-
53
Chapter 3 Traditional Cost Management Systems
QUESTIONS 3-1 Costs need to be estimated for individual jobs in
order to bid for them and to
price them competitively. Estimated costs are also useful for
comparison with actual costs for management control purposes. Costs
may differ across individual jobs because jobs may differ in their
materials content, the hours of labor required to manufacture them
and in the demand they place on support activity resources.
3-2 A typical job bid sheet has the following five distinct
parts:
1. The name of the customer, product and quantity required. 2.
Estimated quantity and current price for different materials. 3.
The wage rate and hours required for direct labor. 4. Estimated
manufacturing support cost. 5. Estimated total cost, bid price,
unit cost and unit price.
3-3 Two types of information are required to estimate direct
material cost for a
job. The quantity required for each item of material is
estimated based on standard engineering specifications. Information
on the price of each item of material is obtained from the
purchasing department.
3-4 Two types of information are required to estimate direct
labor cost. Direct
labor hours are estimated based on industrial engineering
specifications (e.g. work and motion studies) or by analogy with
comparable standard products. Wage rates for each grade of labor
required for the operations performed are obtained from personnel
records.
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3-5 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.
3-6 Support cost for a job is estimated by multiplying the cost
driver rate(s) by
the number of units of the support cost driver(s) associated
with the job. 3-7 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:
Proportion of indirect costs excluded from the numerator in the
computation of the cost driver rate
Target rate of return desired by the firm Past bidding
strategies of key competitors Demand conditions Overall
product-market strategies
3-8 Each cost pool is a portion of the total support costs
associated with a distinct cost driver. Multiple cost pools are
required when support costs are driven by more than one factor
(cost driver).
3-9 Determination of cost driver rates based on planned or
actual short-term
usage will result in rates that are too high in periods of low
demand and that are too low in periods of high demand. As a
consequence, job costs are distorted in such a job costing
system.
3-10 Yes. A separate cost driver rate must be determined for
each cost pool when
there are multiple cost drivers involved, or else job cost
estimates may be distorted. However, if the different cost drivers
vary together in the same proportion then any one of them will be
sufficient.
3-11 Cost pools collect support costs into separate groups, for
each of which a
separate cost driver rate is used. The general principle in
determining the number of cost pools is that a separate cost pool
should be used for the cost of an activity if the pattern of demand
for it varies across products in proportions different from those
reflected in existing cost pool drivers. The increase in
measurement costs for a more detailed cost system, however, must be
traded off against the benefit of increased accuracy in estimating
product costs.
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Chapter 3: Traditional Cost Management Systems
55
3-12 Tracking the actual cost of individual jobs allows managers
to compare the actual cost against the estimated cost and determine
if there are unexpected variations in the efficiency in using
activity resources. Such comparisons between actual and estimated
costs help managers bid more accurately on future jobs and take
corrective actions to alleviate unfavorable variations in
costs.
3-13 Unlike direct material costs and direct labor costs,
support costs cannot be
traced easily to each job. When actual costs are recorded for a
job during the course of a fiscal period, the total support costs
for the period and consequently the actual cost driver is not yet
determined. Therefore, costs are applied to jobs using
predetermined rates.
3-14 Conversion costs are the costs of converting raw materials
into finished
products. They include the costs of production labor and support
activities at each process stage.
3-15 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 ratesthe fraction of the input materials in a process stage
that is transferred to the next process.
3-16 Multistage process costing systems have the same objective
as job order
costing systems. Both types of systems assign material, labor,
and manufacturing support activity costs to products. The two types
of systems differ, however, on some dimensions. In a job order
environment, production requirements vary across different jobs, so
production occurs job by job and costs are measured for individual
jobs. In addition, cost reports that compare actual to estimated
costs may be determined for individual jobs. In a multistage
process environment, production requirements are homogeneous across
products or jobs, so production occurs continuously,
semi-continuously, or in large batches, and costs are measured for
individual process stages. Because of the homogeneous production,
cost reports that compare actual to estimated costs are likely to
be determined only for individual process stages.
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3-17 Production departments are those directly responsible for
transforming raw materials into finished products. Service
departments are departments that perform support activities, such
as production engineering and machine maintenance.
