183.Demski Company has used a two-stage cost allocation system for many years. In the first stage, plant overhead costs are allocated to two production departments, P1 and P2, based on machine hours. In the second stage, Demski uses direct labor hours to assign overhead costs from the production departments to individual products A and B.

Budgeted factory overhead costs for the year are $300,000. Both the budgeted and actual machine hours in P1 and P2 are 12,000 and 28,000 hours, respectively.

After attending a seminar to learn the potential benefits of adopting an activity-based costing system (ABC), Ted Demski, the president of Demski Company, is considering implementing an ABC system. Upon his request, the controller at Demski Company has compiled the following information for analysis:

Demski manufactures two types of product, A and B, for which the following information is available:

Required:

1. Determine the unit cost for each of the two products using the traditional two-stage allocation method. Round calculations to 2 decimal places.

2. Determine the unit cost for each of the two products using the proposed ABC system. 3. Compare the unit manufacturing costs for product A and product B computed in requirements 1 and 2.

(a) Why do two the cost systems differ in their total cost for each product? (b) Why might these differences be important to the Demski Company?

184.Swenson Company manufactures 4,000 units of Deluxe Product and 20,000 units of Regular Product each year. The company currently uses direct labor-hours to assign overhead cost to products. The pre-determined overhead rate is:

Suppose, however, that factory overhead costs are actually caused by the five activities listed below:

Also suppose the following transaction data has been collected:

Required:

Using the activity-based costing method to calculate unit costs of Deluxe and Regular products, and compare them with the current direct labor hours-based costing system.

185.Moss Manufacturing has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by QC inspectors at the end of each major process, and the companys ten QC inspectors were charged as direct labor to the operation or job. In an effort to improve efficiency and quality, a computerized video QC system was purchased for $250,000. The system consists of a minicomputer, 15 video cameras, other peripheral hardware, and software.

The new system used cameras stationed by QC engineers at key points in the production process. Each time an operation changes or there is a new operation, the cameras are moved, and a new master picture is loaded into the computer by a QC engineer. The camera takes pictures of the units in process, and the computer compares them to the picture of a good unit. Any differences are sent to a QC engineer who removes the bad units and discusses the flaws with the production supervisors. The new system has replaced the ten QC inspectors with two QC engineers.

The operating costs of the new QC system, including the salaries of the QC engineers, have been included as factory overhead in calculating the companys volume-based factory overhead rate which is based on direct labor dollars.

The companys president is confused. His vice president of production has told him how efficient the new system is, yet there is a large increase in the factory overhead rate. The computation of the rate before and after automation is shown below.

Three hundred percent, lamented the president, How can we compete with such a high factory overhead rate?

Required:

1. a. Define factory overhead, and cite three examples of typical costs that would be included in factory overhead.

b. Explain why companies develop factory overhead rates.

2. Explain why the increase in the overhead rate should not have a negative financial impact on Moss Manufacturing.

3. Explain, in the greatest detail possible, how Moss Manufacturing could change its overhead accounting system to eliminate confusion over product costs.

186.The controller for Ocean Sailboats Inc., a company which uses an automated process to make sailboats, established the following overhead cost pools and cost drivers:

A recent order for sailboats used:

Required:

1. What is the overhead rate per machine hour if the number of machine hours is used as a single cost driver under traditional costing system?

2. Utilizing traditional costing, how much overhead is assigned to the order based on machine hours as a single cost driver?

3. Utilizing ABC, how much total overhead is assigned to the order?

187.Skateline Inc. designs and manufactures roller skates. The following data pertain to two of its major customers: FantasticSkates and SkateToday.

Required: Compare the net proceeds from each customer to Skateline Inc. 30 days after sale. (rounded to nearest dollar for each step where applicable).

188.Certo Health Products was formed two years ago to produce and distribute a newly-patented protein supplement. Two variations of the original supplement have since been developed and introduced for general sale. The three products are processed in essentially the same way, but Ann Marshall, the owner of Certo, anticipates that a half-dozen new products will be developed for sale in the next two years. These products will not be variations of the patented supplement, and will require a different production process other than the one currently used. Ann has asked you to review the current use of a single volume-based rate and explain the arguments for using departmental rates with activity-based drivers.

189.Cost Pools and Cost Drivers Based on a recent study of its manufacturing operations Johnston Manufacturing Corporation has identified six resource consumption cost drivers. These cost drivers and their budgeted activity levels for the coming year are:

The firm has budgeted the following costs for the year:

With the exception of the factory space cost pool, which uses machine-hours as the activity consumption cost driver, other cost pools have identical resource and activity consumption cost drivers.

Required:

1. Identify the most appropriate activity cost pool for each of the cost items and cost driver for each activity cost pool you identified.

2. Johnston has received a request to quote the price for 4,000 units of a new product. The production will require 100 engineering-hours and 4,250 machine-hours. What is the manufacturing overhead per unit the firm should use in determining the price?

190.Volume-Based Costing Versus ABC: Gorden Company produces a variety of electronic products. One of its plants produces two laser printers, Speedy and Deluxe. At the beginning of 2013, the following data were prepared for this plant:

The unit overhead cost is calculated using the predetermined overhead application rate based on direct labor-hours.

Upon examining the data, the marketing manager was particularly impressed with the per-unit profitability of the Deluxe printer and suggested that more emphasis be placed on producing and selling this product. The plant supervisor objected to this strategy, arguing that the Deluxe model required a very delicate manufacturing process. The supervisor believed that the cost of the Deluxe printer was likely to be much higher than reported.

The controller suggests an activity-based costing system and provides the following budget data pertaining to the period:

* Cost per unit of cost driver

Required:

1. Using the projected data based on the firms current costing system, calculate gross profit per unit and gross profit percentage for each product. Round calculations to 2 decimal places.

2. Using the suggested multiple cost drivers overhead rates, calculate the overhead cost per unit for each product and determine gross profit per unit and gross profit percentage for each product.

3. Based on your results, evaluate the suggestion of the marketing manager to emphasize the Deluxe model.

4. How does ABC contribute to Gordens competitive advantage?

191.

Steel points out that activities cost money. Two customers who request different service activities most likely are not costing the firm the same.

Required:

1. Using activity-based costing, compute the charges per unit of service activities. 2. Using activity-based costing, compute the total distribution costs for each of the customers. 3. Is the City of Albion a more profitable customer? 4. Is Omega International a better customer for Boston Depot?

Customer Profitability AnalysisBoston Depot sells office supplies to area corporations andorganizations. Tom Delayne, founder and CEO, has been disappointed with the operating results and the profit margin for the last two years. Business forms are mostly a commodity business with low profit margins. To increase profit margins and gain competitive advantages, Delayne introduced Desk-Top Delivery service. The business seems to be as busy as ever. Yet, the operating income has been declining. To help identify the root cause of declining profits, he decided to analyze the profitability of two of the firms major customers: Omega International (OI) and City of Albion (CA).

According to the customer profitability analysis that Boston Depot conducts regularly, Boston Depot has the same amount of total sales with both OI and CA. However, the firm earns a higher gross margin and gross margin ratio from CA than those from the sales to OI, as demonstrated here:

Boston Depot adds a flat 17.5 percent to all sales for expenses incurred in such activities as handling customers requests, pick-packing, order delivery, warehousing, and data entry. However, not all customers require the same level of services. Operation Manager, Jamie Steel, points out that CA has been a much heavier service user than OI. She shows the following data to support her belief:

Controller Rod Jay has been investigating ways to determine the costs of performing various activities. He summarized his findings:

192.Customer Profitability Analysis Spring Company collected the following data pertaining to its activities

with selected customers.

Spring Company mails monthly statements on or before the first day of each month. HS pays all of its account payables within the payment discount periods. Adventix does not take the early payment discounts. In fact, the company pays half of its accounts on the date that these accounts are due and pays the remainder at the end of the following month. Baldwin also does not take advantage of discounts for early payments. However, it pays its accounts on the specified due date. Cost of goods sold is sixty percent of gross sales price. Joan Lieberman, the controller of Spring Company, has estimated that the cost of working capital is approximately 2 percent per month. Lieberman also gathered the following cost data:

Required:

Prepare and interpret a customer profitability analysis for Spring Company. How does it help Spring Company become more competitive and profitable?

193.Volume-based Versus ABC Overhead Rate: Medical Arts Hospital (MAH) uses a hospital-wide

overhead rate based on nurse-hours. The intensive care unit (ICU), which has 30 beds, applies over-head using patient-days. Its budgeted cost and operating data for the year follow:

Required:

1. Calculate the ICUs overhead costs for the month of June using

a. The hospital-wide rate b. The ICU department-wide rate

c. The cost driver rates for the ICU department

Explain the differences and determine which overhead assignment method is more appropriate