Answer

3-13
1) The high point is March with 3,100 appointments. The low point is January with 700
appointments.
2) Variable rate = ($2,790 $1,758)/(3,100 700) = $1,032/2,400 = $0.43 per tanning
appointment
Using the high point:
Fixed cost = $2,790 $0.43(3,100) = $1,457
OR
Using the low point:
Fixed cost = $1,758 $0.43(700) = $1,457
3) Total tanning service cost = $1,457 + $0.43 Number of appointments
4) Total predicted cost for September = $1,457 + $0.43(2,500) = $2,532

4-3
1) Predetermined overhead rate = $4,500,000/600,000 = $7.50 per DLH
2) Applied overhead = $7.50 585,000 = $4,387,500
3) Applied overhead
$ 4,387,500
Actual overhead
4,466,250
Underapplied overhead $ (78,750)
4) Unit cost:
Prime costs
Overhead costs
Total
Units
Unit cost

$ 6,750,000
4,387,500
$11,137,500
750,000
$
14.85

Gandars needs to determine what causes its overhead. Is it primarily labor driven (e.g., composed
predominantly of fringe benefits, indirect labor, and personnel costs), or is it machine oriented (e.g.,
composed of depreciation on machinery, utilities, and maintenance)? It is impossible for a decision to
be made on the basis of the information given in this exercise.

4-5
1. Predetermined rates:
Drilling Department: Rate = $600,000/280,000 = $2.14* per MHr
Assembly Department: Rate = $392,000/200,000 = $1.96 per DLH

2. Applied overhead:
Drilling Department: $2.14 288,000 = $616,320
Assembly Department: $1.96 196,000 = $384,160
Overhead variances:
Drilling Assembly Total
Actual overhead $602,000 $ 412,000 $ 1,014,000
Applied overhead 616,320 384,160 1,000,480
Overhead variance $ (14,320) over $ 27,840 under $13,520 under

3. Unit overhead cost = [($2.14 4,000) + ($1.96 1,600)]/8,000

= $11,696/8,000
= $1.46*

4-10
1. Yes. Because direct materials and direct labor are directly traceable to each product, their cost
assignment should be accurate.
2. The consumption ratios for each (using machine hours and setup hours as the activity drivers) are
as follows:

3. Elegant: (1.75 $9,000)/3,000 = $5.25 per briefcase

Fina: (1.75 $3,000)/3,000 = $1.75 per briefcase
Note: Overhead rate = $21,000/$12,000 = $1.75 per direct labor dollar (or 175 percent of direct labor
cost).
There are more machine and setup costs assigned to Elegant than Fina. This is clearly a distortion
because the production of Fina is automated and uses the machine resources much more than the
handcrafted Elegant. In fact, the consumption ratio for machining is 0.10 and 0.90 (using machine
hours as the measure of usage). Thus, Fina uses 9 times the machining resources as Elegant. Setup
costs are similarly distorted. The products use an equal number of setup hours. Yet if direct labor
dollars are used, then the Elegant briefcase receives three times more machining costs than the Fina
briefcase.

4. Products tend to make different demands on overhead activities and this should be reflected in
overhead cost assignments. Usually this means the use of both unit and nonunit-level activity drivers.
In this example, there is a unit-level activity (machining) and a nonunit-level activity (setting up
equipment).
Machine rate: $18,000/5,000 = $3.60 per machine hour
Setup rate: $3,000/200 = $15 per setup hour

5. What are the differences between functional based responsibility accounting and activity-based
responsibility accounting?

5-6
Nonvalue-added:
Comparing documents (state detection)
Resolving discrepancies (rework)
Value-added:
Preparing checks $60,000 (0.10 $600,000)
Mailing checks $30,000 (0.05 $600,000)

$90,000 (0.15 $600,000)

$420,000 (0.70 $600,000)

6-33