Managerial Accounting
Managerial Accounting
7th Edition
ISBN: 9781260247886
Author: Wild
Publisher: MCG
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Chapter 4, Problem 1PSB
To determine

Activity Based Costing (ABC) Method:

Activity based costing (ABC) is a method of costing that determines the tasks that the company executes and allocates the cost of each task to all products and services.

Plant Wide Overhead Rate:

Plantwide overhead rate is a sole overhead rate that a company uses to assign all of its manufacturing overhead costs to its products.

Activity Rates:

Activity rates used to assign overhead cost to products and customers. Activity rate can be computed by dividing the cost assigned to the activity by the total activity

Overhead Costs:

Overhead costs also referred as manufacturing overhead is the sum total of costs incurred in producing a product other than the variable costs such as direct material and direct labor

1.

To compute:Manufacturing cost per unit and gross profit per unit.

Expert Solution
Check Mark

Explanation of Solution

Given below is the table for the calculation of plantwide overhead rate:

Plantwide overhead rate
Particulars ($)
Indirect manufacturing costs
Engineering support costs 56,250
Electricity costs 112,500
Setup costs 41,250
Total indirect manufacturing costs [A] 210,000
Budgeted machine hours:
Standard ( 40,000 units×3 machine hours per unit ) 120,000 hours
Deluxe ( 10,000 units×3 machine hours per unit ) 30,000 hours
Total budgeted machine hours [B] 150,000 hours
Plantwide overhead rate [ ( A ) ( B ) ] $1.40
Table(1)

Plantwide overhead rate is $1.40 per machine hour.

Given below is the computation of manufacturing cost per unit:

Cost per unit
Particulars Standard ($) Deluxe B ($)
Direct materials 4.00 8.00
Direct labor ( Direct labor hours per unit×Direct labor rate ) 80.00 100.00
Indirect manufacturing overhead cost ( Machine hours per unit×Plantwide overhead rate ) 4.20 4.20
Manufacturing cost per unit 88.20 112.20
Table(2)

Calculation of gross profit per unit:

Gross profit per unit
Particulars Standard ($) Deluxe B ($)
Market price 92.00 125.00
Cost (88.20) (112.20)
Gross profit per unit 3.80 12.80
Table(3)

Hence,manufacturing cost per unit for Standard is $88.20 per unit and for Deluxe is $112.20 per unit. Gross profit per unit for standard is $3.80per unit and for Deluxe is $12.80 per unit.

2.

To determine

To compute: Gross profit generated by each customer of Standard and Deluxe using plant wide overhead rate.

2.

Expert Solution
Check Mark

Explanation of Solution

Given below is the computation of manufacturing cost using plant wide overhead rate using ABC method:

Calculation of gross profit generated by each customer:

Profit generated by each customer
Particulars Standard Deluxe
Gross profit per unit ( A ) $3.80 $12.80
Number of units 40,000 10,000
Number of customers 1,000 1,000
Units purchased by customers ( B ) 40 10
Gross profit generated by each customer [ ( A ) ( B ) ] $152.00 $128.00
Table(4)

Gross profit generated by each customer of Standard is $152 and Deluxe is $128.

Given below is the cost of providing service to each customer:

Given,
Customer service cost is $250,000.
Number of customers is 2,000 ( 1,000 Standard+1,000 Deluxe ) .

Formula for calculating cost of providing service to each customer:

   cost of providing service to each customer= Customer service costs Number of customers

Substitute $250,000 for the value of customer service costs and 2,000 for the value of number of customers.

   cost of providing service to each customer= $250,000 2,000 =$125 per customer

The cost of providing service to each customer is $125 per customer.

Given below is the calculation of profit/loss per customer:

Profit/loss per customer
Standard ($) Deluxe ($)
Gross profit per customer 152 128
Cost of providing service to each customer (125) (125)
Profit/loss per customer 27 3
Table(5)
  • From the above calculation it can be interpreted that gross profit per customer of Standard and Deluxe are sufficient to meet the cost of providing service to each customer.
  • The comparison between gross profit per customer and cost of providing service to each customer helps to understand whether Company is earning sufficient gross profit to meet the cost of providing service to each customer.

Hence, gross profit generated by each customer of Standard is $152 and Deluxe is $128. Cost of providing service to each customer is $125.

3.

To determine

To compute: Manufacturing cost of each product using ABC method.

3.

Expert Solution
Check Mark

Explanation of Solution

Activity ( A ) Cost ($) ( B ) Driver Quantity ( C ) ( Standard+Deluxe ) Cost per driver ($) ( B ) ( C )
Engineering support costs 56,250 Engineering modifications 75 750
Electricity costs 112,500 Machine hours 150,000 0.75
Setup costs 41,250 Batches 250 165
Table(6)

Given below is the computation of total manufacturing cost per unit:

Total cost per unit
Activity
Quantity per driver
Overhead costs
Standard ($)
Deluxe ($)
Standard ($)
Deluxe ($)
Cost per driver ($)
Engineering support 50 25 750 37,500 18,750
Electricity 120,000 30,000 0.75 90,000 22,500
Setup cost 175 75 165 28,875 12,375
Total Overhead cost ( A ) 156,375 53,625
Number of units ( B ) 40,000 10,000
Overhead cost per unit [ ( A ) ( B ) ] 3.91 5.36
Direct materials per unit 4.00 8.00
Direct labor per unit 80.00 100.00
Total 87.91 113.36
Table(7)

Given below is the calculation of gross profit:

Gross profit per unit
Particulars Standard ($) Deluxe B ($)
Market price 92.00 125.00
Less: Manufacturing cost per unit (87.91) (113.36)
Gross profit per unit 4.09 11.64
Table(8)

Working note:

Calculation of machine hours:

   Machine hours=( ( Units of Standard×Machine hour per unit of Standard ) +( Units of Deluxe×Machine hour per unit of Deluxe ) ) =( 40,000 units×3 )+( 10,000 units×3 ) =120,000 units+30,000 units =150,000 units

Hence,manufacturing cost of Standard is $87.91 and Deluxe is $113.36.Gross profit per unit for Standard is $4.09 and Deluxe is $11.64 per unit.

