P12. LO 5a.

Cost Pool Overhead rateMaterials ordering $72,000 ÷ 8,000 = $9 per orderMaterials inspection $75,000 ÷ 375 = $200 per rec. reportEquipment setup $105,000 ÷ 3,000 = $35 per setupQuality control $69,000 ÷ 3,000 = $23 per inspectionOther $100,000 ÷ $2,000,000 = $0.05 / labor cost

b. Materials ordering $9 per order 100 orders = $ 900Materials inspection $200 per report 60 reports = 12,000Equipment setup $35 per setup 30 setups = 1,050Quality control $23 per inspection 150 inspections = 3,450Other $0.05 per labor dollar $39,000 = 1,950

Total overhead assigned to Strawberry Cheesecake $19,350

c. Overhead rate per unit of strawberry cheesecake = $19,350 ÷ 19,500 units = $0.992

d. Total unit costs per unit of Strawberry Cheesecake = $10 + $2 + $0.992 = $12.992

e. With a traditional system:The overhead rate per direct labor dollar is:($421,000 ÷ $2,000,000 direct labor cost) $0.211 per dollar of direct labor

The direct labor cost, per unit, for the Strawberry Cheesecake: ($39,000 ÷ 19,500 units) $2.000

Overhead assigned to each unit of Strawberry Cheesecake ($0.211 $2.00 direct labor cost) $0.422

Under the traditional system, less overhead cost is assigned to each unit of Strawberry Cheesecake than under the activity-based costing system. The traditional system allocates overhead to each unit on the basis of one cost driver. In this case, the cost driver is direct labor. Meanwhile, the activity-based costing system uses several cost pools to allocating overhead costs to each unit.

P15. LO 5a.

Cost Pool Cost poolsTotal cost

driver activityCost pool rate

Materials ordering $ 840,000 120,000 $7

Materials inspection 525,000 2,100 $250

Equipment setup 2,500,000 125 $20,000

Quality control 1,000,000 5,000 $200

Other 25,000,000 $12,500,000 $2

Total mfg. overhead $29,865,000

b.

CostsActivity usage

Cost pool rate

Total cost allocated

Materials ordering 1,200 $7 $8,400

Materials inspection 315 $250 78,750

Equipment setup 1 $20,000 20,000

Quality control 500 $200 100,000

Other $320,000 $2 640,000

Total mfg. overhead $847,150

c.

ABC overhead cost per unit:

Total overhead $847,150

Divide by number of units 40,000

ABC overhead cost per unit $ 21.18

d.

Cost per unit using ABC:

Direct materials $37.00

Direct labor 8.00

Overhead (calculated above) 21.18

Total cost per unit $66.18

e.

Traditional Allocation:

Total overhead $29,865,000

Divide by direct labor dollars 12,500,000

Overhead allocation rate per DL $ $ 2.39

Art of Design:

Total DL $ $ 320,000

OH rate 2.39

Overhead allocated to Art of Design $ 764,800

Traditional overhead cost per unit:

Total overhead $764,800

Divide by number of units 40,000

Overhead cost per unit $ 19.12

Cost per unit using Traditional:

Direct materials $37.00

Direct labor 8.00

Overhead (calculated above) 19.12

Total cost per unit $64.12

Art of Design is undercosted using traditional costing. It is a “specialty” product with relatively low volume. A more accurate product cost is calculated using ABC.

P1. LO 2a. Allocation Base Software Consulting

Employee benefits Head count 375 125Proportion .75 .25Amount allocated $2,500,000 $1,875,000 $625,000

Rent Square feet 20,000 20,000Proportion .5 .5Amount allocated $1,000,000 $500,000 $500,000

Telecommunications Headcount 375 125

Proportion .75 .25Amount allocated $500,000 $375,000 $125,000

General and adm. Costs Sales $15,000,000 $8,000,000Proportion .652174 .347826Amount allocated $3,000,000 $ 1,956,522 $1,043,478Total $7,000,000 $ 4,706,522 $2,293,478

Profit Report: (using multiple cost pools/allocation bases)

Software Consulting

Sales $15,000,000 $8,000,000Less direct costs 6,000,000 4,000,000Less allocated costs 4,706,522 2,293,478Income before taxes $ 4,293,478 $1,706,522

Using multiple cost pools and multiple allocation bases allocates $543,478 ($2,293,478 - $1,750,000) more overhead cost to consulting than a single allocation base method.

b. Assuming the controller’s assumptions are correct (that benefits and telecommunications costs are driven by headcount while rent is driven by space occupied and general and administrative costs are driven by relative sales), then the multiple cost pools provide better information on the resources consumed and the profitability of the two divisions.

P14. LO 2, 5a.

Calculate predetermined overhead rate based on DLH:

Estimated MOH (a) $1,800,000

Estimated DLH (b) 120,000

Planned OH rate a÷b $15 per DLH

Calculate how much is allocated to Standard and Elite:

Standard Usage of Cost Driver Rate =

3,000 × $15 = $45,000

Elite Usage of Cost Driver Rate =

300 × $15 = $4,500b.

Calculate individual pool rates: Cost pool rate

Maintenance Costs $700,000 ÷ 120,000 = $5.83/DLH

Setup Costs $500,000 ÷ 200 = $2,500/setup

Engineering Costs $600,000 ÷ 400 = $1,500/design change

Maintenance Costs Setup Costs Engineering Total MOH

Standard $17,490 $2,500 $3,000 $22,990

Elite 1,749 35,000 30,000 66,749

c. Using traditional costing, Standard Switches, the high-volume product, are overcosted, while the low-volume, specialty product, Elite Switches, are undercosted. ABC will provide more accurate product costs because it does not make the simplifying assumption that all overhead costs are proportional to labor hours. Rather, some vary with labor hours, some vary with setups, and some vary with design changes.