| 2. |
Determine the product factory overhead costs, using the
multiple production department rates in (1). Refer to the Amount
Descriptions list provided for the exact wording of the answer
choices for text entries.
Evaluating selling and administrative cost allocations
Gordon Gecco Furniture Company has two major product lines with
the following characteristics:
Commercial office furniture: Few large orders, little
advertising support, shipments in full truckloads, and low handling
complexity
Home office furniture: Many small orders, large advertising
support, shipments in partial truckloads, and high handling
complexity
The company produced the following profitability report for
management:
| Gordon Gecco
Furniture Company |
|
|
|
|
|
| Product
Profitability Report |
|
|
|
|
|
| For the Year
Ended December 31 |
|
|
|
|
|
|
Commercial
Office
Furniture |
Home
Office
Furniture |
Total |
| Revenue |
$5,600,000 |
$2,800,000 |
$8,400,000 |
| Cost of goods sold |
2,100,000 |
980,000 |
3,080,000 |
| Gross profit |
$3,500,000 |
$1,820,000 |
$5,320,000 |
| Selling and administrative expenses |
1,680,000 |
840,000 |
2,520,000 |
| Income from operations |
$1,820,000 |
$ 980,000 |
$2,800,000 |
The selling and administrative expenses are allocated to the
products on the basis of relative sales dollars.
Evaluate the accuracy of this report and recommend an
alternative approach.
The selling and administrative expenses should on the basis of
relative sales dollars. The two product lines have very different
attributes. The commercial product is relatively inexpensive to
sell, while the home product has a number of additional costs
associated with it. As a result, allocating selling and
administrative expenses using sales volumes would allocate selling
and administrative expenses to the commercial product and to the
home product. The commercial product would receive as much selling
and administrative expenses as the home product because it has
twice the sales. An activity-based approach would trace the selling
and administrative costs to the products based upon their actual
consumption of activities. Such an allocation would show the
commercial product to be more profitable than indicated and the
home product to be less profitable than indicated.
Salty Sensations Snacks Company manufactures three types of
snack foods: tortilla chips, potato chips, and pretzels. The
company has budgeted the following costs for the upcoming
period:
| Factory depreciation |
$16,767 |
|
| Indirect labor |
41,553 |
|
| Factory electricity |
4,739 |
|
| Indirect materials |
9,841 |
|
| Selling expenses |
23,328 |
|
| Administrative expenses |
13,122 |
|
|
Total costs |
$109,350 |
|
Factory overhead is allocated to the three products on the basis
of processing hours. The products had the following production
budget and processing hours per case:
|
Budgeted Volume
(Cases) |
Processing Hours
Per Case |
| Tortilla chips |
|
1,200 |
|
|
0.15 |
|
|
| Potato chips |
|
4,500 |
|
|
0.12 |
|
|
| Pretzels |
|
6,300 |
|
|
0.10 |
|
|
|
Total |
|
12,000 |
|
|
|
|
|
If required, round all per-case answers to the nearest cent.
a. Determine the single plantwide factory
overhead rate.
$ per processing hour
b. Use the factory overhead rate in (a) to
determine the amount of total and per-case factory overhead
allocated to each of the three products under generally accepted
accounting principles.
|
Total
Factory Overhead |
Per-Case
Factory Overhead |
| Tortilla chips |
$ |
$ |
| Potato chips |
|
|
| Pretzels |
|
|
| Total |
$ |
|
|
Garfield Inc. manufactures entry and dining room lighting
fixtures. Five activities are used in manufacturing the fixtures.
These activities and their associated budgeted activity costs and
activity bases are as follows:
Activity |
Budgeted
Activity Cost |
Activity Base |
| Casting |
$214,360 |
|
Machine hours |
| Assembly |
212,400 |
|
Direct labor hours |
| Inspecting |
36,890 |
|
Number of inspections |
| Setup |
45,220 |
|
Number of setups |
| Materials handling |
51,940 |
|
Number of loads |
Corporate records were obtained to estimate the amount of
activity to be used by the two products. The estimated
activity-base usage quantities and units produced follow:
| Activity Base |
Entry |
Dining |
Total |
| Machine hours |
4,940 |
|
4,380 |
|
9,320 |
|
| Direct labor hours |
4,250 |
|
6,370 |
|
10,620 |
|
| Number of inspections |
1,650 |
|
520 |
|
2,170 |
|
| Number of setups |
280 |
|
60 |
|
340 |
|
| Number of loads |
840 |
|
220 |
|
1,060 |
|
| Units produced |
9,800 |
|
4,900 |
|
14,700 |
|
a. Determine the activity rate for each
activity. If required, round the rate to the nearest dollar.
| Activity |
Activity Rate |
|
| Casting |
$ |
per machine hour |
| Assembly |
$ |
per direct labor hour |
| Inspecting |
$ |
per inspection |
| Setup |
$ |
per setup |
| Materials handling |
$ |
per load |
b. Use the activity rates in (a) to determine
the total and per-unit activity costs associated with each product.
Round the per unit rates to the nearest cent.
| Product |
Total Activity Cost |
Activity Cost Per Unit |
| Entry Lighting Fixtures |
$ |
$ |
| Dining Room Lighting Fixtures |
$ |
$
|
|
Pineapple Motor Company manufactures two types of specialty
electric motors, a commercial motor and a residential motor,
through two production departments, Assembly and Testing.
Presently, the company uses a single plantwide factory overhead
rate for allocating factory overhead to the two products. However,
management is considering using the multiple production department
factory overhead rate method. The following factory overhead was
budgeted for Pineapple:
| Assembly Department |
$172,000 |
|
| Testing Department |
653,600 |
|
|
Total |
$825,600 |
|
Direct machine hours were estimated as follows:
| Assembly Department |
4,300 |
hours |
| Testing Department |
8,600 |
|
|
Total |
12,900 |
hours |
In addition, the direct machine hours (dmh) used to produce a
unit of each product in each department were determined from
engineering records, as follows:
|
Commercial |
Residential |
| Assembly Department |
0.50 |
dmh |
1.00 |
dmh |
| Testing Department |
1.00 |
|
2.00 |
|
| Total machine hours per unit |
1.50 |
dmh |
3.00 |
dmh |
a. Determine the per-unit factory overhead
allocated to the Commercial and Residential motors under the single
plantwide factory overhead rate method, using direct machine hours
as the allocation base.
| Commercial Motor |
$ per unit |
| Residential Motor |
$ per unit |
b. Determine the per-unit factory overhead
allocated to the Commercial and Residential motors under the
multiple production department factory overhead rate method, using
direct machine hours as the allocation base for each
department.
| Commercial Motor |
$ per unit |
| Residential Motor |
$ per unit |
c. Recommend to management a product costing
approach, based on your analyses in (a) and (b).
The factory overhead determined under the single plantwide
factory overhead rate and multiple production department factory
overhead rate methods are . This is because the ratio of direct
machine hours used by each product from the two departments is .
However, the two production department overhead rates are . Thus,
Peach should consider the easier rate method in this situation.
Product Costs and Product Profitability Reports, using a Single
Plantwide Factory Overhead Rate
Elliott Engines Inc. produces three products—pistons, valves,
and cams—for the heavy equipment industry. Elliott Engines has a
very simple production process and product line and uses a single
plantwide factory overhead rate to allocate overhead to the three
products. The factory overhead rate is based on direct labor hours.
Information about the three products for 20Y2 is as follows:
|
Budgeted Volume
(Units) |
Direct Labor
Hours Per Unit |
Price Per
Unit |
Direct Materials
Per Unit |
| Pistons |
11,000 |
|
0.30 |
|
$46 |
|
$22 |
|
| Valves |
25,000 |
|
0.15 |
|
11 |
|
4 |
|
| Cams |
4,000 |
|
0.20 |
|
61 |
|
26 |
|
The estimated direct labor rate is $26 per direct labor hour.
Beginning and ending inventories are negligible and are, thus,
assumed to be zero. The budgeted factory overhead for Elliott
Engines is $211,950.
If required, round all per unit answers to the nearest cent.
a. Determine the plantwide factory overhead
rate.
$ per dlh
b. Determine the factory overhead and direct
labor cost per unit for each product.
|
Direct Labor
Hours Per Unit |
Factory Overhead
Cost Per Unit |
Direct Labor
Cost Per Unit |
| Pistons |
dlh |
$ |
$ |
| Valves |
dlh |
$ |
$ |
| Cams |
dlh |
$ |
$ |
c. Use the information above to construct a
budgeted gross profit report by product line for the year ended
December 31, 20Y2. Include the gross profit as a percent of sales
in the last line of your report, rounded to one decimal place.
Enter all amounts as positive numbers, except for a negative gross
profit/gross profit percentage of sales.
|
Elliot Engines Inc. |
|
Product Line Budgeted Gross Profit Reports |
| For
the Year Ended December 31, 20Y2 |
|
Pistons |
Valves |
Cams |
|
$ |
$ |
$ |
| Product Costs |
|
|
|
|
$ |
$ |
$ |
|
|
|
|
|
|
|
|
| Total Product Costs |
$ |
$ |
$ |
| Gross profit |
$ |
$ |
$ |
| Gross profit percentage of sales |
% |
% |
% |
d. What does the report in (c) indicate to
you?
Valves have the gross profit as a percent of sales. Valves may
require a price or cost to manufacture in order to achieve the same
profitability as the other two products.
