requires ¼ hour. Direct labor costs $20 per DLH. The deluxe model requires 2 machine hours

and the regular model requires 0.5 machine hours. Direct costs and selling prices per unit are as

follows:

Regular Deluxe

Direct Material $8 $10

Selling Price $25 $60

The company is considering switching to an ABC system. A recent cost study revealed the
following activities and costs:

Activity Annual Cost

Purchase Orders $246,000
Inspections $600,000
Production Set-ups $710,000
Machine Maintenance $450,000
Facility Costs $575,000

TOTAL $2,581,000

The company would like to allocated facility level costs on a per unit basis and has calculated the
following information related to activities:

Activity Driver Regular Deluxe
# of units per batch 1,000 80
Setup time per batch 1 hour
# of purchase orders 0.5 hour 200
# of Inspections per batch 200 1

1

Requirements:
a. Determine the plant-wide overhead rate using the current costing system.
b. Determine the gross margin (per unit) of the regular and deluxe models using the current costing

system.
c. For each activity, calculate activity rates (round to the nearest penny)
d. Determine the gross margin (per unit) of the regular and deluxe models using the ABC

information.

Solutions

Milwaukee Company Problem Solution

The Milwaukee Company manufactures two models of scooters, deluxe and regular. The
company has manufactured the regular model for years; the deluxe model was introduced
recently to tap a new segment of the market. Although sales of the deluxe model have been
increasing rapidly, the company’s profits have steadily declined. Management has become
increasingly concerned about the accuracy of its costing system.

The current cost accounting system allocates manufacturing support costs to the two products on
the basis of direct labor hours. For 2017, the company has estimated that it will incur $2,581,000
in manufacturing support costs and produce 20,000 units of the deluxe model and 500,000 units
of the regular model. The deluxe model requires one hour of direct labor and the regular model
requires ¼ hour. Direct labor costs $20 per DLH. The deluxe model requires 2 machine hours
and the regular model requires 0.5 machine hours. Direct costs and selling prices per unit are as
follows:

Direct Material Regular Deluxe
Selling Price
$8 $10
$25 $60

The company would like to allocated facility level costs on a per unit basis and has calculated the
following information related to activities:

Activity Annual Cost

Purchase Orders $246,000
Inspections $600,000
Production Set-ups $710,000
Machine Maintenance $450,000
Facility Costs $575,000

TOTAL $2,581,000

The company has calculated the following information related to activities:

Activity Driver Regular Deluxe
# of units per batch 1,000 80
Setup time per batch 1 hour
# of purchase orders 0.5 hour 200
# of Inspections per batch 200 1

1

Requirements:
a. Determine the plant-wide overhead rate using the current costing system.

$2,581,000 of MOH costs
20,000 units of deluxe model @ 1 DLH/unit = 20,000 DLH
500,000 units of regular model @ ¼ DLH/unit = 125,000 DLH
Total DLH = 145,000
MOH Rate = $2,581,000 / 145,000 DLH = $17.80 per DLH

b. Determine the gross margin (per unit) of the regular and deluxe models using the current costing
system.
Regular:
DM = $8
DL = $20/DLH * ¼ DLH = $5
MOH = $17.80 * ¼ DLH = $4.45
Total Product Cost = $17.45
Selling Price = $25
Gross Margin = $25 – $17.45 = $7.55 per unit

Deluxe:
DM = $10
DL = $20/DLH * 1 DLH = $20
MOH = $17.80 * 1 DLH = $17.80
Total Product Cost = $47.80
Selling Price = $60
Gross Margin = $60 – $47.80 = $12.20 per unit

c. For each activity, calculate activity rates

Activity Annual Cost Activity Driver Total Activity Rate

Purchase Orders $246,000 # of POs 400 $615.00
Inspections $600,000 # of Inspections 750 $800.00
Production Set-ups $710,000 Setup Hours 500 $1,420.00
Machine Maintenance $450,000 290,000
Facility Costs $575,000 MH 520,000 $1.55
Per unit $1.11

d. Determine the gross margin (per unit) of the regular and deluxe models using the ABC
information.

