Braun Ma3 SM 04.doccvbcvb

Chapter 4
Activity-Based Costing, Lean Operations, and the Costs of Quality
Chapter 4
Activity-Based Costing, Lean Operations, and the

Costs of Quality
Quick Check
Answers:
QC4-1. d
QC4-2. d
QC4-3. c
QC4-4. c
QC4-5. c
QC4-6. d
QC4-7. c
QC4-8. c
QC4-9. a
QC4-10. c
Short Exercises
(5 min) S 4-1
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
Product-level costs
Activity-based costing
Internal failure costs
Unit-level costs
External failure costs
Facility-level costs
Kaizen
Appraisal costs
Takt time
POUS
TQM
Manufacturing cycle time
Lean thinking
Batch-level costs
Prevention costs
Activity-based management
DOWNTIME
(5 min) S 4-2
Req. 1
JOB 484
Departmental overhead rate
Cutting Department
$12 per machine
Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall
hour
Finishing Department
$15 per direct
labor hour
119
Managerial Accounting 3e Solutions Manual

Direct labor hours incurred in the Finishing
Department
Machine hours incurred in the Cutting
Department
Allocation of manufacturing overhead
5 direct labor
9
machine
hours
$108
hours
$75
The total manufacturing overhead allocated to Job 484 is $183.
(continued) S 4-2
Req. 2
The manufacturing cost of Job 484 is determined by summing the three manufacturing costs assigned to the
job.
Direct Materials
Direct Labor ($26 per hour 9 hours)
Manufacturing overhead
Total Job Cost
(5-10 min) S 4-3
Req. 1
Manufacturing Overhead
$3,762,000
$2,550
234
183
$2,967
Plantwide Overhead Rate
Machine Hours
17,100
$220 per machine hour
Req. 2
Production
Departments
Departmental
Machine Hours
Potato Chips
Corn Chips
$2,147,000
$959,000
11,300
2,600
=
=
Cheese Puffs
TOTAL
$ 656,000
$3,762,000
3,200
17,100
Req. 3
Potato Chip
Corn Chip
Cheese Puffs
Departmental Overhead
Rates
$368.85 (rounded) per
machine hour
Overcosted
Undercosted
Overcosted
(5 min.) S 4-4
120
Activity
Preparation
$610,000
Cost Driver
10,000 preparation
Activity Cost Allocation Rate

= $61 per preparation hour
Chapter 4
Cooking and Draining
$972,000
Packaging
$320,000

hours
36,000 cooking and
draining hours
4,000,000 packages
$27 per cooking and draining

hour
= $0.08 per package
=
(5-10 min.) S 4-5
Req. 1 and 2
The total amount of manufacturing overhead allocated to the order (and the amount of manufacturing
overhead per bag) is computed as follows:

$61 per preparation hour
$27 per cooking and
draining hour
$0.05 per package
TOTAL
Number of bags
Manufacturing overhead per bag
Use of Cost Driver

22 preparation hours
32 cooking and draining hours
15,000 bags
Allocated Manufacturing
Overhead
$ 1,342
864
750
$2,956
12,000
$ 0.20 (rounded)
121
(continued) S 4-5
Manufacturing overhead allocated
=
Number of units
$2,956
15,000
$0.20
per unit
Req. 3
In addition to the costs above, Uncle Joe needs to consider the direct materials and direct labor.
(5-10 min.) S 4-6
Req. 1
Estimated Total
Manufacturing Overhead Estimated Total Usage of
Costs
Cost Driver
(A)
(B)
(A B)
Activity
Machine setup
Machining
Quality control
$ 150,450
$ 999,900
$ 339,700
2,950 set-ups
5,050 machine hours
4,300 tests run
$ 51 per setup
$ 79 per QC test
Req. 2
Job Cost Record
JOB #557
Manufacturing Costs
Direct Materials
Direct Labor:
Evan Berg: 9 $25 = $225
Stephanie Berg: 7 $32 = $224
Manufacturing Overhead:
2 setups $51 / setup = $102
5 machine hours $198 /
hour = $990
2 tests $79 / test = $158
TOTAL JOB COST
$1,350
449
1,250
machine
$3,049
(15-20 min.) S 4-7

Req. 1
Alloy Technology
Activity Cost Allocation
Activity
Cost Allocated to Each Board
Start station
$ 0.70
$ 4.20
Dip insertion
20
$ 0.40
8.00
Manual insertion
$ 0.60
5.40
Wave solder
$ 6.40
38.40
122
Chapter 4
Backload

7
$ 0.60
4.20
Test
0.14
$70.00
9.80
Defect analysis
0.17
$60.00
Total
10.20
$80.20
123
(continued) S 4-7
Direct materials cost.
Direct labor cost.
Activity costs allocated
Manufacturing product cost
$56.00
$49.00
80.20
$185.20
Req. 2
Managers might favor this multiple-rate, activity-based costing system because it better pinpoints activities for
planning and control and it provides more accurate data for product costing.
(15-20 min.) S 4-8
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Unit-level
Facility-level
Unit-level
Product-level
Product-level
Facility-level
Facility-level
Batch-level
Unit-level or Batch-level
Product-level
Unit-level or Batch-level
Unit-level
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Unit-level
Product-level
Unit-level
Facility-level
Facility-level
Product-level
Batch-level
Product-level
Facility-level
Facility-level
(15-20 min.) S 4-9
(5 min) S 4-10
1. The company has very few indirect costs less likely

2. The company operates in a very competitive industry more likely
124
Chapter 4
3. The company has re-engineered its production process but has not changed its accounting system
more likely
4. In bidding for jobs, managers lose bids they expected to win
likely
and win bids they expected to lose more
5. The company produces few products, and the products consume resources in a similar manner less
likely
6. The company produces high volumes of some of its products and low volumes of other products more
likely
125
(10 min.) S 4-11

Req. 1
Indirect cost
allocation rate
Estimated total indirect costs

Estimated direct labor hours
$710,500
4,900 hours
= $145 / hour
Req. 2
Wilson
Direct labor (95 hours $335 / hour)
Nanry
$31,825
Indirect costs (95 hours $145 / hour)

Total costs
$31,825
13,630
13,630
$45,455
$45,455
Req. 3
Wilson
Service revenue (160% $31,825)
Nanry
$50,920
$50,920
Direct labor (from Req. 2)
31,825
31,825
Indirect costs (from Req. 2)
13,630
13,630
Total costs
45,455
45,455
$ 5,465
$ 5,465
Operating income
(5-10 min.) S 4-12

There are several warning signs that Sunflowers cost system may be broken:
1.
One client is complaining that the firm's fees are too high, while another client is happy with the fees.
2.
On a job where Schnell feels efficient, the client is complaining about the high fees.
3.
On a complex job where Schnell feels less efficient, the client is happy with the fees.
4.
Sunflowers competitor is able to undercut her fees.
5.
Sunflowers cost system has not changed since the firm was founded.
6.
Sunflower allocates indirect costs using a single allocation basedirect labor hours.
These signals suggest it is time for Schnell to reevaluate her cost system.
126
Chapter 4
(5 min.) S 4-13
Mission, Inc.
ABC Cost Allocation Rates
Documentation
Preparation
Estimated indirect costs of
activity
Information
Technology Support
$144,500
Divide by estimated quantity

of cost allocation base
2,890 pages
Cost allocation rate for

activity
50 / page
Training
$119,000
$447,000
700 applications
$
170 / application
4,470 DL hrs.
$ 100 / DL hour
(10-15 min.) S 4-14
Req. 1
Wilson
Direct labor (95 hours $335)
$31,825
Nanry
$31,825
Documentation preparation:
(50 pages $50)
2,500
(300 pages $50)
15,000
Information technology support:

(1 application $170)
170
(95 applications $100)
13,260
Training (95 hours $100)

Total costs
9,500
9,500
$43,995
$69,585
Req. 2
Webb
Greg
$50,920
$ 50,920
31,825
31,825
2,500
15,000
170
13,260
9,500
9,500
Total costs
$43,995
$ 69,585
Operating income (loss)
$ 6,925
$(18,665)
Service revenue (160% $31,825)

Direct labor
Indirect costs:
Documentation preparation
Information technology support
Training
(10-15 min.) S 4-15

a.
b.
c.
d.
e.
Value added
Value added
Non-value added
Non-value added
Non-value added
127

f.
g.
h.
128
Non-value added
Non-value added
Non-value added
Chapter 4
(10-15 min.) S 4-16

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Value added
Non-value added
Value added
Non-value added
Value added
Non-value added
Non-value added
Value added
Value added
Non-value added
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
Lean
Lean
Traditional
Lean
Lean
Traditional
Traditional
Lean
Lean
Lean
Traditional
Traditional
Lean
(5-10 min.) S 4-17
(5 min.) S 4-18
a. Not utilizing people to their full potential
b. Excess processing
c. Movement
d. Waiting
e. Defects
f. Overproduction
g. Transportation
h. Inventory
(10-15 min.) S 4-19

1. Repairing defective units found during inspection internal failure
2. Legal fees from customer lawsuits external
failure
3. Inspecting products that are half the way through the
production process appraisal
129

4. Redesigning the production process prevention
5. Cost incurred producing and disposing of defective units
6.
internal failure
Incremental cost of using a higher grade raw material prevention
7. Training employees prevention

8. Lost productivity due to machine breakdown internal failure
9. Inspecting incoming raw materials appraisal
10. Warranty repairs external failure
(10-15 min.) S 4-20

