DO IT!

REVIEW 5-14
(a)
Cost Pool
Machine set-up
Machinin
g
Packing

Est.
MOH
$20,000

Est.
Usage
40

$110,000
$30,000

5,000
500

(b)
Cost Pool
Machine set-up
Machinin
g
Packing

Rate
$500 per set-up
$22 per machine hr.
$60 per order

Assignment of overhead:
Machine set-up ($500 25; 15)
Machining ($22 1,000; 4,000)
Packing ($60 150; 350)
Overhead assigned
(c) Overhead cost per unit:
Total overhead assigned
Number of units produced

Rate
$500 per set-up
$22 per machine hr.
$60 per order
Usage
BC113
AD908
25
15
1,000
150

4,000
350

BC113
AD908
$12,500
$7,500
$22,000 $88,000
$ 9,000 $21,000
$43,500 $116,500
BC113
AD908
$43,500 $116,500
3,000
1,400
$14.50
$83.21

(d) The data shows that while the total overhead assigned to the
lower-volume product is three times the total amount assigned to
the higher-volume product, the per unit cost ends up being almost
six times more.

EXERCISE 5-21
(a) Estimated Overhead Expected use of Cost = Activity-based
Drivers per Activity
Overhead Rates
Scheduling & travel: $84, 000 1,680 = $50 per travel hour
Set-up time: $77,000 700 = $110 per set-up
Supervision: $56,000 $400,000 = 14% of direct labour cost

Activity-based overhead applied:

Scheduling & traveltravel hours
($50 1,000)
($50 680)
Set-up timenumber of set-ups
($110 450)
($110 250)
Supervisiondirect labour costs
(14% $100,000)
(14% $300,000)
Total overhead costs applied
(b)

$50,000

$30,000
100,000
113,500

Residential

$34,000

49,500

14,000
$113,500

Commercial

Revenues
Direct material costs
Direct labour costs
Overhead costs applied
Operating income (loss)
(c)

Commercial

$300,000

243,500
$56,500

27,500

42,000
$103,500
Residential

$70,000
300,000
103,500

$480,000

473,500
$6,500

Assuming that the cost drivers are a reasonable representation

of what is occurring in the two product lines, it seems
appropriate to switch to activity-based costing. By using this
system, more accurate cost information is developed which

should lead to better allocations of resources and more

informative pricing decisions in the future.

PROBLEM 5-37A
(a) The total manufacturing cost per unit using activity-based
costing is as follows:
Activity-based overhead applied
Purchasingpurchase orders
$30 11,250; 13,750
Machine set-ups# of set-ups
$30 10,000; 10,000
Machiningmachine hours
$31 40,000; 60,000
Inspections# of inspections
$90 2,250; 2,750
Total overhead applied
Number of units manufactured
Per unit overhead cost
(b)

Computation of unit costs

Direct material
Direct labour
Overhead cost

Royale

$337,500

Majestic

$412,500

300,000

300,000

1,240,000

1,860,000

202,500

247,500

$2,080,000
20,000

$2,820,000
10,000

$104.00

$282.00

Royale

Majestic

$600.00
100.00
104.00

$320.00
80.00
282.00

Per unit cost

$804.00

$682.00

Gross Profit:
Selling price
Less: per unit cost

Royale
$1,400.00
804.00

Majestic
$1,100.00
682.00

Gross profit

$ 596.00

$ 418.00

(c) Managements future plans for the two television models are not
sound. Under ABC costing, the Royale model is $178.00 ($596.00

 $418.00) per unit more profitable than the Majestic model. If any
product should be phased out, it is the Majestic.

PROBLEM 5-45B
(a)

Determine overhead rate based on machine hours:

$1,500,000 300,000 = $5.00 per machine hour
Determine applied overhead per unit:
3,000 machine hrs $5 per hour = $2.50 per unit
6,000 units produced
Bid price per unit of Job #287 (using single overhead rate)
Direct materials
$1.350
Direct labour
1.850
Applied overhead
2.500
Full manufacturing cost per unit
$5.700
Mark-up (25% $5.70)
1.425
Bid price per unit
$7.125

(b)

Determine activity-based overhead rates:

Purchasing & receiving: $300,000 3,000 = $100 per receipt
Machining: $900,000 300,000 = $3.00 per machine hour
Materials handling: $160,000 400,000 = $0.40 per move
Shipping: $140,000 280,000 = $0.50 per kilometre
Determine per unit overhead cost:
Purchasing & receiving ($100 3 receipts)
Machine operating costs ($3.00 3,000 machine hrs)
Materials handling ($0.40 300 moves)
Shipping ($0.50 2,300 kilometers)
Total overhead costs
Units produced
Per unit overhead cost

$300
9,000
120
1,150
$10,570
6,000
$ 1.762

PROBLEM 5-45B (Continued)

Bid price per unit of Job #287 (using activity-based costing)
Direct materials
Direct labour
Applied overhead
Full manufacturing cost per unit
Mark-up (25% $4.962)
Bid price per unit

$1.350
1.850
1.762
$4.962
1.240
$6.202

Using an activity-based approach, Mars Companys bid price of

$6.202 per unit is lower than Arrow Companys bid price of $6.75 per
unit. Thus, Mars is more likely to receive the contract.

PROBLEM 5-47B
(a) Quality control costs assigned to the Varnish line under the
traditional system:
30% $100,000 direct labour cost = $30,000 quality control
costs
(b) Quality control costs assigned to the Varnish line under
activity-based costing:
Incoming material inspection:
$25 50 types of material
In-process inspection:
$0.30 30,000 units
Product certification:
$150 80 orders
Total quality control cost applied to this line

$1,250
9,000
12,000
$22,250

(c) With respect to the quality control costs, the traditional

product-costing system over-costs the Varnish paint product
line by $7,750 ($30,000 $22,250). If the traditional method is
used, it could lead to over-pricing the Varnish line, and losing
sales to competitors who are using the more accurate way to
allocate overhead costs. It could also lead to other bad pricing
decisions, based on under-costing the products the Varnish
paint is subsidizing.

PROBLEM 5-51B
(a)

Determine activity-based overhead rates:

Material requisitions: $54,000 108 = $500 per requisition
Product inspections: $8,200 54 = $151.85 per inspection
Orders shipped: $103,000 296 = $347.97 per order
Assign overhead:
Material requisitions:
$500 46 requisitions
$500 62 requisitions
Product inspections
$151.85 23 inspections
$151.85 31 inspections
Orders shipped
$347.97 167 orders
$347.97 129 orders
Total overhead assigned

Thunderbolt

Earthquake

$23,000
$31,000
3,493

4,708

58,111
44,888
$84,604

$80,596

(b) Three conditions that should be present in PDI are:

The consumption ratios of unit-based and non-unit-based
activities must differ.
Non-unit-based costs should be a significant portion of total
overhead costs.
Measurement costs of the identified cost pools must be
relatively low.

CASE 5-52
(a) Computation of the average hourly charge-out rate:
Total overhead
Total billable hours

$3,516,000
=
120,000

$29.30 per billable

hour

Direct labour cost

Total billable hours

$2,700,000
=
120,000

$22.50 per billable

hour

Average charge out rate:

(b)

2 ($29.30 + $22.50) = $103.60

Determine activity-based overhead rates:

Planning and review: $900,000 120,000 = $7.50 per billable hour
Research: $150,000 400 = $375 per journal
General administration: $1,800,000 600 = $3,000 per client
Building & equipment: $360,000 2,400 = $150 per sq. meter
Clerical: $306,000 34 = $9,000 per staff member
Assign overhead:
Planning & review ($7.50 90,000 hrs)
($7.50 30,000 hrs)
Research
($375 280 journals)
($375 120 journals)
General admin ($3,000 240 clients)
($3,000 360 clients)
Build & equip ($150 1,600 sq. metres)
($150 800 sq. metres)
Clerical
($9,000 20 staff)
($9,000 14 staff)
Total overhead assigned

MGMT
Consult
$675,000
105,000
720,000
240,000
180,000
$1,920,000

EXEC
Train
$225,000
45,000
1,080,000
120,000
126,000
$1,596,000

CASE 5-52 (Continued)

Assignment of activity cost pools to services:
Management Consulting:
Total overhead
Total billable hours

$1,920,000
=
90,000

$21.33 per billable

hour

Executive Training:
Total overhead
$1,596,000
=
=
Total billable hours
30,000

$53.20 per billable

hour

Charge-out rate:
Management Consulting:
Direct Labour Cost
$20.00 ($1,800,000 90,000 hrs)
Overhead
21.33 (as above)
$41.33 2 = $82.66 per hour
Executive Training:
Direct Labour Cost
Overhead

$30.00 ($900,000 30,000 hrs)

53.20 (as above)
$83.20 2 = $166.40 per hour

(c) Three ways that ABC leads to more accurate product costs:
i)

ii)

ABC increases the number of cost pools used to accumulate

overhead costs. Rather than accumulating all overhead
costs in a single company-wide pool, or accumulating them
in departmental pools, costs are accumulated by activity. As
a result, many pools are created with cost-driving activities
that are better related to the incurrence of cost.
ABC changes the base used to assign overhead costs to
products. Rather than assigning costs on a basis of direct
labour or some other measure of volume, costs are

assigned on a basis of cost-driving activities that can be

traced to the product or job involved.

CASE 5-52 (Continued)

iii)

ABC changes a managers perception that many of the

overhead costs are indirect. It becomes obvious with ABC
that many overhead costs can be identified with specific
activities, and thereby are recognized as being traceable to
individual products.

(d) i. ABC costing can be expensive to use because of the

increased cost of identifying multiple activities and applying
numerous cost drivers. ii. Certain overhead costs still need to
be allocated using some arbitrary volume-based cost driver,
such as labour or machine hours.
(e) The cost driver used would have a bearing on the overhead
calculation. Thus, underestimating or overestimating these
would impact on the billing charges that would be passed on to
the client.