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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
$
$