MANAGERIAL

ACCOUNTING

EXERCISE BOOK

2.x – Costs classification

3.x – Cost-profit-volume analysis, contribution margin aplications

4.x – Standard costing and variance analysis

5.x – Job costing

6.x – Process costing, ABC costing

7.x – Responsibility accounting

Exercise 2.1

Consider the following company, „Chip Making Systems“, that manufactures computer chips. It

incurs the following costs in manufacturing chips and in operating the company:

1. Plastic board used to mount the chips, 3.50/1 pc

2. Assembly worker pay 15,-/hour to attach chips to plastic board

3. Salary for factory maintenance workers who maintain factory equipment

4. Factory supervisor pay of 55,000 per year to supervise employees

5. Real estate taxed paid on the factory, 14,500

6. Real estate taxes paid on the company office, 6,000

7. Depreciation costs on machinery used by workers, 30,000

8. Salary paid to the chief financial officer, 95,000

9. Advertising costs of 7,800 paid to promote products

10. Salepersons´ commissions of 0,50 for each assembled chip sold.

11. Company could rent manufacturing plant to store medical records for six local hospitals

instead of producing and assembling chips.

Cost

Period cost Product cost Unit cost classification Sunk

cost

Oportuni

ty cost

Selling and

Administration

Direct

material

(prime cost)

Direct

labour

(prime and

conversion)

Factory

overhead

(conversion

cost)

Direct Indirect

1

2

3

4

5

6

7

8

9

10

11

Exercise 2.2

Total costs and unit costs.

George Green is a well-known motivational speaker. The Professionals Bureau wants Green to be the

sole speaker at an all-day seminar. Green’s agent offers Professionals the choice of three possible fee

arrangements:

• Schedule 1: €8,000 fee

• Schedule 2: €20 per person + €2,000 fixed fee

• Schedule 3: €50 per person

Each attendee will be charged a €200 fee for the all-day seminar.

REQUIRED:

1. What is Professionals’ fixed cost and variable cost for hiring Green under each alternative

schedule?

2. For each schedule, compute the total cost and unit cost per seminar attendee if (a) 50

attend, (b) 200 attend, and (c) 500 attend. Comment on the results.

Exercise 2.3

Service sector.

Consumer Focus is a marketing research firm that organizes focus groups for consumer product

companies. Each focus group has eight individuals who are paid $50 per session to provide

comments on new products. These focus groups meet in hotels and are led by a trained independent

marketing specialist hired by Consumer Focus. Each specialist is paid a fixed retainer to conduct a

minimum number of sessions and a per-session fee of $2,000. A Consumer Focus staff member

attends each session to ensure that all the logistical aspects run smoothly.

REQUIRED:

Classify each of the following cost items as:

a. Direct or indirect costs with respect to each individual focus group.

b. Variable or fixed costs with respect to how the total costs of Consumer Focus change as the

number of focus groups changes. (If in doubt, select the cost type on the basis of whether

the total costs will change substantially if a large number of groups are conducted).

Cost item By traceability By behaviour

Direct Indirect Fixed Variable

Payment to individuals in each focus group to provide comments on new

products

Annual subscription of Consumer Focus to Consumer Reports magazine

Phone calls made by Consumer Focus staff member to confirm individuals

with attend a focus group session (individual calls are not kept)

Retainer paid to focus group leader to conduct 20 focus groups per year on

new medical products.

Hotel meals provided to participants in each focus group

Lease payment by Consumer Focus for corporate office

Cost of tapes used to record comments made by individuals in a focus

group session (sent to the company whose products are being tested

Gasoline costs of Consumer Focus staff for company – owned vehicles (staff

members submit monthly bills with no miles/km’s breakdowns)

Exercise 2.4

Manufacturing sector.

The XYZ Auto company assembles two types of cars: „Sun“ and „Moon“. Separate assembly lines are

used for each type of car.

REQUIRED:

Classify each of the following cost items as:

a) Direct or indirect cost with respect to the type of car assembled (Sun or Moon).

b) Variable or fixed cost with respect to how the total costs of the factory change as the number of

cars assembled changes.

