EXERCISE 5-26 (15 MINUTES)

1. Material-handling cost per lens:

$50,000
 200  $1,000
[(25)(200)  (25)(200)] *

*The total number of direct-labor hours.

An alternative calculation, since both types of product use the same amount of the
cost driver, is the following:

$50,000
 $1,000
50*

*The total number of units (of both types) produced.

2. Material-handling cost per mirror = $1,000. The analysis is identical to that given for
requirement (1).

3. Material-handling cost per lens:

$50,000
 5†
(5  15) *
 $500
25

*The total number of material moves.

†The number of material moves for the lens product line.

4. Material-handling cost per mirror:

$50,000
 15 *
(5  15)
 $1,500
25

*The number of material moves for the mirror product line.

PROBLEM 5-50 (35 MINUTES)

1. Activity-based costing results in improved costing accuracy for two reasons. First, companies
that use ABC are not limited to a single driver when allocating costs to products and
activities. Not all costs vary with units, and ABC allows users to select a host of nonunit-
level cost drivers. Second, consumption ratios often differ greatly among activities. No
single cost driver will accurately assign costs for all activities in this situation.
2. Allocation of administrative cost based on billable hours:
Information systems: 3,100 ÷ 5,000 = 62%; $342,000 x 62% = $212,040
E-commerce consulting: 1,900 ÷ 5,000 = 38%; $342,000 x 38% = $129,960

Information
Systems E-Commerce
Services Consulting
Billings:
3,100 hours x $125………… $387,500
1,900 hours x $125………… $237,500
Less: Professional staff cost:
3,100 hours x $45……. (139,500)
1,900 hours x $45……. (85,500)
Administrative cost……. (212,040) (129,960)
Income…………………………… $ 35,960 $ 22,040

Income ÷ billings………………. 9.28% 9.28%

PROBLEM 5-50 (CONTINUED)

2. Activity-based application rates:

Activity Application
Activity Cost Driver Rate

Staff support $180,000 ÷ 250 clients = $720 per client

In-house 136,400 ÷ 4,400 computer = $31 per CH

computing hours (CH)

Miscellaneous 25,600 ÷ 1,000 client = $25.60 per CT

office charges transactions (CT)

Staff support, in-house computing, and miscellaneous office charges of information systems
services and e-commerce consulting:

Information
Systems E-Commerce
Activity Services Consulting

Staff support:
200 clients x $720…………... $144,000
50 clients x $720……………. $ 36,000
In-house computing:
2,600 CH x $31………………. 80,600
1,800 CH x $31………………. 55,800
Miscellaneous office charges:
400 CT x $25.60……………... 10,240
600 CT x $25.60……………... 15,360
Total $234,840 $107,160
……………………………….
PROBLEM 5-50 (CONTINUED)

Profitability of information systems services and e-commerce consulting:

Information
Systems E-Commerce
Services Consulting
Billings:
3,100 hours x $125……….. $387,500
1,900 hours x $125……….. $237,500
Less: Professional staff cost:
3,100 hours x $45…… (139,500)
1,900 hours x $45…… (85,500)
Administrative cost……. (234,840) (107,160)
Income………………………….. $ 13,160 $ 44,840

Income ÷ billings……………... 3.40% 18.88%

4. Yes, his attitude should change. Even though both services are needed and professionals are
paid the same rate, the income percentages show that e-commerce consulting provides a
higher return per sales dollar than information systems services (18.88% vs. 3.40%). Thus,
all other things being equal, professionals should spend more time with e-commerce.

5. Probably not. Although both services produce an attractive return, the firm is experiencing a
very tight labor market and will likely have trouble finding qualified help. In addition, the
professional staff is currently overworked, which would probably limit the services available
to new clients.
PROBLEM 5-51 (30 MINUTES)

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

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

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

 Sufficient information about product profitability, thus increasing the difficulties associated with
management decision making.

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

PROBLEM 5-52 (40 MINUTES)

1. Overhead to be assigned to medical-testing agent order:

Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $2,000 per setup  5 setups $10,000
Material handling $2 per pound  10,000 pounds 20,000
Hazardous waste control $5 per pound  2,000 pounds 10,000
Quality control $75 per inspection  10 inspections 750
Other overhead costs $10 per machine  500 machine hours 5,000
hour
Total $45,750

2. Overhead cost per 45,750

=  $45.75 per box
box of agent 1,000 boxes

3. Predetermined total budgetedoverheadcost $625,000

overhead rate
= 
totalbudgetedmachine hours 20,000
= $31.25 per machine hr.
4. Overhead to be assigned to medical-testing agent order, given a single predetermined
overhead rate:
 a. Total overhead assigned = $31.25 per machine hr.  500 machine hr.
= $15,625

b. Overhead cost per $15,625

=  $15.625 per box
box of agent 1,000 boxes

5. The medical-testing agent production entails a relatively large number of machine setups, a large
amount of hazardous materials, and several inspections. Thus, it is quite costly in terms of driving
overhead costs. Use of a single predetermined overhead rate obscures this characteristic of the
production job. Underestimating the overhead cost per box could have adverse consequences for
the company. For example, it could lead to poor decisions about product pricing. The activity-based
costing system will serve management much better than the system based on a single,
predetermined overhead rate.

PROBLEM 5-52 (CONTINUED)

6. In the electronic version of the solutions manual, press the CTRL key and click on
the following link: Build a Spreadsheet 05-52.xls

PROBLEM 5-53 (20 MINUTES)

1. Unit cost calculation:
(a) Overhead assigned to specially coated plates used in cancer testing:

Assigned
Activity Cost Pool Level of Overhead
Pool Rate Cost Driver Cost
Machine setups $2,000 per setup  3 setups $ 6,000
Material handling $2 per pound  900 pounds 1,800
Hazardous waste control $5 per pound  300 pounds 1,500
Quality control $75 per inspection  3 inspections 225
Other overhead costs $10 per machine hour  50 machine hours 500
Total $10,025

$10,025
Overhead cost per unit   $100.25
100 plates

(b) Unit cost per plate:

Direct material................................ $120.00

Direct labor .................................... 40.00
Manufacturing overhead ............... 100.25
Total cost per plate ........................ $260.25
2. In the electronic version of the solutions manual, press the CTRL key and click on
the following link: Build a Spreadsheet 05-53.xls
PROBLEM 5-51 (CONTINUED)

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

 Establish activity-cost pools for each significant activity.

 Select a cost driver for each activity that best reflects the relationship of the activity to the
overhead costs incurred.

b. In order to accommodate the automation of the Molding Department in its overhead

accounting system, the company should:

 Establish a separate overhead pool and rate for the Molding Department.

 Identify fixed and variable overhead costs and establish fixed and variable overhead rates.

 Apply overhead costs to the Molding Department on the basis of robot or machine hours.