CHAPTER 3

TRADITIONAL COST MANAGEMENT SYSTEMS

TRUE/FALSE

1. Job order costing estimates the costs of a customer order.

a. True
b. False

2. Job order costing is commonly used to estimate costs in pharmaceutical manufacturing.

a. True
b. False

3. It is inappropriate for service organizations such as public accounting firms to use job order
costing.
a. True
b. False

4. In job order costing, only direct costs are used to determine the cost of a job.
a. True
b. False

5. A job bid sheet includes an amount for profit when determining the bid price.
a. True
b. False

6. The normal level of a cost driver is the long-term capacity made available by the amount of
resources committed to a support activity.
a. True
b. False

7. Determining cost pools and realistic cost driver rates is a relatively simple process.
a. True
b. False

8. Several cost driver rates may apply to a single cost pool.

a. True
b. False

9. In a job order costing system, a cost driver rate is used to apply indirect manufacturing
costs to a specific product.
a. True
b. False

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10. In a normal job order costing system even though the cost driver rate is based on estimates,
support costs are applied to products based on actual levels of activity.
a. True
b. False

11. When demand for a product is low, a higher markup should be used since a larger share of
the capacity-related costs needs to be allocated to each product.
a. True
b. False

12. A greater number of cost pools always results in greater costing accuracy.
a. True
b. False

13. In job order costing, the total amount of support costs will be allocated to individual
products or jobs whether a single cost pool or multiple cost pools is used.
a. True
b. False

14. In job order costing, individual jobs and products will be allocated the same amount of
support costs whether a single cost pool or multiple cost pools is used.
a. True
b. False

15. If cost driver rates were based on actual short-term usage, periods of lower demand would
result in higher cost driver rates.
a. True
b. False

16. A single cost driver rate will usually distort product costs in a business with routine and
specialized services.
a. True
b. False

17. By comparing the job bid sheet with the job cost sheet, differences between actual support
costs and estimated support costs can be compared.
a. True
b. False

18. In a multistage-process costing system, the first step is to assess costs for each stage of the
process.
a. True
b. False

19. Direct materials and direct labor are referred to as conversion costs because these costs are
consumed when manufacturing a product.
a. True
b. False

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20. Job order and multistage-process costing systems all use predetermined cost driver rates to
assign costs to jobs or products.
a. True
b. False

21. Multistage-process costing is used to allocate manufacturing costs to unique batches of a

product.
a. True
b. False

22. Job order costing and multistage-process costing share the same objective of estimating
product costs.
a. True
b. False

23. Multistage-process costing systems are used when products manufactured are relatively
homogeneous and there are few and relatively small differences in the production
requirements for different products.
a. True
b. False

24. While costs are measured for individual jobs in a job order costing system, they are
measured for individual process stages in a multistage-process costing system.
a. True
b. False

25. (Appendix) The direct allocation method recognizes possible interactions between service
departments when allocating service department costs to production departments.
a. True
b. False

26. (Appendix) Conventional product-costing systems assign indirect costs to products in two
stages. In the first stage, production department costs are allocated to the service
departments.
a. True
b. False

27. (Appendix) Conventional two-stage costing systems are likely to undercost low-volume
products.
a. True
b. False

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MULTIPLE CHOICE

28. A cost management system that measures the cost of products, services, and customers is:
a. a job order costing system
b. a process costing system
c. an activity-based costing system
d. All of the above are correct.

29. Job order costing information is used by managers:

a. to make decisions and strategy
b. for planning and control
c. for cost management
d. All of the above are correct.

30. The primary reason managers want to understand the cost of individual products is to
assess:
a. product profitability
b. customer satisfaction
c. employee skill development
d. financial growth

31. __________ costing is used by a business to price unique products for different jobs.
a. Activity-based
b. Job order
c. Process
d. Traditional

32. Job order costing:

a. can only be used in manufacturing
b. records the flow of costs for each customer
c. allocates an equal amount of cost to each unit made during a time period
d. is commonly used when each unit of output is identical

33. Problems with accurate costing occur when:

a. incorrect job numbers are recorded on source documents
b. bar coding is used to record materials used on the job
c. a computer screen requests an employee number before that employee is able to work
on information related to a specific job
d. All of the above occur.

34. A job that shows low profitability may be the result of:
a. wasting direct materials
b. inefficient direct manufacturing labor
c. underpricing the job
d. All of the above are correct.

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35. A job bid sheet and a job cost sheet both include:
a. estimated direct material costs
b. actual direct labor costs
c. estimated support costs
d. All of the above are correct.

36. On a job bid sheet, the bid price includes estimated amounts for:
a. profit
b. administrative costs
c. direct materials
d. All of the above are correct.