Cost item By traceability By behaviour

Direct Indirect Fixed Variable

Cost of tires used on “Moon”

Salary of public relations manager for the factory

Annual awards dinner for “Sun” suppliers

Salary of engineer who monitors design changes on “Moon”

Freight costs of “Sun” engines shipped from Toyota, Japan, to our factory

Electricity costs for factory

Wages paid to temporary assembly-line workers hired in period of high

production (paid on an hourly basis)

Annual fire insurance policy cost for factory

S = total sales (su = selling price per unit) Q = quantity (outputs: production, sales)

FC = fixed costs BEP = break-even point

VC = total variable costs (vcu = variable cost per unit) CM = total contribution margin

TC = total costs cmu = contribution margin per unit

I = income cmru = contribution margin to sales ratio

Exercise 3.1

a) Cottage industries Ltd makes baskets. The fixed costs of operating the workshop for a month

total €500. Each basket requires materials that cost €2. Each basket takes one hour to make,

and the business pays the basket makers €10 an hour. The basket makers are all on contracts

such that if they do not work for any reason, they are not paid. The baskets are sold to a

wholesaler for €14 each.

1. What is the BEP for basket making for the business?

b) Company expects to sell 500 baskets a month. The business has the opportunity to rent a

basket-making machine. Doing so would increase the total fixed costs of operating the

workshop for a month to €3000. Using the machine would reduce the labour time to half an

hour per basket. The basket makers would still be paid €10 an hour.

2. How much profit would the business make each month from selling baskets (i)

assuming that the basket-making machine is not rented, and (ii) assuming that it is

rented?

3. What is the BEP if the machine is rented?

4. What are the BEPs to gain the same amount of the income?

5. What advice would you give Cottage Industries about renting the machine?

c) Cottage Industries has spare capacity in that its basket makers have some spare time. An

overseas retail chain has offered the business an order for 300 baskets at a price of €13 each.

6. Without considering any wider issues, should the business accept the order?

(assume, that the business does not rent the machine).

Exercise 3.2

The business provides three different services, the details of which are as follows:

Service A B C

Selling price per unit 50 40 65

Variable cost per unit 25 20 35

Contribution per unit

Labour time per unit 5 hour 3 hours 6 hours

Within reason, the market will take as many units of each service as can be provided, but the ability

to provide the service is limited by the availability of labour, all of which need to be skilled. Fixed

costs are not affected by the choice of service provided because all three services use the same

facilities.

1. Which service is the most profitable?

2. Let assume, that the business has just 30 hours of labour time available. Which service

is the most profitable now?

Exercise 3.3

The business makes three different products, the details of which are as follows:

Product A B C

Selling price per unit (€) 25 20 23

Variable cost per unit (€) 10 8 12

Weekly demand (units) 25 20 30

Machine time per unit (hours) 4 3 4

Fixed costs are not affected by the choice of product because all three products use the same

machine. Machine time is limited to 148 hours a week.

1. Which combination of products should be manufactured if the business is to produce

the highest profit?

2. Going back to the result of 1st

requirement, what is the maximum price that the

business concerned would logically be prepared to pay to have the remaining “A”

machined by a subcontractor, assuming that no fixed or variable costs would be save as

a result of not doing the machining in-house?

3. Would there be a different maximum if we were considering the “C”?

Exercise 3.4

Smile Company needs a component for one of its products. It can subcontract production of the

component to a subcontractor who will provide the components for €20 each. The business can

produce the components internally for total variable costs of €15 per component. Smile comp. has

spare capacity.

1. Should the component be subcontracted or produced internally?

2. Assume that Smile comp. has no spare capacity, so it can only produce the component

internally by reducing its output of another of its products. While it is making each

component, it will lose contributions of €12 from the other product. Should the

component be subcontracted or produced internally?

Exercise 3.5

Goodsports Ltd is a retail shop that operates through three departments, all in the same premises.

The three departments occupy roughly equal-sized area of the premises. It would appear that if the

general clothes department were to close, the business would be more profitable, by €9000 a

year, assuming last year´s performance to be a reasonable indication of future performance.

