Cost Management Systems: Activity-Based, Just-inTime, and Quality Management Systems

Koehler makes handheld calculators in two models: basic and professional. Koehler estimated $721,000 of manufacturing overhead and 515,000 machine hours for the year. The basic model actually consumed 230,000 machine hours, and the professional model consumed 285,000 machine hours.

Compute the predetermined overhead allocation rate using machine hours (MHr) as the allocation base. How much overhead is allocated to the basic model? To the professional model?

Koehler (see Exercise E19-15) makes handheld calculators in two models—basic and professional—and wants to refine its costing system by allocating overhead using departmental rates. The estimated \(721,000 of manufacturing overhead has been divided into two cost pools: Assembly Department and Packaging Department. The following data have been compiled:

                                            Assembly                  Packaging

                                           Department               Department                   Total

Overhead costs                  \) 456,500                    \( 264,500                 \) 721,000

Machine hours:

Basic Model                     185,000 MHr                    45,000 MHr           230,000 MHr

Professional Model         230,000 MHr                    55,000 MHr           285,000 MHr

Total                                 415,000 MH                    100,000 MHr           515,000 MHr

Direct labor hours:

Basic Model                      20,000 DLHr                   50,000 DLHr          70,000 DLHr

Professional Model        105,125 DLHr                 280,625 DLHr        385,750 DLHr

Total                                 125,125 DLHr                 330,625 DLHr        455,750 DLHr

Compute the predetermined overhead allocation rates using machine hours as the allocation base for the Assembly Department and direct labor hours for the Packaging Department. How much overhead is allocated to the basic model? To the professional model? Round allocation rates to two decimal places and allocated costs to whole dollars.

Koehler (see Exercise E19-15 and Exercise E19-16) makes handheld calculators in two models—basic and professional—and wants to further refine its costing system by allocating overhead using activity-based costing. The estimated \(721,000 of manufacturing overhead has been divided into three primary activities: Materials Handling, Machine Setup, and Insertion of Parts. The following data have been compiled:

Requirement 1

Koehler expects to produce 200,000 basic models and 200,000 professional models. Compute the predetermined overhead allocation rates using activity-based costing. How much overhead is allocated to the basic model? To the professional model?

Koehler (see Exercise E19-15 and Exercise E19-16) makes handheld calculators in two models—basic and professional—and wants to further refine its costing system by allocating overhead using activity-based costing. The estimated \(721,000 of manufacturing overhead has been divided into three primary activities: Materials Handling, Machine Setup, and Insertion of Parts. The following data have been compiled:

Requirement 2

Compare your answers for Exercise E19-15, Exercise E19-16, and Exercise E19-17. What conclusions can you draw?

Franklin, Inc. uses activity-based costing to account for its chrome bumper manufacturing process. Company managers have identified four manufacturing activities:

materials handling, machine setup, insertion of parts, and finishing. The budgeted activity costs for 2018 and their allocation bases are as follows:

Activity                                Total Budgeted Cost                   Allocation Base

Materials handling                       \( 12,000                              Number of parts

Machine setup                                   3,100                           Number of setups

Insertion of parts                             42,000                              Number of parts

Finishing                                           86,000           Finishing direct labor hours

Total                                            \) 143,100

Franklin expects to produce 500 chrome bumpers during the year. The bumpers are expected to use 4,000 parts, require 10 setups, and consume 1,000 hours of finishing time.

Requirements

1. Compute the predetermined overhead allocation rate for each activity.

 Franklin, Inc. uses activity-based costing to account for its chrome bumper manufacturing process. Company managers have identified four manufacturing activities:

materials handling, machine setup, insertion of parts, and finishing. The budgeted activity costs for 2018 and their allocation bases are as follows:

Activity                                Total Budgeted Cost                   Allocation Base

Materials handling                       \( 12,000                              Number of parts

Machine setup                                   3,100                           Number of setups

Insertion of parts                             42,000                              Number of parts

Finishing                                          86,000           Finishing direct labor hours

Total                                            \) 143,100

Franklin expects to produce 500 chrome bumpers during the year. The bumpers are expected to use 4,000 parts, require 10 setups, and consume 1,000 hours of finishing time.

