Connect - Managerial Accounting Chapter 4

1.

Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for 2015 follow.

	Molding					Trimming
Direct labor hours			52,000	DLH				48,000	DLH
Machine hours			30,500	MH				3,600	MH
Overhead costs		$	730,000				$	590,000

Data for two special order parts to be manufactured by the company in 2015 follow:

	Part A27C				Part X82B
Number of units		9,800	units			54,500	units
Machine hours
Molding		5,100	MH			1,020	MH
Trimming		2,600	MH			650	MH
Direct labor hours
Molding		5,500	DLH			2,150	DLH
Trimming		700	DLH			3,500	DLH

Required:
1.	Compute the plantwide overhead rate using direct labor hours as the base.

	Estimated overhead costs $1,320,000 $13.20 per direct labor hour Estimated direct labor hours 100,000

2.	Determine the overhead cost assigned to each product line using the plantwide rate computed in requirement 1. (Round "OH rate" to 2 decimal places.)

	Part Activity Driver Plantwide OH rate Total Overhead Cost A27C 6,200 $13.20 $81,840 X82B 5,650 $13.20 $74,580

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2.

Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for 2015 follow. (Round "OH rate and cost per unit" answers to 2 decimal places.)

	Molding					Trimming
Direct labor hours			52,000	DLH				48,000	DLH
Machine hours			30,500	MH				3,600	MH
Overhead costs		$	730,000				$	590,000

Data for two special order parts to be manufactured by the company in 2015 follow:

	Part A27C				Part X82B
Number of units		9,800	units			54,500	units
Machine hours
Molding		5,100	MH			1,020	MH
Trimming		2,600	MH			650	MH
Direct labor hours
Molding		5,500	DLH			2,150	DLH
Trimming		700	DLH			3,500	DLH

1. Compute a departmental overhead rate for the molding department based on machine hours and a department overhead rate for the trimming department based on direct labor hours. Molding Overhead costs $730,000 $23.93 per machine hour Machine hours 30,500 Trimming Overhead costs $590,000 $12.29 per direct labor hour Direct labor hours 48,000 2. Determine the total overhead cost assigned to each product line using the departmental overhead rates from requirement 1, and then determine the overhead cost per unit. Part A27C Activity Driver Departmental OH Rate Total Overhead Cost Molding 5,100 $23.93 $122,043 Trimming 700 $12.29 8,603 2. Total Overhead Cost $130,646 Units Produced 9,800 3. Overhead cost per unit $13.33 Part X82B Activity Driver Departmental OH Rate Total Overhead Cost Molding 1,020 $23.93 $24,409 Trimming 3,500 $12.29 43,015 2. Total Overhead Cost $67,424 Units Produced 54,500 3. Overhead cost per unit $1.24

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3.

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.

Process	Activity	Overhead Cost				Driver	Quantity
Components	Changeover		$	500,000		Number of batches	800
	Machining			279,000		Machine hours	6,000
	Setups			225,000		Number of setups	120
			$	1,004,000
Finishing	Welding		$	180,300		Welding hours	3,000
	Inspecting			210,000		Number of inspections	700
	Rework			75,000		Rework orders	300
			$	465,300
Support	Purchasing		$	135,000		Purchase orders	450
	Providing space			32,000		Number of units	5,000
	Providing utilities			65,000		Number of units	5,000
			$	232,000

   

Additional production information concerning its two product lines follows.

	Model 145			Model 212
Units produced		1,500			3,500
Welding hours		800			2,200
Batches		400			400
Number of inspections		400			300
Machine hours		1,800			4,200
Setups		60			60
Rework orders		160			140
Purchase orders		300			150

Required:
1.	Using ABC, compute the overhead cost per unit for each product line. (Round your final answers to 2 decimals places.)

