Two-Stage ABC for Manufacturing: Reassigning Costs to Cost

Two-Stage ABC for Manufacturing: Reassigning Costs to Cost Objectives
National Technology, LTD. has developed the following activity cost information for its manufacturing activities:
Activity Activity Cost
Machine setup $65.00 per batch
Movement 17.00 per batch
0.10 per pound
Drilling 3.00 per hole
Welding 5.00 per inch
Shaping 27.00 per hour
Assembly 18.00 per hour
Inspection 2.00 per unit

Filling an order for a batch of 50 fireplace inserts that weighed 150 pounds each required the following:
• Three batch moves
• Two sets of inspections
• Drilling five holes in each unit
• Completing 80 inches of welds on each unit
• Thirty minutes of shaping for each unit
• One hour of assembly per unit
Determine the activity cost of converting the raw materials into 50 fireplace inserts.
Fireplace Inserts
Activity Cost
Set-up $Answer
Movement
Batch $Answer
Weight Answer
Inspection Answer
Drilling Answer
Welding Answer
Shaping Answer
Assembly Answer
________________________________________
Total $Answer
________________________________________

Stage 1 ABC For Machine Shop: Assigning Costs to Activity
As the chief engineer of a small fabrication shop, Brenda Tolliver refers to herself as a “jack-of-all-trades.” When an order for a new product comes in, Brenda must do the following:
1. Design the product to meet customer requirements.
2. Prepare a bill of materials (a list of materials required to produce the product).
3. Prepare an operations list (a sequential list of the steps involved in manufacturing the product).
Each time the foundry manufactures a batch of the product, Brenda must perform these activities:
1. Schedule the job.
2. Supervise the setup of machines that will work on the job.
3. Inspect the first unit produced to verify that it meets specifications.
Brenda supervises the production employees who perform the actual work on individual units of product. She is also responsible for employee training, ensuring that production facilities are in proper operating condition, and attending professional meetings. Brenda’s estimates (in percent) of time spent on each of these activities last year are as follows:
Designing product 12%
Preparing bills of materials 5%
Preparing operations lists 12%
Scheduling jobs 15%
Supervising setups 5%
Inspecting first units 2%
Supervising production 20%
Training employees 18%
Maintaining facility 7%
Attending professional meetings 4%
100%

Assuming Brenda Tolliver’s salary is $121,000 per year, determine the dollar amount of her salary assigned to unit-, batch-, product-, and facility-level activities. (You may need to review Chapter 2 before answering this question.)

% of Time Spent on Activity Assignment of Salary
Unit level:
Answer
Answer
Mark 0.00 out of 1.00
%
________________________________________
Total Answer
Mark 0.00 out of 1.00
% $Answer
Mark 0.00 out of 1.00
Batch level:
Job scheduling Answer
Mark 0.00 out of 1.00
%
Answer
Answer
Mark 0.00 out of 1.00
%
Answer
Answer
Mark 0.00 out of 1.00
%
________________________________________
Total Answer
Mark 0.00 out of 1.00
% Answer
Mark 0.00 out of 1.00
Product level:
Product design Answer
Mark 0.00 out of 1.00
%
Answer
Answer
Mark 0.00 out of 1.00
%
Answer
Answer
Mark 0.00 out of 1.00
%
________________________________________
Total Answer
Mark 0.00 out of 1.00
% Answer
Mark 0.00 out of 1.00
Facility level:
Employee training Answer
Mark 0.00 out of 1.00
%
Answer
Answer
Mark 0.00 out of 1.00
%
Answer
Answer
Mark 0.00 out of 1.00
%
________________________________________
Total Answer
Mark 0.00 out of 1.00
%
________________________________________ Answer
Mark 0.00 out of 1.00
________________________________________
Grand total Answer
Mark 0.00 out of 1.00
%
________________________________________ $Answer
Mark 0.00 out of 1.00
________________________________________

