P18-3B Luxury Furniture designs and builds factory-made, premium, wood armoires for homes. All are of white oak. Its budgeted manufacturing overhead costs for the year 2017 are as follows.

Overhead Cost Pools Amount

Purchasing $ 45,000

Handling materials 50,000

Production (cutting, milling, finishing) 130,000

Setting up machines 85,000

Inspecting 60,000

Inventory control (raw materials and finished goods) 80,000

Utilities 100,000

Total budgeted overhead costs $550,000

For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2017, materials cost of $500,000 were budgeted. Jim Brigham, owner-manager of Luxury Furniture, recently directed his accountant, Bob Borke, to implement the activity-based costing system that he has repeatedly proposed. At Jim Brigham?s request, Bob and the production foreman

identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Overhead Cost Pools Activity Cost Drivers Expected Use of Cost Drivers

Purchasing Number of orders 500

Handling materials Number of moves 5,000

Production (cutting, milling, finishing) Direct labor hours 65,000

Setting up machines Number of setups 1,000

Inspecting Number of inspections 4,000

Inventory control (raw

materials and finished goods) Number of components 40,000

Utilities Square feet occupied 50,000

Debbie Steiner, sales manager, has received an order for 12 luxury armoires from Thom?s Interior Design. At Debbie?s request, Bob prepares cost estimates for producing 12 armoires so Debbie can submit a contract price per armoire to Thom?s. He accumulates the following data for the production of 12 armoires.

Direct materials $5,200

Direct labor $3,500

Direct labor hours 200

Number of purchase orders 3

Number of material moves 32

Number of machine setups 4

Number of inspections 20

Number of components 640

Number of square feet occupied 320

Instructions

(a) Compute the predetermined overhead rate using traditional costing with materials cost as the basis.

(b) What is the manufacturing cost per armoire under traditional costing?

(c) What is the manufacturing cost per armoire under the proposed activity-based costing? (Prepare all of the necessary schedules.)

(d) Which of the two costing systems is preferable in pricing decisions and why?

Chapter 18 Problems: Set B P18-1BVideoPlus, Inc. manufactures two types of DVD players, a deluxe model and a standard model. The deluxe model is a multi-format progressive-scan DVD player with networking capability, Dolby digital, and DTS decoder. The standard model's primary feature is progressive-scan. Annual production is 50,000 units for the deluxe and 20,000 units for the standard. Both products require 2 hours of direct labor for completion. Therefore, total annual direct labor hours are 140,000 [2 hrs. (20,000 + 50,000)]. Expected annual manufacturing overhead is $1,050,000. Thus, the predetermined overhead rate is $7.50 ($1,050,000 140,000) per direct labor hour. The direct materials cost per unit is $42 for the deluxe model and $11 for the standard model. The direct labor cost is $18 per unit for both the deluxe and the standard models. The company's managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows. Activity Cost Pool Purchasing Receiving Assembling Testing Finishing Packing and shipping Cost Driver Orders Pounds Number of parts Number of tests Units Pounds Assign overhead using traditional costing and ABC; compute unit costs; classify activities as value- or non-valueadded. (LO 1, 2, 3) Expected Use of Estimate Expected Drivers by d Use of Product Overhea Cost d Drivers Standard Deluxe $ 126,000 400 100 300 30,000 20,000 4,000 16,000 444,000 74,000 20,000 54,000 115,000 23,000 10,000 140,000 70,000 20,000 195,0 00 80,000 18,000 $1,050,0 00 13,000 50,000 62,000 Instructions (a) Under traditional product costing, compute the total unit cost of both products. Prepare a simple comparative schedule of the individual costs by product (similar to Illustration 18-3 on page 841). (b) Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). (c) Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Include a computation of overhead cost per unit, rounding to the nearest cent.) (d) Compute the total cost per unit for each product under ABC. (e) Classify each of the activities as a value-added activity or a non-value-added activity. (f) Comment on (1) the comparative overhead cost per unit for the two products under ABC, and (2) the comparative total costs per unit under traditional costing and ABC. (a) Unit cost Standard $44 (c) Cost assigned Standard $291,375 (d) Cost/unit Standard $43.57 P18-2BKinnard Electronics manufactures two home theater systems: the Elite which sells for $1,400, and a new model, the Preferred, which sells for $1,100. The Assign overhead to production cost computed per unit under traditional costing for each model in 2017 products using ABC and evaluate decision. was as follows. Traditional Costing Elite Direct materials Preferre d (LO 2) $600 $320 Direct labor ($20 per hour) 100 Manufacturing overhead ($35 per DLH) Total per unit cost 80 140 175 $875 $540 In 2017, Kinnard manufactured 20,000 units of the Elite and 10,000 units of the Preferred. The overhead rate of $35 per direct labor hour was determined by dividing total expected manufacturing overhead of $4,900,000 by the total direct labor hours (140,000) for the two models. Under traditional costing, the gross profit on the models was Elite $525 ($1,400 - $875), and Preferred $560 ($1,100 - $540). Because of this difference, management is considering phasing out Elite and increasing production of Preferred. Before finalizing its decision, management asks Kinnard's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2017. Activity Purchasing Machine setups Machining Quality control Cost Driver Number of Orders Number of setups Estimate d Overhe ad $ 775,000 580,000 3,100,00 0 Machine hours Number of inspections Expecte d Use of Cost Drivers 25,000 20,000 100,00 0 Elite $31 29 31 89 445,000 5,000 The cost drivers used for each product were: Cost Driver ActivityBased Overhead Rate Preferred Number of Orders Number of setups 11,250 11,000 13,750 9,000 Machine hours Number of inspections 40,000 60,000 2,750 2,250 Total $25,00 0 20,000 100,00 0 5,000 Instructions (a) Elite $2,152,500 (b) Cost/unitElite $807.63 Assign overhead to products using ABC and evaluate decision. (LO 1, 2), AN (a) Assign the total 2017 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit. (b) What was the cost per unit and gross profit of each model using ABC costing? (c) Are management's future plans for the two models sound? Explain. P18-3BLuxury Furniture designs and builds factory-made, premium, wood armoires for homes. All are of white oak. Its budgeted manufacturing overhead costs for the year 2017 are as follows. Overhead Cost Pools Amount Purchasing $ 45,000 Handling materials 50,000 Production (cutting, milling, finishing) 130,000 Setting up machines 85,000 Inspecting 60,000 Inventory control (raw materials and finished goods) 80,000 Utilities 100,000 Total budgeted overhead costs $550,000 For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2017, materials cost of $500,000 were budgeted. Jim Brigham, owner-manager of Luxury Furniture, recently directed his accountant, Bob Borke, to implement the activity-based costing system that he has repeatedly proposed. At Jim Brigham's request, Bob and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools. Overhead Cost Pools Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Activity Cost Drivers Number of orders Number of moves Direct labor hours Number of setups Expected Use of Cost Drivers 500 5,000 65,000 1,000 Inspecting Inventory control (raw materials and finished goods) Utilities Number of inspections Number of components Square feet occupied 4,000 40,000 50,000 Debbie Steiner, sales manager, has received an order for 12 luxury armoires from Thom's Interior Design. At Debbie's request, Bob prepares cost estimates for producing 12 armoires so Debbie can submit a contract price per armoire