Hilton Ch 5 Select Solutions

EXERCISE 5-33 (30 MINUTES)

1. ZODIAC MODEL ROCKETRY COMPANY

COMPUTATION OF SELLING COSTS

BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE

Order SizeSmall Medium Large Total

Sales commissionsa

(Unit cost: $675,000/225,000 = $3.00 per box).....................................................

box)............................................................................$ 6,000 $135,000 $534,000 $ 675,000

Catalogsb

(Unit cost: $295,400/590,800 = $.50 per catalog).................................................

catalog)......................................................................127,150 105,650 62,600 295,400

Costs of catalog salesc

(Unit cost: $105,000/175,000 = $.60 per motor)...................................................

skein).........................................................................47,400 31,200 26,400 105,000

Credit and collectiond

(Unit cost: $60,000/6,000 = $10.00 per order)................................................

order)......................................................................... 4,850 24,150 31,000 60,000

Total cost for all orders of a given size......................................................................$185,400 $296,000 $654,000 $1,135,400

Units (motors) solde.....................................................103,000 592,000 2,180,000

Unit cost per order of a given sizef................................................................................$1.80 $.50 $.30

aRetail sales in boxesunit cost:Small, 2,000$3Medium, 45,000$3Large, 178,000$3

bCatalogs distributedunit costcCatalog salesunit costdNumber of retail ordersunit costeSmall: (2,00012) + 79,000 = 103,000 Medium: (45,00012) + 52,000 = 592,000 Large: (178,00012) + 44,000 = 2,180,000

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-1

fTotal cost for all orders of a given size ÷ units sold

EXERCISE 5-33 (CONTINUED)

2. The analysis of selling costs shows that small orders cost more than large orders. This fact could persuade management to market large orders more aggressively and/or offer discounts for them.

EXERCISE 5-40 (40 MINUTES, PLUS TIME AT RESTAURANT)

Several restaurant activities are listed in the following table, along with the required characteristics for each activity. Many other possibilities could be listed, depending on the level of detail.

Activity Description

Value-Addedor Non-Value-

Added Activity Trigger Root Cause

Taking reservations VA Customer calls on phone

Customer desires reservation

Customers waiting for a table

NVA Customer arrives, but no table is ready

An error was made in reservation; service is slow; customers are slow; customers arrive without reservations

Seating customers VA Table becomes available

Customer's reservation (or turn in line) comes up; table becomes ready

Taking orders VA Customers indicate readiness to order

Kitchen staff needs to know what to prepare

Serving meals to customers

VA Meals are ready Meals are ready; customers are hungry

Returning meal to kitchen for revised preparation

NVA Customer complains about meal

An error was made in explaining the menu; there is an error in the printed menu description; meal was prepared wrong; customer is picky


Customers eating meal

VA Meals are served and are satisfactory

Customers are hungry

Clearing the table VA Customers are finished

Customers have finished eating

EXERCISE 5-40 (CONTINUED)

Delivering check to table

VA Customers are finished ordering and eating

Customers need to know amount of bill

Collecting payment VA Customers have produced cash or credit card

Restaurant needs to collect payment for services rendered

EXERCISE 5-44 (20 MINUTES)

There are many key activities that can be suggested for each business. Some possibilities are listed below. After each activity, a suggested cost driver is given in parentheses.

(1) airline: (a) reservations (reservations booked)(b) baggage handling (pieces of baggage handled)(c) flight crew operations (air miles flown)(d) aircraft operations (air miles flown)(e) in-flight service (number of passengers)

(2) restaurant (a) purchasing (pounds or cost of food purchased)(b) kitchen operations (meals prepared)(c) table service (meals served)(d) table clearing (meals served)(e) dish washing (dishes washed)

(3) fitness club: (a) front desk operations (number of patrons)(b) membership records (number of records)(c) personnel (number of employees)(d) equipment maintenance (maintenance hours)(e) fitness consultation (hours of service)

(4) bank: (a) teller window operations (number of customers)(b) loan processing (loan applications)(c) check processing (checks processed)(d) personnel (number of employees)(e) security (number of customers)


(5) hotel: (a) front desk operations (number of guests)(b) bell service (pieces of luggage handled)(c) housekeeping service (number of guest-days)(d) room service (meals delivered)(e) telephone service (phone calls made)

(6) hospital: (a) admissions (patients admitted)(b) diagnostic lab (tests performed)(c) nursing (nursing hours)(d) surgery (hours in operating room)(e) general patient care (patient-days of care)


solutions to Problems PROBLEM 5-45 (35 MINUTES)

1. Activity-based costing results in improved costing accuracy for two reasons. First, companies that use ABC are not limited to a single driver when allocating costs to products and activities. Not all costs vary with units, and ABC allows users to select a host of nonunit-level cost drivers. Second, consumption ratios often differ greatly among activities. No single cost driver will accurately assign costs for all activities in this situation.