37. A job cost sheet details the:

a. direct materials purchased and paid
b. direct labor costs incurred
c. indirect labor costs incurred
d. actual support costs incurred

38. A job cost sheet uses information from:

a. the sales invoice regarding the pricing of the job
b. a purchase order to record raw material purchases from suppliers
c. a receiving report that indicates the type and quantity of each item received in an
order from a supplier
d. a labor time card to record an employee’s wage rate and hours spent on a particular
job

39. In a job order costing system, a manufacturing firm typically uses a cost driver rate to
estimate the __________ used for a job.
a. direct materials
b. direct labor
c. support costs
d. total costs

40. The normal cost of support activities includes:

a. costs of resources committed to the particular activity
b. amounts for additional overtime payments
c. allowances for idle time
d. All of the above are correct.

41. For each cost pool, a(n) __________ is identified that is the primary factor causing support
costs to increase during the accounting period.
a. activity
b. job
c. level
d. process

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42. For the activity cost driver rate, support costs __________ should be used in the
calculation.
a. actually consumed
b. made available
c. based on a seasonal average
d. None of the above is correct.

43. The predetermined support cost driver rate is calculated using __________ support costs.
a. actual
b. allocated
c. direct
d. estimated

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 44 AND 45.

Rupe Company has two departments: Machining and Assembly. The following estimates are for
the coming year:
Machining Assembly
Direct labor hours 10,000 50,000
Machine hours 40,000 20,000
Support costs $200,000 $400,000

44. A single predetermined cost driver rate based on total plant direct labor hours is:
a. $ 8 per direct labor hour
b. $10 per direct labor hour
c. $20 per direct labor hour
d. None of the above is correct.

45. A predetermined cost driver rate for the Machining Department based on the number of
machine hours in that department is:
a. $ 5 per machine hour
b. $10 per machine hour
c. $20 per machine hour
d. None of the above is correct.

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 46 AND 47.

For 2005, Alex’s Animal Supply Manufacturing uses a normal job order costing system. The
accounting records contain the following information:
Estimated manufacturing support (overhead) costs $100,000
Actual manufacturing support (overhead) costs $120,000
Estimated machine hours 20,000
Actual machine hours 25,000.
The only cost driver is machine hours.

46. Using normal job order costing, the 2005 predetermined support cost driver rate is:
a. $4.00 per machine hour
b. $4.80 per machine hour
c. $5.00 per machine hour
d. $6.00 per machine hour

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47. Using normal job order costing, the amount of support costs allocated to jobs during 2005
is:
a. $150,000
b. $125,000
c. $120,000
d. $100,000

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 48 THROUGH 50.

Kristin’s Kitty Supplies Manufacturing applies manufacturing support costs to products at a
predetermined rate of $60 per direct labor hour. A retail outlet has requested a bid on a special
order of the Toy Mouse product. Estimates for this order include: direct materials $40,000;
direct labor 500 direct labor hours @ $20 per hour; and a markup rate of 20%.

48. Support cost estimates for this special order total:

a. $10,000
b. $30,000
c. $36,000
d. None of the above is correct.

49. Estimated total product costs for this special order equal:
a. $96,000
b. $50,000
c. $80,000
d. None of the above is correct.

50. The bid price for this special order is:

a. $50,000
b. $60,000
c. $80,000
d. None of the above is correct.

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 51 AND 52.

Plastic Products Company manufactures piping and applies manufacturing support costs to
production at a predetermined rate of $15 per direct labor hour. The following data are obtained
from the accounting records for June 2005:
Direct materials $280,000
Direct labor (7,000 hours @ $11/hour) $ 77,000
Plant facility rent $ 60,000
Plant facility insurance $ 20,000
Depreciation on machinery and equipment $ 30,000
Sales commissions $ 40,000
Administrative expenses $ 50,000
51. The actual amount of manufacturing support costs incurred in June 2005 total:
a. $557,000
b. $200,000
c. $110,000
d. $ 80,000

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52. The amount of manufacturing support costs applied to all jobs during June 2005 total:
a. $ 77,000
b. $105,000
c. $110,000
d. $200,000

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 53 THROUGH 55.

Wisconsin Electronics has received an order for 1,000 specially designed TV/VCR
combinations. The following standards were compiled for this order:
Direct materials:
Part #123 $25 per TV/VCR
Part #456 $50 per TV/VCR
Direct labor: 2.0 hours per TV/VCR at $15 per hour
Manufacturing support: $40 per direct labor hour

53. The estimated direct labor cost for this order is:
a. $30,000
b. $40,000
c. $80,000
d. None of the above is correct.

54. The estimated manufacturing support cost assigned to this order totals:
a. $30,000
b. $40,000
c. $80,000
d. None of the above is correct.

55. Assume the company adds a 10% markup to arrive at a selling price. The bid price for this
order totals:
a. $203,500
b. $185,000
c. $115,500
d. None of the above is correct.

