ABC Costing

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1
(a)
Estimated annual overhead costs

= Predetermined overhead rate
Expected annual operating activity
$1,000,000
= $10 per direct labor hour
100,000
(b)
90,000 direct labor hours X $10 = $900,000 overhead applied
(c)
If the manufacturing process is complex, then multiple allocation

bases can result in more accurate product-cost computations. In
such situations, managers need to consider a new overhead cost
allocation method that uses multiple bases. That method is activitybased costing.
BRIEF EXERCISE 4-2

Under ABC, overhead costs are shifted from the high-volume products to
the low-volume products. This shift results in more accurate costing for
two reasons:
1. Low-volume products often require more special handling, such
as more machine setups and inspections, than high-volume
products. Thus, the low-volume product frequently is responsible
for more overhead costs per unit than is a high-volume product.
2. Assigning overhead using ABC will usually increase the cost per
unit for low-volume products. Therefore, a traditional overhead
allocation such as direct labor hours is usually a poor cost driver
for assigning overhead costs to low-volume products.
As a result, for Bowyer, one of the products (Product RX3) may have been
low volume and therefore may have more overhead costs assigned to it
under an ABC system.
Copyright 2010 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
4-7
BRIEF EXERCISE 4-3

An appropriate cost driver for each activity is:
Activity
Cost Driver
Materials handling
Machine setups
Factory machine maintenance
Factory supervision
Quality control
Number of requisitions
Number of setups
Machine hours used
Direct labor hours
Number of inspections
BRIEF EXERCISE 4-4

(a)
(b)
(c)
(d)
(e)
(f)
(g)
Number of parts or assemblies

Number of setups
Number of employees
Number of inspections
Number of purchase orders
Machine hours
Square footage occupied
BRIEF EXERCISE 4-5

Machine setups
Machining
Inspections
$180,000 2,500 = $72 per setup

$325,000 25,000 = $13 per machine hour
$ 87,500 1,750 = $50 per inspection
BRIEF EXERCISE 4-6

Activity Cost Pool
Designing
Sizing and cutting
Stitching and trimming
Wrapping and packing
4-8
Estimated
Expected Use of
Overhead Cost Drivers per Activity =
$ 450,000
4,000,000
1,440,000
336,000
12,000 designer hours

160,000 machine hours
80,000 labor hours
32,000 finished units
Activity-Based
Overhead Rates
$37.50 per designer hour
$25.00 per machine hour
$18.00 per labor hour
$10.50 per finished unit
BRIEF EXERCISE 4-7

Activity Cost Pool
Ordering and receiving
Etching
Soldering
Estimated
Expected Use of
Overhead Cost Drivers per Activity =
$
Cost Drivers
11,000 orders
500,000 labor hours
90,000
480,000
1,760,000
15,000 orders
440,000 labor hours
Activity-Based
Overhead Rates
$6.00 per order
$8.00 per machine hour
$4.00 per labor hour
Overhead Total Overhead

Rates
=
Applied
$6
$ 66,000
$8
400,000
$4
2,000,000
$2,466,000
BRIEF EXERCISE 4-8

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Non-value-added
Non-value-added
Value-added
Non-value-added
Non-value-added
Non-value-added
Non-value-added
Value-added
BRIEF EXERCISE 4-9

Value-added Activities
Hours
(1) Designing and drafting

(3) On-site supervision
(5) Consultation with client
Non-value-added Activities
(2) Staff meetings
(4) Lunch
(6) Entertaining a prospective client
3.0
2.0
1.5
6.5
Hours
1
1
2
4
4-9
BRIEF EXERCISE 4-10

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Batch- or unit-level
Unit-level
Unit-level
Batch- or unit-level
Facility-level
Batch- or product-level
Batch- or product-level
Unit-level
Facility-level
Batch-level
BRIEF EXERCISE 4-11

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Facility-level
Unit-level
Product-level
Unit-level
Batch-level
Batch-level
Product-level
Facility-level
BRIEF EXERCISE 4-12