NOTE: Your answers may differ slightly based on your rounding.

Activity Regular Deluxe
Purchase Orders
Inspections $123,000 $123,000
Production Set-ups $400,000 $200,000
Machine Maintenance $355,000 $355,000
Facility Costs $387,931 $62,069
$552,885 $22,115
# of Units
$1,818,816 762,184
DM 500,000 20,000
DL (from part 2)
Total Product Cost $3.64 38.11
Selling Price 8.00 10.00
Gross Margin 5.00 20.00

16.64 68.11
$25.00 $60.00

$8.36 ($8.11)

Brrrrr Problem

ABC Problem—Brrrrr Company

Brrrrr Company manufactures two models of snowblowers: push and self-propelled. The
company has manufactured the push model for years; the self-propelled model was introduced
recently to tap a new segment of the market. While competitors charge quite a bit more for
similar models, the self-propelled model is extremely profitable for Brrrrr. Although sales of the
self-propelled model have been increasing rapidly, the company’s profits have steadily declined.
Management has become increasingly concerned about the accuracy of its costing system.

The current cost accounting system allocates manufacturing overhead costs to the two products
on the basis of direct labor hours. For 2006, the company has estimated that it will incur
$3,570,000 in manufacturing support costs and produce 50,000 units of the push model and
10,000 units of the self-propelled model. The push model requires one hour of direct labor and
the self-propelled model requires 2 hours. Direct labor costs $30 per DLH. The push model
requires 1 machine hours and the self-propelled model requires 4 machine hours. Direct costs
and selling prices per unit are as follows:

Direct Material Push Self-Propelled
Selling Price
$38 $54
$145 $275

The company is considering switching to an ABC system. A recent cost study revealed the
following activities and costs:

Activity Annual Cost

Engineering Design $440,000
Inspections $780,000
Production Set-ups $610,000
Scheduling $220,000
Material Handling $295,000
Machine Maintenance $450,000
Facility Costs $775,000

TOTAL $3,570,000

The company schedules each production run. It doesn’t matter what type of product is being
scheduled – they each take about the same amount of time. Material is pulled for each production
run and is moved from workstation to workstation for each production run. The company has
decided that facility-level costs should be allocated based on direct labor hours. They have
calculated the following information related to activities:

Activity Information Push Self-propelled

# of units per batch 500 100
Setup time per batch 0.5 hour 0.5 hour
# of Inspections per batch 1 1
Inspection time per batch 0.5 hour 1.5 hour
Engineering Design Hours
350 hours 650 hours

4 - 15

InClass Problems – Chapter 4

Requirements:
a. Determine the plant-wide overhead rate using the current costing system.
b. Determine the gross margin (per unit) of the two models using the current costing system.
c. For each activity, calculate activity rates
d. Determine the gross margin (per unit) of the two models using the ABC information.
e. What can Brrrrr Company do to improve its profitability?

4 - 16

Solution

Brrrrr Problem Solution

Brrrrr Company manufactures two models of snowblowers: push and self-propelled. The company
has manufactured the push model for years; the self-propelled model was introduced recently to tap
a new segment of the market. While competitors charge quite a bit more for similar models, the self-
propelled model is extremely profitable for Brrrrr. Although sales of the self-propelled model have
been increasing rapidly, the company’s profits have steadily declined. Management has become
increasingly concerned about the accuracy of its costing system.

