Chapter 5, Problem 9ESA

a

To determine

The overhead cost for each book under each type.

Explanation of Solution

The calculation of overhead rate is as follows:

$\begin{array}{c}\text{Overhead rate}=\frac{\text{Total overhead cost}}{\text{Machine hours}}\\ =\frac{\$1,656,000(1)}{2,400\text{ hours}}\\ =\$690\text{ per hour}\end{array}$

Hence, the overhead rate per hour is $690 per hour.

TABLE (1)

WORKING NOTE:

The calculation of total overhead cost is as follows:

$\begin{array}{c}\text{Total overhead cost}=\text{Machine maintenance}+\text{Setups}+\text{Packing}+\text{Development}\\ =\$360,000+\$630,000+\$162,000+\$504,000\\ =\$1,656,000\end{array}$

Hence, the total overhead cost is $1,656,000.

(1)

b

To determine

The overhead cost for each book using activity-based costing.

Explanation of Solution

The calculation of per hour rate for each cost drivers:

Table (2)

The calculation of allocation cost for machine hours is as follows:

Table (3)

The calculation of allocation cost for setups is as follows:

Table (4)

The calculation of allocation cost for cartons is as follows:

Table (5)

The calculation of allocation cost for pictures is as follows:

Table (6)

The calculation of cost/unit per deluxe is as follows:

$\begin{array}{c}\text{Cost/unit per (deluxe)}=\frac{\text{Total allocation cost (deluxe) }}{\text{Number of units}}\\ =\frac{\$729,000(6)}{50,000}\\ =\$14.58\end{array}$

Hence, the cost/unit per deluxe is $14.58.

The calculation of cost/unit per moderate is as follows:

$\begin{array}{c}\text{Cost/unit per (moderate)}=\frac{\text{Total allocation cost (moderate) }}{\text{Number of units}}\\ =\frac{\$522,000(7)}{150,000}\\ =\$3.48\end{array}$

Hence, the cost/unit per moderate is $3.48.

The calculation of cost/unit per economy is as follows:

$\begin{array}{c}\text{Cost/unit per (economy)}=\frac{\text{Total allocation cost (economy) }}{\text{Number of units}}\\ =\frac{\$405,000(8)}{200,000}\\ =\$2.03\end{array}$

Hence, the cost/unit per economy is $2.03.

Working notes:

The calculation of total number of machine hours is as follows:

$\begin{array}{c}\text{Total number of machine hours}=\text{Deluxe}+\text{Moderate}+\text{Economy}\\ =300+900+1,200\\ =2,400\text{ hours}\end{array}$

Hence, the total number of machine hours is 2,400.

(2)

The calculation of total number of setups is as follows:

$\begin{array}{c}\text{Total number of setups}=\text{Deluxe}+\text{Moderate}+\text{Economy}\\ =30+15+5\\ =50\text{ setups}\end{array}$

Hence, the total number of setups is 50.

(3)

The calculation of total number of cartons is as follows:

$\begin{array}{c}\text{Total number of cartons}=\text{Deluxe}+\text{Moderate}+\text{Economy}\\ =10+30+50\\ =90\text{ cartons}\end{array}$

Hence, the total number of cartons is 90.

(4)

The calculation of total number of pictures is as follows:

$\begin{array}{c}\text{Total number of pictures}=\text{Deluxe}+\text{Moderate}+\text{Economy}\\ =4,000+2,000+1,000\\ =7,000\text{ pictures}\end{array}$

Hence, the total number of pictures is 7,000.

(5)

The calculation of total allocation cost for deluxe is as follows:

$\begin{array}{c}\text{Total allocation cost (deluxe)}=\left(\begin{array}{l}\text{Machine hours allocation}+\text{Setups allocation}\\ +\text{Cartons allocation}+\text{Picture allocation}\end{array}\right)\\ =(\$45,000+\$378,000+\$18,000+\$288,000)\\ =\$729,000\end{array}$

Hence, the total allocation cost for deluxe is $729,000.

(6)

The calculation of total allocation cost for moderate is as follows:

$\begin{array}{c}\text{Total allocation cost (moderate)}=\left(\begin{array}{l}\text{Machine hours allocation}+\text{Setups allocation}\\ +\text{Cartons allocation}+\text{Picture allocation}\end{array}\right)\\ =(\$135,000+\$189,000+\$54,000+\$144,000)\\ =\$522,000\end{array}$

Hence, the total allocation cost for moderate is $522,000.

(7)

The calculation of total allocation cost for economy is as follows:

$\begin{array}{c}\text{Total allocation cost (economy)}=\left(\begin{array}{l}\text{Machine hours allocation}+\text{Setups allocation}\\ +\text{Cartons allocation}+\text{Picture allocation}\end{array}\right)\\ =(\$180,000+\$63,000+\$90,000+\$72,000)\\ =\$405,000\end{array}$

Hence, the total allocation cost for economy is $405,000.

(8)

c

To determine

Explain the reason for different overhead costs per unit in requirements a and b.

Explanation of Solution

The reason for different overhead costs per unit in requirements a and b is as follows:

As it requires equal amount of machine hours for printing each book, the assignment based on volume will allocate the same amount of overhead cost for every unit ($4.14). This gives an incorrect measure of units because consumption of overhead costs differs from product to product. For instance, the deluxe text needs better photo development than the economy text.

Activity-based costing (ABC) provides a closer link between cost assignment and resource consumption. Therefore, ABC allocates more overhead costs for the products. (That is $14.58 for deluxe, $3.48 for moderate, and $2.03 for economy).