3-18 Conventional product costing systems assign indirect costs
to jobs or
products in two stages. In the first stage, indirect costs are
identified with various production and service departments, and all
the service department costs are then allocated to production
departments. In the second stage, the accumulated indirect costs
for the production departments are assigned to individual jobs or
products based on predetermined departmental cost driver rates.
3-19 Because jobs are worked on only in a production department,
conventional
costing systems assume that we cannot obtain direct measures of
the use of service department resources on individual jobs as
conveniently as we can of production department resources.
Therefore, these costing systems allocate service department costs
first to the production departments before assigning them to
individual jobs.
3-20 The direct method is used when service department
activities only benefit
production departments. This method assumes no interaction among
service departments and assigns their costs directly to production
departments. The sequential method is used when there are no
reciprocal interactions between service departments. Costs are
allocated one at a time to other service departments in a
sequential order. The reciprocal method recognizes reciprocal
interactions between different service departments and allocates
costs between service departments simultaneously.
3-21 Conventional two-stage cost allocation systems are likely
to systematically
distort product costs because they break the link between the
cause for the costs and the basis for assignment of the cost to the
individual products.
3-22 Two factors that contribute to cost distortions when using
conventional two-
stage cost accounting systems are (1) the use of unit-related
measures and (2) differences in relative consumption ratios.
Unit-related measures are used to allocate support costs to
products, but the demand for activities might be driven by
batch-related and product-sustaining cost drivers. Also, costs
distortions tend to be greater when the differences between
relative proportions of the activity cost drivers and the base for
second-stage assignment are greater.
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Chapter 3: Traditional Cost Management Systems
57
EXERCISES 3-23 (a) Support cost driver rate:
labor cost direct labor cost
$5, ,$2, ,
000 000500 000 direct
2=
(b) Consulting engagement cost:
Labor cost $20,000 Support cost 2 labor cost 40,000 Total cost
$60,000
3-24 (a) Plantwide cost driver rate:
$60,000
4,000 direct labor hours $15 per direct labor hour=
(b) Departmental cost driver rates: Cutting Department:
$25,000
4,000 machine hours per machine hour= $6.25
Assembly Department:
labor hours $11.67 per direct labor hour
$35,,
0003 000 direct
=
(c) The company may favor the method in (b) if support activity
costs in
the cutting department have a cause-and-effect relationship with
machine hours, while those in the assembly department have a
cause-and-effect relationship with direct labor costs. The company
may use
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the method in (a) because it is simpler than the method in (b),
which is potentially more accurate.
3-25 (a) Month Actual Machine Hours Monthly SupportCosts January
1,350 $51.85 February 1,400 $50.00 March 1,500 $46.67 April 1,450
$48.28 May 1,450 $48.28 June 1,400 $50.00 July 1,400 $50.00 August
1,400 $50.00 September 1,500 $46.67 October 1,600 $43.75 November
1,600 $43.75 December 1,600 $43.75
Total Hours 17,650
(b) The support cost driver rate should be determined as the
ratio of the cost of a support activity accumulated in the cost
pool to the cost driver quantity for the activity. For Tokis
machine-related support costs, the computation is:
$70, $46.000 1212
67 = months
1,500 machine hours months per machine hour
If the cost driver rate is based instead on actual or budgeted
activity quantities that fluctuate over time, then support activity
costs will be understated in periods of high demand and overstated
in periods of low demand, as shown in part (a). If Tokis support
costs are caused by multiple cost drivers, the company may develop
a more accurate cost system by using multiple cost driver
rates.
