BRIEF EXERCISES BE 163 Sanchez Co. has three activities in its manufacturing process: machine setups, machining, and inspections. Estimated annual overhead cost for each activity is $80,000, $162,500, and $28,000, respectively. The expected annual use in each department is 1,000 setups, 12,500 machine hours, and 875 inspections. Instructions Compute the overhead rate for each activity. Solution 163 (5 min.)

Machine setups $80,000 ÷ 1,000 = $80 per setup Machining $162,500 ÷ 12,500 = $13 per machine hour Inspections $28,000 ÷ 875 = $32 per inspection BE 164 Boots and More, Inc. uses activity-based costing to assist management in setting prices for the company’s three major product lines. The following information is available:

Expected Use of Activity Cost Pool Estimated Overhead Cost Driver per Activity Cutting $ 900,000 25,000 labor hours Stitching 8,000,000 320,000 machine hours Inspections 2,800,000 160,000 labor hours Packing 800,000 64,000 finished goods units

BE 164 (cont.) Instructions Compute the activity-based overhead rates. Solution 164 (5 min.)

Estimated Expected Use of Activity-Based Activity Cost Pool Overhead ÷ Cost Driver per Activity = Overhead Rates Cutting $ 900,000 25,000 labor hours $36.00 per labor hour Stitching 8,000,000 320,000 machine hours $25.00 per machine hour Inspections 2,800,000 160,000 labor hours $17.50 per labor hour Packing 800,000 64,000 finished units $12.50 per finished unit

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BE 165 Stereo City Co. manufacturers speakers and receivers and uses activity-based costing. The following information is available:

Expected Use of Activity Cost Pool Estimated Overhead Cost Driver per Activity Ordering $180,000 24,000 orders Soldering 192,000 64,000 machine hours Inspecting 930,000 120,000 labor hours Packing 840,000 56,000 boxes

Instructions Compute the activity-based overhead rates. Solution 165 (5 min.)

Estimated Expected Use of Activity-Based Activity Cost Pool Overhead ÷ Cost Driver per Activity = Overhead Rates Ordering $180,000 24,000 orders $ 7.50 per order Soldering 192,000 64,000 machine hours $ 3.00 per machine hour Inspecting 930,000 120,000 labor hours $ 7.75 per labor hour Packing 840,000 56,000 boxes $15.00 per box BE 166 Plum Tired manufactures tires for dune buggies and has two different products, nubby tires and smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and incurs $171,000 of overhead costs. The following information is available:

Activity Total Cost Cost Driver Materials handling $60,000 Number of requisitions Machine setups 54,000 Number of setups Quality inspections 57,000 Number of inspections

For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The smooth tires require 600 requisitions, 300 setups, and 400 inspections. BE 166 (cont.) Instructions Determine the overhead rate for each activity. Solution 166 (5–10 min.)

The overhead rates are:

Expected Use Activity Overhead of Cost Drivers Overhead Rate Materials handling $60,000 1,000 $ 60/req. Machine setups 54,000 500 $108/setup Quality inspections 57,000 600 $ 95/insp.

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BE 167 Malt Co. manufactures several types of microbrew beers. Malt has identified the following activities:

a. Inventory control e. Machine setups b. Purchasing f. Brewing c. Receiving g. Packing and shipping d. Employee training

Instructions Classify each activity as value-added or non-value-added. Solution 167 (5 min.)

Activity Classification a. Inventory control Non-value-added b. Purchasing Non-value-added c. Receiving Non-value-added d. Employee training Non-value-added e. Machine setups Non-value-added f. Brewing Value-added g. Packing and shipping Value-added

EXERCISES Ex. 168 All Wood Corporation manufactures dining chairs and tables. The following information is available: Dining Chairs Tables Total Cost Machine setups 200 600 $36,000 Inspections 250 470 $54,000 Labor hours 2,600 2,400 All Wood is considering switching from one overhead rate based on labor hours to activity-based costing. Ex. 168 (cont.) Instructions Perform the following analyses for these two components of overhead: a. Compute total machine setups and inspection costs assigned to each product, using a single

overhead rate. b. Compute total machine setups and inspection costs assigned to each product, using activity-

based costing. c. Comment on your findings. Solution 168 (8–12 min.)

a. Single overhead rate ($36,000 + $54,000) ÷ 5,000 = $18 per labor hour

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Dining chairs: 2,600 × $18 = $46,800 Tables: 2,400 × $18 = 43,200 $90,000 b. Activity-based costing Machine setups: $36,000 ÷ 800 = $45 per setup Inspections: $54,000 ÷ 720 = $75 per inspection Dining chairs: (200 × $45) + (250 × $75) = $27,750 Tables: (600 × $45) + (470 × $75) = 62,250 $90,000 c. The use of activity-based costing resulted in the allocation of less cost to dining chairs and

more cost to tables. The change in cost allocation reflects a more accurate allocation based on cause and effect.

Ex. 169 Vid-saver, Inc. has five activity cost pools and two products (a budget tape rewinder and a deluxe tape rewinder). Information is presented below: Cost Drivers by Product Activity Cost Pool Cost Driver Est. Overhead Budget Deluxe Ordering and Receiving Orders $ 110,000 600 400 Machine Setup Setups 297,000 500 400 Machining Machine hours 1,000,000 150,000 100,000 Assembly Parts 1,200,000 1,200,000 800,000 Inspection Inspections 300,000 550 450 Instructions Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and 200,000 units of Deluxe. Round your answer to the nearest cent. Solution 169 (15–20 min.)

Activity Cost Pool Est. Overhead ÷ Total Est. Activity = Overhead Rate Ordering & Receiving $ 110,000 1,000 orders $110/order Machine Setup 297,000 900 setups $330/setup Machining 1,000,000 250,000 mach. hours $4/machine hour Assembly 1,200,000 2,000,000 parts $.60/part Inspection 300,000 1,000 inspections $300/inspection Budget Deluxe Cost Cost Cost Cost Activity Cost Pool Driver × Rate = Assigned Driver × Rate = Assigned Ordering & Receiving 600 $110 $ 66,000 400 $110 $ 44,000 Machine Setup 500 330 165,000 400 330 132,000 Machining 150,000 4 600,000 100,000 4 400,000 Assembly 1,200,000 .60 720,000 800,000 .60 480,000

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Inspection 550 300 165,000 450 300 135,000 $1,716,000 $1,191,000 ÷ 700,000 ÷ 200,000 $2.45 per unit $5.96 per unit Ex. 170 Ami Reed owns a small department store in a metropolitan area. For twenty years, the accountant has applied overhead to the various departments—Women's Apparel, Men's Apparel, Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee hours worked. Ami Reed 's daughter, who is an accounting student at a local university, has suggested her mother should consider using activity-based costing (ABC). In an attempt to implement ABC, Ami Reed and her daughter have identified the following activities. Instructions Determine a cost driver for each of the activities listed below.

Cost Pool Cost Driver

a. Placing orders ______________________________

b. Stocking merchandise ______________________________

c. Waiting on customers ______________________________

d. Janitorial and Maintenance ______________________________

e. Training employees ______________________________

f. Administrative ______________________________

g. Advertising and Marketing ______________________________

h. Accounting and Legal Services ______________________________

i. Wrapping packages ______________________________

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Solution 170 (6–9 min.)

Cost Pool Cost Driver

a. Placing orders number of orders; volume of individual orders

b. Stocking merchandise number of orders; dollar volume of orders

c. Waiting on customers number of customers; dollar volume of sales

d. Janitorial and Maintenance square feet occupied; traffic through area

e. Training employees total number of employees; number of new employees

f. Administrative number of employees; dollar volume of business

g. Advertising and Marketing number of ad campaigns

h. Accounting and Legal Services dollar volume of sales

i. Wrapping packages number of packages Ex. 171 A list of possible cost drivers is presented below: Code Code A Engineering hours D Number of subassemblies B Setups E Boxes C Machine hours F Orders Instructions For each of the following activity cost pools, select the most appropriate cost driver: Code Cost Pool _____ 1. Machine setup _____ 2. Ordering and receiving _____ 3. Packaging and shipping _____ 4. Engineering design _____ 5. Machining _____ 6. Assembly Solution 171 (4–6 min.)

1. B 4. A 2. F 5. C 3. E 6. D

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Ex. 172 Identify appropriate cost drivers for the following activity cost pools: 1. Human resources 2. Security 3. Receiving 4. Data processing Solution 172 (3–5 min.)

1. Number of employees, number of hires 2. Square footage 3. Shipments received; pounds received 4. Lines printed, CPU minutes, storage units Ex. 173 Two of the activity cost pools for Montana Company are (a) machining ($300,000) and (b) inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours (12,500), square footage (2,000), and number of inspections (200). Instructions Compute the overhead rate for each activity. Solution 173 (4–6 min.)

$300,000 (a) Machining: —————————— = $24 per machine hour 12,500 machine hours $42,000 (b) Inspections: ———————- = $210 per inspection 200 inspections Ex. 174 Tanner, Inc. produces two models of cameras, Standard and Luxury. It sells 100,000 Standard cameras and 15,000 Luxury cameras annually. Tanner switched from traditional costing to activity-based costing and discovered that the cost allocated to Luxury cameras increased so dramatically that the Luxury was now only marginally profitable. Instructions Give a probable explanation for this shift. Solution 174 (4–6 min.)

Low-volume products often require more special handling, such as more machine setups and inspections, than high-volume products. Also, the overhead costs incurred by the low-volume product are often disproportionate to a traditional allocation base such as direct labor hours.

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Ex. 175 Compute activity-based costing rates from the following budgeted data for Tatum's Tools: Activity Cost Pool Budgeted Cost Budgeted Cost Driver Designing $2,250,000 75,000 designer hours Machining 525,000 21,000 machine hours Packing 620,000 31,000 labor hours Solution 175 (3–5 min.)

Designing ($2,250,000 ÷ 75,000) = $30 per designer hour Machining ($525,000 ÷ 21,000) = $25 per machine hour Packing ($620,000 ÷ 31,000) = $20 per labor hour Ex. 176 Holiday Favorites manufactures a wide variety of holiday and seasonal decorative items. Holiday’s activity-based costing overhead rates are:

Purchasing $350 per order Storing $2 per square foot/days Machining $100 per machine hour Supervision $5 per direct labor hour The Haunted House project involved three purchase orders, 4,000 square feet/days, 60 machine hours, and 30 direct labor hours. The cost of direct materials on the job was $19,000 and the direct labor rate is $30 per hour. Instructions Determine the total cost of the Haunted House project. Solution 176 (5–7 min.)

Direct materials $19,000 Direct labor (30 × $30) 900 Factory overhead Purchasing (3 × $350) $1,050 Storing (4,000 × $2) 8,000 Machining (60 × $100) 6,000 Supervision (30 × $5) 150 15,200 Total cost $35,100 Ex. 177 Label the following costs as value-adding (VA) or non-value-adding (NVA):

____ 1. Engineering design

____ 2. Machine repair

____ 3. Inventory storage

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Ex. 177 (cont.)

____ 4. Machining

____ 5. Assembly

____ 6. Painting

____ 7. Inspections

____ 8. Packaging Solution 177 (3–5 min.)

1. VA 5. VA 2. NVA 6. VA 3. NVA 7. NVA 4. VA 8. VA Ex. 178 Borke and Falvery is a law firm that uses activity-based costing. Classify these activities as value-added or non-value-added:

______________ 1. Taking appointments

______________ 2. Reception

______________ 3. Meeting with clients

______________ 4. Bookkeeping

______________ 5. Court time

______________ 6. Meeting with opposing attorneys

______________ 7. Billing

______________ 8. Advertising Solution 178 (3–5 min.)

1. Non-value-added 5. Value-added 2. Non-value-added 6. Value-added 3. Value-added 7. Non-value-added 4. Non-value-added 8. Non-value-added Ex. 179 Tim Taylor Tool Company manufactures small tools. Classify each of the following activity costs of the tool company as either unit level, batch level, product level, or facility level:

______________ 1. Plant management

______________ 2. Drilling

______________ 3. Painting

______________ 4. Machine setups

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Ex. 179 (cont.)

______________ 5. Product design

______________ 6. Cutting

______________ 7. Inspection

______________ 8. Inventory management Solution 179 (4–6 min.)

1. Facility 5. Product 2. Unit 6. Unit 3. Unit 7. Batch 4. Batch 8. Product Ex. 180 Brewer & Carr, PSC is an architectural firm that uses activity-based costing. The three activity cost pools used by Brewer & Carr are: Salaries and Wages, Travel Expense, and Plan Reproduction Expense. The firm has provided the following information concerning activity and costs:

Salaries and wages $360,000 Travel expense 100,000 Plan reproduction expense 120,000 Total $580,000 Activity Cost Pools Project Business Assignment Development Other Salaries and wages 60% 30% 10% Travel expense 40% 40% 20% Plan reproduction expense 35% 40% 25% Instructions Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business Development, and (c) Other activity cost pools. Solution 180 (6–9 min.)

Activity Cost Pools (a) (b) (c) Project Business Assignment Development Other Total Salaries and wages $216,000 $108,000 $36,000 $360,000 Travel expense 40,000 40,000 20,000 100,000 Plan reproduction expense 42,000 48,000 30,000 120,000 Total $298,000 $196,000 $86,000 $580,000

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COMPLETION STATEMENTS 181. In traditional costing systems, direct labor cost is often used for the assignment of all

____________________. 182. A __________________ is any activity that has a direct cause-effect relationship with the

resources consumed. 183. In activity-based costing, overhead costs are allocated to ____________________, then

assigned to products. 184. The number of ___________________ is an appropriate cost driver for the ordering and

receiving activity cost pool. 185. The primary benefit of activity-based costing is ___________________ product costing. 186. When product lines differ greatly in volume and manufacturing complexity, a switch from

traditional costing to ___________________ is indicated. 187. ______________________ increase the worth of a product or service to customers. 188. In the hierarchy of activity levels, the four levels are __________, ___________,

____________, and _____________. 189. Equipment setups are a ______________-level activity. a190. A primary objective of __________________ processing is to eliminate all manufacturing

inventories. a191. Dependable suppliers, a multi-skilled workforce, and a __________________________

are necessary elements of just-in-time processing. Answers to Completion Statements 181. overhead costs 182. cost driver 183. activity cost pools 184. purchase orders 185. more accurate 186. activity-based costing 187. value-added activities 188. unit, batch, product, facility 189. batch a190. just-in-time a191. total quality control system

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MATCHING 192. Match the items in the two columns below by entering the appropriate code letter in the

space provided. A. Pull approach F. Just-in-time processing B. Cost driver G. Batch-level activity C. Facility-level activity H. Product-level activity D. Unit-level activity I. Non-value-added activity E. Activity-based costing J. Value-added activity _____ 1. Allocates overhead to multiple activity cost pools, then assigns the activity cost pools

to products. _____ 2. An activity that has a direct cause-effect relationship with the resources consumed. _____ 3. Increases the worth of a product or service to customers. _____ 4. Should be eliminated or reduced. _____ 5. Plant management. _____ 6. Engineering changes. _____ 7. Equipment setups. _____ 8. Assembling. _____ 9. Primary objective is to eliminate all manufacturing inventories. _____ 10. Used to initiate manufacturing under JIT processing. Answers to Matching 1. E 6. H 2. B 7. G 3. J 8. D 4. I 9. F 5. C 10. A

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SHORT-ANSWER ESSAY QUESTIONS S-A E 193 Borg Corporation uses a traditional costing system. Management is considering switching to an activity-based costing system. What steps must Borg take in initiating an activity-based costing system? Solution 193 Borg Corporation must first identify the major activities that pertain to the manufacture of specific products, then allocate manufacturing overhead to activity cost pools. Next, Borg must identify the cost drivers that accurately measure each activity's contribution to the finished product and compute activity-level overhead rates for each pool. Finally, the manufacturing overhead costs for each activity pool must be allocated to products, using the activity-based overhead rates. S-A E 194 Seven Company produces phasers (sales of 200,000 units per year) and force field enhancers (sales of 25,000 units per year). If Seven switches from traditional costing to activity-based costing, what is the likely effect on overhead assigned to the two products? Solution 194 When overhead is properly assigned in ABC, it will usually increase the unit cost of low-volume products like the force field enhancers. This is because low-volume products often require more special handling, such as machine setups and inspections, than high-volume products. Also, overhead costs incurred by low-volume products often are disproportionate to a traditional allocation base. S-A E 195 What are the conditions that would indicate to the management of a firm that they should switch from traditional costing to activity-based costing? Solution 195 The presence of one or more of the following conditions indicates ABC as the superior costing system: 1) Product lines differ greatly in volume and manufacturing complexity. 2) Product lines are numerous and diverse, and they require differing degrees of support

services. 3) Overhead costs constitute a significant portion of total costs. 4) The manufacturing process or the number of products has changed significantly. 5) Production or marketing managers are ignoring data provided by the existing system and are

instead using alternative data in decision-making.