CHAPTER 6 SOLUTIONS

Solutions to Questions for Review and Discussion

1. Resources are the inputs consumed in producing a product or rendering a service. Resource
consumption is represented by costs incurred. Activities are the reason costs are incurred and,
therefore, become the fundamental cost accumulation point in activity-based costing. Costs
are traced to activities, and activities are traced to products or services based on the products’
or services’ use of the activities. This is the means for identifying all resource consumption
with products or services.

2. A cost driver is an event, action, or activity that results in incurring costs. It is any factor that
causes costs to change. The basic concept is that a cost driver measures the amount that a
specific product uses of a particular set of resources – the group of activities.

3. In applying the definition of activity-based costing, the following five steps are followed:

1. Assemble similar actions into activity groups. This means defining activity centers.
2. Classify costs by activity group and kind of expense. Costs are classified by nature of cost
within an activity center.
3. Select cost drivers. Appropriate cost drivers must be identified and their level of activity
estimated.
4. Calculate a cost function to link costs and cost drivers. With a cost function, actual cost
driver activity is also measured.
5. Assign costs to the cost objective (product cost).

4. The number of actions performed in any organization can be quite numerous. Although the
ideal is to relate the cost of every action to cost drivers and then to the product, the expenses
of accomplishing this can far exceed the benefits. Therefore, actions are combined into
activity groups.

5. An activity center is a segment of the organization for which management wants to report the
cost of the activities performed separately. Multiple activity centers can exist in a production
department. Also, the department itself may be the only activity center. The number of activity
centers within a department is determined by how management defines an activity center for
its purposes.

6. Treating collections of actions as activities eliminates the need to measure and track the
performance of individual actions and costs. The specific categories of activities have
characteristics for which cost drivers usually exist, and each category tends to exist in some
form in most organizations.

7. Unit-level activities are performed each time a unit is produced. These are repetitive activities.
Costs of these activities vary with the number of units produced.

Batch-level activities are those performed each time a batch of goods is produced. The costs
of these activities vary according to the number of batches but are common or fixed for all
units in the batch.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-1

 Product-level activities are those performed as needed to support the production of each
different type of product.

8. The costs of unit-level activities are variable costs. The costs of the other three levels are fixed
costs. Separately identifying activities as batch-, product-, and facility-level activity centers
brings a different perspective to the costs. Many costs that are fixed relative to units are now
variable relative to the cost driver.

9. A preliminary stage cost driver links costs of resources consumed (inputs) in an individual
activity to other activity measures. A primary stage cost driver links costs in an activity center
directly with products.

10. A cost function is used to convert the pool of costs and cost driver data into a rate per cost
driver unit, a percentage of other cost amounts, or an allocation percentage. This cost function
should be based on either planned or actual activity levels.

11. Product diversity refers to the degree to which products differ in the number of activities (that
is, resources or inputs) required by each product. The greater the difference in how two
products use resources or inputs, the greater the distortion a single cost driver will make in
tracing costs to the products. The most common reasons for product diversity relate to
physical size, complexity of design, and differences in materials inputs.

12. Batch-size diversity occurs when products are manufactured in different-size batches.
Batches, in this case, refer to production orders, purchase orders, and shipping orders. The
smaller the batch size, the more orders and setups necessary. Each order and setup has a
cost; and, the greater the frequency for placing orders or making setups, the higher the costs.
Therefore, the size of the order influences the total number of orders and setups and
determines the total costs for ordering and setting up. Any increased costs here increase the
costs of producing individual products.

13. One reason is that nonmanufacturing costs are a growing portion of companies’ total costs.
Another reason is that, due to computerization, it has become less costly to develop alternate
accounting systems within a company. So even though only manufacturing costs are
considered product costs for external reporting purposes, companies now find it worthwhile to
maintain alternate systems more useful for internal purposes.

14. The activities identified in activity-based costing are used in activity-based management for
purposes of cost management and performance evaluation.

15. Key characteristics include: (1) drastic reduction or elimination of inventories, (2) emphasis on
quality, (3) long-term agreements with suppliers, (4) focused factories, and (5) automation.

16. JIT costing differs form traditional costing in three respects. First, JIT costing does not use a
Work in Process account. Second, JIT costing combines direct labor and factory overhead into
one account. Third, in JIT costing, overhead is not applied to products until the products are
completed.

