Chapter 5 Guided Practice


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5GP.1 First-Stage Allocation

5GP.1.E1

Candles, Inc. has two budgeted overhead resources (supervisor salaries, equipment lease) and three activities (dipping, packaging, and other). Supervisor salaries are consumed 50% by the “dipping” activity, 25% by the “packaging” activity, and 25% by the “other” activity. The equipment leases are consumed 35% by the “dipping” activity, 55% by the “packaging” activity, and 10% by the “other” activity.

Supervisor salaries are budgeted at $500,000 for the next period. Equipment leases are budgeted at $750,000.

Required

How many dollars are in the “dipping” and “packaging” activity cost pools?

5GP.1.M1

Use the same information for Candles Inc. from problem 5GP.1.E1. The “
“dipping” activity is driven by direct labor hours, which are budgeted at 15,000 units next period. The “packaging” activity is driven by machine hours, which are budgeted at 10,000 units next period.

Required

(A) How much are the budgeted period costs next period?

(B) What are the activity rates for the “dipping” and “packaging” activities?

5GP.2 Second-Stage Allocation

5GP.2.E1

A firm called The Ying Group has three activity cost pools: loading, preparing, and other. The loading activity cost pool is budgeted at $10,500,000. The preparing activity cost pool is budgeted at $2,650,000. The other activity cost pool is budgeted at $2,500,000.

The loading activity cost pool is driven by machine hours, which are budgeted at 50,000 units. The preparing activity cost pool is driven by batches, which are budgeted at 850 units.

Required

(A) If a job has 16 units. The job consumes 50 machine hours and 2 batches. How much overhead is allocated to this job?

(B) If the job from part A consumes $15,000 of direct costs, what is the unit cost for this job?

5GP.2.M1

A firm has four activity cost pools: prepping, cooking, cooling, and other. Prepping has an activity rate of $150 per setup. Cooking has an activity rate of $15 per machine hour. Cooling has an activity rate of $80 per batch. The other activity cost pool includes $27,000 (actual and budgeted).

Required

If this period consumes are 20 setups, 700 machine hours, and 30 batches and if there are $20,000 of direct costs, what are the total costs for this period (assume there are no units left in WIP inventory or finished goods inventory and all budgeted amounts are equal to actuals)?

5GP.3 Activity-Based Management

5GP.3.E1

A firm has two customers: Y and Z. These two customers both seem profitable under the firm’s old job-order costing system. However, the firm has adopted activity-based costing and now wishes to determine if the two customers are still profitable.

Customer Y consumes $1,000 of direct materials, $1,500 of direct labor (at $12 per hour), and 100 machine hours per period. The firm charges customer Y $7,000 per period.

Customer Z consumes $500 of direct materials, $2,000 of direct labor (at $12 per hour), and 80 machine hours per period. The firm charges customer Z $6,750 per period.

The firm’s activity-based costing system uses an activity rate of $15 per labor hour and an activity rate of $20 per machine hour.

Required

Are both customers still profitable for the firm, using the new activity-based costing system?

5GP.3.M1

A firm has two possible improvements it can make. First, it could reduce the number of direct labor hours per unit of output. Second, it could increase the number of units it produces per batch. Both improvements would cost the same amount and do not affect other aspects of the firm’s production activities or market demand.

The firm has the following information.

Activity rate #1 = $15 per direct labor hour
Activity rate #2 = $100 per batch

The direct labor hour improvement would decrease the number of direct labor hours to 1.5 direct labor hours (currently 2 direct labor hours are required). The batch improvement would allow 100 units to be produced per batch (85 units are produced per batch currently).

The average job for this firm includes 1.9 batches and 12 direct labor hours. (Assume that a variety of jobs’ work can be included in each batch).

Required

Which of these two possible improvements is more profitable for the firm?