Activity-Based Costing and Conventional Costs Compared
Chef Grill Company manufactures two types of cooking grills: the Gas Cooker and the Charcoal Smoker. The Cooker is a premium product sold in upscale outdoor shops; the Smoker is sold in major discount stores. Following is information pertaining to the manufacturing costs for the current month.

Manufacturing overhead follows:

Rounding instructions: Do not round until your final answers. Round total cost answers to the nearest dollar and per unit answers to the nearest cent.

(a) Determine the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month, assuming all manufacturing overhead is assigned on the basis of direct labor dollars.

HINT: Use 8.4708 for overhead rate calculations.

(b) Determine the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month, assuming manufacturing overhead is assigned using activity-based costing.

Activity-Based Costing and Conventional Costs Compared
Chef Grill Company manufactures two types of cooking grills: the Gas Cooker and the Charcoal Smoker. The Cooker is a premium product sold in upscale outdoor shops; the Smoker is sold in major discount stores. Following is information pertaining to the manufacturing costs for the current month.

Manufacturing overhead follows:

Rounding instructions: Do not round until your final answers. Round total cost answers to the nearest dollar and per unit answers to the nearest cent.

(a) Determine the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month, assuming all manufacturing overhead is assigned on the basis of direct labor dollars.

HINT: Use 8.4708 for overhead rate calculations.

(b) Determine the total and per-unit costs of manufacturing the Gas Cooker and Charcoal Smoker for the month, assuming manufacturing overhead is assigned using activity-based costing.

1. During the first month of operations ended July 31, YoSan Inc. manufactured 2,400 flat panel televisions, of which 2,000 were sold. Operating data for the month are summarized as follows:

   Sales		$2,150,000
   Manufacturing costs:
   Direct materials	$960,000
   Direct labor	420,000
   Variable manufacturing cost	156,000
   Fixed manufacturing cost	288,000	1,824,000
   Selling and administrative expenses:
   Variable	$204,000
   Fixed	96,000	300,000

   Required:

   1. Prepare an income statement based on the absorption costing concept.

   YoSan Inc.
   Absorption Costing Income Statement
   For the Month Ended July 31
   Contribution margin Gross profit Inventory, July 31 Manufacturing margin Sales		$
   Cost of goods sold:
   Cost of goods manufactured Fixed manufacturing costs Fixed selling and administrative expenses Inventory, July 31 Total cost of goods sold	$
   Contribution margin Cost of goods manufactured Fixed manufacturing costs Inventory, July 31 Total cost of goods sold
   Fixed selling and administrative expenses Gross profit Inventory, July 31 Manufacturing margin Total cost of goods sold
   Gross profit Inventory, July 31 Manufacturing margin Sales Selling and administrative expenses		$
   Contribution margin Cost of goods sold Inventory, July 31 Selling and administrative expenses Variable selling and administrative expenses
   Income from operations Loss from operations		$

   2. Prepare an income statement based on the variable costing concept.

   YoSan Inc.
   Variable Costing Income Statement
   For the Month Ended July 31, 2016
   Contribution margin Fixed manufacturing costs Gross profit Manufacturing margin Sales		$
   Variable cost of goods sold:
   Cost of goods sold Cost of goods manufactured Manufacturing margin Variable cost of goods manufactured Variable selling and administrative expenses	$
   Contribution margin Cost of goods sold Fixed manufacturing costs Fixed selling and administrative expenses Inventory, July 31
   Fixed manufacturing costs Sales Total Variable cost of goods sold Variable cost of goods manufactured Variable selling and administrative expenses
   Contribution margin Fixed manufacturing costs Gross profit Inventory, July 31 Manufacturing margin		$
   Fixed manufacturing costs Fixed selling and administrative expenses Inventory, July 31 Manufacturing margin Variable selling and administrative expenses
   Contribution margin Cost of goods manufactured Fixed selling and administrative expenses Inventory, July 31 Manufacturing margin		$
   Fixed costs:
   Fixed contribution margin Fixed manufacturing costs Fixed sales Total Variable cost of goods sold Variable cost of goods manufactured	$
   Fixed selling and administrative expenses Fixed manufacturing margin Total Variable cost of goods sold Variable cost of goods manufactured Variable selling and administrative expenses
   Fixed selling and administrative expenses Fixed manufacturing margin Total fixed costs Variable cost of goods manufactured Variable selling and administrative expenses
   Income from operations Loss from operations		$

   3. Explain the reason for the difference in the amount of income from operations reported in (1) and (2).

   The income from operations reported under

   • absorption
   • variable
   costing exceeds the income from operations reported under
   • absorption
   • variable
   costing by the difference between the two, due to
   • fixed
   • variable
   manufacturing costs that are deferred to a future month under
   • absorption
   • variable
   costing.

1a. A small diner serves sandwiches and beverages. Which of the following is a variable cost with respect to the number of customers?

a. Rent

b.Soda

c.New dishwasher

d.All of the above

1b. A firm manufactures luxury automobiles. Which of the following is a product cost?

a.CEO salary

b.Sales commissions

c.Advertising

d.Windshields

1c.Within the relevant range, variable costs can be expected to:

a.increase on a per unit basis as the activity level decreases.

a.remain constant in total as the activity level changes.

c.increase on a per unit basis as the activity level increases.

d.vary in total in direct proportion to changes in the activity level.