Req. 1
Cost (Benefit)
Analysis
Prevention costs:
Negotiating with and training suppliers to obtain higher quality materials and ontime delivery
Redesigning the speakers to make them easier to manufacture
Appraisal costs:
Additional 20 minutes of testing for each speaker
Avoid inspection of raw materials
Internal failure costs:
Rework avoided because of fewer defective units
Avoid lost profits from lost production due to rework
External failure costs:
Reduced warranty repair costs
Avoid lost profits from lost sales due to disappointed customers
Net cost (benefit) from implementing quality program
Costs (Savings)
$ 510,000
1,409,000
600,000
(409,000)
(652,000)
(307,000)
(202,000)
(855,000)
$ 94,000
Req. 2
Boatsburg should not implement the new quality program. The company would lose $94,000 by implementing
the new program.
(5-10 min.) S 4-21

1.
2.
3.
4.
5.
6.
130
External failure cost

Internal failure cost
Appraisal cost
Prevention cost
Chapter 4
Exercises (Group A)
(15-20 min.) E 4-22A
Req. 1
Plantwide
overhead rate
=
=
=
=
Estimated total manufacturing costs

Estimated cost allocation base
$1,150,000
25,000* direct labor hours
$46 per direct labor hour
*When calculating plantwide overhead rates, all direct labor

hours incurred in the plant are used.
131
(continued) E 4-22A
Req. 2
Departmental overhead rate
Machining Dept. overhead rate
=
=
Finishing Dept. overhead

rate
Total department overhead

Cost allocation base (estimated)
$825,000
13,750 machine hours
$325,000
13,000** direct labor hours
=
=
**When calculating the finishing departmental rate, only the direct labor hours incurred in the finishing
department are used.
Req. 3
Overhead allocation based on single, plantwide rate:
Cost allocation base (actual)
Plantwide cost allocation
rate
Overhead allocation
Job 450
5 DL hours
Job 455
5 DL hours
$46/ DL hour
$ 230
$46 / DL hour
$ 230
Req. 4
Overhead allocation based on departmental rates:
Machining Department:
Departmental allocation rate
Machine hours used by Job
Overhead allocation
Job 450
Job 455
$60/ MH
3 MH
$60/ MH
6 MH
$180
$360
$25/ DL hr
4 DL hrs
$25/ DL hr
3 DL hrs
$100
$75
$ 280
$ 435
Finishing Department:
DL hours used by Job
Overhead allocation
Total overhead allocation (from

both departments
132
Chapter 4
Req. 5
The single plantwide rate undercosts Job 450 and undercosts Job 455. Since Donovan sets the sales price at
125% of cost, and the job cost is affected by the allocation system used, the sales price will be affected by the
allocation system used.
133
(15-20 min.) E 4-23A

Req. 1
West Horizon
Computation of Cost Allocation Rates
Activity
Total Activity
Overhead (est.)
Cost Allocation Base

(est.)
Activity
Overhead Rate
Materials handling
$13,200
3,300 parts
$ 4 per part
Machine setup
$ 5,200
20 setups
$260 per setup
Insertion
$49,500
3,300 parts
$ 15 per part
Finishing
$86,100
2,100 hours
$ 41 per hour
Req. 2
The amount of manufacturing overhead to be assigned to Job 420 is computed as follows:
Activity
Materials handling
Machine setup
Insertion of parts
Finishing
Total
MOH Cost
$ 400
780
1,500
5,740
$8,420
Req. 3
The amount of manufacturing overhead to be assigned to Job 510 is computed as follows:
Activity
Materials handling
Machine setup
Insertion of parts
Finishing
Total
MOH Cost
$ 1,700
1,560
6,375
14,350
$23,985
(15-20 min.) E 4-24A

Req. 1
Total overhead
Total machine hours
Predetermined MOH rate
Cost of Job #356
Machine hours used
POHR
Total MOH
$ 790,000
10,000
$
79
100
79
7,900
Job #356traditional POHR

134
Chapter 4
Direct material
Direct labor
MOH

300 lbs. @ $50/lb.
55 hrs. @ $20/hr.
Total cost of job
$ 15,000
1,100
7,900
$ 24,000
135
(continued) E 4-24A
Req. 2
Job #356ABC
Direct material
Direct labor
Machine hours
No. of engineering changes
Pounds of hazardous waste
generated
300 lbs. @ $50/lb.

55 hrs. @ $20/hr.
100
6
50
$ 15,000
1,100
2,500
360
15,000
Total cost of job
$ 33,960
Req. 3
The estimate based on the activity-based costing (ABC) method provides more useful information. Activitybased costing (ABC) focuses on activities, rather than departments, as the fundamental cost objects. ABC
recognizes that activities are costly to perform, and each product manufactured may require different types
and amounts of activities. Thus, activities become the building blocks for compiling the indirect costs of
products, services, and customers. Managers use ABC to more accurately estimate the cost of resources
required to produce different products, to render different services, and to serve different customers.
(15-20 min) E 4-25A

Req. 1
Operating
overhead
$233,500
Total professional hours
Current operating overhead allocation rate
10,000
$23.35 per
professional hour
Req. 2
Billing Calculations for the Lillian Yu Kitchen Remodeling Job
Based on current allocation system
Professional time (27 hours $63 per hour)
Operating overhead (27 hours $23.35 per hour)
Total cost of job
Markup on cost
Bill to client
$1,701.00
+ 630.45
$2,331.45
120%
$2,797.74
Req. 3
Activity
Transportation to clients
Blueprint copying
Office support
Cost
$ 10,500
$ 37,000
$186,000
Total activity allocation base
15,000
1,000b
5,000c
Activity allocation rate

= $0.70 / mile
= $35 / copy
= $38 / secretarial hour
To calculate the activity cost allocation rates, you must use the total activity for the year:
a
4,500 + 10,500 = 15,000
b
400 + 600 = 1,000
c
2,100 + 2,900 = 5,000
136
Chapter 4
Req. 4
Total cost of job
Markup percentage
Amount billed to client
$2751.40
120%
$3,301.68
(continued) E 4-25A
Req. 5
The ABC billing system should be more fair to clients because they are charged according to the resources
they used. For example, copying blueprints is very expensive. Under the fairer ABC system, clients are
charged according to the number of blueprint copies their job required. The fairer system better recognized
the extent to which operating costs are incurred by each unique client job.
(20-25 min.) E 4-26A
Req. 1
Total pharmacy rate (using number of prescriptions):
$190,000 / 25,000 = $7.60
Req. 2
Cost assigned using traditional overhead allocation
Used:
Used by this order
Customer
order
#1247
(standard
Cost
assigned
using
traditional
overhead allocation
prescriptions) Used:
3 order
Used by this
Customer order #1248 (complicated
formulation)
Req. 3
$7.60
$7.60
Req. 4
Cost Pools
Pharmacy Occupancy Costs
Packaging Supplies
Estimated Cost
$60,000
$30,000
Req. 5
Customer order #1247 (standard prescriptions)
Used by this
Used:
order
Technician hrs. for order
0.5
Number of prescriptions
3
Cost Drivers
Technician Hours
Number of
Prescriptions
$0.80
$1.20
Estimated Cost Driver

Activity
75,000
25,000
Cost
Pool
Rate
$0.80
$1.20
ABC assigned cost

$ 0.40
$ 3.60
137

Pharmacist hours
$4.00
Total ABC Cost
$ 4.00
$ 8.00
Req. 6
Used by this
Used:
order
Technician hrs. for order
0.5
$0.80
1
$1.20
Pharmacist hours
2.5
$4.00
Total ABC Cost
ABC assigned cost

$ 0.40
$ 1.20
$ 10.00
$ 11.60
138
Chapter 4
(continued) E 4-26A
Req. 7
(20-25 min.) E 4-27A

Req. 1
First, compute the current plantwide manufacturing overhead rate:
Total manufacturing overhead
$820,000
Total direct labor hours
Plantwide overhead rate
20,500
$40 per
direct labor hour
Then, apply it to the two products:

Medium
(42-inch)
Manufacturing Cost
Direct materials
Direct labor
Manufacturing overhead:
(7,875 DL hours $40) =
(12,625 DL hours $40) =
Total manufacturing cost
Number of units produced
Cost per unit
$ 660,000
225,000
Large
(63-inch)
$1,227,000
388,000
315,000
$1,200,000
3,200
$
375
505,000
$2,120,000
4,000
$
530
Req. 2
First, compute the activity cost allocation rates:
Activity
Activity cost
Materials handling
Machine processing
Packaging
$120,000
$600,000
$100,000
Total activity allocation

base
600
40,000b
10,000c
a

$200 / mat. order
= handled
= $15 / machine hour
= $10 / packaging hour
You must use the TOTAL activity for the year as follows. Since Owens only manufactures two products, you
add the activity of each of the individual products to find the total activity:
350 + 250 = 600
25,000 + 15,000 = 40,000
c
3,000 + 7,000 = 10,000
a
b
139
140
Chapter 4
(continued) E 4-27A
Req. 2 (continued)
Then, apply them to the two products:
Manufacturing Cost
Direct materials
Direct labor
Manufacturing overhead:
Medium:
(350 material orders $200
= $70,000)
(25,000 machine hours
$15 = $375,000)
(3,000 packaging hours
$10 = $30,000)
Total allocation of overhead
Large:
(250 material orders $200
= $50,000)
(15,000 machine hours
$15 = $225,000)
(7,000 packaging hours
$10 = $70,000)
Total allocation of overhead
Cost per unit
Medium
(42-inch)
$ 660,000
225,000
Large
(63-inch)
$1,227,000
388,000
475,000
$1,360,000
3,200
$ 425.00
345,000
$2,018,000
4,000
$ 490.00
Req. 3
Medium
Cost per unit using current
system
Cost per unit using ABC
Overcosting / (Undercosting)
Number of units
Total cost distortion
$ 375
425
($ 50)
3,200
($160,000)
Large
$ 530
490
$ 40
4,000
$118,000
The Medium units had been undercosted and the Large units had been overcosted. Since Joness sets its
sales price at 300% of manufacturing cost, the resulting sales price should have been about $150 higher for
the Medium units and about $120 lower for the Large units. This helps to explain why Jones is the low cost
leader for Medium plasma TVs, but faces competitive pressure on the Large plasma TVs.
141
(20-30 min.) E 4-28A