The current cost accounting system allocates manufacturing overhead costs to the two products on
the basis of direct labor hours. For 2006, the company has estimated that it will incur $3,570,000 in
manufacturing support costs and produce 50,000 units of the push model and 10,000 units of the
self-propelled model. The push model requires one hour of direct labor and the self-propelled model
requires 2 hours. Direct labor costs $30 per DLH. The push model requires 1 machine hours and the
self-propelled model requires 4 machine hours. Direct costs and selling prices per unit are as
follows:

Direct Material Push Self-Propelled
Selling Price
$38 $54
$145 $275

The company is considering switching to an ABC system. A recent cost study revealed the following
activities and costs:

Activity Annual Cost

Engineering Design $440,000
Inspections $780,000
Production Set-ups $610,000
Scheduling $220,000
Material Handling $295,000
Machine Maintenance $450,000
Facility Costs $775,000

TOTAL $3,570,000

The company schedules each production run. It doesn’t matter what type of product is being
scheduled – they each take about the same amount of time. Material is pulled for each production run
and is moved from workstation to workstation for each production run. The company has decided that
facility-level costs should be allocated based on direct labor hours. They have calculated the
following information related to activities:

Activity Information Push Self-Propelled

# of units per batch 500 100
Setup time per batch 0.5 hour 0.5 hour
# of Inspections per batch 1 1
Inspection time per batch 0.5 hour 1.5 hour
Engineering Design Hours
350 hours 650 hours

Requirements:
a. Determine the plant-wide overhead rate using the current costing system.

$3,570,000 of MOH costs
50,000 units of push model @ 1 DLH/unit = 50,000 DLH
10,000 units of self-propelled model @ 2 DLH/unit = 20,000 DLH
Total DLH = 70,000
MOH Rate = $3,570,000 / 70,000 DLH = $51.00 per DLH

b. Determine the gross margin (per unit) of the two models using the current costing system.
Push:
DM = $38
DL = $30/DLH * 1 DLH = $30
MOH = $51.00 * 1 DLH = $51
Total Product Cost = $119.00
Selling Price = $145
Gross Margin = $145 – $119 = $26 per unit

Self-Propelled:
DM = $54
DL = $30/DLH * 2 DLH = $60
MOH = $51 * 2 DLH = $102.00
Total Product Cost = $216.00
Selling Price = $275
Gross Margin = $275 – $216 = $59 per unit

c. For each activity, calculate activity rates

Activity Annual Cost Activity Driver Total Activity Rate

Engineering Design $440,000 Engineering hrs 1,000 $440.00
Inspections $780,000 Inspection Hrs 200 $3,900.00
Production Set-ups $610,000 Setup time 200 $6,100.00
Scheduling $220,000 # of batches 200 $1,100.00
Material Handling $295,000 # of batches 200 $1,475.00
Machine Maintenance $450,000
Facility Costs $775,000 MH 90,000 $5.00
DLH 70,000 $11.07

d. Determine the gross margin (per unit) of the two models using the ABC information.

NOTE: Your answers may differ slightly based on your rounding.

Activity Push Self-Propelled

Engineering Design $154,000 $286,000
Inspections 195,000 585,000
Production Set-ups 305,000 305,000
Scheduling 110,000 110,000
Material Handling 147,500 147,500
Machine Maintenance 250,000 200,000
Facility Costs 553,571 221,429

# of Units $1,715,071 $1,854,929
50,000 10,000
DM
DL (from part 2) $34.30 $185.49
Total Product Cost 38.00 54.00
Selling Price 30.00 60.00
Gross Margin
$102.30 $299.49
$145.00 $275.00

$42.70 ($24.49)

e. What can Brrrrr Company do to improve its profitability?

Currently, the Self-propelled model is losing money on each unit sold (even before SG&A
costs!). The company probably doesn’t want to discontinue this model. First, they may want to
explore the idea of increasing prices. Second, they should evaluate whether they can use the
ABC information to manage costs. The schedule below breaks out activity costs per unit. They
should use this information and focus on the high dollar costs. For example, it costs $52 per unit
to inspect the Self-propelled snow blowers. This seems excessive given the $275 selling price
(20% of selling price for inspection?). Setups are also extremely expensive. Can they run more
items in a batch? While inventory holding costs would increase, reducing the number of batches
would likely reduce the costs per unit of inspections, setups, scheduling and material handling.
They should do a cost/benefit analysis to determine whether the savings offset the increasing
inventory holding costs.

