ACCT-312: CLASS EXERCISES FROM CHAPTER 5:

5-17 ABC, cost hierarchy, service. (CMA, adapted) Vineyard Test Laboratories does heat testing (HT) and
stress testing (ST) on materials and operates at capacity. Under its current simple costing system,
Vineyard aggregates all operating costs of $1,190,000 into a single overhead cost pool. Vineyard
calculates a rate per test-hour of $17 ($1,190,000 ÷ 70,000 total test-hours). HT uses 40,000 test-hours,
and ST uses 30,000 test-hours. Gary Celeste, Vineyard’s controller, believes that there is enough
variation in test procedures and cost structures to establish separate costing and billing rates for HT and
ST. The market for test services is becoming competitive. Without this information, any mis-costing and
mispricing of its services could cause Vineyard to lose business. Celeste divides Vineyard’s costs into four
activity-cost categories.

a. Direct-labor costs, $146,000. These costs can be directly traced to HT, $100,000, and ST, $46,000.
b. Equipment-related costs (rent, maintenance, energy, and so on), $350,000. These costs are allocated
to HT and ST on the basis of test-hours.
c. Setup costs, $430,000. These costs are allocated to HT and ST on the basis of the number of setup
hours required. HT requires 13,600 setup-hours, and ST requires 3,600 setup-hours.
d. Costs of designing tests, $264,000. These costs are allocated to HT and ST on the basis of the time
required for designing the tests. HT requires 3,000 hours, and ST requires 1,400 hours.

Required:
Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from
the $17 per test-hour that Vineyard calculated using its simple costing system.
1.

Direct Professional Time Support Services Amount

Rate per Number Billed to

Hour
Client of Hours Total Rate Total Client

(1) (2) (3) (4) = (2)  (3) (5) (6) = (4)  (5) (7) = (4) + (6)

SAN ANTONIO

DOMINION

Walliston $640 26 $16,640 30% $4,992 $21,632

Boutin 220 5 1,100 30 330 1,430

Abbington 100 39 3,900 30 1,170 5,070

$28,132

AMSTERDAM

ENTERPRISES

Walliston $640 4 $2,560 30% $768 $ 3,328

Boutin 220 14 3,080 30 924 4,004

Abbington 100 52 5,200 30 1,560 6,760

$14,092

2.

Direct Professional Time Support Services

Rate per Amount

Hour
Number Billed to
Rate per
Client of Hours Total Hour Total Client

(1) (2) (3) (4) = (2)  (3) (5) (6) = (3)  (5) (7) = (4) + (6)
SAN ANTONIO

DOMINION

Walliston $640 26 $16,640 $75 $1,950 $18,590

Boutin 220 5 1,100 75 375 1,475

Abbington 100 39 3,900 75 2,925 6,825

$26,890

AMSTERDAM

ENTERPRISES

Walliston $640 4 $2,560 $75 $ 300 $ 2,860

Boutin 220 14 3,080 75 1,050 4,130

Abbington 100 52 5,200 75 3,900 9,100

$16,090

Requirement 1 Requirement 2

San Antonio Dominion $28,132 $26,890

Amsterdam Enterprises 14,092 16,090

$42,224 $42,980

Both clients use 70 hours of professional labor time. However, San Antonio Dominion uses a
higher proportion of Walliston’s time (26 hours), which is more costly. This attracts the highest
support-services charge when allocated on the basis of direct professional labor costs.

3. Assume that the Walliston Group uses a cause-and-effect criterion when choosing the
allocation base for support services. You could use several pieces of evidence to determine
whether professional labor costs or hours is the driver of support-service costs:
a. Interviews with personnel. For example, staff in the major cost categories in support
services could be interviewed to determine whether Walliston requires more
support per hour than, say, Abbington. The professional labor costs allocation base
implies that an hour of Walliston’s time requires 6.40 ($640 ÷ $100) times more
support-service dollars than does an hour of Abbington’s time.

b. Analysis of tasks undertaken for selected clients. For example, if computer-related

costs are a sizable part of support costs, you could determine if there was a
systematic relationship between the percentage involvement of professionals with
high billing rates on cases and the computer resources consumed for those cases.
5-19 (20 min.) Plantwide, department and ABC indirect cost rates.