to Thom's. He accumulates the following data for the production of 12 armoires. Direct materials Direct labor Direct labor hours Number of purchase orders Number of material moves Number of machine setups Number of inspections Number of components Number of square feet occupied $5,200 $3,500 200 3 32 4 20 640 320 Instructions (a) Compute the predetermined overhead rate using traditional costing with materials cost as the basis. (b) What is the manufacturing cost per armoire under traditional costing? (c) What is the manufacturing cost per armoire under the proposed activity-based costing? (Prepare all of the necessary schedules.) (d) Which of the two costing systems is preferable in pricing decisions and why? P18-4BMerando Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 600,000 gallon jugs per year of a low-cost, high-volume product called Valley Fresh. Merando also produces and sells roughly 200,000 gallons per year of a low-volume, high-cost product called Merando Valley. Merando Valley is sold in 1-liter bottles. Based on recent data, the Valley Fresh product has not been as profitable as Merando Valley. Management is considering dropping the inexpensive Valley Fresh line so it can focus more attention on the Merando Valley product. The Merando Valley product already demands considerably more attention than the Valley Fresh line. Frankie Merando, president and founder of Merando, is sceptical about this idea. He points out that for many decades the company produced only the Valley Fresh line, and that it was always quite profitable. It wasn't until the company started producing the more complicated Merando Valley wine that the profitability of Valley Fresh declined. Prior to the introduction of Merando Valley, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because Merando Valley is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box, than does Valley Fresh. The company must bottle and handle 4 times as many bottles of Merando Valley to sell the same quantity as Valley Fresh, since there are approximately 4 liters in a gallon. Valley Fresh requires 1 month of aging; Merando Valley requires 1 year. Valley Fresh requires cleaning and inspection of equipment every 2,500 gallons; Merando Valley requires such maintenance every 250 gallons. (b) Cost/ armoire (traditional) $1,201.67 (c) Cost/ armoire (ABC) $1,020.83 Assign overhead costs using traditional costing and ABC; compare results. (LO 1, 2) Frankie has asked the accounting department to prepare an analysis of the cost per gallon using the traditional costing approach and using activity-based costing. The following information was collected. Valley Fresh $1.35 $3.60 $0.75 0.05 30,000 $1.50 0.10 20,000 Direct materials per gallon Direct labor cost per gallon Direct labor hours per gallon Total direct labor hours Activity Cost Pool Merando Valley Expected Estimated Use of Cost Driver Overhead Cost Drivers $ Grape processing Cart of grapes 146,000 8,000 Aging Total months 420,000 3,000,000 210,000 1,400,000 Bottling and corking Number of bottles Number of Labeling and boxing bottles 140,000 1,400,000 Maintain and inspect Number of 234,00 equipment 0 1,040 inspections $1,150,00 0 Expected Use of Cost Drivers per Product Valley Merando Fresh Valley 6,000 600,000 600,000 2,000 2,400,000 800,000 600,000 800,000 240 800 Instructions Answer each of the following questions. (Round all calculations to three decimal places.) (a) Cost/gallonV.F. $3.25 (c) Cost/gallonV.F. $0.663 Assign overhead costs to services using traditional costing and ABC; compute overhead rates and unit costs; compare results. (LO 1, 2, 3, 4) (a) Under traditional product costing using direct labor hours, compute the total manufacturing cost per gallon of both products. (b) Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver). (c) Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per gallon. (d) Compute the total manufacturing cost per gallon for both products under ABC. (e) Write a memo to Frankie Merando discussing the implications of your analysis for the company's plans. In this memo, provide a brief description of ABC as well as an explanation of how the traditional approach can result in distortions. P18-5BSmith and Jones is a law firm that serves both individuals and corporations. A controversy has developed between the partners of the two service lines as to who is contributing to greater profits. The area of contention is the assignment of overhead. The individual partners argue for assigning overhead on the basis of 30% of direct labor dollars, while the corporate partners argue for implementing activity-based costing. The partners agree to use next year's budgeted data for purposes of analysis and comparison. The following overhead data are collected to develop the comparison. Expected Use of Cost Drivers per Service Activity Cost Pool Cost Driver Employee training Direct labor dollars Typing and secretarial Number of reports/forms Computing Estimated Overhead Expected Use of Cost Drivers Corporat Individu e al $900,00 0 $700,000 $120,000 $1,600,000 60,000 2,000 500 1,500 Number of minutes 130,000 40,000 17,000 23,000 Facility rental Number of employees 100,000 25 14 11 Travel Per expense reports 70,000 Direct 48,000 22,000 Instructions (b) (2) Cost assigned- Individual $238,250 (c) Difference Corporate $28,250 (a) Using traditional product costing, compute the total overhead cost assigned to both services (individual and corporate) of Smith and Jones. (b) (1) Using activity-based costing, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). (2) Prepare a schedule assigning each activity's overhead cost pool to each service based on the use of the cost drivers. (c) Comment on the comparative overhead for the two service lines under both traditional costing and ABC