Activity Self-Propelled Per Unit

Engineering Design $286,000 $28.60
Inspections 585,000 58.50
Production Set-ups 305,000 30.50
Scheduling 110,000 11.00
Material Handling 147,500 14.75
Machine Maintenance 200,000 20.00
Facility Costs 221,429 22.14

$1,854,929 $185.49

# of Units $1,715,071 $1,854,929
50,000 10,000
DM
DL (from part 2) $34.30 $185.49
Total Product Cost 38.00 54.00
Selling Price 30.00 60.00
Gross Margin
$102.30 $299.49
$145.00 $275.00

$42.70 ($24.49)

e. What can Brrrrr Company do to improve its profitability?

Currently, the Self-propelled model is losing money on each unit sold (even before SG&A
costs!). The company probably doesn’t want to discontinue this model. First, they may want to
explore the idea of increasing prices. Second, they should evaluate whether they can use the
ABC information to manage costs. The schedule below breaks out activity costs per unit. They
should use this information and focus on the high dollar costs. For example, it costs $52 per unit
to inspect the Self-propelled snow blowers. This seems excessive given the $275 selling price
(20% of selling price for inspection?). Setups are also extremely expensive. Can they run more
items in a batch? While inventory holding costs would increase, reducing the number of batches
would likely reduce the costs per unit of inspections, setups, scheduling and material handling.
They should do a cost/benefit analysis to determine whether the savings offset the increasing
inventory holding costs.

Activity Self-Propelled Per Unit

Engineering Design $286,000 $28.60
Inspections 585,000 58.50
Production Set-ups 305,000 30.50
Scheduling 110,000 11.00
Material Handling 147,500 14.75
Machine Maintenance 200,000 20.00
Facility Costs 221,429 22.14

$1,854,929 $185.49

# of Units $1,715,071 $1,854,929
50,000 10,000
DM
DL (from part 2) $34.30 $185.49
Total Product Cost 38.00 54.00
Selling Price 30.00 60.00
Gross Margin
$102.30 $299.49
$145.00 $275.00

$42.70 ($24.49)

e. What can Brrrrr Company do to improve its profitability?

Currently, the Self-propelled model is losing money on each unit sold (even before SG&A
costs!). The company probably doesn’t want to discontinue this model. First, they may want to
explore the idea of increasing prices. Second, they should evaluate whether they can use the
ABC information to manage costs. The schedule below breaks out activity costs per unit. They
should use this information and focus on the high dollar costs. For example, it costs $52 per unit
to inspect the Self-propelled snow blowers. This seems excessive given the $275 selling price
(20% of selling price for inspection?). Setups are also extremely expensive. Can they run more
items in a batch? While inventory holding costs would increase, reducing the number of batches
would likely reduce the costs per unit of inspections, setups, scheduling and material handling.
They should do a cost/benefit analysis to determine whether the savings offset the increasing
inventory holding costs.

Activity Self-Propelled Per Unit

Engineering Design $286,000 $28.60
Inspections 585,000 58.50
Production Set-ups 305,000 30.50
Scheduling 110,000 11.00
Material Handling 147,500 14.75
Machine Maintenance 200,000 20.00
Facility Costs 221,429 22.14

$1,854,929 $185.49

# of Units $1,715,071 $1,854,929
50,000 10,000
DM
DL (from part 2) $34.30 $185.49
Total Product Cost 38.00 54.00
Selling Price 30.00 60.00
Gross Margin
$102.30 $299.49
$145.00 $275.00

$42.70 ($24.49)

e. What can Brrrrr Company do to improve its profitability?

Currently, the Self-propelled model is losing money on each unit sold (even before SG&A
costs!). The company probably doesn’t want to discontinue this model. First, they may want to
explore the idea of increasing prices. Second, they should evaluate whether they can use the
ABC information to manage costs. The schedule below breaks out activity costs per unit. They
should use this information and focus on the high dollar costs. For example, it costs $52 per unit
to inspect the Self-propelled snow blowers. This seems excessive given the $275 selling price
(20% of selling price for inspection?). Setups are also extremely expensive. Can they run more
items in a batch? While inventory holding costs would increase, reducing the number of batches
would likely reduce the costs per unit of inspections, setups, scheduling and material handling.
They should do a cost/benefit analysis to determine whether the savings offset the increasing
inventory holding costs.

