ACC 406 Lecture Notes - Lecture 3: Activity-Based Costing, Laser Engraving, Cost Accounting
Get access
Related Documents
Related Questions
Koontz Company manufactures two models of industrialcomponentsâa Basic model and an Advanced Model. The companyconsiders all of its manufacturing overhead costs to be fixed andit uses plantwide manufacturing overhead cost allocation based ondirect labor-hours. Koontzâs controller prepared the segmentedincome statement that is shown below for the most recent year (heallocated selling and administrative expenses to products based onsales dollars):
Basic | Advanced | Total | |||||
Number of units produced andsold | 20,000 | 10,000 | 30,000 | ||||
Sales | $ | 3,000,000 | $ | 2,000,000 | $ | 5,000,000 | |
Cost of goods sold | 2,300,000 | 1,350,000 | 3,650,000 | ||||
Gross margin | 700,000 | 650,000 | 1,350,000 | ||||
Selling and administrativeexpenses | 720,000 | 480,000 | 1,200,000 | ||||
Net operating income (loss) | $ | (20,000 | ) | $ | 170,000 | $ | 150,000 |
Direct laborers are paid $20 per hour. Direct materials cost $40per unit for the Basic model and $60 per unit for the Advancedmodel. Koontz is considering a change from plantwide overheadallocation to a departmental approach. The overhead costs in thecompanyâs Molding Department would be allocated based onmachine-hours and the overhead costs in its Assembly and PackDepartment would be allocated based on direct labor-hours. Toenable further analysis, the controller gathered the followinginformation:
Molding | Assemble and Pack | Total | |||||
Manufacturing overheadcosts | $ | 787,500 | $ | 562,500 | $ | 1,350,000 | |
Direct labor hours: | |||||||
Basic | 10,000 | 20,000 | 30,000 | ||||
Advanced | 5,000 | 10,000 | 15,000 | ||||
Machine hours: | |||||||
Basic | 12,000 | - | 12,000 | ||||
Advanced | 10,000 | - | 10,000 | ||||
Required:
3. Koontzâs production manager has suggested usingactivity-based costing instead of either the plantwide ordepartmental approaches. To facilitate the necessary calculations,she assigned the companyâs total manufacturing overhead cost tofive activity cost pools as follows:
Activity Cost Pool | Activity Measure | Manufacturing Overhead | ||
Machining | Machine-hours inMolding | $ | 417,500 | |
Assemble and pack | Direct labor hours in Assembleand Pack | 282,500 | ||
Order processing | Number of customer orders | 230,000 | ||
Setups | Setup hours | 340,000 | ||
Other (unused capacity) | 80,000 | |||
$ | 1,350,000 | |||
She also determined that the average order size for the Basicand Advanced models is 400 units and 50 units, respectively. Themolding machines require a setup for each order. One setup hour isrequired for each customer order of the Basic model and three hoursare required to setup for an order of the Advanced model.
The company pays a sales commissions of 5% for the Basic modeland 10% for the Advanced model. Its traceable fixed advertisingcosts include $150,000 for the Basic model and $200,000 for theAdvanced model. The remainder of the companyâs selling andadministrative costs are organization-sustaining in nature.
Using the additional information provided by the productionmanager, calculate:
a. An activity rate for each activity cost pool.
b. The total manufacturing overhead cost allocated to the Basicmodel and the Advanced model using the activity-based approach.
c. The total selling and administrative cost traced to the Basicmodel and the Advanced model using the activity-based approach.
4. Using your activity-based cost assignments from requirement3, prepare a contribution format segmented income statement that isadapted from Exhibit 7-8. (Hint: Organize all of the companyâscosts into three categories: variable expenses, traceable fixedexpenses, and common fixed expenses.)
5. Using your contribution format segmented income statementfrom requirement 4, calculate the break-even point in dollar salesfor the Advanced model.
Brilliant Accents Company (BAC) manufactures and sells severalstyles of kitchen faucet handles. The companyâs overhead allocationsystem uses direct labor hours as an allocationbase. The following were estimates of 2015âsproduction and some production data for two of its styles.Note that BAC makes more than these two styles ofproduct.
Table 1: Estimates for 2015 | BRASS | CHROME |
Projected sales in units | 30,000 | 50,000 |
Per unit data: | ||
Selling price | $40 | $20 |
Direct materials | $ 8 | $ 4 |
Direct labor | $15 | $ 3 |
Hours per 1000-unit batch: | ||
Direct labor hours | 40 | 10 |
Machine hours | 25 | 25 |
Setup hours | 0.5 | 1.0 |
Inspection hours | 15 | 29 |
Total overhead costs (primarily rent, depreciation and otherfixed costs of the manufacturing plant): | $870,000 | |
Estimated activity | ||
Direct labor hours | 2,900 hours | |
Machine hours | 2,400 hours |
The companyâs controller just returned from an all-expenses-paidseminar in Maui on activity-based costing, sponsored by an ABCconsulting firm. There, she surprisingly became convinced ABC wasright for BAC. She decided to re-do 2015âs overhead allocationusing an ABC system. She commissioned a study of the companyâsoverhead costs and the related activities.
Since the examples used in the Maui seminar used setups andinspections, she used those as the activities for her ABC study.The results of her study, showing total overhead costs and activitylevels for the year are:
Table 2: Overhead costs | ||
Activity | Estimated 2015 total activity levels | Total Cost |
Setups | 95 setup hours | $465,000 |
Inspections | 2,700 inspection hours | $405,000 |
$870,000 |
During 2015, the company had the followingactual results:
Table 3: 2015 actual results | ||
Total overhead costs: | $767,000 | |
Direct labor hours | 2,750 hours | |
Machine hours | 2,200 hours |
a. (8 points) Using the companyâs traditionalcost allocation system that allocates overhead costs viadirect labor hours, compute the allocatedoverhead costs per unit for the Brass and Chrome faucethandles.
b. (4 points) How much overhead would be over-or under-applied for the year using the traditional system?
c. (4 points) If BAC implements anactivity-based costing system using the data in table 2, determinethe activity cost driver rates for setup costs andinspection costs. Fully label your answer.
d. (8 points) Using the ABC cost allocationsystem, compute the estimated overhead costs perunit for the Brass and Chrome faucet handles.
e. (4 points) Why do the costs calculated bythe two systems differ? Be specific. Generic ornonsense answers wonât get you any points.
f. (3 points) Which cost system (thetraditional or the ABC system) is moreaccurate? That is, which cost system comes closer tocalculating the true, actual overheadcosts per unit for the products listed above? Explain youranswer.