Req. 1
King
Total Budgeted Indirect Manufacturing Costs
Budgeted Quantity of
Activity
Materials handling
Activity Cost
Allocation Rate
12,000a
3.75
$ 45,000
30
$314.20
9,426
12,000
$ 32.00
384,000
3,900
$ 54.00
Machine setups
Insertion of parts
Finishing
Total Budgeted
Indirect Cost
210,600
Total budgeted indirect cost
$649,026
__________
a
(5 1,000) + (7 1,000)
b
15 + 15
c
(1.1 1,000) + (3.1 1,000)
Req. 2
King
ABC Indirect Manufacturing Cost per Unit
Cost
Allocation
Rate
Activity
Quantity of Cost Allocation

Base
Used By:
Standard
Materials handling
3.75
Machine setups
$314.20
Insertion of parts
$ 32.00
Finishing
$ 54.00
Allocated Activity Cost Per

Wheel
Deluxe
Standard
7
0.015*
$ 18.75
0.015*
1.1
2.8
Total ABC allocated

indirect cost
Deluxe
$ 26.25
4.71
4.71
160.00
224.00
59.40
151.20
$242.86
$406.16
__________
*15 setups 1,000 wheels = 0.015 per wheel
Req. 3
Total budgeted manufacturing overhead
= $649,026 (Req. 1)
Total budgeted direct labor hours
= (1,000 2) + (1,000 3)
= 2,000 + 3,000
= 5,100
$461,500
5,000
= $127.26 / DL hour
142
Chapter 4
Manufacturing overhead cost per wheel:

Standard:
Deluxe:
2.00 $127.26 = $254.52

3.10 $127.26 = $394.51
143
(continues E 4-28A) (15-20 min.)

E 4-29A
Req. 1
King
Total cost per unit using ABC Data
Standard
Direct materials
Deluxe
$ 32.00
$ 46.25
45.00
50.00
Direct labor
242.86
406.16
$ 320.36
$ 502.41
The gross profit (using ABC data) for the two models are:
King
Gross profit per unit using ABC Data
Standard
Deluxe
Sales price
$ 496.00
$ 670.00
$ 320.36
$ 502.41
Gross profit
$ 175.64
$ 167.59
Req. 2
King
Total cost per unit using plantwide overhead rate
Standard
Deluxe
$ 32.50
$ 46.25
45.00
50.00
254.52
394.51
$332.02
$490.76
Direct materials
Direct labor
King
Gross profit per unit using plantwide overhead rate
Sale price
Total manufacturing costs
Gross profit
Standard
Deluxe
$496.00
$670.00
332.02
490.76
$163.98
$179.24
Req. 3
The standard model is more profitable than the deluxe model. Activity-based costing data generally are more
accurate than cost data generated by a plantwide overhead allocation rate. ABC systems have more cost
categories (activities), each with its own allocation base. ABC cost assignments more accurately represent the
cost of resources consumed to manufacture (and support) products.
Req. 4
144
Chapter 4
The ABC system is likely to pass the cost-benefit test because King manufactures two different products that
use different amounts of resources.
The old cost system appears broken because profits have been declining even though the company shifted
its product mix toward the product that had appeared most profitable under the old system.
145
(15-20 min.) E 4-30A

Req. 1
Either the materials handling cost or the grinding cost is inaccurate. Both costs were assigned based on the
number of parts. Thus, the ratio of Job 409 materials handling cost to Job 622 materials handling cost should
be the same as the ratio of Job 409 grinding cost to Job 622 grinding cost. The materials handling cost ratio is
1:3, but the grinding cost ratio is 1:5. Job 622 cannot have three times as many parts as Job 409 and five
times as many parts simultaneously.
Req. 2
The first step is to determine the allocation rate for each of the four activities:
Franklin Fabricators
ABC Allocation Rates
Activity
Divide by Quantity
of the Cost
Allocation Base
Job 622
Activity Cost
Activity Cost
Allocation Rate
Lathe work
$20,000
62,500 turns
$0.32 / lathe turn
Milling
$25,000
1,000 hours
$25 / machine hour
Grinding
$ 1,800
2,500 parts
$0.72 / part
Testing
$ 3,000
$8 / unit
375 units
The second step is to use the cost allocation rate for each activity to determine the quantity of the allocation base
Job 409 used.
Franklin Fabricators
Quantity of the Allocation Base Used by Job 409
Activity
Job 409
Activity Cost
Divide by Activity Cost

Allocation Rate
Quantity of the Allocation Base

Used by Job 409
Lathe work
$5,200
$0.32 / turn
Milling
$3,700
$25 / hour
16,250 turns
148 hours
Grinding
$ 360
$0.72 / part
500 parts
Testing
$ 120
$8 / unit
15 units
Req. 3
Based on the ABC information, Franklin should not accept the company's offer to test units for $15 each.
Franklins cost of performing this activity is only $8 per unit.
(15-20 min) E 4-31A

1. Inventory levels Lean production systems strive to maintain low inventory levels. Lean producers try to
purchase raw materials just in time to meet the production schedule, and have the finished inventory
ready just in time to meet customer demand. Traditional production systems maintain greater quantities
of raw materials, work in process, and finished goods inventory.
146
Chapter 4
2. Batch sizes Lean production systems produce units in much smaller batches than traditional production
systems. These batches are demand-pulled through production, rather than pushed through
production (like a traditional system), allowing the company to only produce what customers have
ordered.
3. Set-up times Lean production systems stress short set-up times so that they can produce and deliver the
product to the end customer in a very short amount of time. By keeping set-up times short, lean
producers dont have to worry about keeping extra inventory on hand just to be able to quickly meet
demand.
(continued) E 4-31A
4. Workplace organization Lean companies use a workplace organization system called 5s (sort, set in
order, shine, standardize, sustain) to keep their work cells clean and organized. The goal of workplace
organization is, a place for everything and everything in its place. By having a clean, well organized,
ergonomic workplace, every employee within the work cell knows where to find the tools and supplies
they need to do each job in the cell as efficiently as possible. A clean workplace also leads to fewer
defects (due to contaminants), a safer work place, and fewer unscheduled machine repairs.
5. Roles of plant employees At lean producers, plant employees tend to have broader roles. They are
cross-trained to perform about every role that is needed in each production cell. They set-up, operate, and
repair the machines in the cell. They also perform the quality inspections. As a result, employees tend to
have higher morale. Additionally, this decreases bottlenecks caused by having to wait for the right
person to come do the job.
6. Manufacturing cycle times Lean producers put great emphasis on shortening their manufacturing cycle
times. Lean producers need to have short cycle times since they have very little, if any, safety stock ready
to sell to customers. By having short cycle times, they are able to fill customer orders quickly, keeping
customers satisfied.
7. Quality Lean producers stress high quality in every aspect of production. Since lean producers do not
carry much, if any stock, they need to be able to produce the product right, the first time. Lean producers
tend to build-in quality, rather than inspect-in quality as traditional firms do.
(5-10 min.) E 4-32A

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Movement
Excess processing
Not utilizing people to their full potential
Waiting
Defects
Transportation
Inventory
Overproduction
Waiting
Defects
Transportation
147

m.
n.
o.
p.
148
Inventory
Movement
Overproduction
Excess processing
Chapter 4
(15-20 min) E 4-33A

Req. 1
Cost of Quality Report for Healthy Snacks

Corp
Total Costs of
Quality
Percentage of
total costs of
quality
(rounded)
Prevention Costs:
Personnel training
Preventative maintenance
$ 28,000
7,000
Total prevention costs
$ 35,000
4%
$ 55,000
7%
$130,000
16%
$607,000
73%
$827,000
100%
Appraisal Costs:
Inspecting products at half-way point
Inspection of raw materials
$ 52,000
3,000
Total appraisal costs
Internal Failure Costs:

Production loss due to machine breakdowns
$ 24,000
Cost of defective products
93,000
Cost of disposing of rejected products
13,000
Total internal failure costs
External Failure Costs:

Recall of Batch #59374
Warranty claims
$171,000
436,000
Total external failure costs

Total Costs of Quality
Req. 2
Because the company has warranty returns and has had a product recall, the company may suffer a
reputation for poor quality products. If so, they are probably losing profits from losing sales. Unsatisfied
customers will be reluctant to buy from the company again. This report does not include an estimate of the
lost profits arising from a reputation for poor-quality products.
Req. 3
149

The Cost of Quality report shows that very little is being spent on prevention and appraisal, which is probably
why the internal and external failure costs are so high. It appears that the company is only inspecting the
product halfway through the production process, and not again at the end of the process. Perhaps that is the
reason their external failure costs are so high. The CEO should use this information to develop quality
initiatives in the areas of prevention and appraisal. Such initiatives should reduce future internal and external
failure costs.
150
Chapter 4
(15-20 min.) E 4-34A

Req. 1
Prevention costs:
Training employees in TQM
Training suppliers in TQM
Identifying preferred suppliers who commit to on-time delivery of perfect quality materials
Appraisal costs:
Strength-testing one item from each batch of panels
Avoid rework and spoilage
Avoid warranty costs
Req. 2
Cost / <Benefit> Analysis
Prevention costs:
Training suppliers in TQM...
Identifying preferred suppliers who commit to ontime delivery of perfect quality materials..
Cost/<Savings>
$ 29,000
33,000
59,000
Appraisal costs:
Strength-testing one item from each batch of
panels...
Savings on Inspection of raw materials
64,000
$ <51,000>

Savings on Rework and spoilage..
<65,000>

Savings on Lost profits from lost sales due to
disappointed customers.
Savings on Warranty costs..
<92,000>
< 16,000>
Net <Benefit> ...
$<39,000>
Clarke should adopt the new quality program. The program would save the company $39000
151
Exercises (Group B)
(15-20 min.) E 4-35B
Req. 1
Plantwide
overhead rate

=
=
$1,350,000
50,000
$ 27
Req. 2
Department overhead rate
Machining Dept. overhead rate
=
=
Finishing Dept. overhead

rate
Total department overhead

=
=
$900,000
$45 per machine hour*
$450,000
$18 per direct labor hour*
*Rounded to the nearest dollar.