Model 145 Model 212 Activity Expected Costs Expected Activity Activity Rate Activity driver incurred Overhead assigned Activity driver incurred Overhead assigned Components Changeover $500,000 800 Number of batches $625.00 per batch 400 $250,000 400 $250,000 Machining 279,000 6,000 Machine hours $46.50 per machine hour 1,800 83,700 4,200 $195,300 Setups 225,000 120 Setups $1,875.00 per setup 60 112,500 60 $112,500 Finishing Welding $180,300 3,000 Welding hours $60.10 per welding hour 800 48,080 2,200 $132,220 Inspecting 210,000 700 Inspections $300.00 per inspection 400 120,000 300 $90,000 Rework 75,000 300 Rework orders $250.00 per rework order 160 40,000 140 $35,000 Support Purchasing $135,000 450 Purchase orders $300.00 per purchase order 300 90,000 150 $45,000 Providing space and utilities 97,000 5,000 Units $19.40 per unit 1,500 29,100 3,500 $67,900 Total overhead cost $773,380 $927,920 Total units produced 1,500 3,500 Overhead cost per unit 515.59 265.12

2.	Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $180 for Model 212. (Round your final answers to 2 decimals places.)

	Model 145 Model 212 Materials and Labor per unit $250.00 $180.00 Overhead per unit 515.59 265.12 Total cost per unit $765.59 $445.12

3.	If the market price for Model 145 is $820 and the market price for Model 212 is $480, determine the profit or loss per unit for each model. (Round your final answers to 2 decimals places.)

	Model 145 Model 212 Price per unit $820.00 $480.00 Cost per unit 765.59 445.12 Profit (loss) per unit $54.41 $34.88

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4.

Glassworks Inc. produces two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports the following data.

	Rounded Edge				Squared Edge					Total
Direct materials		$	19,000			$	43,200		$	62,200
Direct labor			12,200				23,800			36,000
Overhead (300% of direct labor cost)			36,600				71,400			108,000
Total cost		$	67,800			$	138,400		$	206,200
Quantity produced			10,500	ft.			14,100	ft.
Average cost per ft. (rounded)		$	6.46			$	9.82

Glassworks's controller wishes to apply activity-based costing (ABC) to allocate the $108,000 of overhead costs incurred by the two product lines to see whether cost per foot would change markedly from that reported above. She has collected the following information.

Overhead Cost Category (Activity Cost Pool)	Cost
Supervision		$	5,400
Depreciation of machinery			56,600
Assembly line preparation			46,000
Total overhead		$	108,000

She has also collected the following information about the cost drivers for each category (cost pool) and the amount of each driver used by the two product lines. (Round activity rate and cost per unit answers to 2 decimal places.)

		Usage
Overhead Cost Category   (Activity Cost Pool)	Driver	Rounded Edge			Squared Edge			Total
Supervision	Direct labor cost ($)	$	12,200		$	23,800		$	36,000
Depreciation of machinery	Machine hours		500	hours		1,500	hours		2,000	hours
Assembly line preparation	Setups (number)		40	times		210	times		250	times

1. Assign these three overhead cost pools to each of the two products using ABC. Activity Overhead Cost Activity Drivers Activity Rate Supervision $5,400 $36,000 Direct labor cost 15.00 % of direct labor cost Depreciation of machinery 56,600 2,000 Machine hours $28.30 per machine hour Assembly line preparation 46,000 250 Setups $184.00 per set up Rounded edge ----------Activity rate---------- Activity driver incurred Overhead assigned Supervision 15.00 % of direct labor cost $12,200 $1,830 Depreciation of machinery $28.30 per machine hour 500 14,150 Assembly line preparation $184.00 per set up 40 7,360 Total overhead cost $23,340 Squared edge ----------Activity rate---------- Activity driver incurred Overhead assigned Components Supervision 15.00 % of direct labor cost $23,800 $3,570 Depreciation of machinery $28.30 per machine hour 1,500 42,450 Assembly line preparation $184.00 per set up 210 38,640 Total overhead cost $84,660 2. Determine average cost per foot for each of the two products using ABC. Rounded edge Squared edge Total direct material cost $19,000 $43,200 Total direct labor cost 12,200 23,800 Total overhead cost(ABC) 23,340 84,660 Total manufacturing cost $54,540 $151,660 Total production(feet) 10,500 14,100 Average cost per foot $5.19 $10.76

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Questions 5-7
[The following information applies to the questions displayed below.]

