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Ex 4-16

a
b
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p
q
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t
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job
process
job
process
job
process
job
job
process
process
job
job
process
job
job
job
job
job
job
process
job

Ex 4-17
$
DM
DL
mftg OH

budget 2014
2,000,000
1,500,000
2,700,000

actual 2014
1,900,000
1,450,000
2,755,000

1. OH allocation rates 2014


budgeted

1.80

OH budget
DL budget

2,700,000
1,500,000

actual

1.90

OH actual
DL actual

2,755,000
1,450,000

DM
DL
mftg OH

actual
40,000
30,000
57,000

normal
40,000
30,000
54,000

= 1,9 x DL

= 1,8 x DL

127,000

124,000

2. job 626

3. actual vs normal
total OH allocated in 2014

2,610,000

OH actual cost in 2014

2,755,000

145,000

OH under-allocated

4.

= 1,450,000 (actual DL) x 1,80 (budget OH allocation rate)

Managers at Destin Products might prefer to use normal costing because it enables them to use the budgeted manufacturing overhead rate determined at the beginning of the year to
estimate the cost of a job as soon as the job is completed. Managers want to know job costs for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the
success of the job, learning about what did and did not work, bidding on new jobs, and preparing interim financial statements. Under actual costing, managers would only determine the
cost of a job at the end of the year when they know actual manufacturing overhead costs.

Ex 4-18

OH - $
DL - h
OH - $/hDL

budget 2014
8,000,000
160,000
50.0

actual 2014
7,614,000
162,000
47.0

construction period
DM
DL
DL - hours

Laguna
Feb-Jun 2014
106,650
36,276
920

Mission
May-Oct 2014
127,970
41,750
1,040

1. OH allocation rates 2011


budgeted rate

50.0

budget OH + budget DL hours

actual rate

47.0

actual OH + actual DL hours

2. jobs Laguna, Mission


normal costing
DM
DL
mftg OH
total

Laguna
106,650
36,276
46,000
188,926

Mission
127,970
41,750
52,000
221,720

actual costing
DM
DL
mftg OH
total

Laguna
106,650
36,276
43,240
186,166

Mission
127,970
41,750
48,880
218,600

= 50$/DLh x DLh

= 47$/DLh x DLh

3
Normal costing enables Anderson to report a job cost as soon as the job is completed, assuming that both the direct materials and
direct labor costs are known at the time of use. Once the 920 direct labor-hours are known for the Laguna Model (June 2014), Anderson
can compute the $188,926 cost figure using normal costing. Anderson can use this information to manage the costs of the Laguna
Model job as well as to bid on similar jobs later in the year. In contrast, Anderson has to wait until the December 2014 year-end to
compute the $186,166 cost of the Laguna Model using actual costing.
Although not required, the following overview diagram summarizes Anderson Constructions job-costing system.

Ex 4-22
1.
DL hours/unit
DL hours /month
mftg OH /month
mftg OH $/DL h

Q1
1
565
12,250
21.7

Q2
1
490
12,250
25.0

Q3
1
245
12,250
50.0

Q4
1
100
12,250
122.5

FY
1,400
49,000
35.0

units
DM - $14/unit
DL - $20/DLh x 1DLh
mftg OH -Var - $15/DLh x 1DLh
mftg OH -fixed
total cost
unit cost

Q1
565
7,910
11,300
8,475
12,250
39,935
70.68

Q2
490
6,860
9,800
7,350
12,250
36,260
74.00

Q3
245
3,430
4,900
3,675
12,250
24,255
99.00

Q4
100
1,400
2,000
1,500
12,250
17,150
171.50

FY
1,400
19,600
28,000
21,000
49,000
117,600
84.00

Q1
565
7,910
11,300
8,475
19,775
47,460
84.00

Q2
490
6,860
9,800
7,350
17,150
41,160
84.00

Q3
245
3,430
4,900
3,675
8,575
20,580
84.00

Q4
100
1,400
2,000
1,500
3,500
8,400
84.00

FY
1,400
19,600
28,000
21,000
49,000
117,600
84.00

91.9
109.2

96.2
109.2

128.7
109.2

223.0
109.2

2.
units
DM - $14/unit
DL - $20/DLh x 1DLh
mftg OH -Var - $15/DLh x 1DLh
mftg OH -fixed
total cost
unit cost
3.
selling price Q1
selling price Q2

Ex 4-32
1.

2.
direct cost per hour (DL)

3.
indirect cost per DL hour

4.
DL hours
Dir costs (@65$/DLh)
Ind costs (@55$/DLh)

65.00
$/DLh

97,500
1,500

cost/head
hours/head

55.00
$/DLh

2,475,000
45,000

ind cost
hours

Richardson
120
7,800
6,600
14,400

Punch
160
10,400
8,800
19,200

1500h x 30 heads

Ex 4-33

1.
dir cost / hour (partners)

dir cost / hour (associates)

2.
total cost
total working hours
partners working hours

140.00

210,000
1,500

cost/head
hours/head

50.00

75,000
1,500

cost/head
hours/head

gen support
2,025,000
45,000
45.00

secret support
450,000
7,500
60.00

30heads x 1500h
5heads x 1500h
$/h

total cost

Richardson
6,720
48h x 140$/h
3,600
72h x 50$/h
5,400
120h x 45$/h
2,880
48h x 60$/h
18,600

Punch
4,480
32h x 140$/h
6,400
128h x 50$/h
7,200
160h x 45$/h
1,920
32h x 60$/h
20,000

Richardson
14,400
18,600

Punch
19,200
20,000

40% part; 60% assoc

25% part; 75% assoc

3.
dir cost partners
dir cost associates
ind cost gen supp
ind cost secret supp

4.
ex 4-32, Single direct Single indirect
ex 4-33, Multiple direct Multiple indirect

The Richardson and Punch jobs differ in their use of resources. The Richardson job has a mix of 40% partners and 60% associates, while
Punch has a mix of 20% partners and 80% associates. Thus, the Richardson job is a relatively high user of the more costly partner-related
resources (both direct partner costs and indirect partner secretarial support). The Punch job, on the other hand, has a mix of partner and
associate-related hours (1:4) that is only slightly higher than the mix of partner and associate hours for the firm as a whole (1:5). The
refined-costing system in Problem 4-33 increases the reported cost in Problem 4-32 for the Richardson job by 29.17% (from $14,400 to
$18,600) and the Punch job by a much smaller 4.17% (from $19,200 to $20,000).
5

I would recommend that Kidman & Associates use the job costing system in this problem with two direct- and two indirect- cost
categories.
Kidman & Associates should use multiple categories of direct costs (partner labor and professional labor) because the costs of the
different categories of labor are very different and different jobs use these direct labor resources in different proportions. The system with
only one direct cost would be accurate only if all jobs used partner-labor and professional-labor in the same proportion, which is clearly
not the case. Using a single direct-cost category would undercost (overcost) jobs that have a high (low) proportion of partner-labor.
Kidman should use multiple indirect cost pools because partners use additional secretarial support resources that professionals do not
use. With a single indirect cost pool as in problem 4-32, jobs that use proportionately greater (fewer) partner labor-hours are not assigned
the extra (lower) costs of supporting these partners and are undercosted (overcosted).
The job costing system in this problem more accurately represents the costs incurred on different jobs and therefore helps managers
make better decisions.

Ex 5-17
Total
1,190,000
70,000
17.00

mftg OH total
test hours
mftg OH - $/h
mftg OH - 4 categories
DL (traced)
Equipment (# test-hours)
Setup (# setup-hours)
Design tests (time required)

heat tests

stress tests

40,000

30,000

100,000

46,000

13.600 h
3.000 h

3.600 h
1.400 h

heat tests
100,000
200,000
340,000
180,000
820,000

stress tests
46,000
150,000
90,000
84,000
370,000

Total
146,000
350,000
430,000
264,000
1,190,000

heat tests
2.50
5.00
8.50
4.50
20.50
121

stress tests
1.53
5.00
3.00
2.80
12.33
73

avg
2.09
5.00
6.14
3.77
17.00

$
146,000
350,000
430,000
264,000
1,190,000

1.
output unit level

5.00
25.00
60.00

DL 146k
Equip 350k

batch level

Setup 430k

service sustaining

Design 264k

2.
total cost
DL
Equip
Setup
Design
Total
cost / test hour
DL
Equip
Setup
Design
Total
index vs avg

5$ / test-hour
25$ / setup-hour
60$ / h

At a cost per test-hour of $17, the simple costing system undercosts heat testing ($20.50) and overcosts stress testing ($12.33).
The reason is that heat testing uses direct labor, setup, and design resources per hour more intensively than stress testing. Heat
tests are more complex, take longer to set up, and are more difficult to design. The simple costing system assumes that testing
costs per hour are the same for heat testing and stress testing.
3.
The ABC system better captures the resources needed for heat testing and stress testing because it identifies all the various activities undertaken
when performing the tests and recognizes the levels of the cost hierarchy at which costs vary. Hence, the ABC system generates more accurate
product costs.
Vineyards management can use the information from the ABC system to make better pricing and product mix decisions. For example, it might decide
to increase the prices charged for the more costly heat testing and consider reducing prices on the less costly stress testing. Vineyard should watch if
competitors are underbidding Vineyard in stress testing and causing it to lose business. Vineyard can also use ABC information to reduce costs by
eliminating processes and activities that do not add value, identifying and evaluating new methods to do testing that reduce the activities needed to
do the tests, reducing the costs of doing various activities, and planning and managing activities.

$/test-hour
$/setup-hour
$/hour

Ex 5-25
1

simple costing system

Revenues
Costs
Cost of goods sold
Store support (30% of COGS)
Total costs
Operating income
Operating income as % revenues

Baked
Goods
$
59,500

Milk &
Fruit Juice
$
66,000

Frozen
Products
$
51,000

Total
$
176,500

36,000
10,800
46,800
12,700
21.34%

48,000
14,400
62,400
3,600
5.45%

34,000
10,200
44,200
6,800
13.33%

118,000
35,400
153,400
23,100
13.09%

Baked
Goods
25
90
190
13,500

Milk &
Fruit Juice
20
35
180
17,500

Total

Activity costs are based on the following:

Ordering
Delivery
Shelf-stocking
Customer support

$102 per purchase order


$78 per delivery
$21 per hour
$0.22 per item sold

Revenues
Costs
Cost of goods sold
Ordering ($102 25; 20; 15)
Delivery ($78 90; 35; 30)
Shelf-stocking ($21 190; 180; 40)
Customer support
($0.22 13,500; 17,500; 8,000)
Total costs
Operating income
Operating income as % revenues

1. Baked goods
2. Frozen products 12.50
3. Milk & fruit juice 3.02

ABC system
Baked
Goods
$
59,500

Milk &
Fruit Juice
$
66,000

Frozen
Products
$
51,000

$
176,500

36,000
2,550
7,020
3,990
2,970

48,000
2,040
2,730
3,780
3,850

34,000
1,530
2,340
840
1,760

118,000
6,120
12,090
8,610
8,580

52,530
6,970
11.71%

60,400
5,600
8.48%

40,470
10,530
20.65%

153,400
23,100
13.09%

The rankings of products in terms of relative profitability are:


Simple Costing
System
21.3%
13.3%
5.5%

ABC System
11.7%
8.5%
20.6%

The percentage revenue, COGS, and activity costs for each product line are:

Revenues
Cost of goods sold
Ordering ($102 25; 20; 15)
Delivery ($78 90; 35; 30)
Shelf-stocking ($21 190; 180; 40)
Customer support

Baked
Goods
33.7%
30.5%
41.7%
58.1%
46.3%
34.6%

Milk &
Fruit Juice
37.4%
40.7%
33.3%
22.6%
43.9%
44.9%

Frozen
Products
28.9%
28.8%
25.0%
19.4%
9.8%
20.5%

Total
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%

The baked goods line drops sizably in profitability when ABC is used. Although it constitutes 30.5% of COGS, it
uses a higher percentage of total resources in each activity area, especially the high-cost delivery activity area.
In contrast, frozen products draw a much lower percentage of total resources used in each activity area than
its percentage of total COGS. Hence, under ABC, frozen products are much more profitable.
Henderson Supermarkets may want to explore ways to increase sales of frozen products. It may also want to
explore price increases on baked goods.

Frozen
Products
15
30
40
8,000

Ex 5-26
1
Gross sales
Sales returns
Net sales
Cost of goods sold (80%)
Gross margin
Customer-related costs:
Regular orders ($20 40, 150, 50, 70)
Rush orders ($100 x 10, 50, 10, 30)
Returned items ($10 100, 26, 60, 40)
Catalogs and customer support
Customer related costs
Contribution (loss) margin
Contribution (loss) margin as %GS

1
50,000
10,000
40,000
32,000
8,000

2
30,000
5,000
25,000
20,000
5,000

3
100,000
7,000
93,000
74,400
18,600

4
70,000
6,000
64,000
51,200
12,800

Total
250,000
28,000
222,000
177,600
44,400

800
1,000
1,000
1,000
3,800
4,200
8.40%

3,000
5,000
260
1,000
9,260
-4,260
-14.20%

1,000
1,000
600
1,000
3,600
15,000
15.00%

1,400
3,000
400
1,000
5,800
7,000
10.00%

6,200
10,000
2,260
4,000
22,460
21,940
8.78%

The analysis indicates that customers profitability (loss) contribution varies widely from (14.2%) to 15.0%. Immediate
attention to Chain 2 is required which is currently showing a loss contribution. The chain has a disproportionate number of
both regular orders and rush orders. Ramirez should work with the management of Chain 2 to find ways to reduce the number
of orders while maintaining or increasing the sales volume. If this is not possible, Ramirez should consider dropping Chain 2 if
it can save the customer-related costs.
Chain 1 has a disproportionate number of the items returned as well as sale returns. The causes of these should be
investigated so that the profitability contribution of Chain 1 could be improved.

Ex 5-30
Total
dir costs
general support (criteria: prof lab hours)
labour hours

25,000
250

SE

150

100

$80 / h
$100 / h

2.
DL @ 80$/h
ind costs @ 100$/h
Total

C
12,000
15,000
27,000

SE
8,000
10,000
18,000

Total
20,000
25,000
45,000

Ex 5-31
1

Indirect costs = $10,000


Total professional labor-hours = 250 hours (150 hours on Campa + 100 hours on St. Ediths Glass)
Indirect cost allocated per professional labor-hour (revised) = $10,000 250 = $40 per hour

2
Direct costs:
Direct professional labor $80 150; $80 100
Research support labor
Computer time
Travel and allowances
Telephones/faxes
Photocopying
Total direct costs
Indirect costs allocated $40 150; $40 100
Total costs to be billed

3
exercise 5-30
exercise 5-31

SE

Total

12,000
1,800
400
700
250
300
15,450

8,000
3,850
1,600
4,200
1,200
700
19,550

20,000
5,650
2,000
4,900
1,450
1,000
35,000

6,000

4,000

10,000

21,450

23,550

45,000

C
27,000
21,450

SE
18,000
23,550

Total
45,000
45,000

Single direct cost/ Single indirect cost pool


Multiple direct costs/ Single indirect cost pool

The Problem 5-31 approach directly traces $15,000 of general support costs to the individual jobs. In Problem 5-30, these costs are allocated on
the basis of direct professional labor-hours. The averaging assumption implicit in the Problem 5-30 approach appears incorrectfor example, the
St. Ediths Glass job has travel costs six times higher than the Campa Coal case despite having lower direct professional labor-hours.

Ex 5-32
1
Direct costs:
Direct professional labor
partner $100 50; $100 x 75
associates $60 100; $60 x 25
Research support labor
Computer time
Travel and allowances
Telephones/faxes
Photocopying
Total direct costs
Indirect costs allocated:
Indirect costs for partners $48 50, 75
Indirect costs for associates $32 100, 25
Total indirect costs
Total costs to be billed

Single direct cost/ Single indirect cost pool


Multiple direct costs/ Single indirect cost pool
Multiple direct costs/Multiple indirect cost pools

exercise 5-30
exercise 5-31
exercise 5-32

SE

Total

5,000
6,000
1,800
400
700
250
300
14,450

7,500
1,500
3,850
1,600
4,200
1,200
700
20,550

12,500
7,500
5,650
2,000
4,900
1,450
1,000
35,000

2,400
3,200
5,600

3,600
800
4,400

6,000
4,000
10,000

20,050

24,950

45,000

C
27,000
21,450
20,050

SE
18,000
23,550
24,950

Total
45,000
45,000
45,000

The higher the percentage of costs directly traced to each case, and the greater the number of homogeneous indirect cost pools linked to the cost
drivers of indirect costs, the more accurate the product cost of each individual case.
The Campa and St. Ediths cases differ in how they use resource areas of Bradley Associates:
partner $100 50; $100 x 75
associates $60 100; $60 x 25
Research support labor
Computer time
Travel and allowances
Telephones/faxes
Photocopying

40.0%
80.0%
31.9%
20.0%
14.3%
17.2%
30.0%

60.0%
20.0%
68.1%
80.0%
85.7%
82.8%
70.0%

The Campa Coal case makes relatively low use of the higher-cost partners but relatively higher use of the lower-cost associates than does St. Ediths
Glass. As a result, it also uses less of the higher indirect costs required to support partners compared to associates. The Campa Coal case also
makes relatively lower use of the support labor, computer time, travel, phones/faxes, and photocopying resource areas than does the St. Ediths
Glass case.

Ex 5-35
alloc basis
#procedures
capital cost (depreciation)
total cleaning minutes
total procedure minutes

administration
maintenance
sanitation
utilities

technician labour
depreciation
materials
administration
maintenance
sanitation
utilities
total cost
# procedures
minutes to clean
minutes procedure
minutes to clean total
minutes procedure total

technician labour
depreciation
materials
administration
dir technician labour
sanitation
dir technician labour
total cost
dir technician labour
minutes to clean
dir technician labour
total cost
cost per service

hours
hours
hours
hours

technician labour
depreciation
materials
administration
#procedures
maintenance
depreciation
sanitation
total cleaning minutes
utilities
total procedure minutes
total cost
cost per service

xrays
62,000
42,240
22,600

ultrasound
101,000
256,000
16,400

ct scan
155,000
424,960
23,600

mri
103,000
876,800
31,500

total
421,000
1,600,000
94,100
20,000
250,000
252,500
151,100
2,788,700
13,600

126,840
3,842
5
5

373,400
4,352
5
15

603,560
2,924
15
25

1,011,300
2,482
35
40

19,210
19,210

21,760
65,280

43,860
73,100

86,870
99,280

171,700
256,870

xrays
62,000
42,240
22,600
2,945
14.7%
36,817
14.7%
37,185
14.7%
22,252
14.7%
226,040
58.8

ultrasound
101,000
256,000
16,400
4,798
24.0%
59,976
24.0%
60,576
24.0%
36,250
24.0%
535,000
122.9

ct scan
155,000
424,960
23,600
7,363
36.8%
92,043
36.8%
92,963
36.8%
55,631
36.8%
851,560
291.2

mri
103,000
876,800
31,500
4,893
24.5%
61,164
24.5%
61,776
24.5%
36,967
24.5%
1,176,100
473.9

total
421,000
1,600,000
94,100
20,000
100%
250,000
100%
252,500
100%
151,100
100%
2,788,700
205.1

xrays
62,000
42,240
22,600
5,650
28.3%
6,600
2.6%
28,250
11.2%
11,300
7.5%
178,640
46.5

ultrasound
101,000
256,000
16,400
6,400
32.0%
40,000
16.0%
32,000
12.7%
38,400
25.4%
490,200
112.6

ct scan
155,000
424,960
23,600
4,300
21.5%
66,400
26.6%
64,500
25.5%
43,000
28.5%
781,760
267.4

mri
103,000
876,800
31,500
3,650
18.3%
137,000
54.8%
127,750
50.6%
58,400
38.6%
1,338,100
539.1

total
421,000
1,600,000
94,100
20,000
100%
250,000
100%
252,500
100%
151,100
100%
2,788,700
205.1

3. Using the disaggregated activity-based costing data, managers can see that the MRI actually costs substantially more and x-rays,
ultrasounds, and CT scans substantially less than the traditional system indicated. In particular, the MRI activity generates a lot of
maintenance activity and sanitation activity. Managers should examine the use of these two activities to search for ways to reduce the
activity consumption and ultimately its cost.

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