3-1

Brief Exercise 3-1 (10 minutes)

a. Receive raw materials from suppliers: Batch-level

b. Manage parts inventories: Product-level

c. Do rough milling work on products: Unit-level

d. Interview and process new employees in the personnel department: Facility-level

e. Design new products: Product-level

f. Perform periodic preventive maintenance on general-use equipment: Facility-level

g. Use the general factory building: Facility-level

h. Issue purchase orders for a job: Batch-level

Some of these classifications are debatable and depend on the specific circumstances found in particular companies.

3-2

Brief Exercise 3-2 (15 minutes)

1. The activity rates are computed as follows:

Activity Cost Pool

(a) Estimated Overhead

Cost

(b) Expected Activity

(a) ÷ (b) Activity Rate

Labor related ................... $ 48,000 20,000 DLHs $2.40 per DLH Machine related ................ 67,500 45,000 MHs $1.50 per MH Machine setups ................ 84,000 600 setups $140.00 per setup Production orders ............. 112,000 400 orders $280.00 per order Product testing ................. 58,500 900 tests $65.00 per test Packaging ........................ 90,000 6,000 packages $15.00 per package General factory................. 672,000 20,000 DLHs $33.60 per DLH Total ............................... $1,132,000

2. The predetermined overhead rate based entirely on direct labor-hours would be computed as follows:

Total estimated overhead cost (a) ........... $1,132,000 Total expected direct labor-hours (b) ....... 20,000 DLHs Predetermined overhead rate (a) ÷ (b) .... $56.60 per DLH

3-3

Brief Exercise 3-3 (30 minutes)

The overhead costs assigned to each product would be computed as follows:

K425 M67 Expected

Activity Amount Expected

Activity Amount Labor related, at $6.00 per direct labor-hour ...... 80 $ 480 500 $ 3,000 Machine related, at $4.00 per machine-hour ....... 100 400 1,500 6,000 Machine setups, at $50.00 per setup.................. 1 50 4 200 Production orders, at $90.00 per order............... 1 90 4 360 Shipments, at $14.00 per shipment ................... 1 14 10 140 General factory, at $9.00 per direct labor hour .... 80 720 500 4,500 Total overhead cost assigned (a) ....................... $1,754 $14,200 # of units produced 200 2,000 Overhead cost per unit $8.77 $7.10 The product costs combine direct materials, direct labor, and overhead costs as follows:

K425 M67 Direct materials .......................................... $13.00 $56.00 Direct labor ................................................ 5.60 3.50 Manufacturing overhead (see above) ............ 8.77 7.10 Unit product cost ........................................ $27.37 $66.60

3-4

Brief Exercise 3-4 (30 minutes)

1. Using the company's conventional costing system, the overhead costs applied to the products would be computed as follows:

Product H Product L Total Number of units produced (a) ......... 50,000 10,000 Direct labor-hours per unit (b) ......... 0.20 0.20 Total direct labor-hours (a) × (b) .... 10,000 2,000 12,000

Total manufacturing overhead (a) ............ $1,920,000 Total direct labor-hours (b) ...................... 12,000 DLHs Predetermined overhead rate (a) ÷ (b) ..... $160.00 per DLH

Product H Product L Total Manufacturing overhead applied per unit

0.20 DLH per unit × $160.00 per DLH ... $ 32.00 $ 32.00 Number of units produced ....................... 50,000 10,000 Total manufacturing overhead applied ...... $1,600,000 $320,000 $1,920,000

2. Using the proposed ABC system, overhead costs would be applied as follows:

Product H Product L Total Total manufacturing overhead applied (a) ...... $960,000 $960,000 $1,920,000 Number of units produced (b) ........................... 50,000 10,000 Manufacturing overhead per unit (a) ÷ (b) ......... $19.20 $96.00

3-5

Brief Exercise 3-4 (continued)

3. Under the company’s old method of allocating overhead costs, the high-volume product, Product H, was allocated most of the overhead cost. This occurred simply because the high-volume product is responsible for most of the direct labor-hours. When the overhead is split evenly between the two products, $640,000 of overhead cost is shifted from the high-volume product, Product H, to the low-volume product, Product L. Consequently, the shift from direct labor-hours as an allocation base to an even split of the overhead costs between the two products favors the high-volume product, Product H, and penalizes the low-volume product, Product L. Note that on a per unit basis, the impact is much greater for the low-volume product, Product L, than for the high-volume product, Product H. This is because the impact per unit of shifting the $640,000 in overhead costs is much greater for the low-volume product than for the high-volume product.

3-6

Brief Exercise 3-5 (45 minutes)

1. The journal entries are:

a. Raw Materials ....................... 854,000 Accounts Payable ................ 854,000 b. Work in Process .................... 780,000 Manufacturing Overhead ........ 68,000 Raw Materials ..................... 848,000 c. Work in Process .................... 330,000 Manufacturing Overhead ........ 55,000 Wages Payable ................... 385,000 d. Manufacturing Overhead ........ 225,000 Accumulated Depreciation.... 225,000 e. Manufacturing Overhead ........ 194,000 Accounts Payable ................ 194,000 f. Compute the amount of overhead applied.

Activity Actual Overhead Activity Cost Pool Rate Activity Applied

Machine related................ $24 3,800 $ 91,200 Purchase orders ............... $85 700 59,500 Machine setups ................ $175 400 70,000 General factory ................ $16 22,000 352,000 Total ............................... $572,700

Work in Process .................... 572,700 Manufacturing Overhead...... 572,700 g. Finished Goods ...................... 1,690,000 Work in Process .................. 1,690,000

3-7

Brief Exercise 3-5 (continued)

2. Raw Materials Work in Process

Bal. 18,000 (b) 848,000 Bal. 24,000 (g) 1,690,000 (a) 854,000 (b) 780,000 Bal. 24,000 (c) 330,000 (f) 572,700 Bal. 16,700

Finished Goods Accumulated Depreciation

Bal. 46,000 (d) 225,000 (g) 1,690,000

Accounts Payable Wages Payable

(a) 854,000 (c) 385,000 (e) 194,000

Manufacturing Overhead

(b) 68,000 (f) 572,700 (c) 55,000 (d) 225,000 (e) 194,000 Bal. 30,700

3. The overhead overapplied or underapplied can be computed as follows:

Actual overhead incurred ............... $542,000 Overhead applied ......................... 572,700 Overhead overapplied ................... $(30,700)

3-8

Exercise 3-6 (30 minutes)

1. Entry (a) is the amount of actual manufacturing overhead cost incurred during the year. Debits to Manufacturing Overhead represent actual overhead costs incurred and credits represent overhead applied to products.

2. The activity rates would be computed as follows:

Activity Cost Pool

(a) Estimated Overhead

Cost

(b) Expected Activity

(a) ÷ (b) Activity Rate

Labor related ........... $280,000 40,000 DLHs $7 per DLH Purchase orders ....... $90,000 1,500 orders $60 per order Parts management ... $120,000 400 part types $300 per part type Board etching ........... $360,000 2,000 boards $180 per board General factory......... $400,000 80,000 MHs $5 per MH

3. Computation of the manufacturing overhead cost applied to production:

Activity Cost Pool

(a) Activity Rate

(b) Actual Activity

(a) × (b) Applied

Overhead Labor related .......... $7 per DLH 41,000 DLHs $ 287,000 Purchase orders ...... $60 per order 1,300 orders 78,000 Parts management .. $300 per part type 420 part types 126,000 Board etching ......... $180 per board 2,150 boards 387,000 General factory ....... $5 per MH 82,000 MHs 410,000 Total...................... $1,288,000

4. The overhead overapplied or underapplied can be computed as follows:

Actual overhead incurred ....... $1,302,000 Overhead applied ................. 1,288,000 Overhead underapplied ......... $ 14,000

3-9

Exercise 3-7 (30 minutes)

The overhead applied to each product can be computed as follows:

Product A

Activity Cost Pool

(a) Activity Rate

(b) Actual Activity

(a) × (b) Applied

Overhead Labor related ......... $7/DLH 8,000 DLHs $ 56,000 Purchase orders ..... $60/order 100 orders 6,000 Parts management . $300/part type 20 part types 6,000 Board etching ........ $180/board 0 boards 0 General factory ...... $5/MH 16,000 MHs 80,000 Total ..................... $148,000

Product B

Activity Cost Pool

(a) Activity Rate

(b) Actual Activity

(a) × (b) Applied

Overhead Labor related ......... $7/DLH 12,000 DLHs $ 84,000 Purchase orders ..... $60/order 300 orders 18,000 Parts management . $300/part type 90 part types 27,000 Board etching ........ $180/board 1,500 boards 270,000 General factory ...... $5/MH 24,000 MHs 120,000 Total ..................... $519,000

Product C

Activity Cost Pool

(a) Activity Rate

(b) Actual Activity

(a) × (b) Applied

Overhead Labor related ......... $7/DLH 15,000 DLHs $105,000 Purchase orders ..... $60/order 400 orders 24,000 Parts management . $300/part type 200 part types 60,000 Board etching ........ $180/board 650 boards 117,000 General factory ...... $5/MH 30,000 MHs 150,000 Total ..................... $456,000

3-10

Exercise 3-7 (continued)

Product D

Activity Cost Pool

(a) Activity Rate

(b) Actual Activity

(a) × (b) Applied

Overhead Labor related ......... $7/DLH 6,000 DLHs $ 42,000 Purchase orders ..... $60/order 500 orders 30,000 Parts management . $300/part type 110 part types 33,000 Board etching ........ $180/board 0 boards 0 General factory ...... $5/MH 12,000 MHs 60,000 Total ..................... $165,000 Note that the sum of the overhead costs applied to the individual products ($148,000 + $519,000 + $456,000 + $165,000) equals the total amount of overhead applied ($1,288,000).

3-11

Exercise 3-8 (30 minutes)

1. Activity rates can be computed as follows:

Activity Cost Pool

(a) Estimated Overhead

Cost

(b) Expected Activity

(a) ÷ (b) Activity Rate

Machine setups ....... $72,000 400 setups $180 per setup Special processing ... $200,000 5,000 MHs $40 per MH General factory........ $816,000 24,000 DLHs $34 per DLH

2. The unit product costs would be computed as follows, starting with the

computation of the manufacturing overhead:

Hubs Sprockets Machine setups:

$180 per setup × 100 setups ............ $ 18,000 $180 per setup × 300 setups ............ $ 54,000

Special processing: $40 per MH × 5,000 MHs .................. 200,000 $40 per MH × 0 MHs ........................ 0

General factory: $34 per DLH × 8,000 DLHs ............... 272,000 $34 per DLH × 16,000 DLHs ............. 544,000

Total overhead cost (a) ....................... $490,000 $598,000 Number of units produced (b) .............. 10,000 40,000 Overhead cost per unit (a) ÷ (b) .......... $49.00 $14.95 Hubs Sprockets Direct materials .................................. $32.00 $18.00 Direct labor:

$15 per DLH × 0.80 DLHs ................. 12.00 $15 per DLH × 0.40 DLHs ................. 6.00

Manufacturing overhead (see above) .... 49.00 14.95 Unit product cost ................................ $93.00 $38.95

3-12

Exercise 3-9 (45 minutes)

1. The unit product costs under the company's conventional costing system would be computed as follows:

Rascon Parcel Total

Number of units produced (a) ...... 20,000 80,000 Direct labor-hours per unit (b) ..................... 0.40 0.20 Total direct labor-hours (a) × (b) ................ 8,000 16,000 24,000

Total manufacturing overhead (a) ......... $576,000 Total direct labor-hours (b) ................... 24,000 DLHs Predetermined overhead rate (a) ÷ (b) .. $ 24.00 per DLH

Rascon Parcel Direct materials ......................................... $13.00 $22.00 Direct labor ............................................... 6.00 3.00 Manufacturing overhead applied:

0.40 DLH per unit × $24.00 per DLH ........ 9.60 0.20 DLH per unit × $24.00 per DLH ........ 4.80

Unit product cost ....................................... $28.60 $29.80