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Exercise 4-1 (Part Level Submission) Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activitybased costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the company’s operations. Standard Direct labor costs Machine hours Setup hours $40,800 1,230 100 Custom $111,000 1,340 380 Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $197,700, and $106,300 is allocated to the machine setup activity cost pool. (a) Compute the overhead rate using the traditional (plantwide) approach. (Round answers to 2 decimal places, e.g. 12.25%.) % of dire ct lab or cos t Predeter mined overhead rate (b) Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. $12.25.) Machin ing Machin e setup per $ mach ine hour $ per setup hour (c) Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. $1,225.) Traditio nal costing Standar d $ $ Custom Activity -based costing $ Standar d $ Custom Exercise 4-2 (Part Level Submission) Ayala Inc. has conducted the following analysis related to its product lines, using a traditional costing system (volume-based) and an activity-based costing system. Both the traditional and the activity-based costing systems include direct materials and direct labor costs. Total Costs Products Product 540X Product 137Y Product 249S Sales Traditional Revenue $208,800 ABC $56,940 $46,460 163,300 53,560 40,360 93,790 15,450 39,130 (a) For each product line, compute operating income using the traditional costing system. Produ ct 540X Produ ct 137Y Produ ct 249S $ $ $ (b) For each product line, compute operating income using the activity-based costing system. Produ ct 540X Produ ct 137Y $ $ Produ ct 249S $ (c) Using the following formula, compute the percentage difference in operating income for each of the product lines of Ayala: [Operating Income (ABC) – Operating Income (traditional cost)] ÷ Operating Income (traditional cost). (Round answers to 2 decimal places, e.g. 12.25%. If difference is negative enter with either a - sign or in parenthesis, e.g. -12.25% or (12.25)) Produ ct 540X Produ ct 137Y Produ ct 249S % % % Exercise 4-3 (Part Level Submission) American Fabrics has budgeted overhead costs of $1,077,120. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 489,600 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are: cutting (cost driver is machine hours) and design (cost driver is number of setups). Overhead allocated to the cutting cost pool is $391,680 and $685,440 is allocated to the design cost pool. Additional information related to these pools is as follows. Wool Machine hours Number of setups Cotton Total 108,800 108,800 217,600 1,088 544 1,632 (a) Calculate the overhead rate using activity based costing and then calculate if the traditional approach were used. (Round answers to 2 decimal places, e.g. $12.25.) Overhe ad rates for activity -based costing Cutting Design per $ machi ne hour $ per setup Overhe ad rates using the traditio nal approa ch per $ direct labor hour (b) (1) Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing. Wool product line Cotton product line Ov erh ead Allo cat ed $ $ (2) What amount of overhead would be allocated to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton? Wool product line Cotton product line Ov erh ead Allo cat ed $ Exercise 4-5 (Part Level Submission) Shady Lady sells window coverings (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year. Commercial Revenues Direct material $29,000 costs Direct labor 114,000 costs Overhead 81,800 costs Residential $298,600 $477,500 $50,500 298,000 224,800 149,200 497,700 $ Operating income (loss) $73,800 ($20,200 ) The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed: Activity Cost Pools Estimated Overhead Scheduling and travel Cost Drivers $106,800 Hours of travel Number of setups Direct labor 49,440 cost Setup time 74,760 Supervision Expected Use of Cost Drivers per Product Commercial Scheduling and travel Setup time Residential 1,070 420 535 300 (a) Compute the activity-based overhead rates for each of the three cost pools. (Round the supervision overhead rate to 2 decimal places, e.g. 12% and all other answers to 2 decimal places, e.g. $12.25.) Overhead Rate Scheduli ng and travel $ Setup time $ Supervis ion % (b) Determine the overhead cost assigned to each product line. (Round Overhead Rate to 2 decimal places, 15.25 and final answers to 0 decimal places, e.g. $2,512.) Commercial Sch edul ing and trav el Setu Residential $ $ $ $ p time Sup ervi sion Tota l assi gne d cost s $ $ $ $ (c) Compute the operating income for each product line, using the activity-based overhead rates. (Round answers to 0 decimal places, e.g. $2,512.) Commercial Op era ting inc om e Residential $ $ ...
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