1. EX.18.01.ALGO

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Single plantwide factory overhead rate

Tallulah Inc.'s Machining Department incurred $144,000 of factory overhead cost in producing hoses and valves. The two products consumed a total of 6,000 direct machine hours. Of that amount, hoses consumed 3,200 direct machine hours.

Determine the total amount of factory overhead that should be allocated to hoses using machine hours as the allocation base. fill in the blank 1 of 1$

2. EX.18.05.ALGO

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Multiple production department factory overhead rate method

Spielman Leather, Inc., produces three sizes of sports gloves: small, medium, and large. A glove pattern is first stenciled onto leather in the Pattern Department. The stenciled patterns are then sent to the Cut and Sew Department, where the glove is cut and sewed together. Spielman Leather uses the multiple production department factory overhead rate method of allocating factory overhead costs. Its factory overhead costs were budgeted as follows:

Line Item Description	Amount
Pattern Department overhead	$132,000
Cut and Sew Department overhead	224,000
Total	$356,000

The direct labor estimated for each production department was as follows:

Line Item Description	Amount
Pattern Department	2,200 direct labor hours
Cut and Sew Department	2,800
Total	5,000 direct labor hours

Direct labor hours are used to allocate the production department overhead to the products. The direct labor hours per unit for each product for each production department were obtained from the engineering records as follows:

Production Departments	Small Glove	Medium Glove	Large Glove
Pattern Department	0.04	0.05	0.06
Cut and Sew Department	0.07	0.09	0.11
Direct labor hours per unit	0.11	0.14	0.17

If required, round all per unit answers to the nearest cent.

a. Determine the two production department factory overhead rates. Pattern department fill in the blank 1 of 2$ per dlh Cut and Sew department fill in the blank 2 of 2$ per dlh

b. Use the two production department factory overhead rates to determine the factory overhead per unit for each product.

Product	Amount
Small glove	fill in the blank 1 of 3$ per unit
Medium glove	fill in the blank 2 of 3$ per unit
Large glove	fill in the blank 3 of 3$ per unit

3. EX.18.08

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Identifying activity bases in an activity-based cost system

Isamu Foods Inc. uses activity-based costing to determine product costs. For each activity listed in the left column, select an appropriate activity base from the right column. You may use items in the dropdown list more than once or not at all.

Activity	Activity Base
Cafeteria	Engineering change ordersNumber of customer returnsNumber of employeesNumber of inventory transactionsNumber of material moves
Customer return processing	Kilowatt hours usedNumber of customer returnsNumber of inventory transactionsNumber of material movesNumber of payroll checks processed
Electric power	Kilowatt hours usedNumber of inspectionsNumber of material movesNumber of production ordersNumber of setups
Human resources	Number of customer returnsNumber of employeesNumber of inspectionsNumber of material movesNumber of payroll checks processed
Inventory control	Number of accounting reportsNumber of customer returnsNumber of employeesNumber of inventory transactionsNumber of payroll checks processed
Invoice and collecting	Number of accounting reportsNumber of customer ordersNumber of material movesNumber of payroll checks processedNumber of setups
Machine depreciation	Kilowatt hours usedNumber of employeesNumber of inspectionsNumber of machine hoursNumber of material moves
Materials handling	Engineering change ordersKilowatt hours usedNumber of employeesNumber of material movesNumber of purchase orders
Order shipping	Kilowatt hours usedNumber of customer ordersNumber of inspectionsNumber of machine hoursNumber of material moves
Payroll	Number of employeesNumber of machine hoursNumber of payroll checks processedNumber of purchase ordersNumber of setups
Performance reports	Number of employeesNumber of machine hoursNumber of performance reportsNumber of purchase ordersNumber of setups
Production control	Number of accounting reportsNumber of employeesNumber of customer ordersNumber of machine hoursNumber of production orders
Production setup	Kilowatt hours usedNumber of customer ordersNumber of material movesNumber of purchase ordersNumber of setups
Purchasing	Number of customer returnsNumber of employeesNumber of material movesNumber of machine hoursNumber of purchase ordersNumber of sales orders
Quality control	Engineering change ordersNumber of inspectionsNumber of inventory transactionsNumber of machine hoursNumber of production ordersNumber of sales orders
Sales order processing	Engineering change ordersNumber of inspectionsNumber of inventory transactionsNumber of machine hoursNumber of production ordersNumber of sales orders

4. EX.18.19

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Activity-based costing and customer profitability

Metroid Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate:

Customer Service Activity	Activity Base	Activity Rate
Bid preparation	Number of bid requests	$420 per request
Shipment	Number of shipments	$90 per shipment
Support standard items	Number of standard items ordered	$30 per std. item
Support nonstandard items	Number of nonstandard items ordered	$180 per nonstd. item

Assume that the company had the following gross profit information for three representative customers:

Line Item Description	Customer 1	Customer 2	Customer 3
Revenues	$130,000	$210,000	$180,000
Cost of goods sold	(81,900)	(113,400)	(90,000)
Gross profit	$48,100	$96,600	$90,000
Gross profit as a percent of sales	37%	46%	50%

The administrative records indicated that the activity-base usage quantities for each customer were as follows:

Activity Base	Customer 1	Customer 2	Customer 3
Number of bid requests	15	40	60
Number of shipments	25	55	50
Number of standard items ordered	20	35	52
Number of nonstandard items ordered	6	65	85

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a. create a customer profitability report dated for the year ended December 31, 20Y8, showing (1) the operating income after customer service activities, (2) the gross profit as a percent of sales, and (3) the operating income after customer service activities as a percent of sales. Prepare the report with a column for each customer. Round percentages to the nearest whole percent.

Description	Customer 1	Customer 2	Customer 3
Revenues	$Revenues	$Revenues	$Revenues
Cost of goods sold	Cost of goods sold	Cost of goods sold	Cost of goods sold
Gross profit	$Gross profit	$Gross profit	$Gross profit
Customer service activities:
Bid preparation	$Bid preparation	$Bid preparation	$Bid preparation
Shipment	Shipment	Shipment	Shipment
Support standard items	Support standard items	Support standard items	Support standard items
Support nonstandard items	Support nonstandard items	Support nonstandard items	Support nonstandard items
Total customer service activities	$Total customer service activities	$Total customer service activities	$Total customer service activities
Operating income after customer service activities	$Operating income after customer service activities	$Operating income after customer service activities	$Operating income after customer service activities
Gross profit as a percent of sales	Gross profit as a percent of sales%	Gross profit as a percent of sales%	Gross profit as a percent of sales%
Operating income after customer service activities as a percent of sales	Operating income after customer service activities as a percent of sales%	Operating income after customer service activities as a percent of sales%	Operating income after customer service activities as a percent of sales%

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b. Interpret the report in part (a).

The gross profit as a percent of sales indicated that fill in the blank 1 of 7

Customer 1 Customer 2 Customer 3

was the least profitable, while fill in the blank 2 of 7

Customer 1 Customer 2 Customer 3

was the most profitable. After deducting the activity costs associated with customer service activities, fill in the blank 3 of 7

Customer 1 Customer 2 Customer 3

became the least profitable, while fill in the blank 4 of 7

Customer 1 Customer 2 Customer 3

became nearly as profitable as Customer 2. The reason is because fill in the blank 5 of 7

Customer 1 Customer 2 Customer 3

consumed much more customer service activities than did the other customers. Apparently, fill in the blank 6 of 7

Customer 1 Customer 2 Customer 3

ordered nonstandard products that required specialized bid requests. In addition, fill in the blank 7 of 7

Customer 1 Customer 2 Customer 3

required more shipments, indicating smaller shipments to a customer's location, rather than a few large shipments.

5. EX.18.21

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Activity-Based Costing for a Service Company

Five-Stars Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report:

Line Item Description	Auto	Workers' Compensation	Homeowners
Premium revenue	$5,800,000	$6,250,000	$8,200,000
Estimated claims	(4,060,000)	(4,375,000)	(5,740,000)
Underwriting income	$1,740,000	$1,875,000	$2,460,000
Underwriting income as a percent of premium revenue	30%	30%	30%

Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:

Activity	Activity Rates
New policy processing	$60 per new policy
Cancellation processing	$100 per cancellation
Claim audits	$250 per claim audit
Claim disbursements processing	$80 per disbursement
Premium collection processing	$20 per premium collected

Activity-base usage data for each line of insurance were retrieved from the corporate records as follows:

Line Item Description	Auto	Workers' Compensation	Homeowners
Number of new policies	2,000	1,400	4,100
Number of canceled policies	490	300	2,200
Number of audited claims	390	110	950
Number of claim disbursements	470	220	850
Number of premiums collected	8,500	1,900	15,200

Question Content Area

a. Complete the product profitability report through the administrative activities. Determine the operating income as a percent of premium revenue. Rounded to the nearest whole percent.

Description	Auto	Workers' Comp.	Homeowners
Premium revenue	$Premium revenue	$Premium revenue	$Premium revenue
Estimated claims	Estimated claims	Estimated claims	Estimated claims
Underwriting income	$Underwriting income	$Underwriting income	$Underwriting income
Administrative activities:
New policy processing	$New policy processing	$New policy processing	$New policy processing
Cancellation processing	Cancellation processing	Cancellation processing	Cancellation processing
Claim audits	Claim audits	Claim audits	Claim audits
Claim disbursements processing	Claim disbursements processing	Claim disbursements processing	Claim disbursements processing
Premium collection processing	Premium collection processing	Premium collection processing	Premium collection processing
Total administrative expenses	$Total administrative expenses	$Total administrative expenses	$Total administrative expenses
Operating income	$Operating income	$Operating income	$Operating income
Operating income as a percent of premium revenue	Operating income as a percent of premium revenue%	Operating income as a percent of premium revenue%	Operating income as a percent of premium revenue%

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b. Interpret the report.

All three insurance lines have fill in the blank 1 of 8

differentthe same

percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they consume fill in the blank 2 of 8

administrativeclaims

activities. The fill in the blank 3 of 8

HomeownersWorkers' CompensationAuto

insurance line has the fill in the blank 4 of 8

leasthighest

profitability because it has fill in the blank 5 of 8

smallerlarger

and fill in the blank 6 of 8

moreless

frequent claims that require more auditing and disbursement processing than do the other two lines. In addition, the Homeowners line has a much higher rate of cancellation relative to the other two lines (over 50% of new policies). Lastly, the Homeowners line has more premium collections compared to the other two lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the fill in the blank 7 of 8

HomeownersWorkers' CompensationAuto

line consumes the fill in the blank 8 of 8

mostfewest

administrative activities, causing it to be very profitable. The Auto line is in between these two.

6. EX.18.03.ALGO

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Single plantwide factory overhead rate

Scrumptious Snacks Inc. manufactures three types of snack foods: tortilla chips, potato chips, and pretzels. The company has budgeted the following costs for the upcoming period:

Line Item Description	Amount
Factory depreciation	$17,995
Indirect labor	44,597
Factory electricity	5,086
Indirect materials	10,562
Selling expenses	25,037
Administrative expenses	14,083
Total costs	$117,360

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:

Types of Snacks	Budgeted Volume (Cases)	Processing Hours per Case
Tortilla chips	4,200	0.15
Potato chips	5,700	0.10
Pretzels	6,300	0.12
Total	16,200

If required, round all per-case answers to the nearest cent.

a. Determine the single plantwide factory overhead rate. fill in the blank 1 of 1$ per processing hour

b. Use the overhead rate in (a) to determine the amount of total and per-case overhead allocated to each of the three products under generally accepted accounting principles.

Types of Snacks	Total Factory Overhead	Per Unit Factory Overhead Case
Tortilla chips	fill in the blank 1 of 7$	fill in the blank 2 of 7$
Potato chips	fill in the blank 3 of 7	fill in the blank 4 of 7
Pretzels	fill in the blank 5 of 7	fill in the blank 6 of 7
Total	fill in the blank 7 of 7$

7. EX.18.06

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Single plantwide and multiple production department factory overhead rate methods and product cost distortion

Eclipse 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 Eclipse:

Department	Amount
Assembly Department	$280,000
Testing Department	800,000
Total	$1,080,000

Direct machine hours were estimated as follows:

Department	Amount
Assembly Department	4,000 hours
Testing Department	5,000
Total	9,000 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:

Departments	Commercial	Residential
Assembly Department	2.0 dmh	3.0 dmh
Testing Department	6.0	1.5
Total machine hours per unit	8.0 dmh	4.5 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 fill in the blank 1 of 2$ per unit Residential fill in the blank 2 of 2$ 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 fill in the blank 1 of 2$ per unit Residential fill in the blank 2 of 2$ per unit

c. Recommend to management a product costing approach, based on your analyses in (a) and (b). 1. The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly overheads than residential products. 2. The management should consider single plantwide factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that the overheads are applied evenly based on the direct labor hours. 3. The management could consider either multiple production department factory overhead rate method or the single plantwide rate, as both these methods have the same effect on the final costs. fill in the blank 1 of 1