(a) Product design
(b)
4-10
$50,000
= $5,000 per product change
10
Machining
$300,000
= $2 per machine hour
150,000
Material handling
$100,000
= $1,000 per set up
100
Product designproduct-level
Machiningunit-level
Material handlingbatch-level
SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 4-1
1.
2.
3.
4.
5.
True
False
False
True
True
DO IT! 4-2
(a) Computations of activity-based overhead rates per cost driver:
Activity Cost
Pools
Machine setup
Machining
Packing
Estimated
Overhead
$ 20,000
110,000
30,000
$160,000
Expected Use of Cost

Activity-Based
Drivers per Activity
Overhead Rates
40 setups
$500 per setup
5,000 machine hours
22 per machine hr.
500 orders
60 per order
(b) Assignment of each activitys overhead cost to products using ABC:

BC113
AD908
Expected
Activity Cost
Pools
Machine setup
Machining
Packing
Total assigned costs
Use of Cost
Drivers per Activity-Based
Cost
Product
Overhead Rates Assigned
Expected Use of Activity-Based

Cost
Cost Drivers per
Overhead
Assigned
Product
Rates
25
1000
$500
$ 22
$12,500
22,000
15
4000
$500
$ 22
7,500
88,000
150
$ 60
9,000
$43,500
350
$ 60
21,000
$116,500
(c) Computation of overhead cost per unit:

Total costs assigned
Total units produced
Overhead cost per unit
(a)
(b)
(a) (b)
BC113
$43,500
3,000
$14.50
AD908
$116,500
1,400
$83.21
4-11
DO IT! 4-2 (Continued)

(d) These computations show that the total overhead assigned to Product
AD908 is more than two and a half times that assigned to BC113. On a
per unit basis, the overhead assigned to AD908 is close to six times
that assigned to each BC113.
DO IT! 4-3
1.
2.
3.
4.
5.
6.
NVA
VA
NVA
NVA
VA
VA
DO IT! 4-4
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
4-12
unit-level
product-level
facility-level
batch-level
unit-level
batch-level
facility-level
unit-level
SOLUTIONS TO EXERCISES
EXERCISE 4-1
(a)
Estimated overhead
= Predetermined overhead rate
Direct labor costs
$300,000
= 200% of direct labor cost
$50,000 + $100,000
(b) Activity cost pools

Machining
Machine setup
Cost drivers
Machine hours
Set up hours
Estimated overhead
$200,000
100,000
Activity-based overhead rates

Machining:
Machine setup:
$200,000
$100,000
= $100 per machine hour
= $200 per setup hour
1,000 + 1,000
400 + 100
(c)
Traditional costing
$50,000 X 200%
$100,000 X 200%
Standard
$100,000
$100,000
Activity-based costing
Machining:
1,000 X $100
1,000 X $100
Machine setup:
100 X $200
400 X $200
$200,000
$200,000
$100,000
$100,000
20,000
$120,000
Custom
80,000
$180,000
4-13
EXERCISE 4-2
(a)
Traditional costing system
Sales
Costs
Operating income
(b)
Product 540X
Product 137Y
$200,000
55,000
$145,000
$160,000
50,000
$110,000
Product 249S
$80,000
15,000
$65,000
Activity-based costing system
Sales
Costs
Operating income
(c) Product 540X:
Product 540X
Product 137Y
$200,000
50,000
$150,000
$160,000
35,000
$125,000
Product 249S
$80,000
35,000
$45,000
($150,000 $145,000) $145,000 = 3.45%
Product 137Y
($125,000 $110,000) $110,000 = 13.64%
Product 249S
($45,000 $65,000) $65,000 = (30.77%)
(d) These costs are similar probably because the cost drivers are
essentially the same; that is, they are based on a unit volume
concept.
4-14
EXERCISE 4-3
(a)
Activity cost pools
Cost drivers
Cutting
Machine hours
Design
Number of setups
Activity-based overhead rates

Cutting
$300,000 = $1.50 per machine hour
200,000
Estimated overhead
$300,000
600,000
Design
$600,000 = $400 per setup
1,500
Wool
Activity-based costing
Cutting
100,000 X $1.50
100,000 X $1.50
Design
1,000 X $400
500 X $400
Total cost allocated
(b)
Cotton
$150,000
$150,000
400,000
200,000
$350,000
$550,000
Estimated overhead = $900,000 = $2 per direct labor hour