**When calculating the finishing departmental rate, only the direct labor hours incurred in the finishing
department are used.
Req. 3
Plantwide allocation rate
Overhead allocation
152
Job 450
5 DL hours
$27/ DL hour
$135
Job 455
5 DL hours
$27/ DL hour
$135
Chapter 4
(continued) E 4-35B
Req. 4
Overhead allocation
Job 450
Job 455
$45/ MH
3 MH
$45/ MH
6 MH
$135
$270
$18/ DL hr
4 DL hrs
$18/ DL hr
3 DL hrs
$ 72
$ 54
$207
$324
Finishing Department:
Overhead allocation
Total overhead allocation (from
both departments
Req. 5
The single plantwide rate undercosts Job 450 by $72 and undercosts Job 455 by $189. Since Bergeron sets
his sales price at 125% of cost, and the job cost is affected by the allocation system he uses, its sales price
will also be affected by the allocation system it uses.
(15-20 min.) E 4-36B

Req. 1
Fortunado Company
Computation of Indirect Cost Allocation Rates
Activity
Total Estimated
Cost
Estimated Quantity of
Materials handling
$ 6,400
3,200 parts
Machine setups
$ 9,000
Insertion of parts
$54,400
3,200 parts
Finishing
$89,700
2,300 hours
25 setups
Activity
Cost Allocation Rate
=
2 per part
$360 per setup
$ 17 per part
$ 39 per hour
153
(continued) E 4-36B
Req. 2
The amount of manufacturing overhead to be assigned to Job 420 is computed as follows
Central Plain - Job 420
Manufacturing overhead allocation
Activity
Actual Quantity of Cost

Allocation Base Used
Materials handling
250 parts
Machine setups
3 setups
MOH assigned
$2 / part
$360 / setup
1,080
$17 / part
4,250
5,070
Insertion of parts
250 parts
Finishing
130 hours
$ 39 / hr.
Total
500
$ 10,900
Req. 3
The amount of manufacturing overhead to be assigned to Job 510 is computed as follows
Central Plain - Job 510
Manufacturing overhead allocation
Activity
Actual Quantity of Cost

Allocation Base Used
Materials handling
Machine setups
425 parts
6 setups
MOH assigned
$2 / part
$370 / setup
2,160
$17 / part
7,225
Insertion of parts
425 parts
Finishing
320 hours
$ 39 / hr
Total
850
12,480
$22,715
(15-20 min.) E 4-37B
Req. 1
Total overhead
Total machine hours
Predetermined MOH rate
$1,310,000
10,000
$
131
Req. 2
Cost of Job #356
Machine hours used
POHR
Total MOH
100
$131
13,100
Job #356traditional POHR

Direct material
154
(400 lbs. @$50/lb.)
20,000
Chapter 4
Direct labor
(75 hrs. @$20/hr.)
MOH
Total cost of job

$1,500
$13,100
$ 34,600
155
(continued) E 4-37B
Job #356ABC
Direct material
Direct labor
(400 lbs. @$50/lb.)

(75 hrs. @$20/hr.)
Machine hours
No. of engineering changes
Lbs. of hazardous waste
generated
Total cost of job
20,000
$1,500
100
8
$3,500
$960
60
$13,100
$ 61,960
Req. 3
(15-20 min) E 4-38B

Req. 1
Operating
overhead
$236,500
Total professional hours
Current operating overhead allocation rate
10,000
$23.65 per
professional hour
Req. 2
Total cost of job
$1,992.95
x
x
Markup percentage
140%
=
=
Amount billed
$2,790.13
Req. 3
Activity
Transportation to
clients
Blueprint copying
Cost
15,000
miles driven
1,000b
copies
5,000c
secretarial hours
$ 7,500
38,000
Office
support
Total activity allocation base
191,000
= $0.50 per mile

= $38 per copy
$38.20 per secretarial hour
=
To calculate the activity cost allocation rates, you must use the total activity for the year:
a
3,000 + 12,000 = 15,000
b
300 + 700 = 1,000
c
2,700 + 2,300 = 5,000
156
Chapter 4
(continued) E 4-38B
Req. 4
Total cost of job

$2,159.60
x
x
Markup percentage
140%
=
=
Amount billed
$3,023.44
Req. 5
The ABC billing system should be more fair to clients because they are charged according to the resources
they used. For example, copying blueprints is very expensive. Under the fairer system, clients are charged
according to the number of blueprint copies that their job required. The fairer system better recognized the
extent to which operating costs are incurred by each unique client job.
(15-20 min.) E 4-39B

Req. 1
Cost pools
Pharmacy occupancy costs (utilities, rent, and other costs)
Packaging supplies (bottles, bags, and other packaging)
Professional training and insurance costs
Total pharmacy overhead
Divide by number of prescriptions
Total pharmacy rate (using # of prescriptions)
Total annual
estimated cost
$80,000
$30,000
$100,000
$210,000
20,000
$ 10.50
Req. 2
Customer order #1102
(standard prescriptions)
2 @ $10.50
$21.00
1 @ $10.50
$10.50
Req. 3
Customer order #1103
(standard prescriptions)
Req. 4
Cost Pools
Pharmacy Occupancy Costs
Packaging Supplies
Training and Insurance Costs
Estimated Cost
$80,000
$30,000
$100,000
Cost Drivers
Technician Hours
Number of
Prescriptions
Pharmacist Hours
Estimated Cost
Driver Activity
80,000
20,000
Cost Pool
Rate
$1.00
$1.50
23,810
$4.20
Req. 5
Used:
Technician hours for order
Used by this order

1 @ $1
ABC assigned cost

$1.00
157

Pharmacist hours
2 @ $1.50
2 @ $4.20
Total ABC Cost
158
$3.00
$8.40
$12.40
Chapter 4
(continued) E 4-39B
Req. 6
Customer order #1103 (complicated formulation)
Used:
Technician hours for order
Pharmacist hours
Used by this order

0.5 @ $1
1 @ $1.50
4 @ $4.20
ABC assigned cost

$0.50
$1.50
$16.80
Total ABC Cost
$18.80
Req. 7
(20-25 min.) E 4-40B

Req. 1
$1,020,000
20,400
$50.00
Manufacturing cost
Direct materials
Direct labor
Cost per unit
Medium
(42-inch)
$ 954,750
280,000
350,250
1,585,000
4,000
Large
(63-inch)
$1,520,250
525,000
669,750
2,715,000
5,000
396.25
543.00
Req. 2
Materials
handling
Machine
processing
Packaging
Activity cost
Total activity
allocation base
$145,000
500
$750,000
75,000
$10 / machine hr.
$125,000
25,000
$5 / packaging hr.
Manufacturing cost
Direct materials
Medium
(42-inch)
$ 954,750

$290 / mat. orders
handing
Large
(63-inch)
$1,520,250
159

Direct labor
Cost per unit
160
280,000
565,250
1,800,000
4,000
525,000
454,750
2,500,000
5,000
450
500
Chapter 4
(continued) E 4-40B
Req. 3
Cost/unit using current system

Cost/unit using ABC
Overcosting/(Undercosting)
Cost per unit
Medium
(42-inch)
$ 396.25
450.00
$(53.75)
4,000
Large
(63-inch)
$543.00
500.00
43.00
5,000
$(215,000.00)
$215,000.00
The Medium units had been undercosted and the Large units had been overcosted. Since Joness sets its
sales price at 300% of manufacturing cost, the resulting sales price should have been about $161.25 higher
for the Medium units and about $129.00 lower for the Large units.
(20-30 min.) E 4-41B

Req. 1
Rickett Corp.
Total Budgeted Indirect Manufacturing Costs
Budgeted Quantity of
Activity
Materials handling
Activity Cost
Allocation Rate
10,000a
3.75
$ 37,500
40
$340.00
13,600
10,000
$ 27.00
270,000
$ 55.00
249,100
Machine setups
Insertion of parts
Finishing
Total Budgeted
Indirect Cost
4,700
Total budgeted indirect cost
$570,200
__________
a
(4 1,000) + (6 1,000)
b
20 + 20
c
(1.5 1,000) + (3.2 1,000)
Req. 2
Rickett Corp.
ABC Indirect Manufacturing Cost per Unit
Cost
Allocation
Rate
Activity
Quantity of Cost Allocation

Base
Used By:
Standard
Materials handling
3.75
Machine setups
$340.00
Insertion of parts
$ 27.00
Finishing
$ 53.00
Deluxe
6
0.020*
4
1.5
Allocated Activity Cost Per Wheel

Standard
$ 15.00
0.020*
6
3.2
Total ABC allocated

indirect cost
Deluxe
$ 22.50
6.80
6.80
108.00
162.00
79.50
169.60
$209.30
$360.90
161

__________
*20 setups 1,000 wheels = 0.020 per wheel
162
Chapter 4
(continued) E 4-41B
Req. 3
Total budgeted manufacturing
overhead cost
= $570,200 (Req. 1)
Total budgeted direct labor hours
= (1,000 2.0) + (1,000 3.0)

= 2,000 + 3,000
= 5,000
$570,200
5,000
= $114.04 per direct labor hour

Manufacturing overhead cost per wheel:
Direct labor hours
x
Plantwide
overhead rate
Manufacturing
overhead
Standard
2.00
114.04
$228.08
Deluxe
3.00
114.04
$342.12
(continues E 4-31B) (15-20 min.) E 4-42B

Req. 1
Begin by computing the total costs.
Rickett Corp
Total cost per unit using ABC Data
Standard
Direct materials
32.00
Direct labor
Deluxe
$
46.25
45.60
54.00
209.30
360.90
$ 286.90
$ 461.15
Now compute the gross profit.