The trading results for the year just finished showed the following. When the cost are analysed

between those that are variable and those that are fixed, however, the contribution of each

department can be deduced and the following results obtained:

Total

in thousands €

Sports equipment Sports clothes General clothes

Sales 534 254 183 97

Costs 482 213 163 106

- variable 344 167 117 60

- fixed 138 46 46 46

contribution

Profit / (Loss)

1. Should the department be closed?

Exercise 4.1

Standard costing and variance analysis. The following are the budgeted and actual income

statement for Baxter Ltd. for the month of June:

Budget for June Actual for June

Output (production and sales) 1,100 units 1,150 units

Sales revenue 110,000 € 113,500 €

Raw materials (-) 44,000 € (44,000 metres) (-) 46,300 € (46,300 metres)

Labour (-) 22,000 € (2,750 hours) (-) 23,200 € (2,960 hours)

Fixed overhead (-) 20,000 € (-) 19,300 €

Operating profit (income) ? ?

REQUIRED:

1. Flexing the June budget

2. Total variance in profit

3. Sales volume variance

4. Sales price variance

5. Direct materials usage variance

6. Direct materials price variance

7. Direct labour efficiency variance

8. Direct labour rate variance

9. Fixed overhead spending variance

10. Proof in total variance in profit

Exercise 4.2

Pilot Ltd makes a standard product, which is budgeted to sell at €5.00 a unit. It is made by taking a

budgeted 0.5 kg of material, budgeted to cost €3.00 a kilogram, and working on it by hand by an

employee, paid a budgeted €5.00 an hour, for a budgeted 15 minutes. Monthly fixed overheads are

budgeted at €6,000. The output for March was budgeted at 5,000 units. No inventories existed at the

start or the end of March.

The actual results for March were as follows:

Sales revenue (5,400 units) … €26,460

Materials (2,830 kg) … €8,770

Labour (1,300 hours) … €6,885

Fixed overheads … €6,350

Actual operating profit … ?

REQUIRED:

Deduce the budgeted profit for March and reconcile it with the actual profit in as much details as the

information provided will allow.

Exercise 4.3

Fashion Company Ltd. produces handbags. Budgeted volume of production and sales in January was

12,000 units of handbags. Budgeted sales unit price is CZK 1,000. Budgeted unit direct material used

is 0.8 metres a handbag, budgeted unit direct material costs are CZK 150.00 a meter. Variable costs

are calculated according the budgeted machine-hours, variable cost are CZK 20.00 per machine-hour,

budgeted production of one handbag takes 3 hours. Budgeted fixed cost are CZK 1,380,000.

Actual sales in January were 10,000 units of handbags, actual direct material used was 8,100 metres

and they used actually 32,000 machine-hours.

The actual results for January are:

Sales revenue … CZK 10,500,000

Direct material (total) … CZK 1,174,500

Variable costs … CZK 608,000

Fixed overheads … CZK 1,425,000

REQUIRED:

1. Actual and budgeted profit

2. Sale volume variance

3. Sale price variance

4. Material usage and material price variance

5. Variable cost spending variance

6. Fixed overheads spending variance

Exercise 5.1

Job costing (service application)

McBain is a management consulting firm. Its job-costing has a single direct-cost category (consulting

labour) and a single indirect-cost category pool (consulting support). Consulting support is allocated

to individual jobs using actual consulting labour-hours worked on a job. It is currently examining the

actual, normal, and extended normal costs of a 20X1 strategy review job for Hogsbreath Cafe that

required 70 actual hours of consulting labour. The internal cost expert decides to test your

understanding of cost concepts.

REQUIRED:

1. Fill in the blanks for the Hogsbreath 20X1 job:

Actual costing Normal costing Extended normal

costing

Direct job costs $ ____ ($55 x __) $ ____ ($__ x __) $ ____ ($__ x __)

Indirect job costs $ 2660 ($__ x __) $ 2800 ($__ x 70) $ ____ ($__ x __)

Total job costs $ ____ $ ____ $ 7000

2. Fill in the blanks for McBain for 20X1:

Budgeted amounts for 20X1 Actual amounts for 20X1

Consulting labour compensation

Consulting labour-hours 18000 hours

Consulting support costs $ 798000

Exercise 5.2

Job costing (service application)

Black & Partners is public accounting partnership specializing in audit services. Its job-costing system

has a single direct-costing category (professional labour) and a single indirect-cost pool (audit

support, which contains all the costs in the Audit Support Department). Audit support costs are

allocated to individual jobs using actual professional labour-hours. Black & Partners employs ten

professionals who are involved in their auditing services.

