Concept explainers
(1)
Activity-based costing (ABC) method: The costing method which allocates overheads to the products based on factory overhead rate for each activity or cost object, according to the cost pooled for the cost drivers (allocation base).
Formula to compute activity-based overhead rate:
To compute: The activity-based overhead rate for each of the given activities
(1)
Explanation of Solution
Compute activity-based overhead rates.
Computation of Activity-Based Overhead Rates | |||||
Activity Cost Pools | Activity Cost | ÷ | Total Activity-Base Usage | = | Activity-Based Overhead Rates |
Customer service | $83,720 | ÷ | 322 requests | = | $260 per request |
Project bidding | 61,360 | ÷ | 104 bids | = | $590 per bid |
Engineering support | 86,800 | ÷ | 217 design changes | = | $400 per change |
Table (1)
(2)
To compute: The activity-cost allocated to each of the customers.
(2)
Explanation of Solution
Compute activity cost allocated to GK University.
Activity Cost Pools | Activity-Based Overhead Rates | × | Actual Use of Activity-Base | = | Activity Cost Allocated |
Customer service | $260 per request | × | 60 requests | = | $15,600 |
Project bidding | $590 per bid | × | 36 bids | = | 21,240 |
Engineering support | $400 per change | × | 45 changes | = | 18,000 |
Total activity costs allocated to GK University | $54,840 |
Table (2)
Note: Refer to Table (1) for value and computation of activity-based overhead rates.
Compute activity cost allocated to HS Arena.
Activity Cost Pools | Activity-Based Overhead Rates | × | Actual Use of Activity-Base | = | Activity Cost Allocated |
Customer service | $260 per request | × | 52 requests | = | $13,520 |
Project bidding | $590 per bid | × | 18 bids | = | 10,620 |
Engineering support | $400 per change | × | 30 changes | = | 12,000 |
Total activity costs allocated to HS Arena | $36,140 |
Table (3)
Note: Refer to Table (1) for value and computation of activity-based overhead rates.
Compute activity cost allocated to BL Hospital.
Activity Cost Pools | Activity-Based Overhead Rates | × | Actual Use of Activity-Base | = | Activity Cost Allocated |
Customer service | $260 per request | × | 210 requests | = | $54,600 |
Project bidding | $590 per bid | × | 50 bids | = | 29,500 |
Engineering support | $400 per change | × | 142 changes | = | 56,800 |
Total activity costs allocated to BL Hospital | $140,900 |
Table (4)
Note: Refer to Table (1) for value and computation of activity-based overhead rates.
(3)
To draft: Customer profitability report of Incorporation CZ for the year ended December 31
(3)
Explanation of Solution
Prepare customer profitability report of Incorporation CZ for the year ended December 31.
Incorporation CZ | |||
Customer Profitability Report | |||
For the Year Ended December 31 | |||
GK University | HS Arena | BL Hospital | |
Revenues | $1,650,000 | $1,050,000 | $450,000 |
Cost of goods sold | 1,320,000 | 840,000 | 360,000 |
Gross profit | 330,000 | 210,000 | 90,000 |
Selling and administrative expenses: | |||
Customer service | $15,600 | $13,520 | $54,600 |
Project bidding | 21,240 | 10,620 | 29,500 |
Engineering support | 18,000 | 12,000 | 56,800 |
Total selling expenses | 54,840 | 36,140 | 140,900 |
Income (loss) from operations | $275,160 | $173,860 | $(50,900) |
Table (5)
Working Notes:
Refer to Tables (2), (3) and (4) for value and computation of selling and administrative expenses for the three customers.
Compute sales revenues for each of the customers.
Customers | Number of Units Sold | × | Selling Price Per Unit | = | Sales Revenue |
GK University | 22 units | × | $75,000 | = | $1,650,000 |
HS Arena | 14 units | × | 75,000 | = | 1,050,000 |
BL Hospital | 6 units | × | 75,000 | = | 450,000 |
Table (6)
Compute cost of goods sold for each customer.
Customers | Number of Units Sold | × | Cost Price Per Unit | = | Cost of Goods Sold |
GK University | 22 units | × | $60,000 | = | $1,320,000 |
HS Arena | 14 units | × | 60,000 | = | 840,000 |
BL Hospital | 6 units | × | 60,000 | = | 360,000 |
Table (7)
(4)
To discuss: The inferences from the customer profitability report.
(4)
Explanation of Solution
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Chapter 26 Solutions
Financial & Managerial Accounting
- Davis Co. uses backflush costing to account for its manufacturing costs. The trigger points are the purchase of materials, the completion of goods, and the sale of goods. Prepare journal entries to account for the following: a. Purchased raw materials, on account, 70,000. b. Requisitioned raw materials to production, 70,000. c. Distributed direct labor costs, 15,000. d. Factory overhead costs incurred, 45,000. (Use Various Credits for the account in the credit part of the entry.) e. Completed all of the production started. f. Sold the completed production for 195,000, on account. (Hint: Use a single account for raw materials and work in process.)arrow_forwardFunctional-Based versus Activity-Based Costing For years, Tamarindo Company produced only one product: backpacks. Recently, Tamarindo added a line of duffel bags. With this addition, the company began assigning overhead costs by using departmental rates. (Prior to this, the company used a predetermined plantwide rate based on units produced.) Surprisingly, after the addition of the duffel-bag line and the switch to departmental rates, the costs to produce the backpacks increased, and their profitability dropped. Josie, the marketing manager, and Steve, the production manager, both complained about the increase in the production cost of backpacks. Josie was concerned because the increase in unit costs led to pressure to increase the unit price of backpacks. She was resisting this pressure because she was certain that the increase would harm the companys market share. Steve was receiving pressure to cut costs also, yet he was convinced that nothing different was being done in the way the backpacks were produced. After some discussion, the two managers decided that the problem had to be connected to the addition of the duffel-bag line. Upon investigation, they were informed that the only real change in product-costing procedures was in the way overhead costs are assigned. A two-stage procedure was now in use. First, overhead costs are assigned to the two producing departments, Patterns and Finishing. Second, the costs accumulated in the producing departments are assigned to the two products by using direct labor hours as a driver (the rate in each department is based on direct labor hours). The managers were assured that great care was taken to associate overhead costs with individual products. So that they could construct their own example of overhead cost assignment, the controller provided them with the information necessary to show how accounting costs are assigned to products: The controller remarked that the cost of operating the accounting department had doubled with the addition of the new product line. The increase came because of the need to process additional transactions, which had also doubled in number. During the first year of producing duffel bags, the company produced and sold 100,000 backpacks and 25,000 duffel bags. The 100,000 backpacks matched the prior years output for that product. Required: (Note: Round rates and unit cost to the nearest cent.) 1. CONCEPTUAL CONNECTION Compute the amount of accounting cost assigned to a backpack before the duffel-bag line was added by using a plantwide rate approach based on units produced. Is this assignment accurate? Explain. 2. Suppose that the company decided to assign the accounting costs directly to the product lines by using the number of transactions as the activity driver. What is the accounting cost per unit of backpacks? Per unit of duffel bags? 3. Compute the amount of accounting cost assigned to each backpack and duffel bag by using departmental rates based on direct labor hours. 4. CONCEPTUAL CONNECTION Which way of assigning overhead does the best jobthe functional-based approach by using departmental rates or the activity-based approach by using transactions processed for each product? Explain. Discuss the value of ABC before the duffel-bag line was added.arrow_forwardRoper Furniture manufactures office furniture and tracks cost data across their process. The following are some of the costs that they incur. Classify these costs as fixed or variable costs, and as product costs or period costs. Wood used to produce desks ($125,00 per desk) Production labor used to produce desks ($15 per hour) Production supervisor salary ($45,000 per year) Depreciation on factory equipment ($60,000 per year) Selling and administrative expenses ($45,000 per year) Rent on corporate office ($44,000 per year) Nails, glue, and other materials required to produce desks (varies per desk) Utilities expenses for production facility Sales staff commission (5% of gross sales)arrow_forward
- Petrillo Company produces engine parts for large motors. The company uses a standard cost system for production costing and control. The standard cost sheet for one of its higher volume products (a valve) is as follows: During the year, Petrillo had the following activity related to valve production: a. Production of valves totaled 20,600 units. b. A total of 135,400 pounds of direct materials was purchased at 5.36 per pound. c. There were 10,000 pounds of direct materials in beginning inventory (carried at 5.40 per pound). There was no ending inventory. d. The company used 36,500 direct labor hours at a total cost of 656,270. e. Actual fixed overhead totaled 110,000. f. Actual variable overhead totaled 168,000. Petrillo produces all of its valves in a single plant. Normal activity is 20,000 units per year. Standard overhead rates are computed based on normal activity measured in standard direct labor hours. Required: 1. Compute the direct materials price and usage variances. 2. Compute the direct labor rate and efficiency variances. 3. Compute overhead variances using a two-variance analysis. 4. Compute overhead variances using a four-variance analysis. 5. Assume that the purchasing agent for the valve plant purchased a lower-quality direct material from a new supplier. Would you recommend that the company continue to use this cheaper direct material? If so, what standards would likely need revision to reflect this decision? Assume that the end products quality is not significantly affected. 6. Prepare all possible journal entries (assuming a four-variance analysis of overhead variances).arrow_forwardCharlies Wood Works produces wood products (e.g., cabinets, tables, picture frames, and so on). Production departments include Cutting and Assembly. The Janitorial and Security departments support the Cutting and Assembly departments. The Assembly Department spans about 46,400 square feet and holds assets valued at about 60,000. The Cutting Department spans about 33,600 square feet and holds assets valued at about 140,000. Charlies Wood Works allocates support department costs using the direct method. If costs from the Janitorial Department are allocated based on square feet and costs from the Security Department are allocated based on asset value, determine (a) the percentage of Janitorial costs that should be allocated to the Assembly Department and (b) the percentage of Security costs that should be allocated to the Cutting Department.arrow_forwardThe following product costs are available for Stellis Company on the production of erasers: direct materials, $22,000; direct labor, $35,000; manufacturing overhead, $17,500; selling expenses, $17,600; and administrative expenses; $13,400. What are the prime costs? What are the conversion costs? What is the total product cost? What is the total period cost? If 13,750 equivalent units are produced, what is the equivalent material cost per unit? If 17,500 equivalent units are produced, what is the equivalent conversion cost per unit?arrow_forward
- Preparation of Income Statement: Manufacturing Firm Laworld Inc. manufactures small camping tents. Last year, 200,000 tents were made and sold for 60 each. Each tent includes the following costs: The only selling expenses were a commission of 2 per unit sold and advertising totaling 100,000. Administrative expenses, all fixed, equaled 300,000. There were no beginning or ending finished goods inventories. There were no beginning or ending work-in-process inventories. Required: 1. Calculate the product cost for one tent. Calculate the total product cost for last year. 2. CONCEPTUAL CONNECTION Prepare an income statement for external users. Did you need to prepare a supporting statement of cost of goods manufactured? Explain. 3. CONCEPTUAL CONNECTION Suppose 200,000 tents were produced (and 200,000 sold) but that the company had a beginning finished goods inventory of 10,000 tents produced in the prior year at 40 per unit. The company follows a first-in, first-out policy for its inventory (meaning that the units produced first are sold first for purposes of cost flow). What effect does this have on the income statement? Show the new statement.arrow_forwardCaseys Kitchens makes two types of food smokers: Gas and Electric. The company expects to manufacture 20,000 units of Gas smokers, which have a per-unit direct material cost of $15 and a per-unit direct labor cost of $25. k also expects to manufacture 50,000 units of Electric smokers, which have a per-unit material cost of $20 and a per-unit direct labor cost of $45. Historically, it has used the traditional allocation method and applied overhead at a rate of $125 per machine hour. It was determined that there were three cost pools, and the overhead for each cost pool is as follows: The cost driver for each cost pool and its expected activity is as follows: A. What is the per-unit cost for each product under the traditional allocation method? B. What is the per-unit cost for each product under ABC costing? C. Compared to ABC costing, was each products overhead under- or over applied? D. How much was overhead under- or over applied for each product?arrow_forwardYo-Down Inc. produces yogurt. Information related to the companys yogurt production follows: Support Department 1s costs total 142,000. Using the direct method of support department cost allocation, determine the costs from Support Department 1 that should be allocated to each production department.arrow_forward
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