Rickett Corp
Gross profit per unit using ABC Data
Standard
Sales price
$470.00
$610.00
286.90
461.15
$ 183.10
$ 148.85

Gross profit
Deluxe
Req. 2
Rickett Corp.
Gross profit per unit using plantwide overhead rate
163

Sale price
Gross profit
164
Standard
Deluxe
$470.00
$610.00
305.68
442.37
$ 164.32
$ 167.63
Chapter 4
(continued) E 4-42B
Req. 3
The standard model is more profitable than the deluxe model. Activity-based costing data generally are more
accurate than cost data generated by a plantwide overhead allocation rate. ABC systems have more cost
categories (activities), each with its own allocation base. ABC cost assignments more accurately represent the
cost of resources consumed to manufacture (and support) products.
Req. 4
The ABC system is likely to pass the cost-benefit test because the company manufactures two different
products that use different amounts of resources.
The old cost system appears broken because profits have been declining even though the company shifted
its product mix toward the product that had appeared most profitable under the old system.
(15-20 min.) E 4-43B

Req. 1
Either the materials handling cost or the grinding cost is inaccurate. Both costs were assigned based on the
number of parts. Thus, the ratio of Job 409 materials handling cost to Job 622 materials handling cost should
be the same as the ratio of Job 409 grinding cost to Job 622 grinding cost. The materials handling cost ratio is
1:3 ($600 to $1,800), but the grinding cost ratio is 1:5 ($312 to $1,560). Job 622 cannot have three times as
many parts as Job 409 and five times as many parts simultaneously.
Req. 2
The first step is to determine the allocation rate for each of the four activities:
Williamson Fabricators
ABC Allocation Rates
Activity
Job 622
Activity Cost
Divide by Quantity
of the Cost
Allocation Base
Activity Cost
Allocation Rate
Lathe work
$14,500
58,000 turns
= $0.25 / turn
Milling
$29,000
1,000 hours
= $29.00 / mach. hr.
Grinding
$ 1,560
3,250 parts
= $0.48 / part
Testing
$ 2,700
= $9.00 / unit
300 units
The second step is to use the cost allocation rate for each activity to determine the quantity of the allocation
base Job 409 used.
Williamson Fabricators
Quantity of the Allocation Base Used by Job 409
Activity
Job 409
Activity Cost
Divide by Activity Cost

Allocation Rate
Quantity of the Allocation Base

Used by Job 409
165

Lathe work
$4,500
$0.25 / turn
Milling
$4,350
$29 / hour
150 hours
Grinding
$ 312
$0.48 / part
650 parts
Testing
$ 126
$9.00 / unit
14 units
166
18,000 turns
Chapter 4
(15-20 min.) E 4-43B

Req. 3
Based on the ABC information, Williamson should not accept the company's offer to test units for $12 each.
Williamsons cost of performing this activity is $9 per unit ($2,700 300 units tested for Job 622).
(15-20 min) E 4-44B

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Business strategy of manufacturing without waste Lean production

Just in time inventory philosophy Lean production
Large finished goods inventories Traditional manufacturing
Highly specialized machine operators Traditional manufacturing
Long production lead times Traditional manufacturing
Pull product demand Lean production
Work in process inventories Traditional manufacturing
Production areas are organized by function Traditional manufacturing
Safety stock Traditional manufacturing
Reduced machine setup or changeover times Lean production
Cross-trained production employees Lean production
Partnerships with suppliers Lean production
(15-20 min) E 4-45B

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
Waiting
Overproduction
Excess processing
Transportation
Defects
Overproduction
Inventory
Excess processing
Waiting
Defects
Transportation
Movement
Inventory
Movement
167
168
Chapter 4
(15-20 min) E 4-46B

Req. 1
Cost of Quality Report for
Total Costs of
Quality
Skinny Treats Corp.
Percentage of
total costs of
quality
(rounded)
Prevention Costs:
Personnel training
Preventative maintenance
$ 32,000
8,000
Total prevention costs
$ 40,000
5%
$ 55,000
7%
$116,000
14%
$598,000
74%
$809,000
100%
Appraisal Costs:
Inspecting products at half-way point
Inspection of raw materials
$ 51,000
4,000
Total appraisal costs
Internal Failure Costs:

Production loss due to machine breakdowns
$ 17,000
Cost of defective products
88,000
Cost of disposing of rejected products
11,000
Total internal failure costs
External Failure Costs:

Recall of Batch #59374
Warranty claims
$175,000
423,000
Total external failure costs

Total Costs of Quality
Req. 2
Because the company has warranty returns and has had a product recall, the company may suffer a
reputation for poor quality products. If so, they are probably losing profits from losing sales. Unsatisfied
customers will be reluctant to buy from the company again. This report does not include an estimate of the
lost profits arising from a reputation for poor-quality products.
169

Req. 3
The Cost of Quality report shows that very little is being spent on prevention and appraisal, which is probably
why the internal and external failure costs are so high. It appears that the company is only inspecting the
product half-way through the production process, and not again at the end of the process. Perhaps that is the
reason their external failure costs are so high.
The CEO should use this information to develop quality initiatives in the areas of prevention and appraisal.
Such initiatives should reduce future internal and external failure costs.
(15-20 min.) E 4-47B

Req. 1
Prevention costs:
Training suppliers in TQM
Identifying preferred suppliers who commit to on-time delivery of perfect quality materials
Appraisal costs:
Strength-testing one item from each batch of panels
Avoid rework and spoilage
Avoid warranty costs
Req. 2
The company should implement the new quality program. The program should save the company $48,000.
Problems (Group A)
(40 min.) P 4-48A
Req. 1
Plantwide
overhead rate
=
170

$1,070,000
Chapter 4

171
(continued) P 4-48A
Req. 2
Departmental cost allocation
rate
Machining
=
=
Assembly
Department overhead cost

Department allocation base
$630,000
$440,000
=
=
**When calculating the assembly departmental rate, only the direct labor
hours incurred in the assembly department are used.
Req. 3
Job #501 uses more of the companys resources. Job 501 uses twice as many machine hours as the other
job. The accounting system should show that one job actually costs the company more resources than the
other.
Req. 4
Job 500
17 DL hours
$63 / DL hour
$1,071

Overhead allocation
Job 501
17 DL hours
$63 / DL hour
$1,071
Req. 5
Overhead allocation
Job 500
Job 501
$63/ MH
9 MH
$63/ MH
18 MH
$567
$1,134
Assembly Department:
Overhead allocation
172
$31/ DL hr
14 DL hrs
$434
$31/ DL hr
14 DL hrs
$434
Chapter 4
Total overhead allocation

$1,001
$1,568
(from both departments)
Req. 6
The single plantwide overhead rate assigned the same amount of overhead to both jobs. The departmental
rates assign more overhead cost to Job 501 than Job 500 due to the extra machine hours used. This seems
fairer.
173
(continued) P 4-48A
Req. 7
Manufacturing cost and sales price using current costing system:
Job 500
Direct Materials
$1,800
$1,800
510
510
1,071
1,071
Direct Labor (14 DL hours $25)

Job 501
$3,381
110%
Markup for pricing
$3,381
110%
$3,719
Sales price
$3,719
Req. 8
Gross profit using current costing system:
Job 500
Sales Price (from Req. 1)
Job 501
$3,719
Less: Total manufacturing cost

Gross profit / (loss)
$3,719
3,381
3,381
$ 338
$ 338
Gross profit using departmental rate costing system:

Job 500
Sales price (from Req. 7)
Job 501
$3,719
$2,717
$1,800
$1,800
510
510
1,001
1,568
$3,311
$3,878
Less: Total manufacturing cost:

Direct Materials
Gross profit (loss)
$ 408
(159)
Req. 9
When utilizing a single rate allocation method, the company believes that both jobs are equally profitable.
When utilizing a refined costing method, the company realizes that Job 500 is profitable but Job 501 shows a
loss.
(20-30 min.) P 4-49A
Req. 1
McKnight Corp.
Per-Unit Manufacturing Costs
Standard
Desk
Direct materials
174
$ 93,000
Unpainted
Desk
$21,000
Chapter 4
Materials handling
(120,500 and 30,500) $0.60
72,300
18,300
Assembling (5,900 and 700) $15
88,500
10,500
Painting (5,000 $5.10)
25,500
$279,300
$49,800
5,000
2,500
Number of units
Manufacturing product cost per unit
56
20
(continued) P 4-49A
Req. 2
Hone
Full Product Costs
Standard
Desk
Premanufacturing activities
Unpainted
Desk
$ 5.00
Manufacturing product costs
$ 4.00
56.00
Postmanufacturing activities
Full product cost per unit
20.00
22.00
21.00
$83.00
$45.00
Req. 3
Manufacturing product costs are reported in the financial statements.
Managers use full product costs for decisions, such as pricing and product emphasis.
Full product costs are reported in the costs of premanufacturing activities and postmanufacturing activities that
are expensed as incurred for external reporting. However, these costs often are assigned to products for
internal decisions.
Req. 4
Full product cost...