Activity Self-Propelled Per Unit

Engineering Design $286,000 $28.60
Inspections 585,000 58.50
Production Set-ups 305,000 30.50
Scheduling 110,000 11.00
Material Handling 147,500 14.75
Machine Maintenance 200,000 20.00
Facility Costs 221,429 22.14

$1,854,929 $185.49

# of Units $1,715,071 $1,854,929
50,000 10,000
DM
DL (from part 2) $34.30 $185.49
Total Product Cost 38.00 54.00
Selling Price 30.00 60.00
Gross Margin
$102.30 $299.49
$145.00 $275.00

$42.70 ($24.49)

e. What can Brrrrr Company do to improve its profitability?

Currently, the Self-propelled model is losing money on each unit sold (even before SG&A
costs!). The company probably doesn’t want to discontinue this model. First, they may want to
explore the idea of increasing prices. Second, they should evaluate whether they can use the
ABC information to manage costs. The schedule below breaks out activity costs per unit. They
should use this information and focus on the high dollar costs. For example, it costs $52 per unit
to inspect the Self-propelled snow blowers. This seems excessive given the $275 selling price
(20% of selling price for inspection?). Setups are also extremely expensive. Can they run more
items in a batch? While inventory holding costs would increase, reducing the number of batches
would likely reduce the costs per unit of inspections, setups, scheduling and material handling.
They should do a cost/benefit analysis to determine whether the savings offset the increasing
inventory holding costs.

Activity Self-Propelled Per Unit

Engineering Design $286,000 $28.60
Inspections 585,000 58.50
Production Set-ups 305,000 30.50
Scheduling 110,000 11.00
Material Handling 147,500 14.75
Machine Maintenance 200,000 20.00
Facility Costs 221,429 22.14

$1,854,929 $185.49

Page 31

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Ch. 15 - Allocation of Support Dept.
Costs, Common Costs, and Revenues

Complete List of Terms (From end of
chapter)

Terminology Definitions (selected terms)

38. Bundled products

Textbook​ ​referenced​: H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16​nd​ Edition, Pearson Education

Page 32

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

a. Allocation issues can also arise when revenues from multiple products (for example,
different software programs or cable and Internet packages) are bundled together and sold
at a single price. The methods for revenue allocation parallel those described for
common-cost allocations

39. Common costs

a. is the cost of operating a facility, activity, or cost object when that facility, activity, or
cost object is shared by two or more users.

b. Common costs arise because each user incurs a lower cost by sharing a facility or activity
than operating the facility or performing the activity independently. The cost accounting
challenge is how to allocate common costs to each user in a reasonable way.

40. Stand-alone cost-allocation method

a. determines the weights for cost allocation by considering each user of the common cost
facility or activity as a separate entity.

41. Production departments

a. Also called “operating departments”
b. Manufacturing departments where products are made (where RM become WIP & FG)
c. Directly add value to a product or service
d. Examples:

i. Machining department
ii. Assembly department

42. Revenue allocation

a. Occurs when revenues are related to a particular ​revenue object b​ ut cannot be traced to it
in an economically feasible (cost-effective) way.

43. Revenue object

a. Anything for which a separate measurement of revenue is desired.

44. Support departments

Textbook​ r​ eferenced:​ H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Page 33

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

a. Also called a “service departments”
b. Provide the services that assist other internal departments (operating departments and

other support departments) in the company.
c. Examples

i. Plant administration
ii. Engineering
iii. Production Control
iv. Materials management
v. Information systems
vi. Plant maintenance

Direct Method

Summary:

● Used to a​ llocate multiple support departments’ costs to multiple production departments.
● Allocates each support-department's costs t​ o operating departments​ only.​ ​It d​ oes NOT

allocate support department costs to other support departments.

