(WIP) ACC 350 Exam 1 Study Material

Sarah 

Takash 

ACC 350 

spring 2018 

Exam 1 

- 

Study 

Material

Preface : 

The original study guide 


Topics for first test: 

• Chapters 1 and 2 

o Concepts and Terminology, e.g., product and period costs, direct labor, 

material, and OH 

÷ 

costs, relevant range, opportunity costs, cost drivers, 

fixed and variable costs, etc. 

o Know how to sort expenses by category, e.g., direct material, direct labor, 

and overhead. 

o Understand how to prepare an income statement and a schedule of cost of 

goods manufactured and sold. 

• Chapter 5: Activity-Based Costing and Activity-Based Management 

o Concepts and Terminology. 

o Understand why traditional costing could lead to under- and over-costing 

products and services. 

o Determine the cost of activities and calculate cost driver rates. 

o Assign activity costs to goods and services. 

o Calculate product cost using both the “traditional” and activity-based 

approach. 

o Determine the profitability of products and customers. 

• Chapter 15: Allocation of Support Department Costs, Common Costs & Revenues 

o Concepts and terminology 

o Know the direct and sequential (step) methods to allocate service 

department costs to producing departments. For sequential, be able to 

determine which service department is allocated first. 

o Know how to calculate overhead rates from the operating departments to 

assign overhead costs to products, jobs, or services. 

• Time-Driven Activity Based Costing article. 

The test will approximate the following: 

Conceptual: 25 points 

Numerical: 75 points 

Sum 100 points

Pg. 1 

Sarah Allison Takash 

ACC 350, Spring 2018 

Exam 1 Study Material 

OVERVIEW 

NOTE: 

highlighted text in overview section corresponds to yellow & dark 

blue highlighted text in original study guide (located on the previous 

page) 

● Chs. 1 & 2 : Introduction to Cost Accounting ….. P. 2 

○ Terminology Definitions (terms list in study guide) ….. P. 

○ Other Terminology Definitions (terms not listed in study guide, but worth noting) ….. P. 

○ Complete List of Terms (from end of chs, in textbook, with corresponding page #s) ..... P. 

○ How to Sort Expenses By Category (e.g. DM, DL, & OH) ….. P. 

○ How to Prepare an Income Statement ….. P. 

○ How to Prepare a Schedule of Cost of Goods Manufactured and Sold ….. P. 

○ Blackboard Problems ….. P. 

■ Review Problems (followed by solutions) ….. P. 

■ Exam 1 Practice Problems (followed by solutions)….. P. 

■ In-class Problem (followed by solutions) ….. P. 

● Ch. 5 : ABC (Activity Based Costing) …..P. 

○ Complete List of Terms (from end of chs, in textbook, with corresponding page #s) ….. P. 

○ Terminology Definitions ….. P. 

○ Traditional Costing Effects: Under- and Over-Costing ….. P. 

○ Determining the Cost of Activities ….. P. 

○ Calculating Cost Driver Rates ….. P. 

○ Assigning Activity Costs to Goods & Services ….. P. 

○ Calculating Product Cost Using the Traditional Approach ….. P. 

○ Calculating Product Cost Using ABC ….. P. 

○ Determining the Profitability of Products ….. P. 

○ Determining the Profitability of Customers ….. P. 


■ Practice Problem (followed by solutions) ….. P. 

■ In-class Problem (followed by solutions)….. P. 

■ Milwaukee Problem (followed by solutions)….. P. 

■ Brrrr Problem (followed by solutions)….. P.

Pg. 2 




● Ch. 15 : Allocation of Support Dept. Costs, Common Costs, and Revenues ….. P. 19 

○ Complete List of Terms (from end of chs, in textbook, with corresponding page #s) ….. P. 

○ Terminology Definitions ….. P. 

○ Direct Method ….. P. 

○ Sequential (Step) Method ….. P. 

○ Calculating OH Rates from Operating Departments to assign OH Costs to Products, Jobs and 

Services ….. P. 


■ In-Class problem (followed by solutions) ….. P. 

■ Case Problem (followed by solutions)….. P. 

■ Haliburton Problem (followed by solutions)….. P. 

■ Service Department Problem (followed by solutions)….. P. 

● Time-Driven Activity Based Costing Article 

○ Summary 

○ How-To: TDABC 

Chs. 1 & 2 - Intro. To Cost Accounting: 

Terminology Definitions (Terms listed in study guide) 

1. Product/Service cost 

a. The sum of the costs assigned to a product 

b. Can be different amounts for the same cost object, depending on the purpose of 

measurement 

c. Image illustrating some different product costs for different purposes and the value chain 

activities they include in their calculations (below):

Pg. 3 




2. Period cost 

a. Also known as “SG&A” costs 

b. All costs in the income statement other than COGS 

c. Examples: 

i. Design 

ii. Marketing 

iii. Distribution 

iv. Customer Service 

v. R&D 

d. For manufacturing firms: 

i. All non-manufacturing costs in the income statement 

e. For retail firms: 

i. All costs not related to the cost of goods purchased for resale 

f. Treated like expenses in the periods in which they occur 

3. Direct labor (DL) 

a. Compensation for manufacturing labor 

b. Assignment method: tracing/traced 


i. Wages paid to workers who convert RM to FG 

ii. Benefits paid to workers who convert RM to FG

4. Direct material (DM) 

Pg. 4 




a. Acquisition costs of all materials that eventually become part of the cost object as WIP 

or FG 

b. Assignment methods: Tracing/Traced 

5. Overhead (OH) 

a. Can refer to: 

i. Nonmanufacturing OH 

1. Also known as: 

a. SG&A 

b. Period costs 

ii. Manufacturing OH 

1. Is manufacturing costs related to the cost object that CANNOT be traced in 

an economically feasible way 

2. Also known as: 

a. Indirect manufacturing costs 

b. factory OH 

b. Assignment method: Allocation 

6. Relevant range 

a. is the band or range of normal activity level or volume in which there is a specific 

relationship between the level of activity or volume and the cost in question. 

b. Example 

i. a fixed cost is fixed only in relation to a given wide range of total activity or 

volume (at which the company is expected to operate) and only for a given time 

span (usually a particular budget period). 

7. Opportunity Costs 

a. the loss of potential gain from other alternatives when one alternative is chosen. 

8. Cost Driver 

a. a variable that causally affects costs over a given time span 

b. The cause in a cause-and-effect relationship with costs being the effect 

c. Examples:

Pg. 5 




i. Level of activity 

ii. Volume of production 

d. Note that: 

i. Fixed costs have no cost driver in the short run but may have a cost driver in the 

long run. 

9. Fixed costs (within a relevant range) 

a. Total fixed costs: 

i. Are constant 

1. Unchanged, despite significant changes in levels of total activity or volume. 

when considering fixed costs, always focus on total costs. 

b. Per unit fixed costs 

i. Are inversely proportional 

1. Decrease as the activity level or volume increases 

c. Cannot be easily changed in the short run, rather are changed 

in the long run by managerial decision making 

d. Examples: 

i. Salaries to plant supervisors 

ii. Labor union agreements to set workers 

hours/compensation 

10. Variable costs 

a. Total variable costs: 

i. Are proportional within a relevant range 

1. Total variable cost changes in proportion to changes in the related level of 

total activity or volume of output produced. 

ii. graphed as a diagonal, upward sloping line 

b. Per unit of activity: 

i. Is constant within a relevant range 

ii. Is graphed as a horizontal line 


i. Hourly wages

Pg. 6 




Other Terminology Definitions (Terms not listed in study guide) 

11. Cost Classifications 

a. Costs can be classified based on: 

i. Function/department: 

1. R&D 

2. Design 

3. Production 

4. Marketing 

5. Distribution 

6. Customer Service 

ii. Assignment method: 

1. Direct = tracing 

2. Indirect = allocation 

iii. Behavior: 

1. Variable 

2. Fixed 

iv. Number of units (of the cost object): 

1. Total 

2. Unit 

v. Financial statement-treatment: 

1. Inventoriable 

a. Are assets when incurred 

b. Later expensed as COGS 

c. Include ONLY Manufacturing/Production costs (WIP & FG) 

i. DM - direct materials 

ii. DL - direct labor 

iii. MOH - manufacturing overhead 

2. Period (“SG&A”) 

a. Are expenses in the period incurred 

b. Include any costs outside of the manufacturing function 


i. Company officers’ compensation 

ii. Office supplies, utilities, computers & staff

Pg. 7 




iii. Marketing, sales, & finance staff 

b. Image summarizing cost classifications other than product/service costs (below): 

12. Semi-variable costs 

a. Have both fixed and variable components 

b. Examples: 

i. Phone bill that has a monthly fixed cost plus a per-minute used, variable cost 

Complete List of Terms (From end of chapters)

Pg. 8 




How to sort expenses by category: DM, DL & OH 

Summary: 

Direct materials (DM), direct labor (DL), and overhead (OH) are categories of expenses. 

