CH 5 DEMO SOLUTIONS BRIEF EXERCISE 5-1 (a) Estimated annual overhead costs = Predetermined overhead rate Expected annual

operating activity $500,000 50,000 = $10 per machine hour (b) (c) 40,000 machine hours $10 = $400,000 overhead applied 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 considering resource consumption. That method is activity-based costing.

BRIEF EXERCISE 5-2 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 highvolume 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 labour hours is usually a poor cost driver for assigning overhead costs to lowvolume products. As a result, for Sassafras, 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.

BRIEF EXERCISE 5-3 An appropriate cost driver for each activity is: Activity Materials handling Machine setups Factory machine maintenance Factory supervision Quality control Cost Driver Number of requisitions Number of setups Machine hours used Direct labour hours Number of inspections

BRIEF EXERCISE 5-5 Activity-based overhead rate = $960,000 960* = $1,000 per set-up. *(180 + 240 + 540 = 960) Assigned overhead: Overhead ABC rate Usage Assigned Product Red $1,000 180 $180,000 Product Black $1,000 240 $240,000 Product Yellow $1,000 540 $540,000 960 $960,000

BRIEF EXERCISE 5-7 First determine the overhead rates. Estimated Expected use of Cost = Activity-based Overhead Drivers per Activity Overhead Rates Est. MOH $90,000 $480,000 $1,760,000 Est. Usage 15,000 60,000 440,000

Cost Pool Ordering & receiving Etching Soldering

Rate $6.00 per order $8.00 per machine hr. $4.00 per labour hr.

Then use the rates to determine total overhead applied.

Cost Drivers 11,000 orders 50,000 machine hours 500,000 labour hours

Overhead Total Overhead Rates = Applied $6 $ 66,000 $8 400,000 $4 2,000,000 $2,466,000

BRIEF EXERCISE 5-8 (a) (b) (c) (d) Non-value-added Non-value-added Value-added Non-value-added (e) (f) (g) (h) Non-value-added Non-value-added Non-value-added Value-added

EXERCISE 5-20 (a) Direct labour hrs for car wheels (40,000 2) Direct labour hrs for truck wheels (10,000 6) Total direct labour hours = = 80,000 60,000 140,000

$840,000 ( total estimated overhead) = $6 per direct labour hour 140,000 (total direct labour hours) Overhead assigned Car wheels Truck wheels Total overhead (b) Cost Pool Setting up machines Assembling Inspection (80,000 $6) (60,000 $6) = $480,000 = 360,000 $840,000

Est. MOH $260,000 $280,000 $300,000 $840,000

Est. Usage 500 35,000 600

Rate $520 per set-up $8 per labour hrs $500 per inspection

(c) Cost Pool Setting up machines Assembling Inspection Rate $520 per set-up $8 per labour hrs $500 per inspection

Usage Car Truck 100 400 20,000 15,000 50 550 Car $52,000 $160,000 $25,000 $237,000 Truck $208,000 $120,000 $275,000 $603,000

Assignment of overhead: Setting up machines ($520 100; 400) Assembling ($8 20,000; 15,000) Inspection ($500 50; 550) Overhead assigned

(d) Because of the uneven usage of two of the activities (set-ups [100 vs. 400] and inspection [50 vs. 550]) between the two products, using the three different cost pools will provide a more accurate assignment of overhead costs. YuYu should use activity-based costing.

EXERCISE 5-26 (a) Cost Pool Materials handling Machine set-ups Inspections Est. MOH $33,000 $27,900 $24,600 $85,500 Est. Usage Rate 1,000 $33 per requisiton 450 $62 per set-up 600 $41 per inspection

(b) Cost Pool Materials handling Machine set-ups Inspections Rate $33 per requisition $62 per set-up $41 per inspection

Usage Instruments Gauges 400 600 150 300 200 400

Assignment of overhead: Materials handling Machine set-ups Inspections Overhead assigned (c) To: From: Re: MEMO

Instruments $13,200 $9,300 $8,200 $30,700

Gauges $19,800 $18,600 $16,400 $54,800

President, Fontillas Instrument, Inc. Student 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. EXERCISE 5-26 (Continued) 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.

PROBLEM 5-36A

(a) Computation of indirect manufacturing costsusing the plantwide allocation rate of $800 per labour hour: 50 labour hours $800 overhead rate = $40,000 for 1,000 pairs The rate would be $40 per pair ($40,000 1,000).

(b)

Activity-based overhead applied Material handling# of parts $8.00 4,000 parts Assemblylabour hours $80.00 50 hours Inspectionminutes $12.00 60 minutes Total overhead applied Number of pairs per batch Overhead applied per pair

$32,000

4,000

720 $36,720 1,000 $36.72

(c) The traditional product-costing system over-costs the shoes by $3.28 ($40.00 $36.72). This may have caused the shoes to be overpriced.