Problem 3-12A Contrasting ABC and Conventional Product Costs [LO2, LO3, LO4]

Precision Manufacturing Inc. ( PMI ) makes two  types  of industrial component parts—the EX300 and the TX500. It annually produces 60,000 units of EX300 and 12,500 units of TX500. The company’s conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

 

	EX300	TX500	Total
  Direct materials	$	366,325	$	162,550	$	528,875
  Direct labor	$	120,000	$	42,500	$	162,500

 

The company is considering implementing an activity-based costing system that distributes all of its manufacturing  overhead to four activities as shown below:

 

Activity Cost Pool (and Activity Measure)	Manufacturing  Overhead	Activity
		EX300	TX500	Total
  Machining (machine-hours)	$	198,250		90,000		62,500		152,500
  Setups (setup hours)		150,000		75		300		375
  Product-level (number of products)		100,250		1		1		2
  General factory (direct labor dollars)		60,125	$	120,000	$	42,500	$	162,500
  Total manufacturing  overhead cost	$	508,625

 

Required:

 

1-a.	Compute the plantwide overhead rate that would be used in the company’s conventional cost system. (Round your answer to 2 decimal places.)

 

 

  Predetermined overhead rate

$

per DL$

 

1-b.	Using the plantwide rate, compute the unit product cost for each product. (Do not round intermediate calculations. Round your  answers to  2 decimal places.)

 

	EX300	TX500
  Unit product cost	$	$

 

2-a.	Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.)

 

 

 Activity Cost Pools	            Activity Rate
  Machining	$	   per MH
  Setups	$	   per setup hr.
  Product-level	$	   per product
  General factory	$	   per DL$

 

2-b.	Using the activity rates, compute the unit product cost for each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

	    EX300	    TX500
  Unit product cost	$	$

 

 

Exercise 3-7 Contrast ABC and Conventional Product Costs [LO2, LO3, LO4]

Kunkel Company makes two products and uses a conventional costing system in which a single plantwide predetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow:

 

	Mercon	Wurcon
  Direct materials cost per unit	$	10.00	$	8.00
  Direct  labor cost  per unit	$	3.00	$	3.75
  Direct labor-hours per unit		0.20		0.25
  Number of units produced		10,000		40,000

 

 

These products are customized to some  degree for  specific customers.

 

Required:
1.	The company’s  manufacturing   overhead costs  for the year are expected to be $336,000. Using the company’s conventional costing system, compute the unit product costs for the two products. (Do not round intermediate calculation. Round your final answers to 2 decimal places.)

 

	Mercon	Wurcon
  Unit product cost	$	$

 

 

2.

Management is considering an activity-based costing system in which half of the overhead would continue  to be allocated on the basis of direct labor-hours and half would be allocated on the basis of engineering design time. This time is expected to be distributed as follows during the upcoming year:

 

	Mercon	Wurcon	Total
   Engineering design  time (in hours)	4,000	4,000	8,000

 

 

Compute the unit product costs for the two products using the proposed ABC system. (Do not round intermediate calculation. Round your final answers to 2 decimal places.)

 

	Mercon	Wurcon
  Unit product cost	$	$

 

 

Exercise 3-3 Compute ABC Product Costs [LO3]

Larner Corporation is a diversified manufacturer of industrial goods. The company’s activity-based costing system contains the following six activity cost pools and activity rates:

 

  Activity Cost Pool	        Activity Rates
  Labor-related	$	7.00	 per direct labor-hour
  Machine-related	$	3.00	 per machine-hour
  Machine setups	$	40.00	 per setup
   Production  orders	$	160.00	 per order
   Shipments	$	120.00	 per shipment
  General factory	$	4.00	 per direct labor-hour

 

Cost and activity data have been supplied for the following products:

 

	J78	B52
  Direct materials cost per unit	$	6.50	$	31.00
  Direct  labor cost  per unit	$	3.75	$	6.00
  Number of units produced per year		4,000		100

 

	Total ExpectedActivity
	 J78		 B52
  Direct labor-hours	1,000		40
  Machine-hours	3,200		30
  Machine setups	5		1
  Production orders	5		1
  Shipments	10		1

 

 

Required:

Compute the unit product cost of each product listed above. (Round your  answers to  2 decimal places.)

 

 

	J78	B52
  Unit product cost	$	$

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company shows a balance of $3,000 at the end of an

accounting period. The job-cost sheets of the two incomplete

jobs show charges of $500 and $300 for direct

materials, and charges of $400 and $600 for direct labor.

From this information, it appears that the company is

using a predetermined overhead rate as a percentage of

direct labor costs. What percentage is the rate?

2. The break-even point in dollar sales for Rice Company is

$480,000 and the company’s contribution margin ratio

is 40 percent. If Rice Company desires a profit of

$84,000, how much would sales have to total?

3. Williams Company’s direct labor cost is 25 percent of its

conversion cost. If the manufacturing overhead for the

last period was $45,000 and the direct material cost was

$25,000, how much is the direct labor cost?Grading Company’s cash and cash equivalents consist of

cash and marketable securities. Last year the company’s

cash account decreased by $16,000 and its marketable

securities account increased by $22,000. Cash provided

by operating activities was $24,000. Net cash used for

financing activities was $20,000. Based on this information,

was the net cash flow from investing activities on

the statement of cash flows a net increase or decrease?

By how much?

5. Gladstone Footwear Corporation’s flexible budget cost

formula for supplies, a variable cost, is $2.82 per unit of

output. The company’s flexible budget performance report

for last month showed an $8,140 unfavorable spending

variance for supplies. During that month, 21,250 units

were produced. Budgeted activity for the month had

been 20,900 units. What is the actual cost per unit for

indirect materials?

6. Lyons Company consists of two divisions, A and B. Lyons

Company reported a contribution margin of $60,000 for

Division A, and had a contribution margin ratio of 30

percent in Division B, when sales in Division B were

$240,000. Net operating income for the company was

$22,000 and traceable fixed expenses were $45,000. How

much were Lyons Company’s common fixed expenses?

7. Atlantic Company produces a single product. For the most

recent year, the company’s net operating income computed

by the absorption costing method was $7,800, and its net

operating income computed by the variable costing method

was $10,500. The company’s unit product cost was $15

under variable costing and $24 under absorption costing.

If the ending inventory consisted of 1,460 units, how

many units must have been in the beginning inventory?Black Company uses the weighted-average method in its

process costing system. The company’s ending work-inprocess

inventory consists of 6,000 units, 75 percent

complete with respect to materials and 50 percent complete

with respect to labor and overhead. If the total

dollar value of the inventory is $80,000 and the cost per

equivalent unit for labor and overhead is $6.00, what is

the cost per equivalent unit for materials?

9. At Overland Company, maintenance cost is exclusively a

variable cost that varies directly with machine-hours. The

performance report for July showed that actual maintenance

costs totaled $11,315 and that the associated rate

variance was $146 unfavorable. If 7,300 machine-hours

were actually worked during July, what is the budgeted

maintenance cost per machine-hour?

10. The cost of goods sold in a retail store totaled $650,000.

Fixed selling and administrative expenses totaled $115,000

and variable selling and administrative expenses were

$420,000. If the store’s contribution margin totaled

$590,000, how much were the sales?

11. Denny Corporation is considering replacing a technologically

obsolete machine with a new state-of-the-art

numerically controlled machine. The new machine would

cost $600,000 and would have a 10-year useful life.

Unfortunately, the new machine would have no salvage

value. The new machine would cost $20,000 per year to

operate and maintain, but would save $125,000 per year

in labor and other costs. The old machine can be sold

now for scrap for $50,000. What percentage is the simple

rate of return on the new machine rounded to the nearest

tenth of a percent? (Ignore income taxes in this problem.)Lounsberry Inc. regularly uses material O55P and currently

has in stock 375 liters of the material, for which it paid

$2,700 several weeks ago. If this were to be sold as is on

the open market as surplus material, it would fetch $6.35

per liter. New stocks of the material can be purchased

on the open market for $7.20 per liter, but it must be

purchased in lots of 1,000 liters. You’ve been asked to

determine the relevant cost of 900 liters of the material

to be used in a job for a customer. What is the relevant

cost of the 900 liters of material O55P?

13. Harwichport Company has a current ratio of 3.0 and

an acid-test ratio of 2.8. Current assets equal $210,000,

of which $5,000 consists of prepaid expenses. The

remainder of current assets consists of cash, accounts

receivable, marketable securities, and inventory. What

is the amount of Harwichport Company’s inventory?

14. Tolla Company is estimating the following sales for the

first six months of next year:

January $350,000

February $300,000

March $320,000

April $410,000

May $450,000

June $470,000

Sales at Tolla are normally collected as 70 percent in the

month of sale, 25 percent in the month following the sale,

and the remaining 5 percent being uncollectible. Also, customers

paying in the month of sale are given a 2 percent

discount. Based on this information, how much cash

should Tolla expect to collect during the month of April?Trauscht Corporation has provided the following data

from its activity-based costing system:

The company makes 360 units of product P23F a year,

requiring a total of 725 machine-hours, 85 orders, and 45

inspection-hours per year. The product’s direct materials

cost is $42.30 per unit and its direct labor cost is $14.55

per unit. The product sells for $132.10 per unit. According

to the activity-based costing system, what is the product

margin for product P23F?

16. Williams Company’s direct labor cost is 30 percent of its

conversion cost. If the manufacturing overhead for the

last period was $59,500 and the direct materials cost

was $37,000, what is the direct labor cost?

17. In a recent period, 13,000 units were produced, and there

was a favorable labor efficiency variance of $23,000.

If 40,000 labor-hours were worked and the standard

wage rate was $13 per labor-hour, what would be the

standard hours allowed per unit of output?

18. The balance in White Company’s work-in-process inventory

account was $15,000 on August 1 and $18,000 on

August 31. The company incurred $30,000 in direct labor

cost during August and requisitioned $25,000 in raw

materials (all direct material). If the sum of the debits to

the manufacturing overhead account total $28,000 for the

month, and if the sum of the credits totaled $30,000, then

was Finished Goods debited or credited? By how much?A company has provided the following data:

Sales 4,000 units

Sales price $80 per unit

Variable cost $50 per unit

Fixed cost $30,000

If the dollar contribution margin per unit is increased

by 10 percent, total fixed cost is decreased by 15 percent,

and all other factors remain the same, will net operating

income increase or decrease? By how much?

20. For the current year, Paxman Company incurred

$175,000 in actual manufacturing overhead cost. The

manufacturing overhead account showed that overhead

was overapplied in the amount of $9,000 for the year.

If the predetermined overhead rate was $8.00 per

direct labor-hour, how many hours were worked

 

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