Relevant Range and High-Low Method
The following selected data relate to the major cost categories experienced by Shaw Company at varying levels of operating volumes. Assuming that all operating volumes are within the relevant range, calculate the appropriate costs in each column in which blanks appear:
Total Cost (@ 3,000 Units) Total Cost (@ 4,000 units) Variable Cost per Unit Total Fixed Cost Total Cost (@ 5,000 units)
Direct labor (variable) $63,000 $84,000 $Answer
$Answer
$Answer
Factory supervision (semi-variable) 50,000 65,000 $Answer
$Answer
$Answer
Factory depreciation (fixed) 33,000 33,000 $Answer
$Answer
$Answer
Cost-Volume Profit Analysis
Hailstorm Company sells a single product for $22 per unit. Variable costs are $14 per unit and fixed costs are $65,000 at an operating level of 7,000 to 12,000 units.
a. What is Hailstorm Company’s break-even point in units?
Answer units
b. How many units must be sold to earn $12,000 before income tax?
Answer units
c. How many units must be sold to earn $13,000 after income tax, assuming a 35% tax rate?
Answer units

Break-Even Calculations
Compute the break-even point in units for each of the following independent situations:
Unit Selling Price Unit Variable Cost Total Fixed Cost
a. $10 $7 $180,000
b. 12 9 288,000
c. 5 3 108,000

a. Answer units
b. Answer units
c. Answer units
Variable and Absorption Costing
During its first year, Walnut, Inc., showed an $36 per-unit profit under absorption costing but would have reported a total profit $32,000 less under variable costing. If production exceeded sales by 500 units and an average contribution margin of 62.5% was maintained, what is the apparent:
a. Fixed cost per unit?
$Answer per unit
b. Sales price per unit?
$Answer per unit
c. Variable cost per unit?
$Answer per unit
d. Unit sales volume if total profit under absorption costing was $198,000?
Answer units
Variable and Absorption Costing
Chandler Company sells its product for $109 per unit. Variable manufacturing costs per unit are $48, and fixed manufacturing costs at the normal operating level of 12,000 units are $240,000. Variable selling expenses are $18 per unit sold. Fixed administrative expenses total $104,000. Chandler had no beginning inventory in 2016. During 2016, the company produced 12,000 units and sold 9,000. Would net income for Chandler Company in 2016 be higher if calculated using variable costing or using absorption costing?

Calculate reported income using each method.
Do not use negative signs with any answers.
Absorption Costing Income Statement
Sales $Answer

Cost of Goods Sold:
Beginning Inventory Answer

Variable Costs Answer

Fixed Costs Answer

Less: Ending Inventory Answer
________________________________________
Cost of Goods Sold Answer
________________________________________
Answer
Answer

Answer
Answer

Administrative expense Answer
________________________________________
Net Income $Answer
________________________________________

Variable Costing Income Statement
Sales $Answer

Cost of Goods Sold:
Beginning Inventory Answer

Variable Costs Answer

Answer
Answer
________________________________________
Variable cost of goods sold Answer

Answer
Answer
________________________________________
Answer
Answer

Fixed costs:
Answer
Answer

Administrative Expense Answer
________________________________________
Total Fixed Cost Answer
________________________________________
Net Income $Answer
________________________________________

Total Manufacturing Cost, Income Statement, Unit Cost, and Selling Price
Two inventors, recently organized as Innovation, Inc., consult you regarding a planned new product.They have estimates of the costs of materials, labor, overhead, and other expenses for 2016 but need to know how much to charge for each unit to earn a profit in 2016 equal to 15% of their estimated total long-term investment of $800,000 (ignore income taxes).
Their plans indicate that each unit of the new product requires the following:
Direct Material 4 lb. of a material costing $10 per lb.
Direct labor 2 hrs. of a metal former’s time at $22 per hr.
0.6 hr. of an assembler’s time at $16 per hr.

Major items of production overhead would be annual rent of $92,920 for a factory building, $57,320 rent for machinery, and $43,400 of indirect material. Other production overhead is estimated to be $466,560. Selling expenses are an estimated 30% of total sales, and non-factory administrative expenses are 20% of total sales.

The consensus at Innovation is that during 2016 10,000 units of product should be produced for selling and another 2,000 units should be produced for the next year’s beginning inventory. Also, an extra 3,000 pounds of material will be purchased as beginning inventory for the next year. Because of the nature of the manufacturing process, all units started must be completed, so work in process inventories are negligible.
Required
a. Incorporate the above data into a schedule of estimated total manufacturing costs and compute the unit production cost for 2016.
Do not use negative signs with any of your answers.
Estimated Total Manufacturing Cost
For the Year Ended December 31,2016
Direct material:
Beginning materials inventory $Answer

Answer
Answer
________________________________________
Cost of material available Answer

Less: Answer
Answer
________________________________________
Total materials used Answer

Less: Answer
Answer
________________________________________
Direct materials used $Answer
Direct labor Answer
Manufacturing overhead
Indirect material Answer

Building rent Answer

Machinery rent Answer

Answer
Answer
________________________________________
Total manufacturing overhead Answer
________________________________________
Total manufacturing costs $Answer
________________________________________

Round answer to two decimal places.
Product cost per unit $Answer
b. Prepare an estimated income statement that would provide the target amount of profit for 2016.

Income Statement
For the Year Ended December 31,2016
Answer
$Answer
Answer
Answer
________________________________________
Gross profit on sales Answer
Operating expenses:
Answer
$Answer

Answer
Answer
________________________________________ Answer
________________________________________
Answer
Answer
________________________________________

c. What unit sales price should Innovation charge for the new product?

$Answer

Calculate and Use Manufacturing Overhead Rate
During the coming accounting year, Ester Manufacturing, Inc., anticipates the following costs, expenses, and operating data:
Direct material (15,000 lb.) $ 90,000
Direct labor (@ $12/hr.) 240,000
Indirect material 14,000
Indirect labor 24,000
Sales commissions 36,000
Factory administration 26,000
Non factory administrative expenses 28,000
Other manufacturing overhead* 56,000
*Provides for operating 75,000 machine hours.

a. Calculate the predetermined manufacturing overhead rate for the coming year for each of the following application bases: (1) direct labor hours, (2) direct labor costs, and (3) machine hours.
Round direct labor hours and machine hours answers to two decimal places, when applicable. Round direct labor costs to two decimal places, when applicable (example: 76.25%).
Application base Manufacturing
overhead rate
Direct labor hours $Answer
Direct labor costs Answer %
Machine hours $Answer

b. For each item in requirement a, determine the proper application of manufacturing overhead to Job 128, to which 18 direct labor hours, $200 of direct labor cost, and 64 machine hours have been charged.
Round answers to two decimal places, when applicable.
Application base Manufacturing
overhead rate
Direct labor hours $Answer
Direct labor costs $Answer
Machine hours $Answer

Break-Even with Multiple Products
Warner Company has $228,000 of total fixed costs and sells products A and B with a product mix of 40% A and 60% B. Selling prices and variable costs for A and B result in contribution margins per unit of $12 and $8, respectively. Compute the break-even point.
Enter product mix answers in decimal form. Round weighted average unit contribution margin to two decimal places, if applicable.
Product Product Mix Contribution Margin per unit Weighted average unit contribution margin
A Answer
$Answer
$Answer
B Answer
$Answer
$Answer
________________________________________
$Answer
________________________________________________________________________________

Break-even point = Answer units

Variable and Absorption Costing
Grant Company sells its product for $57 per unit. Variable manufacturing costs per unit are $35, and fixed manufacturing costs at the normal operating level of 18,000 units are $90,000. Variable selling expenses are $5 per unit sold. Fixed administrative expenses total $155,000. Grant had 7,000 units at a per-unit cost of $40 in beginning inventory in 2016. During 2016, the company produced 18,000 units and sold 20,000. Would net income for Grant Company in 2016 be higher if calculated using variable costing or using absorption costing?

Calculate reported income using each method.
Do not use negative signs with any answers.
Absorption Costing Income Statement
Sales $Answer

Cost of Goods Sold:
Beginning Inventory Answer

Variable Costs Answer

Fixed Costs Answer

Less: Ending Inventory Answer
________________________________________
Cost of Goods Sold Answer
________________________________________
Answer
Answer

Answer
Answer

Administrative expense Answer
________________________________________
Net Income $Answer
________________________________________

Variable Costing Income Statement
Sales $Answer

Cost of Goods Sold:
Beginning Inventory Answer

Variable Costs Answer

Answer
Answer
________________________________________
Variable cost of goods sold Answer

Answer
Answer
________________________________________
Answer
Answer

Fixed costs:
Answer
Answer

Administrative Expense Answer
________________________________________
Total Fixed Cost Answer
________________________________________
Net Income $Answer
________________________________________