Budget for 20X1:

Professional labour compensation €960000

Audit Support Department costs €720000

Professional labour-hours billed to clients 16000 hours

Actual results for 20X1:

Audit Support Department costs €744000

Professional labour-hours billed to clients 15500 hours

Actual professional labour cost rate per hour €58

REQUIRED:

1. Identify the direct-cost rate per professional labour-hour and the indirect-cost rate per

professional labour-hour for 20X1 under a) actual costing, b) normal costing, and c) extended

normal costing.

2. The audit of the firm done in 20X1 was budgeted to take 110 hour of professional labour

time. The actual professional labour time on the audit was 120 hours. Compute the 20X1 job

cost using a) actual costing, b) normal costing, and c) extended normal costing. Explain any

differences.

Exercise 5.3

Job costing (service application)

Martin Miller, the president of Tax Assist, is examining alternative ways to compute indirect-cost

rates. He collects the following information from the budget for 20X1:

• Budgeted variable indirect costs: €10 per hour of professional labour time.

• Budgeted fixed indirect costs: €50000 per quarter.

The budgeted billable professional labour-hours per quarter are

January – March 20000 hours

April – June 10000 hours

July – September 4000 hours

October – December 6000 hours

Miller pays all tax professionals employed by Tax Assist on an hourly basis (€30 per hour, including all

fringe benefits). Tax Assist´s job-costing system has a single indirect-cost category (professional

labour at €30 per hour) and a single indirect-cost pool (office support that is allocated using

professional labour-hours).

Tax Assist charges clients € 65 per professional labour-hour.

REQUIRED:

1) Compute budgeted indirect-cost rates per professional labour-hour using:

a) Quarterly budgeted billable hours as the denominator.

b) Annual budgeted billable hours as the denominator.

2) Compute the operating income for the following four customers using:

a) Quarterly-based indirect-cost rate.

b) An annual indirect-cost rate:

i) Ruppert Hoch: 10 hours in February.

ii) Kirsten Bauer: 6 hours in March and 4 hours in April.

iii) Beata Thun: 4 hours in June and 6 hours in August.

iv) Mark Schumacher: 5 hours in January, 2 hours in September, and 3 hours in November.

Exercise 5.4

(Job costing, engineering consulting firm)

Built & Safe, an engineering consulting firm, specializes in analysing the structural causes of major

building catastrophes. Its job-costing system in 20X1 had a single direct-cost category (professional

labour) and a single indirect-cost pool (general support). The allocation base for indirect costs is

professional labour-costs. Actual costs for 20X1 were:

• Direct costs: professional labour € 10,000,000

• Indirect costs: general support € 19,000,000

• Total costs € 29,000,000

The following costs were included in the general support indirect-cost pool:

• Technical specialists´costs € 800,000

• Telephone/fax machine € 600,000

• Computer time € 3,700,000

• Photocopying € 400,000

• Total costs € 5,500,000

The firm´s data-processing capabilities now make it feasible to trace these costs to individual jobs.

The managing partner is considering whether more costs than just professional labour should be

traced to each job as a direct cost. In this way, the firm would be better able to justify billings to

clients.

In late 20X1, arrangements were made to expand the number of direct-cost categories and to trace

them to seven client engagements. Two of the case records showed the following:

Client case (€)

Job A Job B

Professional labour 20,000 20,000

Technical specialists´costs 2,000 6,000

Telephone/fax machine 1,000 2,000

Computer time 2,000 4,000

Photocopying 1,000 2,000

Total costs 26,000 34,000

REQUIRED:

1. What was the actual indirect-cost rate per professional labour?

2. Assume that the €5.5 million of cost included in the 20X1 general support indirect-cost pool

were reclassified as direct cost. The result is a system with five direct-cost categories.

Compute the revised indirect cost rate as a percentage of: (a) professional labour costs, (b)

total direct costs.

