Presentation on theme: "SOLUTIONS TO EXERCISES ASSIGNED FOR CH. 9: ACTIVITY- BASED COSTING."— Presentation transcript:
SOLUTIONS TO EXERCISES ASSIGNED FOR CH. 9: ACTIVITY- BASED COSTING
EXERCISE 9-23, PART A
EXERCISE 9-23, PART B Note that Dept SV has state-of-art machines, and the overhead is likely driven by machine use. Examples of costs? Department SV has an overhead allocation rate of $4.20 per machine-hour($105,840 ÷ 25,200 machine hours). Department C has an overhead allocation rate of $1.32 per DLH ($23,760 ÷ 18,000 labor-hours).
EXERCISE 9-23, PART B We expect these to better reflect the OH costs of the three flavors.
EX. 9-23, PART E Charlene was correct that she was being allocated some of Department SV’s overhead. Plantwide allocation does not correctly allocate the overhead by department; it simply uses one allocation rate for all products in all departments. Under plantwide allocation, 1,000 gallons of chocolate cost $1,950. Once the overhead was reallocated into department cost pools, the cost of chocolate fell to $1,824. Although it requires more time and skill to collect and process the information, department allocation generally yields more accurate product cost information.
SOLUTION TO 9-24 (NOT ASSIGNED, BUT RELATED TO 9/25) Allocation based on separate pools for routine matters and transitions:
PR First, note that the total to be allocated is $750,000 (= $200*1500 employees + $5625* 80 transitions). If we just compute the variable cost to be allocated to Ohio, the remainder will be allocated to Illinois. 50 transition * $2000 = $100, employees* $50 = $15,000 $115,000 So, Illinois gets $750,000 – 115,000 = $635,000
WOULD THE ALLOCATION BE FAIR? REASONABLE? The reason it’s considered an allocation rather than a traced (direct) cost is that there are multiple ways to do it---no “correct” way! Allocations always are arbitrary (because there is no provably “correct” way). But there does exist a hierarchy of reasons, from strongest to weakest: Cause-and-effect Benefits Received Fairness Ability to bear
9-27: ACTIVITY-BASED COSTING IN A NONMANUFACTURING ENVIRONMENT: CATHY’S CATERING
PER-GUEST CHARGE TO COVER COSTS? If Cathy wants to cover her costs she should charge… $49 per guest for the picnic ($980 ÷ 20 guests) $80.00/guest for dinner ($1,600 ÷ 20 guests). Do we know the cost structure? What is her BEP?
9-29: ABC VS. TRADITIONAL c-$15 per machine-hour = $120,000 in production run costs ÷ 8,000 machine-hours. d-$3,500 per run = $70,000 in per-run (setup?) costs ÷ 20 total runs. e-$1,500 per inspection = $90,000 in inspn. costs ÷ 60 inspections.
9-29 CONT’D: ALLOCATED BY DLH Vs. $28.33 and $ for ABC Which product was “subsidizing” the other?
9-29 CONCLUDED By allocating overhead on the basis of direct labor, Doaktown Products has been understating the cost to manufacture M-123, thereby overstating the profits on M-123. Perhaps the basic reel was being charged too much of the overhead costs related to machinery that really is used for the fancy version.