5-21

Direct Labor = $8 × 5 = $40

Copying = $0.05 × 1,000 = $50
Total Job Cost = $50 + $40 = $90

5-27 Activity-Based Costing in the Fashion Apparel Industry (20 min)

The ABC-costing solution follows:

The ABC-costing solution follows:

(all figures in £)
Units 10,000
Price × 20.525
Total Revenue 205,250

Direct Materials 33,750

Labor and Overhead Costs
Pattern cutting 22,000
Grading 19,000
Lay planning 18,500
Sewing 21,000
Finishing 14,300
Inspection 6,500
Boxing up 3,500
Storage 7,000
Labor and Overhead (ABC-based) 111,800
Total Product Cost 145,550
Unit Product Cost (145,550 / 10,0000) 14.56

Nonmanufacturing Expenses 31500

Total Cost 177,050

Profit Margin for Trousers 28,200

The results suggest that the trouser line is more profitable than previously thought
(using volume-based costing). This is likely due to the common situation in which the
high-volume products are overcosted using volume-based costing.

5-28 Activity-Based Costing (25 min)

Cost
Activity Driver
Cost Pools Costs Units Overhead Rate
 Machine
Setup $360,000 4,000 $90.00
Materials
Handling $100,000 20,000 $5.00
Electric
Power $40,000 40,000 $1.00

Cost
Assignment:
A B
DM $42,000 $54,000
DL $24,000 $40,000
Overhead:
Machine $90 × 400 $90 ×
Setup = $36,000 200 = $18,000

Mat. $5 × $5 ×
Handling 1,000= $5,000 3,000 = $15,000
$1 × 2,000 $1 ×
Power = $2,000 4,000 = $4,000
Total Product
Cost $109,000 $131,000
Units
Produced 4,000 20,000
Cost per Unit $27.25 $6.55

The details of the unit cost appear

below
42,000 /
DM per unit 4000 $10.50 $2.70
24,000 /
DL per unit 4000 $ 6.00 $2.00
43,000 /
OH per unit 4000 $10.75 $1.85
Cost per Unit $27.25 $6.55
2. While one could safely assume that the ABC system provides an improved
assignment of the overhead costs to the two products, the term “accuracy” tends to be
regarded as a measure of how close the numbers are to some accepted objective
target, but with product costing there is no one single accepted target. It must be
remembered that allocations are needed because direct assignment of cost to products
is not possible and that all allocations are dependent upon subjective management
decisions. The new costs reflect the decisions made with regard to the number of cost
pools, the actual assignment of costs to those cost pools, and the selection of the cost
drivers for each cost pool. If, for example,
5-28 (continued)

number of setups rather than number of setup hours was used to assign overhead from
the machine setup pool, the cost of each product may have been different, thereby
making it difficult to say that any ABC system is entirely accurate. The resulting values
can only be evaluated with respect to those generated under some other system.

5-39 Resource and Activity-Based Cost Drivers (25 min)

1. The activity based cost pools are determined from the percent-of-use information; for
example, total setup cost = $157,500 = (.15 × $850,000)
+ (.2 × $150,000).

Factory Inspect
Costs Setup Assembly &Finishing Packaging
Salaries $ 850,000 $127,500 $ 467,500 $ 170,000 $ 85,000
Supplies $ 150,000 $ 30,000 $ 90,000 $ 30,000 $ -
Factory
Expense $ 550,000 $ - $ 440,000 $ 110,000 $ -
$1,550,000 $157,500 $ 997,500 $ 310,000 $ 85,000

2. The activity rates are determined as follows:

Total Activity Activity-

Consumptio Activity based
Safe-V Safe-T n Costs Rates
Setup 250 600 850 $157,500 $185.29
Assembly 60,000 72,000 132,000 $997,500 $ 7.56
Inspect and
Finish 0.2 0.3 33,600 $310,000 $ 9.23
Packaging 0.1 0.15 16,800 $85,000 $ 5.06

3. The per unit activity-based costs are $14.19 for Safe-V and $18.63 for the Safe-T
Activity Requirements Activity-Based Cost
Safe-V Safe-T Safe-V Safe-T
Setup 250 600 $ 46,322.50 $ 111,174.00
Assembly 60,000 72,000 $453,600.00 $ 544,320.00
Inspect and Finish 0.2 0.3 $110,760.00 $ 199,368.00
Packaging 0.1 0.15 $ 30,360.00 $ 54,648.00
5-39 (continued)

Activity-Based
Activity-Based Cost Costs/Unit
Safe-V Safe-T Safe-V Safe-T
Setup $ 46,322.50 $ 111,174.00 $ 0.77 $ 1.54
Assembly $453,600.00 $ 544,320.00 $ 7.56 $ 7.56
Inspect and Finish $110,760.00 $ 199,368.00 $ 1.85 $ 2.77
Packaging $ 30,360.00 $ 54,648.00 $ 0.51 $ 0.76
Materials per unit $ 210,000.00 $ 432,000.00 $ 3.50 $ 6.00
Total Cost per Unit $ 14.19 $ 18.63

4. Two obvious uses of the activity-based information is for price setting and assessing
the profitability of its two product lines.