3. Compute the total costs of jobs “A” and “B” using: (a) the 20X1 costing system with a single

direct cost category and single indirect-cost pool (professional labour-costs as the allocation

base); (b) a costing system with five direct-cost categories and a single indirect-cost pool

(professional labour-costs as the allocation base); (c) a costing system with five direct-cost

categories and a single indirect-cost pool (total direct costs as the allocation base).

4. Assume that clients are billed at 120 % of total job costs (that is, a markup on cost of 20 %).

Compute the billings in requirement 3 for jobs “A” and “B” for the (a), (b) ,and (c) costing

systems.

Exercise 5.5

Job costing (manufacturing application)

Syner Construction assembles residential houses. It uses a job-costing system with two direct-cost

categories (direct materials and direct labour) and one indirect cost pool (assembly support). Direct

labour-hours is the allocation base for assembly support costs. In December 20X1, Syner budgets

20X2 assembly support costs to be € 8,000,000 and direct labour-hours to be 160,000.

At the end of 20X2, Syner is comparing the costs of the several jobs that were started and completed

in 20X2.

Laguna Model

February – June 20X2

Mission Model

May – October 20X2

Direct materials € 106,450 € 127,604

Direct labour € 36,276 € 41,140

Direct labour-hours 900 1,010

Direct material and direct labour are paid for on a contract basis. The costs of each are known when

direct materials are used or direct labour-hours are worked. The 20X2 actual assembly support costs

were € 6,888,000 while the actual direct labour-hours were 164,000.

REQUIRED:

1. Compute the a) budgeted and b) actual indirect cost rate. (Why do they differ?)

2. What is the job cost of the Laguna Model and the Mission Model using a) normal costing, and

b) actual costing?

3. Why might Syner Construction prefer normal costing over actual costing?

Exercise 5.6

Accounting for manufacturing overhead.

Consider the following selected cost date for the Edinburgh Forging Company for 20X1.

Budgeted mnf overhead £ 7,000,000

Budgeted machine-hours 200,000

Actual mnf overhead £ 6,800,000

Actual machine-hours 195,000

Edinburgh job-costing system has a single manufacturing overhead cost pool (allocated using a

budgeted rate based on actual machine-hours). Any amount of under- or over-allocation is

immediately written off to cost of goods sold.

REQUIRED:

1. Compute the budgeted manufacturing overhead rate.

2. Journalize the allocation of manufacturing overhead.

3. Compute the amount of under- or over-allocation of manufacturing overhead. Is the amount

significant? Journalize the disposition of this amount on the basis of the ending balances in

the relevant accounts.

Exercise 6.1

Process costing – demonstration problem.

Pennsylvania Company produces a product that passes through a molding process and then through

and assembly process. Information related to its manufacturing activities for July follows:

Raw Materials

- Beginning inventory - Raw mat.purchased on credit

- Direct mat. – Molding

- Direct mat. – Assembly

- Indirect mat. Used

- Ending inventory

100,000

300,000

-190,000

-88,600

-51,400

=70,000

Molding department

Beginning work-in-process inventory

- % completed-Material

- % completed-Labour&overhead

Units started and completed

Ending work-in-process invent. (units)

- % completed-Material

- % completed-Labour&overhead

Costs

- Beginning work-in-process

- Direct material added

- Direct labour added

- Overhead applied(150%of dir.lab.)

- Total costs

5,000

100%

60%

17,000

8,000

100%

25%

53,000

190,000

42,000

63,000

=348,000

Factory payroll

- Direct labour – Molding

- Direct labour – Assembly

- Indirect labour used

- Total payroll cost (paid cash)

42,000

55,375

50,625

=148,000

Factory overhead

- Indirect material used

- Indirect labour used

- Other overhead costs

- Total factory overhead incur.

51,400

50,625

71,725

=173,750

Assembly department

- Beginning work-in-process

- Ending work-in-process inv.

154,800

108,325

Factory overhead applied

- Molding (150 % of dir.labour)

- Assembly (200 % of dir.lab.)

- Total fact.overhead applied

63,000

110,750

=173,750

Finished products

- Beginning inventory - Cost transferred in from assembly

- Cost of products sold

- Ending inventory

96,400

578,400

-506,100

=168,700

REQUIRED:

1. Compute the equivalent units of production for the molding department for July and

determine the cost per equivalent unit for direct materials, direct labour, and factory

overhead.