2. Allocation of administrative cost based on billable hours:

E-commerce consulting: 2,400 ÷ 6,000 = 40%; $381,760 x 40% = $152,704Information systems: 3,600 ÷ 6,000 = 60%; $381,760 x 60% = $229,056

E-CommerceConsulting

InformationSystemsServices

Billings:3,600 hours x $140………… $504,0002,400 hours x $140………… $336,000

Less: Professional staff cost: 3,600 hours x $50 (180,000) 2,400 hours x $50 (120,000) Administrative cost……. (152,704) ( 229,056) Income…………………………… $ 63,296 $ 94,944

Income ÷ billings………………. 18.84% 18.84%


PROBLEM 5-45 (CONTINUED)

3. Activity-based application rates:

Activity CostActivity Driver

Application Rate

Staff support $207,000 ÷ 300 clients = $690 per client

In-house computing

145,000 ÷ 5,000 computerhours (CH)

= $29 per CH

Miscellaneousoffice charges

29,760 ÷ 1,200 client transactions (CT)

= $24.80 per CT

Staff support, in-house computing, and miscellaneous office charges of e-commerce consulting and information systems services:

ActivityE-Commerce Consulting

Information Systems Services

Staff support:240 clients x $690…………... $165,60060 clients x $690……………. $ 41,400

In-house computing:2,900 CH x $29………………. 84,1002,100 CH x $29………………. 60,900

Miscellaneous office charges:480 CT x $24.80……………... 11,904 720 CT x $24.80……………... 17,856

Total ………………………………. $120,156 $261,604



Profitability e-commerce consulting and information systems services:

E-CommerceConsulting

InformationSystemsServices

Billings:3,600 hours x $140……….. $504,0002,400 hours x $140……….. $336,000

Less: Professional staff cost: 3,600 hours x $50 (180,000) 2,400 hours x $50 (120,000) Administrative cost……. (120,156) ( 261,604) Income………………………….. $ 95,844 $ 62,396Income ÷ billings……………... 28.53% 12.38%

4. Yes, his attitude should change. Even though both services are needed and professionals are paid the same rate, the income percentages show that e-commerce consulting provides a higher return per sales dollar than information systems services (28.53% vs. 12.38%). Thus, all other things being equal, professionals should spend more time with e-commerce.

5. Probably not. Although both services produce an attractive return for Clark and Shiffer, the firm is experiencing a very tight labor market and will likely have trouble finding qualified help. In addition, the professional staff is currently overworked, which would probably limit the services available to new clients.


PROBLEM 5-46 (60 MINUTES)

1. The predetermined overhead rate is calculated as follows:

Predetermined overhead rate = Budgeted manufacturing overhead/budgeted direct-labor hours = $1,224,000/102,000* = $12 per hour

*Direct labor, budgeted hours:REG: 5,000 units 9 hours..................................... 45,000 hoursADV: 4,000 units 11 hours................................... 44,000 hoursSPE: 1,000 units 13 hours................................... 13,000 hours

Total direct-labor hours......................................................... 102,000 hours



2. Activity-based-costing analysis:

ActivityActivity

Cost PoolCost

Driver

Cost Driver

QuantityPool Rate

Product Line

Cost Driver

Quantity for

Product Line

Activity Cost for Product

Line

Product LineProd.

Volume

Activity Cost per Unit of Product

Machine $310,500Machine 115,000

$ 2.70 REG 50,000 $135,000 5,000

$27.00

Related Hours ADV 48,000 129,600 4,000 32.40GMT 17,000 45,900 1,000 45.90 Total 115,000 $310,500

Material 52,500 Prod. 100 525.00 REG 40 $ 21,000 5,000 4.20Hand. Runs ADV 40 21,000 4,000 5.25

GMT 20 10,500 1,000 10.50 Total 100 $ 52,500

Purch. 75,000 Purch. 300 250.00 REG 100 $ 25,000 5,000 5.00Orders ADV 96 24,000 4,000 6.00

GMT 104 26,000 1,000 26.00 Total 300 $ 75,000

Setup 85,000 Prod. 100 850.00 REG 40 $ 34,000 5,000 6.80Runs ADV 40 34,000 4,000 8.50

GMT 20 17,000 1,000 17.00 Total 100 $ 85,000

Inspect. 27,500 Inspect. 1,100 25.00 REG 400 $ 10,000 5,000 2.00Hours ADV 400 10,000 4,000 2.50

GMT 300 7,500 1,000 7.50 Total 1,100 $ 27,500

Ship. 66,000 Ship. 1,100 60.00 REG 500 $ 30,000 5,000 6.00ADV 400 24,000 4,000 6.00GMT 200 12,000 1,000 12.00 Total 1,100 $ 66,000

Eng. 32,500 Eng. 650 50.00 REG 250 $ 12,500 5,000 2.50Hours ADV 200 10,000 4,000 2.50

GMT 200 10,000 1,000 10.00 Total 650 $ 32,500

Fac. 575,000Machine 115,000 5.00 REG 50,000 $250,000 5,000

50.00

Hours ADV 48,000 240,000 4,000 60.00GMT 17,000 85,000 1,000 85.00 Total 115,000 $575,000

Grand Total $1,224,000

Grand Total $1,224,000



3. Calculation of new product costs under ABC.

REG ADV GMTDirect material................................. $129.00 $151.00 $203.00Direct labor (not including

set-up time)................................. 171 .00 (9 hr. @ $19) 209 .00 (11 hr. @ $19) 247 .00 (13 hr. @ $19)Total direct costs per unit.............. $300 .00 $360 .00 $450 .00

Manufacturing overhead (based on ABC):Machine-related.......................... $ 27.00 $ 32.40 $ 45.90Material handling....................... 4.20 5.25 10.50Purchasing.................................. 5.00 6.00 26.00Setup........................................... 6.80 8.50 17.00Inspection................................... 2.00 2.50 7.50Packing/shipping....................... 6.00 6.00 12.00Engineering design.................... 2.50 2.50 10.00Facility......................................... 50 .00 60 .00 85 .00

Total ABC overhead cost per unit................................ $103 .50 $123 .15 $213 .90

Total product cost per unit............. $403 .50 $483 .15 $663 .90



4. Comparison of costs and target prices under two alternative product-costing systems:

REG ADV GMTReported unit overhead cost:

Traditional, volume-based costing system.....................................................................................