Direct labors hours
450,000
Wool
Traditional costing
225,000 X $2
225,000 X $2
Cotton
$450,000
$450,000
The wool product line is allocated $100,000 ($550,000 $450,000) more

overhead cost when an activity-based costing system is used. As a result,
the cotton product line is allocated $100,000 ($450,000 $350,000) less.
4-15
EXERCISE 4-4
(a)
Direct labor hours for car wheels

(40,000 X 1) = 40,000
Direct labor hours for truck wheels (10,000 X 3) = 30,000
Total direct labor hours
70,000
$700,000 (total estimated overhead)
70,000 (total direct labor hours)
= $10 per direct labor hour.
Overhead assigned
Car wheels
Truck wheels
Total overhead
(b)
Activity Cost Pool
Estimated
Overhead
Setting up machines
Assembling
Inspection
$180,000
280,000
240,000
(c)
Activity Cost Pools
Expected
ABC
Use of
Overhead
Cost Drivers =
Rate
1,000
70,000
1,200
Car Wheels
Expected Use
Activity-Based
of Cost Driver
Overhead
=
per Product X
Rates
Setting up machines
Assembling
Inspection
Total cost assigned
4-16
= $400,000
= 300,000
$700,000
(40,000 X $10)
(30,000 X $10)
200
40,000
100
$180
$ 4
$200
$180
$ 4
$200
Cost
Assigned
$ 36,000
$160,000
$ 20,000
$216,000
EXERCISE 4-4 (Continued)

(c)
Truck Wheels
Expected use
Activity-Based
of Cost Driver
Overhead
per Product X
Rates
=
Activity Cost Pools

Setting up machines
Assembling
Inspection
Total cost assigned
(d)
800
30,000
1,100
$180
$ 4
$200
Cost
Assigned
$144,000
$120,000
$220,000
$484,000
Assuming that the cost drivers are a reasonable representation of

what is occurring in the two product lines, it seems appropriate to
switch to activity-based costing. By using this system, more accurate
cost information is developed which should lead to better allocation
of resources and pricing decisions in the future.
4-17
EXERCISE 4-5
(a)
Activity Cost Pools
Scheduling and travel
Setup time
Supervision
Estimated Overhead
$90,000
$70,000
$40,000
Expected use
of Cost Drivers = ABC Overhead Rates
1,500
$ 60.00
700
$100.00
$400,000*
$
.10
*$100,000 + $300,000
Commercial
Activity Cost Pools

Setup time
Supervision
Expected use of Cost

Drivers per Product
1,000
450
$100,000
X ABC Overhead Rates =

$ 60.00
$100.00
$
.10
Cost Assigned
$ 60,000
45,000
10,000
$115,000
Residential
Activity Cost Pools

Setup time
Supervision
Expected use of Cost

Drivers per Product
500
250
$300,000
(b)
Revenues
Direct material costs
Direct labor costs
Overhead costs
Operating income (loss)
(c)
4-18
X ABC Overhead Rates =

$ 60.00
$100.00
$
.10
Commercial
$300,000
$ 30,000
100,000
115,000
245,000
$ 55,000
Cost Assigned
$30,000
25,000
30,000
$85,000
Residential
$480,000
$ 50,000
300,000
85,000
435,000
$ 45,000
Assuming that the cost drivers are a reasonable representation of

what is occurring in the two product lines, it seems appropriate to
switch to activity-based costing. By using this system, more accurate
cost information is developed which should lead to better allocations
of resources and more informative pricing decisions in the future.
EXERCISE 4-6
(a) Traditional costing:
$235,000 2,500 (800 + 1,700) hours
= $94 per direct labor hour
(1) One mobile safe:
800 hours X $94 = $75,200
$75,200 200 = $376 each
(2) One walk-in safe:
1,700 hours X $94 = $159,800
$159,800 50 = $3,196 each
(b) Activity-based costing:
(1) Material handling costs
$150,000 500 (300 + 200) moves = $300 per move
(a) One mobile safe:
300 moves X $300 = $90,000
$90,000 200 = $450 each
(b) One walk-in safe:
200 moves X $300 = $60,000
$60,000 50 = $1,200 each
(2) Purchasing activity costs
$85,000 800 (450 + 350) orders = $106.25 per order
(a) One mobile safe:
450 orders X $106.25 = $47,812.50
$47,812.50 200 = $239.0625 each
(b) One walk-in safe:
350 orders X $106.25 = $37,187.50
$37,187.50 50 = $743.75 each
4-19

