Activity-Based Costing

Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activities—production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity bases for these activities:

The activity-base usage quantities for each product are as follows:

a. Determine an activity rate for each activity.

b. Assign activity costs to each product and determine the unit activity cost, using the activity rates from part (a). Round unit costs to the nearest cent.

c. Assume that each product required one direct labor hour per unit. Determine the per-unit cost if factory overhead is allocated on the basis of direct labor hours. Round your answer to the nearest cent.
$per unit

d. The custom product will consume   materials management activities than will the standard product.

1. (10 pts) A firm has the following short run total costs, where Q is output and TC is total cost:

1. What is total fixed cost equal to? $100

2. What is average total cost at Q = 4? $50

3. What is average variable cost at Q = 7? $40

4. What is marginal cost at Q = 8?

5. At Q=8, is the firm operating under increasing or decreasing returns? Why?

2. (6 pts) An economy has the following total transactions (or total requirements) input-output matrix:

                                             Agriculture    Manufact.   Energy    Services

Agriculture                               1.40                0.30         0.40         0.40

Manufacturing                         0.40                1.50         0.50          0.60

Energy                                      0.30                0.60        1.20           0.40

Services                                    0.40                0.50        0.40           1.30

1. If final demand for manufacturing increases by $ 50 billion, what will be the increase in total production in each industry? In the economy as a whole?

2. Calculate the industry multiplier for services.  

3. (2 pts) A firm is producing a product using only labor and physical capital. The price of labor (wage rate) is $ 20/hour, and the cost of capital is $ 60/hour. If the marginal product of labor is 300 units an hour, what must be the marginal product of capital if the firm is a profit maximizer?      

4. (2 pts) A firm has the following production function, where Q is output, K is capital and L is labor:

Q = 400K^0.5L^0.7

Does this firm operate under increasing, decreasing or constant returns to scale, and why?

Activity-Based Costing

Hercules Industries manufactures two types of electrical power units, custom and standard, which involve four overhead activities—production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities:

The activity-base usage quantities for each product are as follows:

a. Determine an activity rate for each activity.

b. Assign activity costs to each product, and determine the unit activity cost using the activity rates from part (a). Round unit costs to the nearest cent.

c. Assume that each product required one direct labor hour per unit. Determine the per unit cost if factory overhead is allocated on the basis of direct labor hours. Round your answer to the nearest cent.
$ per unit

d. The custom product will consume SelectmorelessItem 28 materials management activities than will the standard product.

Exercise 6-8

Kingbird, Inc. uses the periodic inventory system and had 145 units in beginning inventory at a total cost of $18,125. The company purchased 290 units at a total cost of $58,000. At the end of the year, Kingbird had 70 units in ending inventory.

a.Compute the cost of the ending inventory and the cost of goods sold under FIFO, LIFO, and average-cost. (Round average-cost per unit and final answers to 0 decimal places, e.g. 1,250.)

b. Which cost flow method would result in the highest net income?

c. Which cost flow method would result in inventories approximating current cost in the balance sheet?

d. Which cost flow method would result in Kingbird paying the least taxes in the first year?

Monty Corp. uses the periodic inventory system and had 150 units in beginning inventory at a total cost of $15,000. The company purchased 300 units at a total cost of $39,000. At the end of the year, Monty had 80 units in ending inventory.

Compute the cost of the ending inventory and the cost of goods sold under FIFO, LIFO, and average-cost. (Round average-cost per unit and final answers to 0 decimal places, e.g. 1,250.)

Which cost flow method would result in the highest net income?

Which cost flow method would result in inventories approximating current cost in the balance sheet?

Which cost flow method would result in Monty paying the least taxes in the first year?

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below:

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):

************BOLD ANSWERS ARE INCORRECT EVERYTHING ELSE IS CORRECT**************

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.)

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place.)

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below:

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):

************BOLD ANSWERS ARE INCORRECT EVERYTHING ELSE IS CORRECT**************

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.)

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place.)

Background information for all problems:

Chekley Manufacturing has two production departments (Machining and Assembly). They have two service departments that provide services to each other and to production (Plant Maintenance and IT) Chekley believes Plant Maintenance (PM) should be allocated based on square footage and IT should be allocated based on computer hours. Chekley allocates Plant Maintenance first when allocating using the step method. You have the following additional information:

Total manufacturing costs

COSTS Plant maintenance $500,000

Information systems $450,000

Machining $2,000,000

Assembly $3,150,000 $6,100,000

Square Feet Computer hours

Plant maintenance 4,000.00 8,000.00

Information systems 2,000.00 4,000.00

Machining 12,000.00 24,000.00

Assembly 6,000.00 8,000.00

24,000.00 44,000.00

Problem A

1. Under the direct method, what percentage of PM should be allocated to Machining? 2. Under the direct method, what percentage of PM should be allocated to Assembly? 3. Under the direct method, how much of the total allocable cost attributable to PM should be allocated to Machining? 4. Under the direct method, how much of the total allocable cost attributable to PM should be allocated to Assembly? 5. Under the direct method, what percentage of IT should be allocated to Machining? 6. Under the direct method, what percentage of IT should be allocated to Assembly? 7. Under the direct method, how much of the total allocable cost attributable to IT should be allocated to Machining? 8. Under the direct method, how much of the total allocable cost attributable to IT should be allocated to Assembly? Problem B 1. Under the step method, what percentage of PM should be allocated to IT? 2. Under the step method, what percentage of PM should be allocated to Machining? 3. Under the step method, what percentage of PM should be allocated to Assembly? 4. Under the step method, how much of the total allocable cost attributable to PM should be allocated to IT? 5. Under the step method, how much of the total allocable cost attributable to PM should be allocated to Machining? 6. Under the step method, how much of the total allocable cost attributable to PM should be allocated to Assembly? 7. Under the step method, what percentage of IT should be allocated to PM? 8. Under the step method, what percentage of IT should be allocated to Machining? 9. Under the step method, what percentage of IT should be allocated to Assembly? 10. Under the step method, how much of the total allocable cost attributable to IT should be allocated to PM? 11. Under the step method, how much of the total allocable cost attributable to IT should be allocated to Machining? 12. Under the step method, how much of the total MOH cost attributable to IT should be allocated to Assembly?

Problem C

1. Using the reciprocal method, what is the formula for determining the total PM costs that should be allocated? PM = 500,000 + .2IT PM = 500,000 + .2(450,000) PM = 450,000 + .1IT PM = 500,000 + .1(450,000) 2. Using the reciprocal method, what is the formula for determining the total IT costs that should be allocated? IT =500,000 + .1PM IT = 450,000 + .1PM IT = 450,000 + .2(500,000) IT = 500,000 + .1(450,000) 3. Using the reciprocal method, how much in total will be allocated from PM to the other departments? 4. Using the reciprocal method, how much in total will be allocated from IT to the other departments?

Problem 2-20B Context-sensitive nature of cost behavior classifications

Sean Franklin sells a newly developed camera, Panorama Vision. He purchases the cameras from the manufacturer for $150 each and rents a store in a shopping mall for $6,000 per month.

Required

a. Determine the average cost of sales per unit if Mr. Franklin sells 100, 200, 300, 400, or 500 units of Panorama Vision per month. Use the following chart to organize your answer: Sales Volume in Units (a) 100 200 300 400 500 Total cost of cameras (a × $150) $15,000 Total cost of store rental    6,000 Total cost of sales (b) $21,000 Average cost per unit (b ÷ a) $210.00

b. If Mr. Franklin wants to make a gross profit of $30 on each camera he sells, what price should he charge at sales volumes of 100, 200, 300, 400, or 500 units?

c. Record the total cost of store rental if Mr. Franklin opens a camera store at one, two, three, four, or five shopping malls. Record your answers in the following chart. Is the cost of store rental fixed or variable relative to the number of stores opened? Shopping Malls 1 2 3 4 5 Total cost of store rental $6,000

d. Mr. Franklin provides decorative ornaments to customers who purchase cameras. Some customers take the ornaments, others do not, and some take more than one. The number of ornaments varies in relation to the number of cameras sold, but the relationship is not proportional. Assume that, on average, Mr. Franklin gives away $150 worth of ornaments for every 100 cameras sold. What is the additional cost per camera sold? Is the cost fixed or variable?