Activity-Based Costing: Factory Overhead Costs
The total factory overhead for Bardot Marine Company is budgeted
for the year at $1,064,450, divided into four activities:
fabrication, $496,000; assembly, $198,000; setup, $199,950; and
inspection, $170,500. Bardot Marine manufactures two types of
boats: speedboats and bass boats. The activity-base usage
quantities for each product by each activity are as follows:
|
Fabrication |
Assembly |
Setup |
Inspection |
| Speedboat |
7,750 |
dlh |
24,750 |
dlh |
56 |
setups |
97 |
inspections |
| Bass boat |
23,250 |
|
8,250 |
|
409 |
|
678 |
|
|
31,000 |
dlh |
33,000 |
dlh |
465 |
setups |
775 |
inspections |
Each product is budgeted for 5,000 units of production for the
year.
a. Determine the activity rates for each
activity.
| Fabrication |
$ per direct labor hour |
| Assembly |
$ per direct labor hour |
| Setup |
$ per setup |
| Inspection |
$ per inspection |
b. Determine the activity-based factory
overhead per unit for each product. Round to the nearest whole
dollar.
| Speedboat |
$ per unit |
| Bass boat |
$ per unit
|
|
Single Plantwide Rate and Activity-Based Costing
Whirlpool Corporation conducted an activity-based costing study
of its Evansville, Indiana, plant in order to identify its most
profitable products. Assume that we select three representative
refrigerators (out of 333): one low-, one medium-, and one
high-volume refrigerator. Additionally, we assume the following
activity-base information for each of the three refrigerators:
Three Representative
Refrigerators |
Number of
Machine Hours |
Number of
Setups |
Number of
Sales Orders |
Number of
Units |
| Refrigerator—Low Volume |
100 |
|
16 |
|
48 |
|
500 |
|
| Refrigerator—Medium Volume |
320 |
|
15 |
|
107 |
|
1,600 |
|
| Refrigerator—High Volume |
1,070 |
|
11 |
|
160 |
|
5,350 |
|
Prior to conducting the study, the factory overhead allocation
was based on a single machine hour rate. The machine hour rate was
$500 per hour. After conducting the activity-based costing study,
assume that three activities were used to allocate the factory
overhead. The new activity rate information is assumed to be as
follows:
|
Machining Activity |
Setup Activity |
Sales Order
Processing Activity |
| Activity rate |
$480 |
|
$750 |
|
$170 |
|
|
a. Complete the following table, using the
single machine hour rate to determine the per-unit factory overhead
for each refrigerator (Column A) and the three activity-based rates
to determine the activity-based factory overhead per unit (Column
B). Finally, compute the percent change in per-unit allocation from
the single to activity-based rate methods (Column C).
If required, round all per unit answers to the nearest cent.
Round percents to one decimal place. For column C, use the minus
sign to indicate a negative or decrease.
|
Column A |
Column B |
Column C |
Product Volume Class |
Single Rate
Overhead Allocation
Per Unit |
ABC
Overhead Allocation
Per Unit |
Percent Change in
Allocation |
| Low |
$ |
$ |
% |
| Medium |
$ |
$ |
% |
| High |
$ |
$ |
% |
b. Why is the traditional overhead rate per
machine hour greater under the single rate method than under the
activity-based method?
The machine hour rate is greater under the single rate method
than under the activity-based method because 100% of the factory
overhead is is allocated by machine hours under the single rate
method. However, only a portion of the factory overhead is
allocated under the machine rate method using activity-based
costing. The remaining factory overhead is allocated using the .
Thus, the numerator for for determining the machine hour rate under
activity-based costing must be less than the numerator under the
single machine hour rate method.
c. Interpret Column C in your table from part (A).
Column C indicates that under activity-based costing the
low-volume product has a per-unit cost than calculated under the
single rate method. In contrast, under activity-based costing the
high-volume product has a per-unit cost than calculated under the
single rate method. This result will occur when there are
activities that occur in proportions different from their volumes.
In this case, volume products have setups and sales orders
occurring in higher proportions of total setups and sales orders
than their proportion of machine hours to total machine hours. The
opposite is the case for the volume product. Thus, the lower-volume
products are produced and ordered in batch sizes compared to the
higher-volume product. This implies that Whirlpool may wish to
simplify its product line by eliminating some of the volume
products or by attempting to reduce the overall cost of setup and
sales order processing activities.
Sterling Hotel uses activity-based costing to determine the cost
of servicing customers. There are three activity pools: guest
check-in, room cleaning, and meal service. The activity rates
associated with each activity pool are $8.60 per guest check-in,
$16.00 per room cleaning, and $2.00 per served meal (not including
food). Julie Stone visited the hotel for a 6-night stay. Stone had
4 meals in the hotel during her visit.
Determine the total activity-based cost for Stone’s visit during
the month. Round your answer to the nearest cent.
$
|
|
|
|
|
|
|
|
|