Problem Sol Hilton)
Problem Sol Hilton)
Problem Sol Hilton)
1.
a.
Equivalent units:
Tax
Returns
(physical
units)
Returns in process, February 1 ..... 300
Returns started in February ........... 900
Total returns to account for ........... 1,200
Returns completed
during February ........................
Returns in process, February 28 ...
800
Percentage
of
Completion
with Respect
to
Conversion
(labor and
overhead)
20%
100%
75%
400
Total returns accounted for ........... 1,200
Total equivalent units of activity ...
Equivalent Units
Labor
Overhead
800
300
800
300
____
1,100
____
1,100
Overhead
4,000
51,000
55,000
1,100
50.00
Total
7,500
141,000
148,500
Labor
3,500
90,000
93,500
1,100
85.00
135.00
25,500
15,000
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40,500
55,000
60,000
66,000
$
110,600
400,000
14.10
1,320,000
158,000
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60,000
20,000
80,000
100%
30%
60,000
20,000
_____
80,000
60,000
6,000
_____
66,000
Direct
Material
$232,000
400,000
$632,000
80,000
$7.90
Conversion
$110,600
820,000
$930,600
66,000
$14.10
Total
$
342,600
1,220,000
$1,562,600
$22.00
............................. 60,000$22.00
transferred out equivalentunit
$1,320,000
number of
cost per
equivalent
equivalent
unitsof
unit of
................................ 20,000$7.90
direct
material
direct
material
$ 158,000
Conversion:
equivalent
equivalent
unitsof
unit of
.......................................... 6,000$14.10
conversion
conversion
84,600
$242,600
Check:
$1,320,000
242,600
$1,562,600
16,000
6,000
22,000
100%
30%
Direct
Material
$ 31,600
85,000*
$116,600
22,000
$5.30
16,000
6,000
____ _
22,000
16,000
1,800
_ ____
17,800
Conversion
Total
$ 55,220
$ 86,820
210,000
295,000
$265,220
$381,820
17,800
$14.90
$20.20
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............................. 16,000$20.20
transferre
d
out
equivalent
unit
$323,200
number of
cost per
equivalent equivalent
unitsof
unit of
.................................
direct
material
direct
material
6,000$5.30
$31,800
equivalent equivalent
unitsof
unit of
........................................... 1,800$14.90
conversion
conversion
26,820
$58,620
Conversion
2.
$323,200
58,620
$381,820
85,000
70,000
140,000*
85,000
70,000
140,000
323,200
323,200
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Activity
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Classification
P
P
P
P
P
P
P
B
B
B
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Activity
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
Classification
B
B
U
U
U
U
B
F
F
Order Size
Medium
Large
Sales commissionsa
(Unit cost: $675,000/225,000
= $3.00 per box)....................................................
$ 6,000
$135,000
box)
Total
$534,000
$ 675,000
Catalogsb
(Unit cost: $295,400/590,800
= $.50 per catalog) ...............................................
127,150
105,650
catalog)
62,600
295,400
26,400
105,000
31,000
60,000
$654,000
$1,135,400
2,180,000
$.30
aRetail
eSmall:
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.
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:
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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.
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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:
b.
Establish a separate overhead pool and rate for the Molding Department.
Identify fixed and variable overhead costs and establish fixed and variable
overhead rates.
2.
Type of Activity
Unit-level
Batch-level
Product-sustaining-level
Facility-level
I: Machine-related costs:
$1,800,000
= $100 per machine hr.
18,000 machinehrs.
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III. Engineering:
$360,000
= $1,800 per change order
200 changeorders
$384,000
= $100 per sq. ft.
3,840 sq. ft.
PROBLEM 5-54 (CONTINUED)
3.
III: Engineering:
Odds:
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$270,000
= $270 per unit
1,000 units
Ends:
$90,000
= $18 per unit
5,000 units
Ends:
$307,200
= $307.20 per unit
1,000 units
$76,800
= $15.36 per unit
5,000 units
5.
Ends
$240.00
180.00
200.00
72.00
18.00
15.36
$725.36
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Ends
$725.36
120%
$870.43 (rounded)
Ends
$
200.00
72.00
18.00
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
Cost distortion:
Odds
Traditional volume-based costing system:
reported product cost ................................................... $
Activity-based costing system:
reported product cost ...................................................
Amount of cost distortion per unit .....................................
664.00
$996.00
2,017.20
$(1,353.20)
725.36
$270.64
Traditional
system
undercosts
odds by
$1,353.20
per unit
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Ends
Traditional
system
overcosts
ends by
$270.64
per unit
5,000
$1,353,200
a.
GSCC's predetermined overhead rate, using direct-labor cost as the single cost
driver, is $10 per direct labor dollar, calculated as follows:
Overhead rate
totalmanufacturing-overheadcost
budgeteddirect-labor cost
= $12,000,000/$1,200,000
= $10 per direct-labor dollar
b.
The full product costs and selling prices of one pound of Jamaican and one
pound of Colombian coffee are calculated as follows:
Jamaican
Direct material ........................................
Direct labor.............................................
Overhead (.40$10) .............................
Full product cost ...................................
Markup (30%) .........................................
Selling price ...........................................
2.
$2.90
.40
4.00
$7.30
2.19
$9.49
Colombian
$
3.90
.40
4.00
$8.30
2.49
$10.79
The new product cost, under an activity-based costing approach, is $11.06 per pound
of Jamaican and $4.62 per pound of Columbian coffee, calculated as follows:
Activity
Purchasing
Material handling
Quality control
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Cost Driver
Purchase orders
Setups
Batches
Budgeted
Activity
2,316
3,600
1,440
Budgeted
Cost
$2,316,000
2,880,000
576,000
Unit Cost
$1,000
800
400
Roasting
Blending
Packaging
Roasting hours
Blending hours
Packaging hours
192,200
67,200
52,000
3,844,000
1,344,000
1,040,000
20
20
20
$2.90
.40
2.00
4.80
.80
.10
.05
.01
$11.06
4 orders
Colombian Coffee
Standard cost per pound:
Direct material .......................................................................................
Direct labor ............................................................................................
Purchasing (2 orders* $1,000/100,000 lb.) .......................................
Material handling (15 setups $800/100,000 lb.)................................
Quality control (5 batches $400/100,000 lb.) ....................................
Roasting (500 hours $20/100,000 lb.) ...............................................
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$3.90
.40
.02
.12
.02
.10
.05
.01
$4.62
2 orders
a.
The ABC analysis indicates that several activities other than direct labor drive
overhead. The cost computations show that the current system significantly
undercosted Jamaican coffee, the low-volume product, and significantly
overcosted the high-volume product, Colombian coffee.
b.
The implication of the ABC analysis is that the low-volume products are using
resources but are not covering their share of the cost of those resources. The
Jamaican blend is currently priced at $9.49 [see requirement 1(b)], which is
significantly below its activity-based cost of $11.06. The company should set
long-run prices above cost. If there is excess capacity and many of the costs are
fixed, it may be acceptable to price some products below full activity-based cost
temporarily in order to build demand for the product. Otherwise, the high-volume,
high-margin products are subsidizing the low-volume, low-margin products.
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