2. Compute the cost of the units transferred from molding to assembly in July and the cost of

the ending goods in process inventory for the molding department.

Exercise 6.2

A tractor manufacturer began and completed 500 tractors during the period. In addition, another 50

tractors were worked o during the period and on average were 60% completed. There was no

beginning work-in-process. Manufacturing costs during the period were €5,000,000.

REQUIRED:

1. How many equivalent units of work were performed during the period?

2. What was the average cost of a tractor?

Exercise 6.3

A manufacturer of televisions had 1,000 units in beginning work-in-process that were 30% completed

last year. This year the remaining 70% of the work on the 1,000 units was completed and 10,000

more units were started and completed. In addition, 500 more units were started this period but

were only 60% completed. Manufacturing costs during the period were $2,000,000.

REQUIRED:

1. What was the cost per equivalent unit during the period?

Exercise 6.4

During April, 20,000 units were transferred in from Department A at a cost of €39,000. Materials cost

of €6,500 and conversion cost of €9,000 were added in Department B. On April 30, Department B

had 5,000 units of work in process 60 % complete as to conversion cost. Materials are added in the

beginning of the process in Department B.

REQUIRED:

1. Compute equivalent production for materials and conversion cost.

2. Calculate the cost per equivalent unit for conversion cost.

Exercise 6.5

Costing by dividing.

In May 20X1, the company plans the production of single sort of product, quantity of 10,000 units.

According to norm unit costs are CZK 15 per unit. Budgeted manufacturing overhead is CZK 290,000

and, budgeted administrative costs are CZK 50,000 for May.

REQUIRED:

• Prepare budgeted absorption costing per unit by single dividing.

Exercise 6.6

ABC, product cost cross-subsidization.

Idaho Potatoes processes potatoes into potato cuts at its highly automated Pocatello plant. For many

years, it processed potatoes for only the retail consumer market where it had a superb reputation for

quality. Recently, it started selling potato cuts to the institutional market that includes hospitals,

cafeterias, and university dormitories. Its penetration into the institutional market has been slower

than predicted.

Idaho´s existing costing system has a single direct-cost category (direct materials, which are the raw

potatoes) and a single indirect-cost pool (production support). Support costs are allocated on the

basis of pounds of potato cuts processed. Support costs include packaging material. The 20X1 total

actual costs for producing 1,000,000 pounds of potato cuts (900,000 for the retail market and

100,000 for the institutional market) are:

Direct material used $ 150,000

Production support $ 983,000

The existing costing system does not distinguish between potato cuts produced for the retail or the

institutional markets.

At the end of 20X1, Idaho unsuccessfully bid for a large institutional contract. Its bid was reported to

be 30% above the winning bid. This came as a shock as Idaho included only a minimum profit margin

on its bid. Moreover, the Pocatello plant was widely acknowledged as the most efficient in the

industry.

As part of its lost contract bid review process, Idaho decided to explore several ways of refining its

costing system:

1. it identified that $ 188,000 of the $ 983,000 pertains to packaging material that could be

traced to individual jobs ($ 180,000 for retail and $ 8,000 for institutional). These will now be

classified as a direct material. The $ 150,000 of direct materials used, were classified as $

135,000 for retail and $ 15,000 for institutional.

2. it used ABC-costing to examine how the two products (retail potato cuts and institutional

potato cuts) used the support area differently. The finding was that three activity areas

could be distinguished and that different usage occurred in two of these three areas. The

indirect cost per pound of finished product at each activity area is as follows:

Activity area Retail Potato Cuts ($) Institutional Potato Cuts ($)

Cleaning 0.120 0.120

Cutting 0.240 0.150

Packaging 0.480 0.120

There was no beginning or ending amount of any inventory (material, work in process, or finished

goods).

REQUIRED:

1. Using the current costing system, what is the cost per pound of potato cuts produced by

Idaho?

2. Using the refined costing system, what cost per pound of a) retail market potato cuts, and b)

institutional market potato cuts?

3. Comment on the cost differences shown between the two costing systems in requirements 1

and 2. How might Idaho use the information in requirement 2 to make better decisions?

