5-32 (30 min.) Plantwide versus department overhead cost rates.

1. Amounts
(in thousands)
Molding Component Assembly Total

Manufacturing department overhead $21,000 $16,200 $22,600 $59,800

Service departments:
Power 18,400
Maintenance 4,000
Total budgeted plantwide overhead $82,200

Budgeted direct manufacturing labor-hours (DMLH):

Molding 500
Component 2,000
Assembly 1,500
Total budgeted DMLH 4,000

Budgeted plantwide overheard

Plantwide overhead rate =
Budgeted DMLH

$82,200
= = $20.55 per DMLH
4,000

2. The department overhead cost rates are shown in Solution Exhibit 5-32

3. MumsDay Corporation should use department rates to allocate plant overhead because:
(1) the cost drivers of resources used in each department differ and (2) the departments do not
use resources from the support departments in the same proportion. Hence, department rates
better capture cause-and-effect relationships at MumsDay than does a plantwide rate.

4. MumsDay should further subdivide the department cost pools into activity-cost pools if
(a) significant costs are incurred on different activities within the department, (b) the different
activities have different cost drivers, and (c) different products use different activities in different
proportions.
SOLUTIO' EXHIBIT 5-32

Departments (in thousands)

Service Manufacturing
Power Maintenance Molding Component Assembly

2 (a)
Departmental overhead costs $18,400 $4,000 $21,000 $16,200 $22,600
Allocation of maintenance costs (direct method)
$4,000 × 90/125, 25/125, 10/125 (4,000) 2,880 800 320
Allocation of power costs
$18,400 × 360/800, 320/800, 120/800 (18,400) 8,280 7,360
2,760

Total budgeted overhead of manufacturing

departments $ 0 $ 0 $32,160 $24,360 $25,680

2 (b) Allocation Base 875 MH 2,000 DMLH 1,500 DMLH

Budgeted Rate (Budgeted overhead ÷ Alloc. Base) $36.75/MH $12.18/DMLH $17.12/DMLH

5-33 (40 min.) Activity-based costing, unused capacity.

1.
Simple Costing System
Basca Thermo Total
Number of units 30,000 15,000

Direct manuf. labor hours (DMLH) per unit 2 2.5

Cost per DMLH $20

Total DMHL (30,000 × 2; 15,000 × 2.5) 60,000 37,500 97,500

Total indirect costs to be allocated

($3,000,000 + $600,000 + $582,000 +
$900,000 + $90,000 + $315,000 + $390,000) $5,877,000

Indirect cost rate per DMLH

($5,877,000 ÷ 97,500 DMLH) $60.2769

Allocated indirect costs

($60.2769 × 60,000; 37,500) $3,616,615 $2,260,385

Direct material cost per unit $100.00 $150.00

Direct manuf. labor cost per unit

($20 per DMLH × 2 DMLH/unit;
2.5 DMLH/unit) 40.00 50.00

Indirect cost per unit

($3,616,615 ÷ 30,000; $2,260,385 ÷ 15,000) 120.55 150.69

Total cost per unit $260.55 $350.69

5-3
2.

ABC System
Cost Driver Units
Total cost of Consumed during
Cost activity 2006 (see (1)) Cost Allocation Rate for
Activity Driver (given) Basca Thermo Total Activity
(1) (2) (3) (4) (5) (6) = (4) + (5) (7) = (3) ÷ (6)
Design (cost driver consumption given) No. of changed $ 900,000 10 20 30 $30,000 per changed
components component

Setups ((30,000 units ÷ 500 units per Setup hours 600,000 600 2,400 3,000 $200 per setup hour
batch) × 10 hrs. per batch; (15,000
÷ 100) × 16)

Material handling (0.20 hours per load Material 582,000 660 2,250 2,910 $200 per material-
× 55 loads per batch × (30,000 ÷ 500) handling hours handling hour
batches; 0.20 × 75 × (15,000 ÷ 100))

Manuf. operations (cost driver Machine hours 3,000,000 45,000 30,000 75,000 $40 per machine
consumption given) hour

Shipping (cost driver consumption given) No. of shipments 90,000 120 180 300 $300 per shipment

Distribution (1 cu. ft. per motor × 30,000 Cu. ft. of motors 315,000 30,000 22,500 52,500 $6 per cubic foot
motors; 1.5 × 15,000) delivered

