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EXERCISE 6-12. Problems Associated with Too Few Cost Pools [LO 4] Mott Manufacturing allocates factory overhead using one cost pool with direct labor hours as the allocation base.Mott has two production departments, P1 and P2.The new accountant at Mott estimates that next year, the total factory overhead costs will be $5,000,000, and approximately 500,000 direct labor hours will be worked.The accountant also estimates that P1 will use 150,000 direct labor hours,and there will be about $3,000,000 in overhead costs in P1. P2 will use 350,000 direct labor hours, and there will be $2,000,000 in overhead costs in P2. Mott has two products, A1 and B1. It takes two direct labor hours in P1 and three direct labor hours in P2 to complete one unit of A1. It takes one direct labor hour in P1 and four direct labor hours in P2 to complete one unit of B1. Required Which product will be undercosted and which will be overcosted with the one-cost-pool system? Support your answer with appropriate calculations. EXERCISE 6-14. Activity-Based Costing [LO 5] The following are six cost pools established for a company using activity-based costing.The pools are related to the company's products using cost drivers. Cost Pools: 1. Inspection of raw materials 2. Production equipment repairs and maintenance 3. Raw materials storage 4. Plant heat, light,water, and power 5. Finished product quality control 6. Production line setups Required For each of the preceding cost pools, identify a possible cost driver. PROBLEM 6-6. Allocating Service Department Costs [LO 3] World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance.The service department costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departments: (1) domestic flights and (2) international flights.World does not differentiate between fixed and variable costs in making allocations. The following data relate to the allocations: Budgeted Data Costs Air Miles Ticketing $5,000,000 Baggage handling $3,000,000 Engine maintenance $7,000,000 Domestic flights 6,000,000 International flights 24,000,000 Required a. Allocate the service department costs to the revenue-producing departments using air miles as the allocation base. b. Evaluate the cause-and-effect relationship resulting from the use of air miles as the allocation base. In which of the cost pools do you think the cause-and-effect relationship is the strongest? Suggest alternative allocation bases for the two remaining cost pools with the weakest cause-and-effect relationship. PROBLEM 6-12. Activity-Based Costing [LO 5] The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake. It also makes 12 different kinds of cheesecake as well as many other types of bakery items. It has recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to its strawberry cheesecake and the ABC cost pools: Strawberry Cheesecake: Annual production 17,500 units Direct materials per unit $6 Direct labor per unit $2 Cost Pool Cost Cost Driver Materials ordering $ 72,000 Number of purchase orders Materials inspection 75,000 Number of receiving reports Equipment setup 105,000 Number of setups Quality control 69,000 Number of inspections Other 100,000 Direct labor cost Total manufacturing overhead $421,000 Annual activity information related to cost drivers: Strawberry Cost Pool All Products Cheesecake Materials ordering 8,000 orders 100 Materials inspection 375 receiving reports 60 Equipment setup 3,000 setups 30 Quality control 3,000 inspections 150 Other $2,000,000 direct labor $35,000 Required a. Calculate the overhead rate per unit of activity for each of the five cost pools. b. Calculate the total overhead assigned to the production of the strawberry cheesecake. c. Calculate the overhead cost per unit for the strawberry cheesecake. Round to three decimal places. d. Calculate the total unit cost for the strawberry cheesecake. Round to three decimal places. e. Suppose that the Divine Cheesecake Shoppe allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the overhead rate per direct labor dollar and the per unit overhead assigned to the strawberry cheesecake. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach. Round to three decimal places. PROBLEM 6-17. (Appendix) Activity-Based Management [LO 6] Primary Savings and Loan of Denver is conducting an ABM study of its teller operations. In this regard, the company has identified the following major activities performed by bank tellers: 1. Process deposits 2. Process withdrawals 3. Process requests for certificates of deposit 4. Answer customer questions related to balances, overdrafts, interest rates, etc. 5. Print out customer activity statements 6. Provide access to safe deposit boxes 7. Reconcile cash drawer The company benchmarked its operations against banks in other cities and has found that it has many more tellers in comparison to banks of similar size.Further, the company has a relatively unsophisticated Web site and call center. Required a. How do the company's Web site and call center affect the demand for teller activities and the cost of teller services? b. Identify two or three ways that technology can be used to reduce the cost of teller services