Exercise 6.7

ABC, activity area cost driver rates (continuation of Ex 6.6)

The exercise 6.6 reports ABC data for the three activity areas (cleaning, cutting, and packaging) on a

per output unit basis (per pound of potato cut). This format emphasizes product costing. An

alternative approach that emphasizes the costs of individual processes (activities) is to identify: a) the

costs at each activity area, and b) the rate per unit of the cost driver at each activity area. The

following information pertains to a) and b):

• Cleaning activity area – Idaho uses 1.2 million pounds of raw potatoes to yield 1 million

pounds of potato cuts. No distinction is made as to the end product when cleaning potatoes.

The cost driver is pounds of raw potatoes cleaned.

• Cutting activity area – Idaho processes raw potatoes for the retail market independently of

those processed for the institutional market. The production line produces a) 250 pounds of

retail potato cuts per cutting-hour, and b) 400 pounds of institutional potato cuts per cutting-

hour. The cost driver is cutting-hours on the production line.

• Packaging activity area – Idaho packages potato cuts for the retail market independently of

those packaged for the institutional market. The packaging line packages a) 25 pounds of

retail potato cuts per packaging-hour, and b) 100 pounds of institutional potato cuts per

packaging-hour. The cost driver is packaging-hours on the production line.

REQUIRED:

1. What are the total activity costs in the a) cleaning, b) cutting, and c) packaging activity areas?

2. What is the cost rate per unit of the cost driver in the a) cleaning, b) cutting, and c) packaging

activity areas?

Exercise 6.8

Activity-based job-costing system.

The Denver Company manufactures and sells packaging machines. It recently used an activity-based

approach to refine the job-costing system at its Denver plant. The resulting job-costing system has

one direct-cost category (direct material) and four indirect manufacturing cost pools. The four

indirect-cost pools and their allocation bases were chosen by a team of product designers,

manufacturing personnel, and marketing personnel:

Indirect mnf. cost pool Cost-allocation base Budgeted cost-allocation rate

Material handling Component parts $ 8 per part

Machining Machine-hours $ 68 per hour

Assembly Assembly-line-hours $ 75 per hour

Inspection Inspection-hours $ 104 per hour

Cola Supreme recently purchased 50 can-packaging machines from the Denver Company. Each

machine has direct materials costs of $ 3,000, requires 50 component parts, 12 machine-hours, 15

assembly-hours, and 4 inspection-hours.

Denver´s prior costing system had one direct-cost category (direct materials) and one indirect-cost

category (manufacturing overhead, allocated using assembly-hours).

REQUIRED:

1. Present overview diagrams of the prior job-costing system and the refined activity-based job-

costing system.

2. Compute the unit manufacturing costs (using ABC) of each machine and the total

manufacturing cost of the Cola Supreme job.

3. The activity-based job-costing system of Denver has only one manufacturing direct-cost

category: direct materials. A competitor of the Denver Company has two direct-cost

categories at its manufacturing plant: direct material and direct manufacturing labour. Why

might Denver not have a direct manufacturing labour costs category in its job-costing

system? Where are the manufacturing labour costs included in the Denver costing system?

4. What information might members of the team that refined the prior costing system find

useful in the activity-based job-costing system?

Exercise 6.9

Activity-based job-costing system.

The English Design Company manufactures a variety of prestige boardroom chairs. Its job-costing

system was designed using an activity-based approach. There are two direct-cost categories (direct

materials and direct manufacturing labour) and three indirect-cost pools. These three cost pools

represent three activity areas at the plant.

Manufacturing activity area Budgeted costs

for 20X1

Cost driver used as allocation

base

Cost-allocation

rate ( £ )

Material handling 200,000 Parts 0.25

Cutting 2,160,000 Parts 2.50

Assembly 2,000,000 Direct mnf. labour-hours 25.00

Two styles of chairs were produced in March, the executive chair and the chairman chair. Their

quantities, direct material costs, and other data for March 20X1 are as follows:

Units produced Direct material

costs ( £ )

Number of Parts Direct mnf.

labour-hours

Executive chair 5,000 600,000 100,000 7,500

Chairman chair 100 25,000 3,500 500

The direct manufacturing labour rate is £20 per hour. Assume no beginning or ending inventory.