Requirements

2. Compute the expected indirect manufacturing cost of each bumper.

Franklin, Inc. uses activity-based costing to account for its chrome bumper manufacturing process. Company managers have identified four manufacturing activities:

materials handling, machine setup, insertion of parts, and finishing. The budgeted activity costs for 2018 and their allocation bases are as follows:

Activity                                Total Budgeted Cost                   Allocation Base

Materials handling                       \( 12,000                              Number of parts

Machine setup                                   3,100                           Number of setups

Insertion of parts                             42,000                              Number of parts

Finishing                                           86,000           Finishing direct labor hours

Total                                            \) 143,100

Franklin expects to produce 500 chrome bumpers during the year. The bumpers are expected to use 4,000 parts, require 10 setups, and consume 1,000 hours of finishing time.

Requirements

2. Compute the expected indirect manufacturing cost of each bumper.

Turbo Champs Corp. uses activity-based costing to account for its motorcycle manufacturing process. Company managers have identified three supporting manufacturing activities: inspection, machine setup, and machine maintenance. The budgeted activity costs for 2018 and their allocation bases are as follows:

         Activity                        Total Budgeted Cost                     Allocation Base

Inspections                                     \( 5,700                      Number of inspections

Machine setup                                 22,000                               Number of setups

Machine maintenance                       6,000              Finishing of machine hours

Total                                                \) 33,700

Turbo Champs expects to produce 20 custom-built motorcycles for the year. The motorcycles are expected to require 100 inspections, 40 setups, and 100 machine hours.

Requirements

2. Compute the expected indirect manufacturing cost of each motorcycle.

Turbo Champs Corp. uses activity-based costing to account for its motorcycle manufacturing process. Company managers have identified three supporting manufacturing activities: inspection, machine setup, and machine maintenance. The budgeted activity costs for 2018 and their allocation bases are as follows:

         Activity                        Total Budgeted Cost                     Allocation Base

Inspections                                     \( 5,700                      Number of inspections

Machine setup                                 22,000                               Number of setups

Machine maintenance                       6,000              Finishing of machine hours

Total                                                \) 33,700

Turbo Champs expects to produce 20 custom-built motorcycles for the year. The motorcycles are expected to require 100 inspections, 40 setups, and 100 machine hours.

Requirements

1. Compute the predetermined overhead allocation rate for each activity.

Turbo Champs Corp. uses activity-based costing to account for its motorcycle manufacturing process. Company managers have identified three supporting manufacturing activities: inspection, machine setup, and machine maintenance. The budgeted activity costs for 2018 and their allocation bases are as follows:

         Activity                        Total Budgeted Cost                     Allocation Base

Inspections                                     \( 5,700                      Number of inspections

Machine setup                                 22,000                               Number of setups

Machine maintenance                       6,000              Finishing of machine hours

Total                                               \) 33,700

Turbo Champs expects to produce 20 custom-built motorcycles for the year. The motorcycles are expected to require 100 inspections, 40 setups, and 100 machine hours.

Requirements

2. Compute the expected indirect manufacturing cost of each motorcycle.

Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018: 

        Activity                         Allocation Base                  Predetermined Overhead

                                                                                                     Allocation Rate

Materials handling              Number of parts                              $ 4.00 per part

Machine setup                   Number of setups                           400.00 per setup

Insertion of parts                 Number of parts                              26.00 per part

Finishing                       Number of finishing hours                    90.00 per hour

Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:

                                                                     Standard                     Deluxe

Parts per rim                                                    4.0                             7.0

Setups per 500 rims                                      18.0                           18.0

Finishing hours per rim                                  1.0                             5.5

Total direct hours per rim                               5.0                             6.0

The company expects to produce 500 units of each model during the year.

Requirements

1. Compute the total estimated indirect manufacturing cost for 2018.

Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018: 

        Activity                         Allocation Base                  Predetermined Overhead

                                                                                                     Allocation Rate

Materials handling              Number of parts                              $ 4.00 per part

Machine setup                   Number of setups                           400.00 per setup

Insertion of parts                 Number of parts                              26.00 per part

Finishing                       Number of finishing hours                    90.00 per hour

Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:

                                                                     Standard                     Deluxe

Parts per rim                                                    4.0                             7.0

Setups per 500 rims                                      18.0                           18.0

Finishing hours per rim                                  1.0                             5.5

Total direct hours per rim                               5.0                             6.0

The company expects to produce 500 units of each model during the year.