13. Direct Materials 

a. Refer to (#4) “Direct materials (DM)” definition 

b. Acquisition costs for raw materials (RM) in work in process (WIP) or finished goods 

(FG) 

14. Direct Labor 

a. Refer to (#3) “Direct labor” definition 

b. Compensation for workers who convert RM into FG 

15. Overhead 

a. Refer to (#5) “Overhead (OH)” definition 

b. Either non-manufacturing (SG&A, period cost, expense) or manufacturing (MOH, 

inventoriable cost, asset into COGS)

Pg. 9 




How to prepare an Income Statement 

Summary: 

An income statement measures the success of a company over a given period of time. It 

summarizes the transactions that result in net income (i.e. revenue, expense, gain and loss 

transactions). It can classify income by categories such as by product, customer, operating, or 

non-operating income. Determinations and predictions can be made about aspects of the company 

from analyzation of the income statement (e.g. profitability, level of risk, and timing of future cash 

flows). 

● Example simple format of an income statement (below):

Pg. 10 




16. Income Statement Quick Facts 

a. Is comparative - meaning it represents changes over a period rather than depicting a 

single point in time 

b. Facilitates determination or prediction of 

i. profitability 

ii. investment value 

iii. creditworthiness 

iv. risk 

v. Amounts, timing and uncertainties of future cash flows 

c. Method of income statement measurement = transaction approach 

i. Focuses on income-related activities that occurred in the period 

ii. Can further classify income by categories, such as: 

1. Customer 

2. Product line 

3. Function 

4. Operating & non-operating 

5. Continuing & discontinued 

6. Regular & non recurring 

iii. Major elements: 

1. Revenues 

a. Inflows or enhancements of assets 


i. Sales 

ii. Fees 

iii. Interest received 

iv. Dividends received 

2. Expenses 

a. Outflows or using up of assets 


i. COGS 

ii. Depreciation 

iii. Rent paid 

iv. Interest paid 

v. Wages paid

Pg. 11 




3. Gaines 

a. Increases in equity (net assets) that result from peripheral or 

incidental transactions 

4. Losses 

a. Decreases in equity (net assets) that result from peripheral or 

incidental transactions 

17. Multi-step Income Statement 

a. Is a common format of income statement 

b. Sections summarized below: 

c. Example multi-step income statement (below):

Pg. 12 



Exam 1 Study Material

Pg. 13 




How to prepare a Schedule of Cost of Goods 

Manufactured and Sold 

Summary: 

The schedule of Cost of Goods Manufactured and sold summarizes the flow of materials and 

goods through the T-accounts of RM, WIP & FG. 

18. Steps: 

a. Add purchases 

b. Subtract Indirect RM issues, increases in RM inventory, DM used in production, DL & 

MOH 

c. (a+b) → = Total manufacturing costs 

d. Add (c) Beg-WIP 

e. Subtract End-WIP 

f. (c+d-a) → = COGM

Pg. 14 




g. Add reduction in FG 

h. (f+g) → = COGS 

i. NOTE: Do NOT include SG&A (non-production) costs anywhere in the schedule 

Blackboard Problems

Ptt 

e. 

chs 

. 

Review 1132 

Problems 

Ch. 2 Review Problems 

TRUE / FALSE QUESTIONS 

1. Product costs become expenses in the period they are purchased. 

2. Cost of goods sold does not include the costs of selling merchandise. 

3. Factory heating and air conditioning should be considered a product cost in a manufacturing 

operation. 

4. Depreciation of office equipment is a manufacturing overhead cost at Dell Computer, a large 

manufacturer of personal computers. 

5. Overtime premium costs should theoretically be considered part of direct labor cost. 

6. Conversion costs equal direct materials and manufacturing overhead costs. 

7. Non-manufacturing costs include selling and administrative costs, which are not used to produce 

products. 

8. Tracing costs is generally considered a more accurate method of cost assignment than allocating 

costs. 

CONCEPTUAL MULTIPLE CHOICE QUESTIONS 

9. Which of the following should be considered part of a manufacturing company's direct labor cost? 

A) Factory supervisor's salary 

B) Receiving forklift operator's hourly wages 

C) Employer-paid health insurance on factory assemblers' wages 

D) Cost of idle time 

E) None of the above 

10. Wages paid to supervisors in the factory are typically classified as: 

A) Direct manufacturing labor costs 

B) Manufacturing overhead costs 

C) Prime costs 

D) Period costs 

11. Prime costs are the same as: 

A) Manufacturing overhead costs. 

B) Indirect labor costs. 

C) Total manufacturing costs. 

D) Direct labor and direct materials used. 

E) Direct labor and direct materials purchased.

e. 7-2 

P. 

12. Which of the following describes the formula for cost of goods manufactured? 

A) Direct materials used plus direct labor plus overhead minus beginning inventory of work- in-process 

plus ending inventory of work- in -process. 

B) Direct materials used plus direct labor plus overhead plus beginning inventory of work- in- process 

minus ending inventory of work- in- process. 

C) Beginning inventory of raw materials plus purchases of raw materials less ending inventory raw 

materials. 

D) Beginning inventory of finished goods plus purchases of direct materials less ending inventory of 

finished goods. 

COMPUTATIONAL PROBLEM 

13. Pringlay Company had the following transactions last month: 

Purchased Raw Materials - $10,000 

Issues RM as supplies - $1,000 

Incurred Direct labor costs - $5,000 

Paid freight-in - $2,000 

Paid freight-out - $7,000 

Depreciation on plant - $6,000 

Depreciation on office equipment - $4,000 

Plant manager’s salary - $2,500 

Quality Inspector’s salary - $1,500 

Marketing Manager’s salary - $3,500 

Sales Commissions – 5% of sales 

Sales - $65,000 

Ending Raw Materials Inventory increased $3,000 from beginning of the month 

Ending WIP Inventory did not change from beginning of the month 

Ending FG Inventory decreased $8,000 from the beginning of the month 

What was COGS for last month?

P 

. 7 

per 

- 

3 

solutions 

Ch. 2 Review Problem Solutions 

1. FALSE 

2. TRUE 

3. TRUE 

4. FALSE 

5. FALSE 

6. FALSE 

7. TRUE 

8. TRUE 

9. C 

10. B 

11. D 

12. B 

13. $32,000 

TRUE / FALSE QUESTIONS 

1. Product costs become expenses in the period they are purchased. 

FALSE –product costs become expenses in the period they are SOLD 

2. Cost of goods sold does not include the costs of selling merchandise. 

TRUE – selling costs are nonmanufacturing or period costs and are not included in COGS 

3. Factory heating and air conditioning should be considered a product cost in a manufacturing 

operation. 

TRUE –costs related to the plant or factory are manufacturing costs. Factory heating and air 

conditioning would be considered MOH (which is a product cost). 

4. Depreciation of office equipment is a manufacturing overhead cost at Dell Computer, a large 

manufacturer of personal computers. 

FALSE –costs related to the office are considered nonmanufacturing costs 

5. Overtime premium costs should theoretically be considered part of direct labor cost. 

FALSE – overtime premium costs are considered part of MOH

12.7-4 gas 

6. Conversion costs equal direct materials and manufacturing overhead costs. 

FALSE - Conversion Costs = DL plus MOH 

7. Non-manufacturing costs include selling and administrative costs, which are not used to produce 

products. 

TRUE –these are considered period costs 

8. Tracing costs is generally considered a more accurate method of cost assignment than allocating 

costs. 

TRUE –allocating is usually based on some arbitrary method 

CONCEPTUAL MULTIPLE CHOICE QUESTIONS 

9. Which of the following should be considered part of a manufacturing company's direct labor cost? 

A) Factory supervisor's salary 

B) Receiving forklift operator's hourly wages 

C) Employer-paid health insurance on factory assemblers' wages 

D) Cost of idle time 

E) None of the above 

“C” is correct. A, B and D would be considered indirect labor which is part of manufacturing 

overhead. 

10. Wages paid to supervisors in the factory are typically classified as: 

A) Direct manufacturing labor costs 

B) Manufacturing overhead costs 

C) Prime costs 

D) Period costs 

“B” is correct. 

11. Prime costs are the same as: 

A) Manufacturing overhead costs. 

B) Indirect labor costs. 

C) Total manufacturing costs. 

D) Direct labor and direct materials used. 

E) Direct labor and direct materials purchased. 

“D” is correct (based on discussion in class) 

12. Which of the following describes the formula for cost of goods manufactured? 

A) Direct materials used plus direct labor plus overhead minus beginning inventory of work- in-process 

plus ending inventory of work- in -process. 

B) Direct materials used plus direct labor plus overhead plus beginning inventory of work- in- process 

minus ending inventory of work- in- process. 