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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 56 THROUGH 59.
Wood Manufacturing is a small textile manufacturer using machine-hours as the single, plant-
wide predetermined cost driver rate to allocate manufacturing overhead costs to the various jobs
contracted during the year. The following estimates are provided for the coming year for the
company and for the Winfield High School band jacket job:

Company Winfield High School Job

Direct materials $40,000 $1,000
Direct labor $10,000 $ 200
Manufacturing support costs $30,000
Machine-hours 100,000 mh 900 mh

56. For Wood Manufacturing, what is the annual support cost driver rate?
a. $0.50
b. $0.80
c. $0.30
d. $33.33

57. What amount of manufacturing support costs will be allocated to the Winfield job?
a. $270
b. $720
c. $450
d. $30,000

58. What are the total manufacturing costs of this job?

a. $1,200
b. $1,470
c. $1,650
d. $1,920

59. What is the bid price for the Winfield High School Job if the company uses a 40% markup
of total manufacturing costs?
a. $2,310
b. $588
c. $1,680
d. $2,058

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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 60 THROUGH 63.
Apple Valley Corporation uses a job order cost system and has two production departments, A
and B. Budgeted manufacturing costs for the year are:

Department A Department B
Direct materials $700,000 $100,000
Direct labor $200,000 $800,000
Manufacturing support $600,000 $400,000

The actual material and labor costs charged to Job #432 are as follows:

Job #432
Direct materials: $25,000
Direct labor:
Department A $ 8,000
Department B $12,000
$20,000

Apple Valley applies manufacturing support costs to jobs on the basis of direct labor cost using
departmental rates determined at the beginning of the year.

60. For Department A, the support cost driver rate is:

a. 33%
b. 66%
c. 300%
d. None of the above is correct.

61. For Department B, the support cost driver rate is:

a. 50%
b. 80%
c. 100%
d. 200%

62. Support costs applied to Job #432 total:

a. $12,000
b. $24,000
c. $36,000
d. None of the above is correct.

63. Total manufacturing costs associated with Job #432 total:

a. $55,000
b. $65,000
c. $70,000
d. $75,000

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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 64 THROUGH 66.
Sheppard Manufacturing uses departmental cost driver rates to allocate manufacturing support
costs to products. Manufacturing support costs are allocated on the basis of machine hours in the
Machining Department and on the basis of direct labor hours in the Assembly Department. At the
beginning of 2005, the following estimates were provided for the coming year:

Machining Assembly
Direct labor cost $500,000 $900,000
Manufacturing overhead costs $420,000 $240,000
Direct labor-hours 30,000 60,000
Machine-hours 80,000 20,000

The accounting records of the company show the following data for Job #316:

Machining Assembly
Direct labor-hours 120 70
Machine-hours 60 5
Direct material cost $300 $200
Direct labor cost $100 $400

64. For the Machining Department, what is the annual manufacturing support cost driver rate?
a. $4.00
b. $4.20
c. $4.67
d. $5.25

65. What amount of manufacturing support costs will be allocated to Job #316?
a. $439
b. $502
c. $595
d. $532

66. What are the total manufacturing costs of Job #316?

a. $715
b. $880
c. $1,595
d. $1,000

67. Each cost pool:

a. utilizes a separate cost driver rate
b. is a subset of total labor costs
c. can be associated with several normal levels of activity
d. All of the above are correct.

68. In job order costing, the optimum number of cost pools is __________.
a. one
b. more than one
c. 1,000
d. none

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69. More cost pools:
a. always result in better estimates of support costs
b. seldom result in better estimates of support costs
c. are usually beneficial if the pattern of demand varies across resources
d. result in lower estimates of total support costs

70. Different products consume different proportions of manufacturing support costs because
of differences in all of the following EXCEPT:
a. product design
b. product size
c. setup time
d. sales prices

71. If a business offers both routine and specialized services, a single cost driver rate will
overprice:
a. the routine service
b. the specialized service
c. both the routine and the specialized service
d. neither the routine nor the specialized service

72. If support cost driver rates are calculated monthly, distortions might occur because of:
a. rental costs paid monthly
b. property tax payments made in July and December
c. routine, monthly preventive maintenance costs that benefit future months
d. Both (b) and (c) are correct.

73. Capacity-related support costs remain constant at $200,000 per month and are allocated
based on a monthly professional labor-hour allocation rate. Professional labor hours are
estimated at 8,000 for high-output months and 2,000 for low-output months. The final
customer price includes a markup of 50% of cost. As a result:
a. low-output months will allocate less support costs to each job
b. low-output months will deter customers due to the higher prices
c. the high-output months present a more accurate method of pricing
d. an annual allocation rate would result in lower prices during the high-output months

74. Conversion costs:

a. include all the factors of production
b. include direct materials
c. in process costing are usually considered to be added evenly throughout the
production process
d. Both (b) and (c) are correct.

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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 75 AND 76.
Konrade Company uses a manufacturing process that has two distinct stages: the chopping
process (P1) and the juicing process (P2). Raw material is consumed in P1 at the beginning of
the process. No additional material is required in the second stage of the process (in P2). The
following information pertains to the production of 5,000 units of output in March 2005:

P1 P2
Direct materials $60,000 $ 0
Direct labor $20,000 $30,000
Equipment maintenance $30,000 $40,000
Plant depreciation $40,000 $50,000

75. The conversion costs for P1, the chopping process, total:
a. $60,000
b. $80,000
c. $50,000
d. $90,000

76. The conversion cost per unit of output for the Konrade Company totals:
a. $42 per unit
b. $18 per unit
c. $32 per unit
d. $10 per unit

77. Costing systems that are used for the costing of like or similar units of products in mass
production are called:
a. inventory-costing systems
b. job order costing systems
c. process-costing systems
d. conversion costing systems

78. Process costing:

a. allocates conversion costs
b. results in different costs for different jobs
c. is commonly used by general contractors who construct custom-built homes
d. assigns costs to unique jobs based on a support cost driver

79. Which of the following manufactured products would use process costing?
a. polo shirts imprinted with individualized logos
b. picnic packs containing ketchup, mustard, and relish
c. customized boats used for racing
d. handmade stained-glass lamps for recreational rooms

80. Process costing should be used to assign costs to products when:

a. the units produced are similar
b. the units produced are dissimilar
c. the calculation of unit costs requires the averaging of unit costs over all units
produced
d. either (a) or (c) are present

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81. Which one of the following statements is FALSE?
a. In a job order costing system, individual jobs use different quantities of production
resources.
b. In a process-costing system, each unit uses approximately the same amount of
resources.
c. An organization that manufactures several types of cereal would use a job order
costing system.
d. A corporation whose sole business activity is processing the customer deposits of
several banks would use a process-costing system.

82. (Appendix) Under conventional two-stage cost allocation systems, all of the following
allocation bases are often employed in stage two, except:
a. number of square feet of area
b. number of direct labor hours
c. number of machine hours
d. number of units made

83. (Appendix) Product costs estimated using the two-stage allocation method are likely to be
distorted because the second stage allocations are based on:
a. unit-related measures
b. batch-related measures
c. product-sustaining measures
d. facility-sustaining measures

84. (Appendix) Castille Company produces two products, SP24 and SP25. Each is assigned
$25.00 in setup costs by a conventional accounting system. After an activity analysis, it is
revealed that SP25 requires 45 fewer minutes in setup time than SP24. Under the
conventional system, SP25 is:
a. undercosted
b. overcosted
c. fairly costed
d. accurately costed

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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 85 AND 86.
Rhode Island Manufacturing Company developed the following information for its service
departments, S1 and S2, and its production departments, P1 and P2:

S1 S2 P1 P2
Support Cost $4,000 $7,200 $8,000 $10,000
Service Provided by S1 --- 30% 30% 40%
Service Provided by S2 25% --- 30% 45%

85. (Appendix) Using the direct method of service department cost allocation, how much is to
be allocated from S2 to P2 if calculations are rounded to the nearest dollar?
a. $2,860
b. $3,240
c. $4,320
d. $2,160

86. (Appendix) Using the reciprocal method of service department cost allocation, how much
is the total support cost for P1 for the period if calculations are rounded to the nearest
dollar?
a. $12,605
b. $16,594
c. $12,560
d. $12,594

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EXERCISE/PROBLEM

87. Jacobson Manufacturing is a small textile manufacturer using machine hours as the single
cost driver to allocate support costs to the various jobs contracted during the year. The
following estimates are provided for the coming year for the company and for the Maize
High School Science Olympiad Jacket job.

Company Maize High School Job

Direct materials $50,000 $500
Direct labor $10,000 $100
Support costs $40,000
Markup 30%
Machine hours 100,000 800

Required:

a. For Jacobson Manufacturing, determine the annual support cost driver rate.

b. Determine the amount of support costs estimated for the Maize High School job.

c. Determine the bid price for the Maize High School job.

88. David Duty Manufacturing uses departmental cost driver rates to apply manufacturing
support costs to products. Support costs are applied on the basis of machine hours in the
Machining Department and on the basis of direct labor hours in the Assembly Department.
At the beginning of 2005, the following estimates were provided for the coming year:
Machining Assembly
Direct labor hours 10,000 90,000
Machine hours 100,000 5,000
Direct labor cost $ 80,000 $720,000
Support costs $250,000 $360,000

The accounting records of the company show the following data for Product #846:

Machining Assembly
Direct labor hours 50 120
Machine hours 170 10
Direct material cost $2,700 $1,600
Direct labor cost $ 400 $ 900

Required:

a. Compute the predetermined support cost driver rate for each department.

b. Compute the total cost of Product #846.

c. Provide possible reasons why David Duty Manufacturing uses two different cost
drivers.

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89. Elfie Enterprises uses three cost pools to allocate support costs. The following estimates
were provided for the coming year.

Cost Pool Support Costs Cost driver Activity level

Supervision of direct labor $320,000 Direct labor hours 800,000
Machine maintenance $120,000 Machine hours 960,000
Facility rent $200,000 Square feet of area 100,000
Total support costs $640,000

The accounting records show the Lacio Job consumed the following resources.

Cost driver Actual level

Direct labor hours 200
Machine hours 1,600
Square feet of area 50

Required:

a. If direct labor hours are considered the only support cost driver, compute:
1. the single cost driver rate for Elfie Enterprises; and
2. the amount of support costs allocated to the Lacio job.

b. If Elfie Enterprises uses the three cost pools to allocate support costs, compute:
1. the cost driver rate for each of the three support activities above; and
2. the amount of support costs allocated to the Lacio job.

c. Review the amount of support costs allocated in (a2) and (b2). Why do the two
estimates differ? Which method of allocation probably best estimates actual support
costs used? Why?

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90. Poseidon Company produces customized sailboats. The company uses a job order costing
system. Its plant has three production departments: cutting, machining, and assembly. The
estimated support cost and direct labor cost for each department for 2005 follow:

Cutting Machining Assembly

Support cost $600,000 $800,000 $100,000
Direct labor cost $300,000 $200,000 $500,000

In May 2005, the company received an invitation from Duluth Sailing Company to bid on
an order of five luxury sailboats that must be delivered by the end of September 2005. This
Duluth Job would require direct manufacturing costs in the three departments as follows:

Cutting Machining Assembly

Direct material cost $12,000 $ 800 $ 4,600
Direct labor cost $ 7,000 $2,000 $15,000

Required:

a. Assume that a single, plantwide predetermined cost driver rate based on direct labor
cost is used. Determine the cost driver rate and support costs applied to the Duluth
Job.

b. Assume that separate, departmental predetermined cost driver rates based on direct
labor cost are used in each department. Determine the departmental cost driver rates
and support costs applied to the Duluth job.

c. Assume that Poseidon has a policy to add a 60% markup to estimated job costs to
arrive at the bid price. Determine the bid price for the Duluth job using:
1. a plantwide support cost driver rate; and
2. departmental support cost driver rates.

d. Review the bid prices computed in (c). Why do the two bids differ?

e. What are the possible consequences of overbidding a job? Underbidding a job?

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91. Noble Printers has contracts to complete weekly supplements required by forty-six
customers. For the year 2005, support cost estimates total $420,000 for an annual
production capacity of 12 million pages.

For 2005 Noble Printers has decided to evaluate the use of additional cost pools. After
analyzing support costs, it was determined that number of design changes, setups, and
inspections are the primary support cost drivers. The following information was gathered
during the analysis.
Cost pool Support costs Activity level
Design $ 60,000 300 design changes
Setups $320,000 5,000 setups
Inspections $ 40,000 8,000 inspections
Total support costs $420,000

During 2005, two customers, Wealth Managers and Health Systems, are expected to use the
following printing services.
Activity Wealth Managers Health Systems
Pages 60,000 76,000
Design changes 10 0
Setups 20 10
Inspections 30 38

Required:
a. Calculate the cost driver rate if support costs are considered one large cost pool and
are assigned based on 12 million pages of production capacity.
b. Using the cost driver rate determined in (a), calculate the support cost estimate for
Wealth Managers during 2005.
c. Assuming cost pools for design changes, setups, and inspections are used, calculate
the cost driver rates for each of the three cost pools.
d. Using the cost driver rates determined in (c), calculate the support cost estimate for
Wealth Managers during 2005.
e. Review the support costs estimates computed in (b) and (d). Discuss what
conclusions can be drawn from this exercise in regard to the use of cost pools.

92. Roland Company uses a manufacturing process that has two distinct stages: P1 and P2.
Raw material is consumed in P1 at the beginning of the process. No additional material is
required in the second stage of the process (in P2). The following information pertains to
the production of 10,000 units of output in March 2005:

P1 P2
Direct materials $100,000 $ 0
Direct labor $ 80,000 $160,000
Equipment maintenance $ 20,000 $ 40,000
Plant depreciation $ 40,000 $ 60,000

Required:
a. Determine the direct material cost per unit of output.
b. Determine the conversion cost per unit of output.

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CRITICAL THINKING/ESSAY

93. Describe job order costing and process costing management systems. Explain when it
would be appropriate to use each.

94. Three types of product costs are estimated on a job bid sheet. List each of these costs and
explain how each is estimated.

95. On a job bid sheet, four items are added together to arrive at a bid price. List each of these
items and explain why each is necessary to arrive at the bid price.

96. The markup rate on a job bid sheet includes amounts for certain items. Discuss these items.

97. List at least three factors taken into consideration when determining the markup rate.

98. In a job order costing system, explain why it is necessary to apply support costs to
production through the use of a predetermined activity cost driver rate.

99. Explain how an activity cost driver rate is determined.

100. Explain why more than one cost pool usually results in more realistic support cost
estimates.

101. Discuss how to determine the best number of cost pools for best estimating support costs.

102. Does adding more cost pools always result in better support costs estimates? Why or why
not?

103. In job order costing, explain how comparing actuals to the estimates for direct material and
direct labor costs can be helpful to management.

104. Explain what accounts for the difference between each amount reported on the job bid
sheet and the job cost sheet for an individual job.

105. What considerations are important in estimating product costs in continuous processing
plants?

106. (Appendix) Why do conventional product costing systems allocate service department
support costs first to the production departments before assigning them to individual jobs?

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 CHAPTER 3 SOLUTIONS
TRADITIONAL COST MANAGEMENT SYSTEMS

TRUE/FALSE MULTIPLE CHOICE

LO1 1. a LO1 28. d LO3 56. c

LO1 2. b LO1 29. d LO3 57. a
LO1 3. b LO1 30. a LO3 58. b
LO1 4. b LO3 59. d
LO2 5. a LO1 31. b LO3 60. c
LO1 32. b
LO3 6. a LO1 33. a LO3 61. a
LO3 7. b LO1 34. d LO3 62. d
LO3 8. b LO2 35. c LO3 63. d
LO3 9. a LO3 64. d
LO3 10. a LO2 36. d LO3 65. c
LO2 37. b
LO3 11. b LO2 38. d LO3 66. c
LO4 12. b LO3 39. c LO4 67. a
LO4 13. a LO3 40. a LO4 68. d
LO4 14. b LO4 69. c
LO5 15. a LO3 41. a LO4 70. d
LO3 42. b
LO5 16. a LO3 43. d LO5 71. a
LO5 17. b LO3 44. b LO6 72. b
LO6 18. a LO3 45. a LO6 73. b
LO6 19. b LO6 74. c
LO7 20. a LO3 46. c LO6 75. d
LO3 47. b
LO7 21. b LO3 48. b LO6 76. a
LO7 22. a LO3 49. c LO7 77. c
LO7 23. a LO3 50. d LO7 78. a
LO7 24. a LO7 79. b
LO8 25. b LO3 51. c LO7 80. d
LO3 52. b
LO8 26. b LO3 53. a LO7 81. c
LO8 27. a LO3 54. c LO8 82. a
LO3 55. a LO8 83. a
LO8 84. b
LO8 85. b
LO8 86. a

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MULTIPLE CHOICE

44. $10 per direct labor hour = ($200,000 + $400,000) / (10,000 dlh + 50,000 dlh)
45. $5 per machine hour = $200,000 / 40,000 mh

46. $5.00 per machine hour = $100,000 / 20,000 estimated mh

47. $125,000 = $5.00 per machine hour x 25,000 actual mh
48. $30,000 = 500 dlh x $60 predetermined rate
49. $80,000 = DM $40,000 + DL $10,000 + MOH $30,000
50. $96,000 = $80,000 x 1.20

51. $110,000 = $60,000 + $20,000 + $30,000

52. $105,000 = 7,000 dlh x $15 predetermined support rate
53. $30,000 = 1,000 unit order x 2.0 dlh x $15 per hour
54. $80,000 = 1,000 unit order x 2.0 dlh x $40 per hour
55. $203,500 = (DM $75,000 + DL $30,000 + MOH $80,000) x 1.10

56. $0.30 per mh = $30,000 / 100,000mh

57. $270 = 900 mh x $0.30 per mh
58. $1,470 = DM $1,000 + DL $200 + MOH $270
59. $2,058 = $1,470 x 1.40
60. 300% = $600,000 / $200,000

61. 50% = $400,000 / $800,000

62. $30,000 = ($8,000 x 300%) + ($12,000 x 50%)
63. $75,000 = DM $25,000 + DL $20,000 + MOH $30,000
64. $5.25 per mh = $420,000 / 80,000mh
65. $595 = ($5.25 x 60 mh) + [($240,000 / 60,000) x 70dlh]

66. $1,595 = DM $500 + DL $500 + MOH $595

75. $90,000 = $20,000 + $30,000 + $40,000
76. $42 per unit = ($90,000 + $30,000 + $40,000 + $50,000) / 5,000 units
85. $3,240 = $7,200 x 45%
86. S1 = $4,000 + 0.25 [$7,200 + 0.30 (S1)]
S1 = $4,000 + $1,800 + 0.075 (S1)
S1 = $6,270 = $5,800 / 0.925
S2 = $9,081 = $7,200 + 0.30 ($6,270)
$12,605 = $8,000 + 0.30 ($6,270) + 0.30 ($9,081)

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EXERCISE/PROBLEM

LO2,3
87. a. Support cost driver rate = $0.40 per mh = $40,000/100,000mh
b. $320 estimated support costs = 800 mh x $0.40 per mh cost driver rate
c. Maize High School bid price = $1,196 computed as follows:
Direct materials $ 500
Direct labor 100
Support costs 320
Estimated total manufacturing costs 920
Markup (30%) 276
Bid price $1,196

LO3,4
88. a. Machining Department cost driver rate: $2.50 / mh = $250,000/100,000 mh
Assembly Department cost driver rate: $4.00 / dlh = $360,000/90,000 dlh

b. Total cost of Product #846 is $6,505 = Direct materials $4,300 + Direct labor $1,300
+ Support costs $905 (Machining $425 + Assembly $480).

c. Ideally, cost driver(s) should reflect the factor(s) that cause manufacturing support
costs to increase. Apparently, David Duty regards the use of machines as the principal
cause of manufacturing support costs (such as depreciation and repairs) in the
Machining Department. In contrast, David Duty regards direct labor hours as the
principal cause of manufacturing support costs (such as indirect labor) in the
Assembly Department.

LO3,4,5
89. a. 1. Single cost driver rate is $0.80 per dlh = $640,000 / 800,000 dlh
2. $160 = 200 dlh x $0.80 per dlh

b. 1. Supervision cost driver rate is $0.40 per dlh = $320,000 / 800,000 dlh
Machine maintenance cost driver rate is $0.125 per mh = $120,000 / 960,000
Facility rent cost driver rate is $2 per sq ft = $200,000 / 100,000 sq ft
2. $380 = (200 x $0.40 per dlh) + (1,600 x $0.125 per mh) + (50 x $2 per sq ft)

c. The two estimates calculated for support costs differ because the $160 was calculated
using a single cost driver rate and the $380 was calculated using multiple cost driver
rates. The best estimate of actual supports costs used is probably the $380 since total
support costs are affected by each of the three cost drivers. A single cost driver does
not appear to be the cause of increasing support costs.

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LO3,4,5
90. a. Plantwide support cost rate is 150% of direct labor cost
= $(600,000 + 800,000 + 100,000) / $(300,000 + 200,000 + 500,000)
Support costs applied to the Duluth Job are $36,000 = ($7,000 + $2,000 + $15,000) x
150%

b. Cutting support cost rate is 200% of direct labor cost = ($600,000 / $300,000)
Machining support cost rate is 400% of direct labor cost = ($800,000 / $200,000)
Assembly support cost rate is 20% of direct labor cost = ($100,000 / $500,000)
Total support costs applied to the Duluth Job are $25,000 = (Cutting $7,000 x 200%)
+ (Machining $2,000 x 400%) + (Assembly $15,000 x 20%)

c. Bid price using plantwide cost driver rate is $123,840 = [DM $17,400 + DL $24,000
+ SC $36,000 = $77,400 x 160%]
Bid price using departmental cost driver rates is $106,240 = [DM $17,400 + DL
$24,000 + SC $25,000 = $66,400 x 160%]

d. The two bids differ because the plantwide rate assumes that support resources are
used uniformly in all three departments, whereas the departmental rates assume
support resources are not uniformly used within the three departments.

e. Overbidding a job can result in lost business to competitors, while underbidding can
result in too little profit per job.

LO3,4,5
91. a. Cost driver rate is $0.035 / page = ($420,000 / 12,000,000 pages)

b. Support costs applied to Wealth Managers total $2,100 = 60,000 pages x $0.035/page

c. Design changes support cost rate is $200 per change = ($60,000/300 design changes)
Setups support cost rate is $64 per setup = ($320,000/5,000 setups)
Inspections support cost rate is $5 per inspection = ($40,000/8,000 inspections)

d. Wealth Mangers support cost estimate is $3,430 = (10 x $200 per change) = (20 x $64
per setup) + (30 x $5 per inspection)

e. The support cost estimates for Wealth Mangers differ greatly depending on whether
costs are allocated based on printed pages or the three cost support pools. By using
number of printed pages to allocate support costs, the additional costs of design,
setups, and inspections are allocated uniformly to all jobs, rather than to those jobs
that use these special resources. If pages produced continues to be used to allocate
support costs some customers, such as Wealth Mangers, will be grossly underbilled
for the job, while other jobs will be unfairly overbilled.

LO6
92. a. Direct material cost per unit of output is $10 per unit = $100,000/10,000
b. Conversion cost per unit of output is $40 per unit = $(80,000+160,000+20,000+
40,000+40,000+ 60,000)/10,000

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CRITICAL THINKING/ESSAY

LO1,6,7
93. Describe job order costing and process costing management systems. Explain when it
would be appropriate to use each.
Solution: Job order costing accumulates costs for different jobs required by specific
customers. Process costing computes and allocates an equal amount of cost to each
product. Job order costing is the logical choice when the production process has many
distinct products or many heterogeneous jobs, while process costing is typically used when
it is not necessary to keep separate cost records for individual jobs and the products are
relatively homogeneous.

LO2
94. Three types of product costs are estimated on a job bid sheet. List each of these costs and
explain how each is estimated.
Solution:
 Direct materials: For each item of material, the quantity is based on standard engineering
specifications. The current price is obtained from records maintained and updated by
the purchasing department.
 Direct labor: These estimates are obtained from industrial engineering specifications
developed on the basis of work and motion studies, or by analog with comparable
standard products. The wage rate is determined from records disclosing wage rates for
each grade of labor needed for this job.
 Support costs: Activity costs are assigned to jobs in two steps. First, support activity cost
driver rates are determined by dividing the cost of the resources committed to the
support activity by the capacity made available by the resources committed to the
activity. Next, activity costs are assigned to each job based on the level of cost driver
activity using the support activity cost driver rate determined in the first step.

