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6.7: Summary

  • Page ID
    10428
  • Section Summaries 

     

    6.1 Calculate Predetermined Overhead and Total Cost under the Traditional Allocation Method

    • Manufacturing overhead is estimated for the upcoming period.
    • An activity base is selected to allocate overhead. This is traditionally direct labor hours, direct labor cost, or machine hours.
    • A predetermined overhead rate is calculated by dividing the estimated overhead by the allocation base.
    • Overhead is allocated to each product based on the estimated predetermined overhead rate and the number of units in the selected activity base.

    6.2 Describe and Identify Cost Drivers

    • Overhead costs are analyzed and grouped based on similar activity bases. A cost driver, such as inspections, machine setups, or order taking, is selected for each cost grouping.
    • Analysis of cost drivers allows for better selection of true overhead cost drivers and more appropriate allocation of overhead.

    6.3 Calculate Activity-Based Product Costs

    • Costs can be traced to the unit level or batch level.
    • There are five steps in the ABC process:
      • identify activities needed for production
      • assign overhead expenses
      • assign a cost driver for each expense
      • determine a predetermined overhead rate
      • allocate overhead to each product

    6.4 Compare and Contrast Traditional and Activity-Based Costing Systems

    • Traditional allocation assigns overhead based on a single overhead rate, while ABC assigns overhead based on several cost pools and the activities that drive costs.
    • Traditional allocation is optimal when the manufacturing process is labor driven and overhead increases based on traditional activity bases, such as direct labor hours, direct labor dollars, or machine hours.
    • ABC costing is optimal when the manufacturing process is technology driven and overhead increases based on various activities that differ for each product.

    6.5 Compare and Contrast Variable and Absorption Costing

    • Absorption costing assigns all manufacturing costs to products, whereas variable costing only assigns variable costs to the products.
    • Income statements from both methods can be reconciled by starting with the net income or loss using variable costing and adding the amount of fixed costs included in ending inventory and subtracting the fixed costs included in beginning inventory.
    • Variable costing is not considered GAAP compliant but lends itself to cost-volume-profit analysis.

     

    Key Terms

     

    absorption costing
    (also, full costing) system of accounting where all costs are treated as product costs regardless of whether they are variable or fixed
    activity base
    activity that has been considered to be a primary driver of overhead costs and for which, traditionally, direct labor hours or machine hours were used
    activity-based costing
    process of assigning overhead to products based on the cost driver for each activity cost pool
    batch-level cost
    one that is incurred when a group (or batch) of items is produced
    common fixed costs
    expenses that are shared among all divisions or production units and include such costs as the CEO salary and corporate headquarter costs
    cost driver
    activity that is the reason for the increase or decrease of another cost; examples include labor hours incurred, labor costs paid, amounts of materials used in production, units produced, or any other activity that has a cause-and-effect relationship with incurred costs
    cost pool
    accumulation of costs that are incurred during the production of the activities included in the activity cost pool
    direct labor
    labor directly related to the manufacturing of the product or the production of a service
    direct materials
    materials used in the manufacturing process that can be traced directly to the product
    expense recognition principle
    (also, matching principle) matches expenses with associated revenues in the period in which the revenues were generated
    factory-level cost
    one that is incurred when production occurs, such as production supervisor salary
    indirect labor
    labor not directly involved in the active conversion of materials into finished products or the provision of services
    indirect materials
    materials used in production but not efficiently traceable to a specific unit of production
    manufacturing overhead costs
    all manufacturing costs excluding direct material and direct labor
    product-level cost
    one that occurs as support of the product, such as engineering
    traditional allocation
    allocation of factory overhead to products based on the volume of production resources consumed
    unit-level cost
    one that is incurred for each unit produced
    variable costing
    (also, direct costing or marginal costing) system of accounting where only variable costs are treated as product costs

     

    Multiple Choice

     

    1

    LO 6.1Active Frame, Inc., manufactures clear and tinted sport glasses. The manufacturing of clear glasses takes 45,000 direct labor hours and involves 1,700 parts and 115 inspections. The manufacturing of tinted glasses takes 115,000 direct labor hours and involves 1,400 parts and 450 inspections. The traditional method applies $560,000 of overhead on the basis of direct labor hours. What is the amount of overhead per direct labor hour applied to the clear glass products?

    1. $933.33
    2. $157,500
    3. $322.500
    4. $402,500
    2

    LO 6.1TyeDye Lights makes two products: Party and Holiday. It takes 80,900 direct labor hours to manufacture the Party Line and 93,500 direct labor hours to manufacture the Holiday Line. Overhead consists of $225,000 in the machine setup cost pool and $149,960 in the packaging cost pool. The machine setup pool has 52,000 setups for the Party product and 98,000 setups for the Holiday product. The packaging cost pool has 26,000 parts in the Party product and 39,200 parts for the Holiday product. Using the traditional cost method of direct labor hours, what is the predetermined overhead rate?

    1. $1.50 per direct labor hour
    2. $2.15 per direct labor hour
    3. $2.30 per direct labor hour
    4. $3.80 per direct labor hour
    3

    LO 6.2Which is not a step in analyzing the cost driver for manufacturing overhead?

    1. identify the cost
    2. identify non-value-added costs
    3. analyze the effect on manufacturing overhead
    4. identify the correlation between the potential driver and manufacturing overhead
    4

    LO 6.2Overhead costs are assigned to each product based on ________.

    1. the proportion of that product’s use of the cost driver
    2. a predetermined overhead rate for a single cost driver
    3. price of the product
    4. machine hours per product
    5

    LO 6.3Which of the following is a reason a company would implement activity-based costing?

    1. The cost of record keeping is high.
    2. The additional data obtained through traditional allocation are not worth the cost.
    3. They want to improve the data on which decisions are made.
    4. A company only has one cost driver.
    6

    LO 6.3Which is the correct formula for computing the overhead rate?

    1. estimated use of the cost driver for production/estimated overhead for the activity
    2. estimated overhead for the product/estimated use of the cost driver for the activity
    3. estimated use of the cost driver for production/estimated overhead for the activity
    4. estimated overhead for the activity/estimated use of the cost driver for the activity
    7

    LO 6.3A company anticipates the cost to heat the building will be $21,000. Product A takes up 500 square feet of space, while Product B takes up 200 square feet. The activity rate per product using activity-based costing would be which of the following?

    1. $30/square foot
    2. $4.20/square foot
    3. $11/square foot
    4. $15.20/square foot
    8

    LO 6.3A company calculated the predetermined overhead based on an estimated overhead of $70,000, and the activity for the cost driver was estimated as 2,500 hours. If product A utilized 1,350 hours and product B utilized 1,100 hours, what was the total amount of overhead assigned to the products?

    1. $35,000
    2. $30,800
    3. $37,800
    4. $68,600
    9

    LO 6.3Which is not a step in activity-based costing?

    1. identify the activities performed by the organization
    2. identify the cost driver(s) associated with each activity
    3. compute a cost rate per production
    4. assign costs to products by multiplying the cost driver rate by the volume of the cost driver units consumed by the product
    10

    LO 6.3What is the proper order of tasks in an ABC system?

    1. identify the cost drivers, assign the costs to the products, calculate the overhead application rate for each cost pool, identify the cost pools
    2. assign the costs to the products, identify the cost drivers, calculate the overhead application rate for each cost pool, identify the cost pools
    3. identify the cost drivers, identify the cost pools, calculate the overhead application rate for each cost pool, assign the costs to the products
    4. identify the cost pools, identify the cost drivers, calculate the overhead application rate for each cost pool, assign the costs to the products
    11

    LO 6.3Which is not a task typically associated with ABC systems?

    1. calculating the overhead application rate for each cost pool
    2. applying a single cost rate
    3. identifying a cost driver
    4. more correctly allocating overhead costs
    12

    LO 6.4Which statement is correct?

    1. Activity-based cost systems are less costly than traditional cost systems.
    2. Activity-based cost systems are easier to implement than traditional cost systems.
    3. Activity-based cost systems are more accurate than traditional cost systems.
    4. Activity-based cost systems provide the same data as traditional cost systems.
    13

    LO 6.4Activity-based costing systems:

    1. use a single predetermined overhead rate based on machine hours instead of on direct labor
    2. frequently increase the overhead allocation to at least one product while decreasing the overhead allocation to at least one other product
    3. limit the number of cost pools
    4. always result in an increase of at least one product’s selling price
    14

    LO 6.4Activity-based costing is preferable in a system:

    1. when multiple products have similar product volumes and costs
    2. with a large direct labor cost as a percentage of the total product cost
    3. with multiple, diverse products
    4. where management needs to support an increase in sales price
    15

    LO 6.5Absorption costing is also referred to as:

    1. direct costing
    2. marginal costing
    3. full costing
    4. variable costing
    16

    LO 6.5Under variable costing, a unit of product includes which costs?

    1. direct material, direct labor, and manufacturing overhead
    2. direct material, direct labor, and variable manufacturing overhead
    3. direct material, direct labor, and fixed manufacturing overhead
    4. direct material, direct labor, and all variable manufacturing overhead
    17

    LO 6.5Under absorption costing, a unit of product includes which costs?

    1. direct material, direct labor, and manufacturing overhead
    2. direct material, direct labor, and variable manufacturing overhead
    3. direct material, direct labor, and fixed manufacturing overhead
    4. direct material, direct labor, and all variable manufacturing overhead
    18

    LO 6.5A downside to absorption costing is:

    1. not including fixed manufacturing overhead in the cost of the product
    2. that it is not really useful for managerial decisions
    3. that it is not allowable under GAAP
    4. that it is not well designed for cost-volume-profit analysis
    19

    LO 6.5When the number of units in ending inventory increases through the year, which of the following is true?

    1. Net income is the same for variable and absorption costing.
    2. Net income is higher for variable costing than for absorption costing.
    3. Net income is higher for absorption costing than for variable costing.
    4. There is no relationship between net income and the costing method.
    20

    LO 6.5Product costs under variable costing are typically:

    1. higher than under absorption costing
    2. lower than under absorption costing
    3. the same as with absorption costing
    4. higher than absorption costing when inventory increases

     

    Questions

     

    1

    LO 6.1What is the predetermined overhead rate, and when is it typically estimated?

    2

    LO 6.1LO 6.3When is an activity-based costing system better than a traditional allocation system?

    3

    LO 6.2What is the advantage of labeling activities as value added or nonvalue added?

    4

    LO 6.2What conditions are necessary to designate an activity as a cost driver?

    5

    LO 6.2For each cost pool, identify an appropriate cost driver.

    1. order department
    2. accounts receivable processing
    3. catering
    4. raw material inventory
    6

    LO 6.3How is the primary focus of activity-based costing different from that of traditional allocation?

    7

    LO 6.3What are the primary differences between traditional and activity-based costing?

    8

    LO 6.3How are service companies similar or different from manufacturing companies in using ABC costing?

    9

    LO 6.3How are costs allocated in an ABC system?

    10

    LO 6.4In production, what has changed to allow ABC costing to become valuable?

    11

    LO 6.4Why is it important to know the true cost for a product or service?

    12

    LO 6.5What is the primary difference between variable costing and absorption costing?

    13

    LO 6.5Why would managers prefer variable costing over absorption costing?

    14

    LO 6.5Why is absorption costing the method allowable for GAAP?

    15

    LO 6.5Can a company gather information for both variable and absorption costing systems?

     

    Exercise Set A

     

    EA1

    LO 6.1Steeler Towel Company estimates its overhead to be $250,000. It expects to have 100,000 direct labor hours costing $2,500,000 in labor and utilizing 12,500 machine hours. Calculate the predetermined overhead rate using:

    1. Direct labor hours
    2. Direct labor dollars
    3. Machine hours
    EA2

    LO 6.1Crystal Pools estimates overhead will utilize 250,000 machine hours and cost $750,000. It takes 2 machine hours per unit, direct material cost of $14 per unit, and direct labor of $20 per unit. What is the cost of each unit produced?

    EA3

    LO 6.1A company estimated 100,000 direct labor hours and $800,000 in overhead. The actual overhead was $805,100, and there were 99,900 direct labor hours. What is the predetermined overhead rate, and how much was applied during the year?

    EA4

    LO 6.1Cozy, Inc., manufactures small and large blankets. It estimates $350,000 in overhead during the manufacturing of 75,000 small blankets and 25,000 large blankets. What is the predetermined overhead rate if a small blanket takes 1 machine hour and a large blanket takes 2 machine hours?

    EA5

    LO 6.2Identify appropriate cost drivers for these cost pools:

    1. setup cost pools
    2. assembly cost pool
    3. supervising cost pool
    4. testing cost pool
    EA6

    LO 6.2Match the activity with the most appropriate cost driver.

    Activities and Cost Drivers

    Activity Cost Driver
    Fringe benefits Square feet
    Electricity Direct labor hours
    Depreciation Machine hours
    Machine maintenance  
    Heat and air conditioning  

    Table6.5

    EA7

    LO 6.3Rex Industries has two products. They manufactured 12,539 units of product A and 8,254 units of product B. The data are:

    Activity in Cost Pool, Estimated Overhead, Product A, and Product B, respectively. Cost Pool 1. $45,900, 1,000, 500. Cost Pool 2. 67,300, 200, 800. Cost Pool 3. 25,200, 600, 5,400.

    What is the activity rate for each cost pool?

    EA8

    LO 6.3Rex Industries has identified three different activities as cost drivers: machine setups, machine hours, and inspections. The overhead and estimated usage are:

    Activity, Overhead per Activity, and Annual Usage, respectively. Machine setups, $155,000, 4,000. Machine hours, 352,800, 14,112. Inspections, 120,750, 3,500.

    Compute the overhead rate for each activity.

    EA9

    LO 6.3Custom’s makes two types of hats: polyester (poly) and silk. There are two cost pools: setup, with an estimated $100,000 in overhead, and inspection, with $25,000 in overhead. Poly is estimated to have 750,000 setups and 170,000 inspections, while silk has 250,000 setups and 80,000 inspections. How much overhead is applied to each product?

    EA10

    LO 6.3Custom’s has three cost pools and an associated cost driver to allocate the costs to the product. The cost pools, cost driver, estimated overhead, and estimated activity for the cost pool are:

    Cost Pool, Cost Driver, Estimated Activity per Driver, and Estimated Overhead, respectively. Material, Material requisitions, 14,000, $52,500. Machining, Machine hours, 186,400, 363,500. Inspection, Number of inspections, 10,000, 75,000.

    What is the predetermined overhead rate for each activity?

    EA11

    LO 6.3Potterii sells its products to large box stores and recently added a retail line of products to sell directly to consumers. These estimates are to be used in determining the overhead allocation rate for ABC:

    Cost Pool, Cost Driver, Estimated Overhead, Wholesale, and Retail, respectively. Ordering, Number of orders, $120,000, 180,000, 60,000. Machine Setups, Number of setups, 85,000, 200,000, 140,000. Inspections, Number of inspections, 75,000, 60,000, 15,000.

    What would be the predetermined rate for each cost pool?

    EA12

    LO 6.3Assign each of the following expenses to either the machine setup cost pool or the factory cost pool:

    1. indirect materials
    2. factory insurance
    3. machine depreciation
    4. machine setup (indirect labor)
    5. machine setup (indirect material)
    EA13

    LO 6.4Tri-bikes manufactures two different levels of bicycles: the Standard and the Extreme. The total overhead of $300,000 has traditionally been allocated by direct labor hours, with 150,000 hours for the Standard and 50,000 hours for the Extreme. After analyzing and assigning costs to two cost pools, it was determined that machine hours is estimated to have $200,000 of overhead, with 4,000 hours used on the Standard product and 1,000 hours used on the Extreme product. It was also estimated that the setup cost pool would have $100,000 of overhead, with 1,000 hours for the Standard and 1,500 hours for the Extreme. What is the overhead rate per product, under traditional and under ABC costing?

    EA14

    LO 6.5Cool Pool has these costs associated with production of 20,000 units of accessory products: direct materials, $70; direct labor, $110; variable manufacturing overhead, $45; total fixed manufacturing overhead, $800,000. What is the cost per unit under both the variable and absorption methods?

    EA15

    LO 6.5Using this information from Planters, Inc., what is the cost per unit under both variable and absorption costing?

    Production 10,000 units. Direct materials $240. Direct labor 280. Variable manufacturing overhead 100. Fixed manufacturing overhead 1,200,000

     

    Exercise Set B

     

    EB1

    LO 6.1Green Bay Cheese Company estimates its overhead to be $375,000. It expects to have 125,000 direct labor hours costing $1,500,000 in labor and utilizing 15,000 machine hours. Calculate the predetermined overhead rate using:

    1. Direct labor hours
    2. Direct labor dollars
    3. Machine hours
    EB2

    LO 6.1Boarders estimates overhead will utilize 160,000 machine hours and cost $80,000. It takes 4 machine hours per unit, direct material cost of $5 per unit, and direct labor of $5 per unit. What is the cost of each unit produced?

    EB3

    LO 6.1A company estimated 50,000 direct labor hours and $450,000 in overhead. The actual overhead was $445,000, and there were 50,500 direct labor hours. What is the predetermined overhead rate, and how much was applied during the year?

    EB4

    LO 6.1Cozy, Inc., manufactures small and large blankets. It estimates $950,000 in overhead during the manufacturing of 360,000 small blankets and 120,000 large blankets. What is the predetermined overhead rate if a small blanket takes 2 hours of direct labor and a large blanket takes 3 hours of direct labor?

    EB5

    LO 6.2Identify appropriate cost drivers for these cost pools:

    1. material cost pool
    2. machine cost pool
    3. painting cost pool
    4. maintenance cost pool
    EB6

    LO 6.2Match the activity with the most appropriate cost driver.

    Activities and Cost Drivers

    Activity Cost Driver
    Factory maintenance Number of setups
    Payroll tax Number of employees
    Rent Square feet
    Machine setups Direct labor hours
    Factory supervision  

    Table6.6

    EB7

    LO 6.3Rocks Industries has two products. They manufactured 12,539 units of product A and 8,254 units of product B. The data are:

    Activity in Cost Pool, Estimated Overhead, Product A, and Product B, respectively. Cost Pool 1. $32,400, 1,500, 3,000. Cost Pool 2. 54,900, 1,700, 1,300. Cost Pool 3. 51,380, 1,390, 1,000.

    What is the activity rate for each cost pool?

    EB8

    LO 6.3Rocks Industries has identified three different activities as cost drivers: machine setups, machine hours, and inspections. The overhead and estimated usage are:

    Activity, Overhead per Activity, and Annal Usage, respectively. Machine Setups, $75,000, 6,000. Machine Hours, $85,002, 5,484. Inspections, 70,000, 20,000.

    Compute the overhead rate for each activity.

    EB9

    LO 6.3Frenchy’s makes two types of scarves: polyester (poly) and silk. There are two cost pools: setup, with an estimated $120,000 in overhead, and inspection, with $30,000 in overhead. Poly is estimated to have 800,000 setups and 450,000 inspections, while silk has 400,000 setups and 150,000 inspections. How much overhead is applied to each product?

    EB10

    LO 6.3Frenchy’s has three cost pools and an associated cost driver to allocate the costs to the product. The cost pools, cost driver, estimated overhead, and estimated activity for the cost pool are:

    Cost Pool, Cost Driver, Estimated Activity per Driver, and Estimated Overhead, respectively. Material, Material requisitions, 250,000, $105,000. Machining, Machine hours, 360,750, 432,900. Inspection, Number of inspections, 25,000, 15,750.

    What is the predetermined overhead rate for each activity?

    EB11

    LO 6.3Carboni recently added a carbon line in addition to its aluminum line. The following are estimates to be used in determining the overhead allocation rate for ABC.

    Cost Pool, Cost Driver, Estimated Overhead, Carbon, and Aluminum, respectively. Material Handling, Material requisitions, $45,000, 120,000, 60,000. Machine Setups, Number of setups, 55,000, 80,000, 30,000. Assembly, Number of parts, 25,000, 35,000, 15,000.

    What would be the predetermined rate for each cost pool?

    EB12

    LO 6.3Assign each of the following expenses to either the machine cost pool or the factory cost pool:

    1. property taxes
    2. heat and air-conditioning
    3. electricity, machines
    4. plant depreciation
    5. electricity, plant
    6. machine maintenance wages
    EB13

    LO 6.4Stacks manufactures two different levels of hockey sticks: the Standard and the Slap Shot. The total overhead of $600,000 has traditionally been allocated by direct labor hours, with 400,000 hours for the Standard and 200,000 hours for the Slap Shot. After analyzing and assigning costs to two cost pools, it was determined that machine hours is estimated to have $450,000 of overhead, with 30,000 hours used on the Standard product and 15,000 hours used on the Slap Shot product. It was also estimated that the inspection cost pool would have $150,000 of overhead, with 25,000 hours for the Standard and 5,000 hours for the Slap Shot. What is the overhead rate per product, under traditional and under ABC costing?

    EB14

    LO 6.5Crafts 4 All has these costs associated with production of 12,000 units of accessory products: direct materials, $19; direct labor, $30; variable manufacturing overhead, $15; total fixed manufacturing overhead, $450,000. What is the cost per unit under both the variable and absorption methods?

    EB15

    LO 6.5Using this information from Outdoor Grills, what is the cost per unit under both variable and absorption costing?

    Production 90,000. Direct materials $110. Direct labor 150. Variable manufacturing overhead 75. Fixed manufacturing overhead 2,700,000.

     

    Problem Set A

     

    PA1

    LO 6.1Colonels uses a traditional cost system and estimates next year’s overhead will be $480,000, with the estimated cost driver of 240,000 direct labor hours. It manufactures three products and estimates these costs:

    Chart showing the figures for Small, Medium, and Large, respectively. Units: 32,000, 12,000, 4,000. Direct Materials Cost: $5, $8, $9. Direct Labor Hours per Unit: 4, 6, 10.

    If the labor rate is $25 per hour, what is the per-unit cost of each product?

    PA2

    LO 6.1Five Card Draw manufactures and sells 24,000 units of Diamonds, which retails for $180, and 27,000 units of Clubs, which retails for $190. The direct materials cost is $25 per unit of Diamonds and $30 per unit of Clubs. The labor rate is $25 per hour, and Five Card Draw estimated 180,000 direct labor hours. It takes 3 direct labor hours to manufacture Diamonds and 4 hours for Clubs. The total estimated overhead is $720,000. Five Card Draw uses the traditional allocation method based on direct labor hours.

    1. What is the gross profit per unit for Diamonds and Clubs?
    2. What is the total gross profit for the year?
    PA3

    LO 6.2A local picnic table manufacturer has budgeted these overhead costs:

    Purchasing $70,000, Handling materials 33,333, Machine setups 70,500, Inspections 25,500, and Utilities 45,000.

    They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown:

    Cost Drivers are: Orders, Material moves, Machine setups, Number of inspections, and Square feet. Activities are, respectively: 700, 1,334, 15,000, 5,000, 180,000.

    Recent success has yielded an order for 1,000 tables. Assume direct labor costs per hour of $20. Determine how much the job would cost given the following activities:

    Order (units) 1,000; Direct materials 112,700; Machine hours 15,200; Direct labor hours 5,300; Number of purchase orders 60; Number of material moves 800; Number of machine setups 100; Number of inspections 450; Number of square feet occupied 8,000.
    PA4

    LO 6.2Explain how each activity in this list can be associated with the corresponding unit or batch level provided.

    1. Assembling products: unit level
    2. Issuing raw materials: batch level
    3. Machine setup: batch level
    4. Inspection: unit level
    5. Loading the labeling machine: batch level
    6. Equipment maintenance: batch level
    7. Printing a banner: unit level
    8. Moving material: batch level
    9. Ordering a part: batch level
    PA5

    LO 6.3Medical Tape makes two products: Generic and Label. It estimates it will produce 423,694 units of Generic and 652,200 of Label, and the overhead for each of its cost pools is as follows:

    Cost Pool and Estimated Overhead are: Material receipts 133,000; Machine setups 300,000; Assembly 700,000; Inspection 250,000; Total 1,383,000.

    It has also estimated the activities for each cost driver as follows:

    Driver, Generic and Label, respectively. Inspections, 400, 600. Requisitions, 450, 950. Parts, 300, 400. Setups, 250, 350.

    How much is the overhead allocated to each unit of Generic and Label?

    PA6

    LO 6.3Box Springs, Inc., makes two sizes of box springs: twin and double. The direct material for the twin is $25 per unit and $40 is used in direct labor, while the direct material for the double is $40 per unit, and the labor cost is $50 per unit. Box Springs estimates it will make 5,000 twins and 9,000 doubles in the next year. It estimates the overhead for each cost pool and cost driver activities as follows:

    Activity Cost Pools, Driver, Estimated Overhead, Use per Twin, Use per Double, respectively. Framing, Square feet of pine, 210,000, 5,000, 2,000. Padding, Square feet of quilting, 220,000, 120,000, 100,000. Filling, Square feet of filling, 320,000, 500,000, 300,000. Labeling, Number of boxes, 240,000, 800,000, 400,000. Inspection, Number of inspections, 170,000, 12,000, 5,000.

    How much does each unit cost to manufacture?

    PA7

    LO 6.3Please use the information from this problem for these calculations. After grouping cost pools and estimating overhead and activities, Box Springs determined these rates:

    Purchasing (per order) $55. Utilities (per square foot) 3. Machine setups (per machine hour) 8. Supervision (per direct labor hour) 5.

    It estimates there will be five orders in the next year, and those jobs will involve:

    Orders 5. Square feet 200. Machine hours 50. Direct labor hours 35. Direct materials 1,500. Direct labor rate $25.

    What is the total cost of the jobs?

    PA8

    LO 6.4A company has traditionally allocated its overhead based on machine hours but had collected this information to change to activity-based costing:

    Estimated Activity by Activity Center for Product 1, Product 2, and Estimated Cost, respectively. Machine setups, 15, 45, $10,800. Assembly parts, 3,000 3,000, 144,600. Packaging pieces, 500, 400, 55,350. Machine hour per unit, 4, 3. Production volume 750, 1,500
    1. How much overhead would be allocated to each unit under the traditional allocation method?
    2. How much overhead would be allocated to each unit under activity-based costing?
    PA9

    LO 6.4Carlton’s Kitchens makes two types of pasta makers: Strands and Shapes. The company expects to manufacture 70,000 units of Strands, which has a per-unit direct material cost of $10 and a per-unit direct labor cost of $60. It also expects to manufacture 30,000 units of Shapes, which has a per-unit material cost of $15 and a per-unit direct labor cost of $40. It is estimated that Strands will use 140,000 machine hours and Shapes will require 60,000 machine hours. Historically, the company has used the traditional allocation method and applied overhead at a rate of $21 per machine hour. It was determined that there were three cost pools, and the overhead for each cost pool is shown:

    Machine setups $900,000; Machine processing 4,000,000; Material requisitions 100,000; Total overhead $4,190,000.

    The cost driver for each cost pool and its expected activity is shown:

    For Strands, Shapes, and Total, respectively. Machine setups 100, 200, 300. Machine hours 140,000, 60,000, 200,000. Parts requisitions 80, 120, 200.
    1. What is the per-unit cost for each product under the traditional allocation method?
    2. What is the per-unit cost for each product under ABC costing?
    3. Compared to ABC costing, was each product’s overhead under- or overapplied?
    4. How much was overhead under- or overapplied for each product?
    PA10

    LO 6.4Carlton’s Kitchen’s three cost pools and overhead estimates are as follows:

    Activity Cost Pools, Cost Driver, Estimated Overhead, Use per Product A, and Use per Product B, respectively. Machine setups, Setups, $128,000, 5,000, 3,000. Assembly, Number of parts, 105,000, 25,000, 45,000. Machine maintenance, Machine hours, 150,000, 12,500, 37,500.

    Compare the overhead allocation using:

    1. The traditional allocation method
    2. The activity-based costing method

    (Hint: the traditional method uses machine hours as the allocation base.)

    PA11

    LO 6.4Lampierre makes brass and gold frames. The company computed this information to decide whether to switch from the traditional allocation method to ABC:

    Brass and Gold, respectively. Units planned, 750, 125. Material moves, 400, 100. Machine setups, 400, 600. Direct labor hours, 700, 1,200.

    The estimated overhead for the material cost pool is estimated as $12,500, and the estimate for the machine setup pool is $35,000. Calculate the allocation rate per unit of brass and per unit of gold using:

    1. The traditional allocation method
    2. The activity-based costing method
    PA12

    LO 6.4Portable Seats makes two chairs: folding and wooden. This information was obtained to review the decision to consider ABC:

    Folding Chairs, Wooden Chairs, and Total Cost, respectively. Material requisitions, 500 pounds, 200 pounds, $55,000. Inspections, 150, 50, $25,000. Labor hours, 2,600, 2,400

    Compute the overhead assigned to each product under:

    1. The traditional allocation method
    2. The activity-based costing method
    PA13

    LO 6.5Grainger Company produces only one product and sells that product for $100 per unit. Cost information for the product is:

    Direct Material $15 per Unit
    Direct Labor $25 per Unit
    Variable Overhead $5 per Unit
    Fixed Overhead $34,000

    Selling expenses are $4 per unit and are all variable. Administrative expenses of $20,000 are all fixed. Grainger produced 5,000 units; sold 4,000; and had no beginning inventory.

    1. Compute net income under
      1. absorption costing
      2. variable costing
    2. Reconcile the difference between the income under absorption and variable costing.
    PA14

    LO 6.5Summarized data for Walrus Co. for its first year of operations are:

    Sales $5,000,000. Production costs (120,000 units): Direct material 1,800,000, Direct labor 1,500,000. Manufacturing overhead: variable 900,000, fixed 300,000. Selling and administrative expenses: variable 260,000, fixed 440,000.
    1. Prepare an income statement under absorption costing
    2. Prepare an income statement under variable costing
    PA15

    LO 6.5Happy Trails has this information for its manufacturing:

    Direct Materials $15; Direct labor $15; Variable manufacturing overhead $3; Fixed manufacturing overhead $25; Units produced 27,000; Units sold 19,000.

    Its income statement under absorption costing is:

    Sales $1,900,500. Less Cost of Goods Sold: Beginning Inventory 0 plus Cost of Goods Manufactured 1,566,000 equals Cost of Goods Available for Sale 1,566,000 less Ending Inventory 464,000 equals Cost of Goods Sold 1,102,000. Equals Gross Profit 798,500. Less Sales and Admin Expenses: Variable 133,000 and Fixed 300,000, Total Sales and Admin Expenses 433,000. Equals Net Operating Income $365,500.

    Prepare an income statement with variable costing and a reconciliation statement between both methods.

    PA16

    LO 6.5Appliance Apps has the following costs associated with its production and sale of devices that allow appliances to receive commands from cell phones.

    Beginning inventory 0. Units produced 25,000. Units sold 20,000. Selling price per unit $145. Variable sales and administration expenses $5. Fixed sales and administration expenses $975,000. Direct material cost per unit $25. Direct labor cost per unit $11. Variable manufacturing overhead cost per unit $3. Fixed manufacturing Overhead cost per month $980,000.

    Prepare an income statement under both the absorption and variable costing methods along with a reconciliation between the two statements.

    PA17

    LO 6.5This information was collected for the first year of manufacturing for Appliance Apps:

    Direct materials per unit $2.50; Direct labor per unit $1.50; Variable manufacturing overhead per unit $0.25; Variable selling and administration expenses $1.75; Units produced 40,000; Units sold 35,000; Sales price $12; Fixed manufacturing expenses $140,000; Fixed selling and administration expenses $20,000.

    Prepare an income statement under variable costing, and prepare a reconciliation to the income under the absorption method.

     

    Problem Set B

     

    PB1

    LO 6.1Bobcat uses a traditional cost system and estimates next year’s overhead will be $800,000, as driven by the estimated 25,000 direct labor hours. It manufactures three products and estimates the following costs:

    The information for Bobcat, Jaguar, and Tiger, respectively. Units: 250,000, 80,000, 12,000. Direct Material Cost: $13, $22, $37. Direct Labor Hours per Unit 2, 3, 5.

    If the labor rate is $30 per hour, what is the per-unit cost of each product?

    PB2

    LO 6.1Five Card Draw manufactures and sells 10,000 units of Aces, which retails for $200, and 8,000 units of Kings, which retails for $170. The direct materials cost is $20 per unit of Aces and $15 per unit of Kings. The labor rate is $30 per hour, and Five Card Draw estimated 64,000 direct labor hours. It takes 4 direct labor hours to manufacture Aces and 3 hours for Kings. The total estimated overhead is $128,000. Five Card Draw uses the traditional allocation method based on direct labor hours.

    1. How much is the gross profit per unit for Aces and Kings?
    2. What is the total gross profit for the year?
    PB3

    LO 6.2A local picnic table manufacturer has budgeted the following overhead costs:

    Estimated Overhead for the following: Purchasing $80,000; Handling materials 45,00; Machine setups 55,000; Assembly 60,000; Utilities 90,000.

    They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown:

    Cost Drivers are: Orders, Material moves, Machine setups, Number of parts, and Square feet. Activities are, respectively: 10,000, 1,500, 5,000, 5,000, and 60,000.

    Recent success has yielded an order for 1,500 tables. Determine how much the job would cost given the following activities, and assuming an hourly rate for direct labor of $25 per hour:

    Activity for the following: Order (units) 1,500; Direct materials 75,900; Machine hours 3,310; Direct labor hours 4,590; Number of purchase orders 70; Number of material moves 750; Number of machine setups 85;  Number of parts 290; Number of square feet occupied 3,000.
    PB4

    LO 6.2Explain how each activity in this list can be associated with the corresponding unit or batch level provided.

    1. Assembling products: batch level
    2. Issuing raw materials: unit level
    3. Machine setup: unit level
    4. Inspection: batch level
    5. Loading the labeling machine: unit level
    6. Equipment maintenance: unit level
    7. Printing a banner: batch level
    8. Moving material: unit level
    9. Ordering a part: unit level
    PB5

    LO 6.3Wrappers Tape makes two products: Simple and Removable. It estimates it will produce 369,991 units of Simple and 146,100 of Removable, and the overhead for each of its cost pools is as follows:

    Cost Pools and Estimated Overhead are: Material receipts $249,975; Machine setups 150,000; Assembly 450,000; Machine maintenance 175,000; Total $1,024,975.

    It has also estimated the activities for each cost driver as follows:

    Driver, Simple, and Removable, respectively. Machine hours, 2,000, 1,500. Requisitions, 300, 450. Parts, 100, 200. Setups, 150, 50.

    How much is the overhead allocated to each unit of Simple and Removable?

    PB6

    LO 6.3Box Springs, Inc., makes two sizes of box springs: queen and king. The direct material for the queen is $35 per unit and $55 is used in direct labor, while the direct material for the king is $55 per unit, and the labor cost is $70 per unit. Box Springs estimates it will make 4,300 queens and 3,000 kings in the next year. It estimates the overhead for each cost pool and cost driver activities as follows:

    Activity Cost Pools, Driver, Estimated Overhead, Use per Queen, Use per King, respectively. Framing, Square feet of pine, $150,000, 4,500, 3,000. Padding, Square feet of quilting, 156,000, 80,000, 40,000. Filling, Square feet of filling, 210,000, 150,000, 60,000. Labeling, Number of boxes, 190,000, 38,000, 38,000. Inspection, Number of inspections, 180,000, 120,000, 60,000.

    How much does each unit cost to manufacture?

    PB7

    LO 6.3Please use the information from this problem for these calculations. After grouping cost pools and estimating overhead and activities, Box Springs determined these rates:

    Purchasing $21. Utilities 15. Machine setups 10. Supervision 3.

    Box Springs estimates there will be four orders in the next year, and those jobs will involve:

    Orders 4. Square feet 150. Machine hours 60. Direct labor hours 25. Direct materials 900. Direct labor rate 35

    What is the total cost of the jobs?

    PB8

    LO 6.4A company has traditionally allocated its overhead based on machine hours but collected this information to change to activity-based costing:

    Estimated Activity by Activity Center for Product 1, Product 2, and Estimated Cost, respectively. Machine setups, 10, 15, $50,000. Assembly parts, 1,000 1,500, 75,000. Packaging units, 500, 300, 80,000. Machine hours per unit, 1, 1.5. Production volume 2,000, 2,000.
    1. How much overhead would be assigned to each unit under the traditional allocation method?
    2. How much overhead would be assigned to each unit under activity-based costing?
    PB9

    LO 6.4Casey’s Kitchens makes two types of food smokers: Gas and Electric. The company expects to manufacture 20,000 units of Gas smokers, which have a per-unit direct material cost of $15 and a per-unit direct labor cost of $25. It also expects to manufacture 50,000 units of Electric smokers, which have a per-unit material cost of $20 and a per-unit direct labor cost of $45. Historically, it has used the traditional allocation method and applied overhead at a rate of $125 per machine hour. It was determined that there were three cost pools, and the overhead for each cost pool is as follows:

    Machine setups $5,000; Machine processing 6,000,000; Material requisitions 25,000; Total overhead $6,030,000.

    The cost driver for each cost pool and its expected activity is as follows:

    For Gas, Electric, and Total, respectively. Machine setups, 100, 150, 250. Machine hours, 45,000, 105,000, 150,000. Parts requisitions, 360, 140, 500.
    1. What is the per-unit cost for each product under the traditional allocation method?
    2. What is the per-unit cost for each product under ABC costing?
    PB10

    LO 6.4Casey’s Kitchens’ three cost pools and overhead estimates are as follows:

    Activity Cost Pools, Cost Driver, Estimated Overhead, Use per Product A, Use per Product B, respectively. Machine setups, Setups, $250,000, 7,000, 3,000. Assembly, Number of parts, 300,000, 25,000, 35,000. Machine maintenance, Machine hours, 500,000, 10,000, 50,000.

    Compare the overhead allocation using:

    1. The traditional allocation method
    2. The activity-based costing method

    (Hint: the traditional method uses machine hours as the allocation base.)

    PB11

    LO 6.4Lampierre makes silver and gold candlesticks. The company computed this information to decide whether to switch from the traditional allocation method to ABC.

    Silver and Gold, respectively. Units planned 500, 250. Material moves 250, 750. Machine setups 5,600, 4,400. Direct labor hours 500, 1,500.

    The estimated overhead for the material cost pool is estimated as $45,000, and the estimate for the machine setup pool is $55,000. Calculate the allocation rate per unit of silver and per unit of gold using:

    1. The traditional allocation method
    2. The activity-based costing method
    PB12

    LO 6.4Portable Seats makes two chairs: folding and wooden. This information was obtained to review the decision to consider ABC:

    Folding Chairs, Wooden Chairs, and Total Cost, respectively. Material requisitions 450 pounds, 250 pounds, $105,000. Inspections 250, 150, $30,000. Labor hours 1,300, 1,700.

    Compute the overhead assigned to each product under:

    1. The traditional allocation method
    2. The activity-based costing method
    PB13

    LO 6.5Submarine Company produces only one product and sells that product for $150 per unit. Cost information for the product is as follows:

    Direct material $40 per unit. Direct labor $50 per unit. Variable overhead $10 per unit. Fixed overhead $40,000.

    Selling expenses are $2 per unit and are all variable. Administrative expenses of $15,000 are all fixed, Submarine produced 2,000 units and sold 1,800. Grainger had no beginning inventory.

    1. Compute net income under
      1. absorption costing
      2. variable costing
    2. Reconcile the difference between the income under absorption and variable costing.
    PB14

    LO 6.5Summarized data for Backdraft Co. for its first year of operations are as follows:

    Sales (90,000 units) $3,500,000. Production costs (100,000 units): Direct material 1,100,000, Direct labor 400,000. Manufacturing overhead: variable 200,000, fixed 100,000. Selling and administrative expenses: variable 80,000, fixed 50,000.
    1. Prepare an income statement under absorption costing
    2. Prepare an income statement under variable costing
    PB15

    LO 6.5Trail Outfitters has this information for its manufacturing:

    Direct materials $15; Direct labor $15; Variable manufacturing overhead $3; Fixed manufacturing overhead $25; Units produced 30,000; Units sold 38,000.

    Its income statement under absorption costing is as follows:

    Sales $3,200,000. Less Cost of Goods Sold: Beginning Inventory 464,000 plus Cost of Goods Manufactured 1,740,000 equals Cost of Goods Available for Sale 2,204,000 less Ending Inventory 0 equals Cost of Goods Sold 2,204,000. Equals Gross Profit 996,000. Less Sales and Admin Expenses: Variable 266,000 and Fixed 300,000, Total Sales and Admin Expenses 566,000. Equals Net Operating Income $430,000.

    Prepare an income statement with variable costing and a reconciliation statement between both methods.

    PB16

    LO 6.5Wifi Apps has these costs associated with its production and sale of devices that allow visual communications between cell phones:

    Beginning inventory $0. Units produced 33,000. Units sold 23,000. Selling price per unit $170. Variable sales and administration expenses $4. Fixed sales and administration expenses $895,000. Direct material cost per unit $23. Direct labor cost per Unit $15. Variable manufacturing overhead cost per unit $4. Fixed manufacturing overhead cost per month $858,000.

    Prepare an income statement under both the absorption and variable costing methods along with a reconciliation between the two statements.

    PB17

    LO 6.5This information was collected for the first year of manufacturing for Wifi Apps:

    Direct materials per unit $1.75; Direct labor per unit $3.50; Variable manufacturing overhead per Unit $0.55; Variable Selling and administration expenses $1.25; Units produced 50,000; Units sold 40,000; Sales price $13; Fixed manufacturing expenses $120,000; Fixed selling and administration expenses $35,000.

    Prepare an income statement under variable costing and prepare a reconciliation to the income under the absorption method.

     

    Thought Provokers

     

    TP1

    LO 6.1What conditions are optimal for using traditional allocation? Is the allocation more effective when there is high-volume production?

    TP2

    LO 6.2College Cases sells cases for electronic devices such as phones, computers, and tablets. These cases have college logos or mascots on them and can be customized by adding such things as the customer’s name, initials, sport, or fraternity letters. The company buys the cases in various colors and then uses laser technology to do the customization of the letters and to add school names, logos, mascots, and so on. What are potential activity-based costing pools for College Cases, and what would be appropriate cost drivers?

    TP3

    LO 6.3How would a service industry apply activity-based costing?

    TP4

    LO 6.4Cape Cod Adventures makes foam noodles with sales of 3,000,000 units per year and retractable boat oars with sales of 50,000 pairs per year. What information would Cape Cod Adventures need in order to change from traditional to ABC costing? What are the limitations to activity-based costing?

    TP5

    LO 6.5In designing a bonus structure to reward your production managers, one of the options is to reward the managers based on reaching annual income targets. What are the differences between a reward system for a company that uses absorption costing and one for a company that uses variable costing?