5. The collection of more accurate cost driver data can only be justified when the cost of
data collection and analysis is less than the expected benefit. Management would have
to decide whether their decisions would change based on the more accurate data. If
not, then the extra effort and cost associated with collecting the new data would not be
justified. In this situation, for example, an employee might not be assigned to a single
job function. If the employee primarily does assembly but occasionally does
inspections, a rough estimate of the time spent on each activity might be the most cost
effective way to collect the cost driver data. The alternative might be to have the
employee log the time spent on each activity and then the data in that log would have to
be analyzed to determine the actual amount of time spent on each activity. The
decision management faces is whether the data is worth the extra collection effort.

5-41 Volume-based Costing Versus ABC (35 min)

1. Determine the amount of overhead cost per unit and the total overhead for each of
the products.
Product A Product B Product C
Materials $50.00 $114.40 $65.00
Labor $20.00 $12.00 $10.00
Overhead* $120.00 $72.00 $60.00
Total Cost $190.00 $198.40 $135.00

*overhead is applied based on direct labor dollars so the rate is:

$6.00 per direct labor dollar = $510,000 / [($20×1,000) + ($12×5,000) + ($10×500)]
$120 = $6×20; $72.00 = $6×12; $60 = $6×10

2. What is the least profitable and the most profitable product under both the current
and the ABC costing systems?
 Product A Product B Product C
Actual Selling Price $286.00 $255.60 $310.00
Product Manufacturing Cost $190.00 $198.40 $135.00
Gross Margin $96.00 $57.20 $175.00
Gross Margin Ratio 33.57% 22.38% 56.45%

Based on the current cost data, product B is the least profitable product with a gross
margin per unit of $57.20 (22.38%) and product C is the most profitable product with a
gross margin per unit of $175.00 (56.45%). The ABC analysis shows a very different
result. Product C now shows a loss, and Product B is the most profitable.

Product costs based on the activity-based costing system

(calculated on per unit basis) Product A Product B Product C

Direct Materials 50.00 114.40 65.00
Direct Labor 20.00 12.00 10.00
Factory Overhead:
Setups (a) 1.80 0.90 5.40
Materials Handling (b) 44.00 5.50 77.00
Hazardous Control (c) 62.50 22.50 150.00
Quality Control (d) 22.50 5.25 52.50
Utilities (e) 13.20 9.24 13.20
TOTAL 214.00 169.79 373.10

Actual Selling Price $286.00 $255.60 $310.00

Product Manufacturing Cost 214.00 169.79 373.10
Gross Margin $72.00 $85.81 ($63.10)
Gross Margin Percentage 25.17% 33.57% -20.35%

5-46 Time-Driven Activity-Based Costing (TDABC) in a Call Center

(20min)

1. The TDABC rate per minute for MMI is determined as follows:

Total Projected Costs / Practical Capacity

= $9,515,500 / 12,045,000 = $0.79 per minute

The charge to AS should be estimated as follows:

First, the cost of the engagement: 1,614,750 × $0.79 = $1,275,653

Second, the markup on the cost: $1,275,653 × 1.25 = $1,594,566
2. The total time for each type of loan is determined as follows:

Avg. No. of
Total Calls Minutes/ Total Time (minutes)
Inquiries Answered Call Autos Trucks
Inquire re: Rates and
Terms
Autos 80,000 6 480,000
Trucks 32,000 7 224,000
Inquire re: Loan App Status
Autos 45,000 5 225,000
Trucks 6,750 11 74,250
Inquire re: Payment Status
Autos 39,000 3 117,000
Trucks 12,000 4 48,000
Inquire re: Other Matter
Autos 29,000 11 319,000
Trucks 8,500 15 127,500
Total 1,141,000 473,750
5-46 (continued)

The revised proposal would show:

Cost for Autos (1,141,000 × $.79) $901,390
Cost for Trucks (473,750 × $.79) $374,263
Total Cost $1,275,653
Time markup 1.25
Total Charge for Engagement $1,594,566