Managerial Accounting: Tools for Business Decision Making Exercises

Question
E4-11 (a,b)

Sorce Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $89,500 were estimated. An analysis of estimated overhead costs reveals the following activities.

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Activity

Cost Driver

Total Cost

1. Materials handling

Number of requisitions

$35,000

2. Machine setups

Number of setups

27,500

3. Quality inspections

Number of inspections

27,000

$89,500

The cost driver volume for each product was as follows.

Cost Driver

Instruments

Gauges

Total

Number of requisitions

400

600

1,000

Number of setups

200

300

500

Number of inspections

200

400

600

a) Determine the overhead rate for each activity.

b) Assign the manufacturing overhead costs for April to the two products using activity-based costing.

P4-3A (a,c)

Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2011 are as follows.

Overhead Cost Pools

Amount

Purchasing

$ 57,000

Handling materials

82,000

Production (cutting, milling, finishing)

210,000

Setting up machines

85,000

Inspecting

90,000

Inventory control (raw materials and finished goods)

126,000

Utilities

180,000

Total budget overhead costs

$830,000

For the last 4 years, Skaros Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2011, 100,000 machine hours are budgeted.
Anthony Morse, owner-manager of Skaros Stairs Co., recently directed his accountant, Neal Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Anthony Morse’s request, Neal and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Activity Cost Pools

Cost Drivers

Expected
Use of
Cost Drivers

Purchasing

Number of orders

600

Handling materials

Number of moves

8,000

Production (cutting, milling, finishing)

Direct labor hours

100,000

Setting up machines

Number of setups

1,250

Inspecting

Number of inspections

6,000

Inventory control (raw materials and finished goods)

Number of components

168,000

Utilities

Square feet occupied

90,000

David Hannon, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At David’s request, Neal prepares cost estimates for producing components for 280 stairs so David can submit a contract price per stair to Community Builders. He accumulates the following data for the production of 280 stairways.

Direct materials

$103,600

Direct labor

$112,000

Machine hours

14,500

Direct labor hours

5,000

Number of purchase orders

60

Number of material moves

800

Number of machine setups

100

Number of inspections

450

Number of components

16,000

Number of square feet occupied

8,000

Compute the predetermined overhead rate using traditional costing with machine hours as the basis.(Enter answer to 2 decimal places, e.g. 10.50.)

What is the manufacturing cost per stairway under traditional costing?(Use rounded amount from part (a). Round answer to 2 decimal places, e.g. 10.50.)

P4-4A (a-d)

Polzin Corporation produces two grades of wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Polzin also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. LiteMist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line.
Greg Kagen, president and founder of Polzin, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line, and that it was always quite profitable. It wasn’t until the company started producing the more complicated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of LiteMist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; LiteMist requires such maintenance every 600 liters.
Greg has asked the Accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected.

CoolDay

LiteMist

Direct materials per liter

$0.40

$1.20

Direct labor cost per liter

$0.25

$0.50

Direct labor hours per liter

0.05

0.09

Total direct labor hours

150,000

27,000

Activity Cost Pool

Cost Driver

Estimated Overhead

Expected
Use of
Cost Drivers

Expected Use of
Cost Drivers per Product

Activity Cost Pool

Cost Driver

Estimated Overhead

Expected
Use of
Cost Drivers

Expected Use of
Cost Drivers per Product

CoolDay

LiteMist

Grape processing

Cart of grapes

$145,860

6,600

6,000

600

Aging

Total months

396,000

6,600,000

3,000,000

3,600,000

Bottling and corking

Number of bottles

270,000

900,000

600,000

300,000

Labeling and boxing

Number of bottles

189,000

900,000

600,000

300,000

Maintain and inspect equipment

Number of inspections

240,800

800

350

450

$1,241,660

Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products.(Round computations and final answers to 3 decimal places, e.g. 2.250.)

Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).(Enter overhead rate to 2 decimal places, e.g. 10.50.)

Prepare a schedule assigning each activity’s overhead cost pool to each product, based on the use of cost drivers. What is the overhead cost per liter?(Enter overhead rate to 2 decimal places, e.g. 10.50 and round overhead cost per liter to 3 decimal places, e.g. 2.250.)

Compute the total manufacturing cost per liter for both products under ABC.(Round answers to 3 decimal places, e.g. 2.250.)

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