(c) The total amount of overhead allocated to each unit of the two products
under the two allocation approaches is:
Mobile safe
Walk-in safe
Traditional
Costing
Activity-Based
Costing
$ 376
$3,196
**$689.0625**
$ 1,943.75**
**$450 + $239.0625
**$1,200 + $743.75
EXERCISE 4-7
The following activities might be identified at Quik Prints Company from
your analysis of its operations and a discussion with the owner-manager,
James Kieper.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
4-20
Hiring and training personnel

Purchasing supplies and materials
Selling, promoting, and marketing
Billing and collecting
Designing
Offset printing
Copying
Faxing
Collating
Cutting and folding
11.
12.
13.
Maintenance and repairs

Delivery
Accounting
EXERCISE 4-8
Budgeted Costs
Activity Cost Pool
Cost Driver
Engineering design
Engineering prototypes
Engineering
Engineering hours
Depreciation, machinery
Electricity, machinery
Machinery
Machine hours
Machine setup
Number of setups
Inspections
Tests
Quality control
Number of tests or
inspections
Depreciation, plant
Insurance, plant
Property taxes
Oil, heating
Electricity, plant lighting
Factory utilities
Square feet or
Machine hours
Custodial wages
Maintenance
Machine setup, indirect labor

Machine setup, indirect
materials
Number of
machines or
Machine hours
EXERCISE 4-9
The following cost drivers might be used to assign overhead:
1.
2.
3.
4.
5.
6.
7.
8.
Labor hours
Labor hours
Labor hours
Gallons of chemicals
Number of cartfuls or
labor hours
Number of cartfuls
Gallons of juice
Gallons of juice
9.
10.
11.
12.
13.
14.
15.
Gallons of wine or months of aging

Number of bottles
Number of bottles
Number of boxes
Number of shipments
Number of gallons processed
Number of gallons processed
4-21
EXERCISE 4-10
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Number of engineering change orders; hours of designing

Number of orders processed
Number of parts in stock
Weight of material; number of boxes or cartons
Employee turnover; number of employees hired
Machine hours; direct labor hours
Number of employees; number of parts; direct labor hours
Number of employees
Book or market value of assets
Cost of goods manufactured, direct labor hours; number
of employees
Machine hours; number of machines
Gallons of paint; number of appliances
EXERCISE 4-11
(a) The overhead rates are:
Activity Cost Pools
Expected Use
Estimated of Cost Drivers Activity-Based
Overhead per Activity = Overhead Rates
Materials handling
Machine setups
Quality inspections
$35,000
27,500
27,000
1,000
500
600
$35
55
45
(b) The assignment of the overhead costs to products is as follows:
Cost Driver
Materials handling
($35)
Machine setups ($55)
Quality inspections
($45)
Total costs
assigned (a)
4-22
Instruments
Number
Cost
Gauges
Number
Cost
Cost
Assigned
400
200
$14,000
11,000
600
300
$21,000
16,500
$35,000
27,500
200
9,000
400
18,000
27,000
$34,000
$55,500
$89,500
Units produced (b)
50
300
Overhead cost per

Unit (a) (b)
$680
$185

(c)
MEMO
To:
President, Sorce Instrument, Inc.
From:
Student
Re:
Benefits of activity-based costing (ABC)
ABC focuses on the activities performed in producing a product.

Overhead costs are assigned to products based on cost drivers that
measure the activities performed on the product.
The primary benefit of ABC is more accurate and meaningful product
costing. This improved cost data can lead to reduced costs as managers
become more aware of the underlying causes of cost incurrence. Thus,
control over costs is enhanced.
The improved cost data should also lead to better management
decisions. More accurate product costing should contribute to setting
selling prices which will help achieve desired profitability levels. In
addition, it should be helpful in deciding whether to make or buy a
product part or component, and sometimes even whether to eliminate
a product.
4-23
EXERCISE 4-12
(a) (1) Traditional product costing system:
$400,000 X .70 = $280,000 Selling costs assigned in March to the
high intensity product line.
(2) Activity-based costing system:
ActivityBased
Cost Drivers
Overhead
Overhead Cost
Used
X
Rates =
Assigned
Activity Cost Pools