4.

To determine

To compute: Profit generated by each customer.

4.

Expert Solution
Check Mark

Explanation of Solution

Given below is the computation of profit generated by each customer:

Particulars Standard ($) Deluxe B ($)
Gross profit per unit ( A ) $4.09 $11.64
Number of units 40,000 units 10,000 units
Number of customers 1,000 1,000
Units purchased by customers ( B ) 40 10
Gross profit per customer ( A )×( B ) $163.60 $116.40
Table(9)

The cost of providing service to each customer is $125 per customer.

Given below is the calculation of profit/loss per customer:

Profit/loss per customer
Standard ($) Deluxe ($)
Gross profit per customer 163.60 116.40
Cost of providing service to each customer 125 125
Profit/loss per customer $38.60 ($8.60)
Table(10)
  • From the above calculation it can be interpreted that gross profit per customer of Standard is sufficient to meet the cost of providing service to each customeras it earns a profit of $38.60 Whereas gross profit per customer of Deluxeis not sufficient to meet the cost of providing service to each customer as Deluxe incurs a loss of $8.60.
  • The comparison between gross profit per customer and cost of providing service to each customer helps to understand whether Company is earning sufficient gross profit to meet the cost of providing service to each customer.

Hence,gross profit generated by each customer of standard is $163.60 and Deluxe is $116.40.

5.

To determine

To identify: Activity based costing gives better information to the managers.

5.

Expert Solution
Check Mark

Explanation of Solution

  • Activity based costing method is more preferable than plant wide overhead rate method. Activity based costing method allocates the cost of each task to all products and services. Whereas in plant wide overhead rate method, costs are allocated on the basis of volume.
  • Plant wide overhead is only feasible for companies which manufactures only single product or provides only single service.
  • It is preferable to use activity based costing in companies where more than one product is manufactured or more than one servicesare provided, for more accurate results.

Hence, activity based costing gives better information to the managers.

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Chapter 4 Solutions

Managerial Accounting

Ch. 4 - What is a cost object?Ch. 4 - Explain why a single plantwide overhead rate can...Ch. 4 - Why are multiple departmental overhead rates more...Ch. 4 - Prob. 9DQCh. 4 - Prob. 10DQCh. 4 - Prob. 11DQCh. 4 - Prob. 12DQCh. 4 - Prob. 13DQCh. 4 - Prob. 14DQCh. 4 - 15. What are the four activity levels associated...Ch. 4 - Prob. 16DQCh. 4 - Prob. 17DQCh. 4 - Prob. 18DQCh. 4 - Prob. 1QSCh. 4 - Prob. 2QSCh. 4 - Prob. 3QSCh. 4 - Prob. 4QSCh. 4 - Prob. 5QSCh. 4 - Prob. 6QSCh. 4 - Prob. 7QSCh. 4 - Prob. 8QSCh. 4 - Plant wide rate method P1 A manufacturer uses...Ch. 4 - Prob. 10QSCh. 4 - Prob. 11QSCh. 4 - Prob. 12QSCh. 4 - Prob. 13QSCh. 4 - Prob. 14QSCh. 4 - Prob. 15QSCh. 4 - Prob. 16QSCh. 4 - Exercise 17-17 Identifying activity levels C3...Ch. 4 - Prob. 2ECh. 4 - Exercise 17-1 Computing Plantwide overhead rates...Ch. 4 - Prob. 4ECh. 4 - Prob. 5ECh. 4 - Prob. 6ECh. 4 - Exercise 17-5 Departmental overhead rates P2 Refer...Ch. 4 - Prob. 8ECh. 4 - Prob. 9ECh. 4 - Prob. 10ECh. 4 - Prob. 11ECh. 4 - Prob. 12ECh. 4 - Prob. 13ECh. 4 - Prob. 14ECh. 4 - Prob. 15ECh. 4 - Prob. 16ECh. 4 - Exerciser 17-14 Activity-based costing P3 A2...Ch. 4 - Prob. 18ECh. 4 - Problem 17-1A Comparing costs using ABC with the...Ch. 4 - Prob. 2PSACh. 4 - Prob. 3PSACh. 4 - Prob. 4PSACh. 4 - Prob. 5PSACh. 4 - Prob. 1PSBCh. 4 - Prob. 2PSBCh. 4 - Prob. 3PSBCh. 4 - Prob. 4PSBCh. 4 - Prob. 5PSBCh. 4 - Prob. 4SPCh. 4 - Prob. 1AACh. 4 - Prob. 2AACh. 4 - Prob. 3AACh. 4 - Prob. 1BTNCh. 4 - Prob. 2BTNCh. 4 - Accounting professionals who for private companies...Ch. 4 - Prob. 4BTNCh. 4 - Prob. 5BTNCh. 4 - Visit and observe the processes of three different...
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