17. JIT costing is also called backflush costing because the product costs are “flushed” out of the
accounting system and attached to products only after they are completed.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-2

Solutions to Exercises

6-1. Classification of activities:

Unit-level:
Raw materials, components, subassemblies
Inspection – production (if by units)
Batch-level:
Setup wages
Inspection – production (if by units)
Product-level:
Depreciation – machinery
Electricity – machinery
Engineering design
Equipment maintenance – parts and supplies
Equipment maintenance – wages
Facility – level:
Computer programming – production
Custodial wages – plant
Depreciation – plant
Electricity – plant
Heating – plant
Insurance – plant
Property taxes

Suggested cost drivers to get costs to products:

Unit-level:
Raw materials, components, subassemblies (direct identification)
Inspection – production (inspection hours)
Batch-level:
Setup wages (number of units in batch)
Product-level:
Depreciation – machinery (machine hours)
Electricity – machinery (machine hours)
Engineering design (engineering hours)
Equipment maintenance – parts and supplies (machine hours)
Equipment maintenance – wages (machine hours)
Facility – level:
Computer programming – production (dollar value of products)
Custodial wages – plant (square footage to production and machine hours to products)
Depreciation – plant (square footage to production and machine hours to products)
Electricity – plant (square footage to production and machine hours to products)
Heating – plant (square footage to production and machine hours to products)
Insurance – plant (square footage to production and machine hours to products)
Property taxes (square footage to production and machine hours to products)

6-2.
(1) Costs that are directly identified with products without the use of cost drivers:
Raw materials and Direct labor

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-3

(2) and (3) Groupings of activities and costs and cost drivers:

Production activities:
Salary of cell supervisor
Overtime wages for cell workers
Depreciation on machinery
Oil for lubricating machinery
Cell equipment maintenance
Parts for machinery
Power (if metered)
Pencils and paper for cell supervisor
Cost driver – machine time (in some cases, number of units)

Plant space and occupancy activities:

First grouping:
Salaries of janitors
Plant depreciation
Power (unless the power is metered)
Cost driver – square footage
(These costs would all go to the activity centers within the plant and charged to
products through the appropriate activity center’s cost driver.)

Second grouping:
Taxes on plant and equipment
Insurance on plant and equipment
Cost driver – Could be combined with other costs above and use square footage.
– Value of the plant and equipment is another option.

Individual costs with individual cost drivers:

Salary of plant manager (traced to various activity centers)
Cost driver – number of employees or payroll (could be part of plant administration and
include pant space and occupancy costs)
Salary of industrial engineer
Cost driver – engineering time
Cost to set up machinery
Cost driver – number of setups, setup hours, number of units in setup

6-3. Only one activity center, Assembly, uses direct labor hours to link costs with orders. Direct
labor hours do not represent any of the other activity centers. Order 1 would receive 70
percent of the combined costs because it uses that portion of total direct labor hours.
Consequently, the costs charged to both orders will be distorted.

By identifying each activity center separately with its own cost driver, the company has a better
measure of resources consumed for each customer order. Order 2 will receive twice the
purchasing costs; Order 1, twice the materials handling and cutting costs; Order 1, three times
the setup costs; and Order 2, three times the painting costs. A better matching of resources
consumed on each order is achieved by using activity-based costing.

6-4. Assignment to Printing = [($50,000+$35,000) ÷ $170,000] x $20,000 = $10,000

6-5. Machine hours would appear to be the best cost driver because the activity center costs vary
in direct proportion to machine hours ($6.67 per machine hour).

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-4

6.6. Overhead cost:
($220,000 ÷ 55,000)(880) + ($320,000 ÷ 40,000)(400) + ($240,000 ÷ 6,000)(950)
= $44,720

6-7. Overhead costs:

Black hats = (120 ÷ 300)($9,000) + (3,000 ÷ 5,000)($90,000) + (50 ÷ 75)($12,000)
+ (250 ÷ 400)($22,000)
= $79,350
White hats = (180 ÷ 300)($9,000) + (2,000 ÷ 5,000)($90,000) + (25 ÷ 75)($12,000)
+ (150 ÷ 400)($22,000)
= $53,650

6-8. Cost of average claim:

($60,000 + $144,000 + $150,000 + $150,000) ÷ 60,000 = $8.40 per claim

Cost of specific claim via ABC approach:

Assembly of claims packages = ($60,000 ÷ 60,000 claims) x 1 claim = $1

Forms preparation = ($144,000 ÷ 60,000 claims) x (1 claim ÷ 12 forms) x 6 forms = $1.20

Approval steps = ($150,000 ÷ 60,000 claims) x (1 claim ÷ 5 approvals) x 8 approvals =

$4

Quality checking = ($150,000 ÷ 60,000 claims) x (4 claims ÷ 1 hour) x 1 hour = $10

Cost of one claim = $1 + $1.20 + $4 + $10 = $16.20

6-9. Based on Garcia’s activities, she would have been expected to spend the following:

Operations (0.60 x 4,000) = 2,400 New Sol

Entertainment (15.00 x 20 x 10) = 3,000 New Sol
Trips (300.00 x 10) = 3,000 New Sol

This totals 8,400 New Sol. Since she spent only 8,200, her spending seems to be well under
control. The average spending of other agents, however, is 200 New Sol over the expected
amount.

6-10. Unit cost for Kitty Gourmet:

Direct materials $28.00
Direct labor 75.00
Machining [($5,550,000 ÷ 64,000) x 34,000] ÷ 375,000 = 7.86
Inspection [($51,000 ÷ 1,200) x 500] ÷ 375,000 = .06
Shipping [($88,000 ÷ 850) x 100] ÷ 375,000 = .03
Purchasing [($17,000 ÷ 60) x 35] ÷ 375,000 = .03
Machine setup [($360,000 ÷ 5,000) x 3,200] ÷ 375,000 = .61
Total $111.59

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-5

 Unit cost for Cat Yummies:
Direct materials $22.00
Direct labor 45.00
Machining [($5,550,000 ÷ 64,000) x 30,000] ÷ 225,000 = 11.56
Inspection [($51,000 ÷ 1,200) x 700] ÷ 225,000 = .13
Shipping [($88,000 ÷ 850) x 750] ÷ 225,000 = .35
Purchasing [($17,000 ÷ 60) x 25] ÷ 225,000 = .03
Machine setup [($360,000 ÷ 5,000) x 1,800] ÷ 225,000 = .58
Total $79.65

6-11.
(1) Total cost of Job #58 if direct labor hours are used as the cost driver for overhead:

Direct materials $82,000

Direct labor 97,000
Overhead [($820,000 + $180,000 + $390,000 + $315,000) ÷ 60,000] (2,000) 56,833
Total $235,833
(2) Total cost of Job #58 if ABC is used:

Direct materials $82,000

Direct labor 97,000
Maintenance ($820,000 ÷ 34,000)(4,500) = 108,529
Materials handling ($180,000 ÷ 18,000)(185) = 1,850
Inspection ($390,000 ÷ 37,000)(95) = 1,001
Setups (315,000 ÷ 31,000)(88) = 894
Total $291,274

6-12. Customer cost:

Selling ($38,000 ÷ 900) x 2 = $84.44
Alterations ($6,500 ÷ 200) x 3 = 97.50
Cleaning & Preparation ($16,800 ÷ 750) x 7 = 156.80
General Overhead ($52,000 ÷ 900) x 2 = 115.56
Total $454.30

6-13. Cost rates: Administration Maintenance Washing Drying

Direct costs $123,000 $69,000
Support costs $64,000 $75,000 45,000 88,000
From Maintenance:
To Administration (0.2 x $75,000) 15,000 (15,000)
To Washing (0.6 x $75,000) (45,000) 45,000
To Drying (0.2 x $75,000) (15,000) 15,000
$79,000 $0 $213,000 $172,000
From Administration:
To Washing (0.6 x $79,000) (47,400) 47,400
To Drying (0.4 x $79,000) (31,600) 31,600
Total cost $0 $260,400 $203,600
Machine hours ÷ 42,300 ÷ 40,100

Rate per machine hour $6.16 $5.08

6-14.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-6

(1) Activity Rates:

Preparation ($7,500  250) = $30 per labor hour

Machining ($125,000  25,000) = $5 per machine hour
Removal ($9,750  65) = $150 per ton
Resurfacing ($30,000  600) = $50 per mile

(2) Allocation of costs using selected cost drivers:

Streets Sidewalks
Preparation:
100 x $30 $3,000
150 x $30 $4,500
Machining:
12,000 x $5 60,000
13,000 x $5 65,000
Removal:
45 x $150 6,750
20 x $150 3,000
Resurfacing:
200 x $50 10,000
400 x $50 20,000
Total costs $79,750 $92,500

(3) Allocation of costs using an overall rate.