1.
Actual plant-wide variable
MOH rate based on machine
hours, $308,600  4,000
$77.15 per machine hour

  

United Holden Leland

Motors Motors Vehicle Total
 Variable manufacturing overhead, allocated
based on machine hours

($77.15  120; $77.15  2,800; $77.15  1,080) $9,258 $216,020 $83,322 $308,600

2.
Total
Variable MOH
Department in 2011 Driver Units Rate

Design $39,000 390 $100 per CAD-design hour 

Production 29,600 370 $ 80 per engineering hour 

Engineering 240,000 4,000 $ 60 per machine hour  

Holden
United Leland
Motors Motors Vehicle Total

Design-related overhead, allocated on CAD-design

hours

(110  $100; 200  $100; 80  $100) $11,000 $ 20,000 $ 8,000 $ 39,000

Production-related overhead, allocated on

engineering hours

(70  $80; 60  $80; 240  $80) 5,600 4,800 19,200 29,600

Engineering-related overhead, allocated on machine

hours

(120  $60; 2,800  $60; 1,080  $60) 7,200 168,000 64,800 240,000

Total     $23,800 $192,800 $92,000 $308,600

3.
United Holden Leland
Motors Motors Vehicle
a. Department rates
(Requirement 2) $23,800 $192,800 $92,000
b. Plantwide rate
(Requirement 1) $ 9,258 $216,020 $83,322
Ratio of (a) ÷ (b) 2.57 0.89 1.10
The variable manufacturing overhead allocated to United Motors increases by 157% under the
department rates, the overhead allocated to Holden decreases by about 11% and the overhead
allocated to Leland increases by about 10%.
The three contracts differ sizably in the way they use the resources of the three
departments.
The percentage of total driver units in each department used by the companies is:

Cost United Holden Leland

Department Driver Motors Motors Vehicle
Design CAD-design hours 28% 51% 21%
Engineering Engineering hours 19 16 65
Production Machine hours 3 70 27

The United Motors contract uses only 3% of total machines hours in 2011, yet uses 28%
of CAD design-hours and 19% of engineering hours. The result is that the plantwide rate, based
on machine hours, will greatly underestimate the cost of resources used on the United Motors
contract. This explains the 157% increase in indirect costs assigned to the United Motors
contract when department rates are used. The Leland Vehicle contract also uses far fewer
machine-hours than engineering-hours and is also undercosted.
In contrast, the Holden Motors contract uses less of design (51%) and engineering (16%)
than of machine-hours (70%). Hence, the use of department rates will report lower indirect costs
for Holden Motors than does a plantwide rate.
Holden Motors was probably complaining under the use of the simple system because its
contract was being overcosted relative to its consumption of MOH resources. United and Leland,
on the other hand, were having their contracts undercosted and underpriced by the simple
system. Assuming that AP is an efficient and competitive supplier, if the new department-based
rates are used to price contracts, United and Leland will be unhappy. AP should explain to
United and Leland how the calculation was done, and point out United’s high use of design and
engineering resources and Leland’s high use of engineering resources relative to production
machine hours. Discuss ways of reducing the consumption of those resources, if possible, and
show willingness to partner with them to do so. If the price rise is going to be steep, perhaps
offer to phase in the new prices.

4. Other than for pricing, AP can also use the information from the department-based
system to examine and streamline its own operations so that there is maximum value-added from
all indirect resources. It might set targets over time to reduce both the consumption of each
indirect resource and the unit costs of the resources. The department-based system gives AP
more opportunities for targeted cost management.

5. It would not be worthwhile to further refine the cost system into an ABC system if (1) a
single activity accounts for a sizable proportion of the department’s costs or (2) significant costs
are incurred on different activities within a department, but each activity has the same cost driver
or (3) there wasn’t much variation among contracts in the consumption of activities within a
department. If, for example, most activities within the design department were, in fact, driven by
CAD-design hours, then the more refined system would be more costly and no more accurate
than the department-based cost system. Even if there was sufficient variation, considering the
relative sizes of the 3 department cost pools, it may only be cost-effective to further analyze the
engineering cost pool, which consumes 78% ($240,000  $308,600) of the manufacturing
overhead.
5-20 (50 min.) Plantwide, department, and activity-cost rates.

1.

Trophies Plaques Total

Direct materials

Forming $13,000 $11,250

Assembly 2,600 9,375

Total 15,600 20,625

Direct Labor

Forming 15,600 9,000

Assembly 7,800 10,500

Total 23,400 19,500

Total direct costs $39,000 $40,125 $79,125

Budgeted ($12, 000  $10,386  $23, 000  $10,960) $56,346 $0.712114

=  =
overhead rate $79,125 $79,125 per dollar of direct cost

Trophies Plaques Total

Direct materials $15,600 $20,625 $ 36,225

Direct labor 23,400 19,500 42,900

Total direct cost 39,000 40,125 79,125

Allocated overhead* 27,772 28,574 56,346

Total costs $66,772 $68,699 $135,471

*Allocated overhead = Total direct cost  Budgeted overhead rate (0.712114).