Example:

● Includes:
○ Illustration: Summary of Direct Method
○ Table: Departments-Data
○ Table: Calculations

Textbook​ r​ eferenced​: ​Horngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16​nd​ Edition, Pearson Education

Page 34

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Illustrative Summary of Direct Method:

Table of Departments-Data:

Textbook​ ​referenced​: ​Horngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16​nd​ Edition, Pearson Education

Page 35

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Table of Calculations:

45. Steps:

a. Identify which is which type​ of department (support or production)
b. Choose a cost-allocation base​ to associate with the support departments
c. Calculate the percentages​ ​of the cost-allocation bases used by each of the production

departments
i. Determine the total amount of the cost-allocation base​ for each support department
used by the production departments (​DO NOT include​ amounts used by other
support depts.)
ii. Divide​ the total amount of cost-allocation base by the amount used by each
production department, separately → these are your percentages

d. Multiply each percentage by the support department costs​, ​separately → these are the
amounts to be allocated among the production depts.

e. Add the computed allocation amounts to the production departments​ that correspond to
the percentages used in their calculation

Textbook​ r​ eferenced​: H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Page 36

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Sequential (Step) Method

Summary:

● Used to ​allocate multiple support departments’ costs to multiple production departments.
● allocates support-department costs ​to other support departments ​and​ to operating departments

in a sequential manner that​ partially​ recognizes the mutual services provided​ among the
support departments.

Example:

● Includes:
○ Illustration: Summary of Sequential Method
○ Table: Department Data
○ Table: Calculations

Textbook​ r​ eferenced​: ​Horngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16​nd​ Edition, Pearson Education

Page 37

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Illustrative Summary of Sequential Method

Table of Departments Data

Textbook​ ​referenced:​ H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Page 38

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Table of Calculations

46. Steps:

a. I​ dentify which is which type​ of department
i. Steps:
1. Can be either​ support o​ r​ production
a. Refer to “support department” definition
b. Refer to “production department” definition

b. Choose a cost-allocation base for each​ d​ epartment-- whatever bases seems logical
c. Determine the order​ in which to allocate​ support department-costs

i. Steps:
1. Three W​ ays​:
a. By the order g​ iven
b. By greatest to least d​ ollar amoun​t of department-costs
c. By p​ roportion of resources used by the other departments f​ rom
largest to smallest percentage used

d. Allocate the first​ support department’s costs​ to the other departments
i. Steps:

Textbook​ r​ eferenced​: H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16​nd​ Edition, Pearson Education

Page 39

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

1. Calculate the percentages​ used, of the first department’s cost-allocation
base by the other department​s
a. Steps:
i. Determine the total amount of the department-being-allocated’s
cost-allocation base used by all of the other departments.
(Include both types of departments BUT DO NOT include the
department-being-allocated when totaling)
ii. Divide the this total by the amount of allocation base being
used in each department, separately → these are your
percentages
iii. Multiply the department-being-allocated’s costs by the
percentage for each of the other departments → these are your
amounts to be allocated
iv. Add each of allocation-amounts calculated to their
corresponding departments

e. A​ llocate the rest​ o​ f the support department’s costs, in order, to the remaining
departments
i. DO NOT INCLUDE ANY departments that were previously allocated
ii. Repeat the process for allocating the first support department, for each department,
in order, until all of the departments have been allocated to the each of the
producing departments

Textbook​ r​ eferenced:​ H​ orngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

Page 40

Sarah Allison Takash
Arizona State University, ACC 350, Spring 2018

Exam 1 Study Material

Calculating OH Rates from Operating
Departments to assign OH Costs to
Products, Jobs and Services

Summary:

Overhead costs can be assigned to Products, Jobs and Services by using individual-operating
department-OH rates and their related cost allocation bases.