3-26 Ingredient A: $0.40 10,000 $4,000 Ingredient B: $0.60
20,000 12,000 $16,000 Conversion costs: $0.55 30,000 $16,500 Total
costs $32,500 Number of gallons of blended vegetable juice 27,000
Cost per gallon of blended vegetable juice $1.204
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Chapter 3: Traditional Cost Management Systems
59
3-27 Direct materials $232,000 Direct labor 120,000 Support
costs 60,000 Disposal costs of waste product 20,000 Total costs
$432,000 Number of pounds of Goody 200,000 Cost per pound of Goody
$2.16 3-28 (a) Allocation of setup costs:
Assembly Dept.: $40, $30,000 300300 100
000 + =
Finishing Dept.: $40, $10,000 100300 100
000 + = (b) Allocation of inspection costs:
Assembly Dept.: $15, $4, .000 200200 500
28571 + =
Finishing Dept.: $15, $10, .000 500200 500
714 29 + = 3-29 Service Departments Production Departments S1 S2
P1 P2 Directly identified
costs
$65,000
$55,000
$160,000
$240,000
Allocation of S1 costs (65,000) 15,000 20,000 30,000
Allocation of S2 costs (70,000) 33,600 36,400
Total allocated support costs $0 $0 $213,600 $306,400
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3-30 (a) P1 P2
S1 $300: , $150,00030
30 30000 + =
$300, $150,000 3030 30
000 + =
S2 : $300, $100,00025
25 50000 + =
$300, $200,000 5025 50
000 + =
$250,000 $350,000
(b) S1 S2 P1 P2 Directly
identified $300,000 $300,000
Allocation of S1 costs ($300,000) 120,000 $90,000 $90,000
Allocation of S2 costs (420,000) 140,000 280,000
Totals $0 $0 $230,000 $370,000
(c) S S21 000 025= +$300, . S2 S= +$300, .000 0 4 1
Therefore,
S1 S1S
S1
S1
S2
= + +( )= +== == + =
$300, . $300, .$375, .
. $375,$375,
.$416,
$300, . $416, $466,
000 025 000 04000 01 1
09 000000
09667
000 04 667 667
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Chapter 3: Traditional Cost Management Systems
61
Allocation of S1 and S2 costs to P1 and P2 P1 P2 S1: $416,667
30% $125,000 $416,667 30% $125,000
S2: $466,667 25% $116,667 $466,667 50% $233,333
$241,667 $358,333
The summary below incorporates the allocation of 0.25 S2 =
$116,667 to S1 and 0.4 S1= $166,667 to S2.
S1 S2 P1 P2 Directly identified $300,000 $300,000
Allocation of S1 costs (416,667) 166,667 $125,000 $125,000
Allocation of S2 costs 116,667 (466,667) 116,667 233,333
Total $0 $0 $241,667 $358,333
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PROBLEMS 3-31 Job 101 Job 102 Job 103 Beginning work-
in-process:
$25,500
$32,400
$0
Direct materials: Dept. 1 $40,000 $26,000 $58,000 Dept. 2 3,000
5,000 14,000 Dept. 3 0 0 0 $43,000 $31,000 $72,000
Direct labor: Dept. 1 $12 $6, =500 000 $12 $4, =400 800 $12 $3,
=300 600 Dept. 2 $18 $3, =200 600 $18 $4, =250 500 $18 $6, =350 300
Dept. 3 $15 , $22, =1 500 500 $15 , $27, =1 800 000 $15 , $37, =2
500 500 $32,100 $36,300 $47,400
Mfg. support: Dept. 1 150% 000 500 =$43, $64, 150% 000 500 =$31,
$46, 150% 000 000 =$72, $108, Dept. 2 $8 , , =1 200 9 600 $8 , , =1
500 12 000 $8 , , =2 700 21 600 Dept. 3 200% 100 200 =$32, $64,
200% 300 600 =$36, $72, 200% 400 800 =$47, $94, $138,300 $131,100
$224,400
Total costs $238,900 $230,800 $343,800
(a) Total cost of completed Job 101 = $238,900
(b) Total cost of completed Job 102 = $230,800
(c) Work-in-process for Job 103 at April 30 = $343,800
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Chapter 3: Traditional Cost Management Systems
63
3-32 A good case can be made for any of the three alternatives
presented below: Alternative 1: Allocate in the proportion of
actual passengers Week Boston Cambridge 1 $4,800 $2,400 2 4,500 *
2,700 3 5,118 2,482 4 5,200 ** 2,600 5 5,100 2,100
* 1 5002 400
7 200 500,,
, $4, =
** 1 7002 550
7 800 200,,
, $5, = This method is justified by the argument that all costs
should be spread
equally over all passengers.
Alternative 2: Charge capacity cost of $3 = 7,2002,400
per passenger Week Boston Cambridge Unallocated 1 $4,800 *
$2,400 2 4,500 2,700 3 4,950 2,400 $250 4 5,100 2,550 150 5 5,100
2,100
* 1,600 passengers $3 per passenger
Using capacity cost per passenger to allocate service center
costs is justified by the argument that the service center costs
are caused primarily by the capacity that is made available rather
than the actual usage of the committed resources.
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Alternative 3: Allocate normal costs 2:1 (1,600:800) based on
long run demand and additional help costs in the proportion of
additional demand.