Desired profit..
Sale price per unit standard desk
$ 83.00
42.00
$125.00
(30-40 min.) P 4-50A

Req. 1
Corbertt Company
Applications
Development
Content
Production
Testing
Estimated indirect activity cost

175

$1,800,000
Estimated cost allocation
base
Activity overhead rate
$2,800,000
6 applications
14,000,000 lines
$300,000/application
$0.20 / line
$248,000
1,600 testing hours
$155 / hour
Req. 2
Corbertt Company
Activity Costs per Unit
X-Page
X-Secure
Applications development
(1 and 1) $300,000
$300,000
$ 300,000
Content production
(680,000 and 10,200,000) $0.20
Testing (90 and 540) $155
Total costs
176
2,040,000
13,950
83,700
$449,950
Number of units
Per unit cost
136,000
20,000
$
22.50
$2,423,700
$302,962.50
Chapter 4
(continued) P 4-50A
Req. 3
First, compute the total indirect costs under the original single-allocation-based system.
Product
Estimated qty. of the

allocation base
Cost allocation rate
Indirect cost allocated
$113
$113
x
x
8,000
12,000
=
=
$904,000
$1,356,000
X-Page
X-Secure
Now compute the indirect cost per unit for each product under the original single-allocation-base system.
Corbertt Company
Costs per Unit Under Original Direct-Labor Based System
X-Page
Total indirect costs allocated
X-Secure
$ 904,000
Number of units
$1,356,000
20,000
Per unit cost
45.20
8
$169,500.00
Req. 4
The original system overcosted X-Page and undercosted X-Secure.
The original system allocated more overhead to X-Secure than to X-Page. But X-Secure required 15 times as
many lines of code and 6 times as much testing as X-Page. The ABC system recognizes this difference and
allocates more of the content production and testing costs to X-Secure.
Req. 5
Corbertt Companys different software applications use different amounts of resources.
Corbertt Company has high indirect costs.
Corbertt Company produces high volumes of some software applications and low volumes of
other software applications.
Corbertt Company is in a competitive environment and needs accurate product costs.
Corbertt Company has accounting and information system expertise to implement the system.
(30-40 min.) P 4-51A

Req. 1
Jacobsen Pharmaceuticals
Materials Handling
Packaging
Quality Assurance
Estimated indirect
activity costs
$160,000
$430,000
$113,000
Estimated cost
177

allocation base
16,000 kilos
2,300 hours
2,000 samples
10 / kilo
187 / hour
57 / sample
(continued) P 4-51A
Req. 2
Activity Costs Per Unit
Commercial
Container
Materials handling (8,300 and 6,500) $10
Travel Pack
$ 83,000
$ 65,000
168,300
56,100
13,680
19,380
Total indirect costs
$264,980
$140,480
Number of units
2,800
20,000
Packaging (900 and 300) $187

Quality assurance (240 and 340) $57
Indirect activity cost per unit
94.64
7.02
Req. 3
Product
Actual quantity of
allocation base
$400
$400
x
x
900
300
=
=
$360,000
$120,000
Commercial
Travel
Costs per Unit Under Original Machine-Hour Based System

Number of units
Indirect cost per unit
Commercial
Container
Travel Pack
$360,000
$120,000
2,800
$ 128.57
20,000
$
6.00
Req. 4
The original system overcosted the commercial containers and undercosted the travel packs.
The original system allocated 3 times as much indirect cost to the commercial containers as to the travel
packs. However, commercial containers did not use 3 times as much of the material handling and quality
assurance resources. The ABC system recognizes that commercial containers do not require 3 times as much
178
Chapter 4
material handling and quality assurance as travel packs. So, relative to the original system, ABC allocates less
of the material handling and quality assurance costs to commercial containers.
(20-30 min.) P 4-52A

Req. 1
Real Toys
Predicted Quality Cost Savings
Predicted
Reduction In
Activity Units
Activity
Inspection of incoming materials
Inspection of finished goods
Number of defective units discovered in-house
Number of defective units discovered by customers
Lost sales to dissatisfied customers
Activity Cost
Allocation
Rate
=
385
$25
Predicted
Reduction
In Activity
Costs
$
9,625
385
$34
13,090
3,400
$15
51,000
975
$42
40,950
270
$58
15,660
Total predicted quality cost savings
$130,325
(continued) P 4-52A
Req. 2
Creative Construction Toys Corp.
Net Benefit of Design Engineering Effort
Total predicted qualitycost savings
$130,325
Less: Cost of design engineering
(75,000)
Net benefit of design engineering
$ 55,325
Req. 3
Measuring the cost of quality-related activities is difficult. As an alternative, they could monitor nonfinancial
measures of quality and attempt to improve them.
Problems (Group B)
(40 min.) P 4-53B
Req. 1
Plantwide
overhead rate
=
=

$1,040,000
179

Req. 2
Department allocation rate
Machining
=
=
Assembly
=
=
Department overhead cost

Department allocation base
$600,000
4,000 machine hours
$440,000
**When calculating the assembly departmental rate, only the direct labor
hours incurred in the assembly department are used.
180
Chapter 4
(continued) P 4-53B
Req. 3
Job 501 uses more of the companys resources.
Job 501 uses more machine hours than the other job. The accounting system should show that one job
actually costs the company more resources than the other.
Req. 4
Overhead allocation
Job 500
18 DL hours
$72 / DL hour
$1,296
Job 501
18 DL hours
$72 / DL hour
$1,296
Req. 5
Job 500
Job 501
$150/ MH
10 MH
Overhead allocation
$150/ MH
20 MH
$1,500
$3,000
Assembly Department:
$37/ DL hr
12 DL hrs
Overhead allocation
Total overhead allocation
$37/ DL hr
12 DL hrs
$444
$444
$1,944
$3,444
Req. 6
The single plantwide overhead rate assigned the same amount of overhead to both jobs. The departmental
rates assign more overhead cost to Job 501 than Job 500 due to the extra machine hours used. This seems
fairer.
Req. 7
Manufacturing cost and sales price using current costing system:
Job 500
Direct Materials
$2,000
Job 501
$2,000
450
450
1,296
1,296
$3,746
$3,746
181

130%
Markup for pricing (%)
130%
$4,870
Sales price
$4,870
Req. 8
Gross profit using current costing system:
Job 500
Sales Price (from Req. 7)
Less: Total manufacturing cost
Gross profit / (loss)
Job 501
$4,870
$4,870
3,746
3,746
$1,124
$1,124
(continued) P 4-53B
Gross profit using departmental rate costing system:
Job 500
Sales price (from Req. 7)
Job 501
$ 4,870
$ 4,870
Less: Total mfg. cost

Direct Materials
Direct Labor
Gross profit (loss)
$ 2,000
$ 2,000
450
450
1,944
4,394
3,444
5,894
$(1,0224)
$ 476
Req. 9
When utilizing a single rate allocation method, the company believes that both jobs are equally profitable.
When utilizing a refined costing method, the company realizes that Job 500 is profitable but Job 501 shows a
loss.
(20-30 min.) P 4-54B

Req. 1
McMillan Furniture
Per-Unit Manufacturing Costs
Standard
Desk
Direct materials
Unpainted
Desk
$ 95,000
$22,000
Materials handling
(119,000 and 29,000) $0.70
83,300
20,300
Assembling (5,700 and 1,000) $16
91,200
16,000
Painting (7,500 $5.30)
39,750

Number of units
Manufacturing cost per unit
182
$309,250
$58,300
7,500
2,500
41
23
Chapter 4
Req. 2
McMillan Furniture
Full Product Costs
Standard
Desk
Unpainted
Desk
Premanufacturing activities
$ 7
$ 2
Manufacturing product costs
41
23
Postmanufacturing activities
23
21
$71
$46
Full product cost per unit
183
(continued) P 4-54B
Req. 3
Manufacturing product costs are reported in the financial statements. Managers use full product costs for
decisions such as pricing and product emphasis.
Full product costs include the costs of premanufacturing activities and postmanufacturing activities that are
expensed as incurred for external financial reporting. However, these costs often are assigned to products for
internal decisions.
Req. 4
Full product cost.

