Chapter 17: Q15QS (page 789)
Toyota embraces lean techniques, including lean accounting. What are the key components of lean accounting?
Lean concepts, lean culture, lean planning, and lean tools.
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What is the first step in applying activity-based costing?
A company has two products: standard and deluxe. The company expects to produce 36,375 standard units and 62,240 deluxe units. It uses activity-based costing and has prepared the following analysis showing budgeted cost and cost driver activity for each of its three activity cost pools.
Budgeted Activity of
Cost Driver
Activity Cost Pool Budgeted Cost Standard Deluxe
Activity 1 …………………… \(93,000 2,500 5,250
Activity 2 …………………… \)92,000 4,500 5,500
Activity 3 …………………… $87,000 3,000 2,800
Required
1. Compute overhead rates for each of the three activities.
2. What is the expected overhead cost per unit for the standard units?
3. What is the expected overhead cost per unit for the deluxe units?
Wade Company makes two distinct products, with the following information available for each.
Standard Deluxe
Direct materials . . . . . . . . . . . . . . . . . . \( 4 per unit \) 8 per unit
Direct labor hours …………………….. 4 DLH per unit 5 DLH per unit
Machine hours …………………………. 3 MH per unit 3 MH per unit
Batches ………………………………….. 175 batches 75 batches
Volume …………………………………... 40,000 units 10,000 units
Engineering modifications …………... 50 modifications 25 modifications
Number of customers ………………… 1,000 customers 1,000 customers
Market price …………………………….. \(92 per unit \)125 per unit
The company’s direct labor rate is \(20 per direct labor hour (DLH). Additional information follows.
Costs Driver
Indirect manufacturing
Engineering support …………………….. \) 56,250 Engineering modifications
Electricity ………………………………….. 112,500 Machine hours
Setup costs ……………………………….. 41,250 Batches
Nonmanufacturing
Customer service ……………………….. 250,000 Number of customers
Required
1. Compute the manufacturing cost per unit using the plantwide overhead rate based on machine hours. What is the gross profit per unit?
2. How much gross profit is generated by each customer of the standard product using the plantwide overhead rate? How much gross profit is generated by each customer of the deluxe product 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 the standard product using ABC? How much gross profit is generated by each customer of the deluxe product using ABC? Is the gross profit per customer adequate?
5. Which method of product costing gives better information to managers of this company? Explain.
Ryan Foods produces gourmet gift baskets that it distributes online as well as from its small retail store. The following details about overhead costs are taken from its records.
Production Activity Indirect Labor Indirect Materials Other Overhead
Wrapping …………… \(300,000 \)200,000
Assembling ………… 400,000
Product design …….. 180,000
Quality inspection …. 100,000
Cooking ……………… 150,000 120,000
Additional information on the drivers for its production activities follows.
Wrapping ……………………………………………….... 100,000 units
Assembling ……………………………………………… 20,000 direct labor hours
Product design ………………………………………….. 3,000 design hours
Quality inspection ………………………………………. 20,000 direct labor hours
Cooking …………………………………………………… 1,000 batches
Required
1. Classify each activity as unit level, batch level, product level, or facility level.
2. Compute the activity overhead rates using ABC. Combine the assembling and quality inspection activities into a single cost pool.
3. Determine the overhead costs to assign to the following jobs using ABC.
Holiday Basket Executive Basket
Number of units ……………………… 8,000 units 1,000 units
Direct labor hours …………………… 2,000 DLH 500 DLH
Design hours …………………………. 40 design hours 40 design hours
Batches ………………………………... 80 batches 200 batches
4. What is the overhead cost per unit for the Holiday Basket? What is the overhead cost per unit for the Executive Basket?
5. If the company used a plantwide overhead rate based on direct labor hours, what is the overhead cost for each Holiday Basket unit? What would be the overhead cost for each Executive Basket unit if a single plantwide overhead rate were used?
6. Compare the costs per unit computed in requirements 4 and 5 for each job. Which cost assignment method provides the most accurate cost? Explain.
List the three main advantages of the plantwide and departmental overhead rate methods.
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