Week Boston Cambridge 1 $4,800 $2,400 2 4,800 2,400 3 5,200 *
2,400 4 5,200 ** 2,600 5 4,800 2,400
* 5 200 4 800 7 600 7 200, , , ,= + a f ** 5 200
7 800 1 700 1 600
1 700 1 600 850 800,
, , ,
, ,= +
a fa f a f
This method best reflects the factors that cause the costs to be
incurred. 3-33 (a) Portland Electronics, Inc.: Job Cost Sheet
Customer: Video Shack Product: Computer Monitors, 1,000
units
Direct material Quantity Price Amount Part A327 1,000 units $60
$60,000 Part B149 1,000 units 120 120,000 Total direct material
cost $180,000
Direct labor Hours Rate Amount Assembly 6,000 $10 $60,000
Inspection 1,000 12 12,000 Total direct labor cost 7,000
$72,000
Support costs Amount
7,000 Direct labor hours @ $5 per hour $35,000
Total cost $287,000
Number of units produced 1,000
(b) Cost per monitor $287
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Chapter 3: Traditional Cost Management Systems
65
3-34 Baker Auto Shop: Job Cost Sheet for Job #379 Direct
material Quantity Price Amount Engine oil 11 ounces $2 $22
Lubricant 2 ounces 3 6 Total direct material cost $28
Direct labor Hours Rate Amount Direct labor 3 $15 $45
Support costs Amount 3 Direct labor hours @ $10 per hour $
30
Total cost $103
3-35 (a) Plantwide cost driver rate
= ++==
$120, $160,( , )
$280,,
$14
000 0008 000 12,000
00020 000 direct
direct labor hours
labor hours per direct labor hour
Job Cost Sheet: Job #691
Direct materials Amount Milling $800 Assembly 50 Total direct
material cost $850
Direct labor Amount Milling $100 Assembly 600 Total direct labor
cost $700
Manufacturing Support Amount 50 Direct labor hours @ $14 per
hour $ 700 Total cost $2,250
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(b) Cost driver rate Millingmachine hours
per machine hour
==
$120,
$10
00012,000
Cost driver rate Assemblydirect labor hours
per direct labor hour
==
$160,
$13.
00012,000
33
Job Cost Sheet: Job #691
Direct materials Amount Milling $800 Assembly 50 Total direct
material cost $850
Direct labor Amount Milling $100 Assembly 600 Total direct labor
cost $700
Support Amount Milling: 18 machine hours @ $10 per hour $180
Assembly: 40 direct labor hours @ $13.33 per hour 533 Total
overhead cost $713 Total cost $2,263
(c)
Part (a) Part (b) Manufacturing cost $2,250.00 $2,263.00 25%
markup 562.50 565.75 Bid price $2,812.50 $2,828.75
(d) The company may favor the method in (b) if support activity
costs in
the milling department have a cause-and-effect relationship with
machine hours, while those in the assembly department have a
cause-and-effect relationship with direct labor costs. In this
case, the computed total manufacturing cost in part (a) is of
similar magnitude to the cost in part (b), and therefore the bid
prices are also of similar magnitude. Given this result, one might
be inclined to use the simpler method in part (a) rather than the
more accurate but more complex method in part (b). However,
comparisons across different products may produce greater
differences in computed costs and bid prices.
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Chapter 3: Traditional Cost Management Systems
67
3-36 (a) Cutting Grinding Drilling Total
Support cost $504,000 $2,304,000 $2,736,000 $5,544,000
Direct labor hours 60,000 96,000 144,000 300,000
Plantwide cost driver rate:
$5,
,$18.544,000
300 000 direct48 per dir
labor hoursect labor hour=
Support cost applied to Job ST101: $18.48 (2,000 + 2,500 +
3,000) = $138,600.
(b) Cost driver rate: Cutting
$504,,
$0.000960 000
525= per machine hour
Cost driver rate: Grinding
$2,,
$24304,00096 000 direct labor hours
per direct labor hour=
Cost driver rate: Drilling
$2, , $19736 000144,000 direct labor hours
per direct labor hour=
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Atkinson, Solution Manual t/a Management Accounting, 4E
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Support cost applied to Job ST101: Dept Rate Units of Driver
Used Support Cost Cutting $0.525 20,000 MH $10,500 Grinding $24.00
2,500 DLH 60,000 Drilling $19.00 3,000 DLH 57,000 $127,500
(c) The company may favor departmental support cost driver rates
if support
activity costs in the cutting department have a cause-and-effect
relationship with machine hours, while those in the grinding and
drilling departments have a cause-and-effect relationship with
direct labor costs. The company may use the method a plantwide cost
driver rate because it is simpler than using multiple departmental
rates, though the departmental rate method is potentially more
accurate.
