7

3/11/2014
Assignment Print View
Score: 40
1.
out of 40 points (100%)
aw ard:
10 out of
10.00 points
Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these
supplies to hundreds of hospitals. Med Max sets its prices for all hospitals by marking up its cost of goods
sold to those hospitals by 10%. For example, if a hospital buys supplies from Med Max that had cost Med
Max $100 to buy from manufacturers, Med Max would charge the hospital $110 to purchase these
supplies.
For years, Med Max believed that the 10% markup covered its selling and administrative expenses and
provided a reasonable profit. However, in the face of declining profits Med Max decided to implement an
activity-based costing system to help improve its understanding of customer profitability. The company
broke its selling and administrative expenses into five activities as shown below:
Activity Cost Pool
Customer deliveries
Manual order processing
Electronic order processing
Line item picking
Other organization-sustaining costs
Activity Measure
Number of deliveries
Number of manual orders
Number of electronic orders
Number of line items picked
NA
Total selling and administrative expenses
Total Cost
$ 352,000
304,000
242,000
588,000
600,000
Total Activity
4,000 deliveries
4,000 orders
11,000 orders
420,000 line items
$2,086,000
Med Max gathered the data below for two of the many hospitals that it servesCity General and County
General (each hospital purchased medical supplies that had cost Med Max $30,000 to buy from its
manufacturers):
Activity Measure
Activity
City General
County General
18
22
0
45
19
0
110
240
Required:
1. Compute the total revenue that Med Max would receive from City General and County General. (Omit
the "$" sign in your response.)
City General
County General
Total Revenue
$ 33,000
$ 33,000
2. Compute the activity rate for each activity cost pool. (Round the "Line item picking" to 2 decimal
places. Omit the "$" sign in your response.)
Activity Cost Pool
Customer deliveries
Line item picking
Activity Rate
$ 88.00
$ 76.00
$ 22.00
$ 1.40
per delivery
per manual order
per electronic order
per line item picked
3. Compute the total activity costs that would be assigned to City General and County General. (Round
your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your
response.)
City General
County General
Total Activity Costs

$ 2,156.00
$ 5,692.00
4. Compute Med Maxs customer margin for City General and County General. (Hint: Do not overlook the
$30,000 cost of goods sold that Med Max incurred serving each hospital.) (Loss amount should be
indicated with a minus sign. Round your intermediate calculations and final answers to 2
decimal places. Omit the "$" sign in your response.)
City General
County General
Worksheet
Customer Margin
$ 844.00
$ -2,692.00
Learning Objective: 07-04 Assign costs to a cost
http://ezto.mhecloud.mcgraw-hill.com/hm_accounting.tpx?todo=printview
1/13
3/11/2014

object using a second-stage allocation.
Learning Objective: 07-03 Compute activity rates for
cost pools.
Learning Objective: 07-05 Use activity-based costing

to compute product and customer margins.
Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these
supplies to hundreds of hospitals. Med Max sets its prices for all hospitals by marking up its cost of goods
sold to those hospitals by 10%. For example, if a hospital buys supplies from Med Max that had cost Med
Max $100 to buy from manufacturers, Med Max would charge the hospital $110 to purchase these
supplies.
For years, Med Max believed that the 10% markup covered its selling and administrative expenses and
provided a reasonable profit. However, in the face of declining profits Med Max decided to implement an
activity-based costing system to help improve its understanding of customer profitability. The company
broke its selling and administrative expenses into five activities as shown below:
Activity Cost Pool
Customer deliveries
Line item picking
Other organization-sustaining costs
Activity Measure
NA
Total selling and administrative expenses
Total Cost
$ 352,000
304,000
242,000
588,000
600,000
Total Activity
4,000 deliveries
4,000 orders
11,000 orders
420,000 line items
$2,086,000
Med Max gathered the data below for two of the many hospitals that it servesCity General and County
General (each hospital purchased medical supplies that had cost Med Max $30,000 to buy from its
manufacturers):
Activity Measure
Activity
City General
County General
18
22
0
45
19
0
110
240
Required:
1. Compute the total revenue that Med Max would receive from City General and County General. (Omit
Total Revenue
$
33,000
City General
County General
33,000
2. Compute the activity rate for each activity cost pool. (Round the "Line item picking" to 2 decimal
places. Omit the "$" sign in your response.)
Activity Cost Pool
Customer deliveries
Activity Rate
$
88.00 per delivery
76.00 per manual order
22.00 per electronic order
Line item picking
1.40 per line item picked
3. Compute the total activity costs that would be assigned to City General and County General. (Round
your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your
response.)
City General
County General
Total Activity Costs