Sales commissions
AdvertisingTV/Radio
AdvertisingNewspaper
Catalogs
Cost of catalog sales
Credit and collection
Total assigned cost for March
$930,000
250
2,000
60,000
9,000
$930,000
$.05
$300
$10
$2.50
$1.00
$.03
$ 46,500
75,000
20,000
150,000
9,000
27,900
$328,400
(b) As compared to ABC, traditional costing grossly undercosts the selling

costs assigned to the high intensity product line. The difference
of $48,400 ($328,400 $280,000) in the month of March is a 14.7%
understatement.
(c) All six activities, as selling activities, are non-value-added activities.
4-24
EXERCISE 4-13
(a) 1.
Traditional product costing system:

Quality-control overhead costs assigned in June to the low-calorie
dessert line are $9,350 ($55,000 X .17).
2.
Activity-based costing system:
Activity Cost Pools

Inspections of material received
In-process inspections
FDA certification
Total assigned cost for June
ActivityBased
Cost Drivers
Overhead
Overhead Cost
Used
X
Rate
=
Assigned
6,000
10,000
420
$.60
$.33
$12.00
$ 3,600
3,300
5,040
$11,940
(b) As compared to ABC, the traditional costing system undercosts the

quality-control overhead cost assigned to the low-calorie dessert
product line by $2,590 ($11,940 $9,350) in the month of June. That is
a 21.7% understatement.
(c) All three activities, as quality-control related activities, are non-valueadded activities.
EXERCISE 4-14
1.
2.
3.
4.
5.
6.
7.
8.
Value-added. It is assumed that any activity which directly enhances or

improves the quality or quantity of the vines, grapes, or wine is a
value-added activity.
Non-value-added
9. Value-added
Value-added
10. Value-added
Value-added
11. Non-value-added
Non-value-added
12. Non-value-added
Value-added
13. Non-value-added
Value-added
14. Non-value-added
Value-added
15. Non-value-added
4-25
EXERCISE 4-15
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Value-added
Non-value-added
Non-value-added
Non-value-added
Non-value-added
Value-added
Value-added
Non-value-added
Non-value-added
Non-value-added
Non-value-added
Value-added
EXERCISE 4-16
Value-Added Activities
Hours
Writing contracts and letters

Taking depositions
Contemplating legal strategy
Litigating a case in court
1.0
1.0
1.0
2.5
5.5
Non-Value-Added Activities
Hours
Attending staff meetings

Doing research
Traveling to/from court
Eating lunch
Entertaining a prospective client
0.5
1.0
1.0
1.0
2.0
5.5
Questionable Classifications
Writing contracts is value-added; writing letters may be value-added if
related to a specific case or it may be non-value-added if it is billing a client
or collecting receivables. Research may be value-added if it is unique, related
to a specific case, and is billable. Research may be non-value-added if it is
something the attorney should already have known and is not billable to
the client.
4-26
EXERCISE 4-17
Activity Cost Pools
Activity Level
Engineering
Machinery
Machine setup
Quality control
Product-level
Unit-level
Batch-level
Depends on frequency. Could be unit, batch,
or product-level
Facility-level
Facility-level
Factory utilities
Maintenance
EXERCISE 4-18
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Facility-level activity
Product-level activity
Batch-level activity
Batch-level activity
Facility-level activity
Batch-level or unit-level activity
Unit-level activity
Unit-level activity
4-27
SOLUTIONS TO PROBLEMS
PROBLEM 4-1A
(a) Computation of unit coststraditional costing.

Products
Manufacturing Costs
Home Model
Commercial Model
$18.50
19.00
* 23.40*
$60.90
$26.50
19.00
* 23.40*
$68.90
Direct materials
Direct labor
Overhead
Total unit cost
*$15.60 X 1.5 = $23.40
(b)
Estimated
Overhead
Activity Cost Pool

Receiving
Forming
Assembling
Testing
Painting
Packing and shipping
70,350
150,500
390,600
51,000
52,580
787,250
$1,502,280
Expected
Use of Cost Drivers
Activity-Based
Overhead Rate
335,000 Pounds
35,000 Machine hours
217,000 Parts
25,500 Tests
5,258 Gallons
335,000 Pounds
$ .21 per pound

$ 4.30 per machine hour
$ 1.80 per part
$ 2.00 per test
$10.00 per gallon
$ 2.35 per pound
(c)
Home Model
ActivityBased
Expected
Overhead
Cost
Use of
Drivers X Rates = Assigned
Activity Cost Pool
215,000
Receiving
27,000
Forming
165,000
Assembling
15,500
Testing
3,680
Painting
215,000
Total costs assigned (a)
Units produced
(b)
Overhead cost per unit [(a) (b)]
4-28
$ .21
$ 4.30
$ 1.80
$ 2.00
$10.00
$ 2.35
45,150
116,100
297,000
31,000
36,800
505,250
$1,031,300
Commercial Model
ActivityBased
Expected
Overhead
Cost
Use of
Drivers X Rates = Assigned
120,000
8,000
52,000
10,000
1,578
120,000
$ .21
$ 4.30
$ 1.80
$ 2.00
$10.00
$ 2.35
$ 25,200
34,400
93,600
20,000
15,780
282,000
$470,980
54,000
10,200
$19.10
$46.17
PROBLEM 4-1A (Continued)

(d)
ABC Manufacturing Costs
Direct materials
Direct labor
Overhead
Total cost per unit
(e)
(f)
Home Model
Commercial Model
$18.50
19.00
19.10
$56.60
$26.50
19.00
46.17
$91.67
Activity
Value- vs. Non-Value-Added
Receiving
Forming
Assembling
Testing
Painting
Non-value-added
Value-added
Value-added
Non-value-added
Value-added
Value-added
(1) Activity-based costing shows the commercial model absorbs

nearly 21/2 ($46.17 $19.10) times as much overhead per unit as
the home model.
(2) The comparison of ABC and traditional costing shows that the
proper amount of overhead assigned to the two products is not
equal at $23.40 but rather $19.10 for the home model and $46.17
for the commercial model. Under traditional costing, the margin of
error on the commercial model was almost 100%, an understatement
of $22.77 on an assignment of $23.40. These distorted overhead
assignments have likely led to overpricing the home model and
underpricing the commercial model.
4-29
PROBLEM 4-2A
(a) The allocation of total manufacturing overhead using activity-based

costing is as follows:
Overhead Rate
Purchase orders @ $30
Machine setups @ $50
Machine hours @ $40
Inspections @ $25
Total assigned costs (a)
Royale
Drivers
Cost
Used
Assigned
Majestic
Drivers
Cost
Used
Assigned
15,000
5,000
75,000
9,000
25,000
13,000
45,000
19,000
Units produced (b)

Cost per unit (a) (b)
$ 450,000
250,000
3,000,000
225,000
$3,925,000
$ 750,000
650,000
1,800,000
475,000
$3,675,000
25,000
10,000
$157
$367.50
Total
Overhead
$1,200,000
900,000
4,800,000
700,000
$7,600,000
(b) The cost per unit and gross profit of each model under ABC costing
were:
Royale
Majestic
Direct materials
Direct labor
Manufacturing overhead
Total cost per unit
$ 700
120
157
$ 977
$ 420.00
100.00
367.50
$ 887.50
Sales price per unit

Cost per unit
Gross profit
$1,600
977
$ 623
$1,300.00
887.50
$ 412.50
(c) Managements future plans for the two television models are not
sound. Under ABC costing, the Royale model is $210.50 ($623.00
$412.50) per unit more profitable than the Majestic model. If any
product should be phased out, it is the Majestic. But, by applying ABC
and activity-based management analysis, Overton may determine how
to reduce the costs of producing the Majestic model.
4-30
PROBLEM 4-3A
(a) Predetermined overhead rate using machine hours:

$830,000 100,000 hrs. = $8.30 per machine hour
(b) Manufacturing cost per stairway under traditional costing:
Direct materials...........................................................................
Direct labor...................................................................................
Overhead (14,500 X $8.30).......................................................
Total cost of 280 stairs ....................................................
$103,600
112,000
120,350
$335,950
Cost per stairway ($335,950 280).......................................
$1,199.82
(c) Manufacturing cost per stairway under activity-based costing:

Computation of Activity-Based Overhead Rates
Activity Cost Pools
Purchasing
Handling materials
Production
Setting up machines
Inspecting
Inventory control
Utilities
Estimated Expected Use of Cost