123

8. EX.18.07.ALGO

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Single plantwide and multiple production department factory overhead rate methods and product cost distortion

The management of Nova Industries Inc. manufactures gasoline and diesel engines through two production departments, Fabrication and Assembly. Management needs accurate product cost information in order to guide product strategy. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering the multiple production department factory overhead rate method. The following factory overhead was budgeted for Nova:

Department	Amount
Fabrication Department factory overhead	$430,000
Assembly Department factory overhead	172,000
Total	$602,000

Direct labor hours were estimated as follows:

Department	Amount
Fabrication Department	4,300 hours
Assembly Department	4,300
Total	8,600 hours

In addition, the direct labor hours (dlh) used to produce a unit of each product in each department were determined from engineering records, as follows:

Production Departments	Gasoline Engine	Diesel Engine
Fabrication Department	1.20 dlh	2.80 dlh
Assembly Department	2.80	1.20
Direct labor hours per unit	4.00 dlh	4.00 dlh

a. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method, using direct labor hours as the activity base. Gasoline engine fill in the blank 1 of 2$ per unit Diesel engine fill in the blank 2 of 2$ per unit

b. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the multiple production department factory overhead rate method, using direct labor hours as the activity base for each department. Gasoline engine fill in the blank 1 of 2$ per unit Diesel engine fill in the blank 2 of 2$ per unit

c. Recommend to management a product costing approach, based on your analyses in (a) and (b). Management should select the fill in the blank 1 of 5

multiple departmentsingle plantwide

factory overhead rate method of allocating overhead costs. The fill in the blank 2 of 5

multiple departmentsingle plantwide

factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours fill in the blank 3 of 5

equallydifferently

. Thus, the fill in the blank 4 of 5

multiple departmentsingle plantwide

rate method avoids the cost distortions by accounting for the overhead fill in the blank 5 of 5

plantwidein each production department separately

.

9. EX.18.10.ALGO

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Product costs using activity rates

Body-Solid Inc. manufactures elliptical exercise machines and treadmills. The products are prouced in its Fabrication and Assembly production departments. In addition to production activities, several other activities are required to produce the two products. These activities and their associated activity rates are as follows:

Activity	Activity Rate
Fabrication	$30 per machine hour
Assembly	$10 per direct labor hour
Setup	$55 per setup
Inspecting	$21 per inspection
Production scheduling	$11 per production order
Purchasing	$8 per purchase order

The activity-base usage quantities and units produced for each product were as follows:

Activity Base	Elliptical Machines	Treadmill
Machine hours	1,754	1,035
Direct labor hours	390	152
Setups	59	18
Inspections	699	419
Production orders	78	16
Purchase orders	173	106
Units produced	296	198

Use the activity rate and usage information to determine the total activity cost and activity cost per unit for each product. If required, round the per unit answers to the nearest cent.

Product	Total Activity Cost	Activity Cost Per Unit
Elliptical machines	$fill in the blank 1	$fill in the blank 2
Treadmill	$fill in the blank 3	$fill in the blank 4

10. EX.18.20.ALGO

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Activity-based costing for a service company

Crosswinds Hospital plans to use activity-based costing to assign hospital indirect costs to the care of patients. The hospital has identified the following activities and activity rates for the hospital indirect costs:

Activity	Activity Rate
Room and meals	$168 per day
Radiology	$237 per image
Pharmacy	$57 per physician order
Chemistry lab	$108 per test
Operating room	$740 per operating room hour

The activity usage information associated with the two patients is as follows:

Line Item Description	Abel Putin	Cheryl Umit
Number of days	2 days	8 days
Number of images	5 images	5 images
Number of physician orders	5 orders	7 orders
Number of tests	3 tests	6 tests
Number of operating room hours	3.5 hours	6.5 hours

a. Determine the activity cost associated with each patient. Abel Putin fill in the blank 1 of 2$ Cheryl Umit fill in the blank 2 of 2$

b. Why is the total activity cost different for the two patients? fill in the blank 1 of 2

Abel PutinCheryl Umit

apparently had a different condition that required more extensive treatment. Thus, the activity cost to fill in the blank 2 of 2

Abel PutinCheryl Umit

is more than the activity cost of the other patient.