Overall rate: $172,250  25,000 hours = $6.89 per machine hour

Allocation of costs: Streets Sidewalks

12,000 x $6.89 $82,680
13,000 x $6.89 $89,570

(4) The difference in the total costs allocated to the two products is that the overall rate is based
on one cost driver that relates to approximately 73 percent of the costs. The remaining 27
percent of costs are associated with activities not measured by machine hours. However, all
costs are averaged over machine hours. Identifying activities with appropriate cost drivers
produces a more accurate tracing of costs to products.

6-15. Costs of a circuit board:

Direct materials $36.00

Purchasing [72,000  (60,000)(12)] x 12 1.20
Starting 90,000  60,000 1.50
Inserting [150,000  (60,000)(10)] x 10 2.50
Soldering 180,000  60,000 3.00
Quality testing (140,000  2,000) x 0.25 17.50
Total cost of one board $61.70

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-7

6-16.
Allocation to Residential:
$20,500,000 x (4,880,000 ÷ 13,440,000) $7,443,452
$1,800,000 x (5,500 ÷ 9,700) 1,020,619
$8,600,000 x (3,000 ÷ 5,200) 4,961,538
$1,350,000 x (450 ÷ 840) 723,214
Total $14,148,823

Allocation to Commercial:
$20,500,000 x (8,560,000 ÷ 13,440,000) $13,056,547
$1,800,000 x (4,200 ÷ 9,700) 779,381
$8,600,000 x (2,200 ÷ 5,200) 3,638,461
$1,350,000 x (390 ÷ 840) 626,786
Total $18,101,175

6-17. Budgeted amount for Miscellaneous Overhead:

Let M = Miscellaneous Overhead cost

[$14,000 (50  350)] + [$42,000 (55  600)] + [$15,000 (430  5,000)] + M (2,000  10,000)
= $9,500

$2,000 + $3,850 + $1,290 + 0.2M = $9,500

0.2M = $2,360
M = $11,800

6-18.
Old costing method:

Firm-wide overhead rate = $400,000 ÷ $200,000 = 200% of labor cost

Total job cost = $28,000 + ($36,000 + $27,000) + 2 ($36,000 + $27,000)
= $28,000 + $63,000 + $126,000 = $217,000

New costing method: New Renovation

Preliminary stage assignment: Installation & Repairs

Traceable overhead cost $80,000 $120,000
From Administrative Tasks:
$100,000 x (0.40 ÷ 0.80) 50,000
$100,000 x (0.40 ÷ 0.80) 50,000
From Preparation Services:
$100,000 x ($120,000 ÷ $200,000) 60,000
$100,000 x ($80,000 ÷ $200,000) 40,000
$190,000 $210,000

Primary stage assignment:

From New Installation: $28,000 + $36,000 + ($28,000 ÷ $200,000)($190,000)
= $90,600
From Renovation & Repairs: $27,000 + (950 ÷ 9,000)($210,000) = $49,167

Total job cost = $90,600 + $49,167 = $139,767

Thus, the total job cost was $77,233 higher with the old costing method.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-8

6-19. Overhead cost:

$39,000 x ($230,000 ÷ $1,450,000) = $6,186

62 x ($97,000 ÷ 5,300) = 1,135
4,100 x ($125,000 ÷ 478,500) = 1,071
$15,200 x ($150,000 ÷ $998,000) = 2,285
75 x ($280,000 ÷ 88,000) = 239
Total $10,916

6-20.
Preliminary stage assignment: Costs Assigned to:
Costs assigned from: #2300 #3100 #3200
#1100 $75,000 x 0.1; 0.4; 0.5 $7,500 $30,000 $37,500
#1200 $60,000 x 0.25; 0.6; 0.15 15,000 36,000 9,000
$22,500
#2300 ($25,000 + $22,500) x 0.8; 0.2 $38,000 9,500
Total costs $104,000 $56,000

