Management 122 Course XXXXZAXReader - Rev J - Solutions

122
Management
COURSE READER SOLUTIONS
Danny S. Litt
Student Name: ___________________________________________

Student ID Number: _______________________________________
Management
Accounting
DANNY S. LITT
MANAGEMENT 122 COURSE READER - REV J - SOLUTIONS
Class Problem
Superior Manufacturing Company has the following cost and expense data for the year ending
December 31, 2009.
Raw materials, 1/1/09
Raw materials, 12/31/09
Raw materials purchased
Indirect materials used
Work in process, 1/1/09
Work in process, 12/31/09
Finished goods, 1/1/09
Direct labor
Factory managers salary
$30,000
20,000
220,000
15,000
80,000
50,000
110,000
120,000
350,000
35,000
Insurance, factory
$14,000
Property taxes, factory building
6,000
Sales (net)
1,500,000
Delivery expenses
100,000
Sales commissions
150,000
Indirect labor
90,000
Factory machinery rent
40,000
Factory utilities
65,000
Depreciation, factory building
24,000
Administrative expenses
300,000
Requirements
1. Prepare a cost of goods manufactured schedule for Superior Company for 2009.
2. Prepare an income statement for Superior Company for 2009.
Page | 1
DANNY S. LITT
Solution
COST OF GOODS MANUFACTURED
Raw Materials, 1/1/09
Plus: Raw Material Purchased
Raw Material Available
Less: Ending Raw Materials
Total Material Used
Less: Indirect Material Used
Direct Material Used
30,000
220,000
250,000
20,000
230,000
15,000
215,000
Work in Process, 1/1/09

Direct Material
Direct Labor
Indirect Material
Indirect Labor
Factory Manager's Salary
Factory machinery rent
Factory utilities
Depreciation, factory building
Insurance, Factory
Property Taxes, factory building
Work in process, available
Less: Ending Work-in-process, 12/31/09
Cost of goods manufactured
80,000
215,000
350,000
15,000
90,000
35,000
40,000
65,000
24,000
14,000
6,000
934,000
50,000
884,000

Cost of goods manufactured
Goods available for sale
Less: Ending finished goods, 12/31/09
Cost of goods sold
110,000
884,000
994,000
120,000
874,000
Sales
Cost of goods sold
Gross Profit
Sales commissions
Administrative expenses
Delivery expenses
Net Income
1,500,000
874,000
626,000
150,000
300,000
100,000
550,000
76,000
Page | 2
DANNY S. LITT
Problem
The information below relates to Derby Manufacturing Company's operations for a recent
month. (Assume that all raw materials are direct materials.):
Purchases of raw materials ........................
Direct labor cost ........................................
Selling costs (total) ....................................
Administrative costs (total) .......................
Manufacturing overhead costs (total)........
Raw materials inventory, beginning .........
Work in process inventory, beginning ......
Finished goods inventory, beginning ........
Raw materials inventory, ending...............
Work in process inventory, ending ...........
Finished goods inventory, ending .............
$91,000
$122,000
$42,000
$56,000
$340,000
$22,000
$27,000
$42,000
$7,000
$35,000
$15,000
Requirements
What was Derby's cost of goods manufactured for the month?
Solution
Derby Manufacturing Company
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory ................
$ 22,000
Add: Purchases of raw materials ....................
91,000
Raw materials available for use .....................
113,000
Deduct: Ending raw materials inventory .......
7,000
Raw materials used in production ..................
Direct labor ........................................................
Manufacturing overhead ....................................
Total manufacturing costs .................................
Add: Beginning work in process inventory .......
Deduct: Ending work in process inventory .......
Cost of goods manufactured ..............................
$106,000
122,000
340,000
568,000
27,000
595,000
35,000
$560,000
Page | 3
DANNY S. LITT
Class Problem
During the month of August, direct labor cost totaled $13,000 and direct labor cost was 20% of
prime cost. If total manufacturing costs during August were $88,000, the manufacturing
overhead was:
Requirements
Manufacturing overhead for August was:
Solution:
0.20 x Prime cost = Direct labor
0.20 x Prime cost = $13,000
Prime cost = $65,000
Prime cost = Direct materials + Direct labor
$65,000 = Direct materials + $13,000
Direct materials = $52,000
Page | 4
DANNY S. LITT
Class Problem
At the beginning of the year, manufacturing overhead for the year was estimated to be $702,450.
At the end of the year, actual direct labor-hours for the year were 33,100 hours, the actual
manufacturing overhead for the year was $697,450, and manufacturing overhead for the year
was overapplied by $40,680.
Requirements
If the predetermined overhead rate is based on direct labor-hours, then the estimated direct laborhours at the beginning of the year used in the predetermined overhead rate must have been:
Solution:
Applied manufacturing overhead - Actual manufacturing overhead= Overapplied manufacturing
overhead
Applied manufacturing overhead - $697,450 = $40,680
Applied manufacturing overhead = $738,130
Applied manufacturing overhead= Predetermined overhead rate x Actual direct labor-hours
$738,130 = Predetermined overhead rate x 33,100
Predetermined overhead rate = $22.30 per direct labor-hour
Predetermined overhead rate= Estimated manufacturing overhead
hours
$22.30 = $702,450
Estimated direct labor-
Estimated direct labor-hours
Estimated direct labor-hours = 31,500 direct labor-hours
Page | 5
DANNY S. LITT
Class Problem
Bakers Delight has been in the food-processing business 3 years. For its first 2 years (2008 and
2009), its sole product was raisin cake. All cakes were manufactured and packaged in 1-pound
units. The company used a normal costing system. The two direct-cost categories were direct
materials and direct manufacturing labor. The sole indirect manufacturing cost category
manufacturing overhead was allocated to products using a unit of production allocation base.
In its third year, (2010), the company added a second product layered carrot cake that was
packaged in 1-pound units. This product differs from raisin cake in several ways:
More expensive ingredients are used

More direct manufacturing labor time is required
More complex manufacturing is required
In 2010, the company continued to use its existing costing system where a unit of production of
either cake was weighted the same. Direct materials costs in 2010 were $0.60 per pound of raisin
cake and $0.90 per pound of layered carrot cake. Direct manufacturing labor cost in 2010 was
$0.14 per pound of raisin cake and $0.20 per pound of layered carrot cake.
During 2010, the companys sales people reported greater than expected sales of layered carrot
cake and less than expected sales of raisin cake. The budgeted and actual sales volume for 2010
was as follows:
Raisin cake
Layered carrot cake
Budgeted
Actual
160,000 pounds
40,000 pounds
120,000 pounds
80,000 pounds
The budgeted manufacturing overhead for 2010 was $210,800.

