College of Management

AE 108 (Cost Accounting and Control)

Chapter 12 Assignment – Answer Key

1. Riley, SA., has identified the following overhead costs and activity drivers for next year:
Expected Expected
Overhead Item Cost Activity Driver Quantity
Setup costs £100,000 Number of setups 500
Ordering costs 40,000 Number of orders 3,200
Maintenance 200,000 Machine hours 4,000
Power 20,000 Kilowatt hours 80,000
The following are two of the jobs completed during the year:

Job AA Job BB
Direct materials £375 £1,000
Direct labour £350 £1,200
Units completed 100 160
Direct labour hours 50 80
Number of setups 1 4
Number of orders 4 5
Machine hours 20 25
Kilowatt hours 30 50
The company's normal activity is 4,000 direct labour hours.

If the activity drivers are used to allocate overhead costs, the unit cost (rounded to two decimal places) for Job BB would
be
Answer:

Expected
Overhead Item Cost Quantity Cost per Activity
Setup costs 100,000 500 200
Ordering costs 40,000 3,200 12.5
Maintenance 200,000 4,000 50
Power 20,000 80,000 .25

Job BB Unit Cost = (DM + DL + FOH) / Number of Units

= 1,000 + 1,200 + (4x200) + (5x12.5) + (25x50) + (50x.25)
= 4,325 / 160 = 27.03

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2. Owens Ltd. produces specially machined parts. The parts are produced in batches in one continuous manufacturing
process. Each part is custom produced and requires special engineering design activity (based on customer specifications).
Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is
taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four
activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining process with two activities:
providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and
resource drivers:
Engineering £1,000,000
Setups 900,000
Machining 2,000,000
Inspection 800,000
Providing space 250,000
Providing utilities 180,000
Activity drivers for each activity have been identified and their practical capacities listed:

Machine hours 25,000

Setups 200
Engineering hours 5,000
Inspection hours 2,500

The costs of facility-level activities are assigned using machine hours. What is the cost pool overhead rate for the unit-
level activities?
Answer:
Unit Level OH rate = Machining Cost / Machine hours (examples: DM, DL, Machining) in this problem only machining is
given
= 2,000,000 / 25,000 = 80 per machine hour

3. Refer to problem 2. What is the cost pool rate for the batch-level activities?
Answer:

Batch Level OH rate = Engineering Cost + Setup Cost + Inspection Cost / Setups (examples: Purchase order, Machine
Setup, quality tests, engineering, inspection) in this problem only machine setup is given
= 1,000,000 + 900,000 + 800,000 / 200 = 13,500 per setup

4. Refer to problem 2. What is the cost pool rate for the product-level activities?
Answer:

Product Level OH rate = Engineering Cost / Engineering hours (examples: engineering, product design) in this problem
only engineering is given
= 1,000,000 / 5,000 = 200 per engineering hours
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5. Refer to problem 2. What is the cost pool rate for the facility-level activities?

Answer:

Facility Level OH rate = Space + Utilities Costs / Machine Hours (examples: depreciation, taxes, maintenance, support) in
this problem space and utilities are given
= 250,000 + 180,000 / 25,000 = 17.20 per machine hour

6. Moss Ltd. has the following activities: creating bills of materials (BOM), studying manufacturing capabilities,
improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the
following expenditures for manufacturing engineering:

Salaries £ 75,000
Equipment 40,000
Supplies __10,000
Total £125,000

The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the
equipment's time is used for improving processes and 65 percent is used for designing tools. The salaries are for two
engineers. One is paid £50,000, while the other earns £25,000. The £50,000 engineer spends 40 percent of his time
training employees in new processes and 60 percent of his time on improving processes. The remaining engineer spends
equal time on all activities. Supplies are consumed in the following proportions:
Creating BOMs 25%
Studying capabilities 10%
Improving processes 20%
Training employees 25%
Designing tooling 20%

What is the cost assigned to the improving processes activity?

Answer:

Equipment (40,000 x 35%) 14,000

Salaries (50,000 x 60%) 30,000
(25,000 / 5) 5,000
Supplies (10,000 x 20%) 2,000
51,000

7. Refer to problem 6. What is the cost assigned to the training employees activity?
Answer:

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Salaries (50,000 x 40%) 20,000
(25,000 / 5) 5,000
Supplies (10,000 x 25%) 2,500
27,500

8. Refer to problem 6. What is the cost assigned to the creating BOMs activity?
Answer:

Salaries (25,000 / 5) 5,000

Supplies (10,000 x 22%) 2,500
7,500

9. Refer to problem 6. What is the cost assigned to the designing tooling activity?
Answer:

Equipment (40,000 x 65%) 26,000

Salaries (25,000 / 5) 5,000
Supplies (10,000 x 20%) 2,000
33,000

10. The Overdale plant has two categories of overhead: maintenance and inspection. Costs expected for these categories
for the coming year are as follows:
Maintenance £120,000
Inspection £200,000
The plant currently applies overhead using direct labour hours and expected capacity of 80,000 direct labour hours. The
following data has been assembled for use in developing a bid for a proposed job:
Direct materials £1,500
Direct labour £5,000
Machine hours 400
Number of inspections 6
Direct labour hours 750

Total expected machine hours for all jobs during the year are 40,000, and the total expected number of inspections is
2,500.
Using direct labour hours to assign overhead, the total cost of the potential job would be

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Answer:
DM - 1,500
DL - 5,000
FOH - 3,000 [(120,000 + 200,000) / 80,000] x 750
9,500

11. Refer to problem 10. Using activity-based costing and the appropriate cost drivers, the total cost of the potential job
would be

Answer:
DM - 1,500
DL - 5,000
FOH - 1,680
8,180

FOH = [(maintenance cost / total machine hours) Machine hours) + (Inspection cost / total number of inspection) number
of inspection
= [(120,000 / 40,000) 400] + [200,000 / 2,500) 6] = 1,200 + 480 = 1,680

12. Granite, SA., has identified the following overhead costs and cost drivers for next year:
Overhead Item Expected Cost Cost Driver Expected Quantity
Setup costs £100,000 Number of setups 500
Ordering costs 40,000 Number of orders 3,200
Maintenance 200,000 Machine hours 4,000
Power 20,000 Kilowatt hours 80,000
The following are two of the jobs completed during the year:
Job 500 Job 501
Direct materials £1,500 £2,000
Direct labour £1,400 £2,400
Units completed 100 160
Direct labour hours 100 160
Number of setups 2 8
Number of orders 8 10
Machine hours 40 50
Kilowatt hours 60 100

The company's normal activity is 4,000 direct labour hours.

If Granite, SA., used activity-based cost drivers to allocate overhead costs, the total cost of Job 500 would be

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Answer:
DM - 1,500
DL - 1,400
FOH - 2,515
5,415

FOH = [(setup costs/ total setups) number of setups] + [(ordering costs / total number of orders) number of orders] +
[(maintenance costs / total number of machine hours) machine hours] + [(power costs / total number of kw hours) kw
hours]
= [(100,000 / 500) 2] + [40,000 / 3,200) 8] + [200,000 / 4,000) 40] + [20,000 / 80,000) 60]
= 400 + 100 + 2,000 + 15 = 2,515

13. Refer to problem 12. If Granite, SA., used activity-based cost drivers to allocate overhead costs, the unit cost for Job
500 would be
Answer:
Total Costs / Number of Units = 5,415 / 100 = 54.15 per unit

14. Peach, SA., has identified the following overhead costs and cost drivers for next year:
Overhead Item Expected Cost Cost Driver Expected Quantity
Setup costs £200,000 Number of setups 500
Ordering costs 80,000 Number of orders 3,200
Maintenance 400,000 Machine hours 4,000
Power 40,000 Kilowatt hours 80,000
The following are two of the jobs completed during the year:

Job 400 Job 401

Direct materials £750 £2,000
Direct labour £700 £2,400
Units completed 100 160
Direct labour hours 50 80
Number of setups 1 4
Number of orders 4 5
Machine hours 20 25
Kilowatt hours 30 50
The company's normal activity is 4,000 direct labour hours.
If Peach, SA., used direct labour hours to assign overhead, the unit cost for Job 401 would be

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=Answer:
DM - 2,000
DL - 2,400
FOH - 14,400 (80 x 180)
18,800 / 160 = 117.50 per unit

FOH per unit = Total Cost / DLH

= 200,000 + 80,000 + 400,000 + 40,000 = 720,000 / 4,000 = 180

15. Refer to problem 14. If Peach, SA., used activity-based cost drivers to allocate overhead costs, the unit cost for Job
401 would be (round to two decimal places)

Answer:
DM - 2,000
DL - 2,400
FOH - 4,250
8,650 / 160 = 54.06 per unit

FOH = [(setup costs/ total setups) number of setups] + [(ordering costs / total number of orders) number of orders] +
[(maintenance costs / total number of machine hours) machine hours] + [(power costs / total number of kw hours) kw
hours]
= [(200,000 / 500) 4] + [80,000 / 3,200) 5] + [400,000 / 4,000) 25] + [40,000 / 80,000) 50]
= 1,600 + 125 + 2,500 + 25 = 4,250

Hunter Company manufactures two products (XX and YY). The overhead costs have been divided into four cost pools
that use the following activity drivers:
Number of Number of Number of labour Labour
Product Orders Setups Transactions Hours
XX 60 20 50 2,000
YY 20 80 70 500

Cost per pool £16,000 £13,000 £2,400 £20,000

Required:
16. Compute the allocation rates for each of the activity drivers listed.
17. Allocate the overhead costs to Products XX and YY using activity-based costing.
Compute the overhead rate using labour hours under the traditional functional-based costing
18.
system.
Allocate the overhead costs to Products XX and YY using the traditional functional-based
19. costing system overhead rate calculated in part (c).

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ANSWER: Number of
16. Number of Number of labour
labour
Orders Setups Transactions Hours
Cost per pool £16,000 £13,000 £ 2,400 £20,000
Total ÷____80 ÷___100 ÷___120 ÷_2,500
Allocation rate £ 200 £ 130 £ 20 £ 8

17. Product XX Product B

Number of
60 × £200 = £12,000 20 × £200 = £ 4,000
orders
Number of
20 × £130 = 2,600 80 × £130 = 10,400
setups
No. of labour
50 × £20 = 1,000 70 × £20 = 1,400
trans.
labour hours 2,000 × £8 = _16,000 500 × £8 = __4,000
£31,600 £19,800

(£16,000 + £13,000 + £2,400 + £20,000)/2,500 = £20.56 per

18.
DLH

19. Product XX: 2,000 × £20.56 = £41,120

Product YY: 500 × £20.56 = £10,280

Lyons, SA., has identified the following overhead costs and activity drivers for next year:
Overhead Item Expected Cost Activity Driver Expected Qty.
Setup costs £150,000 Number of setups 1,200
Ordering costs 40,000 Number of orders 10,000
Maintenance 200,000 Machine hours 16,000
Power 20,000 Kilowatt hours 100,000

The following are two of the jobs completed during the year:
Job XX Job YY
Direct materials £2,250 £2,500
Direct labour 3,000 1,875
Units completed 375 300
Direct labour hours 90 110
Number of setups 6 8
Number of orders 8 15
Machine hours 180 150
Kilowatt hours 90 120
The company's normal activity is 20,000 direct labour hours.

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Required:
20. Determine the unit cost for each job using direct labour hours to apply overhead.
Determine the unit cost for each job using the four activity drivers. (Round amounts to 2
21.
decimal places.)
22. Which method produces the more accurate cost assignment? Why?

ANSWER: 20. Unit cost for Job XX: £18.92

Unit cost for Job YY: £22.10

Job XX
Direct materials £2,250
Direct labour 3,000
Overhead assigned: (£20.50* × 90) _1,845
Total cost £7,095

Unit cost (£7,095/375) £18.92

*(£150,000 + £40,000 + £200,000 + £20,000)/20,000 = £20.50/DLH

Job YY
Direct materials £2,500
Direct labour 1,875
Overhead assigned: (£20.50 × 110) _2,255
Total cost £6,630

Unit cost (£6,630/300) £22.10

21. Unit cost for Job XX: £22.13

Unit cost for Job YY: £24.45

Setup: £150,000/1,200 = £125/setup

Ordering: £40,000/10,000 = £4/order
Maintenance: £200,000/16,000 = £12.50/hour
Power: £20,000/100,000 = £0.20/kilowatt hour

Job XX
Direct materials £2,250
Direct labour 3,000
Overhead assigned:
£125 × 6 750
£4 × 8 32
£12.50 × 180 2,250
£0.20 × 90 ____18
Total cost £8,300
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 Unit cost (£8,300/375) £22.13

Job YY
Direct material £2,500
Direct labour 1,875
Overhead assigned:
£125 × 8 1,000
£4 × 15 60
£12.50 × 150 1,875
£0.20 × 120 ____24
Total cost £7,334

Unit cost (£7,334/300) £24.45

Activity-based costing produces more accurate cost information because overhead incurrence is often
22.
related to many different activities rather than a single volume-based activity driver.

Hill Manufacturing uses an activity-based costing system. The company produces Model A and Model B. Information
concerning the two products is as follows:

Model A Model B
Units produced 30,000 50,000
Direct labour hours 24,000 26,000
Engineering labour (hours) 4,000 6,000
Setups 20 30
Kilowatt hours 5,000 7,000

The following costs are reported:

Power £12,000
labour-related overhead 70,000
Setups 60,000

Required:
Calculate the following:
23. A cost pool rate for power
24. A cost pool rate for setups
25. A cost pool rate for engineering
Calculate the following:
26. Power costs assigned to Model B
27. Setups costs assigned to Model A
28. Engineering costs assigned to Model A

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ANSWER:

23. £1.00/kwh [£12,000/(5,000 + 7,000)] = £1.00

24. £1,200/setup [£60,000/(20 + 30)] = £1,200
25. £7/hour [£70,000/(4,000 + 6,000)] = £7

26. £7,000 (£1.00 × 7,000)

27. £24,000 (£1,200 × 20)
28. £28,000 (£7 × 4,000)

29. Funk Manufacturing Company produces specially machined parts. The parts are produced in batches in one
continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based
on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the
batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the
manufacturing process has four activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining
process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity
using direct tracing and resource drivers:

Engineering £125,000
Setups 112,500
Machining 250,000
Inspection 100,000
Providing space 31,250
Providing utilities 22,500
Activity drivers for each activity have been identified and their practical capacities listed:
Machine hours 50,000
Setups 400
Engineering hours 10,000
Inspection hours 5,000
The costs of facility-level activities are assigned using machine hours. Compute the cost pool rates

ANSWER:
Activity Activity
Activity Name Process Level Driver Capacity Cost
1 Machining Manufact. Unit Mach. hrs. 50,000 £250,000
2 Engineering Manufact. Batch # of setups 400 125,000
3 Setup Manufact. Batch # of setups 400 112,500
4 Inspecting Manufact. Batch # of setups 400 100,000
5 Prov. space Sustaining Facility Mach. hrs. 50,000 31,250
6 Prov. util. Sustaining Facility Mach. hrs. 50,000 22,500

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 Pool rates:

Pool 1: £250,000/50,000 = £5.00 per machine hour

Pool 2: £337,500/400 = £843.75 per setup
Pool 3: £53,750/50,000 = £1.08 per machine hour

30. Godwin Ltd. produces specially machined parts. The parts are produced in batches in one continuous manufacturing
process. Each part is custom produced and requires special engineering design activity (based on customer specifications).
Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is
taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four
activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining process with two activities:
providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and
resource drivers:
Engineering £250,000
Setups 225,000
Machining 500,000
Inspection 200,000
Providing space 62,500
Providing utilities 45,000
Activity drivers for each activity have been identified and their practical capacities listed:
Machine hours 25,000
Setups 200
Engineering hours 5,000
Inspection hours 2,500
The costs of facility-level activities are assigned using machine hours. Compute the cost pool rates

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ANSWER:
Activity Activity
Activity Name Process Level Driver Capacity Cost
1 Machining Manufact. Unit Mach. hrs. 25,000 £500,000
2 Engineering Manufact. Batch # of setups 200 250,000
3 Setup Manufact. Batch # of setups 200 225,000
4 Inspecting Manufact. Batch # of setups 200 200,000
5 Prov. space Sustaining Facility Mach. hrs. 25,000 62,500
6 Prov. util. Sustaining Facility Mach. hrs. 25,000 45,000

Pool rates:

Pool 1: £500,000/25,000 = £20.00 per machine hour

Pool 2: £675,000/200 = £3,375.00 per setup
Pool 3: £107,500/25,000 = £4.30 per machine hour

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