Desired profit
Sale price per unit std. desk...
$ 71
42
$113
(30-40 min.) P 4-55B
Req. 1
Willitte Co.
Applications
Development
Content
Production
Testing
$2,400,000
$3,000,000
$350,000
Estimated indirect activity cost

Cost allocation base
(estimated)
8 applications
10,000,000 lines
$300,000/application
$0.30 / line
2,000 testing hours

$175 / hour
Req. 2
Willitte Co.
Activity Costs per Unit
X-Page
X-Secure
Applications development
(1 and 1) $300,000
$300,000
$ 300,000
Content production
(580,000 and 8,700,000) $0.30
Testing (130 and 780) $175
174,000
2,610,000
22,750
136,500
Total costs
$496,750
Number of units
35,000
Indirect activity cost per unit
$3,046,500
14.19*
13
$ 234,346.15*
*Rounded to nearest cent

Req. 3
Product
184
Estimated qty. of
the allocation base
Chapter 4
X-Page
X-Secure
$134
$134

x
x
10,000
15,000
=
=
$1,340,000
$2,010,000
185
(continued) P 4-55B
Willitte Co.
Costs per Unit Under Original Direct-Labor Based System
X-Page
X-Secure

(10,000 and 15,000) $134
$1,340,000
Number of units
35,000
Per unit cost
38.29
2,010,000
13
$ 154,615.38*
__________
*Rounded to nearest cent
Req. 4
The original system overcosted X-Page and undercosted X-Secure.
The original system allocated more overhead to X-Secure than to X-Page. But X-Secure required 15 times as
many lines of code and 6 times as much testing as X-Page. The ABC system recognizes this difference and
allocates more of the content production and testing costs to X-Secure.
Req. 5
Willitte Companys different software applications use different amounts of

resources.
Willitte Company has high indirect costs.
Willitte Company produces high volumes of some software applications and low
volumes of other software applications.
Willitte Company is in a highly competitive environment and needs accurate

product costs.
Willitte Company has accounting and information system expertise to implement

the system.
(30-40 min.) P 4-56B
Req. 1
McNeil Pharmaceuticals
Materials Handling
Packaging
Quality Assurance
Estimated indirect
activity cost
$180,000
$420,000
$118,000
Cost allocation base
186
Chapter 4
(estimated)
Overhead rate

18,000
$ 10 / kilo
2,200
$ 191 / hour
1,700
$ 69 / sample
187
(continued) P 4-56B
Req. 2
Activity Costs Per Unit
Commercial
Container
Travel Pack
$ 80,000
$ 63,000
286,500
95,500
18,630
25,530
$385,130
$184,030
Materials handling (8,000 and 6,300) $10

Packaging (1,500 and 500) $191
Quality assurance (270 and 370) $69
Total indirect costs
Number of units
2,600
Indirect activity cost per unit*
60,000
$ 148.13
3.07
*Rounded
Req. 3
Product
Commercial
Travel

$300
$300
x
x
x
Actual qty. of allocation

base
1,500
500
=
=
=

$450,000
$150,000
Now compute the indirect cost per unit for each product under the original single-allocation-base system.
Costs per Unit Under Original Machine-Hour Based System
Commercial
Container
Travel Pack
$450,000
$150,000
Number of units
2,600
Indirect cost per unit*
60,000
$ 173.08
2.50
*Rounded
Req. 4
The original system overcosted the commercial containers and undercosted the travel packs.
The original system allocated 3 times as much indirect cost to the commercial containers as to the travel
packs. However, commercial containers did not use 3 times as much of the material handling and quality
assurance resources. The ABC system recognizes that commercial containers do not require 3 times as much
material handling and quality assurance as travel packs. So, relative to the original system, ABC allocates less
of the material handling and quality assurance costs to commercial containers.
(20-30 min.) P 4-57B

Req. 1
Tiny Toys
Predicted Quality Cost Savings
Predicted
Reduction In
188
Activity
Cost
Predicted
Reduction
Chapter 4

Activity Units
Allocation =
Rate
370
$22
Activity
Inspection of incoming materials
Inspection of finished goods
In Activity
Costs
$
8,140
370
$29
10,730
3,200
$13
41,600
Defective units discovered by

customers
875
$36
$31,500
Lost sales to dissatisfied customers
330
$62
20,460
Defective units discovered in-house
$112,430
(continued) P 4-57B
Req. 2
Tiny Toys
Net Benefit of Design Engineering Effort
$112,430
Cost of design engineering
(70,000)
Net benefit of design engineering
$ 42,430
Req. 3
Measuring the cost of quality-related activities is difficult. An alternative approach to measure quality
improvement is to monitor nonfinancial measures of quality and attempt to improve them.
Discussion & Analysis

A4 58 Discussion & Analysis
Questions
1. Explain why departmental overhead rates might be used
overhead rate.
instead of a single plantwide
A single plantwide overhead rate doesnt always do a good job of matching the cost of overhead
resources with the products that consume those resources. By using department overhead rates,
companies can more equitably assign overhead to their jobs, products, or services. As a result, less cost
distortion occurs and managers have more accurate information for making business decisions.
2. Using activity-based costing, why are indirect costs allocated
allocated?
while direct costs are not
Since direct costs can be traced to products, they are not allocated. Indirect costs, such as overhead,
cannot be traced as easily as direct costs, so must be allocated to products and services.
Discuss the difference between allocate and assign.
189

In terms of overhead, allocation can be described as a distribution of the cost to products or services via
some predetermined cost base such as machine hours. To assign overhead costs rather than allocate, a
company will develop a model that refines the costs of overhead into departments or various activity pools
and cost drivers. Then the overhead is traced to the products/services as they are used.
3. How can using a single predetermined manufacturing
driver cause a high-volume product to be overcosted?
overhead rate based on a unit-level cost
When a company uses a plantwide allocation system that is based on a volume-related driver, such as
direct labor hours, the high-volume products will be allocated more cost than the low volume products
simply because there are more of them produced, not necessarily because they use more overhead. This
can result in the higher volume product being overcosted.
4. Assume a company uses a plantwide predetermined manufacturing overhead rate that is
calculated using direct
labor hours as the cost driver. The use of this plantwide predetermined
manufacturing overhead rate has resulted in cost distortion. The companys high-volume products
are overcosted and its low-volume products are undercosted. What effects of this cost distortion
will the company most
likely be experiencing?
A company that overcosts its high-volume products may be experiencing low sales while the undercosted
low-volume products are experiencing high sales.
Why might the cost distortion be harmful to the companys competitive position in the market?
The cost distortion can be harmful to a companys competitive position in the market because it could be
losing sales of its high-volume products due to the overcosting and therefore over-pricing. It could also be
harmed by losing money on the undercosted low-volume products due to under-pricing.
5. A hospital can use activity-based costing (ABC) for costing its services. In a hospital, what
activities might be
considered to be value-added activities?
Operating on a patient
Dispensing medication to a patient
Evaluating test results
What activities at that hospital might be considered to be non-value-added?
Waiting for a procedure

Fixing equipment
Inspecting prescriptions
6. A company makes shatterproof, waterproof cases for

iPhones. The company makes only one
model and has been very successful in marketing its case; no other company in the market has a
similar product. The only customization available to the customer is the color of the case. There is
no manufacturing cost difference between the different colors of
the cases. Since this company
has a high-volume product, its controller thinks that the company should adopt activity- based
190
Chapter 4
costing. Why might activity-based costing not be as beneficial for this company as for other
companies?
Activity-based costing is beneficial to companies who are
in highly competitive markets
produce many different products that require different types and amounts of resources
produce high volume of some products and low volume of others.
Since this company does not fit into these categories, it might not be beneficial for them to incur the cost
of developing and using ABC.
7. Compare a traditional production system with a lean production system. Discuss the similarities
and the
differences.
Some of the differences between a traditional production system and a lean production system are
like machines grouped together vs. production cells
longer vs. shorter setup times
larger vs. smaller batches
higher vs. lower inventories
many suppliers vs. fewer, well-coordinated suppliers
single tasked labor vs. wider range of labor tasks
longer vs. shorter manufacturing cycles
Similarities include
machinery needed
labor needed
inspection of products
8. Think of a product with which you are familiar. Explain how activity-based costing could help the
company that makes this product in its efforts to be green.
Student answers may vary.
9. It has been said that external failure costs can be catastrophic and much higher than the other
categories. What are some examples of external failure costs?
Lost sales
Sales returns
Warranty repairs/replacements
Why is it often difficult to arrive at the cost of external failures?

Often the largest external failure cost - lost sales/profits - is hard to measure because of its nature. There
are no records kept of lost sales. They must be estimated using subjective experiences and judgments.
Defect rates, the number of customer complaints, and warranty repairs/replacements can help in the
estimation.
191

10. What are the four categories of quality-related costs? Name a cost in each of the four categories
for each of the following types of organizations:
a. Restaurant
b. Hospital
c. Law firm
d. Bank
e. Tire manufacturer
f. University
The four categories of quality-related costs are prevention,
failure costs.
Prevention
Appraisal
a. Restaurant
Training for
cooks/servers
Wait staff inspects

orders before
serving
Evaluating an ER
patient
b. Hospital
Training for ER
employees
c. Law firm
d. Bank
Training for
paralegals
Training for tellers
e. Tire
manufacturer
Training for factory

employees
f. University
Training for
admissions staff
Attorney review of
paralegals work
Manager approval
for certain
transactions
Tires inspected
before shipping
Dean approval for
depart-mental
budgets
appraisal, internal failure costs, and external
Internal Failure
Costs
Meals not as
ordered
Reissuing
medication due to
inaccurate
recording
Underestimated
case time
Cashed an NSF
check
Tires returned to
factory for rework
or scraped
Canceled classes
External Failure
Costs
Mold/insect found
on meal by
customer
Re-casting
improperly set
broken arm
Losing a case due
to carelessness
Customer reporting
bank error on
statement
Warranty repairs
Losing alumni
support
11. What are the similarities between sustainability and lean thinking? What are the differences
between sustainability and lean thinking?
Sustainability and lean thinking have many similarities: both practices seek to reduce waste. However, lean
operations focus on eliminating waste and empowering employees in an effort to increase economic profits.
On the other hand, sustainability focuses on eliminating waste and empowering employees not only to
increase economic profits, but also to preserve the planet and improve the lives of all people touched by the
company.
12. Why might a company want to take lean thinking a step further by including operations and
methods associated with sustainability?
192
Chapter 4
While lean practices tend to center on internal operational waste, green practices also consider the external
waste that may occur as a result of the product. To become greener, a lean company should be particularly
cognizant of all waste that could harm the planet: packaging waste, water waste, energy waste, and
emissions waste that would occur from both manufacturing the product and from consumers using and
eventually disposing of the product.
193
Application & Analysis

A4 59 ABC in Real Companies
Basic Discussion Questions
1. Describe the company selected, including its products or services.