Craft Pro Machining produces machine tools for the construction industry. The following details about overhead costs were taken from its company records.

Production Activity	Indirect Labor				Indirect Materials				Other Overhead
Grinding		$	320,000
Polishing						$	135,000
Product modification			600,000
Providing power										$	255,000
System calibration			500,000

Additional information on the drivers for its production activities follows.

Grinding	13,000	machine hours
Polishing	13,000	machine hours
Product modification	1,500	engineering hours
Providing power	17,000	direct labor hours
System calibration	400	batches

	Job 3175		Job 4286
Number of units	200	units	2,500	units
Machine hours	550	MH	5,500	MH
Engineering hours	26	eng.hours	32	eng.hours
Batches	30	batches	90	batches
Direct labor hours	500	DLH	4,375	DLH

5.

Required:
1.	Classify each activity as unit level, batch level, product level, or facility level.

	Grinding Unit level Polishing Unit level Product modification Product level Providing power Facility level System calibration Batch level

6.

2, 3 & 4.

Compute the activity overhead rates using ABC. Form cost pools as appropriate. Determine overhead costs to assign to the following jobs using ABC. What is the overhead cost per unit for Job 3175? What is the overhead cost per unit for Job 4286? (Round average overhead cost per unit to 2 decimal places.)

Job 3175 Job 4286 Activity Overhead Cost Activity Drivers Activity Rate Activity driver incurred Overhead assigned Activity driver incurred Overhead assigned Grinding & polishing $455,000 $13,000 Machine hours $35 per machine hour 550 $19,250 5,500 $192,500 Product modification 600,000 1,500 Engineering hrs. 400 per engineering hour 26 10,400 32 12,800 Providing power 255,000 17,000 Direct labor hrs. 15 per direct labor hour 500 7,500 4,375 65,625 System calibration 500,000 400 batches 1,250 per batch 30 37,500 90 112,500 Total overhead cost $74,650 $383,425 Number of units in job 200 2,500 Average overhead cost per unit $373.25 $153.37

7.

Required:
5.	If the company used a plantwide overhead rate based on direct labor hours, what is the overhead cost for each unit of Job 3175? Of Job 4286? (Do not round intermediate calculations. Round "OH Cost per unit" answers to 2 decimal places.)

	Overhead costs $1,810,000 $106.47 per direct labor hour Direct labor hours 17,000 Product DL hours Plantwide OH rate Total Overhead Cost Units Produced OH Cost per unit Job 3175 500 $106.47 $53,235 200 $266.18 Job 4286 4,375 $106.47 $465,806 2,500 $186.32

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When products differ in batch size and complexity, they usually consume different amounts of overhead resources.
True

Management's pricing and cost decisions for a product are influenced by that product's cost assignments.
True

The departmental overhead rate method uses a different overhead rate for each production department.
True

Which of the following is a disadvantage of the departmental overhead rate method?
It may fail to accurately assign many overhead costs that are not driven by production volume.
The departmental overhead rate method assigns overhead on the basis of volume-related measures.

The use of a plantwide overhead rate is not acceptable for external reporting under GAAP.
False

Because departmental overhead costs are allocated based on measures closely related to production volume, they accurately assign overhead, such as utility costs.
False

Activity-based costing involves four steps: (1) identify activities and the costs they cause, (2) group similar activities into cost pools, (3) determine an activity rate for each activity cost pool, and (4) allocate overhead costs to products using those activity rates.
True

K Company estimates that overhead costs for the next year will be $2,900,000 for indirect labor and $800,000 for factory utilities. The company uses direct labor hours as its overhead allocation base. If 80,000 direct labor hours are planned for this next year, what is the company's plantwide overhead rate?
$46.25 per direct labor hour.