Requirements
Compute the 2010 unit product cost of raisin cake and layered carrot cake with the normal
costing system used in the 2008 to 2009 period. Determine the selling price based on the full
manufacturing cost plus a 20% markup.
Page | 6
DANNY S. LITT
Solution
Job Costing
Plantwide Overhead Rate Calculation
Estimated Overhead Cost
Raisin Cake
Layered Carrot Cake
$ 210,800
Budgeted
Pounds
160,000
40,000
200,000
Actual
Pounds
120,000
80,000
200,000
Overhead Rate per Direct Labor Hour

Cost of Products per Pound:
Direct Materials
Direct Labor
Overhead
Total Production Costs
Markup
Selling Price
$
Raisin
0.60
0.14
1.05
1.79
0.36
2.15
Layered
0.90
0.20
1.05
2.15
0.43
2.58
1.05 per pound
20%
Page | 7
DANNY S. LITT
Class Problem
DSL Company manufactures a product that is available in both a deluxe model and a regular
model. The company has manufactured the regular model for years. The deluxe model was
introduced several years ago to tap a new segment of the market. Since introduction of the
deluxe model, the companys profits have steadily declined, and management has become
concerned about the accuracy of its costing system. Sales of the deluxe model have been
increasing rapidly.
Overhead is assigned to the products on the basis of direct labor-hours. For the current year, the
company has estimated that it will incur $6,000,000 in overhead cost and produce 15,000 units of
the deluxe model and 120,000 units of the regular model. The direct labor rate is $10 per hour.
The deluxe model requires 1.6 hours of direct labor time per unit, and the regular model requires
0.8 hour. Materials and labor costs per unit are as follows:
Direct materials
Direct labor
Deluxe
$154
$16
Regular
$112
$8
Requirements
Using direct labor-hours as the base for assigning overhead cost to products, compute the
predetermined overhead rate. Using this rate and other data from the problem, determine the unit
product cost of each model. Determine the selling price based on the full manufacturing cost plus
a 20% markup.
Page | 8
DANNY S. LITT
Solution
Job Costing
Plantwide Overhead Rate
Deluxe
Regular
$ 6,000,000
Units
15,000
120,000
DLH/Unit
1.6
0.8

Cost of Products:
Direct Materials
Direct Labor
Overhead
Markup
Selling Price
DL Hours
24,000
96,000
120,000
$
Deluxe
154.00
16.00
80.00
250.00
50.00
300.00
Regular
112.00
8.00
40.00
160.00
32.00
192.00
50.00 per DLH
20%
Page | 9
DANNY S. LITT
Class Problem
KML Company uses the weighted-average method in its process costing system. The following
data concerning the operations of the companys first processing department for a recent month.
Work in process, beginning:
Units in process
Stage of completion with respect to materials
Stage of completion with respect to conversion
Costs in the beginning inventory:
Material costs
Conversion costs
800
50%
20%
$2,440
$4,928
Units started into production during the month

Units completed and transferred out
15,000
15,600
Costs added to production during this month:

Materials cost
Conversion cost
$96,470
476,362
Work in process, ending:

Units in process
Stage of completion with respect to materials
Stage of completion with respect to conversion
200
50%
90%
Requirements
a. Determine the equivalent units of production for materials and conversion costs.
b. Determine the cost per equivalent unit for materials and conversion costs.
c. Determine the cost of units transferred out of the department during the month.
d. Determine the cost of ending work in process inventory in the department.
e. Redo this problem using the FIFO method.
Page | 10
DANNY S. LITT
Solution Weighted Average Method

Production Report - Weighted Average Method
Equivalent Units
Units to be accounted for:
Work in process, beginning
Started into production
Total units
800
15,000
15,800

Work in process, ending
Total units
15,600
200
15,800
Equivalent Units
Materials Conversion
Units accounted for as follows:

Transferred to the next dept.
Total Equivalent Units (EU's)
Cost per Equivalent Unit

Cost to be accounted for:
Cost added during month
Total Cost
15,600
200
15,800
Total Cost
7,368
572,832
580,200
Equivalent units of production

Costs per Equivalent Unit
36.80
Cost Reconciliation
Total Cost
15,600
100
15,700
15,600
180
15,780
2,440
96,470
98,910
4,928
476,362
481,290
15,700
15,780
6.30
30.50
Equivalent Units
Material Conversion
Cost accounted for as follows:

Materials, at cost per EU
Conversion, at cost per EU
Total work in process, ending
Total cost
574,080
15,600
$
$
$
$
630
5,490
6,120
580,200
100
15,600
180
Page | 11
DANNY S. LITT
Solution FIFO Method

Production Report - FIFO Method
Equivalent Units
Total units
800
15,000
15,800

Total units
15,600
200
15,800
Equivalent Units

From the beginning inventory
Started and completed

Total Cost
800
14,800
200
15,800
400
14,800
100
15,300
640
14,800
180
15,620
Total Cost
Materials
Conversion
7,368
572,832
580,200
96,470
96,470
476,362
476,362
15,300
15,620
6.31
30.50

36.80
Cost Reconciliation
Total Cost
Transferred out:
Cost in the beginning inventory
Cost to complete these units:
Materials
Conversion
Total Cost
Units started and completed
Total cost transferred
Total cost
Equivalent Units
Material Conversion
7,368
$
$
$
$
2,522
19,518
29,408
544,672
574,080
631
5,489
6,120
580,200
400
640
14,800
14,800
100
180
Page | 12
DANNY S. LITT
Class Problem
Arrow Space Corporation manufactures military equipment. Its Santa Fe plant manufactures the
Interceptor missile under contract to the U.S. government and other countries. All Interceptors go
through an identical manufacturing process. Every effort is made to ensure that all Interceptors
are identical and meet many demanding performance specifications. The product-costing system
at the Santa Fe plant has a single direct-cost category (direct materials) and a single indirect-cost
category (conversion costs). Each Interceptor passes through two departments the Assembly
Department and the Testing Department. Direct materials are added at the beginning of the
process in Assembly. Conversion costs are added evenly throughout the two departments. When
the Assembly Department finishes work on each Interceptor, it is immediately transferred to
Testing.
Arrow Space uses the weighted-average method of process costing. Data for the Assembly
Department for August 2007 are:
Physical Units Direct
(Missiles)
Materials
Work in process, August 1* 2007
20
$460,000
Started during August 2007
80
Completed during August 2007
90
Work in process, August 31** 2007 10
Costs added during August 2007
$2,000,000
Conversion
Costs
$120,000
$935,000
*Degree of completion: direct materials, ?%; conversion costs, 60%

**Degree of completion: direct materials, ?%; conversion costs, 70%
Requirements
a) For each cost element, compute equivalents units of work done in August 2007 in the
Assembly Department. Show physical units in the first column.
b) For each cost element, calculate cost per equivalent unit of beginning work in process and of
work done in August 2007.
c) Summarize the total Assembly Department costs for August 2007, and assign these costs to
units completed (and transferred out) and to units in ending work in process using the
weighted-average method.
d) Rework the above sections based on the FIFO method of process costing.
e) Explain any difference between the cost of work completed and transferred out and cost of
ending work in process in the Assembly Department under the weighted-average method and
the FIFO method.
Page | 13
DANNY S. LITT
Solution Weighted Average Method

Equivalent Units
Total units
20
80
100

Total units
90
10
100
Equivalent Units


Total Cost
90
10
100
90
7
97
Total Cost
580,000
2,935,000
$ 3,515,000
460,000
2,000,000
2,460,000
120,000
935,000
1,055,000
100
97
24,600.00
10,876.29

90
10
100
35,476.29
Cost Reconciliation
Total Cost
Equivalent Units
Material Conversion

Total cost
$ 3,192,866
90
$ 246,000
$
76,134
$ 322,134
$ 3,515,000
10
90
Page | 14
DANNY S. LITT
Solution FIFO
Equivalent Units
Total units
20
80
100