Budgeted Budgeted Forming Department overhead costs

2. overhead rate — =
Forming Dept. Budgeted Forming Department direct-labor costs

$12, 000  $10,386

=
$15, 600  $9, 000

$22,386
=  $0.91 per Forming Department direct-labor dollar
$24, 600

Budgeted Budgeted Assembly Department overhead costs

overhead rate — =
Assembly Dept. Budgeted Assembly Department direct costs

$23, 000  $10,960

=
($2, 600  $9,375  $7,800  $10,500)

$33,960
=  $1.121718 per Assembly Department direct cost dollar
$30, 275

Trophies Plaques Total

Direct materials $15,600 $20,625 $ 36,225

Direct labor 23,400 19,500 42,900

Total direct cost 39,000 40,125 79,125

Allocated overhead

Forming Dept.a 14,196 8,190 22,386

Assembly Dept.b 11,666 22,294 33,960

Total costs $64,862 $70,609 $135,471

3.

  Trophies Plaques Total

a
Forming Dept.

Direct labor costs $15,600 $ 9,000 $24,600

Allocated overhead

(0.91 × $15,600; $9,000) $14,196 $ 8,190 $22,386

b
Assembly Dept.

Total direct costs

($2,600 + $7,800; $9,375 + $10,500) $10,400 $19,875 $30,275

Allocated overhead

(1.121718  $10,400; $19,875) $11,666 $22,294 $33,960

Forming Department

$12, 000
Budgeted setup rate = = $76.92308 per batch
156 batches

$10,386
Budgeted supervision rate = = $0.422195 per direct-labor dollar
$24, 600

Assembly Department

$23, 000
Budgeted set up rate = = $157.5342 per batch
146 batches
 $10,960
Budgeted supervision rate = = $0.598907 per direct-labor dollar
$18,300
 Trophies Plaques Total

Direct material costs $15,600 $20,625 $36,225

Direct labor costs 23,400 19,500 42,900

Total direct costs 39,000 40,125 79,125

Forming Dept. overhead

Set up

$76.92308  40; 116 3,077 8,923 12,000

Supervision

0.422195  $15,600; $9,000 6,586 3,800 10,386

Assembly Department overhead

Set up

$157.5342  43; 103 6,774 16,226 23,000

Supervision

0.598907  $7,800; $10,500 4,671 6,289 10,960

Total costs $60,108 $75,363 $135,471

4. Tarquin uses more refined cost pools the costs of trophies decreases and costs of
plaques increases. This is because plaques use a higher proportion of cost drivers (batches
of set ups and direct manufacturing labor costs) than trophies whereas the direct costs (the
allocation base used in the simple costing system) are slightly smaller for plaques compared
to trophies. This results in plaques being undercosted and trophies overcosted in the simple
costing system.

Department costing systems increases the costs of plaques relative to trophies

because the forming department costs are allocated based on direct manufacturing labor
costs in the forming department and plaques use more direct manufacturing labor in this
department compared to trophies.

Disaggregated information can improve decisions by allowing managers to see the

details which helps them understand how different aspects of cost influence total cost per
unit. Managers can also understand the drivers of different cost categories and use this
information for pricing and product-mix decisions, cost reduction and process-improvement
decisions, design decisions, and to plan and manage activities. However, too much detail
can overload managers who don’t understand the data or what it means. Also, managers
looking at per-unit data may be misled when considering costs that aren’t unit-level costs.
5-21 (10–15 min.) ABC, process costing.

1. Rates per unit cost driver.

Activity Cost Driver Rate

Machining Machine-hours $375,000 ÷ (25,000 + 50,000)

= $5 per machine-hour

Set up Production runs $120,000 ÷ (50 + 50)

= $1,200 per production run

Inspection Inspection-hours $105,000 ÷ (1,000 + 500)

= $70 per inspection-hour

 Overhead cost per unit:
Mathematical Financial

Machining: $5 × 25,000; 50,000 $125,000 $250,000

Set up: $1,200 × 50; $1,200 × 50 60,000 60,000

Inspection: $70 × 1,000; $70 × 500 70,000 35,000

Total manufacturing overhead costs $255,000 $345,000

Divide by number of units ÷ 50,000 ÷100,000

Manufacturing overhead cost per unit $ 5.10 $ 3.45

2.

Mathematical Financial

Manufacturing cost per unit:

Direct materials

$150,000 ÷ 50,000 $3.00

$300,000 ÷ 100,000 $3.00

Direct manufacturing labor

$50,000 ÷ 50,000 1.00

$100,000 ÷ 100,000 1.00

Manufacturing overhead (from requirement 1) 5.10 3.45

Manufacturing cost per unit $9.10 $7.45