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3/11/2014 Assignment Print View

http://ezto.mhecloud.mcgraw-hill.com/hm_accounting.tpx?todo=printview 1/13

Score: 40 out of 40 points (100%)

1.aw ard:

10 out of10.00 points

Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers thesesupplies to hundreds of hospitals. Med Max sets its prices for all hospitals by marking up its cost of goodssold to those hospitals by 10%. For example, if a hospital buys supplies from Med Max that had cost MedMax $100 to buy from manufacturers, Med Max would charge the hospital $110 to purchase thesesupplies. For years, Med Max believed that the 10% markup covered its selling and administrative expenses andprovided a reasonable profit. However, in the face of declining profits Med Max decided to implement anactivity-based costing system to help improve its understanding of customer profitability. The companybroke its selling and administrative expenses into five activities as shown below:

Activity Cost Pool Activity Measure Total Cost Total Activity Customer deliveries Number of deliveries $ 352,000 4,000 deliveries Manual order processing Number of manual orders 304,000 4,000 orders Electronic order processing Number of electronic orders 242,000 11,000 orders Line item picking Number of line items picked 588,000 420,000 line items Other organization-sustaining costs NA 600,000 Total selling and administrative expenses $2,086,000

Med Max gathered the data below for two of the many hospitals that it serves—City General and CountyGeneral (each hospital purchased medical supplies that had cost Med Max $30,000 to buy from itsmanufacturers):

Activity

Activity Measure City General County General Number of deliveries 18 22 Number of manual orders 0 45 Number of electronic orders 19 0 Number of line items picked 110 240

Required:1. Compute the total revenue that Med Max would receive from City General and County General. (Omit

the "$" sign in your response.)

Total Revenue City General $ 33,000 County General $ 33,000

2. Compute the activity rate for each activity cost pool. (Round the "Line item picking" to 2 decimalplaces. Omit the "$" sign in your response.)

Activity Cost Pool Activity Rate

Customer deliveries $ 88.00 per delivery Manual order processing $ 76.00 per manual order Electronic order processing $ 22.00 per electronic order Line item picking $ 1.40 per line item picked

3. Compute the total activity costs that would be assigned to City General and County General. (Roundyour intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in yourresponse.)

Total Activity Costs City General $ 2,156.00 County General $ 5,692.00

4. Compute Med Max’s customer margin for City General and County General. (Hint: Do not overlook the$30,000 cost of goods sold that Med Max incurred serving each hospital.) (Loss amount should beindicated with a minus sign. Round your intermediate calculations and final answers to 2decimal places. Omit the "$" sign in your response.)

Customer Margin City General $ 844.00 County General $ -2,692.00

WorksheetLearning Objective: 07-04 Assign costs to a cost



object using a second-stage allocation.

Learning Objective: 07-03 Compute activity rates for

cost pools.

Learning Objective: 07-05 Use activity-based costing

to compute product and customer margins.

Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers thesesupplies to hundreds of hospitals. Med Max sets its prices for all hospitals by marking up its cost of goodssold to those hospitals by 10%. For example, if a hospital buys supplies from Med Max that had cost MedMax $100 to buy from manufacturers, Med Max would charge the hospital $110 to purchase thesesupplies. For years, Med Max believed that the 10% markup covered its selling and administrative expenses andprovided a reasonable profit. However, in the face of declining profits Med Max decided to implement anactivity-based costing system to help improve its understanding of customer profitability. The companybroke its selling and administrative expenses into five activities as shown below:

Activity Cost Pool Activity Measure Total Cost Total Activity Customer deliveries Number of deliveries $ 352,000 4,000 deliveries Manual order processing Number of manual orders 304,000 4,000 orders Electronic order processing Number of electronic orders 242,000 11,000 orders Line item picking Number of line items picked 588,000 420,000 line items Other organization-sustaining costs NA 600,000 Total selling and administrative expenses $2,086,000

Med Max gathered the data below for two of the many hospitals that it serves—City General and CountyGeneral (each hospital purchased medical supplies that had cost Med Max $30,000 to buy from itsmanufacturers):

Activity

Activity Measure City General County General Number of deliveries 18 22 Number of manual orders 0 45 Number of electronic orders 19 0 Number of line items picked 110 240

Required:1. Compute the total revenue that Med Max would receive from City General and County General. (Omit

the "$" sign in your response.)

Total Revenue

City General $ 33,000

County General $ 33,000

2. Compute the activity rate for each activity cost pool. (Round the "Line item picking" to 2 decimalplaces. Omit the "$" sign in your response.)


Customer deliveries $ 88.00 per delivery

Manual order processing $ 76.00 per manual order

Electronic order processing $ 22.00 per electronic order

Line item picking $ 1.40 per line item picked

3. Compute the total activity costs that would be assigned to City General and County General. (Roundyour intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in yourresponse.)

Total Activity Costs

City General $ 2,156.00

County General $ 5,692.00

4. Compute Med Max’s customer margin for City General and County General. (Hint: Do not overlook the$30,000 cost of goods sold that Med Max incurred serving each hospital.) (Loss amount should beindicated with a minus sign. Round your intermediate calculations and final answers to 2decimal places. Omit the "$" sign in your response.)

Customer Margin

City General $ 844.00

County General $ -2,692.00

Explanation:

1.

Total revenue received:

City

General County General

Cost of goods sold to the hospital (a) $30,000 $30,000



2.aw ard:


Markup percentage 10% 10% Markup in dollars (b) $ 3,000 $ 3,000 Revenue received from hospitals (a) + (b) $33,000 $33,000

2.

Activity Rates:

Activity Cost Pool

(a)EstimatedOverhead

cost (b) Expected Activity

(c)Activity Rate

Customer deliveries $ 352,000 4,000 deliveries $88.00 per delivery Manual order processing $ 304,000 4,000 orders $76.00 per manual order Electronic order processing $ 242,000 11,000 orders $22.00 per electronic order Line item picking $ 588,000 420,000 line items $ 1.40 per line item picked

3.

Activity costs are assigned to the two hospitals as follows:

City General:

Activity Cost Pool(a)

Activity Rate (b) Activity

(a) × (b) ABC Cost

Customer deliveries $88.00 per delivery 18 deliveries $ 1,584.00 Manual order processing $76.00 per order 0 orders 0 Electronic order processing $22.00 per order 19 orders 418.00 Line item picking $ 1.40 per line item 110 line items 154.00 Total activity costs $ 2,156.00

County General:


Activity Rate (b) Activity

(a) × (b) ABC Cost

Customer deliveries $88.00 per delivery 22 deliveries $ 1,936.00 Manual order processing $76.00 per order 45 orders 3,420.00 Electronic order processing $22.00 per order 0 orders 0 Line item picking $ 1.40 per line item 240 line items 336.00 Total activity costs $ 5,692.00

4.

Customer margins for the two hospitals:

City

General County General

Sales $33,000.00 $33,000.00 Cost of goods sold 30,000.00 30,000.00 Gross margin 3,000.00 3,000.00 Customer deliveries 1,584.00 1,936.00 Manual order processing 0 3,420.00 Electronic order processing 418.00 0 Line item picking 154.00 336.00 Total activity costs 2,156.00 5,692.00

Customer margin $ 844.00 $ (2,692.00)

Rocky Mountain Corporation makes two types of hiking boots—Xactive and the Pathbreaker. Dataconcerning these two product lines appear below:

Xactive Pathbreaker Selling price per unit $132.00 $ 94.00 Direct materials per unit $ 64.60 $ 53.00 Direct labor per unit $ 9.60 $ 8.00 Direct labor-hours per unit 1.2 DLHs 1.0 DLHs Estimated annual production and sales 24,000 units 70,000 units

The company has a traditional costing system in which manufacturing overhead is applied to unitsbased on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for theupcoming year appear below:



Estimated total manufacturing overhead $2,470,000 Estimated total direct labor-hours 98,800 DLHs

Required:1. Compute the product margins for the Xactive and the Pathbreaker products under the company’s

traditional costing system. (Loss amounts should be indicated with a minus sign. Omit the "$"sign in your response.)

Xactive Pathbreaker Total Product margin $ 667,200 $ 560,000 $ 1,227,200

2. The company is considering replacing its traditional costing system with an activity-based costingsystem that would assign its manufacturing overhead to the following four activity cost pools (the Othercost pool includes organization-sustaining costs and idle capacity costs):

Estimated Expected Activity

Activities and Activity MeasuresOverhead

Cost Xactive Pathbreaker Total Supporting direct labor (direct labor-hours) $ 642,200 28,800 70,000 98,800 Batch setups (setups) 915,000 350 260 610 Product sustaining (number of products) 840,000 1 1 2 Other 72,800 NA NA NA Total manufacturing overhead cost $ 2,470,000

Compute the product margins for the Xactive and the Pathbreaker products under the activity-basedcosting system. (Loss amounts should be indicated with a minus sign. Round your intermediatecalculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$"sign in your response.)

Xactive Pathbreaker Total Product margin $ 255,000 $ 1,045,000 $ 1,300,000

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not roundintermediate calculations. Round your percentage answers to one decimal place and otheranswers to the nearest dollar amount. Omit the "$" & "%" signs in your response.)

Xactive Pathbreaker Total

Amount

% ofTotal Amount Amount


Traditional Cost System Direct materials $ 1,550,400 29.5 % $ 3,710,000 70.5 % $ 5,260,400 Direct labor 230,400 29.1 % 560,000 70.9 % 790,400 Manufacturing overhead 720,000 29.1 % 1,750,000 70.9 % 2,470,000 Total cost assigned to products $ 2,500,800 $ 6,020,000 $ 8,520,800 Activity-Based Costing System Direct costs: Direct materials $ 1,550,400 29.5 % $ 3,710,000 70.5 % $ 5,260,400 Direct labor 230,400 29.1 % 560,000 70.9 % 790,400 Indirect costs: Supporting direct labor 187,200 29.1 % 455,000 70.9 % 642,200 Batch setups 525,000 57.4 % 390,000 42.6 % 915,000 Product sustaining 420,000 50.0 % 420,000 50.0 % 840,000 Total cost assigned to products $ 2,913,000 $ 5,535,000 $ 8,448,000 Costs not assigned to products: Other 72,800 Total cost $ 8,520,800

rev: 12_19_2011

WorksheetLearning Objective: 07-03 Compute activity rates for

cost pools.

Learning Objective: 07-05 Use activity-based costing

to compute product and customer margins.

Learning Objective: 07-01 Understand activity-based

costing and how it differs from a traditional costing

system.

Learning Objective: 07-04 Assign costs to a cost


Rocky Mountain Corporation makes two types of hiking boots—Xactive and the Pathbreaker. Data



concerning these two product lines appear below:

Xactive Pathbreaker Selling price per unit $132.00 $ 94.00 Direct materials per unit $ 64.60 $ 53.00 Direct labor per unit $ 9.60 $ 8.00 Direct labor-hours per unit 1.2 DLHs 1.0 DLHs Estimated annual production and sales 24,000 units 70,000 units

The company has a traditional costing system in which manufacturing overhead is applied to unitsbased on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for theupcoming year appear below:

Estimated total manufacturing overhead $2,470,000 Estimated total direct labor-hours 98,800 DLHs

Required:1. Compute the product margins for the Xactive and the Pathbreaker products under the company’s

traditional costing system. (Loss amounts should be indicated with a minus sign. Omit the "$"sign in your response.)


Product margin $ 667,200 $ 560,000 $ 1,227,200

2. The company is considering replacing its traditional costing system with an activity-based costingsystem that would assign its manufacturing overhead to the following four activity cost pools (the Othercost pool includes organization-sustaining costs and idle capacity costs):

Estimated Expected Activity

Activities and Activity MeasuresOverhead

Cost Xactive Pathbreaker Total Supporting direct labor (direct labor-hours) $ 642,200 28,800 70,000 98,800 Batch setups (setups) 915,000 350 260 610 Product sustaining (number of products) 840,000 1 1 2 Other 72,800 NA NA NA Total manufacturing overhead cost $ 2,470,000

Compute the product margins for the Xactive and the Pathbreaker products under the activity-basedcosting system. (Loss amounts should be indicated with a minus sign. Round your intermediatecalculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$"sign in your response.)


Product margin $ 255,000 $ 1,045,000 $ 1,300,000

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not roundintermediate calculations. Round your percentage answers to one decimal place and otheranswers to the nearest dollar amount. Omit the "$" & "%" signs in your response.)


Amount



Traditional Cost System

Direct materials $ 1,550,400 29.5 % $ 3,710,000 70.5 % $ 5,260,400

Direct labor 230,400 29.1 % 560,000 70.9 % 790,400

Manufacturing overhead 720,000 29.1 % 1,750,000 70.9 % 2,470,000

Total cost assigned to products $ 2,500,800 $ 6,020,000 $ 8,520,800

Activity-Based Costing System Direct costs:

Direct materials $ 1,550,400 29.5 % $ 3,710,000 70.5 % $ 5,260,400

Direct labor 230,400 29.1 % 560,000 70.9 % 790,400

Indirect costs:

Supporting direct labor 187,200 29.1 % 455,000 70.9 % 642,200

Batch setups 525,000 57.4 % 390,000 42.6 % 915,000

Product sustaining 420,000 50.0 % 420,000 50.0 % 840,000

Total cost assigned to products $ 2,913,000 $ 5,535,000 $ 8,448,000

Costs not assigned to products:

Other 72,800

Total cost $ 8,520,800



rev: 12_19_2011

Explanation:

1.

Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to productsusing the predetermined overhead rate computed as follows:

Predeterminedoverhead rate

=Estimated total manufacturing overhead cost

Estimated total direct labor-hours

=$2,470,000

= $25.00 per DLH98,800 DLHs*

*24,000 units of Xactive @ 1.2 DLH per unit + 70,000 units of the Pathbreaker @ 1 DLH per unit = 28,800DLHs + 70,000 DLHs = 98,800 DLHs

Consequently, the product margins using the traditional approach would be computed as follows:

Xactive Pathbreaker Total Sales $3,168,000 $6,580,000 $ 9,748,000 Direct materials 1,550,400 3,710,000 5,260,400 Direct labor 230,400 560,000 790,400 Manufacturing overhead applied @ $25.00 per direct labor-hour

720,000 1,750,000 2,470,000

Total manufacturing cost 2,500,800 6,020,000 8,520,800 Product margin $ 667,200 $ 560,000 $ 1,227,200

Note that all of the manufacturing overhead cost is applied to the products under the company's traditionalcosting system.

2.

The first step is to determine the activity rates:

(a) (b) (a) ÷ (b) Activity Cost Pool Total cost Total activity Activity Rate Supporting direct labor $ 642,200 98,800 DLH $ 6.50 per DLH Batch setups $ 915,000 610 setups $ 1,500 per setup Product sustaining $ 840,000 2 products $420,000 per product

*The Other activity cost pool is not shown above because it includes organization-sustaining and idlecapacity costs that should not be assigned to products.

Under the activity-based costing system, the product margins would be computed as follows:

Xactive Pathbreaker Total Sales $ 3,168,000 $ 6,580,000 $ 9,748,000 Direct materials 1,550,400 3,710,000 5,260,400 Direct labor 230,400 560,000 790,400 Supporting direct labor 187,200 455,000 642,200 Batch setups 525,000 390,000 915,000 Product sustaining 420,000 420,000 840,000 Total cost 2,913,000 5,535,000 8,448,000 Product margin $ 255,000 $ 1,045,000 $ 1,300,000

3.

Traditional Cost System Xactive PathbreakerDirect materials $1,550,400 / $5,260,400 = 29.5% $3,710,000 / $5,260,400 = 70.5%Direct labor $230,400 / $790,400 = 29.1% $560,000 / $790,400 = 70.9%Manufacturing overhead $720,000 / $2,470,000 = 29.1% $1,750,000 / $2,470,000 = 70.9% Activity-Based Costing System Direct costs: Direct materials $1,550,400 / $5,260,400 = 29.5% $3,710,000 / $5,260,400 = 70.5% Direct labor $230,400 / $790,400 = 29.1% $560,000 / $790,400 = 70.9%Indirect costs: Supporting direct labor $187,200 / $642,200 = 29.1% $455,000 / $642,200 = 70.9% Batch setups $525,000 / $915,000 = 57.4% $390,000 / $915,000 = 42.6% Product sustaining $420,000 / $840,000 = 50.0% $420,000 / $840,000 = 50.0%



3.aw ard:


Denny Asbestos Removal Company removes potentially toxic asbestos insulation and related productsfrom buildings. The company’s estimator has been involved in a long-simmering dispute with the on-sitework supervisors. The on-site supervisors claim that the estimator does not adequately distinguish betweenroutine work such as removal of asbestos insulation around heating pipes in older homes and nonroutinework such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-sitesupervisors believe that nonroutine work is far more expensive than routine work and should bear highercustomer charges. The estimator sums up his position in this way: “My job is to measure the area to becleared of asbestos. As directed by top management, I simply multiply the square footage by $4,000 perthousand square feet to determine the bid price. Since our average cost is only $3,000 per thousand squarefeet, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up.Besides, it is difficult to know what is routine or nonroutine until you actually start tearing things apart.”

To shed light on this controversy, the company initiated an activity-based costing study of all of itscosts. Data from the activity-based costing system follow:

Activity Cost Pool Activity Measure Total Activity Removing asbestos Thousands of square feet 480 thousand square feet Estimating and job setup Number of jobs 230 jobs* Working on nonroutine jobs Number of nonroutine jobs 21 nonroutine jobs Other (organization-sustaining and idle capacity costs) None Not applicable

* The total number of jobs includes nonroutine jobs as well as routine jobs. Nonroutine jobs as well asroutine jobs require estimating and setup work.

Costs for the Year Wages and salaries $ 206,000 Disposal fees 592,000 Equipment depreciation 48,000 On-site supplies 61,000 Office expenses 186,000 Licensing and insurance 368,000 Total cost $1,461,000

Distribution of Resource Consumption Across Activities

RemovingAsbestos

Estimatingand JobSetup

Working onNonroutine

Jobs Other Total Wages and salaries 34% 6% 29% 31% 100% Disposal fees 75% 0% 25% 0% 100% Equipment depreciation 48% 0% 31% 21% 100% On-site supplies 49% 6% 16% 29% 100% Office expenses 7% 34% 24% 35% 100% Licensing and insurance 48% 0% 33% 19% 100%

Required:1. Perform the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain

to enter "0" wherever required. Omit the "$" sign in your response.)

Removing Asbestos

Estimating and Job Setup

Working on Nonroutine Jobs Other Total

Wages and salaries $ 70,040 $ 12,360 $ 59,740 $ 63,860 $ 206,000 Disposal fees 444,000 0 148,000 0 592,000 Equipment depreciation 23,040 0 14,880 10,080 48,000 On-site supplies 29,890 3,660 9,760 17,690 61,000 Office expenses 13,020 63,240 44,640 65,100 186,000 Licensing and insurance 176,640 0 121,440 69,920 368,000 Total cost $ 756,630 $ 79,260 $ 398,460 $ 226,650 $ 1,461,000

2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.Omit the "$" sign in your response.)

Activity Cost Pool Activity Rate Removing asbestos $ 1,576.31 per thousand square feet Estimating and job setup $ 344.61 per job Working on nonroutine jobs $ 18,974.29 per nonroutine job

3. Using the activity rates you have computed, determine the total cost and the average cost per thousandsquare feet of each of the following jobs according to the activity-based costing system. (Round yourintermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

a. A routine 2,000-square-foot asbestos removal job.

Total cost of the job $ 3,497.23 Average cost per thousand square feet $ 1,748.62

b. A routine 4,000-square-foot asbestos removal job.




c. A nonroutine 2,000-square-foot asbestos removal job.


WorksheetLearning Objective: 07-03 Compute activity rates for

cost pools.

Learning Objective: 07-02 Assign costs to cost pools

using a first-stage allocation.

Learning Objective: 07-04 Assign costs to a cost


Denny Asbestos Removal Company removes potentially toxic asbestos insulation and related productsfrom buildings. The company’s estimator has been involved in a long-simmering dispute with the on-sitework supervisors. The on-site supervisors claim that the estimator does not adequately distinguish betweenroutine work such as removal of asbestos insulation around heating pipes in older homes and nonroutinework such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-sitesupervisors believe that nonroutine work is far more expensive than routine work and should bear highercustomer charges. The estimator sums up his position in this way: “My job is to measure the area to becleared of asbestos. As directed by top management, I simply multiply the square footage by $4,000 perthousand square feet to determine the bid price. Since our average cost is only $3,000 per thousand squarefeet, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up.Besides, it is difficult to know what is routine or nonroutine until you actually start tearing things apart.”

To shed light on this controversy, the company initiated an activity-based costing study of all of itscosts. Data from the activity-based costing system follow:

Activity Cost Pool Activity Measure Total Activity Removing asbestos Thousands of square feet 480 thousand square feet Estimating and job setup Number of jobs 230 jobs* Working on nonroutine jobs Number of nonroutine jobs 21 nonroutine jobs Other (organization-sustaining and idle capacity costs) None Not applicable

* The total number of jobs includes nonroutine jobs as well as routine jobs. Nonroutine jobs as well asroutine jobs require estimating and setup work.

Costs for the Year Wages and salaries $ 206,000 Disposal fees 592,000 Equipment depreciation 48,000 On-site supplies 61,000 Office expenses 186,000 Licensing and insurance 368,000 Total cost $1,461,000

Distribution of Resource Consumption Across Activities

RemovingAsbestos

Estimatingand JobSetup

Working onNonroutine

Jobs Other Total Wages and salaries 34% 6% 29% 31% 100% Disposal fees 75% 0% 25% 0% 100% Equipment depreciation 48% 0% 31% 21% 100% On-site supplies 49% 6% 16% 29% 100% Office expenses 7% 34% 24% 35% 100% Licensing and insurance 48% 0% 33% 19% 100%

Required:1. Perform the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain

to enter "0" wherever required. Omit the "$" sign in your response.)

Removing Asbestos

Estimating and Job Setup

Working on Nonroutine Jobs Other Total

Wages and salaries $ 70,040 $ 12,360 $ 59,740 $ 63,860 $ 206,000

Disposal fees 444,000 0 148,000 0 592,000

Equipment depreciation 23,040 0 14,880 10,080 48,000

On-site supplies 29,890 3,660 9,760 17,690 61,000

Office expenses 13,020 63,240 44,640 65,100 186,000

Licensing and insurance 176,640 0 121,440 69,920 368,000

Total cost $ 756,630 $ 79,260 $ 398,460 $ 226,650 $ 1,461,000



2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.

Omit the "$" sign in your response.)


Removing asbestos $ 1,576.31 per thousand square feet

Estimating and job setup $ 344.61 per job

Working on nonroutine jobs $ 18,974.29 per nonroutine job

3. Using the activity rates you have computed, determine the total cost and the average cost per thousandsquare feet of each of the following jobs according to the activity-based costing system. (Round yourintermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

a. A routine 2,000-square-foot asbestos removal job.

Total cost of the job $ 3,497.23

Average cost per thousand square feet $ 1,748.62

b. A routine 4,000-square-foot asbestos removal job.



c. A nonroutine 2,000-square-foot asbestos removal job.



Explanation:

1.

Wages and salaries:Removing Asbestos = 34% × $206,000 = $70,040Estimating and Job Setup = 6% × $206,000 = $12,360Working on Nonroutine Jobs = 29% × $206,000 = $59,740Other = 31% × $206,000 = $63,860

Disposal fees:Removing Asbestos = 75% × $592,000 = $444,000Estimating and Job Setup = 0% × $592,000 = $0Working on Nonroutine Jobs = 25% × $592,000 = $148,000Other = 0% × $592,000 = $0

Equipment depreciation:Removing Asbestos = 48% × $48,000 = $23,040Estimating and Job Setup = 0% × $48,000 = $0Working on Nonroutine Jobs = 31% × $48,000 = $14,880Other= 21% × $48,000 = $10,080

On-site supplies:Removing Asbestos = 49% × $61,000 = $29,890Estimating and Job Setup = 6% × $61,000 = $3,660Working on Nonroutine Jobs = 16% × $61,000 = $9,760Other = 29% × $61,000 = $17,690

Office expenses:Removing Asbestos = 7% × $186,000 = $13,020Estimating and Job Setup = 34% × $186,000 = $63,240Working on Nonroutine Jobs = 24% × $186,000 = $44,640Other = 35% × $186,000 = $65,100

Licensing and insurance:Removing Asbestos = 48% × $368,000 = $176,640Estimating and Job Setup = 0% × $368,000 = $0Working on Nonroutine Jobs = 33% × $368,000 = $121,440Other = 19% × $368,000 = $69,920

2.


Total Cost(b)

Total Activity(a) ÷ (b)

Activity Rate Removing asbestos $ 756,630 480 thousand square feet $ 1,576.31 per thousand square feet Estimating and job setup $ 79,260 230 jobs $ 344.61 per job Working on nonroutine jobs $ 398,460 21 nonroutine jobs $18,974.29 per nonroutine job

3.

The costs of each of the jobs can be computed as follows using the activity rates computed above:a.

Routine 2,000-square-foot job:



4.aw ard:


Removing asbestos ($1,576.31 per thousand square feet × 2 thousand square feet) $3,152.62 Estimating and job setup ($344.61 per job × 1 job) 344.61 Nonroutine job (not applicable) 0 Total cost of the job $3,497.23 Average cost per thousand square feet ($3,497.23 ÷ 2 thousand square feet) $1,748.62

b.

Routine 4,000-square-foot job:

Removing asbestos ($1,576.31 per thousand square feet × 4 thousand square feet) $6,305.24 Estimating and job setup ($344.61 per job × 1 job) 344.61 Nonroutine job (not applicable) 0 Total cost of the job $6,649.85 Average cost per thousand square feet ($6,649.85 ÷ 4 thousand square feet) $1,662.46

c.

Nonroutine 2,000-square-foot job:

Removing asbestos ($1,576.31 per thousand square feet × 2 thousand square feet) $ 3,152.62 Estimating and job setup ($344.61 per job × 1 job) 344.61 Nonroutine job ($18,974.29 per nonroutine job × 1 nonroutine job) 18,974.29 Total cost of the job $22,471.52 Average cost per thousand square feet ($22,471.52 ÷ 2 thousand square feet) $11,235.76

Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model.Data regarding the two products follow:

Product Direct Labor-HoursAnnual

ProductionTotal DirectLabor-Hours

XR7 0.2 DLHs per unit 24,000 Units 4,800 DLHs ZD5 0.4 DLHs per unit 35,000 Units 14,000 DLHs

18,800 DLHs

Additional information about the company follows:a. Product XR7 requires $35 in direct materials per unit, and product ZD5 requires $31.b. The direct labor rate is $40 per hour.c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost

to products. Manufacturing overhead totals $1,362,200 per year.d. Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling

machine.e. Because of the special work required in (d) above, the company is considering the use of activity-based

costing to apply overhead cost to products. Three activity cost pools have been identified and the first-stage allocations have been completed. Data concerning these activity cost pools appear below:

Estimated Total Activity

Activity Cost Pool Activity MeasureEstimatedTotal Cost XR7 ZD5 Total

Machine setups Number of setups $ 199,800 108 162 270 Special milling Machine-hours 410,400 1,080 0 1,080 General factory Direct labor-hours 752,000 4,800 14,000 18,800 $ 1,362,200

Required:1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to

products.

a. Compute the predetermined overhead rate. (Round your answer to the nearest dollar amount. Omitthe "$" sign in your response.)

Predetermined overhead rate $ 72 per DLH

b. Determine the unit product cost of each product. (Round pre-determined overhead rate to nearestdollar amount. Round other intermediate answers and the final answer to two decimal places.Omit the "$" sign in your response.)



Model XR7 ZD5 Unit product cost $ 57.40 $ 75.80

2. Assume that the company decides to use activity-based costing to apply overhead cost to products.

a. Compute the activity rate for each activity cost pool. Also, compute the amount of overhead cost thatwould be applied to each product. (Round your overhead cost per unit to 2 decimal places. Omitthe "$" sign in your response.)

Activity cost Pool Activity Rate Machine setups $ 740 Per setup Special processing $ 380 Per MH General factory $ 40 Per DLH

Activity Cost Pool Model XR7 Model ZD5 Total overhead cost $ 682,320 $ 679,880 Overhead cost per unit $ 28.43 $ 19.43

b. Determine the unit product cost of each product. (Round your intermediate and final answers to 2decimal places. Omit the "$" sign in your response.)

Unit product cost of Model XR7 $ 71.43 Unit product cost of Model ZD5 $ 66.43

Worksheet

Learning Objective: 07B-07 (Appendix 7B) Use

activity based costing techniques to compute unit

product costs for external reports.

Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model.Data regarding the two products follow:

Product Direct Labor-HoursAnnual

ProductionTotal DirectLabor-Hours

XR7 0.2 DLHs per unit 24,000 Units 4,800 DLHs ZD5 0.4 DLHs per unit 35,000 Units 14,000 DLHs 18,800 DLHs

Additional information about the company follows:a. Product XR7 requires $35 in direct materials per unit, and product ZD5 requires $31.b. The direct labor rate is $40 per hour.c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost

to products. Manufacturing overhead totals $1,362,200 per year.d. Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling

machine.e. Because of the special work required in (d) above, the company is considering the use of activity-based

costing to apply overhead cost to products. Three activity cost pools have been identified and the first-stage allocations have been completed. Data concerning these activity cost pools appear below:

Estimated Total Activity

Activity Cost Pool Activity MeasureEstimatedTotal Cost XR7 ZD5 Total

Machine setups Number of setups $ 199,800 108 162 270 Special milling Machine-hours 410,400 1,080 0 1,080 General factory Direct labor-hours 752,000 4,800 14,000 18,800 $ 1,362,200

Required:1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to

products.

a. Compute the predetermined overhead rate. (Round your answer to the nearest dollar amount. Omitthe "$" sign in your response.)

Predetermined overhead rate $ 72 per DLH

b. Determine the unit product cost of each product. (Round pre-determined overhead rate to nearestdollar amount. Round other intermediate answers and the final answer to two decimal places.Omit the "$" sign in your response.)

Model XR7 ZD5

Unit product cost $ 57.40 $ 75.80



2. Assume that the company decides to use activity-based costing to apply overhead cost to products.

a. Compute the activity rate for each activity cost pool. Also, compute the amount of overhead cost thatwould be applied to each product. (Round your overhead cost per unit to 2 decimal places. Omitthe "$" sign in your response.)

Activity cost Pool Activity Rate

Machine setups $ 740 Per setup

Special processing $ 380 Per MH

General factory $ 40 Per DLH

Activity Cost Pool Model XR7 Model ZD5

Total overhead cost $ 682,320 $ 679,880

Overhead cost per unit $ 28.43 $ 19.43

b. Determine the unit product cost of each product. (Round your intermediate and final answers to 2decimal places. Omit the "$" sign in your response.)

Unit product cost of Model XR7 $ 71.43

Unit product cost of Model ZD5 $ 66.43

Explanation:

1.a.

When direct labor-hours are used to apply overhead cost to products, the company’s predeterminedoverhead rate would be:

Predeterminedoverhead rate

=Manufacturing overhead cost

Direct labor hours

=$1,362,200

= $72 per DLH18,800 DLHs

1.

b.

Model

XR7 ZD5 Direct materials $35.00 $31.00 Direct labor: ($40 per DLH × .2 DLH; $40 per DLH × .4DLH) 8.00 16.00 Manufacturing overhead: ($72 per DLH × .2 DLH; 72 per DLH × .4 DLH) 14.40 28.80 Total unit product cost $57.40 $75.80

2.a.

Predetermined overhead rates for the activity cost pools:

Activity cost Pool

(a)EstimatedTotal cost

(b)Estimated

Total Activity(a) ÷ (b)

Activity Rate Machine setups $ 199,800 270 setups $ 740 per setup Special milling $ 410,400 1,080 MHs $ 380 per MH General factory $ 752,000 18,800 DLHs $ 40 per DLH

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

Model XR7


Activity rate(b)

Activity

(a) × (b)OverheadApplied

Machine setups $ 740 per setup 108 setups $ 79,920 Special milling $ 380 per MH 1,080 MHs 410,400 General factory $ 40 per DLH 4,800 DLHs 192,000 Total manufacturing overhead cost (a) $ 682,320 Number of units produced (b) 24,000 Overhead cost per unit (a) ÷ (b) $ 28.43

Model ZD5


Activity rate(b)

Activity

(a) × (b)OverheadApplied

Machine setups $ 740 per setup 162 setups $ 119,880 Special milling $ 380 per MH 0 MHs 0 General factory $ 40 per DLH 14,000 DLHs 560,000 Total manufacturing overhead cost (a) $ 679,880



Number of units produced (b) 35,000 Overhead cost per unit (a) ÷ (b) $ 19.43

2.b.

The unit product cost of each model under activity-based costing would be computed as follows:

Model

XR7 ZD5 Direct materials $ 35.00 $ 31.00 Direct labor ($40per DLH × .2 DLH; $40 per DLH × .4DLH) 8.00 16.00 Manufacturing Overhead (above) 28.43 19.43 Total unit product cost $ 71.43 $ 66.43

Comparing these unit cost figures with the unit costs in Part 1(b), we find that the unit product cost forModel XR7 has increased from $57.40 to $71.43, and the unit product cost for Model ZD5 has decreasedfrom $75.80 to $66.43.

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