3-37 (a) Cost driver rate for machining:
$500,,
$2500020 000 machine hours
per machine hour= Cost driver rate for finishing:
$400,$500,
.000000
80%= of direct labor cost
(b) Machining
Department Finishing
Department
Total Direct material cost $12,000 $2,000 $14,000 Direct labor
cost 300 1,200 1,500 Manufacturing support 2,000a 960b 2,960 Total
costs of Job 134 $14,300 $4,160 $18,460
a 2 000 80, $25= b $960 ,= 80% 1 200of
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Chapter 3: Traditional Cost Management Systems
69
(c) Gonzalez Company likely believes that its manufacturing
support costs
are driven by different factors. Specifically, support activity
costs in the machining department have a cause-and-effect
relationship with machine hours, while those in the finishing
department have a cause-and-effect relationship with direct labor
costs.
3-38 (a) Brumelle Electronic Company: Job bid sheet
Job Bid Sheet Customer: Takayama, Inc.
Product: ICB371 Number of units: 1,000
Quantity Price Amount Direct material 2,000 units $10 per unit
$20,000 Direct labor 1,000 hours $10 per hour 10,000 Manufacturing
support
$6a per direct labor hour 6,000
Total estimated costs $36,000 Markup (20%) 7,200 Bid price
$43,200
a $300,000 50,000 = $6 per direct labor hour
(b) Brumelle Electronic Company: Job cost sheet
Job Cost Sheet Customer: Takayama, Inc.
Product: ICB371 Number of units: 1,000
Quantity Price Amount Direct material 2,100 units $9.75 per unit
$20,475 Direct labor 1,000 hours $11 per hour 11,000 Manufacturing
support
$6 per direct labor hour 6,000
Total actual costs $37,475
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(c) The differences between actual and estimated material
quantity and material price per unit could reflect poorer quality
materials (for example, a higher percentage of defects) that
resulted in requisitioning a larger number of units of material
than expected. Although the job required the same number of labor
hours as estimated, the hourly rate was higher than estimated. This
may be because there are several grades of labor with differing
wage rates, while a single common rate is used for estimating labor
costs on jobs.
3-39 (a) Service Departments Production Departments Personnel
Maintenance Machining Assembly Directly identified
costs $100,000 $200,000 $400,000 $300,000 Allocation of
Personnel Dept. costs
(100,000)
11,111a
88,889b
Allocation of Maintenance Dept. costs (200,000)
176,471c
23,529d $0 $0 $587,582 $412,418
a $100,000545
c $200, ,,
0007 5008 500
b $100,0004045
d $200, ,,
0001 0008 500
(b) Cost driver rate: Machining ==
$587,,
$58.
58210 000 machin
7582e hours
per machine hour
Cost driver rate: Assembly ==
$412,,
$41.
41810 000 direct
2418 per d labor hours
irect labor hour
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Chapter 3: Traditional Cost Management Systems
71
Direct materials and labor costs: $ 450.00
Support costs from Machining Department ($58.7582 3 machine
hours)
176.27
Support costs from Assembly Department ($41.2418 5 direct labor
hours)
206.21
Total unit cost $ 832.48
Markup (30%) 249.74
Bid price $1,082.22 (c) Service Departments Production
Departments Personnel Maintenance Machining Assembly Directly
identified costs $100,000 $200,000 $400,000 $300,000
Allocation of Personnel Dept. costs
30,000a
(200,000)
150,000b
20,000c
Allocation of Maintenance Dept. costs (130,000)
14,444d
115,556e
$0 $0 $564,444 $435,556
a $200, ,,
0001 500
10 000 d $130,000 5
45
b $200,,,
0007 500
10 000 e $130,000 40
45
c $200,,,
0001 000
10 000
(d) Cost driver rate: Machining ==
$ ,,
$ .
564 44410 00056 4444
machine hours per machine hour
Cost driver rate: Assembly ==
$ ,,
$ .