Total units
90
10
100
Equivalent Units


Total Cost
20
70
10
100
70
10
80
8
70
7
85
Total Cost
Materials
Conversion
580,000
2,935,000
$ 3,515,000
2,000,000
2,000,000
935,000
935,000
80
85
25,000.00
11,000.00

36,000.00
Cost Reconciliation
Total Cost
Transferred out:
Materials
Conversion
Total Cost
Total cost transferred
Total cost
Equivalent Units
Material Conversion
580,000
88,000
668,000
$ 2,520,000
3,188,000
$ 250,000
$
77,000
$ 327,000
$ 3,515,000
8
70
70
10
7
Page | 15
DANNY S. LITT
Class Problem
Lahania Corporation uses a FIFO process costing system to collect costs related to production.
The following selected information relates to production for April:
Equivalent units:
Units in process, April 1
Units started and completed during April
Units in process, April 31
Total equivalent units
0
2,500
32,000
32,000
8,000
1,500
40,000
36,000
Costs in work in process on April 1

Costs added to production during April
Total cost
$ 50,400
$126,000
169,600
529,200
$220,000
$655,200
All materials at Lahania are added at the beginning of the production process. Conversion costs
are incurred uniformly over the production process. During April, Lahania completed 44,000
units.
Requirements
What total amount of cost should be assigned to the units completed and transferred out?
Solution
Equivalent Units of Production
To complete beginning work in process .....................................
Materials
0
Conversion
2,500
Units started and completed during the period ...........................
32,000
32,000
Ending work in process ..............................................................

Equivalent units of production....................................................
8,000
40,000
1,500
36,000

Cost added during the period (a).................................................
Equivalent units of production (b) ..............................................
Cost per equivalent unit (a) (b) ................................................
Materials
$169,600
40,000
$4.24
Conversion
$529,200
36,000
$14.70
$50,400
$126,000
0
$4.24
$0
2,500
$14.70
$36,750
32,000
$4.24
$135,680
$186,080
32,000
$14.70
$470,400
$633,150
Units transferred out:

Cost in beginning inventory........................................................
Cost to complete the units in beginning inventory:
Equivalent units of production required to complete the
beginning inventory ................................................................
Cost per equivalent unit ..............................................................
Cost to complete the units in beginning inventory .....................
Cost of units started and completed this period:
Units started and completed this period ......................................
Cost per equivalent unit ..............................................................
Cost of units started and completed this period ..........................
Cost of units transferred out........................................................
Total cost of units transferred out = $186,080 + $633,150 =$819,230

Page | 16
DANNY S. LITT
Class Problem
DSL Corporation manufactures a plastic gasket that is used in automobile engines. The gaskets go
through three processing departments: mixing, forming and stamping. The companys accountant (who is
very inexperienced) has prepared a summary of production and costs for the forming department as
follows for July:
DSL Corporation
SUMMARY OF PRODUCTION AND COSTS
FORMING DEPARTMENT
For the Month of July
Forming department costs:
Work in process inventory, July 1, 8,000 units; all materials added; 7/8 complete as
to conversion costs
Costs transferred in from the mixing department
Material added during July (added when processing is 50% complete in the forming
department)
Conversion costs added during July
Total departmental costs
Forming department costs assigned to:
Units completed and transferred to the stamping department, 100,000 units at $2.284
each
Work in process inventory, July 31, 5,000 units, 2/5 complete as to conversion costs
Total departmental costs assigned
$ 22,420*
81,480
27,600
96,900
$228,400
$228,400
0
$228,400
*Consists of cost transferred in, $8,820; materials cost, $3,400; and conversion costs, $10,200
After mulling over the data above, DSLs president commented, I cant understand whats happening
here. Despite a concentrated effort at cost reduction, our unit cost actually went up in the forming
department last month. With that kind of performance, year-end bonuses are out of the question for the
people in that department.
The company uses the weighted-average method to account for units and costs.
Requirements:
a) Prepare a revised production report for the forming department for July using the weighted-average
method. Redo using the FIFO method and compare the results.
b) Explain to the president why the unit cost figure appearing on the report prepared by the accountant is
so high.
Page | 17
DANNY S. LITT
Equivalent Units
Total units
8,000
97,000
105,000

Plus: Work in process, ending
Total units
100,000
5,000
105,000
Equivalent Units
Transferred In Materials Conversion


Total Cost
Cost Reconciliation
100,000
5,000
105,000
100,000
5,000
105,000
100,000
100,000
100,000
2,000
102,000
Total Cost Transferred In Materials Conversion

22,420
205,980
$ 228,400
2.22
8,820
81,480
90,300
3,400
27,600
31,000
10,200
96,900
107,100
105,000
0.86
100,000
0.31
102,000
1.05
Equivalent Units
Total Cost Transferred In Material Conversion

Total cost transferred out
$ 222,000
105,000

Transferred in cost
Total cost accounted for
$ 4,300
$
$ 2,100
$ 6,400
$ 228,400
5,000
100,000
100,000
2,000
The unit cost figure on the report prepared by the accountant is high because none of the cost
incurred during the month was assigned to the units in the ending work in process inventory.
Page | 18
DANNY S. LITT
Equivalent Units
Total units
8,000
97,000
105,000

Plus: Work in process, ending
Total units
100,000
5,000
105,000
Equivalent Units
Transferred In Materials Conversion


Total Cost
8,000
92,000
5,000
105,000
Cost Reconciliation
Transferred out:
Materials
Conversion
Total Cost
Total cost transferred out
Transferred in cost
Total cost
92,000
92,000
1,000
92,000
2,000
95,000

205,980
205,980

92,000
5,000
97,000
2.16
81,480
81,480
27,600
27,600
96,900
96,900
97,000
92,000
95,000
0.84
0.30
1.02
Equivalent Units
1,020
1,020
$ 198,720
$ 199,740
$ 4,200
$
$ 2,040
$ 6,240
$ 205,980
5,000
1,000
92,000
92,000
2,000
The effects of the cost-cutting will tend to show up more under the FIFO method. The reason is
that the FIFO method keeps the costs of the current period separate from the costs of the prior
period. Thus, under the FIFO method, the company will be able to compare unit costs of the
current period to those of the prior period to see how effective the cost-cutting program has been.
Under the weighted-average method, however, costs carried over from the prior period are
averaged in with costs of the current period, which will tend to mask somewhat the effects of the
cost-cutting effort.
Page | 19
DANNY S. LITT
Class Problem
Departmental costs
Services provided by:
Plant Maintenance
Information Services
Plant
Maintenance
$600,000
Information
Services
$116,000
1,600 hours
200 hours
Machining
$400,000
Assembly
$200,000
Total
$1,316,000
2,400 hours
1,600 hours
4,000 hours
200 hours
8,000 hours
2,000 hours
Calculate the plant maintenance and information services cost to the operating departments by
the direct method, step method and reciprocal method. Assuming 4,000 hours of machining
and 3,000 hours of assembly, calculate the overhead rates for these operating departments.
Direct Method
Support Departments
Information
Maintenance
Services
Overhead Budget
before allocations
600,000
116,000
Operating Departments
Machining
Assembly
Total Budget
400,000
200,000
1,316,000
2,400
38%
225,000
4,000
63%
375,000
6,400
100%
1,600
89%
103,111
200
11%
12,889
1,800
100%
Services Provided by
Maintenance
Labor Hours
Percentage
Allocation
(600,000)
Computer Time in hours
Percentage
Allocation
Total Allocation
Activity Driver
Overhead Rate
(116,000)
-
728,111
587,889
4,000
182.03
3,000
195.96
1,316,000
Page | 20
DANNY S. LITT
Step Method
If Maintenance is the major service department:
Support Departments
Information
Maintenance
Services
Overhead Budget
before allocations
Machining
Assembly
Total Budget
1,316,000
600,000
116,000
400,000
200,000
(600,000)
1,600
20%
120,000
2,400
30%
180,000
4,000
50%
300,000
8,000
100%
-
200
11%
26,222
1,800
100%
(236,000)
1,600
89%
209,778
Maintenance
Labor Hours
Percentage
Allocation
Percentage
Allocation
Total Allocation
Activity Driver (DLHs)