The cost object(s) of the activity-based costing method is(are):
The production activities in the first stage and the unit of product in the second stage.

Activity-based costing often shifts overhead costs from large volume, standardized products to low-volume, specialty products that consume disproportionate resources.
True

The departmental overhead rate method traces costs to each department and then determines an allocation base for each department.
True

Which of the following would not be considered a product cost?
Cost accountant's salary. Budget accountant's salary.
Facility level costs vary with the number of units or batches produced.
False

Activity-based costing first assigns costs to products and then uses these product costs to assign costs to manufacturing activities.
False

Examples of volume-related measures include direct labor hours, direct labor cost dollars, and machine hours.
True

ABC systems ________.
highlight the different levels of activities

A company produces paint that goes through two operations, operation A and operation B, before it is complete. Expected costs and activities for the two departments are shown below. Given this information, the departmental overhead rate for Department B based on machine hours is $4 per machine hour.

	Department A	Department B
Machine hours	50,000 MH	60,000 MH
Direct labor hours	78,500 DLH	100,800 DLH
Overhead costs	$392,500	$403,200

False

Overhead costs:
Cannot be traced to units of product in the same way that direct labor can.

A company estimates total overhead costs for the next year to be $1,200,000 and wishes to use direct labor hours as its overhead allocation base. This company makes two products: (1) Fancy X, which requires three direct labor hours per unit, and (2) Plain X, which requires one direct labor hour per unit. If the company plans to make 10,000 units of Fancy X and 10,000 units of Plain X, then each unit produced will be allocated the same amount of overhead.
False

Which of the following is true?
Overhead costs are often affected by many issues and are frequently too complex to be explained by any one factor.

A company identified the following partial list of activities, costs, and activity drivers expected for the next year:

Activity	Expected Costs	Cost Driver
Extrusion costs	$83,600	Number batches made
Handling costs	$8,800	Number of orders filled
Packaging costs	$40,500	Number of units made

	Product A	Product B
Production volume	750,000 units	600,000 units
Batches made	200 batches	750 batches
Orders filled	75	200

How much overhead in total will be assigned to the Product A line using activity based costing?
$42,500.

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A company has two products: A1 and B2. It uses activity-based costing and has prepared the following analysis showing budgeted cost and activity for each of its three activity cost pools:

		Budgeted Activity
Activity Cost Pool	Budgeted Cost	Product A1	Product B2
Activity 1	$48,000	1,200	4,800
Activity 2	$63,000	2,240	4,760
Activity 3	$80,000	7,200	800

Annual production and sales level of Product A1 is 8,480 units, and the annual production and sales level of Product B2 is 22,310 units. What is the approximate overhead cost per unit of Product A1 under activity-based costing?

$12.00

Annual production and sales level of Product A1 is 8,480 units, and the annual production and sales level of Product B2 is 22,310 units. What is the approximate overhead cost per unit of Product B2 under activity-based costing?
$4.00


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Aztec Industries produces bread which goes through two operations, mixing and baking, before it is ready to be packaged. Next year's expected costs and activities are shown below.

	Mixing	Baking
Direct labor hours	413,000 DLH	93,000 DLH
Machine hours	813,000 MH	813,000 MH
Overhead costs	$495,600	$413,000

Compute Aztec's departmental overhead rate for the mixing department based on direct labor hours.

$1.20 per DLH.

Compute Aztec's departmental overhead rate for the baking department based on direct labor hours.

$4.44 per DLH

Compute Aztec's departmental overhead rate for the mixing department based on machine hours.

$0.61 per MH.

Compute Aztec's departmental overhead rate for the baking department based on machine hours.