435 55610 00043 5556
direct labor hours per direct labor hour
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Atkinson, Solution Manual t/a Management Accounting, 4E
72
Direct materials and labor costs: $450.00
Support costs from Machining Department ($56.4444 3 machine
hours)
169.33
Support costs from Assembly Department ($43.5556 5 direct labor
hours)
217.78
Total unit cost $837.11
Markup (30%) 251.13
Bid price $1,088.24
3-40 (a) Service Departments Production Departments Maintenance
Grounds Machining Assembly Directly
identified costs
$18,000
$14,000
$45,000
$25,000
Allocation of Maintenance Dept. costs
(18,000)
12,000a
6,000b
Allocation of Grounds Dept. costs
(14,000)
6,000c
8,000d
$0 $0 $63,000 $39,000
a $18,,,
00012 00018 000
c $14, ,,
00015 00035 000
b $18,,,
0006 000
18 000 d $14, ,
,000
20 00035 000
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Chapter 3: Traditional Cost Management Systems
73
(b) Service Departments Production Departments Maintenance
Grounds Fabricating Assembly Directly
identified costs $18,000 $14,000 $45,000 $25,000
Allocation of Personnel Dept. costs
(18,000)
1,385a
11,077b
5,538c
Allocation of Maintenance Dept. costs
(15,385)
6,594d
8,791e
$0 $0 $62,671 $39,329
a $18,,,
0001 500
19 500 d $15, ,
,385
15 00035 000
b $18,,,
00012 00019 500
e $15, ,,
38520 00035 000
e $18,,,
0006 000
19 500
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Atkinson, Solution Manual t/a Management Accounting, 4E
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(c) Service Departments Production Departments Maintenance
Grounds Fabricating Assembly Directly
identified costs $18,000.000 $14,000.000 $45,000.000
$25,000.000
Allocation of Maintenance Dept. costs ($19,193.481)
($19,193.481)
1,476.422a
11,811.372b
5,905.686c
Allocation of Grounds Dept. costs ($15,515.274)
1,224.890d
(15,515.274)
6,124.450e
8,165.934f
$62,936.000 $39,072.000
round-off errors
a $19, . ,,
193 4811 500
19 500 d $15, . ,
,515 274
3 00038 000
b $19, . ,,
193 48112 00019 500
e $15, . ,,
515 27415 00038 000
c $19, . ,,
193 4816 000
19 500 f $15, . ,
,515 274
20 00038 000
M G
G M
= +
= +
$18, ,,
$14, ,,
000 150019 500
000 3 00038 500
Therefore,
M M
MM
G
= + +FHGIKJ
=== + =
$18, ,,
$14, ,,
. $19, .$19, .
$14, ,,
, .
$15, .
000 150019 500
000 3 00038 000
0 9939272 076 923193481
000 3 00038 000
19 193481
515274
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Chapter 3: Traditional Cost Management Systems
75
3-41 (a) Service Dept. Cost Allocation: Direct Method Service
Departments Production Departments Maintenance Power Casting
Assembly Directly
identified costs
$750,000
$450,000
$150,000
$110,000
Allocation of Maint. Dept. costs
(750,000)
500,000
250,000
Allocation of Power Dept. costs
(450,000)
250,000
200,000
$0 $0 $900,000 $560,000
Cost driver rate: Casting
machine hours per machine hour
==
$900,,
$11.
00080 000
25
Cost driver rate: Assembly
direct labor hours per direct labor hour
==
$560,,
$9.
00060 000
33
Maintenance: Casting
Assembly
= +RST
UVW =
= +RST
UVW =
750 000 80 00080 000 40 000
500 000
750 000 40 00080 000 40 000
250 000
, ,, ,
,
, ,, ,
,
Power: Casting
Assembly
= +RST
UVW =
= +RST
UVW =
450 000 200 000200 000 160 000
250 000
450 000 160 000200 000 160 000
200 000
, ,, ,
,
, ,, ,
,
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Atkinson, Solution Manual t/a Management Accounting, 4E
76
Direct labor and material costs $32.000
Support costs:
Casting (1 $11.25) $11.250
Assembly (0.5 $9.33) 4.665 15.915
Unit cost $47.915
Number of units per month 1,000.000
Total manufacturing costs per month $47,915.000
Mark up (25%) $11,978.750
Bid price (per month) $59,893.750 (b) Service Dept. Cost
Allocation: Sequential Method
Service Departments Production Departments Maintenance Power
Casting Assembly Directly
identified costs $750,000 $450,000 $150,000 $110,000
Allocation of Maint. Dept. costs
(750,000)
$300,000
300,000
150,000
Allocation of Power Dept. costs (750,000) 416,667 333,333
$0 $0 $866,667 $593,333
Cost driver rate: Casting ==
$ ,,
$ .
