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Chapter 4

Managerial Accounting 3e Solutions ManualChapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Quick Check

Answers:

QC4-1. dQC4-3. cQC4-5. cQC4-7. c QC4-9. a

QC4-2. dQC4-4. cQC4-6. dQC4-8. cQC4-10. c

Short Exercises

(5 min) S 4-1

a.

Product-level costs

b.

Activity-based costingc.

Internal failure costs

d.

Unit-level costs

e.

External failure costs

f.

Facility-level costs

g.

Kaizen

h.

Appraisal costs

i.

Takt time

j.

POUS

k.

TQM

l.Manufacturing cycle time

m.

Lean thinking

n.

Batch-level costs

o. Prevention costs

p. Activity-based management

q.

DOWNTIME (5 min) S 4-2

Req. 1

JOB 484Cutting DepartmentFinishing Department

Departmental overhead rate$12 per machine

hour$15 per direct

labor hour

Direct labor hours incurred in the Finishing Department 5 direct labor hours

Machine hours incurred in the Cutting Department 9 machine

hours

Allocation of manufacturing overhead$108$75

The total manufacturing overhead allocated to Job 484 is $183.

(continued) S 4-2

Req. 2

The manufacturing cost of Job 484 is determined by summing the three manufacturing costs assigned to the job.

Direct Materials$2,550

Direct Labor ($26 per hour 9 hours)234

Manufacturing overhead 183

Total Job Cost$2,967

(5-10 min) S 4-3

Req. 1

Manufacturing OverheadMachine HoursPlantwide Overhead Rate

$3,762,00017,100=$220 per machine hour

Req. 2

Production DepartmentsDepartmental Manufacturing OverheadMachine HoursDepartmental Overhead Rates

Potato Chips$2,147,000 11,300=$190 per machine hour

Corn Chips$959,000 2,600=$368.85 (rounded) per machine hour

Cheese Puffs$ 656,000 3,200=$205 per machine hour

TOTAL$3,762,00017,100

Req. 3

Potato ChipOvercosted

Corn ChipUndercosted

Cheese PuffsOvercosted

(5 min.) S 4-4

ActivityManufacturing OverheadCost DriverActivity Cost Allocation Rate

Preparation$610,000 10,000 preparation hours=$61 per preparation hour

Cooking and Draining$972,000 36,000 cooking and draining hours=$27 per cooking and draining hour

Packaging$320,000 4,000,000 packages =$0.08 per package

(5-10 min.) S 4-5

Req. 1 and 2

The total amount of manufacturing overhead allocated to the order (and the amount of manufacturing overhead per bag) is computed as follows:

Activity Cost Allocation RateUse of Cost DriverAllocated Manufacturing Overhead

$61 per preparation hour22 preparation hours$ 1,342

$27 per cooking and draining hour32 cooking anddraining hours864

$0.05 per package15,000 bags 750

TOTAL$2,956

Number of bags 12,000

Manufacturing overhead per bag $ 0.20 (rounded)

(continued) S 4-5Manufacturing overhead allocated=$2,956=$0.20

Number of units15,000per unit

Req. 3

In addition to the costs above, Uncle Joe needs to consider the direct materials and direct labor.

(5-10 min.) S 4-6

Req. 1

ActivityEstimated Total Manufacturing Overhead Costs

(A)Estimated Total Usage of Cost Driver

(B)Activity Cost Allocation Rate

(A B)

Machine setup$ 150,4502,950 set-ups$ 51 per setup

Machining$ 999,9005,050 machine hours$198 per machine hour

Quality control$ 339,7004,300 tests run$ 79 per QC test

Req. 2

Job Cost Record

JOB #557Manufacturing Costs

Direct Materials$1,350

Direct Labor:

Evan Berg: 9 $25 = $225

Stephanie Berg: 7 $32 = $224449

Manufacturing Overhead:

2 setups $51 / setup = $102

5 machine hours $198 /

machine hour = $990

2 tests $79 / test = $158 1,250

TOTAL JOB COST$3,049

(15-20 min.) S 4-7

Req. 1

Alloy Technology

Activity Cost Allocation

ActivityCost Allocated to Each Board

Start station

6$ 0.70=$ 4.20

Dip insertion

20$ 0.40=8.00

Manual insertion

9$ 0.60=5.40

Wave solder

6$ 6.40=38.40

Backload

7$ 0.60=4.20

Test

0.14$70.00=9.80

Defect analysis

0.17$60.00= 10.20

Total

$80.20

(continued) S 4-7

Direct materials cost.$56.00

Direct labor cost.$49.00

Activity costs allocated 80.20

Manufacturing product cost$185.20

Req. 2

Managers might favor this multiple-rate, activity-based costing system because it better pinpoints activities for planning and control and it provides more accurate data for product costing.

(15-20 min.) S 4-8

a.

Unit-level

b.

Facility-level

c.

Unit-level

d.

Product-level

e.

Product-level

f.

Facility-level

g.

Facility-level

h.

Batch-level

i.

Unit-level or Batch-level

j.

Product-level

k.Unit-level or Batch-level

l.

Unit-level

(15-20 min.) S 4-9

1.

Unit-level

2.

Product-level

3.

Unit-level

4.

Facility-level

5.

Facility-level

6.

Product-level

7.

Batch-level

8.

Product-level

9.

Facility-level

10.

Facility-level

(5 min) S 4-10

1. The company has very few indirect costs less likely

2.The company operates in a very competitive industry more likely

3.The company has re-engineered its production process but has not changed its accounting system more likely

4. In bidding for jobs, managers lose bids they expected to win and win bids they expected to lose more likely

5.The company produces few products, and the products consume resources in a similar manner less likely

6.The company produces high volumes of some of its products and low volumes of other products more likely

(10 min.) S 4-11

Req. 1

Indirect cost=Estimated total indirect costs

allocation rateEstimated direct labor hours

=$710,500

4,900 hours

=$145 / hour

Req. 2

WilsonNanry

Direct labor (95 hours $335 / hour)$31,825$31,825

Indirect costs (95 hours $145 / hour) 13,630 13,630

Total costs$45,455$45,455

Req. 3

WilsonNanry

Service revenue (160% $31,825)$50,920$50,920

Direct labor (from Req. 2) 31,825 31,825

Indirect costs (from Req. 2) 13,630 13,630

Total costs 45,455 45,455

Operating income$ 5,465$ 5,465

(5-10 min.) S 4-12

There are several warning signs that Sunflowers cost system may be broken:

1.One client is complaining that the firm's fees are too high, while another client is happy with the fees.

2.On a job where Schnell feels efficient, the client is complaining about the high fees.

3.On a complex job where Schnell feels less efficient, the client is happy with the fees.

4.Sunflowers competitor is able to undercut her fees.

5.Sunflowers cost system has not changed since the firm was founded.

6.Sunflower allocates indirect costs using a single allocation basedirect labor hours.

These signals suggest it is time for Schnell to reevaluate her cost system.

(5 min.) S 4-13

Mission, Inc.

ABC Cost Allocation Rates

Documentation PreparationInformation

Technology SupportTraining

Estimated indirect costs of

activity$144,500$119,000$447,000

Divide by estimated quantity

of cost allocation base 2,890 pages 700 applications 4,470 DL hrs.

Cost allocation rate for

activity$ 50 / page $ 170 / application$ 100 / DL hour

(10-15 min.) S 4-14

Req. 1

WilsonNanry

Direct labor (95 hours $335)$31,825$31,825

Documentation preparation:

(50 pages $50)2,500

(300 pages $50)15,000

Information technology support:

(1 application $170)170

(95 applications $100)13,260

Training (95 hours $100) 9,500 9,500

Total costs$43,995$69,585

Req. 2

WebbGreg

Service revenue (160% $31,825)$50,920$ 50,920

Direct labor 31,825 31,825

Indirect costs:

Documentation preparation2,50015,000

Information technology support17013,260

Training 9,500 9,500

Total costs$43,995$ 69,585

Operating income (loss)$ 6,925$(18,665)

(10-15 min.) S 4-15

a.

Value added

b.

Value added

c.

Non-value added

d.

Non-value added

e.

Non-value added

f.

Non-value added

g.

Non-value added

h.

Non-value added

(10-15 min.) S 4-16

1.

Value added

2.

Non-value added

3.

Value added

4.

Non-value added

5.

Value added

6.

Non-value added

7.

Non-value added

8.

Value added

9. Value added

10. Non-value added

(5-10 min.) S 4-17

a.

Lean

b.

Lean

c. Traditional

d.

Lean

e.

Lean

f.

Traditional

g.

Traditional

h.

Lean

i.

Lean

j.

Lean

k.

Traditional

l.

Traditional

m.

Lean

(5 min.) S 4-18

a. Not utilizing people to their full potential

b. Excess processing

c. Movement

d. Waiting

e. Defects

f. Overproduction

g. Transportation

h. Inventory

(10-15 min.) S 4-19

1. Repairing defective units found during inspection internal failure

2.Legal fees from customer lawsuits externalfailure

3.Inspecting products that are half the way through the production process appraisal

4. Redesigning the production process prevention5. Cost incurred producing and disposing of defective units internal failure6. Incremental cost of using a higher grade raw material prevention 7.Training employees prevention

8.Lost productivity due to machine breakdown internal failure9. Inspecting incoming raw materials appraisal

10. Warranty repairs external failure (10-15 min.) S 4-20

Req. 1

Cost (Benefit)

AnalysisCosts (Savings)

Prevention costs:

Negotiating with and training suppliers to obtain higher quality materials and on-time delivery$ 510,000

Redesigning the speakers to make them easier to manufacture1,409,000

Appraisal costs:

Additional 20 minutes of testing for each speaker600,000

Avoid inspection of raw materials(409,000)

Internal failure costs:

Rework avoided because of fewer defective units(652,000)

Avoid lost profits from lost production due to rework(307,000)

External failure costs:

Reduced warranty repair costs(202,000)

Avoid lost profits from lost sales due to disappointed customers (855,000)

Net cost (benefit) from implementing quality program$ 94,000

Req. 2

Boatsburg should not implement the new quality program. The company would lose $94,000 by implementing the new program.

(5-10 min.) S 4-21

1.

External failure cost

2.


3.


4.

Internal failure cost

5.

Appraisal cost

6.

Prevention cost

Exercises (Group A)

(15-20 min.) E 4-22A

Req. 1

Plantwide

overhead rate==Estimated total manufacturing costs

Estimated cost allocation base

==$1,150,000

25,000* direct labor hours

=$46 per direct labor hour

*When calculating plantwide overhead rates, all direct labor

hours incurred in the plant are used.

(continued) E 4-22A

Req. 2

Departmental overhead rate=Total department overhead

Cost allocation base (estimated)

Machining Dept. overhead rate=$825,000

13,750 machine hours

=$60 per machine hour

Finishing Dept. overhead rate=$325,000

13,000** direct labor hours


**When calculating the finishing departmental rate, only the direct labor hours incurred in the finishing department are used.

Req. 3

Overhead allocation based on single, plantwide rate:

Job 450Job 455

Cost allocation base (actual)5 DL hours5 DL hours

Plantwide cost allocation

rate $46/ DL hour $46 / DL hour

Overhead allocation$ 230$ 230

Req. 4

Overhead allocation based on departmental rates:

Job 450Job 455

Machining Department:

Departmental allocation rate$60/ MH$60/ MH

Machine hours used by Job 3 MH 6 MH

Overhead allocation$180$360

Finishing Department:

Departmental allocation rate$25/ DL hr$25/ DL hr

DL hours used by Job 4 DL hrs 3 DL hrs


Total overhead allocation (from

both departments$ 280$ 435

Req. 5

The single plantwide rate undercosts Job 450 and undercosts Job 455. Since Donovan sets the sales price at 125% of cost, and the job cost is affected by the allocation system used, the sales price will be affected by the allocation system used.

(15-20 min.) E 4-23A

Req. 1

West Horizon

Computation of Cost Allocation Rates

ActivityTotal Activity Overhead (est.)Cost Allocation Base (est.)Activity

Overhead Rate

Materials handling$13,2003,300 parts=$ 4 per part

Machine setup$ 5,20020 setups=$260 per setup

Insertion$49,5003,300 parts=$ 15 per part

Finishing $86,1002,100 hours=$ 41 per hour

Req. 2

The amount of manufacturing overhead to be assigned to Job 420 is computed as follows:

ActivityMOH Cost

Materials handling$ 400

Machine setup780

Insertion of parts1,500

Finishing 5,740

Total$8,420

Req. 3

The amount of manufacturing overhead to be assigned to Job 510 is computed as follows:

ActivityMOH Cost

Materials handling$ 1,700

Machine setup1,560

Insertion of parts6,375

Finishing 14,350

Total$23,985

(15-20 min.) E 4-24A

Req. 1

Total overhead $ 790,000

Total machine hours 10,000

Predetermined MOH rate$ 79

Cost of Job #356

Machine hours used100

POHR 79

Total MOH$ 7,900

Job #356traditional POHR

Direct material300 lbs. @ $50/lb.$ 15,000

Direct labor55 hrs. @ $20/hr.1,100

MOH 7,900

Total cost of job$ 24,000

(continued) E 4-24A

Req. 2

Job #356ABC

Direct material300 lbs. @ $50/lb.$ 15,000

Direct labor55 hrs. @ $20/hr.1,100

Machine hours100 2,500

No. of engineering changes6360

Pounds of hazardous waste generated50 15,000


Req. 3

The estimate based on the activity-based costing (ABC) method provides more useful information. Activity-based costing (ABC) focuses on activities, rather than departments, as the fundamental cost objects. ABC recognizes that activities are costly to perform, and each product manufactured may require different types and amounts of activities. Thus, activities become the building blocks for compiling the indirect costs of products, services, and customers. Managers use ABC to more accurately estimate the cost of resources required to produce different products, to render different services, and to serve different customers.

(15-20 min) E 4-25A

Req. 1

Operating

overheadTotal professional hoursCurrent operating overhead allocation rate

$233,50010,000=$23.35 per

professional hour

Req. 2

Billing Calculations for the Lillian Yu Kitchen Remodeling Job

Based on current allocation system

Professional time (27 hours $63 per hour)$1,701.00

Operating overhead (27 hours $23.35 per hour) + 630.45

Total cost of job$2,331.45

Markup on cost 120%

Bill to client$2,797.74

Req. 3

ActivityCostTotal activity allocation baseActivity allocation rate

Transportation to clients$ 10,50015,000a=$0.70 / mile

Blueprint copying$ 37,0001,000b=$35 / copy

Office support$186,0005,000c=$38 / secretarial hour

To calculate the activity cost allocation rates, you must use the total activity for the year:

a 4,500 + 10,500 = 15,000

b 400 + 600 = 1,000

c 2,100 + 2,900 = 5,000

Req. 4

Total cost of jobxMarkup percentage=Amount billed to client

$2751.40x120%=$3,301.68

(continued) E 4-25A

Req. 5

The ABC billing system should be more fair to clients because they are charged according to the resources they used. For example, copying blueprints is very expensive. Under the fairer ABC system, clients are charged according to the number of blueprint copies their job required. The fairer system better recognized the extent to which operating costs are incurred by each unique client job.

(20-25 min.) E 4-26A

Req. 1

Total pharmacy rate (using number of prescriptions):

$190,000 / 25,000 = $7.60

Req. 2

Cost assigned using traditional overhead allocation

Used:Used by this order

Customer order #1247 (standard prescriptions)3$7.60

Req. 3


Used:Used by this order

Customer order #1248 (complicated formulation)1$7.60

Req. 4

Cost PoolsEstimated CostCost DriversEstimated Cost Driver ActivityCost Pool Rate

Pharmacy Occupancy Costs$60,000Technician Hours75,000$0.80

Packaging Supplies$30,000Number of Prescriptions25,000$1.20

Req. 5

Customer order #1247 (standard prescriptions)

Used:Used by this orderABC assigned cost

Technician hrs. for order0.5$0.80$ 0.40

Number of prescriptions3$1.20$ 3.60

Pharmacist hours1$4.00$ 4.00

Total ABC Cost$ 8.00

Req. 6



Technician hrs. for order0.5$0.80$ 0.40

Number of prescriptions1$1.20$ 1.20

Pharmacist hours2.5$4.00$ 10.00

Total ABC Cost$ 11.60

(continued) E 4-26A

Req. 7


(20-25 min.) E 4-27A

Req. 1

First, compute the current plantwide manufacturing overhead rate:

Total manufacturing overheadTotal direct labor hoursPlantwide overhead rate

$820,00020,500=$40 per

direct labor hour

Then, apply it to the two products:

Manufacturing CostMedium

(42-inch)Large

(63-inch)

Direct materials$ 660,000$1,227,000

Direct labor 225,000 388,000

Manufacturing overhead:

(7,875 DL hours $40) = 315,000

(12,625 DL hours $40) = 505,000

Total manufacturing cost$1,200,000$2,120,000

Number of units produced 3,200 4,000

Cost per unit$ 375$ 530

Req. 2

First, compute the activity cost allocation rates:

ActivityActivity costTotal activity allocation baseActivity allocation rate

Materials handling$120,000600a=$200 / mat. order handled

Machine processing$600,00040,000b=$15 / machine hour

Packaging $100,00010,000c=$10 / packaginghour

You must use the TOTAL activity for the year as follows. Since Owens only manufactures two products, you add the activity of each of the individual products to find the total activity:

a 350 + 250 = 600

b 25,000 + 15,000 = 40,000

c 3,000 + 7,000 = 10,000

(continued) E 4-27A

Req. 2 (continued)

Then, apply them to the two products:

Manufacturing CostMedium

(42-inch)Large

(63-inch)


Direct labor 225,000 388,000

Manufacturing overhead:

Medium:

(350 material orders $200

= $70,000)

(25,000 machine hours

$15 = $375,000)

(3,000 packaging hours

$10 = $30,000)

Total allocation of overhead 475,000

Large:

(250 material orders $200

= $50,000)

(15,000 machine hours

$15 = $225,000)

(7,000 packaging hours

$10 = $70,000)

Total allocation of overhead 345,000

Total manufacturing cost$1,360,000$2,018,000


Cost per unit$ 425.00$ 490.00

Req. 3

Medium Large

Cost per unit using current

system$ 375$ 530

Cost per unit using ABC 425 490

Overcosting / (Undercosting) ($ 50)$ 40

Number of units 3,200 4,000

Total cost distortion($160,000)$118,000

The Medium units had been undercosted and the Large units had been overcosted. Since Joness sets its sales price at 300% of manufacturing cost, the resulting sales price should have been about $150 higher for the Medium units and about $120 lower for the Large units. This helps to explain why Jones is the low cost leader for Medium plasma TVs, but faces competitive pressure on the Large plasma TVs.

(20-30 min.) E 4-28A

Req. 1

King

Total Budgeted Indirect Manufacturing Costs

ActivityBudgeted Quantity of Cost Allocation BaseActivity Cost Allocation RateTotal Budgeted Indirect Cost

Materials handling12,000a$ 3.75$ 45,000

Machine setups 30b$314.20 9,426

Insertion of parts12,000a $ 32.00384,000

Finishing 3,900c$ 54.00 210,600

Total budgeted indirect cost$649,026

__________

a (5 1,000) + (7 1,000)

b 15 + 15

c (1.1 1,000) + (3.1 1,000)

Req. 2

King

ABC Indirect Manufacturing Cost per Unit

ActivityCostAllocationRateQuantity of Cost Allocation Base

Used By:Allocated Activity Cost Per Wheel

StandardDeluxeStandardDeluxe

Materials handling$ 3.7557 $ 18.75$ 26.25

Machine setups$314.200.015*0.015* 4.71 4.71

Insertion of parts$ 32.0057160.00 224.00

Finishing$ 54.001.12.8 59.40 151.20

Total ABC allocated indirect cost$242.86$406.16

__________

*15 setups 1,000 wheels = 0.015 per wheel

Req. 3

Total budgeted manufacturing overhead=$649,026 (Req. 1)

Total budgeted direct labor hours=(1,000 2) + (1,000 3)

=2,000 + 3,000

=5,100

Plantwide overhead rate=$461,500

5,000

=$127.26 / DL hour

Manufacturing overhead cost per wheel:

Standard:

2.00 $127.26 = $254.52Deluxe:3.10 $127.26 = $394.51

(continues E 4-28A) (15-20 min.) E 4-29A

Req. 1

King

Total cost per unit using ABC Data

StandardDeluxe

Direct materials $ 32.00 $ 46.25

Direct labor45.0050.00

Manufacturing overhead 242.86 406.16

Total manufacturing cost$ 320.36$ 502.41

The gross profit (using ABC data) for the two models are:

King

Gross profit per unit using ABC Data

StandardDeluxe

Sales price $ 496.00 $ 670.00


Gross profit $ 175.64 $ 167.59

Req. 2

King

Total cost per unit using plantwide overhead rate

StandardDeluxe



Manufacturing overhead 254.52 394.51

Total manufacturing cost$332.02$490.76

King

Gross profit per unit using plantwide overhead rate

StandardDeluxe

Sale price$496.00$670.00

Total manufacturing costs 332.02 490.76

Gross profit$163.98$179.24

Req. 3

The standard model is more profitable than the deluxe model. Activity-based costing data generally are more accurate than cost data generated by a plantwide overhead allocation rate. ABC systems have more cost categories (activities), each with its own allocation base. ABC cost assignments more accurately represent the cost of resources consumed to manufacture (and support) products.

Req. 4

The ABC system is likely to pass the cost-benefit test because King manufactures two different products that use different amounts of resources.

The old cost system appears broken because profits have been declining even though the company shifted its product mix toward the product that had appeared most profitable under the old system.

(15-20 min.) E 4-30A

Req. 1

Either the materials handling cost or the grinding cost is inaccurate. Both costs were assigned based on the number of parts. Thus, the ratio of Job 409 materials handling cost to Job 622 materials handling cost should be the same as the ratio of Job 409 grinding cost to Job 622 grinding cost. The materials handling cost ratio is 1:3, but the grinding cost ratio is 1:5. Job 622 cannot have three times as many parts as Job 409 and five times as many parts simultaneously.

Req. 2

The first step is to determine the allocation rate for each of the four activities:

Franklin Fabricators

ABC Allocation Rates

ActivityJob 622

Activity CostDivide by Quantity

of the Cost

Allocation BaseActivity Cost

Allocation Rate

Lathe work$20,000 62,500 turns $0.32 / lathe turn

Milling$25,000 1,000 hours $25 / machine hour

Grinding$ 1,800 2,500 parts $0.72 / part

Testing $ 3,000 375 units $8 / unit

The second step is to use the cost allocation rate for each activity to determine the quantity of the allocation base Job 409 used.

Franklin Fabricators

Quantity of the Allocation Base Used by Job 409

ActivityJob 409

Activity CostDivide by Activity Cost Allocation RateQuantity of the Allocation Base Used by Job 409

Lathe work$5,200 $0.32 / turn16,250 turns

Milling$3,700 $25 / hour148 hours

Grinding$ 360 $0.72 / part500 parts

Testing$ 120 $8 / unit15 units

Req. 3

Based on the ABC information, Franklin should not accept the company's offer to test units for $15 each. Franklins cost of performing this activity is only $8 per unit.

(15-20 min) E 4-31A

1. Inventory levels Lean production systems strive to maintain low inventory levels. Lean producers try to purchase raw materials just in time to meet the production schedule, and have the finished inventory ready just in time to meet customer demand. Traditional production systems maintain greater quantities of raw materials, work in process, and finished goods inventory.

2. Batch sizes Lean production systems produce units in much smaller batches than traditional production systems. These batches are demand-pulled through production, rather than pushed through production (like a traditional system), allowing the company to only produce what customers have ordered.

3. Set-up times Lean production systems stress short set-up times so that they can produce and deliver the product to the end customer in a very short amount of time. By keeping set-up times short, lean producers dont have to worry about keeping extra inventory on hand just to be able to quickly meet demand.

(continued) E 4-31A

4.Workplace organization Lean companies use a workplace organization system called 5s (sort, set in order, shine, standardize, sustain) to keep their work cells clean and organized. The goal of workplace organization is, a place for everything and everything in its place. By having a clean, well organized, ergonomic workplace, every employee within the work cell knows where to find the tools and supplies they need to do each job in the cell as efficiently as possible. A clean workplace also leads to fewer defects (due to contaminants), a safer work place, and fewer unscheduled machine repairs.

5. Roles of plant employees At lean producers, plant employees tend to have broader roles. They are cross-trained to perform about every role that is needed in each production cell. They set-up, operate, and repair the machines in the cell. They also perform the quality inspections. As a result, employees tend to have higher morale. Additionally, this decreases bottlenecks caused by having to wait for the right person to come do the job.

6. Manufacturing cycle times Lean producers put great emphasis on shortening their manufacturing cycle times. Lean producers need to have short cycle times since they have very little, if any, safety stock ready to sell to customers. By having short cycle times, they are able to fill customer orders quickly, keeping customers satisfied.

7. Quality Lean producers stress high quality in every aspect of production. Since lean producers do not carry much, if any stock, they need to be able to produce the product right, the first time. Lean producers tend to build-in quality, rather than inspect-in quality as traditional firms do.

(5-10 min.) E 4-32A

a. Movement

b. Excess processing

c. Not utilizing people to their full potential

d. Waiting

e. Defects

f. Transportation

g. Inventory

h. Overproduction

i. Waiting

j. Defects

k. Not utilizing people to their full potential

l. Transportation

m. Inventory

n. Movement

o. Overproduction

p. Excess processing

(15-20 min) E 4-33A

Req. 1

Cost of Quality Report for Healthy Snacks CorpTotal Costs of QualityPercentage of total costs of quality (rounded)

Prevention Costs:

Personnel training$ 28,000

Preventative maintenance 7,000

Total prevention costs$ 35,0004%

Appraisal Costs:

Inspecting products at half-way point$ 52,000

Inspection of raw materials 3,000

Total appraisal costs$ 55,0007%

Internal Failure Costs:

Production loss due to machine breakdowns$ 24,000

Cost of defective products93,000

Cost of disposing of rejected products 13,000

Total internal failure costs$130,00016%

External Failure Costs:

Recall of Batch #59374$171,000

Warranty claims 436,000

Total external failure costs$607,00073%

Total Costs of Quality$827,000100%

Req. 2

Because the company has warranty returns and has had a product recall, the company may suffer a reputation for poor quality products. If so, they are probably losing profits from losing sales. Unsatisfied customers will be reluctant to buy from the company again. This report does not include an estimate of the lost profits arising from a reputation for poor-quality products.

Req. 3

The Cost of Quality report shows that very little is being spent on prevention and appraisal, which is probably why the internal and external failure costs are so high. It appears that the company is only inspecting the product halfway through the production process, and not again at the end of the process. Perhaps that is the reason their external failure costs are so high. The CEO should use this information to develop quality initiatives in the areas of prevention and appraisal. Such initiatives should reduce future internal and external failure costs.

(15-20 min.) E 4-34A

Req. 1

Prevention costs:

Training employees in TQM

Training suppliers in TQM

Identifying preferred suppliers who commit to on-time delivery of perfect quality materials

Appraisal costs:

Strength-testing one item from each batch of panels

Avoid inspection of raw materials


Avoid rework and spoilage


Avoid lost profits from lost sales due to disappointed customers

Avoid warranty costs

Req. 2

Cost / AnalysisCost/

Prevention costs:

Training employees in TQM$ 29,000

Training suppliers in TQM... 33,000

Identifying preferred suppliers who commit to on-

time delivery of perfect quality materials.. 59,000

Appraisal costs:

Strength-testing one item from each batch of

panels... 64,000

Savings on Inspection of raw materials $


Savings on Rework and spoilage..


Savings on Lost profits from lost sales due to

disappointed customers.

Savings on Warranty costs.. < 16,000>

Net ... $

Clarke should adopt the new quality program. The program would save the company $39000

Exercises (Group B)

(15-20 min.) E 4-35B

Req. 1

Plantwide

overhead rate==Total manufacturing overhead


==$1,350,000

50,000

=$ 27

Req. 2

Department overhead rate=Total department overhead


Machining Dept. overhead rate=$900,000


=$45 per machine hour*

Finishing Dept. overhead rate=$450,000


=$18 per direct labor hour*

*Rounded to the nearest dollar.

**When calculating the finishing departmental rate, only the direct labor hours incurred in the finishing department are used.

Req. 3


Job 450Job 455

Total direct labor hours5 DL hours5 DL hours

Plantwide allocation rate $27/ DL hour $27/ DL hour


(continued) E 4-35B

Req. 4


Job 450Job 455





Finishing Department:



Overhead allocation$ 72$ 54

Total overhead allocation (from

both departments$207$324

Req. 5

The single plantwide rate undercosts Job 450 by $72 and undercosts Job 455 by $189. Since Bergeron sets his sales price at 125% of cost, and the job cost is affected by the allocation system he uses, its sales price will also be affected by the allocation system it uses.

(15-20 min.) E 4-36B

Req. 1

Fortunado Company

Computation of Indirect Cost Allocation Rates

ActivityTotal Estimated

CostEstimated Quantity of Cost Allocation Base Activity

Cost Allocation Rate

Materials handling$ 6,4003,200 parts=$ 2 per part

Machine setups$ 9,00025 setups=$360 per setup

Insertion of parts$54,4003,200 parts=$ 17 per part

Finishing $89,7002,300 hours=$ 39 per hour

(continued) E 4-36B

Req. 2

The amount of manufacturing overhead to be assigned to Job 420 is computed as follows

Central Plain - Job 420

Manufacturing overhead allocation

ActivityActual Quantity of Cost Allocation Base Used Cost Allocation RateMOH assigned

Materials handling 250 parts $2 / part=$ 500

Machine setups 3 setups$360 / setup= 1,080

Insertion of parts 250 parts $17 / part= 4,250

Finishing 130 hours$ 39 / hr.= 5,070

Total$ 10,900

Req. 3

The amount of manufacturing overhead to be assigned to Job 510 is computed as follows

Central Plain - Job 510

Manufacturing overhead allocation

ActivityActual Quantity of Cost Allocation Base Used Cost Allocation RateMOH assigned

Materials handling 425 parts $2 / part= $ 850

Machine setups 6 setups$370 / setup= 2,160

Insertion of parts 425 parts $17 / part= 7,225

Finishing 320 hours$ 39 / hr= 12,480

Total $22,715

(15-20 min.) E 4-37B

Req. 1

Total overhead $1,310,000

Total machine hours 10,000

Predetermined MOH rate$ 131

Req. 2

Cost of Job #356

Machine hours used100

POHR $131

Total MOH$ 13,100

Job #356traditional POHR

Direct material (400 lbs. @$50/lb.)$ 20,000

Direct labor (75 hrs. @$20/hr.)$1,500

MOH$13,100


(continued) E 4-37B

Job #356ABC

Direct material (400 lbs. @$50/lb.)$ 20,000

Direct labor (75 hrs. @$20/hr.)$1,500

Machine hours 100$3,500

No. of engineering changes 8$960

Lbs. of hazardous waste

generated 60$13,100


Req. 3


(15-20 min) E 4-38B

Req. 1

Operating

overheadTotal professional hoursCurrent operating overhead allocation rate

$236,50010,000=$23.65 per

professional hour

Req. 2

Total cost of jobxMarkup percentage=Amount billed

$1,992.95x140%=$2,790.13

Req. 3

ActivityCostTotal activity allocation baseActivity allocation rate

Transportation to clients$ 7,50015,000a

miles driven=$0.50 per mile

Blueprint copying 38,0001,000b

copies=$38 per copy

Office

support191,0005,000c

secretarial hours=$38.20 per secretarial hour

To calculate the activity cost allocation rates, you must use the total activity for the year:

a 3,000 + 12,000 = 15,000

b 300 + 700 = 1,000

c 2,700 + 2,300 = 5,000

(continued) E 4-38B

Req. 4

Total cost of jobxMarkup percentage=Amount billed

$2,159.60x140%=$3,023.44

Req. 5

The ABC billing system should be more fair to clients because they are charged according to the resources they used. For example, copying blueprints is very expensive. Under the fairer system, clients are charged according to the number of blueprint copies that their job required. The fairer system better recognized the extent to which operating costs are incurred by each unique client job.

(15-20 min.) E 4-39B

Req. 1

Cost poolsTotal annual

estimated cost

Pharmacy occupancy costs (utilities, rent, and other costs)$80,000

Packaging supplies (bottles, bags, and other packaging)$30,000

Professional training and insurance costs $100,000

Total pharmacy overhead$210,000

Divide by number of prescriptions20,000

Total pharmacy rate (using # of prescriptions)$ 10.50

Req. 2


Customer order #1102

(standard prescriptions)2 @ $10.50$21.00

Req. 3


Customer order #1103

(standard prescriptions)1 @ $10.50$10.50

Req. 4

Cost PoolsEstimated CostCost DriversEstimated Cost Driver ActivityCost Pool Rate

Pharmacy Occupancy Costs$80,000Technician Hours80,000$1.00

Packaging Supplies$30,000Number of Prescriptions20,000$1.50

Training and Insurance Costs$100,000Pharmacist Hours23,810$4.20

Req. 5



Technician hours for order1 @ $1$1.00

Number of prescriptions2 @ $1.50$3.00

Pharmacist hours2 @ $4.20 $8.40

Total ABC Cost$12.40

(continued) E 4-39B

Req. 6

Customer order #1103 (complicated formulation)


Technician hours for order0.5 @ $1$0.50

Number of prescriptions1 @ $1.50$1.50

Pharmacist hours4 @ $4.20$16.80

Total ABC Cost$18.80

Req. 7


(20-25 min.) E 4-40B

Req. 1

Total manufacturing overheadTotal direct labor hours=Plantwide overhead rate

$1,020,00020,400=$50.00

Manufacturing costMedium

(42-inch)Large

(63-inch)


Direct labor280,000525,000

Manufacturing overhead 350,250 669,750

Total manufacturing cost1,585,0002,715,000


Cost per unit396.25543.00

Req. 2

Activity costTotal activity allocation base=Activity allocation rate

Materials handling$145,000500=$290 / mat. orders handing

Machine processing$750,00075,000=$10 / machine hr.

Packaging$125,00025,000=$5 / packaging hr.

Manufacturing costMedium

(42-inch)Large

(63-inch)


Direct labor280,000525,000


Total manufacturing cost1,800,0002,500,000


Cost per unit$ 450$ 500

(continued) E 4-40B

Req. 3

Medium

(42-inch)Large

(63-inch)

Cost/unit using current system$ 396.25$543.00

Cost/unit using ABC 450.00 500.00

Overcosting/(Undercosting) $(53.75)43.00


Cost per unit$(215,000.00)$215,000.00

The Medium units had been undercosted and the Large units had been overcosted. Since Joness sets its sales price at 300% of manufacturing cost, the resulting sales price should have been about $161.25 higher for the Medium units and about $129.00 lower for the Large units.

(20-30 min.) E 4-41B

Req. 1

Rickett Corp.

Total Budgeted Indirect Manufacturing Costs

ActivityBudgeted Quantity of Cost Allocation BaseActivity Cost Allocation RateTotal Budgeted Indirect Cost

Materials handling10,000a$ 3.75$ 37,500

Machine setups 40b$340.00 13,600

Insertion of parts10,000a $ 27.00270,000

Finishing 4,700$ 55.00 249,100

Total budgeted indirect cost$570,200

__________

a (4 1,000) + (6 1,000)

b 20 + 20

c (1.5 1,000) + (3.2 1,000)

Req. 2

Rickett Corp.

ABC Indirect Manufacturing Cost per Unit

ActivityCostAllocationRateQuantity of Cost Allocation Base

Used By:Allocated Activity Cost Per Wheel

StandardDeluxeStandardDeluxe

Materials handling$ 3.7546 $ 15.00$ 22.50

Machine setups$340.000.020*0.020* 6.80 6.80

Insertion of parts$ 27.0046108.00 162.00

Finishing$ 53.001.53.2 79.50 169.60

Total ABC allocated indirect cost$209.30$360.90

__________

*20 setups 1,000 wheels = 0.020 per wheel

(continued) E 4-41B

Req. 3

Total budgeted manufacturing

overhead cost=$570,200 (Req. 1)

Total budgeted direct labor hours=(1,000 2.0) + (1,000 3.0)

=2,000 + 3,000

=5,000

Plantwide overhead rate=$570,200

5,000

=$114.04 per direct labor hour

Manufacturing overhead cost per wheel:

Direct labor hoursxPlantwide

overhead rate=Manufacturing overhead

Standard2.00x114.04=$228.08

Deluxe3.00x114.04=$342.12

(continues E 4-31B) (15-20 min.) E 4-42B

Req. 1

Begin by computing the total costs.

Rickett Corp

Total cost per unit using ABC Data

StandardDeluxe



Manufacturing overhead 209.30360.90


Now compute the gross profit.

Rickett Corp

Gross profit per unit using ABC Data

StandardDeluxe

Sales price$470.00$610.00

Total manufacturing costs 286.90461.15

Gross profit$ 183.10$ 148.85

Req. 2

Rickett Corp.

Gross profit per unit using plantwide overhead rate

StandardDeluxe

Sale price$470.00$610.00

Total manufacturing costs 305.68 442.37

Gross profit$ 164.32$ 167.63

(continued) E 4-42B

Req. 3

The standard model is more profitable than the deluxe model. Activity-based costing data generally are more accurate than cost data generated by a plantwide overhead allocation rate. ABC systems have more cost categories (activities), each with its own allocation base. ABC cost assignments more accurately represent the cost of resources consumed to manufacture (and support) products.

Req. 4

The ABC system is likely to pass the cost-benefit test because the company manufactures two different products that use different amounts of resources.

The old cost system appears broken because profits have been declining even though the company shifted its product mix toward the product that had appeared most profitable under the old system.

(15-20 min.) E 4-43B

Req. 1

Either the materials handling cost or the grinding cost is inaccurate. Both costs were assigned based on the number of parts. Thus, the ratio of Job 409 materials handling cost to Job 622 materials handling cost should be the same as the ratio of Job 409 grinding cost to Job 622 grinding cost. The materials handling cost ratio is 1:3 ($600 to $1,800), but the grinding cost ratio is 1:5 ($312 to $1,560). Job 622 cannot have three times as many parts as Job 409 and five times as many parts simultaneously.

Req. 2

The first step is to determine the allocation rate for each of the four activities:

Williamson Fabricators

ABC Allocation Rates

ActivityJob 622

Activity CostDivide by Quantity

of the Cost

Allocation BaseActivity Cost

Allocation Rate

Lathe work$14,500 58,000 turns = $0.25 / turn

Milling$29,000 1,000 hours = $29.00 / mach. hr.

Grinding$ 1,560 3,250 parts = $0.48 / part

Testing $ 2,700 300 units = $9.00 / unit

The second step is to use the cost allocation rate for each activity to determine the quantity of the allocation base Job 409 used.

Williamson Fabricators

Quantity of the Allocation Base Used by Job 409

ActivityJob 409

Activity CostDivide by Activity Cost Allocation RateQuantity of the Allocation Base Used by Job 409

Lathe work$4,500 $0.25 / turn18,000 turns

Milling$4,350 $29 / hour150 hours

Grinding$ 312 $0.48 / part650 parts

Testing$ 126 $9.00 / unit14 units

(15-20 min.) E 4-43B

Req. 3

Based on the ABC information, Williamson should not accept the company's offer to test units for $12 each. Williamsons cost of performing this activity is $9 per unit ($2,700 300 units tested for Job 622).

(15-20 min) E 4-44B

1. Business strategy of manufacturing without waste Lean production

2. Just in time inventory philosophy Lean production

3. Large finished goods inventories Traditional manufacturing

4. Highly specialized machine operators Traditional manufacturing

5. Long production lead times Traditional manufacturing

6. Pull product demand Lean production

7. Work in process inventories Traditional manufacturing

8. Production areas are organized by function Traditional manufacturing

9. Safety stock Traditional manufacturing

10. Reduced machine setup or changeover times Lean production

11. Cross-trained production employees Lean production

12. Partnerships with suppliers Lean production

(15-20 min) E 4-45B

a. Waiting

b. Overproduction

c. Excess processing

d. Not utilizing people to their full potential

e. Transportation

f. Defects

g. Overproduction

h. Inventory

i. Excess processing

j. Waiting

k. Defects

l. Not utilizing people to their full potential

m. Transportation

n. Movement

o. Inventory

p. Movement

(15-20 min) E 4-46B

Req. 1

Cost of Quality Report for

Skinny Treats Corp.Total Costs of QualityPercentage of total costs of quality (rounded)

Prevention Costs:

Personnel training$ 32,000

Preventative maintenance 8,000

Total prevention costs$ 40,0005%

Appraisal Costs:

Inspecting products at half-way point$ 51,000

Inspection of raw materials 4,000

Total appraisal costs$ 55,0007%

Internal Failure Costs:

Production loss due to machine breakdowns$ 17,000

Cost of defective products88,000

Cost of disposing of rejected products 11,000

Total internal failure costs$116,00014%

External Failure Costs:

Recall of Batch #59374$175,000

Warranty claims 423,000

Total external failure costs$598,00074%

Total Costs of Quality$809,000100%

Req. 2

Because the company has warranty returns and has had a product recall, the company may suffer a reputation for poor quality products. If so, they are probably losing profits from losing sales. Unsatisfied customers will be reluctant to buy from the company again. This report does not include an estimate of the lost profits arising from a reputation for poor-quality products.

Req. 3

The Cost of Quality report shows that very little is being spent on prevention and appraisal, which is probably why the internal and external failure costs are so high. It appears that the company is only inspecting the product half-way through the production process, and not again at the end of the process. Perhaps that is the reason their external failure costs are so high.

The CEO should use this information to develop quality initiatives in the areas of prevention and appraisal. Such initiatives should reduce future internal and external failure costs.

(15-20 min.) E 4-47B

Req. 1

Prevention costs:

Training employees in TQM

Training suppliers in TQM

Identifying preferred suppliers who commit to on-time delivery of perfect quality materials

Appraisal costs:

Strength-testing one item from each batch of panels

Avoid inspection of raw materials


Avoid rework and spoilage


Avoid lost profits from lost sales due to disappointed customers

Avoid warranty costs

Req. 2

The company should implement the new quality program. The program should save the company $48,000.

Problems (Group A)

(40 min.) P 4-48A

Req. 1

Plantwide

overhead rate=Total manufacturing overhead

Total direct labor hours

=$1,070,000





(continued) P 4-48A

Req. 2

Departmental cost allocation rate=Department overhead cost

Department allocation base

Machining=$630,000



Assembly=$440,000



**When calculating the assembly departmental rate, only the direct labor

hours incurred in the assembly department are used.Req. 3

Job #501 uses more of the companys resources. Job 501 uses twice as many machine hours as the other job. The accounting system should show that one job actually costs the company more resources than the other.

Req. 4


Job 500Job 501


Plantwide allocation rate $63 / DL hour $63 / DL hour

Overhead allocation$1,071$1,071

Req. 5


Job 500Job 501




Overhead allocation$567$1,134

Assembly Department:




Total overhead allocation $1,001$1,568

(from both departments)

Req. 6

The single plantwide overhead rate assigned the same amount of overhead to both jobs. The departmental rates assign more overhead cost to Job 501 than Job 500 due to the extra machine hours used. This seems fairer.

(continued) P 4-48A

Req. 7

Manufacturing cost and sales price using current costing system:

Job 500Job 501

Direct Materials$1,800$1,800

Direct Labor (14 DL hours $25) 510510


Total manufacturing cost $3,381 $3,381

Markup for pricing 110% 110%

Sales price$3,719$3,719

Req. 8

Gross profit using current costing system:

Job 500Job 501

Sales Price (from Req. 1)$3,719$3,719

Less: Total manufacturing cost 3,381 3,381

Gross profit / (loss)

$ 338$ 338

Gross profit using departmental rate costing system:

Job 500Job 501

Sales price (from Req. 7)$3,719$2,717

Less: Total manufacturing cost:





Gross profit (loss)

$ 408$ (159)

Req. 9

When utilizing a single rate allocation method, the company believes that both jobs are equally profitable.

When utilizing a refined costing method, the company realizes that Job 500 is profitable but Job 501 shows a loss.

(20-30 min.) P 4-49A

Req. 1

McKnight Corp.

Per-Unit Manufacturing Costs

Standard

DeskUnpainted

Desk

Direct materials$ 93,000$21,000

Materials handling

(120,500 and 30,500) $0.6072,30018,300

Assembling (5,900 and 700) $1588,50010,500

Painting (5,000 $5.10) 25,500 0

Total manufacturing costs$279,300$49,800


Manufacturing product cost per unit$ 56 $ 20

(continued) P 4-49A Req. 2

Hone

Full Product Costs

Standard

Desk Unpainted

Desk

Premanufacturing activities$ 5.00$ 4.00

Manufacturing product costs56.0020.00

Postmanufacturing activities 22.00 21.00

Full product cost per unit$83.00$45.00

Req. 3

Manufacturing product costs are reported in the financial statements.

Managers use full product costs for decisions, such as pricing and product emphasis.

Full product costs are reported in the costs of premanufacturing activities and postmanufacturing activities that are expensed as incurred for external reporting. However, these costs often are assigned to products for internal decisions.

Req. 4

Full product cost... $ 83.00

Desired profit.. 42.00

Sale price per unit standard desk $125.00

(30-40 min.) P 4-50A

Req. 1

Corbertt Company


Applications

DevelopmentContent

ProductionTesting

Estimated indirect activity cost$1,800,000$2,800,000$248,000

Estimated cost allocation base 6 applications 14,000,000 lines 1,600 testing hours

Activity overhead rate$300,000/application $0.20 / line $155 / hour

Req. 2

Corbertt Company

Activity Costs per Unit

X-PageX-Secure

Applications development

(1 and 1) $300,000$300,000$ 300,000

Content production

(680,000 and 10,200,000) $0.20136,000 2,040,000

Testing (90 and 540) $155

13,950 83,700

Total costs

$449,950$2,423,700

Number of units

20,000 8

Per unit cost$ 22.50$302,962.50

(continued) P 4-50A

Req. 3

First, compute the total indirect costs under the original single-allocation-based system.

ProductEstimated qty. of the allocation basexCost allocation rate=Indirect cost allocated

X-Page$113x8,000=$904,000

X-Secure$113x12,000=$1,356,000

Now compute the indirect cost per unit for each product under the original single-allocation-base system.

Corbertt Company

Costs per Unit Under Original Direct-Labor Based System

X-PageX-Secure

Total indirect costs allocated$ 904,000$1,356,000

Number of units

20,000 8

Per unit cost

$ 45.20$169,500.00

Req. 4

The original system overcosted X-Page and undercosted X-Secure.

The original system allocated more overhead to X-Secure than to X-Page. But X-Secure required 15 times as many lines of code and 6 times as much testing as X-Page. The ABC system recognizes this difference and allocates more of the content production and testing costs to X-Secure.

Req. 5

Corbertt Companys different software applications use different amounts of resources.

Corbertt Company has high indirect costs.

Corbertt Company produces high volumes of some software applications and low volumes of other software applications.

Corbertt Company is in a competitive environment and needs accurate product costs.

Corbertt Company has accounting and information system expertise to implement the system.

(30-40 min.) P 4-51A

Req. 1

Jacobsen Pharmaceuticals


Materials HandlingPackagingQuality Assurance

Estimated indirect

activity costs$160,000$430,000$113,000

Estimated cost

allocation base 16,000 kilos 2,300 hours 2,000 samples

Activity overhead rate$ 10 / kilo$ 187 / hour$ 57 / sample

(continued) P 4-51A

Req. 2


Activity Costs Per Unit

Commercial ContainerTravel Pack

Materials handling (8,300 and 6,500) $10

$ 83,000$ 65,000

Packaging (900 and 300) $187

168,30056,100

Quality assurance (240 and 340) $57

13,680 19,380

Total indirect costs

$264,980 $140,480

Number of units

2,800 20,000

Indirect activity cost per unit

$ 94.64 $ 7.02

Req. 3

ProductCost allocation ratexActual quantity of allocation base=Indirect cost allocated

Commercial $400x900=$360,000

Travel$400x300=$120,000


Costs per Unit Under Original Machine-Hour Based System


Total indirect costs allocated$360,000$120,000

Number of units

2,800 20,000

Indirect cost per unit

$ 128.57 $ 6.00

Req. 4

The original system overcosted the commercial containers and undercosted the travel packs.

The original system allocated 3 times as much indirect cost to the commercial containers as to the travel packs. However, commercial containers did not use 3 times as much of the material handling and quality assurance resources. The ABC system recognizes that commercial containers do not require 3 times as much material handling and quality assurance as travel packs. So, relative to the original system, ABC allocates less of the material handling and quality assurance costs to commercial containers.

(20-30 min.) P 4-52A

Req. 1

Real Toys

Predicted Quality Cost Savings

ActivityPredicted Reduction In Activity UnitsActivity Cost Allocation Rate=Predicted

Reduction

In Activity

Costs

Inspection of incoming materials385$25$ 9,625

Inspection of finished goods385$3413,090

Number of defective units discovered in-house3,400$1551,000

Number of defective units discovered by customers975$4240,950

Lost sales to dissatisfied customers270$5815,660

Total predicted quality cost savings$130,325

(continued) P 4-52A

Req. 2

Creative Construction Toys Corp.

Net Benefit of Design Engineering Effort

Total predicted qualitycost savings $130,325

Less: Cost of design engineering (75,000)

Net benefit of design engineering$ 55,325

Req. 3

Measuring the cost of quality-related activities is difficult. As an alternative, they could monitor nonfinancial measures of quality and attempt to improve them.

Problems (Group B)

(40 min.) P 4-53B

Req. 1

Plantwide

overhead rate=Total manufacturing overhead

Total direct labor hours

=$1,040,000





Req. 2

Department allocation rate=Department overhead cost

Department allocation base

Machining=$600,000

4,000 machine hours


Assembly=$440,000



**When calculating the assembly departmental rate, only the direct labor

hours incurred in the assembly department are used.

(continued) P 4-53B

Req. 3

Job 501 uses more of the companys resources.

Job 501 uses more machine hours than the other job. The accounting system should show that one job actually costs the company more resources than the other.

Req. 4


Job 500Job 501


Plantwide allocation rate $72 / DL hour $72 / DL hour


Req. 5


Job 500Job 501





Assembly Department:




Total overhead allocation $1,944$3,444

Req. 6

The single plantwide overhead rate assigned the same amount of overhead to both jobs. The departmental rates assign more overhead cost to Job 501 than Job 500 due to the extra machine hours used. This seems fairer.

Req. 7

Manufacturing cost and sales price using current costing system:

Job 500Job 501



Manufacturing overhead 1,2961,296


Markup for pricing (%) 130% 130%

Sales price$4,870$4,870

Req. 8

Gross profit using current costing system:

Job 500Job 501

Sales Price (from Req. 7)$4,870$4,870

Less: Total manufacturing cost 3,746 3,746

Gross profit / (loss)

$1,124$1,124

(continued) P 4-53B

Gross profit using departmental rate costing system:

Job 500Job 501

Sales price (from Req. 7)$ 4,870$ 4,870

Less: Total mfg. cost

Direct Materials$ 2,000$ 2,000

Direct Labor 450450

Manufacturing overhead 1,9444,3943,4445,894

Gross profit (loss)

$ 476$(1,0224)

Req. 9

When utilizing a single rate allocation method, the company believes that both jobs are equally profitable.

When utilizing a refined costing method, the company realizes that Job 500 is profitable but Job 501 shows a loss.

(20-30 min.) P 4-54B

Req. 1

McMillan Furniture

Per-Unit Manufacturing Costs

Standard

DeskUnpainted

Desk

Direct materials$ 95,000$22,000

Materials handling

(119,000 and 29,000) $0.7083,30020,300

Assembling (5,700 and 1,000) $1691,20016,000

Painting (7,500 $5.30) 39,750 0

Total manufacturing costs$309,250$58,300


Manufacturing cost per unit$ 41 $ 23

Req. 2

McMillan Furniture

Full Product Costs

Standard

Desk Unpainted

Desk

Premanufacturing activities$ 7$ 2

Manufacturing product costs4123

Postmanufacturing activities2321

Full product cost per unit$71$46

(continued) P 4-54B

Req. 3

Manufacturing product costs are reported in the financial statements. Managers use full product costs for

decisions such as pricing and product emphasis.

Full product costs include the costs of premanufacturing activities and postmanufacturing activities that are expensed as incurred for external financial reporting. However, these costs often are assigned to products for internal decisions.

Req. 4

Full product cost. $ 71

Desired profit 42

Sale price per unit std. desk... $113

(30-40 min.) P 4-55B

Req. 1

Willitte Co.


Applications

DevelopmentContent

ProductionTesting

Estimated indirect activity cost$2,400,000$3,000,000$350,000

Cost allocation base (estimated) 8 applications 10,000,000 lines 2,000 testing hours

Activity overhead rate$300,000/application $0.30 / line $175 / hour

Req. 2

Willitte Co.

Activity Costs per Unit

X-PageX-Secure

Applications development

(1 and 1) $300,000$300,000$ 300,000

Content production

(580,000 and 8,700,000) $0.30174,000 2,610,000

Testing (130 and 780) $175

22,750 136,500

Total costs

$496,750$3,046,500

Number of units

35,000 13

Indirect activity cost per unit

$ 14.19*$ 234,346.15*

*Rounded to nearest cent

Req. 3

ProductEstimated qty. of the allocation basexCost allocation rate=Indirect cost allocated

X-Page$134x10,000=$1,340,000

X-Secure$134x15,000=$2,010,000

(continued) P 4-55B

Willitte Co.

Costs per Unit Under Original Direct-Labor Based System

X-PageX-Secure

Total indirect costs allocated

(10,000 and 15,000) $134

$1,340,000$ 2,010,000

Number of units

35,000 13

Per unit cost $ 38.29$ 154,615.38*

__________

*Rounded to nearest cent

Req. 4

The original system overcosted X-Page and undercosted X-Secure.

The original system allocated more overhead to X-Secure than to X-Page. But X-Secure required 15 times as many lines of code and 6 times as much testing as X-Page. The ABC system recognizes this difference and allocates more of the content production and testing costs to X-Secure.

Req. 5

Willitte Companys different software applications use different amounts of resources.

Willitte Company has high indirect costs.

Willitte Company produces high volumes of some software applications and low volumes of other software applications.

Willitte Company is in a highly competitive environment and needs accurate product costs.

Willitte Company has accounting and information system expertise to implement the system.

(30-40 min.) P 4-56B

Req. 1

McNeil Pharmaceuticals


Materials HandlingPackagingQuality Assurance

Estimated indirect

activity cost$180,000$420,000$118,000

Cost allocation base

(estimated) 18,000 2,200 1,700

Overhead rate$ 10 / kilo$ 191 / hour$ 69 / sample

(continued) P 4-56B

Req. 2


Activity Costs Per Unit


Materials handling (8,000 and 6,300) $10

$ 80,000$ 63,000

Packaging (1,500 and 500) $191

286,50095,500

Quality assurance (270 and 370) $69

18,630 25,530

Total indirect costs

$385,130 $184,030

Number of units

2,600 60,000

Indirect activity cost per unit*

$ 148.13 $ 3.07

*Rounded

Req. 3

ProductCost allocation ratexActual qty. of allocation base=Indirect cost allocated

Commercial$300x1,500=$450,000

Travel$300x500=$150,000

Now compute the indirect cost per unit for each product under the original single-allocation-base system.


Costs per Unit Under Original Machine-Hour Based System


Total indirect costs allocated$450,000$150,000

Number of units

2,600 60,000

Indirect cost per unit*$ 173.08 $ 2.50

*Rounded

Req. 4

The original system overcosted the commercial containers and undercosted the travel packs.

The original system allocated 3 times as much indirect cost to the commercial containers as to the travel packs. However, commercial containers did not use 3 times as much of the material handling and quality assurance resources. The ABC system recognizes that commercial containers do not require 3 times as much material handling and quality assurance as travel packs. So, relative to the original system, ABC allocates less of the material handling and quality assurance costs to commercial containers.

(20-30 min.) P 4-57B

Req. 1

Tiny Toys

Predicted Quality Cost Savings

ActivityPredicted Reduction In Activity UnitsActivity Cost Allocation Rate=Predicted

Reduction

In Activity

Costs

Inspection of incoming materials370$22$ 8,140

Inspection of finished goods370$2910,730

Defective units discovered in-house3,200$1341,600

Defective units discovered by

customers875$36$31,500

Lost sales to dissatisfied customers330$62 20,460

Total predicted quality cost savings$112,430

(continued) P 4-57B

Req. 2

Tiny Toys

Net Benefit of Design Engineering Effort

Total predicted quality cost savings $112,430

Cost of design engineering (70,000)

Net benefit of design engineering$ 42,430

Req. 3

Measuring the cost of quality-related activities is difficult. An alternative approach to measure quality improvement is to monitor nonfinancial measures of quality and attempt to improve them.

Discussion & Analysis

A4 58 Discussion & Analysis Questions

1. Explain why departmental overhead rates might be used instead of a single plantwide overhead rate.

A single plantwide overhead rate doesnt always do a good job of matching the cost of overhead resources with the products that consume those resources. By using department overhead rates, companies can more equitably assign overhead to their jobs, products, or services. As a result, less cost distortion occurs and managers have more accurate information for making business decisions.

2. Using activity-based costing, why are indirect costs allocated while direct costs are not allocated?

Since direct costs can be traced to products, they are not allocated. Indirect costs, such as overhead, cannot be traced as easily as direct costs, so must be allocated to products and services.

Discuss the difference between allocate and assign.

In terms of overhead, allocation can be described as a distribution of the cost to products or services via some predetermined cost base such as machine hours. To assign overhead costs rather than allocate, a company will develop a model that refines the costs of overhead into departments or various activity pools and cost drivers. Then the overhead is traced to the products/services as they are used.

3. How can using a single predetermined manufacturing overhead rate based on a unit-level cost driver cause a high-volume product to be overcosted?

When a company uses a plantwide allocation system that is based on a volume-related driver, such as direct labor hours, the high-volume products will be allocated more cost than the low volume products simply because there are more of them produced, not necessarily because they use more overhead. This can result in the higher volume product being overcosted.

4. Assume a company uses a plantwide predetermined manufacturing overhead rate that is calculated using direct labor hours as the cost driver. The use of this plantwide predetermined manufacturing overhead rate has resulted in cost distortion. The companys high-volume products are overcosted and its low-volume products are undercosted. What effects of this cost distortion will the company most likely be experiencing?

A company that overcosts its high-volume products may be experiencing low sales while the undercosted low-volume products are experiencing high sales.

Why might the cost distortion be harmful to the companys competitive position in the market?

The cost distortion can be harmful to a companys competitive position in the market because it could be losing sales of its high-volume products due to the overcosting and therefore over-pricing. It could also be harmed by losing money on the undercosted low-volume products due to under-pricing.

5. A hospital can use activity-based costing (ABC) for costing its services. In a hospital, what activities might be considered to be value-added activities?

Operating on a patient

Dispensing medication to a patient

Evaluating test results

What activities at that hospital might be considered to be non-value-added?

Waiting for a procedure

Fixing equipment

Inspecting prescriptions

6. A company makes shatterproof, waterproof cases for iPhones. The company makes only one model and has been very successful in marketing its case; no other company in the market has a similar product. The only customization available to the customer is the color of the case. There is no manufacturing cost difference between the different colors of the cases. Since this company has a high-volume product, its controller thinks that the company should adopt activity-based costing. Why might activity-based costing not be as beneficial for this company as for other companies?

Activity-based costing is beneficial to companies who are

in highly competitive markets

produce many different products that require different types and amounts of resources

produce high volume of some products and low volume of others.

Since this company does not fit into these categories, it might not be beneficial for them to incur the cost of developing and using ABC.

7. Compare a traditional production system with a lean production system. Discuss the similarities and the differences.

Some of the differences between a traditional production system and a lean production system are

like machines grouped together vs. production cells

longer vs. shorter setup times

larger vs. smaller batches

higher vs. lower inventories

many suppliers vs. fewer, well-coordinated suppliers

single tasked labor vs. wider range of labor tasks

longer vs. shorter manufacturing cycles

Similarities include

machinery needed

labor needed

inspection of products

8. Think of a product with which you are familiar. Explain how activity-based costing could help the company that makes this product in its efforts to be green.

Student answers may vary.

9. It has been said that external failure costs can be catastrophic and much higher than the other categories. What are some examples of external failure costs?

Lost sales

Sales returns

Warranty repairs/replacements

Why is it often difficult to arrive at the cost of external failures?

Often the largest external failure cost - lost sales/profits - is hard to measure because of its nature. There are no records kept of lost sales. They must be estimated using subjective experiences and judgments. Defect rates, the number of customer complaints, and warranty repairs/replacements can help in the estimation.

10. What are the four categories of quality-related costs? Name a cost in each of the four categories for each of the following types of organizations:

a. Restaurant

b. Hospital

c. Law firm

d. Bank

e. Tire manufacturer

f. University

The four categories of quality-related costs are prevention, appraisal, internal failure costs, and external failure costs.

PreventionAppraisalInternal Failure CostsExternal Failure Costs

a. RestaurantTraining for cooks/serversWait staff inspects orders before servingMeals not as ordered Mold/insect found on meal by customer

b. HospitalTraining for ER employeesEvaluating an ER patientReissuing medication due to inaccurate recordingRe-casting improperly set broken arm

c. Law firmTraining for paralegalsAttorney review of paralegals workUnderestimated case timeLosing a case due to carelessness

d. BankTraining for tellersManager approval for certain transactionsCashed an NSF checkCustomer reporting bank error on statement

e. Tire manufacturerTraining for factory employeesTires inspected before shippingTires returned to factory for rework or scrapedWarranty repairs

f. UniversityTraining for admissions staffDean approval for depart-mental budgetsCanceled classesLosing alumni support

11. What are the similarities between sustainability and lean thinking? What are the differences between sustainability and lean thinking?

Sustainability and lean thinking have many similarities: both practices seek to reduce waste. However, lean operations focus on eliminating waste and empowering employees in an effort to increase economic profits. On the other hand, sustainability focuses on eliminating waste and empowering employees not only to increase economic profits, but also to preserve the planet and improve the lives of all people touched by the company.

12. Why might a company want to take lean thinking a step further by including operations and methods associated with sustainability?

While lean practices tend to center on internal operational waste, green practices also consider the external waste that may occur as a result of the product. To become greener, a lean company should be particularly cognizant of all waste that could harm the planet: packaging waste, water waste, energy waste, and emissions waste that would occur from both manufacturing the product and from consumers using and eventually disposing of the product.

Application & Analysis

A4 59 ABC in Real Companies

Basic Discussion Questions

1. Describe the company selected, including its products or services.

A bookstore provides books and other products to its customers. In addition, it could offer events such as book signings or book clubs for its customers.

2. List eight key activities performed at this company. Choose at least one activity in the areas of production, sales, human resources, and accounting.

1. Process customer purchases

2. Process customer special orders

3. Handle customer inquiries

4. Hiring and training new employees

5. Stock shelves

6. Advertise events

7. Close out cash registers daily

8. Record daily transactions

3. For each of the key activities, list a potential cost driver for that activity and describe why this cost driver would be appropriate for the associated activity.

1. customer sales

2. special orders

3. customer inquiries

4. training sessions held

5. packages delivered

6. events scheduled

7. cash registers used

8. bookkeepers hours

Student responses will vary.

A4 60 ABC in Real Companies

Go to a fast food restaurant (or think of the last time you were at a fast food restaurant). Observe the steps involved in providing a meal to a customer. You will be watching for value-added steps and non-value-added steps. Answer the following questions.

Basic Discussion Questions

1. Describe the steps involved with delivering the meal to the customer that you can observe.

2. Describe the behind-the-scenes processes that are likely in the restaurant, such as cleaning, stocking, and cooking activities.

3. With your answers for 1 and 2 above, list all of the possible activities, materials, and information that you think might be included on a value stream map for the restaurant. Include all steps you can think of (not necessarily of those you can observe).

4. Make a list of the eight wastes as denoted by the acronym DOWNTIME (defects, overproduction, waiting, not utilizing people to their full potential, transportation, inventory, movement, and excess processing). Next to each waste category, list at least one possible non-value-added activity that might or might not be in the processes in that restaurant.

5. Go back to the list of items for the potential value stream map. Circle potential areas for improvement and explain what wastes might be involved in those areas.

Student answers will vary.

Decision Cases

(20-40 min.) A 4-61

Req. 1

Axis Systems

Product Costs per Unit (Original Cost System)

Job AJob B

Direct materials

$210,000$30,000

Direct labor

160,00012,000

Allocated overhead (8,000 and 600) $22 176,000 13,200

Total cost

$546,000$55,200

Divide by number of units

100 10

Product cost per unit

$ 5,460$ 5,520

Req. 2

Axis Systems

Product Costs Per Unit (ABC System)

Job AJob B

Direct materials

$ 210,000$30,000

Direct labor

160,00012,000

Allocated overhead:

Materials handlinga

12,7501,700

Machine setupb

3,0002,000

Assemblingc

120,00016,000

Shippingd

1,500 1,500

Total cost

$ 507,250$63,200

Divide by number of units

100 10

Product cost per unit

$5,072.50$ 6,320

__________

a (15,000and2,000)$0.85

b (6and 4)$500

c (1,500and 200)$80

d (1and 1)$1,500

The change in costs of Job A does not exactly offset the change in costs of Job B between the original system and ABC, because Axis has more than these two jobs. If Axis had only these two jobs, then the change in one jobs costs would exactly offset the change in the other jobs costs.

(continued) A 4-61

Req. 3

The activity-based costing system is more accurate than the single-rate system in assigning the costs of the resources each job consumes. The single rate allocates all overhead cost based on direct labor hours. Job A units require 80 direct labor hours each (8,000 100), and Job B units require 60 direct labor hours each (600 10). Consequently, the single rate system assigns to each unit of Job A 133% (80 60) of the overhead cost assigned to each unit of Job B.

But a unit of Job A does not consume 133% as much of each activity as does a unit of Job B. The data given in the problem reveal the following resource consumption patterns:

Job AJob B

Parts per unit

150200

Setups per unit

0.06 0.4

Assembling hours per unit

15 20

Shipments per unit

0.01 0.1

These data show that a unit of Job B actually consumes more of every overhead resource than a unit of Job A. The ABC system recognizes the actual resource consumption. The single rate undercosts Job B and overcosts Job A.

Students responses will probably not be this complete. The response above is intended to provide a basis for class discussion.

Req. 4

a.If Axis Systems managers base their decision on original system costs, they will outsource both jobs. The original cost system indicates that Axis can produce the A and B jobs for $5,460 and $5,520 per unit, respectively, which is more than the $5,400 outsourcing cost.

b.If the managers base their decision on ABC system costs, they will only outsource Job B. The ABC system shows that Axis Systems will incur $327.50 ($5,400 $5,072.50) less in costs to make the Job A units than to buy them. Because the ABC costs are more accurate, Axis managers should outsource Job B and produce Job A to maximize income.

(15 min.) A 4-62

Axis Systems

Original and Revised Product Costs per Unit (ABC System)

Job B Original Job B Revised

Direct Materials:

Original

Revised ($3,000 0.90%)$3,000$2,700

Direct Labor1,2001,200

Allocated overhead:

Materials handling170170

Machine setup200200

Assembling1,600980*

Shipping 150 150

Total unit cost$6,320$5,400

__________

(continued) A 4-62

*The new assembly process must result in a revised assembling

cost per unit of no more than $980:

$980 = $5,400 ($2,700 + $1,200 + $170 + $200 + $150)

Therefore, the value engineering needs a minimum cost saving in assembling of $620 per unit ($1,600 $980).

$16,000 / 10 units = $1,600 assembly cost per unit from

Decision Case 4-69. Ethical Issue

(15-20 min.) A 4-63

The IMA Statement of Ethical Professional Practice includes overarching ethical principles that express values (honesty, fairness, objectivity and responsibility) and four standards that guide conduct (competence, confidentiality, integrity and credibility). Three of the four specific standards are relevant to Rachel Gambol.

Competence: Gambol has the responsibility to maintain her professional competence (as evidenced by attending the ABC conference), and also to apply that competence to benefit her employer. Gambol can apply her knowledge of ABC by identifying the Order Department as a likely candidate for ABC.

Integrity: Gambol is responsible for communicating unfavorable as well as favorable information and judgments. The unfavorable outcome that some employees may lose their jobs does not excuse Gambol from pursuing the ABC opportunity in the Order Department.

Credibility: Gambol is responsible for communicating all relevant information about the ABC proposal fairly and objectively. She should recognize the benefits and the costs, including how cost savings will require the termination of some employees.

Termination of long-term employees can hurt the morale of remaining employees and possibly even subject the firm to age-discrimination lawsuits. Therefore, Gambol should carefully consider all the relevant implications, not just those for which "hard" numbers are available. Gambol should consider alternatives to terminations, such as transferring "extra" employees to other departments, or offering early retirement packages.

Student responses will probably be less complete.

CMA Question

(5 - 10 min.) A 4-64

Answer: C

144 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

145Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

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