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Cost Accounting Problems

The document discusses various costing methods and their implications for different companies, including Hamilton, Inc., Walliston Group, Automotive Products, Quikprint Corporation, and National Savings Bank. It covers cost classifications, allocation bases, and the impact of activity-based costing on pricing and profitability assessments. The document also highlights the importance of accurately determining costs to avoid miscosting and ensure competitive pricing.

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21 views4 pages

Cost Accounting Problems

The document discusses various costing methods and their implications for different companies, including Hamilton, Inc., Walliston Group, Automotive Products, Quikprint Corporation, and National Savings Bank. It covers cost classifications, allocation bases, and the impact of activity-based costing on pricing and profitability assessments. The document also highlights the importance of accurately determining costs to avoid miscosting and ensure competitive pricing.

Uploaded by

sophiaarayata02
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

I.

Cost hierarchy
Hamilton, Inc., manufactures boom boxes (music systems with radio, cassette, and compact disc players) for
several well-known companies. The boom boxes differ significantly in their complexity and their manufacturing
batch sizes. The following costs were incurred in 2011:
a) Indirect manufacturing labor costs such as supervision that supports direct manufacturing labor,
$1,450,000
b) Procurement costs of placing purchase orders, receiving materials, and paying suppliers related to the
number of purchase orders placed, $850,000
c) Cost of indirect materials, $275,000
d) Costs incurred to set up machines each time a different product needs to be manufactured, $630,000
e) Designing processes, drawing process charts, making engineering process changes for products,
$775,000
f) Machine-related overhead costs such as depreciation, maintenance, production engineering $1,500,000
(These resources relate to the activity of running the machines.)
g) Plant management, plant rent, and plant insurance, $925,000

Required:
1. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility
sustaining. Explain each answer.
2. Consider two types of boom boxes made by Hamilton, Inc. One boom box is complex to make and is
produced in many batches. The other boom box is simple to make and is produced in few batches.
Suppose that Hamilton needs the same number of machine-hours to make each type of boom box and
that Hamilton allocates all overhead costs using machine-hours as the only allocation base. How, if at
all, would the boom boxes be miscosted? Briefly explain why.

II. Alternative allocation bases for a professional services firm


The Walliston Group (WG) provides tax advice to multinational firms. WG charges clients for (a) direct
professional time (at an hourly rate) and (b) support services (at 30% of the direct professional costs billed). The
three professionals in WG and their rates per professional hour are as follows:

Professional Billing rate per hour


Max Walliston $640.00
Alexa Boutin $220.00
Jacob Abbington $100.00

WG has just prepared the May 2011 bills for two clients. The hours of professional time spent on each client are
as follows:

Hours per client


Professional San Antonio Dominion Amsterdam Enterprises
Max Walliston 26 4
Alexa Boutin 5 14
Jacob Abbington 39 52
Total 70 70

Required:

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1. What amounts did WG bill to San Antonio Dominion and Amsterdam Enterprises for May 2011?
2. Suppose support services were billed at $75 per professional labor-hour (instead of 30% of professional
labor costs). How would this change affect the amounts WG billed to the two clients for May 2011?
Comment on the differences between the amounts billed in requirements 1 and 2.
3. How would you determine whether professional labor costs or professional labor-hours is the more
appropriate allocation base for WG’s support services?

III. Plant-wide, department, and ABC indirect cost rates


Automotive Products (AP) designs and produces automotive parts. In 2011, actual variable manufacturing
overhead is $308,600. AP’s simple costing system allocates variable manufacturing overhead to its three
customers based on machine-hours and prices its contracts based on full costs. One of its customers has regularly
complained of being charged noncompetitive prices, so AP’s controller Devon Smith realizes that it is time to
examine the consumption of overhead resources more closely. He knows that there are three main departments
that consume overhead resources: design, production, and engineering. Interviews with the department personnel
and examination of time records yield the following detailed information:

Required:
1. Compute the variable manufacturing overhead allocated to each customer in 2011 using the simple
costing system that uses machine-hours as the allocation base.
2. Compute the variable manufacturing overhead allocated to each customer in 2011 using department-
based variable manufacturing overhead rates.
3. Comment on your answers in requirements 1 and 2. Which customer do you think was complaining
about being overcharged in the simple system? If the new department-based rates are used to price
contracts, which customer(s) will be unhappy? How would you respond to these concerns?

IV. Activity-based costing, service company


Quikprint Corporation owns a small printing press that prints leaflets, brochures, and advertising materials.
Quikprint classifies its various printing jobs as standard jobs or special jobs. Quikprint’s simple job-costing
system has two direct-cost categories (direct materials and direct labor) and a single indirect-cost pool. Quikprint
operates at capacity and allocates all indirect costs using printing machine-hours as the allocation base.
Quikprint is concerned about the accuracy of the costs assigned to standard and special jobs and therefore is
planning to implement an activity-based costing system. Quickprint’s ABC system would have the same direct-
cost categories as its simple costing system. However, instead of a single indirect-cost pool there would now be
six categories for assigning indirect costs: design, purchasing, setup, printing machine operations, marketing,
and administration. To see how activity-based costing would affect the costs of standard and special jobs,
Quikprint collects the following information for the fiscal year 2011 that just ended.

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Required:
1. Calculate the cost of a standard job and a special job under the simple costing system.
2. Calculate the cost of a standard job and a special job under the activity-based costing system.
3. Compare the costs of a standard job and a special job in requirements 1 and 2. Why do the simple and
activity-based costing systems differ in the cost of a standard job and a special job?
4. How might Quikprint use the new cost information from its activity-based costing system to better
manage its business?

ABC, product costing at banks, cross-subsidization


National Savings Bank (NSB) is examining the profitability of its Premier Account, a combined savings and
checking account. Depositors receive a 7% annual interest rate on their average deposit. NSB earns an interest
rate spread of 3% (the difference between the rate at which it lends money and the rate it pays depositors) by
lending money for home loan purposes at 10%. Thus, NSB would gain $60 on the interest spread if a depositor
had an average Premier Account balance of $2,000 in 2011 ($2,000 * 3% = $60). The Premier Account allows
depositors unlimited use of services such as deposits, withdrawals, checking accounts, and foreign currency
drafts. Depositors with Premier Account balances of $1,000 or more receive unlimited free use of services.
Depositors with minimum balances of less than $1,000 pay a $22-a-month service fee for their Premier Account.
NSB recently conducted an activity-based costing study of its services. It assessed the following costs for six
individual services. The use of these services in 2011 by three customers is as follows:

3/4
Assume Holt and Graham always maintain a balance above $1,000, whereas Turner always has a balance below
$1,000.

Required:
1. Compute the 2011 profitability of the Holt, Turner, and Graham Premier Accounts at NSB.
2. Why might NSB worry about the profitability of individual customers if the Premier Account product
offering is profitable as a whole?
3. What changes would you recommend for NSB’s Premier Account?

4/4

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