Individual-operating department-overhead rates rates are developed after support-department
costs are allocated to operating departments because products are not directly affected by service
depts. Only once support department costs are accumulated in operating departments can they be
absorbed into products.

Blackboard Problems: Ch 15

Textbook​ r​ eferenced​: ​Horngren’s Cost Accounting, a Managerial Emphasis, Datar and Rajan 16n​ d​ Edition, Pearson Education

In - class Problem





solutions





Case Problem

Solution--Case 15-18 Solution
1. Step method:










Pers

Total cost before allocations ............................ $36
Allocations:

Personnel (@ $1,800 per employee)* ............ (36
Custodial services

(@ $1.20 per square foot)** ......................
Maintenance (5/6, 1/6) ................................
Total overhead cost after allocations ................ $
Divide by machine-hours.................................
Divide by direct labor-hours ............................
Predetermined overhead rate ..........................



* Based on 15 + 25 + 40 + 120 = 200 employees.
** Based on 20,000 + 80,000 + 40,000 = 140,000 s





















© The McGraw-Hill Companies, Inc., 2006. All rights reserved.

950

Printing Binding







Custodial Mainte-
sonnel Services nance

60,000 $141,000 $201,000 $525,000 $373,500

60,000) 27,000 45,000 72,000 216,000

(168,000) 24,000 96,000 48,000

(270,000) 225,000 45,000

0$ 0$ 0 $918,000 $682,500
÷150,000
÷175,000

$ 6.12 $ 3.90

square feet.

Managerial Accounting, 11th Edition

Case 15-18 (continued)



2. Direct method:

Pers

Total costs before allocations........................... $36
Allocations:

Personnel (1/4, 3/4)* ................................... (36
Custodial Services (2/3, 1/3)** .....................
Maintenance (5/6, 1/6) ................................
Total overhead cost after allocations ................ $
Divide by machine-hours.................................
Divide by direct labor-hours ............................
Predetermined overhead rate ..........................



* Based on 40 + 120 = 160 employees.
** Based on 80,000 + 40,000 = 120,000 square feet






















Solutions Manual, Chapter 15

Printing Binding

$525,000 $373,500




Custodial Mainte-
sonnel Services nance

60,000 $141,000 $201,000

60,000) 90,000 270,000
0 47,000
(141,000) 94,000
33,500
(201,000) 167,500 $724,000

$ 0 $ 0 $876,500 ÷175,000
$ 4.14
÷150,000

$ 5.84

t.

© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
951

Case 15-18 (continued)



3. a. The amount of overhead cost assigned to the job would

be: Step method:

Printing department:

$6.12 per machine-hour × 15,400 machine-hours ...... $

94,248 Binding department:
$3.90 per direct labor-hour × 2,000 direct labor-hours 7,800

Total overhead cost..................................................... $102,048


Direct method:

Printing

department:

$5.84 per machine-hour × 15,400 machine-hours ...... $
89,936 Binding department:
$4.14 per direct labor-hour × 2,000 direct labor-hours 8,280

Total overhead cost..................................................... $ 98,216


b. The step method provides a better basis for computing predeter-

mined overhead rates than the direct method because it gives
recog- nition to services provided between service departments. If
this inter- departmental service is not recognized, then either too
much or too little of a service department’s costs may be allocated
to a producing department. The result will be an inaccuracy in the
producing de- partment’s predetermined overhead rate.


For example, using the direct method and ignoring
interdepartmental services causes the predetermined overhead rate
in the Printing De- partment to fall to only $5.84 per MH (from
$6.12 per MH when the step method is used), and causes the
predetermined overhead rate in the Binding Department to rise to
$4.14 per DLH (from $3.90 per DLH when the step method is
used). These inaccuracies in the prede- termined overhead rate can
cause corresponding inaccuracies in bids for jobs. Since the direct
method in this case understates the rate in the Printing Department
and overstates the rate in the Binding De- partment, it is not
surprising that the company tends to bid low on jobs requiring a lot
of printing work and tends to bid too high on jobs that require a lot
of binding work.