REQUIRED:

1. Compute the March 20X1 total manufacturing costs and unit costs of the executive chair and

chairman chair.

2. Suppose that the upstream activities to manufacturing (R&D and design) and the

downstream activities (marketing, distribution, and customer service) were analyzed. The

unit costs in 20X1 were budgeted to be as follows:

Upstream activities ( £ ) Downstream activities ( £ )

Executive chair 60 110

Chairman chair 146 236

Compute the full product costs per unit of each line of chairs. (full product costs = ∑ of the costs in all

business function areas).

• Sold-hour rate = monthly budged / service-hours available

• Variable rate per hour = budgeted variable cost / capacity available (e.g. service-hour)

• Charged variable cost = actual services used (hours) x variable rate

• (a) Spending variance = actual cost - budgeted cost = actual cost - budgeted fixed cost -

budgeted variable cost

• (b) Spending variance = actual variable cost - charged variable cost

• actual variable cost = actual total cost - fixed cost

• fixed rate = total fixed cost /normal capacity (maintenance hours, number of employees)

• (a) Idle capacity variance = budgeted allowance - applied (charged out) cost

• (b) Idle capacity variance = ( normal capacity - actual capacity) * fixed cost rate

Exercise 7.1

Economy. The budgeted direct material costs per unit are CZK 10. Budgeted quantity of the

production is 1,000 units. Actual total direct material costs are CZK 8,000.

REQUIRED:

• Consider economy of the company.

• Determine amount of units which the company is able to produce from saved direct material

if you sustain the same economy.

Exercise 7.2

Economy. The company manufactures two types of blankets, type A and type B. Budgeted amount of

direct material costs is CZK 200 per unit A and CZK 225 per unit B. Monthly amount of fixed cost is

CZK 1,500,000. Sale price is CZK 580 per unit A and CZK 590 per unit B. Budgeted volume of

production and sale is 3,000 units of A and 2,000 units of B but actually the company manufactured

and sold 3,200 units of A and 1,800 units of B. Actual amount of total cost is CZK 2,498,000.

REQUIRED:

• Determine budgeted and actual profit of the company, compute the total profit variance.

• Quantify separately the impact of economy and, of changes in production lines on profit

variance.

Exercise 7.3

Billing rates, variance analysis. Applegate Company uses predetermined departmental overhead

rates to apply factory overhead. In computing these rates, every attempt is made to transfer service

department costs to producing departments on the most equitable bases. Budgeted cost and other

date for Applegate´s two service departments, Maintenance and General Factory, are as follows:

Maintenance General Factory

Monthly fixed cost £7,500 £30,000

Variable cost £8.50 per maintenance labour hour £20 per employee -prod.dpts.only

Normal level of activity 15,000 maintenance hour monthly 1,000 producing dpt employees

Actual total cost £132,000 £48,000

Actual level of activity 14,000 maintenance hours 980 producing dpt employees

REQUIRED:

1. Compute the charging or billing rates to be used to transfer estimated maintenance and

general factory costs to other departments, together with a description of the method used.

2. Compute the spending and idle capacity variances for the service departments.

Exercise 7.4

Sold-hour rates, variance analysis. A company´s two service departments that show the following

budgeted and actual cost and service-hours data:

Service Center Monthly budget

(€)

Service-Hours

Available

Actual monthly

expenses (€)

Carpenter Shop 20,000 2,000 19,300

Electricians 30,000 2,500 28,400

The two service departments serve three producing departments that show the following budgeted

and actual cost and service-hours data:

Estimated service required Actual Services Used

Carpenter Shop Electricians Carpenter Shop Electricians

1 st department 600 hrs 900 hrs 400 hrs 1,000 hrs

2nd department 750 hrs 1,000 hrs 800 hrs 850 hrs

3rd department 650 hrs 600 hrs 450 hrs 550 hrs

REQUIRED:

1. Compute the sold-hour rates for the two service departments.

2. Compute the amounts charged to the producing departments for services rendered.

Compute the spending variances for the two service departments, assuming that 70% of the

budgeted expense is fixed in Carpenter Shop and 80% in Electricians.