$0.51 per MH

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Aztec Industries produces bread which goes through two operations, mixing and baking, before it is ready to be packaged. Next year's expected costs and activities are shown below. Compute Aztec's departmental overhead rate for the mixing department based on direct labor hours. $1.25 per DLH. Compute Aztec's departmental overhead rate for the mixing department based on machine hours. $0.63 per MH. Compute Aztec's departmental overhead rate for the baking department based on direct labor hours. $4.48 per DLH Compute Aztec's departmental overhead rate for the baking department based on machine hours. $0.51 per MH

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A company uses activity-based costing to determine the costs of its three products: A, B, and C. The budgeted cost and activity for each of the company's three activity cost pools are shown in the following table:

		Budgeted Activity
Activity Cost Pool	Budgeted Cost	Product A	Product B	Product C
Activity 1	$70,000	6,000	9,000	20,000
Activity 2	$45,000	7,000	15,000	8,000
Activity 3	$82,000	2,500	1,000	1,625

What are the activity rates for the three activities under activity based costing?
(1) $2.00; (2) $1.50; (3) $16.00

Which of the following statements is true regarding this company's activity rates?
The activity rate under the activity-based costing system for Activity 2 is $1.50.

The final step of activity-based costing assigns overhead costs to pools rather than to products.
False

ABC can be used to assign costs to any cost object that is of management interest.
True

Activity-based costing eliminates the need for overhead allocation rates.
False

In activity-based costing, an activity can involve several related tasks.
True

Plantwide overhead rates typically do a better job of matching each department's overhead costs to the products using the department's resources than do departmental overhead rates.
False

By definition, costs classified as overhead are consumed in basically the same manner regardless of the process involved.
False

A company allocates $7.50 overhead to products based on the number of direct labor hours worked. The company uses a plantwide overhead rate with direct labor hours as the allocation base. Given the amounts below, how many direct labor hours does the company expect in department 2?

9,914 DLH

Put the following ABC implementation steps in order ________.
A Use the activity overhead rates to assign overhead costs to cost objects.
B Compute the allocation rates.
C Trace overhead costs to cost pools.
D Identify the activities and the overhead costs they cause.
DCBA

Which of the following statements is true with regard to the plantwide overhead rate method?
The rate is determined using volume-related measures.

Which of the following is not true?
The departmental overhead rate method is more refined than the plantwide overhead rate method.
The departmental overhead rate method is more costly to implement than the traditional overhead rate method.
The departmental overhead rate method does not assign overhead on the basis of volume-related measures.
Overhead costing accuracy is improved by the use of multiple departmental rates rather than a single overhead rate.
The departmental overhead method assigns overhead on the basis of volume-related measures.

Which types of overhead allocation methods result in the use of more than one overhead rate during the same time period?
Departmental overhead rate method and activity-based costing.

The use of departmental overhead rates will generally result in:
The use of a separate cost allocation base for each department in the shop

ABC costing might lead to:
increasing the sales price of low-volume products

Western Company allocates $10.00 overhead to products based on the number of machine hours used. The company uses a plantwide overhead rate with machine hours as the allocation base. Given the amounts below, how many machine hours does the company expect in department 2?  25,000 MH

Gold Company uses a plantwide overhead rate with machine hours as the allocation base. Use the following information to solve for the amount of machine hours estimated per unit of product RST. 
21 MH per unit of RST.

The following data relates to Mangini Company's estimated amounts for next year.

What is the company's plantwide overhead rate if machine hours are the allocation base?
$160.00 per MH  (320,000+400,000) / (2,000+2,500)

From an ABC perspective, what causes costs to be incurred?
Activities.

What are the main advantages of traditional volume-based allocation methods compared to activity-based costing?
Traditional volume-based methods are easier to use and less costly to implement and maintain.

Two big benefits of ABC costing are a) more accurate product cost information and b) more detailed information on costs and the drivers of those costs.
True

A company produces surgical equipment that goes through threes processes, 1A1, 2B2, and 3C3, before they are complete. Expected costs and activities for the three departments are shown below. All departments have departmental overhead rates based on direct labor hours. Therefore, the overhead rate for each department is $5 per direct labor hour.

False

In competitive markets, the price of a given product is established through the forces of supply and demand.
True

Compared to the departmental overhead rate method, the plantwide overhead rate method usually results in more accurate overhead allocations.
False