Administration (see requirement 1) DML hours 390,000 60,000 37,500 97,500 $4 per direct
manuf. labor
hour

Total indirect costs $5,877,000

5-4
 30,000 15,000
Basca Units Thermo Units
Total per Unit Total per Unit Total
Cost Description (1) (2) = (1) ÷ 30,000 (3) (4) = (3) ÷ 15,000 (5) = (1) + (3)
Direct Costs
Direct materials ($100 × 30,000; $150 × 15,000) $3,000,000 $100.00 $2,250,000 $150.00 $ 5,250,000
Direct manufacturing labor
($20/hr. × 60,000 hrs.; $20/hr. × 37,500 hrs.) 1,200,000 40.00 750,000 50.00 1,950,000
Total direct costs 4,200,000 140.00 3,000,000 200.00 7,200,000
Indirect Costs of Activities
Design
Basca, 10 parts-sq. ft. × 30,000 300,000 10.00
900,000
Thermo, 20 parts-sq. ft. × 30,000 600,000 40.00
Setup
Basca, 600 setup hours × $200 120,000 4.00
600,000
Thermo, 2,400 setup-hours × $200 480,000 32.00
Materials handling
Basca, 660 hrs. × $200 132,000 4.40
582,000
Thermo, 2,250 hrs. × $200 450,000 30.00
Manufacturing operations
Basca, 45,000 machine-hour s × $40 1,800,000 60.00
3,000,000
Thermo, 30,000 machine-hours × $40 1,200,000 80.00
Shipping
Basca, 120 shipments × 300 36,000 1.20
90,000
Thermo, 180 shipments × 300 54,000 3.60
Distribution
Basca, 30,000 cubic feet delivered × $6 180,000 6.00
315,000
Thermo, 22,500 cubic feet delivered × $6 135,000 9.00
Administration
Basca, 60,000 dir. manuf. labor-hours × $4 240,000 8.00
390,000
Thermo, 37,500 dir. manuf. labor-hours × $4 _________ _______ 150,000 10.00
Total indirect costs allocated 2,808,000 93.60 3,069,000 204.60 5,877,000
Total Costs $7,008,000 $233.60 $6,069,000 $404.60 $13,077,000

3.
Cost per unit Basca Thermo
Simple system $260.55 $350.69
Activity-based Cost System $233.60 $404.60
Activity-based cost as % of original 90% 115%

The simple and activity-based costs per unit differ because the pattern of consumption of direct
manufacturing labor-hours (the indirect cost driver in the simple system) is very different from
the pattern of consumption of the six new cost drivers by Basca and Thermo products. In
particular, using the new activity-based cost drivers, we see that Thermo consumes significantly
more of design, setup, material handling and shipping resources. This is driven by the fact that
Thermo has more change components, smaller batch sizes, larger number of components and a
greater number of smaller-size shipments than Basca. In the ABC analysis Thermo is therefore
more costly per unit than in the simple system. These differences are important to Bronco
Electric because it can use the information to price the motors based on their consumption of
resources, and also, it can use the activity-consumption information to reduce costs and to
optimize its operations for maximum value-added from indirect resources.

5-5
4.
Basca Thermo Total
Number of units 30,000 15,000

Old cubic feet per motor 1 1.5

New cubic feet per motor 0.9 1.2

Distribution costs $315,000

Distribution capacity in cu. ft.*

(30,000 motors × 1 cu. ft. per motor;
15,000 × 1.5) 30,000 22,500 52,500

Distribution cost per cu. ft.

($315,000 ÷ 52,500) $ 6.00

Cu. ft. of distribution capacity used

(30,000 motors × 0.9 cu. ft. per motor;
15,000 × 1.2) 27,000 18,000 45,000

Cost of distribution resources consumed

(27,000 cu. ft. × $6/cu. ft.; 18,000 × 6) $162,000 $108,000 $270,000

Excess distribution capacity

($315,000 – $270,000) $ 45,000

* We are given that Bronco’s distribution system was operating at capacity at the old number of
units and old cu. ft. per motor.

5. In the short run, Bronco can try to sell the excess distribution capacity of 7,500 (52,500 –
45,000) cu. ft. (costing $45,000) to other businesses. In the long run, Bronco should focus on
reducing bulkiness of shipments as much as possible and minimizing or eliminating excess
distribution capacity, to match the demand for distribution resources.

5-6