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Chapter 19: Q9RQ (page 1063)
Question: Why is ABC usually considered more accurate than traditional costing methods?
Answer
ABC considers the resources (activities) each product uses.
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Spectrum Corp. makes two products: C and D. The following data have been summarized:
Product C Product D
Direct materials cost per unit \( 600 \) 2,400
Direct labor cost per unit 300 200
Indirect manufacturing cost per unit ? ?
Indirect manufacturing cost information includes the following:
Activity Predetermined
Overhead
Allocation Rate Product C Product D
Setup \( 1,500 per setup 35 setups 76 setups
Machine maintenance \) 10 per MHr 1,500 MHr 3,700 MHr
The company plans to manufacture 250 units of each product. Calculate the product cost per unit for Products C and D using activity-based costing.
Willette Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling \( 95,000 Number of kilos 19,000 kilos
Packaging 200,000 Number of machine hours 5,000 hours
Quality assurance 112,500 Number of samples 1,875 samples
Total indirect costs \) 407,500
Actual production information includes the following:
Commercial Containers Travel Packs
Units produced 2,400 containers 50,000 packs
Weight in kilos 9,600 5,000
Machine hours 1,680 500
Number of samples 240 750
Requirements
1. Willitte’s original single plantwide overhead allocation rate costing system allocated indirect costs to products at $81.50 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for each product. Round to two decimal places.
Question:Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.
Activity Predicted Predetermined
Reduction in Overhead Allocation
Activity Units Rate per Unit
Inspection of incoming raw materials 390 $ 44
Inspection of finished goods 390 19
Number of defective units discovered in-house 1,200 50
Number of defective units discovered by customers 325 72
Lost profits due to dissatisfied customers 75 102
Requirements
3. What major difficulty would Stella’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?
Question:Newton Company has analyzed its production process and identified two primary activities. These activities, their allocation bases, and their estimated costs are listed below.
Activity | Allocation Base | Estimated Activity | Estimated Costs |
Purchasing | Number of purchase orders | 200 purchase orders | \( 10,000 |
Materials Handling | Number of parts | 15,000 parts | \) 7,500 |
The company manufactures two products: Regular and Super. The products use the following resources in March:
Regular Super
Number of purchase orders 5 purchase orders 7 purchase orders
Number of parts 600 parts 750 parts
5. Compute the predetermined overhead allocation rates using activity-based costing.
6. Determine the amount of overhead allocated to Regular products in March.
7. Determine the amount of overhead allocated to Super products in March.
How is the Conversion Costs account used in JIT costing?
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