Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
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Textbook Question
Chapter 9, Problem 67P
MTI makes three types of lawn tractors: M3100, M4100, and M6100. In the past, it allocated
MTI’s controller has heard about activity-based costing and puts together an employee team to recommend cost allocation bases. The employee team recommends the following:
The employee team recommends that plant administration costs not be allocated to products.
Required
- a. Using machine-hours to allocate overhead, complete the income statement for MTI. Do not allocate plant administrative costs to products.
- b. Complete the income statement using the activity-based costing method suggested by the employee team.
- c. Write a brief report indicating how activity-based costing might result in better decisions by MTI.
- d. After hearing the recommendations, the president expresses concern about failing to allocate plant administrative costs. If plant administrative costs were to be allocated to products, how would you allocate them?
a.
Expert Solution
To determine
Complete the income statement in accordance with the information given in the question.
Explanation of Solution
Activity-based costing:
Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.
Complete the income statement:
| Particulars | M3100 | M4100 | M6100 | Total |
| Sales revenue | $9,000,000 | $15,000,000 | $13,500,000 | $37,500,000 |
| Add: Direct costs: | ||||
| Direct material | $3,000,000 | $4,500,000 | $3,300,000 | $10,800,000 |
| Direct labor | $600,000 | $900,000 | $1,800,000 | $3,300,000 |
|
Variable overhead | $2,088,000 | $3,132,000 | $3,480,000 | $8,700,000 |
| Contribution margin | $3,312,000 | $6,468,000 | $4,920,000 | $14,700,000 |
| Less: Plant admin | $6,000,000 | |||
| Gross profit | $8,700,000 |
Table: (1)
Working note 1:
Compute the machine hour rate:
b.
Expert Solution
To determine
Complete the income statement in accordance with the information given in the question.
Explanation of Solution
Activity-based costing:
Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.
Compute the cost driver rates:
| Particulars | Cost | Activity volume | Unit rate | |
| Setting up machines | $2,400,000 | 50 Production runs | $48,000 | |
| Processing sales orders | $1,800,000 | 800 Sales orders | $2,250 | |
| Warehousing | $2,400,000 | 400 Units | $6,000 | |
| Operating machines | $1,200,000 | 25,000 Machine-hours | $48 | |
| Shipping | $900,000 | 37,500 Units shipped | $24 |
Table: (2)
Complete the income statement using the activity-based costing system:
| Particulars | M3100 | M4100 | M6100 | Total |
| Sales revenue | $9,000,000 | $15,000,000 | $13,500,000 | $37,500,000 |
| Direct costs: | ||||
| Direct material | $3,000,000 | $4,500,000 | $3,300,000 | $10,800,000 |
| Direct labor | $600,000 | $900,000 | $1,800,000 | $3,300,000 |
| Variable overhead: | ||||
|
Setting up machines | $480,000 | $960,000 | $960,000 | $2,400,000 |
|
Processing orders | $405,000 | $900,000 | $495,000 | $1,800,000 |
|
Warehousing | $600,000 | $1,200,000 | $600,000 | $2,400,000 |
|
Operating machines | $288,000 | $432,000 | $480,000 | $1,200,000 |
|
Shipping | $240,000 | $420,000 | $240,000 | $900,000 |
| Contribution margin | $3,387,000 | $5,688,000 | $5,625,000 | $14,700,000 |
| Less: Plant admin | $6,000,000 | |||
| Gross profit | $8,700,000 |
Table: (3)
c.
Expert Solution
To determine
Write a brief report according to the information given in the question.
Explanation of Solution
Activity-based costing:
Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.
The relevance of the activity-based costing system according to the information given in the question:
The computed income statement by the machine-hour method and activity-based costing method are equal. Thus, the choice of method will not have any impact on the choice of the method used for the determination of profit and cost.
But, choosing the activity-based method of computation provides a better assessment of the costing structure. The allocation of cost on the basis of cost drivers helps management taking informed decision.
d.
Expert Solution
To determine
Determine the cost allocation according to the information given in the question.
Explanation of Solution
Activity-based costing:
Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.
The relevance of plant administration cost with respect to the information given in the question:
The allocation of the cost should be in a manner that can establish a relationship between benefits and the plant administration cost. The more information related to the plant administration cost would help establish the correlation better for the identification of the parts of the plant administration cost.
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Chapter 9 Solutions
Fundamentals Of Cost Accounting (6th Edition)
Ch. 9 - Give examples of cost drivers commonly used to...Ch. 9 - What is the death spiral? How is it related to the...Ch. 9 - The product costs reported using either plantwide...Ch. 9 - Why do companies commonly use direct labor-hours...Ch. 9 - What are the costs of moving to an activity-based...Ch. 9 - What are the basic steps in computing costs using...Ch. 9 - Prob. 7RQCh. 9 - Prob. 8RQCh. 9 - What type of organization is most likely to...Ch. 9 - Prob. 10RQ
Ch. 9 - How does complexity lead to higher costs? Why is...Ch. 9 - Prob. 12RQCh. 9 - Prob. 13RQCh. 9 - Why are cost drivers based on direct labor widely...Ch. 9 - Prob. 15CADQCh. 9 - Activity-based costing could not be applied in a...Ch. 9 - Activity-based costing is the same as department...Ch. 9 - Prob. 18CADQCh. 9 - It is clear after reading this chapter that...Ch. 9 - Prob. 20CADQCh. 9 - Prob. 21CADQCh. 9 - Prob. 22CADQCh. 9 - Prob. 23CADQCh. 9 - Activity-based costing is just another inventory...Ch. 9 - Prob. 25CADQCh. 9 - Prob. 26CADQCh. 9 - Prob. 27CADQCh. 9 - One of the issues we identified with traditional...Ch. 9 - The cost accounting manager at your business says...Ch. 9 - Prob. 30CADQCh. 9 - Prob. 31ECh. 9 - Reported Costs and Decisions Kima Company...Ch. 9 - Plantwide versus Department Allocation Munoz...Ch. 9 - Plantwide versus Department Allocation Main Street...Ch. 9 - Unitwide versus Department...Ch. 9 - Prob. 36ECh. 9 - Prob. 37ECh. 9 - Upriver currently applies overhead on the basis of...Ch. 9 - Compute the unit costs for the two products, V-1...Ch. 9 - Prob. 40ECh. 9 - Prob. 41ECh. 9 - Activity-Based Costing in a Nonmanufacturing...Ch. 9 - Activity-Based versus Traditional Costing Maglie...Ch. 9 - Activity-Based Costing versus Traditional Costing...Ch. 9 - Activity-Based Costing in a Service Environment...Ch. 9 - Activity-Based versus Traditional Costing Isadores...Ch. 9 - Prob. 47ECh. 9 - Activity-Based Costing: Cost Flows through...Ch. 9 - Prob. 49ECh. 9 - Activity-Based Costing for an Administrative...Ch. 9 - Prob. 51ECh. 9 - Time-Driven Activity-Based Costing Kim...Ch. 9 - Time-Driven ABC for an Administrative Service The...Ch. 9 - Comparative Income Statements and Management...Ch. 9 - Comparative Income Statements and Management...Ch. 9 - Prob. 56PCh. 9 - Activity-Based Costing and Predetermined Overhead...Ch. 9 - Activity-Based Costing and Predetermined Overhead...Ch. 9 - Choosing an Activity-Based Costing System Pickle...Ch. 9 - Churchill Products is considering updating its...Ch. 9 - Utica Manufacturing (UM) was recently acquired by...Ch. 9 - Cain Components manufactures and distributes...Ch. 9 - Prob. 63PCh. 9 - Prob. 64PCh. 9 - Prob. 65PCh. 9 - Cawker Products has two manufacturing...Ch. 9 - MTI makes three types of lawn tractors: M3100,...Ch. 9 - Prob. 68PCh. 9 - Prob. 69PCh. 9 - Prob. 72IC
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