1d.Which of the following is true at a firm's break-even point?

a.Profit is zero

b.Total revenue equals total cost

c.Total contribution margin equals total fixed cost

d.All of the above

1e.A corporation has provided the following contribution format income statement

Sales (1,000)                                 $50,000
Variable expense       $32,500
Contribution margin              $17,500
Fixed expenses                             12,250
Net Operating Income            $ 5,250

The break-even point in unit sales is closest to:

a.0 units

b.895 units

c.650 units

d.700 units

1f.A company has the following information:

Income tax rate                        25%
Selling price per unit         $8.00
Variable cost per unit       $5.00
Total fixed costs      $100,000

The contribution margin per unit is:

a.$3.00

b.$2.00

c.$5.00

d.$8.00

St. Mark’s Hospital contains 520 beds. The occupancy rate varies between 60% and 90% per month, but the average occupancy rate is generally 80%. In other words, on average, 80% of the hospital’s beds are occupied by patients. At this level of occupancy, the hospital’s operating costs are $39 per occupied bed per day, assuming a 30-day month. This $39 figure contains both variable and fixed cost elements. This average cost figure drops to $36 when the occupancy rate is 90% (typically during the months of July and August).

During June, the hospital’s occupancy rate was only 60% and a total of $467,120 in operating costs was incurred during the month.

Required:

1-a. Using the high-low method, estimate the variable cost per occupied bed on a daily basis. (Round your answer to 3 decimal places.)

Variable cost: (per bed-day)

1-b. Using the high-low method, estimate the total fixed operating costs per month. (Do not round intermediate calculations.)

Total fixed operating costs: (per month)

2. Assume an occupancy rate of 70% per month. What amount of total operating cost would you expect the hospital to incur? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Total expected costs:

Snavely, Inc., manufactures and sells two products: Product E1 and Product A7. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below:

The direct labor rate is $29.70 per DLH. The direct materials cost per unit for each product is given below:

The company has an activity-based costing system with the following activity cost pools, activity measures, and expected activity:

The total overhead applied to Product E1 under activity-based costing is closest to: (Round your intermediate calculations to 2 decimal places.)

rev: 03_25_2018_QC_CS-119201

Multiple Choice

• $1,127,785

• $663,551

• $796,812

• $529,680

The Deli Company is planning an investment in the consumer electronics market. The company already has an established brand recognition in this market, and believes it can capture 5% of the whole market. Table 1 sets out data on the relevant consumer electronics market.

Table 1: Consumer electronics market (numbers in millions)

Table 2: Deli's investment project

The risk-free interest rate is 3% and the average return on the market index is 7%.

1. What is the relevant cost of capital for Deli’s investment appraisal analysis?

2. What is the present value of Deli’s future variable and fixed costs?

3. What is the net present value of Deli’s working capital investment?

4. What is the present value of Deli’s future sales revenues?

5. What is the net present value of Deli’s total investment in the consumer electronics market?

6. Why do you think that Deli’s sales revenues are 4.5% of the total market but only 4% of the total variable cost?

Fixed and Variable Cost Allocation Kumar, Inc., evaluates managers of producing departments on their ability to control costs. In addition to the costs directly traceable to their departments, each production manager is held responsible for a share of the costs of a support center, the Human Resources (HR) Department. The total costs of HR are allocated on the basis of actual direct labor hours used. The total costs of HR and the actual direct labor hours worked by each producing department are as follows:

Year 1 Year 2 Direct labor hours worked: Department A 24,000 25,000 Department B 36,000 25,000 Total hours 60,000 50,000 Actual HR cost $120,000 $120,000 Budgeted HR cost 115,000 * 112,500 * *$0.25 per direct labor hour plus $100,000. When the capacity of the HR Department was originally established, the normal usage expected for each department was 20,000 direct labor hours. This usage is also the amount of activity planned for the two departments in Year 1 and Year 2.

Required: 1. Allocate the costs of the HR Department using the direct method and assuming that the purpose is product costing. Department A Department B Variable costs $ $ Fixed costs Total cost $ $

2. Allocate the costs of the HR Department using the direct method and assuming that the purpose is to evaluate performance. Year 1 Year 2 Department A Department B Department A Department B Variable costs $ $ $ $ Fixed costs Total cost $ $ $ $

1.

Pinkin Inc. needs to determine a price for a new phone model. Pinkin desires a 20% markup on the total cost of the phone. Pinkin expects to sell 37,000 phones. Additional information is as follows:

Using the total cost method what price should Pinkin charge?

2.

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $9.70; direct labor, $13.70, variable overhead $2.70 and fixed overhead, $7.70. An outside supplier has offered to sell the product to Paxton for $33.80. Compute the net incremental cost or savings of buying the component.

3.Bricktan Inc. makes three products, basic, classic, and deluxe. The maximum Bricktan can sell is 110,000 units of basic, 476,000 units of classic, and 190,000 units of deluxe. Bricktan has limited production capacity of 118,000 hours. It can produce 10 units of basic, 8 units of classic, and 4 units of deluxe per hour. Contribution margin per unit is $15 for the basic, $25 for the classic, and $55 for the deluxe. What is the total contribution margin if Bricktan chooses the most profitable sales mix?

A company manufactures and sells two products: Product A1 and Product C4. Data concerning the expected production of each product and the expected total direct labor-hours (DLHs) required to produce that output appear below:

The direct labor rate is $29.70 per DLH. The direct materials cost per unit is $263 for Product A1 and $266 for Product C4.

The company is considering adopting an activity-based costing system with the following activity cost pools, activity measures, and expected activity:

The total cost per unit of Product C4 under activity-based costing is closest to: (Round your intermediate calculations to 2 decimal places.)

rev: 03_25_2018_QC_CS-119201

Multiple Choice

• $961.52 per unit

• $1,057.70 per unit

• $676.70 per unit

• $994.40 per unit