Solution manual Cost Accounting by Carter 14e Ch14SM PDF

Preview

Summary

Download Solution manual Cost Accounting by Carter 14e Ch14SM PDF

Description

CHAPTER 14 DISCUSSION QUESTIONS

Q14-1.

Q14-2.

Q14-3.

Q14-4.

Q14-5.

Q14-6.

Q14-7.

Q14-8.

Q14-9.

Compared to traditional costing, ABC is a more thorough application of cost traceability. Traditional costing traces only direct material and direct tabor to output; ABC recognizes that many other costs are traceable, if not to output, then to other cost objects called activities. The role of activities in assigning costs to products, using ABC, is to serve as the link between products and costs: activities are required to produce output, and it is the activities that consume resources, thus causing costs to be incurred. This differs from traditional costing in which output is assumed to cause costs. Examples of significant, costly activities in manufacturing are setting up, changing designs, receiving materials, requisitioning materials, moving materials and products, ordering from vendors, and inspecting. The two circumstances that must be present for a traditional costing system to report distorted product costs are a complex cost structure and a diverse product line. A complex cost structure is present if a significant part of overhead cost is not related to the volume of output. A diverse product line is one in which different products consume different mixes of volume-related and nonvolume-related costs. The four levels of costs and drivers in ABC are the unit level, the batch level, the product level, and the plant level. If a product consumes 10% of all unit-level activities and 30% of all batch-level activities, traditional costing will under-report its cost by assigning 10% of all overhead costs to the product, including 10% of batch-level costs, when 30% of batch-level costs should be assigned to the product. When both low-volume and high-volume products are produced in a company using traditional costing, the low-volume product is likely to have its cost distorted by a larger percentage than the high-volume product. The lowvolume product’s cost is generally distorted

Q14-10.

Q14-11.

Q14-12.

Q14-13.

Q14-14.

Q14-15.

Q14-16.

Q14-17.

14-1

downward by traditional costing, and the highvolume product’s cost is distorted upward. In assigning plant-level costs to products, ABC offers little or no advantage over traditional costing. The difference between CM and ABC is primarily explained by the fact that ABC is a long-run decision-making technique, while CM is short-run analysis. If a product is discontinued, the costs reported for that product by ABC will not necessarily be avoided, because ABC only measures how resources are consumed by products, not how spending will be affected by discontinuing a product. Avoiding a cost requires that less be spent on some resource(s), and ABC does not predict changes in spending. (This is also true of traditional absorption costing.) The relationship between ABC and ABM is that ABM uses information obtained from ABC to make improvements in the firm. The area of ABM that follows directly from ABC’s revision of product costs is the strategic realignment of the firm’s pricing structure and product line, permitting the firm to retain or regain high-volume business in spite of pricing pressure, and prompting management to reexamine the roles of some low-volume products. The high costs of some activities, especially non-value-added activities, can focus attention on the need to reduce or eliminate them. ABC can lead to improved decisions in designing a product because ABC tells the cost of each activity required in producing the product. This information permits designers to make design decisions more accurately, so that the most cost-effective design can be selected. The link between ABC and TQM is that ABC reveals the costs of each activity, including those that do not add value, and TQM seeks to reduce or eliminate non-value-added activities.Thus, ABC can focus attention in a TQM effort and can prioritize TQM’s improvements.

14-2

Chapter 14

EXERCISES E14-1 (a) (b) (c) (d)

(e) (f) (g)

(h) (i) (j) E 14-2 (a) (b) (c) (d) (e) (f) (g) (h)

B U U B—because no finished goods inventory is maintained, each batch is shipped immediately; therefore, shipments are most likely a batch-level driver. P U P—where large materials inventories are maintained, purchase orders are not issued for each batch to be produced; instead, a withdrawal will be made from inventory for each batch. Purchase orders are then identifiable with the total annual requirements, which makes it a product-level driver, i.e., it is traceable no farther than to products. If a purchased item is used in several products, its purchase orders are at the level of the product family or product line, which are even higher levels. U U B U B U U U B P P

E14-3 The existing system allocated 1,500/30,000 = 5% of all overhead to Product #1 last year; but #1 accounted for only 30/1,000 = 3% of batch-level activity. So, with respect to batch-level costs only, the existing system overstated #1’s cost last year by a total of: (5% – 3%) × $100,000 = $2,000 overstatement E14-4 The existing system allocated $15,000/$3,000,000 = 0.5% of materials-related overhead to Product AA last year, but AA accounted for only 40/40,000 = 0.1% of materials-related activity. So, with respect to materials-related overhead only, the existing system overstated AA’s cost last year by a total of: (0.5% – 0.1%) × $1,200,000 = $4,800 overstatement

Chapter 14

14-3

E14-5 The existing system allocated only 600/50,000 = 1.2% of all overhead to Product RK last year; but Product RK accounted for 132/6,000 = 2.2% of design change activity last year. Therefore, with respect to design change costs only, the existing system understated RK’s cost last year by a total of: (2.2% – 1.2%) × $2,000,000 = $20,000 understatement E14-6 The existing system allocated $40,000/$200,000 = 20% of all overhead to Product BB last year; but BB accounted for only 6/200 = 3% of the activity of maintaining supplies of purchased subassemblies last year. Therefore, with respect to the cost of maintaining supplies of purchased subassemblies only, the existing system overstated BB’s cost last year by a total of: (20% – 3%) × $50,000 = $8,500 overstatement E14-7 (1) $126 of overhead cost will be allocated to a unit of #456, calculated as follows: $1, 400, 000 × 90 machine hours = $ 12, 600; 10, 000 machine hours $12, 600 = $ 126 per unit 100 units of Product # 456 (2)

$554 of overhead cost will be allocated to a unit of #456, calculated as follows: $300 ,000 × 6 setups = $15, 000 of batch − level cost; 120 setups $35,000 of $500, 000 × 280 design hours = product-level cost; 4, 000 design hours $5,400 of unit$200 ,000 + $400, 000 and plant-level cost. × 90 machine hours = 10, 000 machine hours Therefore, the overhead allocated to a unit of Product #456 is: ($15,000 + $35,000 + $5,400)/100 units = $55,400/100 units = $554 per unit

14-4

Chapter 14

E14-8 Because the traditional system uses machine hours as the only allocation base, Product #456 is allocated 90/10,000 = 0.9% of all overhead. The activity data indicate #456 should be assigned 6/120 = 5% of batch-level costs, 280/4,000 = 7% of product-level costs, and 0.9% of all other overhead. The reconciliation is: Per Unit

Total Cost of #456 from traditional system, as calculated in part (1) of E14-7 ..................... Adjustments for. Understatement of batch-level costs, $300,000 × (5% – 0.9%) ................. Understatement of product-level costs, $500,000 × (7% – 0.9%) ................. Total adjustments ......................................... Cost of #456 from ABC system, as calculated in part (2) of E14-7 ....................

$12,600

$126

$42,800

428

$55,400

$554

$12,300 30,500

E14-9 (1) $140 of overhead cost will be allocated to a unit of #456, calculated as follows: $1,400 ,000 × 200 DL hours = $ 14, 000; 20, 000 DL hours $14 ,000 = $140 per unit 100 units of Product # 456 (2)

$740 of overhead cost will be allocated to a unit of #456, calculated as follows: $300 ,000 × 30 setup hours = $ 18, 000 of batch-level costt; 500 setup hours $500 ,000 $50,000 of product-level × 4 design changes = cost; 40 design hours $200 ,000 + $400, 000 200 direct labor $6,000 of unit× = hours and plant-level cost. 20, 000 DL hours Therefore, the overhead allocated to a unit of Product #456 is: ($18,000 + $50,000 + $6,000)/100 units = $74,000/100 units = $740 per unit

Chapter 14

14-5

E14-10 Because the traditional system uses direct labor hours as the only allocation base, Product #456 is allocated 200/20,000 = 1% of all overhead. The activity data indicate #456 should be assigned 30/500 = 6% of batch-level costs, 4/40 = 10% of product-level costs, and 1% of all other overhead. The reconciliation is:

Cost of #456 from traditional system, as calculated in part (1) of E14-9 ..................... Adjustments for: Understatement of batch-level costs, $300,000 × (6% – 1%) .................... Understatement of product-level costs, $500,000 × (10% – 1%) .................. Total adjustments ........................................ Cost of #456 from ABC system, as calculated in part (2) of E14-9 .....................

Total

Per Unit

$14,000

$140

$60,000

600

$74,000

$740

$15,000 45,000

E14-11 Activities g, u, y, and dd are the only ones that definitely add value. Activity k is questionable, because a single deburring after drilling should be sufficient to remove all burrs. The first deburring, k, is probably performed to make it easier and safer for workers to handle the product in the interim. If the need for so much handling can be eliminated (perhaps through automated material-handling equipment), then k could be eliminated with no loss of value to the customer and perhaps with a net savings to the company, so k is arguably a non-value-added activity.

14-6

Chapter 14

PROBLEMS P14-1 (1) The overhead rates in the existing costing system are $23 per machine hour, and $14 per direct labor hour, calculated as follows: $92 ,000 of machine -related overhead = $ 23 per machine hour 4, 000 machine hours $280 ,000 of remaining overhead costs = $ 14 per direct labor hour 20, 000 DLH (2)

Making only the changes suggested by the study, the structure of the ABC system would be: Pool machine operation ..................... setup and material handling ..... other materials-related overhead all remaining overhead ..............

Driver machine hours setups purchase orders direct labor hours

The study did not suggest any change for machine operation cost, nor for the “other overhead” category. (3)

The ABC system’s overhead rates (driver rates) are $16.25 per machine hour, $57 per setup, $50 per purchase order, and $10.75 per direct labor hour, calculated as follows: $65 ,000 of machine operation overhead = $16.25 per machine hour 4, 000 machine hours $27 ,000 of machine-setup overhead + $30 ,000 of materials handling overhead = $57 per setup 1, 000 setups $35 ,000 of otherr materials-related cost = $50 per purchase orde er 700 purchase orders $215 ,000 of "other overhead" = $ 10. 75per direct labor hour 20, 000DLH

Chapter 14

14-7

P14-2 (1)

The three overhead rates in the existing costing system are $17.50 per machine hour, $.96 per direct material dollar, and $1.25 per direct labor dollar, calculated as follows: $700,000 of machine-related overhead = $17.50 per machine hour 40,000 machine hours $960,000 of materialsrelated overhead = $1,000,00 00 of direct material cost

96% of direct material cost or $.96 per direct material dollar

$2,500,000 of other 125% of direct labor cost or overhead cost = $1.25 per direct labor dollar $2,000,000 of direct labor cost (2)

Making only the changes suggested by the study, the structure of the ABC system would be: Pool machine operation ..................... setup and material handling ..... materials administration............ freight-in ...................................... all remaining overhead ..............

Driver machine hours setups purchase orders material pounds direct labor cost

The study did not suggest any change for machine operation cost, nor for the “all remaining overhead” category. (3)

The ABC system’s overhead rates are $12.50 per machine hour, $1,020 per setup, $50 per purchase order, $.75 per pound of materials, and $1.25 per direct labor dollar, calculated as follows: $500, 000 of machineoperation overhead = $ 12.50 per machine hour 40, 000 machine hours $200 ,000 of machine-setup overhead + $310, 000 o f materials handling overhead = $ 1, 020 per setup 500 setups $500,000 of materials administration overhead = $50 per purchase order 10 ,000 purchase orders

14-8

Chapter 14

P14-2 (Concluded) $150,000 of freight-in = $.75 per pound off materials 200,000 pounds of materials $2,500,000 of other overhead cost = 125% of direct labor cost or $2,000,000 of $1.25 per direct labor dollar direct labor cost P14-3 (1) Overhead rate:

DRAPER COMPANY Product Costs from Existing Costing System $4,500,000 of overhead divided by $3,000,000 of direct labor cost = 150% of direct labor cost

Direct material ................................................ Direct labor ................................................ Overhead: 150% × $2,910,000 ........................................... 150% × $90,000 ................................................ Total cost ................................................ Units produced Cost per unit

................................................ ................................................

Standard $ 882,000 2,910,000

Custom Total $ 12,500 $ 894,500 90,000 3,000,000

4,365,000 $8,157,000

135,000 $237,500

÷ 73,500 $ 110.98

÷ 125 1,900

$

4,500,000 $8,394,500

Chapter 14

14-9

P14-3 (Continued) (2)

DRAPER COMPANY Product Costs from Activity Based Costing System

Overhead rates: $300,000 setup-related costs divided by 60 setups = $5,000 per setup $900,000 design-related costs divided by 15,000 design hours = $60 per design hour $3,300,000 other overhead divided by $3,000,000 DL cost = 110% of direct labor cost

Direct material...................................................... Direct labor........................................................... Overhead: $5,000 × 30 setups ............................................ $5,000 × 30 setups ............................................ $60 × 12,000 design hrs.................................... $60 × 3,000 design hrs...................................... 110% × $2,910,000 ............................................. 110% × $90,000 .................................................. Total cost .............................................................. Units produced .................................................... Cost per unit ........................................................ (3)

Standard $ 882,000 2,910,000

Custom Total $ 12,500 $ 894,500 90,000 3,000,000

150,000 150,000

300,000

180,000

900,000

$7,863,000

99,000 $531,500

3,300,000 $8,394,500

÷ $

÷ $

720,000 3,201,000

73,500 106.98

125 4,252

Because the existing system used direct labor cost as the only allocation base and Custom consumed $90,000/$3,000,000 = 3% of direct labor cost, the existing system allocated 3% of all overhead to Custom. The activity information indicates Custom consumed 30/60 = 50% of setup-related activity and 3,000/15,000 = 20% of design-related activity, so the reconciliation is as follows:

Cost of Custom from traditional system, as calculated in requirement (1) ................. Adjustments for: Understatement of setup-related costs, $300,000 × (50% – 3%) .................. Understatement of design-related costs, $900,000 × (20% – 3%) .................. Total adjustments ......................................... Cost of Custom from ABC system, as calculated in requirement (2) ......................

P14-3 (Concluded)

Total

Per Unit

$237,500

$1,900

294,000

2,352

$531,500

$4,252

$141,000 153,000

14-10

(4)

Chapter 14

The only costs handled differently by the two costing systems were the $300,000 of setup-related costs and $900,000 of design-related costs, for a total of $1,200,000; this represents only 27% of the total overhead of $4,500,000. The change in the costing system caused the reported cost of Custom to change from $237,500 to $531,500, which is an increase of 124%.

P14-4 (1) Overhead rate:

SHAUTON COMPANY Product Costs from Existing Costing System $1,200,000 of overhead divided by 30,000 direct labor hours = $40 per direct labor hour

Direct material...................................................... Direct Labor ......................................................... Overhead: $40 × 2,800 DLH............................................... $40 × 27,200 DLH............................................. Total cost .............................................................. Units produced .................................................... Cost per unit ........................................................

Fancy Plain $ 60,000 $ 160,000 28,000 272,000

Total $ 220,000 300,000

112,000 1,088,000 $200,000 $1,520,000 ÷ $

200 ÷ 1,000 $

16,000 95

1,200,000 $1,720,000

Chapter 14

14-11

P14-4 (Continued) (2)

SHAUTON COMPANY Product Costs from Activity Based Costing System

Overhead rates: $135,000 setup-related costs divided by 90 setups = $1,500 per setup $240,000 design-related costs divided by 8,000 design hours = $30 per design hour $825,000 other overhead divided by 30,000 direct labor hours = $27.50 per direct labor hour Fancy Plain Total Direct material...................................................... $ 60,000 $ 160,000 $ 220,000 Direct labor........................................................... 28,000 272,000 300,000 Overhead: $1,500 × 45 setups .................................. 67,500 $1,500 × 45 setups .................................. 67,500 135,000 $30 × 3,000 design hrs ........................... 90,000 $30 × 5,000 design hrs ........................... 150,000 240,000 $27.50 × 2,800 DLH ................................. 77,000 $27.50 × 27,200 DLH ............................... 748,000 825,000 Total cost .............................................................. $322,500 $1,397,500 $1,720,000 Units produced .................................................... Cost per unit ........................................................ (3)

÷ 200 ÷ $1,612.50 $

16,000 87.34

Because the existing system used direct labor hours as the only allocation base and Fancy consumed 2,800/30,000 = 9 1/3% of direct labor hours, the existing system allocated 9 1/3% of all overhead to Fancy. The activity information indicates Fancy consumed 45/90 = 50% of setup-related activity and 3,000/8,000 = 37.5% of design-related activi...