Ch04 m 06_09_10

Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 5/e, Solutions Manual (For Instructor Use Only) 4-7
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1
(a) Estimated annual overhead costs
Expected annual operating activity
= Predetermined overhead rate
$1,000,000
100,000
= $10 per direct labor hour
(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 activity-
based 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.

4-8 Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
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) Number of parts or assemblies
(b) Number of setups
(c) Number of employees
(d) Number of inspections
(e) Number of purchase orders
(f) Machine hours
(g) 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
Estimated
Overhead ÷
Expected Use of
Cost Drivers per Activity =
Activity-Based
Overhead Rates
Designing
Sizing and cutting
Stitching and trimming
Wrapping and packing
$ 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
$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
Estimated
Overhead ÷
Expected Use of
Activity-Based
Overhead Rates
Ordering and receiving
Etching
Soldering
$ 90,000
480,000
1,760,000
15,000 orders
440,000 labor hours
$6.00 per order
$8.00 per machine hour
$4.00 per labor hour
Cost Drivers X
Overhead
Rates =
Total Overhead
Applied
11,000 orders
500,000 labor hours
$6
$8
$4
$ 66,000
400,000
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)
(3)
(5)
Designing and drafting
On-site supervision
Consultation with client
3.0
2.0
1.5
6.5
Non-value-added Activities Hours
(2)
(4)
(6)
Staff meetings
Lunch
Entertaining a prospective client
1
1
2
4

BRIEF EXERCISE 4-10
(a) Batch- or unit-level
(b) Unit-level
(c) Unit-level
(d) Batch- or unit-level
(e) Facility-level
(f) Batch- or product-level
(g) Batch- or product-level
(h) Unit-level
(i) Facility-level
(j) Batch-level
BRIEF EXERCISE 4-11
(a) Facility-level
(b) Unit-level
(c) Product-level
(d) Unit-level
(e) Batch-level
(f) Batch-level
(g) Product-level
(h) Facility-level
BRIEF EXERCISE 4-12
(a) Product design $50,000
10
= $5,000 per product change
Machining $300,000
150,000
= $2 per machine hour
Material handling $100,000
100
= $1,000 per set up
(b) Product design—product-level
Machining—unit-level
Material handling—batch-level

SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 4-1
1. True
2. False
3. False
4. True
5. True
DO IT! 4-2
(a) Computations of activity-based overhead rates per cost driver:
Activity Cost
Pools
Estimated
Overhead
Expected Use of Cost
Drivers per Activity
Activity-Based
Overhead Rates
Machine setup $ 20,000 40 setups $500 per setup
Machining 110,000 5,000 machine hours 22 per machine hr.
Packing 30,000 500 orders 60 per order
$160,000
(b) Assignment of each activity’s overhead cost to products using ABC:
BC113 AD908
Activity Cost
Pools
Expected
Use of Cost
Drivers per
Product
Activity-Based
Overhead Rates
Cost
Assigned
Expected Use of
Cost Drivers per
Product
Activity-Based
Overhead
Rates
Cost
Assigned
Machine setup 25 $500 $12,500 15 $500 $ 7,500
Machining 1000 $ 22 22,000 4000 $ 22 88,000
Packing 150 $ 60 9,000 350 $ 60 21,000
Total assigned costs $43,500 $116,500
(c) Computation of overhead cost per unit:
BC113 AD908
Total costs assigned (a) $43,500 $116,500
Total units produced (b) 3,000 1,400
Overhead cost per unit (a) ÷ (b) $14.50 $83.21

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. NVA
2. VA
3. NVA
4. NVA
5. VA
6. VA
DO IT! 4-4
(a) unit-level
(b) product-level
(c) facility-level
(d) batch-level
(e) unit-level
(f) batch-level
(g) facility-level
(h) unit-level

SOLUTIONS TO EXERCISES
EXERCISE 4-1
(a) Estimated overhead
Direct labor costs
= Predetermined overhead rate
$300,000
$50,000 + $100,000
= 200% of direct labor cost
(b) Activity cost pools Cost drivers Estimated overhead
Machining Machine hours $200,000
Machine setup Set up hours 100,000
Activity-based overhead rates
Machining: Machine setup:
$200,000 $100,000
1,000 + 1,000
= $100 per machine hour
400 + 100
= $200 per setup hour
(c) Traditional costing Standard Custom
$50,000 X 200% $100,000
$100,000 X 200% $200,000
$100,000 $200,000
Activity-based costing
Machining:
1,000 X $100 $100,000
1,000 X $100 $100,000
Machine setup:
100 X $200 20,000
400 X $200 80,000
$120,000 $180,000

EXERCISE 4-2
(a) Traditional costing system
Product 540X Product 137Y Product 249S
Sales $200,000 $160,000 $80,000
Costs 55,000 50,000 15,000
Operating income $145,000 $110,000 $65,000
(b) Activity-based costing system
Product 540X Product 137Y Product 249S
Sales $200,000 $160,000 $80,000
Costs 50,000 35,000 35,000
Operating income $150,000 $125,000 $45,000
(c) Product 540X: ($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.

EXERCISE 4-3
(a) Activity cost pools Cost drivers Estimated overhead
Cutting Machine hours $300,000
Design Number of setups 600,000
Activity-based overhead rates
Cutting Design
$300,000 $600,000
200,000
= $1.50 per machine hour
1,500
= $400 per setup
Wool Cotton
Activity-based costing
Cutting
100,000 X $1.50 $150,000
100,000 X $1.50 $150,000
Design
1,000 X $400 400,000
500 X $400 200,000
Total cost allocated $550,000 $350,000
(b) Estimated overhead $900,000
Direct labors hours
=
450,000
Wool Cotton
Traditional costing
225,000 X $2 $450,000
225,000 X $2 $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.

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 (40,000 X $10) = $400,000
Truck wheels (30,000 X $10) = 300,000
Total overhead $700,000
(b)
Activity Cost Pool
Estimated
Overhead ÷
Expected
Use of
Cost Drivers =
ABC
Overhead
Rate
Setting up machines $180,000 1,000 $180
Assembling 280,000 70,000 $ 4
Inspection 240,000 1,200 $200
(c) Car Wheels
Activity Cost Pools
Expected Use
of Cost Driver
per Product X
Activity-Based
Overhead
Rates =
Cost
Assigned
Setting up machines 200 $180 $ 36,000
Assembling 40,000 $ 4 $160,000
Inspection 100 $200 $ 20,000
Total cost assigned $216,000

EXERCISE 4-4 (Continued)
(c) Truck Wheels
Activity Cost Pools
Expected use
of Cost Driver
per Product X
Activity-Based
Overhead
Rates =
Cost
Assigned
Setting up machines 800 $180 $144,000
Assembling 30,000 $ 4 $120,000
Inspection 1,100 $200 $220,000
Total cost assigned $484,000
(d) 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.

EXERCISE 4-5
(a)
Activity Cost Pools Estimated Overhead ÷
Expected use
of Cost Drivers = ABC Overhead Rates
Scheduling and travel $90,000 1,500 $ 60.00
Setup time $70,000 700 $100.00
Supervision $40,000 $400,000* $ .10
*$100,000 + $300,000
Commercial
Activity Cost Pools
Expected use of Cost
Drivers per Product X ABC Overhead Rates = Cost Assigned
Scheduling and travel 1,000 $ 60.00 $ 60,000
Setup time 450 $100.00 45,000
Supervision $100,000 $ .10 10,000
Total assigned costs $115,000
Residential
Activity Cost Pools
Expected use of Cost
Drivers per Product X ABC Overhead Rates = Cost Assigned
Scheduling and travel 500 $ 60.00 $30,000
Setup time 250 $100.00 25,000
Supervision $300,000 $ .10 30,000
Total assigned costs $85,000
(b) Commercial Residential
Revenues $300,000 $480,000
Direct material costs $ 30,000 $ 50,000
Direct labor costs 100,000 300,000
Overhead costs 115,000 245,000 85,000 435,000
Operating income (loss) $ 55,000 $ 45,000
(c) 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
(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

(c) The total amount of overhead allocated to each unit of the two products
under the two allocation approaches is:
Traditional
Costing
Activity-Based
Costing
Mobile safe
Walk-in safe
$ 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. Hiring and training personnel 11. Maintenance and repairs
2. Purchasing supplies and materials 12. Delivery
3. Selling, promoting, and marketing 13. Accounting
4. Billing and collecting
5. Designing
6. Offset printing
7. Copying
8. Faxing
9. Collating
10. Cutting and folding

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, indirect labor
Machine setup, indirect
materials
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
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

EXERCISE 4-10
1. Number of engineering change orders; hours of designing
2. Number of orders processed
3. Number of parts in stock
4. Weight of material; number of boxes or cartons
5. Employee turnover; number of employees hired
6. Machine hours; direct labor hours
7. Number of employees; number of parts; direct labor hours
8. Number of employees
9. Book or market value of assets
10. Cost of goods manufactured, direct labor hours; number
of employees
11. Machine hours; number of machines
12. Gallons of paint; number of appliances
EXERCISE 4-11
(a) The overhead rates are:
Activity Cost Pools
Estimated
Overhead ÷
Expected Use
of Cost Drivers
per Activity =
Activity-Based
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:
Instruments Gauges
Cost Driver Number Cost Number Cost
Cost
Assigned
Materials handling
($35)
Machine setups ($55)
Quality inspections
($45)
Total costs
assigned (a)
Units produced (b)
400
200
200
$14,000
11,000
9,000
$34,000
50
600
300
400
$21,000
16,500
18,000
$55,500
300
$35,000
27,500
27,000
$89,500
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.

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:
Activity Cost Pools
Cost Drivers
Used X
Activity-
Based
Overhead
Rates =
Overhead Cost
Assigned
Sales commissions
Advertising—TV/Radio
Advertising—Newspaper
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.

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
Cost Drivers
Used X
Activity-
Based
Overhead
Rate =
Overhead Cost
Assigned
Inspections of material received
In-process inspections
FDA certification
Total assigned cost for June
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-value-
added activities.
EXERCISE 4-14
1. 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.
2.
3.
4.
5.
6.
7.
8.
Non-value-added
Value-added
Value-added
Non-value-added
Value-added
Value-added
Value-added
9.
10.
11.
12.
13.
14.
15.
Value-added
Value-added
Non-value-added
Non-value-added
Non-value-added
Non-value-added
Non-value-added

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.

EXERCISE 4-17
Activity Cost Pools Activity Level
Engineering
Machinery
Machine setup
Quality control
Factory utilities
Maintenance
Product-level
Unit-level
Batch-level
Depends on frequency. Could be unit, batch,
or product-level
Facility-level
Facility-level
EXERCISE 4-18
1. Facility-level activity
2. Product-level activity
3. Batch-level activity
6. Batch-level activity
7. Facility-level activity
8. Batch-level or unit-level activity
9. Unit-level activity
10. Unit-level activity

SOLUTIONS TO PROBLEMS
PROBLEM 4-1A
(a) Computation of unit costs—traditional costing.
Products
Manufacturing Costs Home Model Commercial Model
Direct materials
Direct labor
Overhead
Total unit cost
$18.50
19.00
* 23.40*
$60.90
$26.50
19.00
* 23.40*
$68.90
*$15.60 X 1.5 = $23.40
(b)
Activity Cost Pool
Estimated
Overhead ÷
Expected
Use of Cost Drivers =
Activity-Based
Overhead Rate
Receiving
Forming
Assembling
Testing
Painting
Packing and shipping
$ 70,350
150,500
390,600
51,000
52,580
787,250
$1,502,280
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 Commercial Model
Activity Cost Pool
Expected
Use of
Drivers X
Activity-
Based
Overhead
Rates =
Cost
Assigned
Expected
Use of
Drivers X
Activity-
Based
Overhead
Rates =
Cost
Assigned
Receiving
Forming
Assembling
Testing
Painting
Total costs assigned
Units produced
(a)
(b)
215,000
27,000
165,000
15,500
3,680
215,000
$ .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
54,000
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
10,200
Overhead cost per unit [(a) ÷ (b)] $19.10 $46.17

PROBLEM 4-1A (Continued)
(d)
ABC Manufacturing Costs Home Model Commercial Model
Direct materials
Direct labor
Overhead
Total cost per unit
$18.50
19.00
19.10
$56.60
$26.50
19.00
46.17
$91.67
(e) 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
(f) (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.

PROBLEM 4-2A
(a) The allocation of total manufacturing overhead using activity-based
costing is as follows:
Royale Majestic
Overhead Rate
Drivers
Used
Cost
Assigned
Drivers
Used
Cost
Assigned
Total
Overhead
Purchase orders @ $30
Machine setups @ $50
Machine hours @ $40
Inspections @ $25
Total assigned costs (a)
Units produced (b)
Cost per unit (a) ÷ (b)
15,000
5,000
75,000
9,000
$ 450,000
250,000
3,000,000
225,000
$3,925,000
25,000
$157
25,000
13,000
45,000
19,000
$ 750,000
650,000
1,800,000
475,000
$3,675,000
10,000
$367.50
$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
Sales price per unit
Cost per unit
Gross profit
$ 700
120
157
$ 977
$1,600
977
$ 623
$ 420.00
100.00
367.50
$ 887.50
$1,300.00
887.50
$ 412.50
(c) Management’s 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.

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........................................................................... $103,600
Direct labor................................................................................... 112,000
Overhead (14,500 X $8.30)....................................................... 120,350
Total cost of 280 stairs.................................................... $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
Estimated
Overhead ÷
Expected Use of Cost
Drivers per Activity =
Activity-Based
Overhead Rate
Purchasing
Handling materials
Production
Setting up machines
Inspecting
Inventory control
Utilities
$ 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.
$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 X
Activity-Based
Overhead Rates = Cost Assigned
Purchasing
Handling materials
Production
Setting up machines
Inspecting
Inventory control
Utilities
60 Orders
800 Moves
5,000 D/L Hours
100 Setups
450 Inspections
16,000 Components
8,000 Sq. ft.
$95
$10.25
$2.10
$68
$15
$.75
$2.00
$ 5,700
8,200
10,500
6,800
6,750
12,000
16,000
Total overhead assigned $65,950

Total manufacturing cost per stairway under ABC:
Direct materials .................................................................................. $ 103,600
Direct labor .......................................................................................... 112,000
Overhead.............................................................................................. 65,950
Total cost of 280 stairs ........................................................... $ 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 volume-
based system.

PROBLEM 4-4A
(a) Computation of unit costs—traditional costing
Overhead cost per direct labor hour is $1,241,660 ÷ (150,000 + 27,000) =
$7.015
Products
Manufacturing Costs CoolDay LiteMist
Direct materials
Direct labor
Overhead
$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
Estimated
Overhead ÷
Expected Use
of Cost Drivers =
Activity-Based
Overhead Rates
Grape processing
Aging
Bottling and corking
Labeling and boxing
Maintain and inspect
equipment
$ 145,860
396,000
270,000
189,000
240,800
$1,241,660
6,600
6,600,000
900,000
900,000
800
$22.10 per cart
$0.06 per month
$0.30 per bottle
$0.21 per bottle
$301 per inspection
(c) CoolDay LiteMist
Activity Cost Pools
Expected
Use of
Cost
Drivers X
Activity-
Based
Overhead
Rates =
Cost
Assigned
Expected
Use of
Cost
Drivers X
Activity-
Based
Overhead
Rates =
Cost
Assigned
Grape processing
Aging
Bottling and corking
Labeling and boxing
Maintain and inspect
equipment
Total costs assigned (a)
Liters produced (b)
Overhead cost per
liter [(a) ÷ (b)]
6,000
3,000,000
600,000
600,000
350
$22.10
$0.06
$0.30
$0.21
$301
$132,600
180,000
180,000
126,000
105,350
$723,950
3,000,000
$0.241
600
3,600,000
300,000
300,000
450
$22.10
$0.06
$0.30
$0.21
$301
$ 13,260
216,000
90,000
63,000
135,450
$517,710
300,000
$1.726

(d) Products
Manufacturing Costs CoolDay LiteMist
Direct materials
Direct labor
Overhead
$0.400
0.250
0.241
$0.891
$1.200
0.500
1.726
$3.426
(e) To: Mr. Greg Kagen
From: Student
Subject: Product costs using traditional approach versus ABC
The memorandum covers the following points:
a. ABC allocates overhead costs as a function of each product’s use
of cost drivers. Thus, ABC results in overhead allocation that
more closely approximates each product’s 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 profit-
ability of this product.
d. The total cost of the two products under the two approaches was
as follows:

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

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: .40 X $1,000,000 = $400,000
Overhead assigned to tax: .40 X $800,000 = $320,000
(b) (1) Computation of activity-based overhead rates:
Activity Cost Pools
Estimated
Overhead ÷
Expected Use of
Activity-Based
Overhead Rates
Employee training
Typing and secretarial
Computing
Facility rental
Travel
$216,000
76,200
204,000
142,500
81,300
$720,000
$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:
Audit Tax
Activity Cost Pools
Expected
Use of
Cost
Driver X
Activity-
Based
Overhead
Rate =
Cost
Assigned
Expected
Use of
Cost
Driver X
Activity-
Based
Overhead
Rate =
Cost
Assigned
Employee training
Computing
Facility rental
Travel
$1,000,000
600
25,000
22
56,000
$.12
$30.48
$3.40
$3,562.50
Direct
$120,000
18,288
85,000
78,375
56,000
$800,000
1,900
35,000
18
25,300
$.12
$30.48
$3.40
$3,562.50
Direct
$ 96,000
57,912
119,000
64,125
25,300
Overhead costs
assigned $357,663 $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:
Audit Tax
Traditional costing
ABC
Difference
$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 profit-
ability of each service.

Ch04 m 06_09_10

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Ch04 m 06_09_10