9-24

Unit Illinois=1,200 employees

UnitOhio=300 employees

$ 500
=$ 600,000
1 employee

$ 500
=$ 150,000
1 employee

$ 200
$ 5,625
(1,200 employees 1 employee
)+( 30 employees 1 transition
)=$ 240,000+ $ 168,750=$ 408,750
$ 200
$ 5,625
(300 employees 1 employee
)+( 50 employees 1 transition
)=$ 60,000+ $ 281,250=$ 341,250

9-25
Total cost allocated for Ohio at the variable rate

$ 50
$ 2,000
(300 employees 1 employee
)+( 50 employees 1 transition
)=$ 15,000+ $ 100,000=$ 115,000
Total cost allocated for Illinois at the total rate

$ 200
$ 5,625
(1,200 employees 1 employee
)+( 30 employees 1 transition
)=$ 240,000+ $ 168,750=$ 408,750
Total cost allocated for Ohio at the total rate

$ 200
$ 5,625
(300 employees 1 employee
)+( 50 employees 1 transition
)=$ 60,000+ $ 281,250=$ 341,250
The total cost allocated is $408,750 + $341,250 = $750,000
The total cost for Illinois unit using the new rate system is $750,000 - $115,000 = $635,000

Explanation:
The manager of the new unit is correct in saying the company would need to pay the fixed costs
even in the new unit did not exist. However, the problem with his suggestion comes if the new
unit grows relative to the original unit. If this were to happen, the total costs associated with
employees for both units will be highly influenced by the new unit.

9-26

Direct material
Direct labor
Assembly
Packaging
Total direct labor
Direct costs
Overhead
Assembly building
Assembling (@ $30 per MH)
Setting up machines (@ $900 per setup hour)
Handling material (@ $3,000 per run)
Packaging building
Inspecting and packaging (@ $5 per direct labor
hour)
Shipping (@ $1,320 per shipment)
Total ABC overhead
Total ABC cost
Number of units
Unit cost

J25P
$
1,500,000

J40X
$
2,400,000

$
750,000
$
990,000
$
1,740,000
$
3,240,000

$
600,000
$
360,000
$
960,000
$
3,360,000

$
180,000
$
27,000
$
24,000

$
900,000
$
270,000
$
120,000

$
300,000
$
132,000
$
663,000
$
3,903,000
100,000
$
39.03

$
114,000
$
264,000
$
1,668,000
$
5,028,000
40,000
$
125.70

Kris could have made the reductions he planned, but the effect on the product costs would have
been different. The $99,000 reduction in setup costs (25% of $396,000), would have been
spread between the two products based on labor or machine-hours

ABC provides more detailed measures of costs than do plantwide or department allocation
methods. In this case, ABC shows the costs of machining, setting up equipment, handling
materials, inspecting, packaging products, and shipping. The plantwide and department
allocation methods did not reveal any of these detailed cost drivers. With ABCs more detailed
information, management has an opportunity to manage costs by managing cost drivers.
ABC also provides better measures of product costs than plantwide and department allocation
methods, which leads to better decisions about product pricing and whether to keep or drop
products.
ABC requires more record keeping than plantwide or department allocation methods. ABC also
requires more teamwork among accountants, production people, marketing, and management,
which can be both costly and beneficial. In the end, management must decide whether the
benefits of ABC, outlined above, are worth these costs.

9-28

Direct labor
Direct materials
Overhead costs
Production runs
Quality tests
Shipping orders
Total overhead
Total costs
Total units
Total unit cost

Wired Mouse
$
290,100
$
187,500

Wireless Mouse
$
109,900
$
171,000

$
$
$
$
$

$
$
$
$
$

132,000
59,400
31,000
222,400
700,000
140,000
5

Production:
$165,000 / 25 runs = $6,600 per run
$6,600 x 20 runs = $132,000
$6,600 x 5 runs = $33,000

Tests
$148,500 / 15 tests = $9,900 per test
$9,900 x 6 tests = $59,400
$9,900 x 9 tests = $89,100