LO2
95. On a job bid sheet, four items are added together to arrive at a bid price. List each of these
items and explain why each is necessary to arrive at the bid price.
Solution: Direct materials, direct labor, support costs, and margin.
Direct materials, direct labor, and support costs together are the estimated costs for
production and margin adds an amount for profit.

LO2
96. The markup rate on a job bid sheet includes amounts for certain items. Discuss these items.
Solution: The markup rate on a job bid sheet includes amounts for profit, organizational
costs, and support costs not already estimated on the job bid sheet.
A service organization may use a combined conversion cost driver, and therefore, allow
amounts for direct labor, in addition to profit, organizational costs, and support costs not
already estimated on the job bid sheet.

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LO2
97. List at least three factors taken into consideration when determining the markup rate.
Solution: Markup rate is the percentage addition to the estimated job cost to calculate the
bid price. The markup rate depends on a variety of factors including:
1) proportion of indirect costs excluded from the numerator in the computation of the cost
driver rate;
2) target rate of return desired by the firm;
3) past bidding strategies of key competitors;
4) demand conditions; and
5) overall product-market strategies.

LO3
98. In a job order costing system, explain why it is necessary to apply support costs to
production through the use of a predetermined activity cost driver rate.
Solution: First, actual support costs are not known until the end of year. In order to price
and invoice jobs in a timely manner, annual support costs need to be estimated and
allocated to specific jobs during the accounting period.
Secondly, support costs are usually not incurred evenly throughout the year. The use of a
predetermined activity cost driver rate evenly distributes support costs over the entire year.

LO3
99. Explain how an activity cost driver rate is determined.
Solution: Support activity cost driver rates are determined by dividing the cost of the
resources committed to the support activity by the capacity made available by the resources
committed to the activity.

LO4,5
100. Explain why more than one cost pool usually results in more realistic support cost
estimates.
Solution: In today's industrial environment, the production process often involves the
employment of multiple support activities that require multiple activity cost drivers. If the
demand for different activity cost drivers varies in different proportions, a separate cost
driver rate must first be determined for each activity cost and then used for estimating
product costs. Therefore, a cost system with a single cost driver rate is likely to distort
product costs if multiple activity cost drivers are actually required.

LO3,4
101. Discuss how to determine the best number of cost pools for best estimating support costs.
Solution: The following factors should be considered in the determination of the number of
cost pools:
1) whether the cost or productivity of resources are different; and
2) whether the pattern of demand varies across resources.

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LO3,4
102. Does adding more cost pools always result in better support costs estimates? Why or why
not?
Solution: No, adding more cost pools does not always result in better cost estimates. The
cost of the additional cost pools may be more than the benefit of the information. However,
more cost pools are usually beneficial if:
1) the cost or productivity of resources are different; and
2) the pattern of demand varies across resources.

LO5
103. In job order costing, explain how comparing actuals to the estimates for direct material and
direct labor costs can be helpful to management.
Solution: Conducting cost variance analysis can help managers in several ways. If the
managerial actions that led to actual costs being lower than estimated costs are identified,
similar cost savings can be realized by repeating those actions in the production of other
jobs. If factors resulting in actual costs being higher are identified, then managers may be
able to take the necessary actions to eliminate or control those factors. If cost changes are
likely to be permanent, however, the revised cost information can be used in bidding for
jobs in the future.

LO3,5
104. Explain what accounts for the difference between each amount reported on the job bid
sheet and the job cost sheet for an individual job.
Solution: The job bid sheet estimates costs for direct material and direct labor while the job
cost sheet records the actual costs. The job bid sheet includes support cost estimates based
on an estimated level of activity while the job cost sheet estimates are based on the actual
level of activity. The job bid sheet includes margin but the job cost sheet does not.

LO6
105. What considerations are important in estimating product costs in continuous processing
plants?
Solution: Continuous processing plants are characterized by the fact that production flows
continuously, semi-continuously, or in large batches from one process stage to the next. At
each successive process stage further progress is made toward converting the raw materials
into finished products. Therefore, the product costing system must accumulate conversion
costs assigned to individual products for successive process stages. Product costs must also
reflect the yield rates--the proportion of the input materials in a process stage that is
transferred to the next process stage.

LO8
106. (Appendix) Why do conventional product costing systems allocate service department
support costs first to the production departments before assigning them to individual jobs?
Solution: (Appendix) Because jobs are worked on only in the production departments,
conventional costing systems assume that we cannot obtain direct measures of the
consumption of service department resources on individual jobs as conveniently as we can
of production department resources. Therefore, these costing systems allocate service
department support costs first to the production departments.

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