$108.00 $132.00 $156.00

Activity-based costing system.....................................................................................

103.50 123.15 213.90

Reported unit product cost (direct material, direct labor and overhead):

Traditional, volume-based costing system.....................................................................................

408.00 492.00 606.00


403.50 483.15 663.90

Sales price data:Original target price (130% of product cost based on traditional, volume-based costing system).....................................................................................

530.40 639.60 787.80

New target price (130% of product cost based activity-based costing system).....................................................................................

524.55 628.10 863.07

Actual current selling price........................................... 525.00 628.00 800.00

5. The REG and ADV products were overcosted by the traditional system, and the GMT product was undercosted by the traditional system

Reported unit product cost:Traditional, volume-based costing system.....................................................................................

$408.00 $492.00 $606.00


403 .50 483 .15 663 .90

Cost distortion: REG and ADV overcosted by traditional system.....................................................................................

$ 4 .50 $ 8 .85

GMT undercosted by traditional system................. ($ 57 .90)

6. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.


http://www.mhhe.com/hilton8e


1. Deluxe manufacturing overhead cost:32,000 machine hours x $80 = $2,560,000$2,560,000 ÷ 16,000 units = $160 per unit

Executive manufacturing overhead cost:45,000 machine hours x $80 = $3,600,000$3,600,000 ÷ 30,000 units = $120 per unit

Deluxe Executive

Direct material………………. $ 40 $ 65Direct labor………………….. 25 25Manufacturing overhead…. 160 120

Unit cost………………… $225 $210

2. Activity-based application rates:

Activity CostActivity Driver

Application Rate

Manufacturingsetups

$1,344,000 ÷ 160 setups (SU) = $8,400 per SU

Machine processing

3,696,000 ÷ 77,000 machinehours (MH)

= $48 per MH

Product shipping

1,120,000 ÷ 350 outgoing shipments (OS)

= $3,200 per OS



Manufacturing setup, machine processing, and product shipping costs of a Deluxe unit and an Executive unit:

Activity Deluxe Executive

Manufacturing setups:100 SU x $8,400…………….. $ 840,000 60 SU x $8,400…………….. $ 504,000

Machine processing:32,000 MH x $48…………... 1,536,00045,000 MH x $48…………... 2,160,000

Product shipping:200 OS x $3,200…………… 640,000 150 OS x $3,200…………….. 480,000

Total ……………………………. $3,016,000 $3,144,000

Production volume (units)…. 16,000 30,000

Cost per unit………………….. $188.50* $104.80**

* $3,016,000 ÷ 16,000 units = $188.50** $3,144,000 ÷ 30,000 units = $104.80

The manufactured cost of a Deluxe cabinet is $253.50, and the manufactured cost of an Executive cabinet is $194.80. The calculations follow:

Deluxe Executive

Direct material………………………………… $ 40.00 $ 65.00Direct labor……………………………………. 25.00 25.00Manufacturing setup, machine

processing, and outgoing shipments.. 188.50 104.80 Total cost………………………………………. $253.50 $194.80

3. The Deluxe storage cabinet is undercosted. The use of machine hours produced a unit cost of $225; in contrast, the more accurate activity-based-costing approach shows a unit cost of $253.50. The difference between these two amounts is $28.50.



4. Cost distortion:

The Deluxe cabinet product line is undercosted by $456,000, and the Executive cabinet product line is overcosted by $456,000. Supporting calculations follow:

Deluxe Executive

$28.50* 16,000 = $456,000 $(15.20)† 30,000 = $(456,000)

*$253.50 $225.00 †$194.80 $210.00

5. No, the discount is not advisable. The regular selling price of $270, when compared against the more accurate ABC cost figure, shows that each sale provides a profit to the firm of $16.50 ($270.00 - $253.50). However, a $30 discount will actually produce a loss of $13.50 ($253.50 - $240.00), and the more units that are sold, the larger the loss. Notice that with the less-accurate, machine-hour-based figure ($225), the marketing manager will be misled, believing that each discounted unit sold would boost income by $15 ($240 - $225).



1. a. Manufacturing overhead costs include all indirect manufacturing costs (all production costs except direct material and direct labor). Typical overhead costs include:

Indirect labor (e.g., a lift-truck driver, maintenance and inspection labor, engineering labor, and supervisors).

Indirect material.

Other indirect manufacturing costs (e.g., building maintenance, machine and tool maintenance, property taxes, insurance, depreciation on plant and equipment, rent, and utilities).

b. Companies develop overhead rates before production to facilitate the costing of products as they are completed and shipped, rather than waiting until actual costs are accumulated for the period of production.

2. The increase in the overhead rate should not have a negative impact on the company, because the increase in indirect costs was offset by a decrease in direct labor.

3. Rather than using a plantwide overhead rate, Digital Light could implement separate activity cost pools. Examples are as follows:

Separate costs into departmental overhead accounts (or other relevant pools), with one account for each production and service department. Each department would allocate its overhead to products on the basis that best reflects the use of these overhead services.

Treat individual machines as separate cost centers, with the machine costs collected and charged to the products using machine hours.

4. An activity-based costing system might benefit Digital Light because it assigns costs to products according to their usage of activities in the production process. More accurate product costs are the result.



1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours = $710,000 ÷ 20,000* = $35.50 per direct labor hour

*20,000 budgeted direct-labor hours = (2,500 units of Medform)(3 hrs./unit) + (3,125 units of Procel)(4 hrs./unit)

Medform Procel

Direct material.................................. $ 30.00 $ 45.00Direct labor:

3 hours x $15.............................. 45.004 hours x $15.............................. 60.00

Manufacturing overhead:3 hours x $35.50......................... 106.50 4 hours x $35.50......................... 142.00

Total cost.......................................... $181.50 $247.00

2. Activity-based overhead application rates:

Activity CostActivity Cost

DriverApplication

Rate

Order processing

$120,000 ÷ 600 orders processed (OP)

= $200 per OP

Machine processing

500,000 ÷ 50,000 machinehrs. (MH)

= $10 per MH

Product inspection

90,000 ÷ 15,000 inspection hrs. (IH)

= $6 per IH



Order processing, machine processing, and product inspection costs of a Medform unit and an Procel unit:

Activity Medform Procel

Order processing:350 OP x $200........................ $ 70,000250 OP x $200........................ $ 50,000

Machine processing:23,000 MH x $10..................... 230,00027,000 MH x $10..................... 270,000

Product inspection: 4,000 IH x $6......................... 24,000 11,000 IH x $6......................... 66,000

Total $324,000 $386,000

Production volume (units) 2,500 3,125Cost per unit $129.60* $123.52**

* $324,000 ÷ 2,500 units = $129.60** $386,000 ÷ 3,125 units = $123.52

The manufactured cost of a Medform unit is $204.60, and the manufactured cost of a Procel unit is $228.52:

Medform Procel

Direct material………………………………. $ 30.00 $ 45.00Direct labor:

3 hours x $15…………………………… 45.004 hours x $15…………………………… 60.00

Order processing, machine processing, and product inspection……………….. 129.60 123.52

Total cost……………………………………. $204.60 $228.52



3. a. The Procel product is overcosted by $18.48 ($247.00 - $228.52) under the traditional product-costing system. The labor-hour application base resulted in a $247 unit cost; in contrast, the more accurate ABC approach yielded a lower unit cost of $228.52. The opposite situation occurs with the Medform product, which is undercosted by $23.10 under the traditional approach ($181.50 vs. $204.60 under ABC).

The traditional costing system overcosts the Procel product line by a total of $57,750 ($18.48 x 3,125 units), and it undercosts the Medform product line by the same amount, $57,750 ($23.10 x 2,500 units).

b. Yes, especially since Meditech’s selling prices are based heavily on cost. An overcosted product will result in an inflated selling price, which could prove detrimental in a highly competitive marketplace. Customers will be turned off and will go elsewhere, which hurts profitability. With undercosted products, selling prices may be too low to adequately cover a product’s more accurate (higher) cost. This situation is also troublesome and will result in lower income reported for the company.





1. Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is applied on the basis of direct-labor dollars. In general, a plantwide manufacturing-overhead rate is acceptable only if a similar relationship between overhead and direct labor exists in all departments or the company manufactures products that receive the same proportional services from each department

In most cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide the following:

A framework for reviewing overhead costs on a departmental basis, identifying departmental cost overruns, or taking corrective action to improve departmental cost control.

Sufficient information about product profitability, thus increasing the difficulties associated with management decision making.

2. Because the company uses a plantwide overhead rate applied on the basis of direct-labor dollars, the elimination of direct labor in the Molding Department through the introduction of robots may appear to reduce the overhead cost of the Molding Department to zero. However, this change will not reduce fixed manufacturing costs such as depreciation and plant supervision. In reality, the use of robots is likely to increase fixed costs because of increased depreciation. Under the current method of allocating overhead costs, these costs merely will be absorbed by the remaining departments.



3. a. In order to improve the allocation of overhead costs in the Cutting and Finishing departments, management should move toward an activity-based costing system. The firm should:

Establish activity-cost pools for each significant activity.

Select a cost driver for each activity that best reflects the relationship of the activity to the overhead costs incurred.

b. In order to accommodate the automation of the Molding Department in its overhead accounting system, the company should:

Establish a separate overhead pool and rate for the Molding Department.

Identify fixed and variable overhead costs and establish fixed and variable overhead rates.

Apply overhead costs to the Molding Department on the basis of robot or machine hours.



1. Overhead to be assigned to development chemical order:

Activity CostPool

PoolRate

Level of Cost Driver

Assigned Overhead

CostMachine setups $4,000 per setup 6 setups $24,000Material handling $4 per pound 9,000 pounds 36,000Hazardous waste control $10 per pound 2,100 pounds 21,000Quality control $150 per inspection 8 inspections 1,200Other overhead costs $20 per machine

hour 550 machine hours 11,000

Total $93,200

2. Overhead cost perbox of chemicals =

3. Predeterminedoverhead rate =

= $62.50 per machine hr.

4. Overhead to be assigned to film development chemical order, given a single predetermined overhead rate:

a. Total overhead assigned = $62.50 per machine hr. 550 machine hr.

= $34,375

b. Overhead cost per box of chemicals =

5. The radiological development chemicals entail a relatively large number of machine setups, a large amount of hazardous materials, and several inspections. Thus, they are quite costly in terms of driving overhead costs. Use of a single predetermined overhead rate obscures this characteristic of the production job. Underestimating the overhead cost per box could have adverse consequences for Rapid City Radiology, Inc. For example, it could lead to poor decisions about product pricing. The activity-based costing system will serve management much better than the system based on a single, predetermined overhead rate.





1. Calculation of unit cost:

(a) Overhead assigned to plates:

Activity CostPool

PoolRate

Level of Cost Driver

Assigned Overhead

CostMachine setups $4,000 per setup 4 setups $16,000Material handling $4 per pound 800 pounds 3,200Hazardous waste control $10 per pound 400 pounds 4,000Quality control $150 per inspection 4 inspections 600Other overhead costs $20 per machine hour 60 machine hours 1,200 Total $25,000

(b) Unit cost per plate:

Direct material................................ $210Direct labor..................................... 60Manufacturing overhead............... 250Total cost per plate........................ $520

2. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: WWW.MHHE.COM/HILTON8E.





1. Activity Cost Pool Type of ActivityI: Machine-related costs Unit-levelII: Setup and inspection Batch-levelIII: Engineering Product-sustaining-levelIV: Plant-related costs Facility-level

2. Calculation of pool rates:

I: Machine-related costs:

= $100 per machine hr.

II. Setup and inspection:

= $9,000 per run

III. Engineering:

= $1,800 per change order

IV. Plant-related costs:

= $100 per sq. ft.



3. Unit costs for odds and ends:

I: Machine-related costs:

Odds: $100 per machine hr.8 machine hr. per unit = $800 per unit

Ends: $100 per machine hr.2 machine hr. per unit = $200 per unit

II: Setup and inspection:

Odds: $9,000 per run ÷ 25 units per run = $360 per unit

Ends: $9,000 per run ÷ 125 units per run = $72 per unit

III: Engineering:

Odds:

= = $270 per unit

Ends:

= = $18 per unit

IV. Plant-related costs:

Odds:

= = $307.20 per unit

Ends:

= = $15.36 per unit



4. New product cost per unit using the ABC system:

Odds EndsDirect material.......................................................................$ 160.00 $240.00Direct labor............................................................................120.00 180.00Manufacturing overhead:

Machine-related..............................................................800.00 200.00Setup and inspection.....................................................360.00 72.00Engineering.....................................................................270.00 18.00Plant-related.................................................................... 307.20 15.36

Total cost per unit.................................................................$2,017.20 $725.36

5. New target prices:

Odds EndsNew product cost (ABC).......................................................$2,017.20 $725.36Pricing policy......................................................................... 120% 120% New target price.....................................................................$2,420.64 $870.43 (rounded)

6. Full assignment of overhead costs:

Odds EndsManufacturing overhead costs:

Machine-related..............................................................$ 800.00 $ 200.00Setup and inspection.....................................................360.00 72.00Engineering.....................................................................270.00 18.00Plant-related.................................................................... 307.20 15.36

Total overhead cost per unit................................................$1,737.20 $ 305.36 Production volume........................................................... 1,000 5,000 Total overhead assigned......................................................$1,737,200 $1,526,800

Total = $3,264,000



7. Cost distortion:

Odds EndsTraditional volume-based costing system:

reported product cost.................................................... $ 664.00 $996.00Activity-based costing system:

reported product cost.................................................... 2,017.20 725.36 Amount of cost distortion per unit...................................... $(1,353.20) $270.64

Traditionalsystem

undercostsodds by

$1,353.20per unit

Traditionalsystem

overcostsends by$270.64per unit

Production volume................................................................ 1,000 5,000 Total amount of cost distortion for entire

product line..................................................................... $(1,353,200) $1,353,200

Sum of these two amounts is zero.



1. Based on the cost data from Gigabyte's traditional, volume-based product-costing system, product G is the firm's least profitable product. Its reported actual gross margin is only $66.00, as compared with $254.25 and $313.50 for products T and W, respectively. However, the validity of this conclusion depends on the accuracy of the product costs reported by Gigabyte's product-costing system.

2. Again, based on the product costs reported by the firm's traditional, volume-based product-costing system, product W appears to be very profitable. As in requirement (1), however, the validity of this assessment depends on the accuracy of the reported product costs.

3. Gigabyte's competitors have moved aggressively into the market for gismos (product G), but they have abandoned the whatchamacallit (product W) market to Gigabyte.

These competing firms apparently believe they can sell gismos at a much lower price than Gigabyte's management feels is feasible. This evidence suggests that Gigabyte's competitors may believe their product cost for gismos is below Gigabyte's reported product cost. In contrast, Gigabyte's competitors apparently believe that they cannot afford to sell whatchamacallits at Gigabyte's current price of $600. Perhaps the competing firms' reported production costs for product W are higher than the cost reported by Gigabyte's product-costing system.

The danger to Gigabyte is that the company will be forced out of the market for its second largest selling product. This could be disastrous to Gigabyte, Inc.

4. Percentages for raw-material costs:

PercentageAnnual of Total

Raw-Material Annual Raw-Material Raw-MaterialProduct Cost per Unit Volume Cost Cost*

G $105.00 8,000 $ 840,000 25%T 157.50 15,000 2,362,500 69%W 52.50 4,000 210,000 6%

Total $3,412,500 100%

*Percentages rounded to nearest whole percent.



5. Product costs based on an activity-based costing system:

ProductG

ProductT

ProductW

Direct material................................................. $105.00 $157.50 $ 52.50Direct labor...................................................... 48.00 36.00 24.00Machinerya....................................................... 110.25 122.50 238.88Machine setupb................................................ .43 .32 1.89Inspectionc....................................................... 31.50 46.20 157.50Material handlingd........................................... 82.03 120.75 39.38Engineeringe.................................................... 45.25 6.90 142.21Total................................................................. $422.46 $490.17 $656.36

aMachinery:Product G: ($3,675,000 24%) 8,000 units = $110.25Product T: ($3,675,000 50%) 15,000 units = $122.50Product W: ($3,675,000 26%) 4,000 units = $238.88

bMachine setup:Product G: ($15,750 22%) 8,000 units = $ .43Product T: ($15,750 30%) 15,000 units = $ .32Product W: ($15,750 48%) 4,000 units = $ 1.89

cInspection:Product G: ($1,575,000 16%) 8,000 units = $ 31.50Product T: ($1,575,000 44%) 15,000 units = $ 46.20 Product W: ($1,575,000 40%) 4,000 units = $157.50

dMaterial handling:Product G: ($2,625,000 25%) 8,000 units = $ 82.03Product T: ($2,625,000 69%) 15,000 units = $120.75Product W: ($2,625,000 6%) 4,000 units = $ 39.38

eEngineering:Product G: ($1,034,250 35%) 8,000 units = $ 45.25Product T: ($1,034,250 10%) 15,000 units = $ 6.90Product W: ($1,034,250 55%) 4,000 units = $142.21



6. Comparison of reported product costs, new target prices, and actual selling prices:

ProductG

ProductT

ProductW

Reported product costs:Traditional, volume-based costing system $573.00 $508.50 $286.50Activity-based costing system 422.46 490.17 656.36

Target price based on new product costs(150%new product cost) 633.69 735.26 984.54

Current actual selling price 639.00 762.75 600.00

7. THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL “BUILD A SPREADSHEET SOLUTIONS” IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE HILTON, 8E WEBSITE: WWW.MHHE.COM/HILTON8E.


MEMORANDUM

Date: Today

To: President, Gigabyte, Inc.

From: I.M. Student

Subject: Gigabyte's competitive position

Gigabyte's product-costing system has been providing misleading product cost information. Our traditional, volume-based costing system overcosted gismos and thingamajigs, but it substantially undercosted whatchamacallits. As a result Gigabyte has been overpricing gismos and thingamajigs and underpricing whatchamacallits. The company has been losing money on every sale in the product W market. Our competitors have taken advantage of our mispricing by moving aggressively into the gismo market and abandoning the whatchamacallit market to Gigabyte. As a result, our profitability has suffered.

I recommend the following courses of action:

1. Implement the new activity-based costing system and revise its database frequently.

2. Lower the target price of gismos to $639, the current actual selling price. This price is slightly over our usual 50 percent markup over product cost.

3. Consider lowering the price of thingamajigs to $736 in order to increase demand. The lower price still yields Gigabyte a 50 percent markup over product cost.

4. Raise the price of whatchamacallits to $985. If the product does not sell at that price, consider discontinuing the product line.




1. Two dimensional ABC:


Cost Assignment View

RESOURCE COSTS

Assignment of resource costs to activity cost pools

associated with significant activitiesProcess View

Activity analysisActivity evaluation

PERFORMANCE MEASURES

(see req. (4) for examples)ROOTCAUSES

(see req. (3) for examples)

ACTIVITYTRIGGERS

(see req. (2) for examples)

Assignment of activitycosts to cost objectsusing second-stage

cost drivers

COST OBJECTS(Product lines: cooking

utensils, tableware, flatware)

1 2 3 4 5 67 8 9 1011 12

13 14 1516

ACTIVITIES


2. Triggers for selected activities:

Activity Number Trigger

(2) Realization by purchasing personnel that they do not fully understand the part specifications

(9) Realization by purchasing personnel that the ordered part will be (or may be) late in arriving

(11) Receipt of order

(12) Discovery during inspection that parts do not meet specifications

(13) Discovery that parts do not satisfy intended purpose

3. Possible root causes:

Activity Number Possible Root Causes*

(2) Unclear specificationsIncomplete specificationsClear, but apparently wrong, specificationsUndertrained purchasing personnel

(9) Vendor delayDelay in placing orderFailure by purchasing personnel to make deadline clear

(11) Use of vendor that has not been fully certified as a reliable supplierCritical importance of parts

(12) Misspecification of partsError by purchasing personnel in placing orderVendor errorInspector error

(13) Misspecification of partsIncomplete specificationsPoor product designError by purchasing personnel in placing orderVendor error

*This list is not necessarily complete. Other root causes may exist.



4. Suggested performance measures:

Activity Number

Performance Measures

(5) Average price paid

(6) Number of vendorsNumber of vendors that are precertified as dependable

(10) Percentage of orders received on timeAverage delay for delinquent orders

(12) Number of orders returnedPercentage of orders returned

(16) Average dollar value tied up in parts inventory


1. Customer-profitability analysis:

Caltex Computer

Trace Telecom

Sales revenue....................................................................... $380,000 $247,600Cost of goods sold............................................................... 160,000 124,000 Gross margin........................................................................ $220,000 $123,600 Selling and administrative costs:

General selling costs..................................................... $ 48,000 $ 36,000General administrative costs........................................ 38,000 32,000Customer-related costs:

Sales activity............................................................. 16,000 12,000Order taking.............................................................. 6,000 8,000Special handling....................................................... 80,000 60,000Special shipping....................................................... 18,000 20,000

Total selling and administrative costs............................... $206,000 $168,000 Operating income................................................................. $ 14,000 $ (44,400 )





1. Customer-profitability profile (supporting details in the table following the profile):

Cumulative Operating Income as aPercentage of Total Operating Income

*Customers ranked by operating income.


Customers*0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

1 2 3 4 5 6 7 8



Supporting details for customer-profitability profile:

Customer Numbera Customer

Operating Income

Cumulative Operating

Income

Cumulative Operating

Income as a Percentage of

Total Operating

Income

(1) Network-All, Inc. $186,000 $186,000 39%(2) Golden Gate Service Associates 142,000 328,000 69%(3) Graydon Computer Company 120,000 448,000 94%(4) Mid-State Computing Company 84,000 532,000 111%(5) Caltex Computerb 14,000 546,000 114%(6) The California Group 12,000 558,000 117%(7) Tele-Install, Inc. (36,000) 522,000 109%(8) Trace Telecomc (44,400) 477,600 100%

aCustomer numbers are ranked by operating income.bFrom solution to preceding problem.cFrom solution to preceding problem.

2. Memorandum

Date: Today

To: I. Sellit, Vice President for Marketing

From: I. M. Student

Subject: Customer-profitability profile

The attached customer-profitability profile shows that two of our customer relationships are unprofitable (Tele-Install, Inc. and Trace Telecom). As the profile shows, over half of our operating income is generated by our two most profitable customer relationships, and 94 percent of our operating profit is generated by our three most profitable customers.

An activity-based costing analysis of customer-related costs provided the data for the customer-profitability analysis portrayed in the profile.


SOLUTIONS TO CASES

CASE 5-68 (45 MINUTES)

1. Activity-based costing (ABC) differs from traditional costing in that it focuses on activities that consume resources as the fundamental cost drivers. ABC is a two-stage cost assignment process focused on causality and the determination of cost drivers. It usually uses several different activities to assign costs to products or services. Therefore, it is more detailed and more accurate than traditional costing. It also helps managers distinguish between value added and non-value added activities.

2. Calculations of total activity cost pools and pool rates:

Material handling...... ($113,208 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]= $120,000* (25,000 parts + 50,000 parts)= $120,000 75,000 parts = $1.60 per part

*Rounded

Inspection................. ($235,850 1.06) (5,000 hours + 7,500 hours)= $250,000* 12,500 hours = $20 per inspection hour

*RoundedMachining.................. ($849,056 1.06) (15,000 hours + 30,000 hours)

= $900,000* 45,000 hours = $20 per machine hour

*Rounded

Assembly.................. ($433,962 1.06) (6,000 hours + 5,500 hours)= $460,000* 11,500 hours = $40 per assembly hour

*Rounded


CASE 5-68 (CONTINUED)

3.JY-63 JY-63 RX-67 RX-67

20x4CostData

Estimated20x5

ProductCost

20x4CostData

Estimated20x5

ProductCost

Direct material:No cost increase......................... $2,000,000 $3,500,000

Direct labor:Direct labor $370,370 $185,186 1.08 cost increase*.............. 400,000 200,000

Material handling:Number of parts 5 10 units produced....................

5,000 5,000

25,000 50,000 $1.60 per unit....................... 40,000 80,000

Inspection:Inspection hours 5,000 7,500 $20 per hour......................... 100,000 150,000

Machining:Machining activity in

hours15,000 30,000

$20 per hour......................... 300,000 600,000Assembly:Assembly activity in

hours6,000 5,500

$40 per hour......................... 240,000 220,000

Total cost....................................... $3,080,000 $4,750,000

*$400,000 and $200,000 are both rounded.



4. CINCINNATI CYCLE COMPANY

BUDGETED STATEMENT OF GROSS MARGIN FOR 20X5

JY-63 RX-67 TotalSales revenue................................................... $3,621,000 $4,459,000 $8,080,000Cost of goods manufactured and sold:Beginning finished-goods inventory............. $ 480,000 $ 600,000 $1,080,000Add: Direct material...................................... 2,000,000 3,500,000 5,500,000

Direct labor........................................... 400,000 200,000 600,000Material handling................................. 40,000 80,000 120,000Inspection............................................. 100,000 150,000 250,000Machining............................................. 300,000 600,000 900,000Assembly.............................................. 240,000 220,000 460,000

Cost of goods available for sale.................... $3,560,000 $5,350,000 $8,910,000Less: Ending finished-goods inventory*.... 431,200 665,000 1,096,200 Cost of goods sold.......................................... $3,128,800 $4,685,000 $7,813,800Gross margin................................................... $ 492,200 $ (226,000 ) $ 266,200

*Ending finished-goods inventory = (total product cost units produced) ending inventory in units:

JY-63: ($3,080,000 5,000 units) 700 units = $431,200

RX-67: ($4,750,000 5,000 units) 700 units = $665,000


CASE 5-69 (60 MINUTES)

1.Regular Model

Advanced Model

Deluxe Model

Product costs based on traditional, volume-based costing system................................ $210.00 $430.00 $464.00

× 110%............................................................... 110% 110% 110% Target price....................................................... $231.00 $473.00 $510.40

2. Product costs based on activity-based costing system:

Regular Model

Advanced Model

Deluxe Model

Direct material.................................................. $ 20.00 $ 50.00 $ 84.00Direct labor....................................................... 20.00 40.00 40.00Machinery depreciation and maintenancea. . . 62.40 416.00 153.60Engineering, inspection and

repair of defectsb........................................ 34.08 87.00 68.15Purchasing, receiving, shipping, and

material handlingc....................................... 30.55 104.00 58.50Factory depreciation, taxes, insurance,

and miscellaneous overhead costsd......... 24.99 178.50 51.17Total................................................................... $192.02 $875.50 $455.42

aPool I:Depreciation, machinery................................................................ $2,960,000Maintenance, machinery................................................................ 240,000 Total................................................................................................. $3,200,000

Regular: ($3,200,00039%)

20,000 = $ 62.40

Advanced: ($3,200,00013%)

1,000 = $416.00

Deluxe: ($3,200,00048%)

10,000 = $153.60



bPool II:Engineering..................................................................................... $ 700,000Inspection and repair of defects................................................... 750,000 Total................................................................................................. $1,450,000

Regular: ($1,450,000 47%) 20,000 = $ 34.08Advanced: ($1,450,000

6%) 1,000 = $ 87.00

Deluxe: ($1,450,000 47%) 10,000 = $ 68.15

cPool III:Purchasing, receiving, and shipping............................................ $ 500,000Material handling............................................................................ 800,000 Total................................................................................................. $1,300,000

Regular: ($1,300,000 47%) 20,000 = $ 30.55Advanced: ($1,300,000

8%) 1,000 = $104.00

Deluxe: ($1,300,000 45%) 10,000 = $ 58.50

dPool IV:Depreciation, taxes, and insurance for factory........................... $ 600,000Miscellaneous manufacturing overhead...................................... 590,000 Total................................................................................................. $1,190,000

Regular: ($1,190,000 42%)

20,000 = $ 24.99

Advanced: ($1,190,000 15%)

1,000 = $178.50

Deluxe: ($1,190,000 43%)

10,000 = $51.17

3.Regular Model

AdvancedModel

Deluxe Model

Product costs based on activity-basedcosting system................................................... $192.02 $875.50 $455.42

× 110%......................................................................... 110% 110% 110% New target price......................................................... $211.22 $963.05 $500.96

The new target price of the regular model, $211.22, is lower than the current actual selling price, $220.



4. MEMORANDUM

Date: Today

To: President Madison Electric Pump Corporation

From: I.M. Student

Subject: Product costing

Based on the cost data from our traditional, volume-based product-costing system, our regular model is not very profitable. Its reported actual contribution margin is only $10 ($220 – $210). However, the validity of this conclusion depends on the accuracy of the product costs reported by our product-costing system. Our competitors are selling motors like our standard model for $212. This price suggests that their product cost is substantially below our previously reported cost of $210.

Our new, activity-based costing system reveals serious product cost distortions stemming from our old costing system. The new costing system shows that the regular model costs only $192.02, which implies a target price of $211.22. This price is lower than our current actual selling price and roughly consistent with the price our competitors are charging.

In contrast, our new product-costing system reveals that the advanced model's product cost is $875.50 instead of the previously reported cost of $430. The new product cost suggests a target price of $963.05 for the advanced model, rather than $473, which was our previous target price for the advanced model.



5. The company should adopt and maintain the activity-based costing system. The price of the regular model should be lowered to the $212. Lowering the price should enable the firm to regain its competitive position in the market for the regular model. Further price cuts should be considered if marketing studies indicate such a move will increase demand.

The price of the advanced model should be set near the target price of $963.05. If the advanced model does not sell at this price, management should consider discontinuing the product line. Input from the marketing staff should be sought before such an action is taken. An important consideration is the extent to which sales in the regular model and deluxe model markets depend on the firm's offering a complete product line.

A slight price reduction should be considered for the deluxe model (from $510.40 down to $500.96). However, the product cost distortion from the old costing system did not affect this model as seriously as it did the other two.


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