C) Beginning inventory of raw materials plus purchases of raw materials less ending inventory raw 

materials. 

D) Beginning inventory of finished goods plus purchases of direct materials less ending inventory of 

finished goods. 

“B” is correct.

P 

. 

be 7-5 

COMPUTATIONAL QUESTION 

13. Pringlay Company had the following transactions last month: 

Purchased Raw Materials - $10,000 

Issues RM as supplies - $1,000 

Incurred Direct labor costs - $5,000 

Paid freight-in - $2,000 

Paid freight-out - $7,000 

Depreciation on plant - $6,000 

Depreciation on office equipment - $4,000 

Plant manager’s salary - $2,500 

Quality Inspector’s salary - $1,500 

Marketing Manager’s salary - $3,500 

Sales Commissions – 5% of sales 

Sales - $65,000 

Ending Raw Materials Inventory increased $3,000 from beginning of the month 

Ending WIP Inventory did not change from beginning of the month 

Ending FG Inventory decreased $8,000 from the beginning of the month 

What was COGS for last month? 

+ Purchases 12,000 Include freight-in 

- Indirect RM Issues 1,000 

- Increase in RM Inventory 3,000 

DM used in Production $8,000 

DL 5,000 

Manufacturing Overhead 11,000 RM Supplies + Depr on plant + Plant Mgr 

Salary + Quality Inspector salary 

Total Manufacturing Costs $24,000 

+ Beginning WIP 0 

- Ending WIP 0 No Change 

Cost of Goods Manufactured $24,000 

+ Reduction in FG 8,000 

Cost of Goods Sold $32,000 

The following items are SG&A Expenses: 

Freight-out 

Depreciation on office equipment 

Marketing manager’s salary 

Sales commissions

• 

P. 

7-6 

Ch . 

2 

: Exam 1 Practice Problems 


Review Problems, Chapter 2 

Inventory Equation: Beginning Inventory + Additions = Withdrawals + Ending Inventory 

1. The records of Custom Choppers, Inc. for September 2014 shows the following information: 

Sales $820,000 

Selling and administrative expenses 140,000 

Direct materials purchases 176,000 

Direct labor 200,000 

Factory overhead 270,000 

Direct materials, September 1 24,000 

Work in process, September 1 50,000 

Finished goods, September 1 46,000 




The net income for the month of September is: 

$3 

a. $644,000 

b. $ 36,000 

c. $636,000 

d. $180,000 

2. The following information for the Sutton Glass Company has been provided: 

Cost of goods manufactured $100,000 

Work in process: 

Beginning 15,000 

Ending 20,000 


Direct materials used ? 


What is the amount of direct materials used? 

a. $25,000 

b. $30,000 

c. $35,000 

d. $100,000

P . 

Efg 7-7 

Inventory balances for the Jameson Company in October 2014 are as follows: 

October 1, 2014 October 31, 2014 

Raw materials $ 27,000 $21,000 

Work in process 48,000 37,200 

Finished goods 108,000 90,000 

During October, purchases of direct materials were $36,000. Direct labor and factory overhead costs were 

$60,000 and $84,000, respectively. 

3. Refer to the above. What are the total manufacturing costs ADDED to production in the period? 

a. $186,000 

b. $180,000 

c. $144,000 

d. $174,200 

Figure 2-11 

Information from the records of the Abel Corporation for July 2014 was as follows: 

Sales $1,230,000 


Direct materials used 264,000 


Factory overhead * 405,000 

*variable overhead is $205,000, fixed overhead is $200,000 

4. Refer to Figure 2-11. The variable product costs are 

a. $ 969,000 

b. $ 769,000 

c. $ 764,000 

d. $1,179,000 

5. Refer to Figure 2-11. The total product cost is 

a. $1,179,000 

b. $ 969,000 

c. $ 615,000 

d. $ 764,000

7- 

P 

. 

8 

so 

Inventory balances for Spiritlight Ventures for November 2014 are as follows: 

November 1, 2014 November 30, 2014 

Materials $ 9,000 $ 7,000 



During November, purchases of direct materials were $18,000. Direct labor and factory overhead 

costs were $20,000 and $28,000, respectively. 

6. The cost of goods manufactured in November was 

a. $68,000. 

b. $77,600. 

c. $74,000. 

d. $71,600. 

7. The records for the previous year for Sarasota Boat Builders, Inc., shows the following data: 

Selling and administrative expenses $300,000 


Direct labor (100,000 hours) 600,000 

Factory overhead application rate $5 per DLH 

The cost of goods sold is 

a. $1,630,000. 

b. $1,880,000. 

c. $1,600,000. 

d. $1,650,000. 

Inventories 

Beginning 

Ending 

Work in process $150,000 $160,000 

Finished goods 80,000 50,000

P 

. 

a. 

7-9 

8. The following information has been provided for Hopen Enterprises: 

What is the amount of factory overhead? 

a. $2,000 

b. $2,200 

c. $1,400 

d. $5,500 


Work in process 


Ending 1,400 


Materials placed in production 1,500 

Factory overhead ? 

9. Morton Manufacturing shows cost of goods sold for the month of March was $90,000. The 

finished goods inventory was $15,000 on March 1 and $17,500 on March 31. Beginning and 

ending work-in-process inventories were $20,000 and $25,000, respectively. What was the cost of 

goods manufactured during March? 

a. $92,500 

b. $90,000 

c. $87,500 

d. $97,500

←e 

e 7- to 

solutions 


Review Problems, Chapter 2 

Inventory Equation: Beginning Inventory + Additions = Withdrawals + Ending Inventory 

1. The records of Custom Choppers, Inc. for September 2014 shows the following information: 

Sales $820,000 


Direct materials purchases 176,000 









The net income for the month of September is: 

$3 

a. $644,000 

b. $ 36,000 

c. $636,000 

d. $180,000 

2. The following information for the Sutton Glass Company has been provided: 


Work in process: 


Ending 20,000 


Direct materials used ? 


What is the amount of direct materials used? 

a. $25,000 

b. $30,000 

c. $35,000 

d. $100,000

1=7-11 See 

Inventory balances for the Jameson Company in October 2014 are as follows: 

October 1, 2014 October 31, 2014 

Raw materials $ 27,000 $21,000 



During October, purchases of direct materials were $36,000. Direct labor and factory overhead costs were 

$60,000 and $84,000, respectively. 

3. Refer to the above. What are the total manufacturing costs ADDED to production in the period? 

a. $186,000 

b. $180,000 

c. $144,000 

d. $174,200 

Figure 2-11 

Information from the records of the Abel Corporation for July 2014 was as follows: 

Sales $1,230,000 




Factory overhead * 405,000 

*variable overhead is $205,000, fixed overhead is $200,000 

4. Refer to Figure 2-11. The variable product costs are 

a. $ 969,000 

b. $ 769,000 

c. $ 764,000 

d. $1,179,000 

5. Refer to Figure 2-11. The total product cost is 

a. $1,179,000 

b. $ 969,000 

c. $ 615,000 

d. $ 764,000

P . 

breed 7-12 

Inventory balances for Spiritlight Ventures for November 2014 are as follows: 

November 1, 2014 November 30, 2014 

Materials $ 9,000 $ 7,000 



During November, purchases of direct materials were $18,000. Direct labor and factory overhead 

costs were $20,000 and $28,000, respectively. 

6. The cost of goods manufactured in November was 

a. $68,000. 

b. $77,600. 

c. $74,000. 

d. $71,600. 

7. The records for the previous year for Sarasota Boat Builders, Inc., shows the following data: 

Selling and administrative expenses $300,000 


Direct labor (100,000 hours) 600,000 

Factory overhead application rate $5 per DLH 

The cost of goods sold is 

a. $1,630,000. 

b. $1,880,000. 

c. $1,600,000. 

d. $1,650,000. 

Inventories 

Beginning 

Ending 

Work in process $150,000 $160,000 

Finished goods 80,000 50,000

P . 

7-13 f- 

8. The following information has been provided for Hopen Enterprises: 

What is the amount of factory overhead? 

a. $2,000 

b. $2,200 

c. $1,400 

d. $5,500 


Work in process 


Ending 1,400 


Materials placed in production 1,500 

Factory overhead ? 

9. Morton Manufacturing shows cost of goods sold for the month of March was $90,000. The 

finished goods inventory was $15,000 on March 1 and $17,500 on March 31. Beginning and 

ending work-in-process inventories were $20,000 and $25,000, respectively. What was the cost of 

goods manufactured during March? 

a. $92,500 

b. $90,000 

c. $87,500 

d. $97,500

Spade Pit H 

chz 

: 

In 

- 

class 

Problem 


In-Class Problems – Chapter 2 

#1 – Identify Costs 

The Temp Company manufactures bicycles and has the following costs: 

DM DL MOH 

Period or 

Product 

Fixed or 

Variable 

1. Assembly-line worker’s salary 

2. Factory heating and air conditioning 

3. Salaries of the company’s top 

executives 

4. Sales Commissions 

5. Production supervisor’s salary 

6. Research and development costs 

7. Chains used to make bicycles 

8. Supplies (e.g. lubricant) used to make 

bicycles 

9. Freight-in on direct materials 

10. Freight-out to ship goods 

11. Quality inspectors’ salaries 

12. Material handler salaries 

13. Process design engineer salaries 

14. Electricity for the machines 

15. Overtime premium paid to assembly 

workers 

16. Property taxes on the factory & office 

17. Office rental for cost-management staff 

Identify each cost as Direct Material (DM), Direct Labor (DL), or Manufacturing 

Overhead (MOH), as a Period or Product Cost, and as a Fixed or Variable Cost.

p 

. 

Be 7-15 

#2 – COGM / COGS 

Hanks Corporation produced 120,000 toy pianos last year. These pianos sell for $100 

each. Hanks had 11,350 pianos in finished goods inventory at the beginning of the year. 

At the end of the year, there were 7,600 pianos in finished goods inventory. Hanks uses 

FIFO method of accounting and the accounting records from last year show the following 

information 

a. Purchases of Raw Materials $900,000 

b. Rent on the factory building 250,000 

c. Utilities (50% factory, 50% sales office) 60,000 

d. Insurance on the factory 10,000 

e. Depreciation, factory equipment 70,000 

f. General Administration 175,000 

g. Raw Materials used as supplies 35,000 

h. Plant receptionist, Plant landscaping, etc. 100,000 

i. Salaries 

Direct labor 2,500,000 

Factory Supervisors 500,000 

Plant Manager 90,000 

Plant Controller 40,000 

Receiving personnel 60,000 

Quality Inspectors 150,000 

Salespeople 300,000 

Machine Maintenance salary 100,000 

RM Inventory manager 40,000 

Total Salaries 3,780,000 

Raw Materials Inventory, January 1 310,000 

Raw Materials Inventory, December 31 100,000 

Work In Process Inventory, January 1 450,000 

Work In Process Inventory, December 31 600,000 

Finished Goods Inventory, January 1 454,000

Seed 1=7-16 

Required: 

a. Prepare a Cost of Goods Manufactured Statement. 

Beginning RM Inventory 

+ Raw Material Purchases 

= RM Available for Use 

- RM used as supplies 

- Ending RM Inventory 

= DM Used in Production 

+ Direct Labor 

+ Manufacturing Overhead 

= Total Manufacturing Cost 

+ Beginning WIP 

- Ending WIP 

= COGM 

b. What was the cost of producing one toy piano last year? 

c. Based on the COGM Statement, what is the value of ending FG inventory? 

d. What was COGS? 

= COGM 

+ Beginning FG 

- Ending FG 

= COGS

a. 

t 7- it 

Solutions 



#1 – Identify Costs 

The Temp Company manufactures bicycles and has the following costs: 

DM DL MOH 

Period or 

Product 

Fixed or 

Variable 

1. Assembly-line worker’s wages X Product Variable 

2. Factory heating and air conditioning X Product Fixed 

3. Salaries of the company’s top executives Period Fixed 

4. Sales Commissions Period Variable 

5. Production supervisor’s salary X Product 

Fixed 

6. Research and development costs Period Fixed 

7. Chains used to make bicycles X Product Variable 

8. Supplies (e.g. lubricant) used to make 

bicycles 

X 

Product 

Variable 

9. Freight-in on direct materials X Product Variable 

10. Freight-out to ship goods Period Variable 

11. Quality inspectors’ salaries X Product Fixed 

12. Material handler salaries X Product Fixed 

13. Process design engineer salaries X Product Fixed 

14. Electricity for the machines X Product Variable 

15. OT premium paid to assembly workers X Product Variable 

16. Property taxes on the factory & office* X 

17. Office rental for cost-management staff* X 

Product or 

Period 

Product or 

Period 

Fixed 

Fixed 

Identify each cost as Direct Material (DM), Direct Labor (DL), or Manufacturing Overhead (MOH), as a 

Period or Product Cost, and as a Fixed or Variable Cost. 

* Depends on location. If a factory office—MOH; if an administrative office—Period Expense. 

Note: many of the fixed costs are fixed within a relevant range. As volume increases beyond the relevant 

range, additional supervisors, inspectors, etc. will need to be hired. 

2 - 14

12.7-18 

am 

InClass Problems – Chapter 2 

#2 – COGM / COGS 

Hanks Corporation produced 120,000 toy pianos last year. These pianos sell for $100 each. 

Hanks had 11,350 pianos in finished goods inventory at the beginning of the year. At the end of 

the year, there were 7,600 pianos in finished goods inventory. Hanks uses FIFO method of 

accounting and the accounting records from last year show the following information 

a. Purchases of Raw Materials $900,000 

b. Rent on the factory building 250,000 OH 

c. Utilities (50% factory, 50% sales office) 60,000 ½ OH ½ S&A 

d. Insurance on the factory 10,000 OH 

e. Depreciation, factory equipment 70,000 OH 

f. General Administration 175,000 S&A 

g. Raw Materials used as supplies 35,000 OH 

h. Plant receptionist, Plant landscaping, etc. 100,000 OH 

i. Salaries 

Direct labor 

$2,500,000 DL 

Factory Supervisors 

500,000 OH 

Plant Manager 

90,000 OH 

Plant Controller 

40,000 OH 

Receiving personnel 

60,000 OH 

Quality Inspectors 

150,000 OH 

Salespeople 

300,000 S&A 

Machine Maintenance salary 

100,000 OH 

RM Inventory manager 

40,000 OH 

Total Salaries $3,780,000 

Raw Materials Inventory, January 1 $310,000 

Raw Materials Inventory, December 31 100,000 

Work In Process Inventory, January 1 450,000 

Work In Process Inventory, December 31 600,000 

Finished Goods Inventory, January 1 454,000 

2 - 15

P 

. 

soft 

7-19 


Required: 

a. Prepare a Cost of Goods Manufactured Statement. 

Beginning RM Inventory $310,000 

+ Raw Material Purchases 900,000 

= RM Available for Use $1,210,000 

- RM used as supplies 35,000 

- Ending RM Inventory 100,000 

= DM Used in Production $1,075,000 

+ Direct Labor 2,500,000 

+ Manufacturing Overhead 1,475,000 

= Total Manufacturing Cost $5,050,000 

+ Beginning WIP 450,000 

- Ending WIP 600,000 

= COGM $4,900,000 

b. What was the cost of producing one toy piano last year? 

$4,900,000/120,000 = $40.83/unit 

c. Based on the COGM Statement, what is the value of ending FG 

inventory? 

$40.83 * 7,600 = $310,308 

d. What was COGS? 

COGM $4,900,000 

+ Beginning FG 454,000 

- Ending FG 310,308 

= COGS $5,043,692 

2 - 16

Pg. 15 




Ch. 5 - ABC: 

Complete List of Terms (From end of chapter) 

Terminology Definitions (selected terms) 

19. Activity-based costing (ABC) 

a. A tool for refining a cost system 

b. Identifies individual activities as cost objects 

c. For strategic (pricing & product mix) decisions 

i. Identify all activities in the value chain 

ii. Calculate all costs of individual activities 

iii. Assign costs to cost objects on the basis of mix of activities needed 

d. Illustration of ABC process:

20. Cost hierarchy 

Pg. 16 




a. Categorizes various activity pools 

i. Basis: 

1. Cost-drivers 

2. Cost-allocation bases 

3. Degrees of difficulty in determining cause-and-effect or benefits received 

relationships 

ii. Levels: 

1. Output-unit 

2. Batch 

3. Product/Service-Sustaining 

4. Facility-sustaining 

21. Traditional Costing 

a. “Simple costing system” or “Peanut-Butter Costing” 

b. Uses a single indirect cost pool 

c. Broadly averages cost of resources to cost objects 

d. Often leads to under/over-costing 

e. Works best for: 

i. Limited variety of products 

ii. Few OH resources used 

22. Under-costing 

a. A product/service is reported as having a lower cost per unit than the level of resources it 

actually consumes 

b. Strategic consequences: 

i. under-pricing 

ii. Losses on profits 

23. Over-costing 

a. A product/service is reported as having a higher cost per unit than the level of resources 

it actually consumes 

b. Strategic consequence:

Pg. 17 




i. Over-pricing 

ii. Low market share as competition with lower prices gains consumers 

24. Product-cost cross-subsidization 

a. Common in a traditional/simple costing system 

b. Undercosting one item and overcosting one or more of its other products 

25. Activity 

a. Verb 

b. Event, task, or unit of work with a specified purpose 

c. Examples 

i. Designing products/processes 

ii. Setting up machines 

iii. Operations of machines 

iv. Setting up shipments 

v. Distributing 

d. Are sources of indirect costs 

e. Are used to refine total indirect costs into pools 

f. To achieve an effective balance, focus on activities that account for a sizable fraction of 

indirect costs 

g. Individual tasks can be combined into single activities if they all have the same cost 

driver 

i. Example: 

1. A firm decides to combine maintenance of molding machines, 

operations of molding machines, and process control into a single 

activity—molding machine operations—because all these 

activities have the same cost driver: molding machine-hours. 

26. Indirect-cost pools 

a. A grouping of indirect costs caused by activities 

b. In ABC: 

i. should be homogenous 

1. Have the same or similar cause-and-effect/benefits-received relationship 

with a single cost-driver

Pg. 18 





i. Distribution costs pool 

1. Includes: 

a. all costs associated with distribution 

ii. Set-up costs pool 

1. Includes: 

a. all costs associated with setting up a machine 

27. Cost-allocation base 

a. The cost-driver that proportionally causes an indirect cost-pool to increase 


i. Cubic feet of packages 

1. Cost pool associated: distribution costs 

ii. Setup hours 

1. Cost pool associated: set-up costs 

28. Activity Based Management (ABM) 

a. Uses ABC to improve customer satisfaction and profitability 

b. Critical decisions: 

i. Pricing & product mix 

ii. Cost reduction 

iii. Process improvement 

iv. Product & process design 

Traditional Costing Effects: Under- and Over-Costing 

Summary: 

Traditional costing, also known as “simple costing” or “peanut-butter costing,” often 

leads to under/over-costing of products/services when applied to modern businesses. 

Historically used when companies produced low variety products with minimal overhead costs. 

The strategic consequences of traditional costing include mis-pricing of products/services 

along with the effects mis-pricing can lead to [under-pricing → lost profits & Over-pricing → 

low market share]

Pg. 19 




Determining the cost of activities 

Summary: 

Activities are the prime sources of total indirect cost accumulation. In normal ABC, the cost of 

activities is measured using surveys and interviews. Budgeted quantities of indirect costs per cost 

pool are then identified. 

Calculating cost driver rates 

Summary: 

A budgeted indirect cost rate is determined for each activity, by dividing its associated, 

homogeneous cost pool by the total budgeted quantity of cost-allocation base related to the activity. 

● Example calculation:

29. Steps: 

Pg. 20 




a. Determine the total budgeted indirect costs for an activity/indirect cost-pool 

b. Determine the total budgeted quantity of the activity’s cost-allocation base 

c. Divide step (a) by step (c): 

i. total budgeted indirect costs for an activity/indirect cost-pool 

total budgeted quantity of the activity’s cost-allocation base 

Assigning activity costs to goods & services 

Summary: 

Take the cost-driver rate (budgeted indirect cost rate) and multiply it by the quantity of costallocation 

base that the individual product or service consumes. 

30. Steps: 

Calculating product cost using the traditional 

approach 

Summary: 

Refer to (#18) “Traditional costing” definition. Simply divide total indirect costs (a single pool) 

by one single budgeted cost-allocation base. Use this rate to determine product costs by multiplying 

the rate by the amount of cost-allocation base consumed by the particular product. 

Calculating product cost using ABC 

Summary:

Pg. 21 




Refer to (#16) “Activity Based Costing” definition. ABC groups indirect costs into 

homogenous activity-cost pools, each having a cost-allocation base. The cost-allocation base is the 

driver of costs in the activity-cost pool. It is used to determine indirect cost-rates for individual 

activities. Those rates are used to compute product costs based on the product’s cost-allocation base 

consumption per unit. 

31. Steps: 

a. Identify cost objects 

i. cost pools 

ii. products/services 

b. Identify direct costs of the product 

i. DM 

ii. DL 

c. Select the activities and/or cost allocation bases for indirect costs 

d. Identify the indirect costs associated with each cost-allocation base 

e. Compute the rate per unit of each cost allocation base 

f. Compute allocation amounts to assign to each product 

g. Compute the total assigned costs of a product 

i. Sum: 

1. All direct costs traced 

2. All indirect costs allocated 

h. Illustration of steps (below):

Pg. 22 




Determining the profitability of products 

Summary: 

The profitability of a product is the net gain a company receives for providing it. This is 

often represented as a percentage called the “operating profit margin.” 

● Operating profit margin 

○ Also known as: 

■ Operating income margin 

■ Operating margin 

■ Return on Sales (ROS) 

○ Is a percentage

○ = operating income / revenues 

32. Steps: 

Pg. 23 




a. Determine total product revenues attributable to the particular product 

i. = “net sales” 

ii. = price * qty sold - returns and sales allowances 

b. Determine the total product-cost 

i. = Cost of all value chain activities associated with providing the product 

ii. = COGS + indirect/period/SG&A costs allocated to the product 

iii. = COGS + operating costs ---- (on income statement) 

c. Using (a) and (b), Determine the product’s operating income: 

i. Subtract total product-cost from total product-revenues to get the product’s 

operating income 

ii. = (product-operating income) = (total product-revenue) - (total product-cost) 

d. Divide total revenues (step a) by operating income (step b) 

i. = (Total product-revenue) / (product-operating income) 

e. Multiply by 100 to get a % → this is your operating profit margin 

Example Problem from textbook:

Pg. 24 




Solution on p. 178 of textbook 

Determining the profitability of customers 

Summary: 

Same as for determining profitability of products, except use customer related revenues and 

customer related costs instead of product related revenues and product-costs. 

Blackboard Problems:

Practice 

Problems 


Practice problem—chapter 5 

Name _____________________________ 

The Oakland plant uses a normal cost system and has the following overhead pool cost estimates for the 

coming year: 

Machine maintenance costs $240,000 

Set-up costs $200,000 

Inspection costs $500,000 

Total $940,000 

Total expected machine hours are 60,000. 

Total expected set-ups are 500 (one per batch). 

Total expected inspections are 4,000. 

Overhead is currently applied using direct labor hours, with an expected and normal capacity of 100,000 

direct labor hours. 

The following data has been assembled for a proposed job which would require the production of 1,000 

units of a product. Bid prices normally reflect a 20% mark-up on cost. 

Proposed Job (1,000 units) 

Direct material $ 10,000 

Direct labor hours ($12 per hour) 1,000 

Machine hours 900 

Batch size 100 

Number of inspections 60 

Required: 

a. Determine the bid price per unit for the proposed job using the current costing system. 

b. Determine the bid price per unit for the proposed job using activity based costing.

Solutions 


Practice problem solution—chapter 5 

Name _____________________________ 

The Oakland plant uses a normal cost system and has the following overhead pool cost estimates for the 

coming year: 

Machine maintenance costs $240,000 

Set-up costs $200,000 

Inspection costs $500,000 

Total $940,000 

Total expected machine hours are 60,000. 

Total expected set-ups are 500 (one per batch). 

Total expected inspections are 4,000. 

Overhead is currently applied using direct labor hours, with an expected and normal capacity of 100,000 

direct labor hours. 

The following data has been assembled for a proposed job which would require the production of 1,000 

units of a product. Bid prices normally reflect a 20% mark-up on cost. 

Proposed Job (1,000 units) 

Direct material $ 10,000 

Direct labor hours ($12 per hour) 1,000 

Machine hours 900 

Batch size 100 

Number of inspections 60 

Required: 

a. Determine the bid price per unit for the proposed job using the current costing system. 

b. Determine the bid price per unit for the proposed job using activity based costing. 

1. $940,000 of Ovhd / 100,000 DLH = $9.40 per hour 

DLH = 1,000 X $9.40 = 9,400 of applied overhead 

Total Cost = DM + DL + MOH = $10,000 + $12,000 + $9,400 = $31,400 

Bids are marked up 20% over cost - $31,400 X 120% = $37,680 Total Bid Price 

$37,680 total bid price / 1,000 units = $37.68 per unit bid price 

2. Maintenance-related activity rate = $240,000 / 60,000 MH = $4 per MH 

Set-up-related activity rate = $200,000/ 500 setups = $400 per setup 

Inspection-related activity rate = $500,000/4,000 inspections = $125 per inspection 

Maintenance-related ovhd on job = $4 per MH X 900 MH = $3,600 

Set-up related ovhd on job = $400 per setup X 10 setups = $4,000 

(NOTE – each batch is 100 units; total job is 1,000 units; therefore, there are 10 setups) 

Inspection-related activity rate = $125 per inspection X 60 inspections = $7,500 

Total overhead applied to job = $3,600 + $4,000 + $7,500 = $15,100 

Total Cost = DM + DL + MOH = $10,000 + $12,000 + $15,100 = $37,100 

Bids are marked up 20% over cost - $37,100 X 120% = $44,520 Total Bid Price 

$44,520 total bid price / 1,000 units = $44.52 per unit bid price

In 

- 

Class 

Problems 



Problem #1 – Identify Activity Level 

The company below manufactures trucks and has the following activities: 

1. Work on assembly line 

2. Set-up production machinery 

3. Operate production machines 

4. Maintenance of production machinery 

5. Inspect products 

6. Receive Raw Materials 

7. Factory heating, lighting & air 

conditioning 

8. Set up an inventory part number in the 

information system. 

9. Prepare a production order 

10. Advertising the product 

11. Customer returns 

12. Rent on manufacturing plant 

13. Move materials 

14. Prepare an engineering change order 

15. Provide a “help” line for ten largest 

customers. 

Activity 

Level 

Potential Activity Driver 

For each activity, identify the activity level (unit, batch, product, customer or facility) and list a 

potential activity driver.

Problem #2 – Activity Based Costing Problem 

The Manhattan Company manufactures two models of compact disc players, deluxe and regular. 

The company has manufactured the regular model for years; the deluxe model was introduced 

recently to tap a new segment of the market. Although sales of the deluxe model have been 

increasing rapidly, the company’s profits have steadily declined. Management has become 

increasingly concerned about the accuracy of its costing system. 

The current cost accounting system allocates manufacturing support costs to the two products on 

the basis of direct labor hours. Information for deluxe and regular products for the next year is 

shown below: 

Deluxe Regular 

Selling Price $140 $80 

Number of Units Produced & Sold 5,000 45,000 

Direct Material per unit $45 $30 

Direct Labor per unit $20 $20 

DLH per unit 2 2 

MH per unit 3 0.5 

Units per batch 50 450 

Inspection hrs/batch 1 0.25 

Vendors of components 6 4 

A machine is setup once for each batch and the setup is the same regardless of the type of 

product. There is one inspection performed for each batch and the inspection time is 1 hour for 

the deluxe product and ¼ hour for the regular product. The company has a JIT inventory system 

and purchases raw materials by batch. For each batch, the purchasing agent has to order from the 

various vendors for the appropriate direct material components. There are six different vendors 

for various components of the deluxe model (and therefore six purchase orders per batch) and 4 

different vendors for components for the regular product (and therefore four purchase orders per 

batch). 

The company is considering switching to an ABC system. A recent cost study revealed the 

company expects $1,000,000 of overhead next year from the following activities: 

Activity 

Annual Cost 

Purchasing $180,000 

Quality Control $250,000 

Production Set-ups $220,000 

Machine Maintenance $350,000 

TOTAL $1,000,000

Requirements: 

1. Determine the plant-wide overhead rate using the current costing system. 

2. Determine the gross margin (per unit) of the regular and deluxe models using the current costing 

system. 

Deluxe 

Regular 

3. For each activity, identify an activity driver and calculate the activity driver rates. 

4. Determine the gross margin (per unit) of the regular and deluxe models using the ABC 

information. 

Deluxe 

Regular 

5. Is the deluxe model as profitable as the company thinks it is? Why or why not? 

6. What can Manhattan Company do to improve its profitability? Should the company drop the 

Deluxe model? Why or why not?


Anderson Company uses a conventional cost system with overhead allocated to products on the 

basis of direct labor hours. The company manufactures two products, for which the following 

estimated information for next year is available. 

Standard Unique 


Number of Units Produced 15,000 5,000 

Prime Cost per Unit $85 $125 


# of units produced each MH 7.5 2.5 


Hours to setup a batch 4 6 

Number of moves per batch 2 3 

Engineering Support Hours 1,000 2,000 

Total overhead for the current year was estimated to be $402,500 from the following activities: 

Activity 

Cost 

Material Handling $ 30,000 

Machine Set-ups $100,000 

Engineering Support $150,000 

Power for Machines $ 80,000 

Providing Space $ 42,500 

Total $402,500 

If the company adopts an ABC system, they will allocate facility-level costs equally to each 

product line. 

Requirements: 

1. Estimate the cost per unit of the two products using the current cost system.


3. Calculate the cost of the two products using ABC. 

4. How did the cost of the two products change and why? 

5. Discuss how the company would go about improving profitability.

solutions 



Problem #1 – Identify Activity Level 

The company below manufactures trucks and has the following activities: 

Activity 

Level 

1. Work on assembly line Unit Labor hours 

Potential Activity Driver 

2. Set-up production machinery Batch # of Setups/Setup hours 

3. Operate production machines Unit Machine hours 

4. Maintenance of production machinery Unit Machine hours 

5. Inspect products Batch* # of Inspections/Inspection hours 

6. Receive Raw Materials Batch # of Receipts 

7. Factory heating, lighting & air 

conditioning 

8. Set up an inventory part number in the 

information system. 

Facility 

Product 

Square footage 

# of different parts 

9. Prepare a production order Batch # of production orders 

10. Advertising the product Product # of different products 

11. Customer returns Customer # of returns 

12. Rent on manufacturing plant Facility Square Footage 

13. Move materials Batch # of moves 

14. Prepare an engineering change order Product # of different products 

15. Provide a “help” line for ten largest 

customers. 

Customer 

# of calls/# of hours on the phone 

For each activity, identify the activity level (unit, batch, product, customer or facility) and list a potential 

activity driver. 

*This (as well as other batch activities) would be a unit-level activity if each unit required inspection.


The Manhattan Company manufactures two models of compact disc players, deluxe and regular. 

The company has manufactured the regular model for years; the deluxe model was introduced 





the basis of direct labor hours. Information for deluxe and regular products for the next year is 

shown below: 

Deluxe Regular 


# of Units Produced & Sold 5,000 45,000 

Direct Material per unit $45 $30 

Direct Labor per unit $20 $20 


MH per unit 3 0.5 


Inspection hrs/batch 1 0.25 

Vendors of components 6 4 

A machine is setup once for each batch and the setup is the same regardless of the type of 

product. There is one inspection performed for each batch and the inspection time is 1 hour for 

the deluxe product and ¼ hour for the regular product. The company has a JIT inventory system 

and purchases raw materials by batch. For each batch, the purchasing agent has to order from the 

various vendors for the appropriate direct material components. There are six different vendors 

for various components of the deluxe model (and therefore six purchase orders per batch) and 4 

different vendors for components for the regular product (and therefore four purchase orders per 

batch). 


company expects $1,000,000 of overhead next year from the following activities: 

Activity 

Annual Cost 

Purchasing $180,000 

Quality Control $250,000 


Machine Maintenance $350,000 

TOTAL $1,000,000

Requirements: 

1. Determine the plant-wide overhead rate using the current costing system. 

$1,000,000/100,000 DLH = $10/DLH 

2. Determine the gross margin (in total and per unit) of the regular and deluxe models using the 

current costing system. 

Deluxe Regular Total 

Sales $140 $80 

DM 45 30 

DL 20 20 

OH 20 20 

Gross Margin $55 $10 

5,000 u. 45,000 u. 

Total Gross Margin $275,000 $450,000 $725,000 


Purchasing--Purchase Orders 

Number of Batches 

Deluxe: 5,000 units / 50 u/batch = 100 batches 

Regular: 45,000 units / 450 u/batch = 100 batches 

200 batches 

Number of Purchase Orders 

Deluxe: 100 batches * 6 POs / batch = 600 POs 

Regular: 100 batches * 4 POs / batch = 400 POs 

1,000 POs 

$180,000 / 1,000 POs = $180/PO 

Quality Control—Inspection Time 

Deluxe: 100 batches * 1 hr/batch = 100 hrs 

Regular: 100 batches * .25 hr/batch = 25 hrs 

125 hrs 

$250,000/125 hrs = $2,000/Inspection hr

Set-ups—Number of set-ups (batches) 

$220,000 / 200 set-ups = $1,100/Set-up 

Machine Maintenance—Machine Hours 

Deluxe: 5,000 units * 3 MH/u = 15,000 MHs 

Regular: 45,000 units * .5 MH/u = 22,500 MHs 

37,500 MHs 

$350,000 / 37,500 MHs = $9.33/MH 

4. Determine the gross margin (in total and per unit) of the regular and deluxe models using the ABC 

information. 

Deluxe Regular Total 

Sales (5,000 * $140/u; 45,000 * $80/u) $700,000 $3,600,000 

DM (5,000 * $45/u; 45,000 * $30/u) -225,000 -1,350,000 

DL (5,000 * $20/u; 45,000 * $20/u) -100,000 -900,000 

OH 

Purchasing (600 POs * $180/PO; 400 POs * $180/PO) -108,000 -72,000 

QC (100 hrs. * $2,000/hr; 25 hrs. * $2,000/hr) -200,000 -50,000 

Set-up (100 Batches * $1,100/batch) -110,000 -110,000 

Maint. (15,000 MHs * $9.33/MH; 22,500 * 9.33/MH -140,000 -210,000 

Gross Margin $(183,000) $908,000 $725,000 

Gross Margin/unit $(36.60) $20.18 

5. Is the deluxe model as profitable as the company thinks it is? Why or why not? 

No, the deluxe model consumes more resources than was shown under the more traditional method 

of product costing. 

6. What can Manhattan Company do to improve its profitability? Should the company drop the 

Deluxe model? Why or why not? 

• Consider increasing the price of the Deluxe model. 

• Emphasize (increase sales) of the Regular model and de-emphasize (reduce sales) of the 

Deluxe model. 

• Improve productivity by reducing the cost of the activities. 

• Reduce the activity requirements (activity quantities) associated with the Deluxe model. 

• It should only drop the Deluxe model if the avoidable costs associated with the Deluxe 

model are greater than the Deluxe model’s contribution margin.


Anderson Company uses a conventional cost system with overhead allocated to products on the 

basis of direct labor hours. The company manufactures two products, for which the following 

estimated information for next year is available. 



Number of Units Produced 15,000 5,000 

Prime Cost per Unit $85 $125 


# of units produced each MH 7.5 2.5 


Hours to setup a batch 4 6 

Number of moves per batch 2 3 

Engineering Support Hours 1,000 2,000 

Total overhead for the current year was estimated to be $402,500 from the following activities: 

Activity 

Cost 

Material Handling $ 30,000 

Machine Set-ups $100,000 

Engineering Support $150,000 

Power for Machines $ 80,000 

Providing Space $ 42,500 

Total $402,500 

If the company adopts an ABC system, they will allocate facility-level costs equally to each 

product line. 

Requirements: 

1. Estimate the cost per unit of the two products using the current cost system. 

OH costs / DLH = $402,500/35,000 DLH = $11.50/DLH 


Prime costs (DM & DL) $85.00 $125.00 

OH (2 * $11.50; 1 * $11.50) 23.00 11.50 

Total $108.00 $136.50


Material Handling-- # of moves (in batches) 

Number of batches: 

Standard: 15,000 units / 30 units/batch = 500 batches 

Unique: 5,000 units / 10 units/batch = 500 batches 

Number of moves: 

Standard: 500 batches * 2 moves/batch = 1,000 moves 

Unique: 500 batches * 3 moves/batch = 1,500 moves 

2,500 moves 

$30,000 / 2,500 moves = $12/move 

Machine Set-up—Set-up hours 

Number of set-up hours: 

Standard: 500 batches * 4 hrs/batch = 2,000 hrs 

Unique: 500 batches * 6 hrs/batch = 3,000 hrs 

5,000 hrs 

$100,000 / 5,000 hrs = $20/set-up hr 

Engineering Support—Engineering hours 

$150,000 / 3,000 hrs = $50/hr 

Power for Machines—Machine hours 

Number of machine hours 

Standard: 15,000 units / 7.5 units/MH = 2,000 MHs 

Unique: 5,000 units / 2.5 units/MH = 2,000 MHs 

4,000 MHs 

$80,000 / 4,000 MHs = $20/MH 

Providing Space—Equally to each product line

Standard: ($42,500 * .50) / 15,000 units = $1.42/unit 

Unique: ($42,500 * .50) / 5,000 units = $4.25/unit 

3. Calculate the cost of the two products using ABC. 


OH 

Mtl handling ($12/move * 1,000; $12/move * 1,500) $12,000 $18,000 

Set-ups ($20/hr * 2,000; $20/hr * 3,000) 40,000 60,000 

Engin. Support ($50/hr * 1,000; $50/hr * 2,000) 50,000 100,000 

Power ($20/MH * 2,000MH; $20/MH * 2,000MH) 40,000 40,000 

Space 21,250 21,250 

Total OH Costs $163,250 239,250 

Number of units 15,000 5,000 

OH Cost/Unit $10.88 $ 47.85 

Prime Costs (DM & DL) 85.00 125.00 

Total Cost/Unit $95.88 $172.85 

4. How did the cost of the two products change and why? 

Using ABC, the cost of the Standard product declined and the cost of the Unique product 

increased. The traditional method of product costing did not take into account all of the resources 

consumed by the Unique product, and overestimated the resources consumed by the Standard 

product. 

5. Discuss how the company would go about improving profitability. 

• Improve productivity by reducing the cost of the activities. 

• Reduce the activity requirements (activity quantities) associated with the Unique product. 

• While we don’t have pricing information, we should consider: 

o Increasing the price of the Unique product. 

o Emphasize (increase sales) of the Standard product and de-emphasize (reduce 

sales) of the Unique product. 

o Drop the Unique product if the avoidable costs associated with the Unique 

product are greater than the Unique product’s contribution margin

Milwaukee 

Problem 

Milwaukee Company ABC Problem 

The Milwaukee Company manufactures two models of scooters, deluxe and regular. The 

company has manufactured the regular model for years; the deluxe model was introduced 





the basis of direct labor hours. For 2006, the company has estimated that it will incur $2,581,000 

in manufacturing support costs and produce 20,000 units of the deluxe model and 500,000 units 

of the regular model. The deluxe model requires one hour of direct labor and the regular model 

requires ¼ hour. Direct labor costs $20 per DLH. The deluxe model requires 2 machine hours 

and the regular model requires 0.5 machine hours. Direct costs and selling prices per unit are as 

follows: 

Regular Deluxe 

Direct Material $8 $10 



following activities and costs: 

Activity 

Annual Cost 

Purchase Orders $246,000 

Inspections $600,000 


Machine Maintenance $450,000 

Facility Costs $575,000 

TOTAL $2,581,000 

The company would like to allocated facility level costs on a per unit basis and has calculated the 

following information related to activities: 

Activity Driver Regular Deluxe 

# of units per batch 1,000 80 

Setup time per batch 0.5 hour 1 hour 

# of purchase orders 200 200 

# of Inspections per batch 1 1 

Requirements: 

a. Determine the plant-wide overhead rate using the current costing system. 

b. Determine the gross margin (per unit) of the regular and deluxe models using the current costing 

system. 

c. For each activity, calculate activity rates (round to the nearest penny) 

d. Determine the gross margin (per unit) of the regular and deluxe models using the ABC 

information.

Solutions 

Milwaukee Company Problem Solution 

The Milwaukee Company manufactures two models of scooters, deluxe and regular. The 

company has manufactured the regular model for years; the deluxe model was introduced 





the basis of direct labor hours. For 2017, the company has estimated that it will incur $2,581,000 

in manufacturing support costs and produce 20,000 units of the deluxe model and 500,000 units 

of the regular model. The deluxe model requires one hour of direct labor and the regular model 

requires ¼ hour. Direct labor costs $20 per DLH. The deluxe model requires 2 machine hours 

and the regular model requires 0.5 machine hours. Direct costs and selling prices per unit are as 

follows: 

Regular Deluxe 



The company would like to allocated facility level costs on a per unit basis and has calculated the 


Activity 

Annual Cost 

Purchase Orders $246,000 





TOTAL $2,581,000 

The company has calculated the following information related to activities: 

Activity Driver Regular Deluxe 

# of units per batch 1,000 80 

Setup time per batch 0.5 hour 1 hour 

# of purchase orders 200 200 


Requirements: 


$2,581,000 of MOH costs 

20,000 units of deluxe model @ 1 DLH/unit = 20,000 DLH 

500,000 units of regular model @ ¼ DLH/unit = 125,000 DLH 

Total DLH = 145,000 

MOH Rate = $2,581,000 / 145,000 DLH = $17.80 per DLH

. Determine the gross margin (per unit) of the regular and deluxe models using the current costing 

system. 

Regular: 

DM = $8 

DL = $20/DLH * ¼ DLH = $5 

MOH = $17.80 * ¼ DLH = $4.45 

Total Product Cost = $17.45 

Selling Price = $25 

Gross Margin = $25 – $17.45 = $7.55 per unit 

Deluxe: 

DM = $10 

DL = $20/DLH * 1 DLH = $20 

MOH = $17.80 * 1 DLH = $17.80 



Gross Margin = $60 – $47.80 = $12.20 per unit 

c. For each activity, calculate activity rates 

Activity Annual Cost Activity Driver Total Activity Rate 

Purchase Orders $246,000 # of POs 400 $615.00 

Inspections $600,000 # of Inspections 750 $800.00 

Production Set-ups $710,000 Setup Hours 500 $1,420.00 

Machine Maintenance $450,000 MH 290,000 $1.55 

Facility Costs $575,000 Per unit 520,000 $1.11

d. Determine the gross margin (per unit) of the regular and deluxe models using the ABC 

information. 

NOTE: Your answers may differ slightly based on your rounding. 

Activity Regular Deluxe 

Purchase Orders $123,000 $123,000 

Inspections $400,000 $200,000 

Production Set-ups $355,000 $355,000 

Machine Maintenance $387,931 $62,069 

Facility Costs $552,885 $22,115 

$1,818,816 762,184 

# of Units 500,000 20,000 

$3.64 38.11 

DM 8.00 10.00 

DL (from part 2) 5.00 20.00 

Total Product Cost 16.64 68.11 

Selling Price $25.00 $60.00 

Gross Margin $8.36 ($8.11)

Brrrrr 

Problem 

ABC Problem—Brrrrr Company 

Brrrrr Company manufactures two models of snowblowers: push and self-propelled. The 

company has manufactured the push model for years; the self-propelled model was introduced 

recently to tap a new segment of the market. While competitors charge quite a bit more for 

similar models, the self-propelled model is extremely profitable for Brrrrr. Although sales of the 

self-propelled model have been increasing rapidly, the company’s profits have steadily declined. 

Management has become increasingly concerned about the accuracy of its costing system. 

The current cost accounting system allocates manufacturing overhead costs to the two products 

on the basis of direct labor hours. For 2006, the company has estimated that it will incur 

$3,570,000 in manufacturing support costs and produce 50,000 units of the push model and 

10,000 units of the self-propelled model. The push model requires one hour of direct labor and 

the self-propelled model requires 2 hours. Direct labor costs $30 per DLH. The push model 

requires 1 machine hours and the self-propelled model requires 4 machine hours. Direct costs 

and selling prices per unit are as follows: 

Push Self-Propelled 




following activities and costs: 

Activity 

Annual Cost 

Engineering Design $440,000 



Scheduling $220,000 

Material Handling $295,000 



TOTAL $3,570,000 

The company schedules each production run. It doesn’t matter what type of product is being 

scheduled – they each take about the same amount of time. Material is pulled for each production 

run and is moved from workstation to workstation for each production run. The company has 

decided that facility-level costs should be allocated based on direct labor hours. They have 

calculated the following information related to activities: 

Activity Information Push Self-propelled 

# of units per batch 500 100 

Setup time per batch 0.5 hour 0.5 hour 


Inspection time per batch 0.5 hour 1.5 hour 

Engineering Design Hours 350 hours 650 hours 

4 - 15


Requirements: 


b. Determine the gross margin (per unit) of the two models using the current costing system. 


d. Determine the gross margin (per unit) of the two models using the ABC information. 

e. What can Brrrrr Company do to improve its profitability? 

4 - 16

Brrrrr Problem Solution 

Brrrrr Company manufactures two models of snowblowers: push and self-propelled. The company 

has manufactured the push model for years; the self-propelled model was introduced recently to tap 

a new segment of the market. While competitors charge quite a bit more for similar models, the selfpropelled 

model is extremely profitable for Brrrrr. Although sales of the self-propelled model have 

been increasing rapidly, the company’s profits have steadily declined. Management has become 


The current cost accounting system allocates manufacturing overhead costs to the two products on 

the basis of direct labor hours. For 2006, the company has estimated that it will incur $3,570,000 in 

manufacturing support costs and produce 50,000 units of the push model and 10,000 units of the 

self-propelled model. The push model requires one hour of direct labor and the self-propelled model 

requires 2 hours. Direct labor costs $30 per DLH. The push model requires 1 machine hours and the 

self-propelled model requires 4 machine hours. Direct costs and selling prices per unit are as 

follows: 

Push Self-Propelled 



The company is considering switching to an ABC system. A recent cost study revealed the following 

activities and costs: 

Activity 

Annual Cost 

Engineering Design $440,000 



Scheduling $220,000 

Material Handling $295,000 



TOTAL $3,570,000 

Solution 

The company schedules each production run. It doesn’t matter what type of product is being 

scheduled – they each take about the same amount of time. Material is pulled for each production run 

and is moved from workstation to workstation for each production run. The company has decided that 

facility-level costs should be allocated based on direct labor hours. They have calculated the 


Activity Information Push Self-Propelled 

# of units per batch 500 100 

Setup time per batch 0.5 hour 0.5 hour 


Inspection time per batch 0.5 hour 1.5 hour 

Engineering Design Hours 350 hours 650 hours

Requirements: 


$3,570,000 of MOH costs 

50,000 units of push model @ 1 DLH/unit = 50,000 DLH 

10,000 units of self-propelled model @ 2 DLH/unit = 20,000 DLH 

Total DLH = 70,000 

MOH Rate = $3,570,000 / 70,000 DLH = $51.00 per DLH 

b. Determine the gross margin (per unit) of the two models using the current costing system. 

Push: 

DM = $38 

DL = $30/DLH * 1 DLH = $30 

MOH = $51.00 * 1 DLH = $51 



Gross Margin = $145 – $119 = $26 per unit 

Self-Propelled: 

DM = $54 

DL = $30/DLH * 2 DLH = $60 

MOH = $51 * 2 DLH = $102.00 



Gross Margin = $275 – $216 = $59 per unit 


Activity Annual Cost Activity Driver Total Activity Rate 

Engineering Design $440,000 Engineering hrs 1,000 $440.00 

Inspections $780,000 Inspection Hrs 200 $3,900.00 

Production Set-ups $610,000 Setup time 200 $6,100.00 

Scheduling $220,000 # of batches 200 $1,100.00 

Material Handling $295,000 # of batches 200 $1,475.00 

Machine Maintenance $450,000 MH 90,000 $5.00 

Facility Costs $775,000 DLH 70,000 $11.07 

d. Determine the gross margin (per unit) of the two models using the ABC information. 

NOTE: Your answers may differ slightly based on your rounding. 

Activity Push Self-Propelled 

Engineering Design $154,000 $286,000 

Inspections 195,000 585,000 

Production Set-ups 305,000 305,000 

Scheduling 110,000 110,000 

Material Handling 147,500 147,500 

Machine Maintenance 250,000 200,000 

Facility Costs 553,571 221,429

$1,715,071 $1,854,929 

# of Units 50,000 10,000 

$34.30 $185.49 

DM 38.00 54.00 

DL (from part 2) 30.00 60.00 

Total Product Cost $102.30 $299.49 


Gross Margin $42.70 ($24.49) 


Currently, the Self-propelled model is losing money on each unit sold (even before SG&A 

costs!). The company probably doesn’t want to discontinue this model. First, they may want to 

explore the idea of increasing prices. Second, they should evaluate whether they can use the 

ABC information to manage costs. The schedule below breaks out activity costs per unit. They 

should use this information and focus on the high dollar costs. For example, it costs $52 per unit 

to inspect the Self-propelled snow blowers. This seems excessive given the $275 selling price 

(20% of selling price for inspection?). Setups are also extremely expensive. Can they run more 

items in a batch? While inventory holding costs would increase, reducing the number of batches 

would likely reduce the costs per unit of inspections, setups, scheduling and material handling. 

They should do a cost/benefit analysis to determine whether the savings offset the increasing 

inventory holding costs. 

Activity Self-Propelled Per Unit 

Engineering Design $286,000 $28.60 

Inspections 585,000 58.50 

Production Set-ups 305,000 30.50 

Scheduling 110,000 11.00 

Material Handling 147,500 14.75 

Machine Maintenance 200,000 20.00 

Facility Costs 221,429 22.14 

$1,854,929 $185.49

$1,715,071 $1,854,929 

# of Units 50,000 10,000 

$34.30 $185.49 

DM 38.00 54.00 

DL (from part 2) 30.00 60.00 



Gross Margin $42.70 ($24.49) 





















$1,854,929 $185.49

$1,715,071 $1,854,929 

# of Units 50,000 10,000 

$34.30 $185.49 

DM 38.00 54.00 

DL (from part 2) 30.00 60.00 



Gross Margin $42.70 ($24.49) 





















$1,854,929 $185.49

$1,715,071 $1,854,929 

# of Units 50,000 10,000 

$34.30 $185.49 

DM 38.00 54.00 

DL (from part 2) 30.00 60.00 



Gross Margin $42.70 ($24.49) 





















$1,854,929 $185.49

$1,715,071 $1,854,929 

# of Units 50,000 10,000 

$34.30 $185.49 

DM 38.00 54.00 

DL (from part 2) 30.00 60.00 



Gross Margin $42.70 ($24.49) 





















$1,854,929 $185.49

Pg. 25 




Ch. 15 - Allocation of Support Dept. Costs, 

Common Costs, and Revenues 

Complete List of Terms (From end of chapter) 

Terminology Definitions 

33. Allowable cost 

Direct Method 

Summary: 

34. Steps:

Pg. 26 




Sequential (Step) Method 

Summary: 

35. Steps: 

Calculating OH rates from operating departments 

Summary: 

36. Steps: 

Assigning OH costs to products, jobs and services 

Summary: 

37. Steps: 

TDABC Costing Article

Summary of Article 

Pg. 27 




Summary 

38. The Problem 

39. Solution 

How-to: TDABC 

40. Steps

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