Overhead Rate
789,778
526,222
4,000
197.44
3,000
175.41
1,316,000
If Information Services is the major service department:

Support Departments
Information
Maintenance
Services
Overhead Budget
before allocations
600,000
116,000
Machining
Assembly
Total Budget
400,000
200,000
1,316,000
2,400
38%
229,350
4,000
63%
382,250
6,400
100%
-
1,600
80%
92,800
200
10%
11,600
2,000
100%
-
Maintenance
Labor Hours
Percentage
Allocation
Percentage
Allocation
Total Allocation
Activity Driver
Overhead Rate
(611,600)
200
10%
11,600
-
(116,000)
-
722,150
593,850
4,000
180.54
3,000
197.95
1,316,000
Page | 21
DANNY S. LITT
Reciprocal Method
Step 1: express support department costs and support department reciprocal relationships in
linear form.
Plant Maintenance cost = PM = $600,000 + 0.1 IS (equation1)
Information Services cost = IS = 116,000 + 0.2 PM (equation 2)
Step 2: solve the system of simultaneous equations to find the cost of each support
department.
Put equation 1 into equation 2:
PM = 600,000 + 0.1 (116,000 + 0.2PM)
PM = 600,000 + 11,600 + 0.02PM
0.98PM = 611,600
PM = 624,082
IS = 240,816
Step 3: allocate the complete allocated service department costs to all other departments.
Support Departments
Information
Maintenance
Services
Overhead Budget
before allocations
Machining
Assembly
Total Budget
1,316,000
600,000
116,000
400,000
200,000
(624,082)
1,600
20%
124,816
2,400
30%
187,224
4,000
50%
312,041
8,000
100%
-
200
10%
24,082
2,000
100%
(240,816)
1,600
80%
192,653
Maintenance
Labor Hours
Percentage
Allocation
Percentage
Allocation
Total Allocation
Activity Driver
Overhead Rate
200
10%
24,082
0
779,878
536,122
4,000
194.97
3,000
178.71
1,316,000
Page | 22
DANNY S. LITT
Using Matrix Algebra we can solve n equations with n unknowns:
1.0000 (0.1000)
0
0
600,000
(0.2000)
1.0000
0
0
116,000
x
=
400,000
(0.3000) (0.8000) 1.0000
0
200,000
(0.5000) (0.1000)
0
1.0000
1.020408163 0.102040816
0
0
0.204081633 1.020408163
0
0
=
x
0.469387755 0.846938776 1.0000
0
0.530612245 0.153061224
0
1.0000
600,000
116,000
400,000
200,000
0
0
779,877.55
536,122.45
Summary of Overhead Rates

No Allocation
Direct Method
Step Method - Maintenance
Step Method - Info Services
Reciprocal Method
Machining
100.00
182.03
197.44
180.54
194.97
Assembly
66.67
195.96
175.41
197.95
178.71
Page | 23
DANNY S. LITT
Class Problem
LittAir flies a medium-sized passenger jet on a route between Washington, D.C., and Cape Cod.
The manager of the airline would like to estimate the relationship between the plane's payload
(i.e., total weight of passengers and cargo) and total fuel costs. On five recent flights, the payload
varied between 22 tons and 35 tons.
Flight 1
Flight 2
Flight 3
Flight 4
Flight 5
Payload
(tons)
35
26
33
28
22
Fuel
Cost
$780
$720
$765
$735
$700
Requirement
Using the least-squares regression method, estimate the variable cost per ton and the fixed cost
per flight in the form of y=a+bx. (Round off the variable cost per ton to the nearest cent and the
fixed cost per flight to the nearest dollar.)
Y X X XY
a
n X X
2
n XY X Y
n X 2 X
The cost formula is about $562 per flight plus $6.18 per ton.
Flight
Flight
Flight
Flight
Flight
Flight
1
2
3
4
5
Payload (tons) Fuel cost

x
y
35.00
780.00
26.00
720.00
33.00
765.00
28.00
735.00
22.00
700.00
144.00
3,700.00
a=
b=
r2=
xy
27,300.00
18,720.00
25,245.00
20,580.00
15,400.00
107,245.00
x2
1,225.000
676.000
1,089.000
784.000
484.000
4,258.000
y2
608,400.00
518,400.00
585,225.00
540,225.00
490,000.00
2,742,250.00
561.95
6.18
0.999983848
Page | 24
DANNY S. LITT
Class Problem
The management of Hamano Corporation would like for you to analyze their overhead costs as a function
of direct labor hours, which are listed below:
Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
DLHs
OH Cost
x
y
840
25,200
830
24,800
740
20,800
1,130
27,500
770
23,300
910
26,900
950
24,800
1,170
26,100
1,160
29,100
1,030
27,300
1,200
27,600
780
21,100
750
21,700
1,290
30,200
1,060
27,300
Management believes that overhead cost is a mixed cost that depends on the number of direct labor hours.
Using the least-squares regression method, estimate the variable overhead cost per direct labor hour and
the fixed cost in the form of y=a+bx. (Round off the variable cost per direct labor hour to the nearest cent
and the fixed cost per month to the nearest dollar.)
Y X X XY
a
n X X
2
n XY X Y
n X 2 X
Requirement
Use linear regression to estimate the formula for overhead cost
The solution using Microsoft Excel functions is:

slope = $13.64 per direct labor hour
intercept = $12,290.13 per month
Page | 25
DANNY S. LITT
Solution
Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
DLHs
OH Cost
x
y
840
25,200
830
24,800
740
20,800
1,130
27,500
770
23,300
910
26,900
950
24,800
1,170
26,100
1,160
29,100
1,030
27,300
1,200
27,600
780
21,100
750
21,700
1,290
30,200
1,060
27,300
14,610 383,700
Number of observations=
12,290.13
13.64463
r2=
r=
12,290.13
x2
705,600
688,900
547,600
1,276,900
592,900
828,100
902,500
1,368,900
1,345,600
1,060,900
1,440,000
608,400
562,500
1,664,100
1,123,600
14,716,500
y2
635,040,000
615,040,000
432,640,000
756,250,000
542,890,000
723,610,000
615,040,000
681,210,000
846,810,000
745,290,000
761,760,000
445,210,000
470,890,000
912,040,000
745,290,000
9,929,010,000
15
a=
b=
y=
xy
21,168,000
20,584,000
15,392,000
31,075,000
17,941,000
24,479,000
23,560,000
30,537,000
33,756,000
28,119,000
33,120,000
16,458,000
16,275,000
38,958,000
28,938,000
380,360,000
0.967809464
0.983773075
+
Functions
12290.13488
13.64462538
0.891367303
13.6446 x
The solution using Microsoft Excel functions is:

slope = $13.64 per direct labor hour
intercept = $12,290.13 per month
Page | 26
DANNY S. LITT
Lockheed TriStar
Lockheed has been known for their extensive line of
military products. In 1966, Lockheed started working
on what would become their first commercial jetliner:
the L-1011 TriStar. The TriStar was considered the
worlds most technologically-advanced airliner at the
time of the introduction. In 1966, more than four years
before the venerable Boeing 747 inaugurated service,
many airlines were already showing interest in a
smaller, medium-range wide body jetliner. While
Lockheed came to settle with the L-1011, McDonnell Douglas was also finalizing their designs
on what would become the DC-10. The third competitor for a wide-bodied commercial jet
aircraft with a capacity of up to 400 passengers was the A-300B airbus.
By the beginning of 1968, both Lockheed and McDonnell Douglas had their designs refined, in
anticipation of large orders from major U.S. airlines. In an effort to attract orders, Lockheed
agreed to sell under favorable terms if Eastern Airlines and Trans World Airlines (TWA)
selected the L-1011. Finally, on the evening of March 28, TWA came to an agreement with
Lockheed, and it was only few hours later when Eastern followed suit. On the morning of March
29, letters of intent for a total of 144 commitments valued at $2.16 billion were signed and the L1011 program officially came to a launch. Within a month of the launch date, the L-1011 had
attracted a total of 176 commitments (firm orders plus options-to-buy) worth $2.74 billion.
Lockheeds financial staff has gathered together the following
estimates:
The cost of developing the TriStar is forecast at $900 million
and this investment can be depreciated in six equal annual
amounts.
Production of the plane is expected to take place at a steady
annual rate over the following six years.
The average price of the TriStar is expected to be $15.5
million.
Fixed costs are forecast at $175 million a year.
Variable costs are forecast at $8.5 million a plane.
QBE = (FC + Depr) / (P-VC) = (175+150)/(15.5-8.5) = 46.4 planes per year or 279 for the 6
years.
The actual number turned out to be more than 400 planes.
$64 (Jan 1967) drops to $11 (Jan 1971).
($64 - $11) (11.3 Million shares) = -$599M.
Page | 27
DANNY S. LITT
Class Problem
In 1988, Pittsburghs city government and corporate leaders together
bought the Pirates, the citys baseball team, to keep major league
baseball in Pittsburgh. Operating in a small metropolitan area with a
population of about two million, the Pirates faced financial problems in
the 1980s and 1990s. The 1988 buyout contract provides for the
ownership to revert to the city if the team amasses operating losses of
$10 million or more in any consecutive three-year period. The city is expected to sell the team in
this case.
In 1988, the Pirates had a breakeven point of 1.4 million tickets. With a steep increase in the
teams payroll, the Pirates had to sell more than two million tickets in 1990 to break even. How
were the breakeven points estimated?
The teams payroll in 1988 was $6.2 million. Administrative and other fixed operating costs
amounted to $4.1 million. Revenues from television and radio broadcast rights and from
concessions were $1.9 million. The contribution margin was $6 per ticket. The Pirates break
even if the total revenues from ticket sales and broadcast rights equal the total payroll and
administrative costs:
Breakeven Point = (Payroll Costs + Administrative Costs Broadcast Revenues) / Contribution
margin per ticket
= ($6.2 million + $4.1 million - $1.9 million) / $6 per ticket
= 1.4 million tickets
Requirements
Determine how the breakeven point would change if the Pirates add high-priced talented players
to strengthen their roster and increase their payroll by 58% to $9.8 million? (Answer: The
breakeven point increases to two million tickets)
Breakeven Point = (Payroll Costs + Administrative Costs Broadcast Revenues) / Contribution
margin per ticket
= ($9.8 million + $4.1 million - $1.9 million) / $6 per ticket
Determine how many tickets the Pirates (with the $9.8 million payroll) must sell to keep their
annual operating losses under $3.333 million? (Answer: 1.445 million tickets)
Breakeven Point = (Payroll Costs + Administrative Costs Broadcast Revenues + Profit goal) /
Contribution margin per ticket
= ($9.8 million + $4.1 million - $1.9 million - $3.333 million) / $6 per ticket
Page | 28
DANNY S. LITT
Class Problem
This article is from Business Week, June 30, 2003.
Requirement
Calculate the breakeven and determine the number of incremental books needed to be sold in
order to achieve breakeven. Does this correspond to the incremental breakeven quantity in the
article?
TR=TC
$14Q + 3,000,000 = $2Q + 11,050,000
12Q = 8,050,000
Q = 670,833.33
Sell 70,834 more books to break even
or
TR=TC
$14Q + 3,000,000 = 13,050,000
14Q = 10,050,000
Q = 717,857.14
Sell 117,858 more books to break even
Page | 29
DANNY S. LITT
Class Problem
Karen Marie picked up the phone and called her boss. Matthew Ryan, the vice president of
marketing Piedmont Fasteners Corporation: Matt, Im not sure how to go about answering the
questions that came up at the meeting with the president yesterday.
Whats the problem?
Im sure you can handle it, Karen. And, by the way, I need your analysis on my desk tomorrow
morning at 8:00am sharp in time for the follow-up meeting at 9:00am.
Piedmont Fasteners Corporation makes three different clothing fasteners in its manufacturing
facility in North Carolina. Data concerning these products appear below:
Velcro Metal
Nylon
Normal annual sales volume 100,000 200,000 400,000
Unit selling price
$1.65
$1.50
$0.85
Variable cost per unit
$1.25
$0.70
$0.25
Total fixed expenses are $400,000 per year.
All three products are sold in highly competitive markets, so the company is unable to raise its
prices without losing unacceptable numbers of customers. The company has an extremely
effective just-in-time manufacturing system, so there is no beginning or ending work in process
or finished goods inventories.
Requirements:
1. What is the companys over-all breakeven in total sales dollars?
2. Of the total fixed costs of $400,000, $20,000 could be avoided if the Velcro product were
dropped, $80,000 if the Metal product were dropped, and $60,000 if the nylon product were
dropped. The remaining fixed costs of $240,000 consist of common fixed costs such as
administrative salaries and rent on the factory building that could be avoided only by going
out of business entirely.
a) What is the breakeven quantity of each product?
b) If the company sells exactly the breakeven quantity of each product, what will be the
overall profit of the company?
Page | 30
DANNY S. LITT
Solution
1. The overall break-even sales can be determined using the CM ratio.
Sales ................................
Variable expenses ...........
Contribution margin ........
Fixed expenses ................
Net income ......................
CM ratio =
Velcro
$165,000
125,000
$ 40,000
Metal
$300,000
140,000
$160,000
Nylon
$340,000
100,000
$240,000
Total
$805,000
365,000
440,000
400,000
$ 40,000
Contribution margin $440,000
0.5466
Sales
$805,000
Break - even point in = Fixed expenses $400,000 $732,000 (rounded)