$
2,156.00
$
5,692.00
4. Compute Med Maxs customer margin for City General and County General. (Hint: Do not overlook the
$30,000 cost of goods sold that Med Max incurred serving each hospital.) (Loss amount should be
indicated with a minus sign. Round your intermediate calculations and final answers to 2
City General
Customer Margin
$
844.00
County General
-2,692.00
Explanation:
1.
Total revenue received:
Cost of goods sold to the hospital (a)
City
General
$30,000
County
General
$30,000
2/13
3/11/2014

Markup percentage
10%
Markup in dollars (b)

Revenue received from hospitals (a) + (b)
$ 3,000
$33,000
10%
$ 3,000
$33,000
2.
Activity Rates:
(a)
Estimated
Overhead
cost
$ 352,000
$ 304,000
$ 242,000
$ 588,000
Activity Cost Pool

Customer deliveries
Line item picking
(b)
Expected Activity
4,000 deliveries
4,000 orders
11,000 orders
420,000 line items
(c)
Activity Rate
$88.00 per delivery
$76.00 per manual order
$22.00 per electronic order
$ 1.40 per line item picked
3.
Activity costs are assigned to the two hospitals as follows:

City General:
Activity Cost Pool

Customer deliveries
Line item picking
(a)
Activity Rate
$ 88.00 per delivery
$ 76.00 per order
$ 22.00 per order
$ 1.40 per line item
(b)
Activity
18 deliveries
0 orders
19 orders
110 line items
Total activity costs
(a) (b)
ABC Cost
$ 1,584.00
0
418.00
154.00
$ 2,156.00
County General:
Activity Cost Pool

Customer deliveries
Line item picking
(a)
Activity Rate
$88.00 per delivery
$76.00 per order
$22.00 per order
$ 1.40 per line item
(b)
Activity
22 deliveries
45 orders
0 orders
240 line items
(a) (b)
ABC Cost
$ 1,936.00
3,420.00
0
336.00
$ 5,692.00
4.
Customer margins for the two hospitals:
City
General
$ 33,000.00
30,000.00
County
General
$ 33,000.00
30,000.00
Gross margin
3,000.00
3,000.00
Customer deliveries
Line item picking
1,584.00
0
418.00
154.00
1,936.00
3,420.00
0
336.00
2,156.00
5,692.00
Sales
Cost of goods sold
Customer margin
2.
844.00
$ (2,692.00)
aw ard:
10 out of
10.00 points
Rocky Mountain Corporation makes two types of hiking bootsXactive and the Pathbreaker. Data
concerning these two product lines appear below:
Selling price per unit
Direct materials per unit
Direct labor per unit
Direct labor-hours per unit
Estimated annual production and sales
Xactive
$132.00
$ 64.60
$ 9.60
1.2 DLHs
24,000 units
Pathbreaker
$ 94.00
$ 53.00
$ 8.00
1.0 DLHs
70,000 units
The company has a traditional costing system in which manufacturing overhead is applied to units
based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the
upcoming year appear below:
3/13
3/11/2014
Estimated total manufacturing overhead

Estimated total direct labor-hours
$2,470,000
98,800 DLHs
Required:
1. Compute the product margins for the Xactive and the Pathbreaker products under the companys
traditional costing system. (Loss amounts should be indicated with a minus sign. Omit the "$"
sign in your response.)
Product margin
Xactive
$ 667,200
Pathbreaker
$ 560,000
Total
$ 1,227,200
2. The company is considering replacing its traditional costing system with an activity-based costing
system that would assign its manufacturing overhead to the following four activity cost pools (the Other
cost pool includes organization-sustaining costs and idle capacity costs):
Activities and Activity Measures

Supporting direct labor (direct labor-hours)
Batch setups (setups)
Product sustaining (number of products)
Other
Estimated
Overhead
Cost
$ 642,200
915,000
840,000
72,800
Total manufacturing overhead cost
$ 2,470,000
Expected Activity
Xactive Pathbreaker
28,800
70,000
350
260
1
1
NA
NA
Total
98,800
610
2
NA
Compute the product margins for the Xactive and the Pathbreaker products under the activity-based
costing system. (Loss amounts should be indicated with a minus sign. Round your intermediate
calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$"
Product margin
Xactive
$ 255,000
Pathbreaker
$ 1,045,000
Total
$ 1,300,000
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round
intermediate calculations. Round your percentage answers to one decimal place and other
answers to the nearest dollar amount. Omit the "$" & "%" signs in your response.)
Xactive
Amount
Traditional Cost System
Direct materials
Direct labor
Manufacturing overhead
$ 1,550,400
230,400
720,000
Total cost assigned to products
$ 2,500,800
Activity-Based Costing System

Direct costs:
Direct materials
Direct labor
Indirect costs:
Supporting direct labor
Batch setups
Product sustaining
Pathbreaker
% of
Total Amount
29.5
29.1
29.1
Amount
%
%
%
$ 3,710,000
560,000
1,750,000
Total
% of
Total Amount
70.5
70.9
70.9
Amount
%
%
%
$ 6,020,000
$ 5,260,400
790,400
2,470,000
$ 8,520,800
$ 1,550,400
230,400
29.5
29.1
%
%
$ 3,710,000
560,000
70.5
70.9
%
%
$ 5,260,400
790,400
187,200
525,000
420,000
29.1
57.4
50.0
%
%
%
455,000
390,000
420,000
70.9
42.6
50.0
%
%
%
642,200
915,000
840,000
$ 2,913,000
$ 5,535,000
Costs not assigned to products:

Other
$ 8,448,000
72,800
Total cost
$ 8,520,800
rev: 12_19_2011
Worksheet

cost pools.
Learning Objective: 07-01 Understand activity-based

costing and how it differs from a traditional costing
system.

Learning Objective: 07-05 Use activity-based costing

to compute product and customer margins.
Rocky Mountain Corporation makes two types of hiking bootsXactive and the Pathbreaker. Data
4/13
3/11/2014

concerning these two product lines appear below:
Xactive
$132.00
$ 64.60
$ 9.60
1.2 DLHs
24,000 units
Selling price per unit

Direct materials per unit
Direct labor per unit
Direct labor-hours per unit
Estimated annual production and sales
Pathbreaker
$ 94.00
$ 53.00
$ 8.00
1.0 DLHs
70,000 units
The company has a traditional costing system in which manufacturing overhead is applied to units
based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the
upcoming year appear below:
Estimated total manufacturing overhead
$2,470,000
98,800 DLHs
Required:
1. Compute the product margins for the Xactive and the Pathbreaker products under the companys
traditional costing system. (Loss amounts should be indicated with a minus sign. Omit the "$"
Product margin
Xactive
667,200
Pathbreaker
560,000
Total
1,227,200
2. The company is considering replacing its traditional costing system with an activity-based costing
system that would assign its manufacturing overhead to the following four activity cost pools (the Other
cost pool includes organization-sustaining costs and idle capacity costs):
Activities and Activity Measures

Supporting direct labor (direct labor-hours)
Batch setups (setups)
Product sustaining (number of products)
Other
Estimated
Overhead
Cost
$ 642,200
915,000
840,000
72,800
Total manufacturing overhead cost
$ 2,470,000
Expected Activity
Xactive Pathbreaker
28,800
70,000
350
260
1
1
NA
NA
Total
98,800
610
2
NA
Compute the product margins for the Xactive and the Pathbreaker products under the activity-based
costing system. (Loss amounts should be indicated with a minus sign. Round your intermediate
calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$"
Product margin
Xactive
255,000
Pathbreaker
1,045,000
Total
1,300,000
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round
intermediate calculations. Round your percentage answers to one decimal place and other
answers to the nearest dollar amount. Omit the "$" & "%" signs in your response.)
Xactive
Amount
Direct materials
Pathbreaker
% of
Total Amount
Amount
Amount
1,550,400
29.5 %
3,710,000
70.5 %
Direct labor
230,400
29.1 %
560,000
70.9 %
790,400
720,000
29.1 %
1,750,000
70.9 %
2,470,000
2,500,800

Direct costs:
Direct materials
1,550,400
29.5 %
230,400
29.1 %
Direct labor
Indirect costs:
Total
% of
Total Amount
$
5,260,400
6,020,000
8,520,800
3,710,000
70.5 %
560,000
70.9 %
5,260,400
790,400
187,200
29.1 %
455,000
70.9 %
642,200
Batch setups
525,000
57.4 %
390,000
42.6 %
915,000
Product sustaining
420,000
50.0 %
420,000
50.0 %
840,000
2,913,000
5,535,000
Costs not assigned to products:

Other
Total cost
8,448,000
72,800
$
8,520,800
5/13
3/11/2014
rev: 12_19_2011
Explanation:
1.
Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to products
using the predetermined overhead rate computed as follows:
Predetermined
overhead rate
Estimated total manufacturing overhead cost

$2,470,000
98,800 DLHs*
= $25.00 per DLH
*24,000 units of Xactive @ 1.2 DLH per unit + 70,000 units of the Pathbreaker @ 1 DLH per unit = 28,800
DLHs + 70,000 DLHs = 98,800 DLHs
Consequently, the product margins using the traditional approach would be computed as follows:
Xactive
$3,168,000
Pathbreaker
$6,580,000
Total
$ 9,748,000
Direct materials
Direct labor
applied @ $25.00 per direct labor-hour
1,550,400
230,400
3,710,000
560,000
5,260,400
790,400
720,000
1,750,000
2,470,000
Total manufacturing cost
2,500,800
6,020,000
8,520,800
$ 667,200
$ 560,000
$ 1,227,200
Sales
Product margin
Note that all of the manufacturing overhead cost is applied to the products under the company's traditional
costing system.
2.
The first step is to determine the activity rates:

Activity Cost Pool
Batch setups
Product sustaining
(a)
Total cost
$ 642,200
$ 915,000
$ 840,000
(b)
Total activity
98,800 DLH
610 setups
2 products
(a) (b)
Activity Rate
$
6.50 per DLH
$ 1,500 per setup
$420,000 per product
*The Other activity cost pool is not shown above because it includes organization-sustaining and idle
capacity costs that should not be assigned to products.
Under the activity-based costing system, the product margins would be computed as follows:
Sales
Xactive
$ 3,168,000
Pathbreaker
$ 6,580,000
Total
$ 9,748,000
Direct materials
Direct labor
Batch setups
Product sustaining
1,550,400
230,400
187,200
525,000
420,000
3,710,000
560,000
455,000
390,000
420,000
5,260,400
790,400
642,200
915,000
840,000
Total cost
2,913,000
5,535,000
8,448,000
255,000
$ 1,045,000
$ 1,300,000
Product margin
3.

Direct materials
Direct labor
Direct costs:
Direct materials
Direct labor
Indirect costs:
Batch setups
Product sustaining
Xactive
Pathbreaker
$1,550,400 / $5,260,400 = 29.5% $3,710,000 / $5,260,400 = 70.5%
$230,400 / $790,400 = 29.1%
$560,000 / $790,400 = 70.9%
$720,000 / $2,470,000 = 29.1%
$1,750,000 / $2,470,000 = 70.9%
$1,550,400 / $5,260,400 = 29.5% $3,710,000 / $5,260,400 = 70.5%

$230,400 / $790,400 = 29.1%
$560,000 / $790,400 = 70.9%
$187,200 / $642,200 = 29.1%
$525,000 / $915,000 = 57.4%
$420,000 / $840,000 = 50.0%
$455,000 / $642,200 = 70.9%

$390,000 / $915,000 = 42.6%
$420,000 / $840,000 = 50.0%
6/13
3/11/2014
3.

aw ard:
10 out of
10.00 points
Denny Asbestos Removal Company removes potentially toxic asbestos insulation and related products
from buildings. The companys estimator has been involved in a long-simmering dispute with the on-site
work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between
routine work such as removal of asbestos insulation around heating pipes in older homes and nonroutine
work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site
supervisors believe that nonroutine work is far more expensive than routine work and should bear higher
customer charges. The estimator sums up his position in this way: My job is to measure the area to be
cleared of asbestos. As directed by top management, I simply multiply the square footage by $4,000 per
thousand square feet to determine the bid price. Since our average cost is only $3,000 per thousand square
feet, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up.
Besides, it is difficult to know what is routine or nonroutine until you actually start tearing things apart.
To shed light on this controversy, the company initiated an activity-based costing study of all of its
costs. Data from the activity-based costing system follow:
Activity Cost Pool
Removing asbestos
Estimating and job setup
Working on nonroutine jobs
Other (organization-sustaining
and idle capacity costs)
Activity Measure
Thousands of square feet
Number of jobs
Number of nonroutine jobs
Total Activity
480 thousand square feet
230 jobs*
21 nonroutine jobs
None
Not applicable
* The total number of jobs includes nonroutine jobs as well as routine jobs. Nonroutine jobs as well as
routine jobs require estimating and setup work.
Costs for the Year
Wages and salaries
Disposal fees
Equipment depreciation
On-site supplies
Office expenses
Licensing and insurance
$ 206,000
592,000
48,000
61,000
186,000
368,000
Total cost
$1,461,000
Wages and salaries

Disposal fees
On-site supplies
Office expenses
Distribution of Resource Consumption Across Activities

Estimating Working on
Removing
and Job
Nonroutine
Asbestos
Setup
Jobs
Other
Total
34%
6%
29%
31%
100%
75%
0%
25%
0%
100%
48%
0%
31%
21%
100%
49%
6%
16%
29%
100%
7%
34%
24%
35%
100%
48%
0%
33%
19%
100%
Required:
1. Perform the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain
to enter "0" wherever required. Omit the "$" sign in your response.)
Wages and salaries

Disposal fees
On-site supplies
Office expenses
Total cost
Removing
Asbestos
$ 70,040
444,000
23,040
29,890
13,020
176,640
$ 756,630
Estimating and
Job Setup
$ 12,360
0
0
3,660
63,240
0
$ 79,260
Working on
Nonroutine Jobs
$ 59,740
148,000
14,880
9,760
44,640
121,440
$ 398,460
Other
$ 63,860
0
10,080
17,690
65,100
69,920
Total
$ 206,000
592,000
48,000
61,000
186,000
368,000
$ 226,650
$ 1,461,000
2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.
Omit the "$" sign in your response.)
Activity Cost Pool
Removing asbestos
Activity Rate
$ 1,576.31
$ 344.61
$ 18,974.29
per thousand square feet

per job
per nonroutine job
3. Using the activity rates you have computed, determine the total cost and the average cost per thousand
square feet of each of the following jobs according to the activity-based costing system. (Round your
intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)
a. A routine 2,000-square-foot asbestos removal job.
Total cost of the job
Average cost per thousand square feet
$ 3,497.23
$ 1,748.62
b. A routine 4,000-square-foot asbestos removal job.
7/13
3/11/2014

$ 6,649.85
$ 1,662.46
c. A nonroutine 2,000-square-foot asbestos removal job.

$ 22,471.52
$ 11,235.76
Worksheet

cost pools.
Learning Objective: 07-02 Assign costs to cost pools

using a first-stage allocation.

Denny Asbestos Removal Company removes potentially toxic asbestos insulation and related products
from buildings. The companys estimator has been involved in a long-simmering dispute with the on-site
work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish between
routine work such as removal of asbestos insulation around heating pipes in older homes and nonroutine
work such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site
supervisors believe that nonroutine work is far more expensive than routine work and should bear higher
customer charges. The estimator sums up his position in this way: My job is to measure the area to be
cleared of asbestos. As directed by top management, I simply multiply the square footage by $4,000 per
thousand square feet to determine the bid price. Since our average cost is only $3,000 per thousand square
feet, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up.
Besides, it is difficult to know what is routine or nonroutine until you actually start tearing things apart.
To shed light on this controversy, the company initiated an activity-based costing study of all of its
costs. Data from the activity-based costing system follow:
Activity Cost Pool
Removing asbestos
Other (organization-sustaining
and idle capacity costs)
Activity Measure
Thousands of square feet
Number of jobs
Number of nonroutine jobs
Total Activity
230 jobs*
21 nonroutine jobs
None
Not applicable
* The total number of jobs includes nonroutine jobs as well as routine jobs. Nonroutine jobs as well as
routine jobs require estimating and setup work.
Costs for the Year
Wages and salaries
Disposal fees
On-site supplies
Office expenses
$ 206,000
592,000
48,000
61,000
186,000
368,000
Total cost
$1,461,000
Wages and salaries

Disposal fees
On-site supplies
Office expenses
Distribution of Resource Consumption Across Activities

Estimating Working on
Removing
and Job
Nonroutine
Asbestos
Setup
Jobs
Other
Total
34%
6%
29%
31%
100%
75%
0%
25%
0%
100%
48%
0%
31%
21%
100%
49%
6%
16%
29%
100%
7%
34%
24%
35%
100%
48%
0%
33%
19%
100%
Required:
1. Perform the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain
to enter "0" wherever required. Omit the "$" sign in your response.)
Wages and salaries
Disposal fees
Removing
Asbestos
70,040
Estimating and
Job Setup
$
12,360
Working on
Nonroutine Jobs
$
59,740
Other
63,860
Total
206,000
444,000
148,000
592,000
23,040
14,880
10,080
48,000
On-site supplies
29,890
3,660
9,760
17,690
61,000
Office expenses
13,020
63,240
44,640
65,100
186,000
176,640
121,440
69,920
368,000

Total cost
756,630
79,260
398,460
226,650
1,461,000
8/13
3/11/2014

2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.
Activity Cost Pool
Removing asbestos
Activity Rate
$
1,576.31 per thousand square feet
344.61 per job

18,974.29 per nonroutine job
3. Using the activity rates you have computed, determine the total cost and the average cost per thousand
square feet of each of the following jobs according to the activity-based costing system. (Round your
intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)
a. A routine 2,000-square-foot asbestos removal job.
3,497.23
1,748.62
6,649.85
1,662.46
b. A routine 4,000-square-foot asbestos removal job.
c. A nonroutine 2,000-square-foot asbestos removal job.

22,471.52
11,235.76
Explanation:
1.
Wages and salaries:

Removing Asbestos = 34% $206,000 = $70,040
Estimating and Job Setup = 6% $206,000 = $12,360
Working on Nonroutine Jobs = 29% $206,000 = $59,740
Other = 31% $206,000 = $63,860
Disposal fees:
Estimating and Job Setup = 0% $592,000 = $0
Other = 0% $592,000 = $0
Equipment depreciation:
Other= 21% $48,000 = $10,080
On-site supplies:
Other = 29% $61,000 = $17,690
Office expenses:
Other = 35% $186,000 = $65,100
Licensing and insurance:
Other = 19% $368,000 = $69,920
2.
Activity Cost Pool

Removing asbestos
(a)
Total Cost
$ 756,630
$ 79,260
$ 398,460
(b)
Total Activity
230 jobs
21 nonroutine jobs
(a) (b)
Activity Rate
$ 1,576.31 per thousand square feet
$ 344.61 per job
$18,974.29 per nonroutine job
3.
The costs of each of the jobs can be computed as follows using the activity rates computed above:
a.
Routine 2,000-square-foot job:
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3/11/2014

Removing asbestos ($1,576.31 per thousand square feet 2 thousand square feet)
Estimating and job setup ($344.61 per job 1 job)
Nonroutine job (not applicable)
$3,152.62
344.61
0
$3,497.23
Average cost per thousand square feet ($3,497.23 2 thousand square feet)
$1,748.62
b.
Routine 4,000-square-foot job:

Nonroutine job (not applicable)
$6,305.24
344.61
0
$6,649.85
$1,662.46
c.
Nonroutine 2,000-square-foot job:
4.
Nonroutine job ($18,974.29 per nonroutine job 1 nonroutine job)
$ 3,152.62
344.61
18,974.29
$22,471.52
$11,235.76
aw ard:
10 out of
10.00 points
Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model.
Data regarding the two products follow:
Product
XR7
ZD5
Direct Labor-Hours
0.2 DLHs per unit
0.4 DLHs per unit
Annual
Production
24,000 Units
35,000 Units
Total Direct
Labor-Hours
4,800 DLHs
14,000 DLHs
18,800 DLHs
Additional information about the company follows:

a. Product XR7 requires $35 in direct materials per unit, and product ZD5 requires $31.
b. The direct labor rate is $40 per hour.
c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost
to products. Manufacturing overhead totals $1,362,200 per year.
d. Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling
machine.
e. Because of the special work required in (d) above, the company is considering the use of activity-based
costing to apply overhead cost to products. Three activity cost pools have been identified and the firststage allocations have been completed. Data concerning these activity cost pools appear below:
Estimated Total Activity
Activity Cost Pool
Machine setups
Special milling
General factory
Activity Measure
Number of setups
Machine-hours
Direct labor-hours
Estimated
Total Cost
$ 199,800
410,400
752,000
XR7
108
1,080
4,800
ZD5
162
0
14,000
Total
270
1,080
18,800
$ 1,362,200
Required:
1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to
products.
a. Compute the predetermined overhead rate. (Round your answer to the nearest dollar amount. Omit
Predetermined overhead rate
$ 72
per DLH
b. Determine the unit product cost of each product. (Round pre-determined overhead rate to nearest
dollar amount. Round other intermediate answers and the final answer to two decimal places.
10/13
3/11/2014

Model
XR7
$ 57.40
Unit product cost
ZD5
$ 75.80
2. Assume that the company decides to use activity-based costing to apply overhead cost to products.
a. Compute the activity rate for each activity cost pool. Also, compute the amount of overhead cost that
would be applied to each product. (Round your overhead cost per unit to 2 decimal places. Omit
Activity cost Pool
Machine setups
Special processing
General factory
Activity Rate
$ 740
Per setup
$ 380
Per MH
$ 40
Per DLH
Activity Cost Pool

Total overhead cost
Overhead cost per unit
Model XR7
$ 682,320
$ 28.43
Model ZD5
$ 679,880
$ 19.43
b. Determine the unit product cost of each product. (Round your intermediate and final answers to 2
Unit product cost of Model XR7
Unit product cost of Model ZD5
$ 71.43
$ 66.43
Learning Objective: 07B-07 (Appendix 7B) Use

activity based costing techniques to compute unit
product costs for external reports.
Worksheet
Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model.
Data regarding the two products follow:
Product
XR7
ZD5
Direct Labor-Hours
0.2 DLHs per unit
0.4 DLHs per unit
Annual
Production
24,000 Units
35,000 Units
Total Direct
Labor-Hours
4,800 DLHs
14,000 DLHs
18,800 DLHs
Additional information about the company follows:

a. Product XR7 requires $35 in direct materials per unit, and product ZD5 requires $31.
b. The direct labor rate is $40 per hour.
c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost
to products. Manufacturing overhead totals $1,362,200 per year.
d. Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling
machine.
e. Because of the special work required in (d) above, the company is considering the use of activity-based
costing to apply overhead cost to products. Three activity cost pools have been identified and the firststage allocations have been completed. Data concerning these activity cost pools appear below:
Estimated Total Activity
Activity Cost Pool
Machine setups
Special milling
General factory
Estimated
Total Cost
$ 199,800
410,400
752,000
Activity Measure
Number of setups
Machine-hours
Direct labor-hours
XR7
108
1,080
4,800
ZD5
162
0
14,000
Total
270
1,080
18,800
$ 1,362,200
Required:
1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to
products.
a. Compute the predetermined overhead rate. (Round your answer to the nearest dollar amount. Omit
Predetermined overhead rate
72 per DLH
b. Determine the unit product cost of each product. (Round pre-determined overhead rate to nearest
dollar amount. Round other intermediate answers and the final answer to two decimal places.
Unit product cost
Model
XR7
$
57.40
ZD5
75.80
11/13
3/11/2014

2. Assume that the company decides to use activity-based costing to apply overhead cost to products.
a. Compute the activity rate for each activity cost pool. Also, compute the amount of overhead cost that
would be applied to each product. (Round your overhead cost per unit to 2 decimal places. Omit
Activity cost Pool
Machine setups
Activity Rate
$
740 Per setup
Special processing
General factory
Activity Cost Pool

Total overhead cost
Overhead cost per unit
380 Per MH
40 Per DLH
Model XR7
682,320
28.43
Model ZD5
679,880
19.43
b. Determine the unit product cost of each product. (Round your intermediate and final answers to 2
Unit product cost of Model XR7
71.43
Unit product cost of Model ZD5
66.43
Explanation:
1.
a.
When direct labor-hours are used to apply overhead cost to products, the companys predetermined
overhead rate would be:
Predetermined
=
overhead rate
=
Manufacturing overhead cost

Direct labor hours
$1,362,200
18,800 DLHs
= $72 per DLH
1.
b.
Direct materials
Direct labor: ($40 per DLH .2 DLH; $40 per DLH .4DLH)
Manufacturing overhead: ($72 per DLH .2 DLH; 72 per DLH .4 DLH)
Model
XR7
ZD5
$35.00
$31.00
8.00
16.00
14.40
28.80
Total unit product cost
$57.40
$75.80
2.
a.
Predetermined overhead rates for the activity cost pools:
Activity cost Pool

Machine setups
Special milling
General factory
(a)
Estimated
Total cost
$ 199,800
$ 410,400
$ 752,000
(b)
Estimated
Total Activity
270 setups
1,080 MHs
18,800 DLHs
(a) (b)
Activity Rate
$ 740 per setup
$ 380 per MH
$ 40 per DLH
The overhead applied to each product can be determined as follows:

Model XR7
Activity Cost Pool

Machine setups
Special milling
General factory
(a)
Activity rate
$ 740 per setup
$ 380 per MH
$ 40 per DLH
(b)
Activity
108 setups
1,080 MHs
4,800 DLHs
(a) (b)
Overhead
Applied
$ 79,920
410,400
192,000
Total manufacturing overhead cost (a)
$ 682,320
Number of units produced (b)

Overhead cost per unit (a) (b)
24,000
28.43
Model ZD5
Activity Cost Pool

Machine setups
Special milling
General factory
(a)
Activity rate
$ 740 per setup
$ 380 per MH
$ 40 per DLH
Total manufacturing overhead cost (a)
(b)
Activity
162 setups
0 MHs
14,000 DLHs
(a) (b)
Overhead
Applied
$ 119,880
0
560,000
$ 679,880
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3/11/2014

Number of units produced (b)
Overhead cost per unit (a) (b)
35,000
19.43
2.
b.
The unit product cost of each model under activity-based costing would be computed as follows:
Direct materials
Direct labor ($40per DLH .2 DLH; $40 per DLH .4DLH)
Manufacturing Overhead (above)
Model
XR7
ZD5
$ 35.00 $ 31.00
8.00
16.00
28.43
19.43
Total unit product cost
$ 71.43 $ 66.43
Comparing these unit cost figures with the unit costs in Part 1(b), we find that the unit product cost for
Model XR7 has increased from $57.40 to $71.43, and the unit product cost for Model ZD5 has decreased
from $75.80 to $66.43.
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Assignment Print View

out of 40 points (100%)

Total selling and administrative expenses

Total Activity Costs

Learning Objective: 07-04 Assign costs to a cost

Assignment Print View

Learning Objective: 07-05 Use activity-based costing

Total selling and administrative expenses

Manual order processing

76.00 per manual order

Electronic order processing

22.00 per electronic order

Line item picking

1.40 per line item picked

Total Activity Costs

Cost of goods sold to the hospital (a)

Assignment Print View

Markup in dollars (b)

Activity Cost Pool

Activity costs are assigned to the two hospitals as follows:

Activity Cost Pool

Total activity costs

Activity Cost Pool

Total activity costs

Total activity costs

Assignment Print View

Estimated total manufacturing overhead

Activities and Activity Measures

Total manufacturing overhead cost

Total cost assigned to products

Activity-Based Costing System

Costs not assigned to products:

Learning Objective: 07-03 Compute activity rates for

Learning Objective: 07-01 Understand activity-based

Learning Objective: 07-04 Assign costs to a cost

Learning Objective: 07-05 Use activity-based costing

Assignment Print View

Selling price per unit

Activities and Activity Measures

Total manufacturing overhead cost

Total cost assigned to products

Activity-Based Costing System

Total cost assigned to products

Costs not assigned to products:

Assignment Print View

Estimated total manufacturing overhead cost

= $25.00 per DLH

Total manufacturing cost

The first step is to determine the activity rates:

Traditional Cost System

$1,550,400 / $5,260,400 = 29.5% $3,710,000 / $5,260,400 = 70.5%

$455,000 / $642,200 = 70.9%

Assignment Print View

Wages and salaries

Distribution of Resource Consumption Across Activities

Wages and salaries

per thousand square feet

b. A routine 4,000-square-foot asbestos removal job.

Assignment Print View

c. A nonroutine 2,000-square-foot asbestos removal job.

Learning Objective: 07-03 Compute activity rates for

Learning Objective: 07-02 Assign costs to cost pools