33,000
89,100
15,500
137,600
418,500
50,000
8.37

Shipping
$46,500 / 75 shipping orders = $620 per order
$620 x 50 orders = $31,000
$620 x 25 orders = $15,500

Direct labor
Direct materials
Total overhead
Total costs
Total units
Total unit costs

Wired Mouse
$
290,100
$
187,500
$
261,090
$
738,690
140,000
$
5.28

Wireless Mouse
$
109,900
$
171,000
$
98,910
$
379,810
50,000
$
7.60

Overhead cost = $360,000 / $400,000 = 0.9 or 90%

90% x $290,100 = $261,090
90% x $109,900 = $98,910

Explanation
Using activity-based costing in part a helps management understand the declining profit. In part
a, we see that the cost to manufacture the wireless mouse has been understated and thus the
profits for the wireless mouse has been overstated.

9-29

Rate
Direct materials

M-008
$
100,000

M-123
$
80,000

Total
$
180,000

Direct labor
Overhead costs
Machine-hours
Production runs
Inspections

$
15
$
3,500
$
1,500

Total overhead
Total costs
Total units
Total unit cost

Rate
Direct materials
Direct labor
Total overhead

200%

Total costs
Total units
Total unit cost

$
100,000

$
40,000

$
140,000

$
75,000
$
35,000
$
30,000
$
140,000
$
340,000
12,000
28.33

$
45,000
$
35,000
$
60,000
$
140,000
$
260,000
2,000
130

$
120,000
$
70,000
$
90,000
$
280,000
$
600,000
14,000

M-008
$
100,000
$
100,000
$
200,000
$
400,000
12,000
$
33.33

M-123
$
80,000
$
40,000
$
80,000
$
200,000
2,000
$
100.00

Total
$
180,000
$
140,000
$
280,000
$
600,000

By allocating overhead on the basis of direct labor, Doaktown Products has been understating the
cost to manufacture M-123 thereby overstating the profits of M-123.

9-30

Revenue

Commercial
$
378,000

Residential
$
910,000

Total
$
1,288,000

Direct labor
Overhead
Profit

$
210,000
$
43,400
$
124,600

Rate
Revenue
Direct labor
Overhead
Traveling
Equipment
Supplies
Total
overhead
Profit

$
390,000
$
80,600
$
439,400

$
600,000
$
124,000
$
564,000

Commerc
ial

Residen
tial

$378,000

$910,000

$210,000

$390,000

$1,288,00
0
$600,000

$4,250
$22,500
$46,800

$11,750
$13,500
$25,200

$16,000
$36,000
$72,000

$73,550

$50,450

$124,000

$94,450

$469,550

$564,000

$250.00
$6.00
$0.36

Total

The recommendation to Ms. Lodge is that she should reconsider dropping residential services in
favor of the commercial business. From the table in part b of the solution, we can show Ms.
Lodge that commercial work has a profit margin of 25%, while the residential business has a
profit margin of greater than 50%. We can explain the differences in profits under the two cost
methods by showing Ms. Lodge that there is little correlation in costs between direct labor and
the overhead costs.

9-31

Setting Up
Inspecting
Packing and
shipping
Total overhead

Rate
$1,440
$2,160

Pencils
$28,800
$8,640

Pens
$43,200
$12,960

$0.36

$16,200

$27,000

$53,640

$83,160

45,000 boxes x 0.1 labor-hour = 4,500 labor-hours

75,000 x 0.2 labor-hour = 15,000 labor-hours

Total direct labor hours = 4,500 + 15,000 = 19,500 labor-hours

Amount of overhead allocated in pencils:

4,500 labor hours

=4,500 labor hour $ 7.02=$ 31,569.23

( 19,500$ 136,800
labor hours )

Amount of overhead allocated in pens:

15,000labor hours

$ 136,800
=15,000 labor hour $ 7.02=$ 105,230.77
( 19,500labor
hours )

Explanation
No, the company should not follow the controllers recommendations. While doing
ABC is more expensive, since it can be costly to obtain the information, it is the
more accurate method to allocate overhead costs.