Requirements

2. Prior to 2018, Eason used a single plantwide overhead allocation rate system with direct labor hours as the allocation base. Compute the predetermined overhead allocation rate based on direct labor hours for 2018. Use this rate to determine the estimated indirect manufacturing cost per wheel rim for each model, to the nearest cent.

Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018: 

        Activity                         Allocation Base                  Predetermined Overhead

                                                                                                     Allocation Rate

Materials handling              Number of parts                              $ 4.00 per part

Machine setup                   Number of setups                           400.00 per setup

Insertion of parts                 Number of parts                              26.00 per part

Finishing                       Number of finishing hours                    90.00 per hour

Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:

                                                                     Standard                     Deluxe

Parts per rim                                                    4.0                             7.0

Setups per 500 rims                                      18.0                           18.0

Finishing hours per rim                                  1.0                             5.5

Total direct hours per rim                               5.0                             6.0

The company expects to produce 500 units of each model during the year.

Requirements

3. Compute the estimated ABC indirect manufacturing cost per unit of each model for 2018. Carry each cost to the nearest cent.

Refer to Exercise E19-20. For 2019, Eason’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using activity based costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s standard and deluxe models for 2019:

                                                      Standard                     Deluxe

Sales price                                    \( 800.00                    \) 940.00

Direct materials                                 31.00                         48.00

Direct labor                                        45.00                         52.00

Because of limited machine hour capacity, Eason can produce either 2,000 standard rims or 2,000 deluxe rims.

Requirements

1. If Eason’s managers rely on the ABC unit cost data computed in Exercise E19-20, which model will they produce? Carry each cost to the nearest cent. (Ignore selling and administrative expenses for this calculation.)

Refer to Exercise E19-20. For 2019, Eason’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using activity based n costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s standard and deluxe models for 2019:

                                                      Standard                     Deluxe

Sales price                                    \( 800.00                    \) 940.00

Direct materials                                 31.00                         48.00

Direct labor                                        45.00                         52.00

Because of limited machine hour capacity, Eason can produce either 2,000 standard rims or 2,000 deluxe rims.

Requirements

2. If the managers rely on the single plantwide overhead allocation rate cost data, which model will they produce?

Refer to Exercise E19-20. For 2019, Eason’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using activitybasedn costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s standard and deluxe models for 2019:

                                                      Standard                     Deluxe

Sales price                                    \( 800.00                    \) 940.00

Direct materials                                 31.00                         48.00

Direct labor                                        45.00                         52.00

Because of limited machine hour capacity, Eason can produce either 2,000 standard rims or 2,000 deluxe rims.

Requirements

3. Which course of action will yield more income for Eason?

Refer to Exercises E19-20 and E19-21. Controller Michael Bender is surprised by the increase in cost of the deluxe model under ABC. Market research shows that for the deluxe rim to provide a reasonable profit, Eason will have to meet a target manufacturing cost of \(625.00 per rim. A value engineering study by Eason’s employees suggests that modifications to the finishing process could cut finishing cost from \)90.00 to \(60.00 per hour and reduce the finishing direct labor hours per deluxe rim from 5.50 hours to 5.0 hours. Direct materials would remain unchanged at \)48.00 per rim, as would direct labor at $52.00 per rim. The materials handling, machine setup, and insertion of parts activity costs also would remain the same.

Would implementing the value engineering recommendation enable Eason to achieve its target cost for the deluxe rim?

Measuring and recording goodwill Princeton has acquired several other companies. Assume that Princeton purchased Kelleher for \(9,000,000 cash. The book value of Kelleher’s assets is \)19,000,000 (market value, \(20,000,000), and it has liabilities of \)12,000,000 (market value, $12,000,000).