866 66780 00010 833 per machine hour
Cost driver rate: Assembly ==
$ ,,
$ .
593 33360 0009 889 per labor hour
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Chapter 3: Traditional Cost Management Systems
77
Direct labor and material costs $32.000
Support costs:
Casting (1 $10.833) $10.833
Assembly (0.5 $9.889) 4.944 15.777
Unit cost $47.777
Number of units per month 1,000.000
Total manufacturing costs per month $47,777.000
Mark up (25%) $11,944.250
Bid price (per month) $59,721.250
(c) M PP M= += +
$750, .$450, .
000 01000 04
Therefore,
M MM MM
= + += +=
$750, . , .$795, .
. $795,
000 01 450 000 0 4000 0 04
0 96 000
a f
M
P
= == + =
$795,.
$828,
, . $828, $781,
000096
125
450 000 04 125 250
Casting Assembly Directly identified costs $150,000 $110,000
Allocation of Maint. Dept. costs $828,125 40% = $331,250
$828,125 20% = $165,625
Allocation of Power Dept. costs $781,250 50% = $390,625 $781,250
40% = $312,500
$871,875 $588,125
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Atkinson, Solution Manual t/a Management Accounting, 4E
78
Cost driver rate: Casting ==
$ ,,
$ .
871 87580 00010 8984 per machine hour
Cost driver rate: Assembly ==
$ ,,
$ .
588 12560 0009 8021 per labor hour
Direct labor and material costs $32.0000
Support costs:
Casting (1 $10.8984) $10.8984
Assembly (0.5 $9.8021) 4.9011 15.7995
Unit cost $47.7995
Number of units per month 1,000.0000
Total manufacturing costs per month $47,799.5000
Mark up (25%) $11,978.7500
Bid price (per month) $59,749.3750
CASES 3-42 (a) Let salaries be denoted as follows: M = manager,
S = senior
mechanic, and J = junior mechanic. The estimated total support
costs are:
( )Personnel costs 1 4 4 Capacity-related costs
$75,000 (4 $65,000) (4 $45,000) $96,800$611,800
M S J+ + += + + +=
Estimated total number of hours on customer jobs = =8 1 750 95%
13 300, , hours. Therefore, the cost driver rate
hourper 46$hours 300,13800,611$ ==
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Chapter 3: Traditional Cost Management Systems
79
Furthermore,
46100
106.51 +=
x
so x = 11. (b) Class A Repairs Class B Repairs Estimated
total conversion costs 611800 60% 080, $367, = 611800 40% 720,
$244, =
Estimated total hours on customer jobs
13 300 12
6 650, , =
13 300 12
6 650, , =
Support cost per customer job hour
367,0806 650
20 per hou,
$55.= r 244,7206 650
80 per hou,
$36.= r
Price per hour $55. . $61.2 111 27 = per hour $36. . $40.8 111
85 = per hour
(c) Job 101: 4 5 1 5. .A B+ Job 102: 2B (Note: A = Class A
repair hours, B = Class B repair hours) Under the present
accounting system, costs charged to: Job 101: 6 51 06 306 36 =. $ .
Job 102: 2 51 06 102 12 =. $ . Under the proposed accounting
system, costs charged to: Job 101: 4 5 61 27 1 5 40 85 337 00. . .
. $ . + = Job 102: 2 40 85 81 70 =. $ .
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Atkinson, Solution Manual t/a Management Accounting, 4E
80
Therefore, under the present accounting system: Job 101 is
undercosted and underpriced. Job 102 is overcosted and overpriced.
(d) Depending on competition for repairs, the proportion of Class
B
repairs may increase and the proportion of Class A repairs may
decrease because of the price change.
(e) The current costing system is simple to administer and
results in
pricing at a uniform labor rate (that includes coverage of
support costs). The proposed costing system more accurately
reflects resource usage, but is more complex to administer and to
communicate to customers in pricing.