E4-11 (a,b)
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Sorce Instrument, Inc. manufactures two products: missile range
instruments and space pressure gauges. During April, 50 range instruments and
300 pressure gauges were produced, and overhead costs of $89,500 were
estimated. An analysis of estimated overhead costs reveals the following
activities.
Activity
Cost Driver
Total Cost
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1. Materials handling
Number of requisitions
$35,000
2. Machine setups
Number of setups
27,500
3. Quality inspections
Number of inspections
27,000
$89,500
The cost driver volume for each product was as follows.
Cost Driver
Instruments
Gauges
Total
Number of requisitions
400
600
1,000
Number of setups
200
300
500
Number of inspections
200
400
600
a)
Determine the overhead rate for each activity.
b)
Assign the manufacturing overhead costs for April to the two
products using activity-based costing.
P4-3A (a,c)
Skaros Stairs Co. of Moore designs and builds factory-made premium
wooden stairs for homes. The manufactured stair components (spindles, risers,
hangers, hand rails) permit installation of stairs of varying lengths and
widths. All are of white oak wood. Budgeted manufacturing overhead costs for
the year 2011 are as follows.
Overhead Cost Pools
Amount
Purchasing
$ 57,000
Handling materials
82,000
Production (cutting, milling, finishing)
210,000
Setting up machines
85,000
Inspecting
90,000
Inventory control (raw materials and finished goods)
126,000
Utilities
180,000
Total budget overhead costs
$830,000
For the last 4 years, Skaros Stairs Co. has been charging overhead
to products on the basis of machine hours. For the year 2011, 100,000 machine
hours are budgeted.
Anthony Morse, owner-manager of Skaros Stairs Co., recently directed his
accountant, Neal Seagren, to implement the activity-based costing system that
he has repeatedly proposed. At Anthony Morse’s request, Neal and the production
foreman identify the following cost drivers and their usage for the previously
budgeted overhead cost pools.
Activity Cost Pools
Cost
Drivers
Expected
Use of
Cost Drivers
Purchasing
Number of orders
600
Handling materials
Number of moves
8,000
Production (cutting, milling, finishing)
Direct labor hours
100,000
Setting up machines
Number of setups
1,250
Inspecting
Number of inspections
6,000
Inventory control (raw materials and finished goods)
Number of components
168,000
Utilities
Square feet occupied
90,000
David Hannon, sales manager, has received an order for 280 stairs
from Community Builders, Inc., a large housing development contractor. At
David’s request, Neal prepares cost estimates for producing components for 280
stairs so David can submit a contract price per stair to Community Builders. He
accumulates the following data for the production of 280 stairways.
Direct materials
$103,600
Direct labor
$112,000
Machine hours
14,500
Direct labor hours
5,000
Number of purchase orders
60
Number of material moves
800
Number of machine setups
100
Number of inspections
450
Number of components
16,000
Number of square feet occupied
8,000
Compute the predetermined overhead rate using traditional costing
with machine hours as the basis.(Enter answer to 2 decimal
places, e.g. 10.50.)
What is the manufacturing cost per stairway under traditional
costing?(Use rounded amount from part (a). Round answer to 2 decimal places,
e.g. 10.50.)
P4-4A (a-d)
Polzin Corporation produces two grades of wine from grapes that it
buys from California growers. It produces and sells roughly 3,000,000 liters
per year of a low-cost, high-volume product called CoolDay. It sells this in
600,000 5-liter jugs. Polzin also produces and sells roughly 300,000 liters per
year of a low-volume, high-cost product called LiteMist. LiteMist is sold in
1-liter bottles. Based on recent data, the CoolDay product has not been as
profitable as LiteMist. Management is considering dropping the inexpensive
CoolDay line so it can focus more attention on the LiteMist product. The
LiteMist product already demands considerably more attention than the CoolDay
line.
Greg Kagen, president and founder of Polzin, is skeptical about this idea. He
points out that for many decades the company produced only the CoolDay line,
and that it was always quite profitable. It wasn’t until the company started
producing the more complicated LiteMist wine that the profitability of CoolDay
declined. Prior to the introduction of LiteMist, the company had simple
equipment, simple growing and production procedures, and virtually no need for
quality control. Because LiteMist is bottled in 1-liter bottles, it requires
considerably more time and effort, both to bottle and to label and box than
does CoolDay. The company must bottle and handle 5 times as many bottles of
LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of
aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of
equipment every 10,000 liters; LiteMist requires such maintenance every 600
liters.
Greg has asked the Accounting department to prepare an analysis of the cost per
liter using the traditional costing approach and using activity-based costing.
The following information was collected.
CoolDay
LiteMist
Direct materials per liter
$0.40
$1.20
Direct labor cost per liter
$0.25
$0.50
Direct labor hours per liter
0.05
0.09
Total direct labor hours
150,000
27,000
Activity Cost Pool
Cost Driver
Estimated
Overhead
Expected
Use of
Cost Drivers
Expected
Use of
Cost Drivers per Product
Activity Cost Pool
Cost Driver
Estimated
Overhead
Expected
Use of
Cost Drivers
Expected
Use of
Cost Drivers per Product
CoolDay
LiteMist
Grape processing
Cart of grapes
$145,860
6,600
6,000
600
Aging
Total months
396,000
6,600,000
3,000,000
3,600,000
Bottling and corking
Number of bottles
270,000
900,000
600,000
300,000
Labeling and boxing
Number of bottles
189,000
900,000
600,000
300,000
Maintain and inspect equipment
Number of inspections
240,800
800
350
450
$1,241,660
Under traditional product costing using direct labor hours,
compute the total manufacturing cost per liter of both products.(Round
computations and final answers to 3 decimal places, e.g. 2.250.)
Under ABC, prepare a schedule showing the computation of the
activity-based overhead rates (per cost driver).(Enter
overhead rate to 2 decimal places, e.g. 10.50.)
Prepare a schedule assigning each activity’s overhead cost pool to
each product, based on the use of cost drivers. What is the overhead cost per
liter?(Enter overhead rate to 2 decimal places, e.g. 10.50 and round
overhead cost per liter to 3 decimal places, e.g. 2.250.)
Compute the total manufacturing cost per liter for both products
under ABC.(Round answers to 3 decimal places, e.g. 2.250.)
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