 Requirements 

1. Compute the cost of the goodwill purchased by Princeton.

 2. Record the purchase of Kelleher by Princeton

Question: Treat Dog Collars uses activity-based costing. Treat’s system has the following features:

___________________________________________________________________

Activity Allocation BasePredetermined

                                                                                           Overhead Allocation Rate

Purchasing Number of purchase orders \( 60.00 per purchase order

Assembling Number of parts 0.36 per part

Packaging Number of finished collars 0.19 per collar

___________________________________________________________________

Each collar has three parts, direct materials cost is \)5.00 per collar, and direct laborcost is \(4.00 per collar. Suppose Animal Hut has asked for a bid on 30,000 dog collars.Treat will issue a total of 175 purchase orders if Animal Hut accepts Treat’s bid.

Requirements

1. Compute the total estimated cost Treat will incur to purchase the needed materialsand then assemble and package 30,000 dog collars. Also compute the cost percollar.

2. For bidding, Treat adds a 40% markup to total cost. What total price will the companybid for the entire Animal Hut order?

3. Suppose that instead of an ABC system, Treat has a traditional product costingsystem that allocates indirect costs at the rate of \)9.50 per direct labor hour. Thedog collar order will require 9,000 direct labor hours. What total price will Treat bidusing this system’s total cost?

4. Use your answers to Requirements 2 and 3 to explain how ABC can help Treatmake a better decision about the bid price it will offer Animal Hut.

Question: Western, Inc. is a technology consulting firm focused on Web site development and integration of Internet business applications. The president of the company expectsto incur \(640,000 of indirect costs this year, and she expects her firm to work 4,000direct labor hours. Western’s systems consultants provide direct labor at a rate of \)280per hour. Clients are billed at 160% of direct labor cost. Last month, Western’s consultantsspent 170 hours on Halbert’s engagement.

Requirements

1. Compute Western’s predetermined overhead allocation rate per direct labor hour.

2. Compute the total cost assigned to the Halbert engagement.

3. Compute the operating income from the Halbert engagement.

Question: Refer to Exercise E19-24. The president of Western suspects that her allocation of indirect costs could be giving misleading results, so she decides to develop an ABCsystem. She identifies three activities: documentation preparation, information technologysupport, and training. She figures that documentation costs are driven by thenumber of pages, information technology support costs are driven by the number ofsoftware applications used, and training costs are driven by the number of direct laborhours worked. Estimates of the costs and quantities of the allocation bases follow:

Compute the predetermined overhead allocation rate for each activity. Round to thenearest dollar.

Question: Refer to Exercises E19-24 and E19-25. Suppose Western’s direct labor rate was $280 per hour. The Halbert engagement used the following resources last month:

Allocation Base Halbert

Direct labor hours 170

Pages 310

Applications used 80

Requirements

1. Compute the cost assigned to the Halbert engagement, using the ABC system.

2. Compute the operating income or loss from the Halbert engagement, using theABC system.

Question: Measuring asset cost, units-of-production depreciation, and asset trade Wimot Trucking Corporation uses the units-of-production depreciation method because units-of-production best measures wear and tear on the trucks. Consider these facts about one Mack truck in the company’s fleet. When acquired in 2015, the rig cost \(360,000 and was expected to remain in service for 10 years or 1,000,000 miles. Estimated residual value was \)90,000. The truck was driven 80,000 miles in 2015, 120,000 miles in 2016, and 160,000 miles in 2017. After 44,000 miles, on March 15, 2018, the company traded in the Mack truck for a less expensive Freightliner. Wimot also paid cash of $20,000. Fair market value of the Mack truck was equal to its net book value on the date of the trade.

 Requirements 

1. Record the journal entry for depreciation expense in 2018. 

2. Determine Wimot’s cost of the new truck.

 3. Record the journal entry for the exchange of assets on March 15, 2018. Assume the exchange had commercial substance

Computing asset turnover ratio Blackerby Photo reported the following figures on its December 31, 2018, income statement and balance sheet:

Compute the asset turnover ratio for 2018 Round to two decimal places

Darrel & Co. makes electronic components. Chris Darrel, the president, recently instructed Vice President Jim Bruegger to develop a total quality control program. “If we don’t at least match the quality improvements our competitors are making,” he told Bruegger, “we’ll soon be out of business.” Bruegger began by listing various “costs of quality” that Darrel incurs. The first six items that came to mind were:

a. Costs incurred by Darrel customer representatives traveling to customer sites to repair defective products, \(13,000.

b. Lost profits from lost sales due to reputation for less-than-perfect products, \)35,000.

c. Costs of inspecting components in one of Darrel’s production processes, \(40,000.

d. Salaries of engineers who are redesigning components to withstand electrical overloads, \)65,000.

e. Costs of reworking defective components after discovery by company inspectors, \(50,000.

f. Costs of electronic components returned by customers, \)70,000.

Classify each item as a prevention cost, an appraisal cost, an internal failure cost, or an external failure cost. Then determine the total cost of quality by category.

Question: Refer to Exercise E19-26. Western desires a 20% target net profit after covering all costs. Considering the total costs assigned to the Halbert engagement in Exercise E19-26, what would Western have to charge the customer to achieve that net profit? Roundto two decimal places.

Question: Lally, Inc. produces universal remote controls. Lally uses a JIT costing system. One of the company’s products has a standard direct materials cost of \(9 per unit and a standardconversion cost of \)35 per unit. During January 2018, Lally produced 500 unitsand sold 495 units on account at \(45 each. It purchased \)4,800 of direct materials onaccount and incurred actual conversion costs totaling \(14,000.

Requirements

1. Prepare summary journal entries for January.

2. The January 1, 2018, balance of the Raw and In-Process Inventory account was\)70. Use a T-account to find the January 31 balance.

3. Use a T-account to determine whether conversion costs are overallocated orunderallocated for the month. By how much? Prepare the journal entry to adjustthe Conversion Costs account.

Question: Gateway produces electronic calculators. Suppose Gateway’s standard cost per calculator is \(25 for direct materials and \)68 for conversion costs. The following data applyto August activities:

Direct materials purchased (on account) \( 8,300

Conversion costs incurred 20,500

Number of calculators produced 300 calculators

Number of calculators sold (on account, at \)105 each) 295 calculators

Requirements

1. Prepare summary journal entries for August using JIT costing, including the entryto adjust the Conversion Costs account.

2. The beginning balance of Finished Goods Inventory was $1,300. Use a T-accountto find the ending balance of Finished Goods Inventory.

Question: Exchanging assets—two situations Partner Bank recently traded in office fixtures. Here are the facts

Requirements 

1. Record Partner Bank’s trade-in of old fixtures for new ones. Assume the exchange had commercial substance. 

2. Now let’s change one fact. Partner Bank feels compelled to do business with Elm Furniture, a bank customer, even though the bank can get the fixtures elsewhere at a better price. Partner Bank is aware that the new fixtures’ market value is only $126,000. Record the trade-in. Assume the exchange had commercial substance

Clason, Inc. manufactures door panels. Suppose Clason is considering spending the following amounts on a new total quality management (TQM) program:

___________________________________________________________________

Strength-testing one item from each batch of panels                               \( 68,000

Training employees in TQM                                                                            27,000

Training suppliers in TQM                                                                               39,000

Identifying suppliers who commit to on-time delivery of

perfect-quality materials                                                                                   58,000

Clason expects the new program would save costs through the following:

___________________________________________________________________

Avoid lost profits from lost sales due to disappointed customers          \) 86,000

Avoid rework and spoilage                                                                              63,000

Avoid inspection of raw materials                                                                  57,000

Avoid warranty costs                                                                                       15,000

Requirements

1. Classify each cost as a prevention cost, an appraisal cost, an internal failure cost, or an external failure cost.

2. Should Clason implement the new quality program? Give your reason.

Answer

Loiselle manufactures high-quality speakers. Suppose Loiselle is considering spending the following amounts on a new quality program:

___________________________________________________________________

Additional 20 minutes of testing for each speaker                                 \( 625,000

Negotiating and training suppliers to obtain higher-quality

materials and on-time delivery                                                                     430,000

Redesigning the speakers to make them easier to manufacture            1,250,000

Loiselle expects this quality program to save costs as follows:

                    __________________________________________________

                   Reduce warranty repair costs                                \) 275,000

                   Avoid inspection of raw materials                            580,000

                   Avoid rework because of fewer defective units      825,000_

It also expects this program to avoid lost profits from the following:

                   ___________________________________________________

                   Lost profits due to disappointed customers           $ 920,000

                   Lost production time due to rework                            278,000

Requirements

1. Classify each of these costs into one of the four categories of quality costs (prevention, appraisal, internal failure, or external failure).

2. Should Loiselle implement the quality program? Give your reasons.

Willitte Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:

Activity                          Estimated                                              Estimated Quantity

                                     Indirect Cost          Allocation Base      of Allocation Base

Materials handling          \( 95,000        Number of kilos                    19,000 kilos

Packaging                         200,000        Number of machine hours   5,000 hours

Quality assurance            112,500        Number of samples             1,875 samples

Total indirect costs       \) 407,500

Actual production information includes the following:

                                                Commercial Containers                   Travel Packs

Units produced                            2,400 containers                       50,000 packs

Weight in kilos                             9,600                                             5,000

Machine hours                             1,680                                               500

Number of samples                        240                                                750

Requirements

3. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)

Willette Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:

Activity                          Estimated                                              Estimated Quantity

                          Indirect Cost          Allocation Base      of Allocation Base

Materials handling          \( 95,000        Number of kilos                    19,000 kilos

Packaging                         200,000        Number of machine hours   5,000 hours

Quality assurance            112,500        Number of samples             1,875 samples

Total indirect costs       \) 407,500

Actual production information includes the following:

                                                Commercial Containers                   Travel Packs

Units produced                            2,400 containers                       50,000 packs

Weight in kilos                             9,600                                             5,000

Machine hours                             1,680                                               500

Number of samples                        240                                                750

Requirements

1. Willitte’s original single plantwide overhead allocation rate costing system allocated indirect costs to products at $81.50 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for each product. Round to two decimal places.

Willitte Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:

Activity                          Estimated                                              Estimated Quantity

                                     Indirect Cost          Allocation Base      of Allocation Base

Materials handling          \( 95,000        Number of kilos                    19,000 kilos

Packaging                         200,000        Number of machine hours   5,000 hours

Quality assurance            112,500        Number of samples             1,875 samples

Total indirect costs       \) 407,500

Actual production information includes the following:

                                                Commercial Containers                   Travel Packs

Units produced                            2,400 containers                       50,000 packs

Weight in kilos                             9,600                                             5,000

Machine hours                             1,680                                               500

Number of samples                        240                                                750

Requirements

4. Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain why the costs changed.

Willitte Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:

Activity                          Estimated                                             Estimated Quantity

                                     Indirect Cost          Allocation Base      of Allocation Base

Materials handling          \( 95,000        Number of kilos                    19,000 kilos

Packaging                         200,000        Number of machine hours   5,000 hours

Quality assurance            112,500        Number of samples             1,875 samples

Total indirect costs       \) 407,500

Actual production information includes the following:

                                               Commercial Containers                  Travel Packs

Units produced                            2,400 containers                       50,000 packs

Weight in kilos                             9,600                                            5,000

Machine hours                             1,680                                               500

Number of samples                        240                                               750

Requirements

3. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)

Willitte Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:

Activity                          Estimated                                             Estimated Quantity

                                     Indirect Cost          Allocation Base      of Allocation Base

Materials handling          \( 95,000        Number of kilos                    19,000 kilos

Packaging                         200,000        Number of machine hours   5,000 hours

Quality assurance            112,500        Number of samples             1,875 samples

Total indirect costs       \) 407,500

Actual production information includes the following:

                                               Commercial Containers                  Travel Packs

Units produced                            2,400 containers                       50,000 packs

Weight in kilos                             9,600                                            5,000

Machine hours                             1,680                                               500

Number of samples                        240                                               750

Requirements

4. Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain why the costs changed.

Willitte Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:

Activity                          Estimated                                             Estimated Quantity

                                     Indirect Cost          Allocation Base      of Allocation Base

Materials handling          \( 95,000        Number of kilos                    19,000 kilos

Packaging                         200,000        Number of machine hours   5,000 hours

Quality assurance            112,500        Number of samples             1,875 samples

Total indirect costs       \) 407,500

Actual production information includes the following:

                                               Commercial Containers                  Travel Packs

Units produced                            2,400 containers                       50,000 packs

Weight in kilos                             9,600                                            5,000

Machine hours                             1,680                                               500

Number of samples                        240                                               750

Requirements

2. Compute the predetermined overhead allocation rate for each activity.

The Alright Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):

                   Direct materials cost                                \( 80.00

                   Direct labor cost                                          20.00

                   Activity-based costs allocated                 ?

   Total manufacturing product cost           ?

The activities required to build the component follow:

        Activity                    Allocation Base                                    Cost Allocated to                          

                                                                                                     Each Unit

Start station            Number of raw component chassis            4 * \) 1.50 = \( 6.00

Dip insertion           Number of dip insertions           ? * 0.30 = 9.60

Manual insertion    Number of manual insertions                               10 * 0.50 = ?

Wave solder            Number of components soldered                     4 * 1.90 = 7.60

Backload                 Number of backload insertions                              7 * ? = 4.20

Test                          Number of testing hours                                  0.43 * 90.00 = ?

Defect analysis       Number of defect analysis hours                   0.15 * ?= 12.00

Total activity-based costs                                                                               \) ?

Requirements

1. Complete the missing items for the two tables.

The Alright Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):

                   Direct materials cost                                \( 80.00

                   Direct labor cost                                          20.00

                   Activity-based costs allocated                         ?

                   Total manufacturing product cost                   ?

The activities required to build the component follow:

        Activity                    Allocation Base                                Cost Allocated to                                                                                                                   Each Unit

Start station            Number of raw component chassis        4 * \) 1.50 = \( 6.00

Dip insertion           Number of dip insertions                                ? * 0.30 = 9.60

Manual insertion    Number of manual insertions                             10 * 0.50 = ?

Wave solder            Number of components soldered                  4 * 1.90 = 7.60

Backload                 Number of backload insertions                           7 * ? = 4.20

Test                          Number of testing hours                              0.43 * 90.00 = ?

Defect analysis       Number of defect analysis hours                  0.15 * ? = 12.00

Total activity-based costs                                                                                    \) ?

Requirements

2. Why might managers favor this ABC system instead of Alright’s older system, which allocated all manufacturing overhead costs on the basis of direct labor hours?

The Alright Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):

                   Direct materials cost                                \( 80.00

                   Direct labor cost                                          20.00

                   Activity-based costs allocated                         ?

                   Total manufacturing product cost                   ?

The activities required to build the component follow:

        Activity                    Allocation Base                                    Cost Allocated to                          

                                                                                                                Each Unit

Start station            Number of raw component chassis            4 * \) 1.50 = \( 6.00

Dip insertion           Number of dip insertions                                   ? * 0.30 = 9.60

Manual insertion    Number of manual insertions                               10 * 0.50 = ?

Wave solder            Number of components soldered                     4 * 1.90 = 7.60

Backload                 Number of backload insertions                              7 * ? = 4.20

Test                          Number of testing hours                                 0.43 * 90.00 = ?

Defect analysis       Number of defect analysis hours                   0.15 * ? = 12.00

Total activity-based costs                                                                                    \) ?

Requirements

2. Why might managers favor this ABC system instead of Alright’s older system, which allocated all manufacturing overhead costs on the basis of direct labor hours?

Question: Oscar, Inc. manufactures bookcases and uses an activity-based costing system. Oscar’s activity areas and related data follow:

*Refers to number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Oscar produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Requirements

4. What price should Oscar’s managers set for unfinished bookcases to earn a net profit of $19 per bookcase?

Question: Oscar, Inc. manufactures bookcases and uses an activity-based costing system. Oscar’s activity areas and related data follow:

*Refers to number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Oscar produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Requirements

2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard bookcases at \(5 each and to the unfinished bookcases at \)3 each. Similar analyses were conducted of post-manufacturing activities such as distribution, marketing, and customer service. The post-manufacturing costs were \(20 per standard bookcase and \)18 per unfinished bookcase. Compute the full product costs per unit.

Question: Oscar, Inc. manufactures bookcases and uses an activity-based costing system. Oscar’s activity areas and related data follow:

*Refers to number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Oscar produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Requirements

3. Which product costs are reported in the external financial statements? Which costs are used for management decision-making? Explain the difference.

Question: Oscar, Inc. manufactures bookcases and uses an activity-based costing system. Oscar’s activity areas and related data follow:

*Refers to number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Oscar produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Requirements

1. Compute the manufacturing product cost per unit of each type of bookcase.

Question: Blanchette Plant Service completed a special landscaping job for Kerry Company. Blanchette uses ABC and has the following predetermined overhead allocation rates:

                  Activity                                                                   Predetermined

                                                  Allocation Base               Overhead Allocation Rate

                Designing               Number of designs                  \( 290 per design

                  Planting                Number of plants                     \) 20 per plant

The Kerry job included \(750 in plants; \)1,300 in direct labor; one design; and 30 plants.

Requirements

1. What is the total cost of the Kerry job?

Question: Blanchette Plant Service completed a special landscaping job for Kerry Company. Blanchette uses ABC and has the following predetermined overhead allocation rates:

                  Activity                                                                   Predetermined

                                                  Allocation Base               Overhead Allocation Rate

                Designing               Number of designs                  \( 290 per design

                  Planting                Number of plants                     \) 20 per plant

The Kerry job included \(750 in plants; \)1,300 in direct labor; one design; and 30 plants.

Requirements

3. If Blanchette desires an operating income of 30% of cost, how much should the company charge for the Kerry job?

Question: Low Range produces fleece jackets. The company uses JIT costing for its JIT production system.

Low Range has two inventory accounts: Raw and In-Process Inventory and

Finished Goods Inventory. On March 1, 2018, the account balances were Raw and In-Process Inventory, \(9,000; Finished Goods Inventory, \)1,700.

The standard cost of a jacket is \(40, composed of \)12 direct materials plus \(28 conversion costs. Data for March’s activities follow:

Number of jackets completed                                                            15,000

Number of jackets sold (on account, for \)50 each)                          14,600

Direct materials purchased (on account)                                      \( 177,500

Conversion costs incurred                                                            \) 521,000

Requirements

2. Prepare summary journal entries for March. Underallocated or overallocated conversion costs are adjusted to Cost of Goods Sold monthly.

Question: Low Range produces fleece jackets. The company uses JIT costing for its JIT production system.

Low Range has two inventory accounts: Raw and In-Process Inventory and

Finished Goods Inventory. On March 1, 2018, the account balances were Raw and In-Process Inventory, \(9,000; Finished Goods Inventory, \)1,700.

The standard cost of a jacket is \(40, composed of \)12 direct materials plus \(28 conversion costs. Data for March’s activities follow:

Number of jackets completed                                                            15,000

Number of jackets sold (on account, for \)50 each)                          14,600

Direct materials purchased (on account)                                      \( 177,500

Conversion costs incurred                                                            \) 521,000

Requirements

1. What are the major features of a JIT production system such as that of Low Range?

Question: Low Range produces fleece jackets. The company uses JIT costing for its JIT production system.

Low Range has two inventory accounts: Raw and In-Process Inventory and

Finished Goods Inventory. On March 1, 2018, the account balances were Raw and In-Process Inventory, \(9,000; Finished Goods Inventory, \)1,700.

The standard cost of a jacket is \(40, composed of \)12 direct materials plus \(28 conversion costs. Data for March’s activities follow:

Number of jackets completed                                                            15,000

Number of jackets sold (on account, for \)50 each)                          14,600

Direct materials purchased (on account)                                      \( 177,500

Conversion costs incurred                                                            \) 521,000

Requirements

3. Use a T-account to determine the March 31, 2018, balance of Raw and In-Process Inventory.

Question: Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.

Activity                                                                         Predicted        Predetermined

                                                                             Reduction in  Overhead Allocation

                                                                               Activity Units         Rate per Unit

Inspection of incoming raw materials                             390                      \( 44

Inspection of finished goods                                            390                         19

Number of defective units discovered in-house         1,200                         50

Number of defective units discovered by customers    325                         72

Lost profits due to dissatisfied customers                       75                       102

Requirements

2. Stella spent \)103,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?