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Chapter 19: Q9RQ (page 1063)
Question: Why is ABC usually considered more accurate than traditional costing methods?
Answer
ABC considers the resources (activities) each product uses.
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Refer to Exercises E19-20 and E19-21. Controller Michael Bender is surprised by the increase in cost of the deluxe model under ABC. Market research shows that for the deluxe rim to provide a reasonable profit, Eason will have to meet a target manufacturing cost of \(625.00 per rim. A value engineering study by Eason鈥檚 employees suggests that modifications to the finishing process could cut finishing cost from \)90.00 to \(60.00 per hour and reduce the finishing direct labor hours per deluxe rim from 5.50 hours to 5.0 hours. Direct materials would remain unchanged at \)48.00 per rim, as would direct labor at $52.00 per rim. The materials handling, machine setup, and insertion of parts activity costs also would remain the same.
Would implementing the value engineering recommendation enable Eason to achieve its target cost for the deluxe rim?
The Alright Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):
Direct materials cost \( 80.00
Direct labor cost 20.00
Activity-based costs allocated ?
Total manufacturing product cost ?
The activities required to build the component follow:
Activity Allocation Base Cost Allocated to
Each Unit
Start station Number of raw component chassis 4 * \) 1.50 = \( 6.00
Dip insertion Number of dip insertions ? * 0.30 = 9.60
Manual insertion Number of manual insertions 10 * 0.50 = ?
Wave solder Number of components soldered 4 * 1.90 = 7.60
Backload Number of backload insertions 7 * ? = 4.20
Test Number of testing hours 0.43 * 90.00 = ?
Defect analysis Number of defect analysis hours 0.15 * ?= 12.00
Total activity-based costs \) ?
Requirements
1. Complete the missing items for the two tables.
Willette Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling \( 95,000 Number of kilos 19,000 kilos
Packaging 200,000 Number of machine hours 5,000 hours
Quality assurance 112,500 Number of samples 1,875 samples
Total indirect costs \) 407,500
Actual production information includes the following:
Commercial Containers Travel Packs
Units produced 2,400 containers 50,000 packs
Weight in kilos 9,600 5,000
Machine hours 1,680 500
Number of samples 240 750
Requirements
1. Willitte鈥檚 original single plantwide overhead allocation rate costing system allocated indirect costs to products at $81.50 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for each product. Round to two decimal places.
Rennie Plant Service completed a special landscaping job for Brenton Company. rennie uses ABC and has the following predetermined overhead allocation rates:
Activity Predetermined
Allocation Base Overhead Allocation Rate
Designing Number of designs \( 290 per design
Planting Number of plants \) 20 per plant
The Rennie job included \(1,500 in plants; \)800 in direct labor; one design; and 30 plants.
Requirements
1. What is the total cost of the Brenton job?
Question:Blanchette Plant Service completed a special landscaping job for Kerry Company. Blanchette uses ABC and has the following predetermined overhead allocation rates:
Activity Predetermined
Allocation Base Overhead Allocation Rate
Designing Number of designs \( 290 per design
Planting Number of plants \) 20 per plant
The Kerry job included \(750 in plants; \)1,300 in direct labor; one design; and 30 plants.
Requirements
3. If Blanchette desires an operating income of 30% of cost, how much should the company charge for the Kerry job?
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