total sales dollars
CM ratio
0.5466
2. The issue is what to do with the common fixed cost when computing the break-evens for the
individual products. The correct approach is to ignore the common fixed costs. If the common
fixed costs are included in the computations, the break-even points will be overstated for
individual products and managers may drop products that in fact are profitable.
a.The break-even points for each product can be computed using the contribution margin
approach as follows:
Velcro
Metal
Nylon
Unit selling price ..............................................
$1.65
$1.50
$0.85
Variable cost per unit .......................................
1.25
0.70
0.25
Unit contribution margin (a) ............................
$0.40
$0.80
$0.60
Product fixed expenses (b) ...............................
$20,000
$80,000
$60,000
Break-even point in units sold (b)(a) .............
50,000
100,000
100,000
b.If the company were to sell exactly the break-even quantities computed above, the company
would lose $240,000the amount of the common fixed cost. This can be verified as follows:
Velcro
Metal
Nylon
Total
Unit sales................................
50,000
100,000
100,000
Sales ......................................
$82,500
$150,000
$85,000
$ 317,500
Variable expenses ..................
62,500
70,000
25,000
157,500
Contribution margin ...............
$20,000
$ 80,000
$60,000
160,000
Fixed expenses .......................
400,000
Net income ............................
$(240,000)
At this point, many students conclude that something is wrong with their answer to part (a) since
a result in which the company loses money operating at the break-evens for the individual
products does not seem to make sense. They also worry that managers may be lulled into a false
sense of security if they are given the break-evens computed in part (a). Total sales at the
individual product break-evens is only $317,500 whereas the total sales at the overall break-even
computed in part (1) is $732,000.
Page | 31
DANNY S. LITT
Many students (and managers, for that matter) attempt to resolve this apparent paradox by
allocating the common fixed costs among the products prior to computing the break-evens for
individual products. Any of a number of allocation bases could be used for this purposesales,
variable expenses, product-specific fixed expenses, contribution margins, etc. (We usually take a
tally of how many students allocated the common fixed costs using each possible allocation base
before proceeding.) For example, the common fixed costs are allocated below based on sales.
Allocation of common fixed expenses on the basis of sales revenue:
Sales ...............................................
Percentage of total sales .................
Allocated common
fixed expense* .............................
Product fixed expenses ...................
Allocated common and
product fixed expenses (a) ............
Unit contribution margin (b) ...........
Break-even point in
units sold (a)(b) .........................
Velcro
$165,000
20.5%
Metal
$300,000
37.3%
Nylon
$340,000
42.2%
Total
$805,000
100.0%
$49,193
20,000
$ 89,441
80,000
$101,366
60,000
$240,000
160,000
$69,193
$0.40
$169,441
$0.80
$161,366
$0.60
$400,000
172,981
211,801
268,944
*Total common fixed expense percentage of total sales

If the company sells 172,981 units of the Velcro product, 211,801 units of the Metal product, and
268,944 units of the Nylon product, the company will indeed break even overall. However, the
apparent break-evens for two of the products are below their normal annual sales.
Normal annual sales volume ............................

Break-even annual sales ...............................
Strategic decision ..........................................
Velcro
100,000
172,981
drop
Metal
200,000
211,801
drop
Nylon
400,000
268,944
retain
It would be natural for managers to interpret a break-even for a product as the level of sales
below which the company would be financially better off dropping the product. Therefore, we
should not be surprised if managers, based on the above erroneous break-even calculation, would
decide to drop the Velcro and Metal products and concentrate on the companys core
competency, which appears to be the nylon product.
Page | 32
DANNY S. LITT
However, if they were to do that, the company would face a loss of $60,000 computed as
follows:
Sales ................................
Variable expenses ...........
Contribution margin ........
Fixed expenses* ..............
Net income ......................
Velcro
dropped
Metal
dropped
Nylon
$340,000
100,000
$240,000
Total
$340,000
100,000
240,000
300,000
$ (60,000)
*By dropping the two products, the company reduces its fixed expenses by only $100,000
(=$20,000 + $80,000). Therefore, the total fixed expenses are $300,000 rather than $400,000.
By dropping the two products, the company would go from making a profit of $40,000 to
suffering a loss of $60,000. The reason is that the two dropped products were contributing
$100,000 toward covering common fixed expenses and toward profits. This can be verified by
looking at a segmented income statement like the one that will be introduced in a later chapter.
Sales
Variable expenses
Contribution margin
Product fixed expenses
Product segment margin
Common fixed expenses .......
Net income ............................
Velcro
$165,000
125,000
40,000
20,000
$ 20,000
Metal
$300,000
140,000
160,000
80,000
$ 80,000
Nylon
$340,000
100,000
240,000
60,000
$180,000
Total
$805,000
365,000
440,000
160,000
280,000
240,000
$ 40,000
$100,000
Page | 33
DANNY S. LITT
Class Problem
Data concerning Borden Company's operations last year appear below:
Units in beginning inventory .........................................................................
Units produced ..............................................................................................
Units sold .......................................................................................................
-012,000
11,250
Selling price per unit .....................................................................................
$90
Variable costs per unit:

Direct materials .............................................................................................
Direct labor ....................................................................................................
Variable manufacturing overhead .................................................................
Variable selling and administrative ...............................................................
$20
10
8
5
Fixed costs in total:

Fixed manufacturing overhead ......................................................................
Fixed selling and administrative....................................................................
$180,000
150,000
Requirements
a. Compute the unit product cost under both absorption and variable costing.
b. Prepare an income statement for the year using absorption costing.
c. Prepare an income statement for the year using variable costing.
d. Prepare a report reconciling the difference in net operating income between absorption and
variable costing for the year.
Page | 34
DANNY S. LITT
Solution
a.
Variable
Absorption
costing
costing
Direct materials .............................................................................................
$20
$20
Direct labor ....................................................................................................
10
10
Variable manufacturing overhead .................................................................
8
8
Fixed manufacturing overhead ($180,000 12,000 units) ...........................
15
Unit product cost ...........................................................................................
$38
$53
b. Sales ..............................................................................................................
$1,012,500
Cost of goods sold:
Beginning inventory......................................................................................
$ -0Add cost of goods manufactured @ $5 .........................................................
636,000
Goods available for sale ................................................................................
636,000
Less ending inventory @ $53 .......................................................................
39,750
596,250
Gross margin
416,250
Selling and administrative expenses* ...........................................................
206,250
Net operating income ....................................................................................
$ 210,000
* 11,250 units x $5 per unit variable plus $150,000 fixed.
c. Sales
$1,012,500
Less variable expenses:
Variable cost of goods sold:
Beginning inventory ......................................................................................
$ -0Add variable manufacturing costs @ $38 .....................................................
456,000
Goods available for sale ................................................................................
456,000
Less ending inventory @ $38........................................................................
28,500
Variable cost of goods sold ...........................................................................
427,500
Variable selling & admin. @ $5....................................................................
56,250
483,750
Contribution margin ......................................................................................
528,750
Less fixed expenses:
Fixed manufacturing overhead ......................................................................
180,000
Fixed selling & admin. ..................................................................................
150,000
330,000
Net operating income
$ 198,750
d. Variable costing net operating income..........................................................
$198,750
Add fixed factory overhead deferred in
inventory under absorption costing (750 units
x $15 per unit) ...............................................................................................
11,250
Absorption costing net operating income .....................................................
$210,000
Page | 35
DANNY S. LITT
Class Problem
A. E. Newman Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price
Units
Units
Units
Units
$123
in beginning inventory
produced
sold
in ending inventory
300
7,600
7,400
500
Variable costs per unit:

Direct materials
Direct labor
Variable manufacturing overhead
$46
$26
$1
Variable selling and administrative
$4
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
$235,600
$88,800
The company produces the same number of units every month, although the sales in units vary from
month to month. The company's variable costs per unit and total fixed costs have been constant from
month to month.
Requirements:
Determine the net operating income by variable costing and absorption costing.
Contribution Income Statement
Sales
Less variable expenses:
Variable cost of goods sold:
Beginning inventory
Add variable manufacturing costs
Less ending inventory
Variable cost of goods sold
Contribution margin
Less fixed expenses:
Product Cost
Direct materials
Direct labor
Absorption Income Statement

$910,200
21,900
554,800
576,700
36,500
540,200
29,600
235,600
$88,800
46
26
1
73
569,800
340,400
Sales
Less cost of goods sold:
Beginning inventory
Add cost of goods manufactured
Less ending inventory
Gross margin
Less selling and administrative expenses:
$910,200
31,200
790,400
821,600
52,000
29,600
$88,800
769,600
140,600
118,400
22,200
324,400
16,000
Product Cost
Direct materials
Direct labor
46
26
1
31
104
Page | 36
DANNY S. LITT
Class Problem
Karen Company manufacturers a line of high-end exercise equipment of commercial quality.
The chief accountant has proposed changing from a traditional costing system to an activitybased costing system. The financial vice president is not convinced of making the changes, so
she requests that the next large order for equipment be costed under both systems for purposes of
comparison and analysis. An order from Slim-Way Salons, Inc., for 150 low-impact treadmills is
received and identified as the order to be subjected to dual costing. The following cost data relate
to the Slim-Way order.
Data relevant to both costing systems
Direct materials
Direct labor hours
Direct labor rate per hour
$55,500
820
$18
Data relevant to the traditional costing system

Predetermined overhead rate is 300% of direct labor cost.
Data relevant to the activity-based costing system
Activity Cost Pool
Cost Driver
Overhead Rate
Engineering design
Machine setup
Machining
Assembly
Packaging and Shipping
Building occupancy
$30 per hour

$200 per setup
$25 per hour
$8 per subassembly
$15 per hour
$6 per hour
Engineering hours
Setups
Machine hours
Number of subassemblies
Packaging/shipping hours
Machine hours
Use of
Cost Driver
330
22
732
1,450
152
732
Requirements
Compute the total cost of the order under:
a. Traditional costing system.
b. Activity-based costing system.
Traditional
Direct Material
Direct Labor
Manufacturing Overhead
ABC
Direct Material
Direct Labor
Engineering Design
Machine Setup
Machining
Assembly
Packaging and Shipping
Building occupancy
$55,500
$14,760
$44,280
$114,540
$55,500
$14,760
$9,900
$4,400
$18,300
$11,600
$2,280
$4,392
$121,132
Page | 37
DANNY S. LITT
Class Problem
Bakers Delight has been in the food-processing business 3 years. For its first 2 years (2006 and
2007), its sole product was raisin cake. All cakes were manufactured and packaged in 1-pound
units. The company used a normal costing system. The two direct-cost categories were direct
materials and direct manufacturing labor. The sole indirect manufacturing cost category
manufacturing overhead was allocated to products using a unit of production allocation base.
In its third year, (2008), the company added a second product layered carrot cake that was
packaged in 1-pound units. This product differs from raisin cake in several ways:
More expensive ingredients are used

More direct manufacturing labor time is required
More complex manufacturing is required
In 2008, the company continued to use its existing costing system where a unit of production of
either cake was weighted the same. Direct materials costs in 2008 were $0.60 per pound of raisin
cake and $0.90 per pound of layered carrot cake. Direct manufacturing labor cost in 2008 was
$0.14 per pound of raisin cake and $0.20 per pound of layered carrot cake.
During 2008, the companys sales people reported greater than expected sales of layered carrot
cake and less than expected sales of raisin cake. The budgeted and actual sales volume for 2007
was as follows:
Budgeted
Actual
Raisin cake
160,000 pounds 120,000 pounds
Layered carrot cake
40,000 pounds
80,000 pounds
The budgeted manufacturing overhead for 2008 was $210,800. At the end of 2008, the controller
decided to investigate how use of an activity-based costing system would affect the product cost
numbers. After consultation with operating personnel, the single manufacturing overhead cost
pool was subdivided into five activity areas. These activity areas, their driver, their 2008
budgeted rate, and the driver units used per pound of each cake are as follows:
Activity Center
(and Cost Driver)
Mixing (Labor time)

Cooking (Oven time)
Cooling (Cool room time)
Creaming/icing (Machine
time)
Packaging (Machine time)
Budgeted
Costs
per Driver
Unit
$0.04
$0.14
$0.02
$0.25
$0.08
Driver Units
per Pound
of
Raisin Cake
5
2
3
0
3
Driver Units
per Pound of
Layered Carrot
Cake
8
3
5
3
7
Requirements
1. Compute the 2008 unit product cost of raisin cake and layered carrot cake with the normal
costing system used in the 2006 to 2007 period.
2. Compute the 2008 unit product cost per cake under the activity-based normal costing system.
3. Explain the differences in unit product costs computed in requirements 1 and 2.
4. Describe three uses Bakers Delight might make of the activity-based cost numbers.
Page | 38
DANNY S. LITT
Solution
Job Costing
Raisin Cake
Layered Carrot Cake
$ 210,800
Budgeted
Pounds
160,000
40,000
200,000
Acutal
Pounds
120,000
80,000
200,000

Cost of Products per Pound:
Direct Materials
Direct Labor
Overhead
Markup
Selling Price
$
Raisin
0.60
0.14
1.05
1.79
0.36
2.15
Layered
0.90
0.20
1.05
2.15
0.43
2.58
1.05 per pound
20%
Activity Based Costing (ABC)