Overhead Drivers per Activity =
$ 57,000
82,000
210,000
85,000
90,000
126,000
180,000
$830,000
600 Orders
8,000 Moves
100,000 D/L Hours
1,250 Setups
6,000 Inspections
168,000 Components
90,000 Sq. ft.
Activity-Based
Overhead Rate
$95 per order
$10.25 per move
$2.10 per D/L hour
$68 per setup
$15 per inspection
$.75 per component
$2.00 per sq. ft.
Assignment of Overhead to Order of 280 Stairs

Activity Cost Pools
Expected Use of
Cost Drivers
Purchasing
60 Orders
Handling materials
800 Moves
Production
5,000 D/L Hours
Setting up machines
100 Setups
Inspecting
450 Inspections
Inventory control
16,000 Components
Utilities
8,000 Sq. ft.
Total overhead assigned
Activity-Based
X Overhead Rates = Cost Assigned
$95
$10.25
$2.10
$68
$15
$.75
$2.00
$ 5,700
8,200
10,500
6,800
6,750
12,000
16,000
$65,950
4-31

Total manufacturing cost per stairway under ABC:
Direct materials ..................................................................................
Direct labor ..........................................................................................
Overhead ..............................................................................................
Total cost of 280 stairs ...........................................................
$ 103,600
112,000
65,950
$ 281,550
Total cost per stairway ($281,550 280)....................................
$1,005.54
(d) The difference between the traditional cost and the activity-based cost
per unit, $1,199.82 versus $1,005.54, is not great in amount but $194.28
($1,199.82 $1,005.54) is 19.3% of the more correct ABC cost per
unit. Activity-based costing is the preferable costing system for setting
prices because the real costs are more accurately reflected. The greater
accuracy is a result of multiple, more relevant activity cost drivers
under ABC than the single cost driver used with the traditional volumebased system.
4-32
PROBLEM 4-4A
(a) Computation of unit coststraditional costing

Overhead cost per direct labor hour is $1,241,660 (150,000 + 27,000) =
$7.015
Products
Manufacturing Costs
CoolDay
Direct materials
Direct labor
Overhead
LiteMist
$0.400
0.250
0.351*
$1.001
$1.200
0.500
0.631**
$2.331
*$7.015 X .05 **$7.015 X .09

(b)
Activity Cost Pools
Grape processing
Aging
Bottling and corking
Labeling and boxing
Maintain and inspect
equipment
(c)
Estimated
Expected Use
Overhead of Cost Drivers =
$ 145,860
396,000
270,000
189,000
6,600
6,600,000
900,000
900,000
240,800
$1,241,660
800
CoolDay
ActivityExpected
Based
Use of
Overhead
Cost
Cost
Rates = Assigned
Drivers X
Activity Cost Pools
6,000
Grape processing
3,000,000
Aging
600,000
Bottling and corking
600,000
Labeling and boxing
Maintain and inspect
350
equipment
Total costs assigned (a)
Liters produced
Activity-Based
Overhead Rates
$22.10 per cart
$0.06 per month
$0.30 per bottle
$0.21 per bottle
$301 per inspection
LiteMist
ActivityExpected
Based
Use of
Overhead
Cost
Cost
= Assigned
Drivers X Rates
$22.10
$0.06
$0.30
$0.21
$132,600
180,000
180,000
126,000
600
3,600,000
300,000
300,000
$301
105,350
$723,950
450
$22.10
$0.06
$0.30
$0.21
$ 13,260
216,000
90,000
63,000
$301
135,450
$517,710
(b)
3,000,000
300,000
Overhead cost per

liter
[(a) (b)]
$0.241
$1.726
4-33

(d)
Products
CoolDay
LiteMist
$0.400
$1.200
0.250
0.500
0.241
1.726
$0.891
$3.426
Manufacturing Costs
Direct materials
Direct labor
Overhead
(e) To:
Mr. Greg Kagen
From:
Student
Subject:
Product costs using traditional approach versus ABC
The memorandum covers the following points:
4-34
a.
ABC allocates overhead costs as a function of each products use

of cost drivers. Thus, ABC results in overhead allocation that
more closely approximates each products generation of overhead
costs.
b.
Traditional approaches that allocate costs as a function of volume

tend to be biased toward allocating too much overhead to high
volume, simple products, and too little to low volume, complex
products. This is because the actual incurrence of overhead costs
is rarely correlated with labor costs.
c.
In the case of the Polzin Corporation, the LiteMist product required

the company to begin using more complex methods and equipment.
Overhead costs increased substantially. When overhead costs were
allocated using labor rates, too much overhead was allocated to
the high volume CoolDay product. This reduced the apparent profitability of this product.
d.
The total cost of the two products under the two approaches was
as follows:

CoolDay
LiteMist
Traditional approach
$1.001
$2.331
ABC
$0.891
$3.426
Therefore, the relative profitability of the two products should be

determined using ABC costing.
4-35
PROBLEM 4-5A
(a) Computation of assigned overhead under traditional costing (direct

labor dollars appears in the first line of the schedule of overhead data):
Predetermined overhead rate X direct labor dollars
Overhead assigned to audit:
Overhead assigned to tax:
.40 X $1,000,000 = $400,000

.40 X $800,000 = $320,000
(b) (1) Computation of activity-based overhead rates:
Activity Cost Pools

Employee training
Typing and secretarial
Computing
Facility rental
Travel
Estimated
Overhead
$216,000
76,200
204,000
142,500
81,300
$720,000
Expected Use of
Cost Drivers per Activity
Activity-Based
Overhead Rates
$1,800,000 Direct labor dollars

2,500 Reports/forms
60,000 Minutes
40 Employees
Direct
$.12 per DL dollar

$30.48 per report/form
$3.40 per minute
$3,562.50 per employee
Direct
(2) Assignment of overhead to audit and tax services:
Activity Cost Pools

Employee training
Computing
Facility rental
Travel
Overhead costs
assigned
4-36
Audit
Expected
ActivityUse of
Based
Cost
Overhead
Cost
Driver X
Rate
= Assigned
Tax
Expected
ActivityUse of
Based
Cost
Overhead
Cost
Driver X
Rate = Assigned
$1,000,000
600
25,000
22
56,000
$800,000
1,900
35,000
18
25,300
$.12
$30.48
$3.40
$3,562.50
Direct
$120,000
18,288
85,000
78,375
56,000
$.12
$30.48
$3.40
$3,562.50
Direct
$357,663
$ 96,000
57,912
119,000
64,125
25,300
$362,337

(c)
Activity
Value-Added vs. Non-Value-Added
Employee training
Computing
Facility rental
Travel
Non-value-added
Value-added
Value-added
Non-value-added
Non-value-added
(d) Overhead is assigned to the two service lines as follows:
Traditional costing
ABC
Difference
Audit
Tax
$400,000
357,663
$ 42,337
$320,000
362,337
$ 42,337
The $42,337 difference for audits is 10.6% lower under ABC costing,
while the $42,337 difference for tax is 13.2% higher under ABC costing.
Clearly, ABC costing should be used to determine the relative profitability of each service.
4-37

ABC Costing

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ABC Costing

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4-1

Estimated annual overhead costs

90,000 direct labor hours X $10 = $900,000 overhead applied

If the manufacturing process is complex, then multiple allocation

BRIEF EXERCISE 4-2

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 4-3

BRIEF EXERCISE 4-4

Number of parts or assemblies

BRIEF EXERCISE 4-5

$180,000 2,500 = $72 per setup

BRIEF EXERCISE 4-6

Copyright 2010 John Wiley & Sons, Inc.

12,000 designer hours

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 4-7

Overhead Total Overhead

BRIEF EXERCISE 4-8

BRIEF EXERCISE 4-9

(1) Designing and drafting

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 4-10

BRIEF EXERCISE 4-11

BRIEF EXERCISE 4-12

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO DO IT! REVIEW EXERCISES

Expected Use of Cost

(b) Assignment of each activitys overhead cost to products using ABC:

Expected Use of Activity-Based

(c) Computation of overhead cost per unit:

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

DO IT! 4-2 (Continued)

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

(b) Activity cost pools

Activity-based overhead rates

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Traditional costing system

Activity-based costing system

($150,000 $145,000) $145,000 = 3.45%

($125,000 $110,000) $110,000 = 13.64%

($45,000 $65,000) $65,000 = (30.77%)

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Activity cost pools

Activity-based overhead rates

Estimated overhead = $900,000 = $2 per direct labor hour

The wool product line is allocated $100,000 ($550,000 $450,000) more

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual