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Chapter 17: Q14E (page 794)

Glassworks Inc. produces two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports the following data.

Rounded Edge Squared Edge Total

Direct materials …………… \(19,000 \) 43,200 \( 62,200

Direct labor ………………… 12,200 23,800 36,000

Overhead 36,600 71,400 108,000

(300% of direct labor cost)

Total cost ………………….. \) 67,800 \( 138,400 \) 206,200

Quantity produced ……….. 10,500 ft. 14,100 ft.

Average cost per ft. (rounded) \( 6.46 \) 9.82

Glassworks'controller wishes to apply activity-based costing (ABC) to allocate the \(108,000 of overhead costs incurred by the two product lines to see whether cost per foot would change markedly from that reported above. She has collected the following information.

Overhead Cost Category (Activity Cost Pool) Cost

Supervision ……………………………………………………………….. \) 5,400

Depreciation of machinery ……………………………………………… 56,600

Assembly line preparation ……………………………………………… 46,000

Total overhead ……………………………………………………………. \(108,000

She has also collected the following information about the cost drivers for each category (cost pool) and the amount of each driver used by the two product lines.

Overhead Cost Category Usage

(Activity Cost Pool) Driver Rounded Edge Squared Edge Total

Supervision …………. Direct labor \)12,200 \(23,800 \)36,000

cost ($)

Depreciation Machine hours 500 hours 1,500 hours 2,000 hours

of machinery

Assembly Setups (number) 40 times 210 times 250 times

line preparation

Required

1. Assign these three overhead cost pools to each of the two products using ABC.

2. Determine average cost per foot for each of the two products using ABC.

3. Compare the average cost per foot under ABC with the average cost per foot under the current method for each product. Explain why a difference between the two cost allocation methods exists.

Short Answer

Expert verified

Answer

Average cost per foot

For Rounded Edge:$5.2

For Squared Edge: $10.76

Step by step solution

01

Overhead cost

Overhead Cost for Rounded Edge

SupervisionCost=TotalCostTotalLaborCost×LaborCostbyRoundedEdge=$5,400$36,000×$12,200=$1,830

DepartmentionCost=TotalCostTotalMachineHour×MachineHourbyRoundedEdge=$56,6002,000×500=$14,150

AssemblyLineCost=TotalCostTotalTimes×TimesbyRoundedEdge=$46,000250×40=$7,360

localid="1662386619762" TotalOverheadCostforSquaredEdge=SupervisionCost+DepreciationCost+AssembalyLineCost=$3,570+$42,450+$38,640=$84,660

Overhead Cost for Squared Edge

SupervisionCost=TotalCostTotalLaborCost×LaborCostbySquaredEdge=$5,400$36,000×$23,800=#3,570

DepreciationCost=TotalCostTotalMachineHour×MachineHourbyRoundedEdge=$56,6002,000×1,500=$42,450

AssemblyLineCost=TotalCostTotalTime×TimesbyRoundedEdge=$46,000250×210=$38,640

TotalOverheadCostforSquaredEdge=Supervisioncost+DepreciationCost+AssemblyLineCost=$3,570+$42,450+$38,640=$84,660

02

Average cost per foot

AverageCostperFootforRoundedEdge=TotalDirectMatreialCost+TotalDirectLaborCostTotal+OverheadAllocatedTotalfootProduced=$19,000+$12,200+$23,34010,5000=$5.2

AverageCostperfootforSquaredEdge=TotalDirectMatrerialCost+TotalDirectLaborCostTotal+OverheadAllocatedTotalfootProduced=$43,200+$23,800+$84,66014,100=$10.76

03

Average cost per foot under ABC


Average Cost Per Foot

Under Traditional Method
Under ABC Method



Rounded Edge
$6.46
$5.2
Squared Edge
$9.82
$10.76

By comparing the above table it can be seen that under the ABC method cost per foot for Rounded Edge has decreased and the cost per foot for Squared Edge has increased.

This is so because the overheads under ABC have been allocated as per the activity level. So the allocation is justified. But under the traditional method overheads have been allocated unjustly based on a signed cost driver. So the product line having the lowest cost driver has got an advantage under the traditional method.

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Most popular questions from this chapter

In conducting interviews and observing factory operations to implement an activity-based costing system, you determine that several activities are unnecessary or redundant. For example, warehouse personnel were inspecting purchased components as they were received at the loading dock. Later that day, the components were inspected again on the shop floor before being installed in the final product. Both of these activities caused costs to be incurred but were not adding value to the product. If you include this observation in your report, one or more employees who perform inspections will likely lose their jobs.

Required

1. As a plant employee, what is your responsibility to report your findings to superiors?

2. Should you attempt to determine if the redundancy is justified? Explain.

3. What is your responsibility to the employees whose jobs will likely be lost because of your report?

4. What facts should you consider before making your decision to report or not?

What are the four activity levels associated with activity based costing? Define each.

Refer to the information in Exercise 17-7 to answer the following requirements.

Required

1. Using ABC, compute the overhead cost per unit for each product line.

2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are \(250 for Model 145 and \)180 for Model 212.

3. If the market price for Model 145 is \(820 and the market price for Model 212 is \)480, determine the profit or loss per unit for each model. Comment on the results.

The following data are for the two products produced by Tadros Company.

Product A Product B

Direct materials …………………… \(15 per unit \)24 per unit

Direct labor hours ………………… 0.3 DLH per unit 1.6 DLH per unit

Machine hours …………………….. 0.1 MH per unit 1.2 MH per unit

Batches ……………………………... 125 batches 225 batches

Volume ………………………………. 10,000 units 2,000 units

Engineering modifications ……….. 12 modifications 58 modifications

Number of customers ……………… 500 customers 400 customers

Market price ………………………….. \(30 per unit \)120 per unit

The company’s direct labor rate is \(20 per direct labor hour (DLH). Additional information follows.

Costs Driver

Indirect manufacturing

Engineering support …………………… \)24,500 Engineering modifications

Electricity ………………………………… 34,000 Machine hours

Setup costs ……………………………… 52,500 Batches

Nonmanufacturing

Customer service ………………………. 81,000 Number of customers

Required

1. Compute the manufacturing cost per unit using the plantwide overhead rate based on direct labor hours. What is the gross profit per unit?

2. How much gross profit is generated by each customer of Product A using the plantwide overhead rate? How much gross profit is generated by each customer of Product B using the plantwide overhead rate? What is the cost of providing customer service to each customer? What information is provided by this comparison?

3. Determine the manufacturing cost per unit of each product line using ABC. What is the gross profit per unit?

4. How much gross profit is generated by each customer of Product A using ABC? How much gross profit is generated by each customer of Product B using ABC? Is the gross profit per customer adequate?

5. Which method of product costing gives better information to managers of this company? Explain why.

Question: Midwest Paper produces cardboard boxes. The boxes require designing, cutting, and printing. (The boxes are shipped flat, and customers fold them as necessary.) Midwest has a reputation for providing high quality products and excellent service to customers, who are major U.S. manufacturers. Costs are assigned to products based on the number of machine hours required to produce them. Three years ago, a new marketing executive was hired. She suggested the company offer custom design and manufacturing services to small specialty manufacturers. These customers required boxes for their products and were eager to have Midwest as a supplier. Within one year, Midwest found that it was so busy with orders from small customers, it had trouble supplying boxes to all its customers on a timely basis. Large, long-time customers began to complain about slow service, and several took their business elsewhere. Within another 18 months, Midwest was in financial distress with a backlog of orders to be filled.

Required

1. What do you believe are the major costs of making boxes? How are those costs related to the volume of boxes produced?

2. How did Midwest’s new customers differ from its previous customers?

3. Would the unit cost to produce a box for new customers be different from the unit cost to produce a box for its previous customers? Explain.

4. Could Midwest’s fate have been different if it had used ABC for determining the cost of its boxes?

5. What information would have been available with ABC that might have been overlooked using a traditional volume-based costing method?
See all solutions

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