A bookstore provides books and other products to its customers. In addition, it could offer events such as
book signings or book clubs for its customers.
2. List eight key activities performed at this company. Choose at least one activity in the areas of
production, sales, human resources, and accounting.
1.
2.
3.
4.
5.
6.
7.
8.
Process customer purchases

Process customer special orders
Handle customer inquiries
Hiring and training new employees
Stock shelves
Advertise events
Close out cash registers daily
Record daily transactions
3. For each of the key activities, list a potential cost driver for that activity and describe why this cost
driver would be appropriate for the associated activity.
1. customer sales
2. special orders
3. customer inquiries
4. training sessions held
5. packages delivered
6. events scheduled
7. cash registers used
8. bookkeepers hours
Student responses will vary.
A4 60 ABC in Real Companies

Go to a fast food restaurant (or think of the last time you were at a fast food restaurant). Observe the
steps involved in providing a meal to a customer. You will be watching for value-added steps and nonvalue-added steps. Answer the following questions.
Basic Discussion Questions
194
Chapter 4
1. Describe the steps involved with delivering the meal to the customer that you can observe.
2. Describe the behind-the-scenes processes that are likely in the restaurant, such as
cleaning, stocking, and cooking activities.
3. With your answers for 1 and 2 above, list all of the possible activities, materials, and
information that you think might be included on a value stream map for the restaurant. Include
all steps you can think of (not necessarily of those you can observe).
4. Make a list of the eight wastes as denoted by the acronym DOWNTIME (defects,
overproduction, waiting, not utilizing people to their full potential, transportation, inventory,
movement, and excess processing). Next to each waste category, list at least one possible
non-value-added activity that might or might not be in the processes in that restaurant.
5. Go back to the list of items for the potential value stream map. Circle potential areas for
improvement and explain what wastes might be involved in those areas.
Student answers will vary.
Decision Cases
(20-40 min.) A 4-61
Req. 1
Axis Systems
Product Costs per Unit (Original Cost System)
Job A
Direct materials
$210,000
$30,000
160,000
12,000
Direct labor
Allocated overhead (8,000 and 600) $22
Total cost
176,000
13,200
$546,000
$55,200
Divide by number of units
Product cost per unit
Job B
100
10
5,460
$ 5,520
Req. 2
Axis Systems
Product Costs Per Unit (ABC System)
Direct materials
Job A
Job B
$ 210,000
$30,000
160,000
12,000
12,750
1,700
3,000
2,000
120,000
16,000
Direct labor
Allocated overhead:
Materials handlinga
Machine setup
Assembling
Shipping
Total cost
1,500
1,500
$ 507,250
$63,200
195

Divide by number of units
Product cost per unit

__________
a
(15,000
b
(6
c
(1,500
d
(1
and
and
and
and
$5,072.50
2,000)
4)
200)
1)
100
10
$ 6,320
$0.85
$500
$80
$1,500
The change in costs of Job A does not exactly offset the change in costs of Job B between the original system
and ABC, because Axis has more than these two jobs. If Axis had only these two jobs, then the change in one
jobs costs would exactly offset the change in the other jobs costs.
196
Chapter 4
(continued) A 4-61
Req. 3
The activity-based costing system is more accurate than the single-rate system in assigning the costs of the
resources each job consumes. The single rate allocates all overhead cost based on direct labor hours. Job A
units require 80 direct labor hours each (8,000 100), and Job B units require 60 direct labor hours each (600
10). Consequently, the single rate system assigns to each unit of Job A 133% (80 60) of the overhead cost
assigned to each unit of Job B.
But a unit of Job A does not consume 133% as much of each activity as does a unit of Job B. The data given
in the problem reveal the following resource consumption patterns:
Job A
Job B
Parts per unit
150
200
Setups per unit
0.06
0.4
15
20
0.01
0.1
Assembling hours per unit

Shipments per unit
These data show that a unit of Job B actually consumes more of every overhead resource than a unit of Job
A. The ABC system recognizes the actual resource consumption. The single rate undercosts Job B and
overcosts Job A.
Students responses will probably not be this complete. The response above is intended to provide a basis for
class discussion.
Req. 4
a.
If Axis Systems managers base their decision on original system costs, they will outsource both jobs.
The original cost system indicates that Axis can produce the A and B jobs for $5,460 and $5,520 per
unit, respectively, which is more than the $5,400 outsourcing cost.
b.
If the managers base their decision on ABC system costs, they will only outsource Job B. The ABC
system shows that Axis Systems will incur $327.50 ($5,400 $5,072.50) less in costs to make the
Job A units than to buy them. Because the ABC costs are more accurate, Axis managers should
outsource Job B and produce Job A to maximize income.
(15 min.) A 4-62
Axis Systems
Original and Revised Product Costs per Unit (ABC System)
Job B Original
Direct Materials:
Original
Revised ($3,000 0.90%)
Direct Labor
Job B Revised
$3,000
1,200
$2,700
1,200
197

Allocated overhead:
Materials handling
Machine setup
Assembling
Shipping
Total unit cost
170
200
1,600
150
$6,320
170
200
980*
150
$5,400
__________
198
Chapter 4
(continued) A 4-62
*The new assembly process must result in a revised assembling
cost per unit of no more than $980:
$980 = $5,400 ($2,700 + $1,200 + $170 + $200 + $150)
Therefore, the value engineering needs a minimum cost saving in assembling of $620 per unit ($1,600
$980).
$16,000 / 10 units = $1,600 assembly cost per unit from

Decision Case 4-69.
Ethical Issue
(15-20 min.) A 4-63
The IMA Statement of Ethical Professional Practice includes overarching ethical principles that express values
(honesty, fairness, objectivity and responsibility) and four standards that guide conduct (competence,
confidentiality, integrity and credibility). Three of the four specific standards are relevant to Rachel Gambol.
Competence: Gambol has the responsibility to maintain her professional competence (as evidenced
by attending the ABC conference), and also to apply that competence to benefit her employer.
Gambol can apply her knowledge of ABC by identifying the Order Department as a likely candidate
for ABC.
Integrity: Gambol is responsible for communicating unfavorable as well as favorable information and
judgments. The unfavorable outcome that some employees may lose their jobs does not excuse
Gambol from pursuing the ABC opportunity in the Order Department.
Credibility: Gambol is responsible for communicating all relevant information about the ABC proposal
fairly and objectively. She should recognize the benefits and the costs, including how cost savings will
require the termination of some employees.
Termination of long-term employees can hurt the morale of remaining employees and possibly even subject
the firm to age-discrimination lawsuits. Therefore, Gambol should carefully consider all the relevant
implications, not just those for which "hard" numbers are available. Gambol should consider alternatives to
terminations, such as transferring "extra" employees to other departments, or offering early retirement
packages.
Student responses will probably be less complete.
199
CMA Question
(5 - 10 min.) A 4-64
Answer: C
200

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Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Activity-Based Costing, Lean Operations, and the

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Managerial Accounting 3e Solutions Manual

The total manufacturing overhead allocated to Job 484 is $183.

(5-10 min) S 4-3

Plantwide Overhead Rate

$220 per machine hour

Activity Cost Allocation Rate

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Cooking and Draining

Activity-Based Costing, Lean Operations, and the Costs of Quality

$27 per cooking and draining

(5-10 min.) S 4-5

Activity Cost Allocation Rate

Use of Cost Driver

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Managerial Accounting 3e Solutions Manual

(5-10 min.) S 4-6

(15-20 min.) S 4-7

Cost Allocated to Each Board

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Activity-Based Costing, Lean Operations, and the Costs of Quality

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Managerial Accounting 3e Solutions Manual

(15-20 min.) S 4-8

(15-20 min.) S 4-9

1. The company has very few indirect costs less likely

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Activity-Based Costing, Lean Operations, and the Costs of Quality

and win bids they expected to lose more

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Managerial Accounting 3e Solutions Manual

(10 min.) S 4-11

Estimated total indirect costs

Indirect costs (95 hours $145 / hour)

Direct labor (from Req. 2)

Indirect costs (from Req. 2)

(5-10 min.) S 4-12

Sunflowers competitor is able to undercut her fees.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Activity-Based Costing, Lean Operations, and the Costs of Quality

Divide by estimated quantity

Cost allocation rate for

(10-15 min.) S 4-14

(300 pages $50)

Information technology support:

(95 applications $100)

Training (95 hours $100)

Operating income (loss)

Service revenue (160% $31,825)

(10-15 min.) S 4-15

Managerial Accounting 3e Solutions Manual

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Activity-Based Costing, Lean Operations, and the Costs of Quality

(10-15 min.) S 4-16

(5-10 min.) S 4-17

(10-15 min.) S 4-19

3. Inspecting products that are half the way through the

production process appraisal

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Managerial Accounting 3e Solutions Manual