Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Textbook Question
Chapter 5, Problem 5.26E
Activity-based
| Interior | Exterior | |
| Units sold | 3,200 | 1,800 |
| Selling price | $ 125 | $ 200 |
| Direct material cost per unit | $ 30 | $ 45 |
| Direct manufacturing labor cost per hour | $ 16 | $ 16 |
| Direct manufacturing labor-hours per unit | 1.50 | 2.25 |
| Production runs | 40 | 85 |
| Material moves | 72 | 168 |
| Machine setups | 45 | 155 |
| Machine-hours | 5,500 | 4,500 |
| Number of inspections | 250 | 150 |
The owners have heard of other companies in the industry that are now using an activity-based costing system and are curious how an ABC system would affect their product costing decisions. After analyzing the indirect-cost pool for Decorative Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine setup, assembly, inspection, and marketing. Decorative Doors collected the following data related to the indirect-cost activities:
| Activity | Activity Cost | Activity Cost Driver |
| Production scheduling | $95,000 | Production runs |
| Material handling | $45,000 | Material moves |
| Machine setup | $25,000 | Machine setups |
| Assembly | $60,000 | Machine-hours |
| Inspection | $ 8,000 | Number of inspections |
Marketing costs were determined to be 3% of the sales revenue for each type of door.
- 1. Calculate the cost of an interior door and an exterior door under the existing simple costing system.
Required
- 2. Calculate the cost of an interior door and an exterior door under an activity-based costing system.
- 3. Compare the costs of the doors in requirements 1 and 2. Why do the simple and activity-based costing systems differ in the cost of an interior door and an exterior door?
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Decorative Doors Ltd produces two types of doors: interior and exterior. The company’s costing system has two direct-cost categories (materials and labour) and one indirect-cost pool. The costing system allocates indirect costs on the basis of machine-hours. Recently, the owners of Decorative Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Decorative Doors production for the most recent year is as follows:
Particulars
Interior
Exterior
Units sold
3200
1800
Selling price
$125
$200
Direct material cost per unit
$30
$45
Direct production labour cost per hour5
$16
$16
Direct production labour-hours per unit
1.50
2.25
Production runs
40
85
Material moves
72
168
Machine set-ups
45
155
Machine-hours
5500
4500
Number of inspections
250
150
The owners have heard of other companies in the industry that are now…
Cost Classification
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Bradford Watch Company manufactures luxury and sports watches both for male and female customers. The luxury watches are famous for the high-end design materials while the sports watches are popular for their utilities.
The company uses a traditional costing system in assigning overhead costs to the products on the basis of direct labour hours. However, the Production Manager seeks to replace the existing system with the Activity-based Costing (ABC) system to keep control over costs and offer more competitive pricing. After reviewing the existing costing system and interviewing the company’s personnel in relevant departments, the accountant compiled a report highlighting resources and costs involved in manufacturing watches per month:
The following table lists out the overhead cost:
Activity cost pool
Overhead cost (£)
Additional Notes
Job-order set up
33,000
Procurement and placement
360,000
Installation of winding system
195,000
An auto winding…
Chapter 5 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 5 - What is broad averaging, and what consequences can...Ch. 5 - Why should managers worry about product...Ch. 5 - What is costing system refinement? Describe three...Ch. 5 - What is an activity-based approach to designing a...Ch. 5 - Describe four levels of a cost hierarchy.Ch. 5 - Why is it important to classify costs into a cost...Ch. 5 - What are the key reasons for product cost...Ch. 5 - Prob. 5.8QCh. 5 - Department indirect-cost rates are never...Ch. 5 - Prob. 5.10Q
Ch. 5 - Prob. 5.11QCh. 5 - Prob. 5.12QCh. 5 - Activity-based costing is the wave of the present...Ch. 5 - Increasing the number of indirect-cost pools is...Ch. 5 - The controller of a retail company has just had a...Ch. 5 - Conroe Company is reviewing the data provided by...Ch. 5 - Prob. 5.17MCQCh. 5 - Cost hierarchy. Roberta, Inc., manufactures...Ch. 5 - ABC, cost hierarchy, service. (CMA, adapted)...Ch. 5 - Alternative allocation bases for a professional...Ch. 5 - Plant-wide, department, and ABC Indirect cost...Ch. 5 - Plant-wide, department, and activity-cost rates....Ch. 5 - ABC, process costing. Sander Company produces...Ch. 5 - Department costing, service company. DLN is an...Ch. 5 - Activity-based costing, service company....Ch. 5 - Activity-based costing, manufacturing. Decorative...Ch. 5 - ABC, retail product-line profitability. Fitzgerald...Ch. 5 - Prob. 5.28ECh. 5 - Activity-based costing. The job-costing system at...Ch. 5 - ABC, product costing at banks,...Ch. 5 - Problems 5-31 Job costing with single direct-cost...Ch. 5 - Job costing with multiple direct-cost categories,...Ch. 5 - Job costing with multiple direct-cost categories,...Ch. 5 - First-stage allocation, time-driven activity-based...Ch. 5 - First-stage allocation, time-driven activity-based...Ch. 5 - Department and activity-cost rates, service...Ch. 5 - Activity-based costing, merchandising. Pharmahelp,...Ch. 5 - Choosing cost drivers, activity-based costing,...Ch. 5 - ABC, health care. Crosstown Health Center runs two...Ch. 5 - Unused capacity, activity-based costing,...Ch. 5 - Unused capacity, activity-based costing,...Ch. 5 - ABC, implementation, ethics. (CMA, adapted) Plum...Ch. 5 - Activity-based costing, activity-based management,...
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