Activity Rates:
Mixing
Cooking
Cooling
Creaming/Icing
Packaging
Cost of Jobs:
Overhead
Mixing
Cooking
Cooling
Creaming/Icing
Packaging
Total Overhead Cost Per Pound
Direct Materials
Direct Labor
Overhead Cost per Unit
Total Production Cost/Unit
Markup
Selling Price
Budget Cost
Activity
Per Driver
Drivers
0.04 Labor time
0.14 Oven time
0.02 Cool room time
0.25 Machine time
0.08 Machine time
Activity
Raisin
5
2
3
0.20
0.28
0.06
0.24
0.78
0.60
0.14
0.78
1.52
0.30
1.82
Raisin
5
2
3
0
3
Layered
8
3
5
3
7
Activity
Layered
8
3
5
3
7
0.32
0.42
0.10
0.75
0.56
2.15
0.90
0.20
2.15
3.25
0.65
3.90
Page | 39
DANNY S. LITT
Class Problem
DSL Company manufactures a product that is available in both a deluxe model and a regular
model. The company has manufactured the regular model for years. The deluxe model was
introduced several years ago to tap a new segment of the market. Since introduction of the
deluxe model, the companys profits have steadily declined, and management has become
concerned about the accuracy of its costing system. Sales of the deluxe model have been
increasing rapidly.
Overhead is assigned to the products on the basis of direct labor-hours. For the current year, the
company has estimated that it will incur $6,000,000 in overhead cost and produce 15,000 units of
the deluxe model and 120,000 units of the regular model. The direct labor rate is $10 per hour.
The deluxe model requires 1.6 hours of direct labor time per unit, and the regular model requires
0.8 hour. Materials and labor costs per unit are as follows:
Direct materials
Direct labor
Deluxe
$154
$16
Regular
$112
$8
Requirements
a. Using direct labor-hours as the base for assigning overhead cost to products, compute the
predetermined overhead rate. Using this rate and other data from the problem, determine the
unit product cost of each model. Determine the selling price based on the full manufacturing
cost plus a 20% markup.
b. Assume that the companys overhead costs can be traced to four activity centers. These
activity centers, cost drivers, and estimated cost and activity data for each center are given
below. Determine the overhead rate for each of the four activity centers.
Activity Center
Purchase orders (number of orders)
Scrap/rework orders (number of orders)
Product testing (number of units produced)
Machine related (machine-hours)
Total
Estimated
Total
Overhead Costs Activities Deluxe Regular
$252,000
1,200
400
800
648,000
900
500
400
1,350,000
15,000
6,000
9,000
3,750,000
50,000 20,000
30,000
$6,000,000
c. Using activity-based costing and the data from (b) above, determine the total amount of
overhead cost assignable to each model. Determine the amount of overhead cost per unit for
each model. Determine the unit product cost of each model. Determine the selling price
based on the full manufacturing cost plus a 20% markup.
Page | 40
DANNY S. LITT
Solution
Job Costing
Deluxe
Regular
$ 6,000,000
Units
15,000
120,000
DLH/Unit
1.6
0.8

Cost of Products:
Direct Materials
Direct Labor
Overhead
Markup
Selling Price
DL Hours
24,000
96,000
120,000
$
Deluxe
154.00
16.00
80.00
250.00
50.00
300.00
Regular
112.00
8.00
40.00
160.00
32.00
192.00
Total Cost
of Activity
252,000
648,000
1,350,000
3,750,000
6,000,000
Activity
Drivers
No. of orders
No. of orders
Units produced
machine hours
Activity
Deluxe
50.00
20%
Activity Based Costing (ABC)

Activity Rates:
Purchase orders
Scrap/rework orders
Product testing
Machine related
Cost of Jobs:
Overhead
Purchase orders
Scrap/rework orders
Product testing
Machine related
Total Overhead
Number of units produced
400
500
6,000
20,000
Direct Materials
Direct Labor
Total Production Cost/Unit
Markup
Selling Price
Comparison of selling price:
Job Costing
Activity Based Costing
Difference
Deluxe
300.00
402.72
(102.72)
Deluxe
400
500
6,000
20,000
Regular
800
400
9000
30000
Activity
Regular
84,000.00
360,000.00
540,000.00
1,500,000.00
2,484,000.00
15,000.00
165.60
800
168,000.00
400
288,000.00
9000
810,000.00
30000 2,250,000.00
3,516,000.00
120,000.00
29.30
154.00
16.00
165.60
335.60
67.12
402.72
112.00
8.00
29.30
149.30
29.86
179.16
Overhead
Total Rate/Activity
1,200 $
210.00
900 $
720.00
15,000 $
90.00
50,000 $
75.00
20%
Regular
192.00
179.16
12.84
Page | 41
DANNY S. LITT
Class Problem
The Coletti Cleaning Brigade Company provides housecleaning services to its clients. The
company uses an activity-based costing system for its overhead costs. The company has provided
the following data from its activity-based costing system.
Activity Cost Pool
Cleaning
Job support
Client support
Other
Total
Total Cost Total Activity

$302,993
43,100 hours
79,100
5,000 jobs
3,348
180 clients
150,000 Not applicable
$535,441
The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining
costs. One particular client, the Tubman family, requested 26 jobs during the year that required a
total of 104 hours of housecleaning. For this service, the client was charged $1,420.
Requirements
Using the activity-based costing system, compute the customer

profit for the Tubman family. Round off all calculations to the
nearest whole cent.
Assume the company decides instead to use a traditional costing
system in which ALL costs are allocated to customers on the basis
of cleaning hours. Compute the customer profit for the Tubman
family. Round off all calculations to the nearest whole cent.
$258.96
$128.32
Solution:
Client - Tubman
Total charges
Less:
Cleaning
Number of jobs
Client
104
26
1
ABC
Job Costing
$1,420.00
$1,420.00
$1,161.04
Customer Profit
$258.96
$1,291.68
$128.32
$731.12
$411.32
$18.60
Computations for costs:

Cleaning: 104 hours x $7.03 per hour = $731.12
Job support: 26 jobs x $15.82 per job = $411.32
Client support: 1 client x $18.60 per client = $18.60
The margin if all costs are allocated on the basis of cleaning hours:
Predetermined overhead rate = $535,441
43,100 hours = $12.42 per hour
Page | 42

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COURSE READER SOLUTIONS

Student Name: ___________________________________________

Work in Process, 1/1/09

Finished goods, 1/1/09

Estimated direct labor-

Estimated direct labor-hours

Estimated direct labor-hours = 31,500 direct labor-hours

More expensive ingredients are used

The budgeted manufacturing overhead for 2010 was $210,800.

Overhead Rate per Direct Labor Hour

1.05 per pound

Overhead Rate per Direct Labor Hour

50.00 per DLH

Units started into production during the month

Costs added to production during this month:

Work in process, ending:

Solution Weighted Average Method

Units to be accounted for:

Units accounted for as follows:

Cost per Equivalent Unit

Equivalent units of production

Cost accounted for as follows:

Work in process, ending

Solution FIFO Method

Units to be accounted for:

Units accounted for as follows:

Cost per Equivalent Unit

Equivalent units of production

*Degree of completion: direct materials, ?%; conversion costs, 60%

Solution Weighted Average Method

Units to be accounted for:

Units accounted for as follows:

Cost per Equivalent Unit

Equivalent units of production

Cost accounted for as follows:

Work in process, ending

Units to be accounted for:

Units accounted for as follows:

Cost per Equivalent Unit

Equivalent units of production

Costs in work in process on April 1

Units started and completed during the period ...........................

Ending work in process ..............................................................

Cost per Equivalent Unit

Units transferred out:

Total cost of units transferred out = $186,080 + $633,150 =$819,230

Units to be accounted for:

Units accounted for as follows:

Cost per Equivalent Unit

Total Cost Transferred In Materials Conversion

Cost accounted for as follows:

Work in process, ending

Units to be accounted for:

Units accounted for as follows:

Cost per Equivalent Unit

Total Cost Transferred In Materials Conversion

Equivalent units of production

Activity Driver (DLHs)

If Information Services is the major service department:

Using Matrix Algebra we can solve n equations with n unknowns:

Summary of Overhead Rates

Payload (tons) Fuel cost

The solution using Microsoft Excel functions is: