high-volume to the low-volume product. The unit product cost of the Standard product line, the high-volume product, has gone down from $53.70 under the traditional cost- ing system to $51.96 under activity-based costing. In contrast, the unit product cost of the Premium product line, the low-volume product, has increased from $71.60 under the traditional costing system to $78.56 under activity-based costing. Instead of using direct labor-hours (which moves in tandem with the volume of the production) to assign all manufacturing overhead costs to products, the activity-based approach uses a batch- level activity measure and a product-level activity measure to assign the batch-level and product-level activity cost pools to the two products.
EXERCISE 2A–2 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing LO2–5
Harrison Company makes two products and uses a traditional costing system in which a single plantwide predetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow:
Rascon Parcel Total
Engineering design time (in hours) . . . . 3,000 3,000 6,000
Compute the unit product costs for the two products using the proposed activity-based absorp- tion costing system.
3. Explain why the product costs differ between the two systems.
EXERCISE 2A–3 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing LO2–5
Stillicum Corporation makes ultralightweight backpacking tents. Data concerning the company’s two product lines appear below:
Deluxe Standard
Direct materials per unit . . . $72.00 $53.00 Direct labor per unit . . . $19.00 $15.20 Direct labor-hours per unit . . . . 1.0 DLHs 0.8 DLHs Estimated annual production . . . 10,000 units 50,000 units
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:
Estimated total manufacturing overhead . . . . $325,000 Estimated total direct labor-hours . . . . 50,000 DLHs
Required:
1. Determine the unit product costs of the Deluxe and Standard products under the company’s traditional costing system.
2. The company is considering replacing its traditional costing system with an activity-based absorption costing system that would have the following three activity cost pools:
Activity Cost Pools (and Activity Measures)
Estimated Overhead Cost
Expected Activity Deluxe Standard Total Supporting direct labor (direct labor-hours) . . . . $ 200,000 10,000 40,000 50,000 Batch setups (setups) . . . . 75,000 200 100 300 Safety testing (tests) . . . . 50,000 30 70 100
Total manufacturing overhead cost . . . . $ 325,000
Rascon Parcel
Direct materials cost per unit . . . $13.00 $22.00 Direct labor cost per unit . . . . $6.00 $3.00 Direct labor-hours per unit . . . . 0.40 0.20 Number of units produced . . . 20,000 80,000
These products are customized to some degree for specific customers.
Required:
1. The company’s manufacturing overhead costs for the year are expected to be $576,000. Using the company’s traditional costing system, compute the unit product costs for the two products.
2. Management is considering an activity-based absorption costing system in which half of the over- head would continue to be allocated based on direct labor-hours and half would be allocated based on engineering design time. This time is expected to be distributed as follows during the upcoming year:
Determine the unit product costs of the Deluxe and Standard products under the activity-based absorption costing system.
PROBLEM 2A–4 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing LO2–5
Ellix Company manufactures two models of ultra-high fidelity speakers—the X200 model and the X99 model. Data regarding the two products follow:
Additional information about the company follows:
a. Model X200 requires $72 in direct materials per unit, and model X99 requires $50.
b. The direct labor workers are paid $20 per hour.
c. The company has always used direct labor-hours as the base for applying manufacturing over- head cost to products.
d. Model X200 is more complex to manufacture than model X99 and requires the use of special equipment.
e. Because of the special work required in (d) above, the company is considering the use of activity-based absorption costing to apply manufacturing overhead cost to products. Three activity cost pools have been identified as follows:
Activity Cost Pool Activity Measure Estimated
Total Cost
Estimated Total Activity
X200 X99 Total
Machine setups . . . . Number of setups $ 360,000 50 100 150
Special processing . . . . Machine-hours 180,000 12,000 0 12,000
General factory . . . . Direct labor-hours 1,260,000 9,000 27,000 36,000
$ 1,800,000
Required:
1. Assume that the company continues to use direct labor-hours as the base for applying over- head cost to products.
a. Compute the plantwide predetermined overhead rate.
b. Compute the unit product cost of each model.
2. Assume that the company decides to use activity-based absorption costing to apply overhead cost to products.
a. Compute the activity rate for each activity cost pool and determine the amount of over- head cost that would be applied to each model using the activity-based approach.
b. Compute the unit product cost of each model.
3. Explain why overhead cost shifted from the high-volume model to the low-volume model under the activity-based approach.
PROBLEM 2A–5 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing LO2–5
Siegel Company manufactures a product that is available in both a deluxe model and a reg- ular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.
Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $900,000 in manufacturing overhead cost and produce 5,000 units of the deluxe model and 40,000 units of the regular model. The deluxe
Product
Direct Labor-Hours
Annual Production
Total Direct Labor-Hours X200 . . . 1.8 DLHs per unit 5,000 units 9,000 DLHs X99 . . . 0.9 DLHs per unit 30,000 units 27,000 DLHs 36,000 DLHs
model requires two hours of direct labor time per unit, and the regular model requires one hour.
Material and labor costs per unit are as follows:
Model
Deluxe Regular
Direct materials . . . . $40 $25 Direct labor . . . . $38 $19
Required:
1. Compute the predetermined overhead rate using direct labor-hours as the allocation base.
Using this rate and other data from the problem, calculate the unit product cost of each model.
2. Management is considering using activity-based absorption costing to apply manufacturing over- head cost to products. The activity-based system would have the following four activity cost pools:
Activity Cost Pool Activity Measure
Estimated Overhead Cost Purchasing . . . Purchase orders issued $ 204,000 Processing . . . Machine-hours 182,000 Scrap/rework . . . Scrap/rework orders issued 379,000 Shipping . . . Number of shipments 135,000
$ 900,000
Activity Measure
Expected Activity
Deluxe Regular Total
Purchase orders issued . . . . 200 400 600 Machine-hours . . . . 20,000 15,000 35,000 Scrap/rework orders issued . . . . 1,000 1,000 2,000 Number of shipments . . . . 250 650 900
Determine the predetermined overhead rate for each of the four activity cost pools.
3. Using the predetermined overhead rates you computed in part (2), do the following:
a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.
b. Compute the unit product cost of each model (direct materials, direct labor, and manufac- turing overhead).
4. From the data you have developed in parts (1) through (3), identify factors that may account for the company’s declining profits.
CASE 2A–6 Activity-Based Absorption Costing and Pricing LO2–5
Java Source, Inc., (JSI) buys coffee beans from around the world and roasts, blends, and packages them for resale. Some of JSI’s coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. JSI prices its coffees at manufacturing cost plus a markup of 25%.
For the coming year, JSI’s budget includes estimated manufacturing overhead cost of
$2,200,000. JSI assigns manufacturing overhead to products on the basis of direct labor-hours.
The expected direct labor cost totals $600,000, which represents 50,000 hours of direct labor time.
The expected costs for direct materials and direct labor for one-pound bags of two of the com- pany’s coffee products appear below.
Kenya Dark Viet Select Direct materials . . . . $4.50 $2.90 Direct labor (0.02 hours per bag) . . . . $0.34 $0.34
JSI’s controller believes that the company’s traditional costing system may be providing mis- leading cost information. To determine whether or not this is correct, the controller has prepared an analysis of the year’s expected manufacturing overhead costs, as shown in the following table:
Kenya Dark Viet Select
Expected sales . . . . 80,000 pounds 4,000 pounds Batch size . . . . 5,000 pounds 500 pounds Setups . . . . 2 per batch 2 per batch Purchase order size . . . . 20,000 pounds 500 pounds Roasting time per 100 pounds . . . . 1.5 roasting hours 1.5 roasting hours Blending time per 100 pounds . . . . 0.5 blending hours 0.5 blending hours Packaging time per 100 pounds . . . . 0.3 packaging hours 0.3 packaging hours
Activity Cost Pool Activity Measure
Expected Activity for the Year
Expected Cost for the Year Purchasing . . . . Purchase orders 2,000 orders $ 560,000 Material handling . . . . Number of setups 1,000 setups 193,000 Quality control . . . . Number of batches 500 batches 90,000 Roasting . . . . Roasting hours 95,000 roasting hours 1,045,000 Blending . . . . Blending hours 32,000 blending hours 192,000 Packaging . . . . Packaging hours 24,000 packaging hours 120,000 Total manufacturing
overhead cost . . . . $ 2,200,000
Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below.
Required:
1. Using direct labor-hours as the manufacturing overhead cost allocation base, do the following:
a. Determine the plantwide predetermined overhead rate that will be used during the year.
b. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee.
2. Using the activity-based absorption costing approach, do the following:
a. Determine the total amount of manufacturing overhead cost assigned to Kenya Dark cof- fee and to Viet Select coffee for the year.
b. Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of Kenya Dark coffee and Viet Select coffee.
c. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee.
3. Write a brief memo to the president of JSI that explains what you found in (1) and (2) above and that discusses the implications of using direct labor-hours as the only manufacturing over- head cost allocation base.
(CMA, adapted)