Primary stage assignment: Cost assigned to:

Cost assigned from: Local Out-of-town
#3100 ($80,000 + $104,000) x 0.75; 0.25 $138,000 $46,000
#3200 ($92,000 + $56,000) x 0.35; 0.65 51,800 96,200
Prime costs: $221,000 x 0.25; 0.75 55,250 165,750
Total costs $245,050 $307,950
Number of miles 175,000 250,000
Cost per mile $1.40 $1.23

6-21.
Preliminary stage assignment: Costs Assigned to:
Costs assigned from: Setup Operations Machining Assembly
P.A.: $66,000 x 0.05; 0.4; 0.55 $3,300 $26,400 $36,300
M.H.: $47,000 x 0.0; 0.65; 0.35 0 30,550 16,450
$3,300 $56,950 $52,750

Primary stage assignment: Cost assigned to:

Cost Assigned From: Electric Propane
Setup ($24,000 + $3,300) x 0.6; 0.4 $16,380 $10,920
Machining ($180,000 + $56,950) x 0.625; 0.375 148,094 88,856
Assembly ($150,000 + $52,750) x 0.4; 0.6 81,100 121,650
$245,574 $221,426
Number of units ÷ 100 ÷ 150
Overhead cost per unit $2,456 $1,476

6-22.
(1) March 31 balance in Conversion Cost account: The Conversion Cost account would have a
debit of $302,000 ($225,000 + $77,000) and a credit of $290,000. Therefore, on March 31,
there would be a $12,000 debit balance.

(2) March 31 balance in Finished Goods account = $104,000 + $290,000 = $394,000 debit
balance

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-9

6-23. August entries:

Raw and In-Process Inventory Accounts Payable

(a) 950,000 | (f) 950,000 | (a) 950,000
| (d) 6,000,000
Conversion Costs
(d) 8,500,000 | (f) 8,100,000

Wages Payable Finished Goods

| (d) 2,500,000 (f) 9,050,000 |

6-24.
(1) a. and (2) a. Conventional costing:

Raw Materials Inventory Accounts Payable

(1a) 50,000 | (1a) 40,000 | (1a) 50,000
| (2a) 65,000
Work in Process
(1a) 40,000 |
(2a) 10,000 |

Wages Payable Factory Overhead

| (2a) 10,000 (2a) 65,000 |

(1) b. and (2) b. JIT costing:

Raw and In-Process Inventory Accounts Payable

(1b) 40,000 | | (1b) 40,000
| (2b) 65,000

Wages Payable Conversion Costs

| (2b) 10,000 (2b) 75,000 |

6-25.
(1) Conventional costing:

Raw Materials Inventory Accounts Payable

8,700 | 8,700 | 8,700
| 35,000

Work in Process Finished Goods

8,700 | 70,700 70,700 | 70,700
24,000 |
38,000 |

Wages Payable Factory Overhead

| 24,000 35,000 | 38,000
3,000 |

Cost of Goods Sold Accounts Receivable

70,700 | 3,000 80,000 |

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-10

 Sales
| 80,000

(2) JIT costing:

Raw and In-Process Inventory Accounts Payable

8,700 | 8,700 | 8,700
| 35,000

Conversion Costs Finished Goods

24,000 | 62,000 70,700 | 70,700
35,000 |
3,000 |

Wages Payable Sales

| 24,000 | 80,000

Cost of Goods Sold Accounts Receivable

70,700 | 3,000 80,000 |

6-26.
(1) Number of orders and ordering quantities:
___ _________ __
EOQ = √(2 x 10,000 x $25) / $2
= 500 tons per order

Number of orders = 10,000 tons / 500 tons per order = 20

(2) Tabular presentation:

Number of Cost of Total Total Total

Number Units per Average Average Storage Order Storage &
of Orders Order Inventory Inventory Cost Cost Order Cost
19 526 263 $2,630 $526 $475 $1,001
20 500 250 2,500 500 500 1,000
21 476 238 2,380 476 525 1,001

6-27.
(1) EOQ: _________ __ __
EOQ = √(2 x 2,000 x $18) / $5
= 120 units

(2) Reorder point:

Reorder point = 2,000 x (1/12) = 167 units (rounded)

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-11

Solutions to Problems

6-28.
(1) Classification of costs by types of activity and cost-driver selection.

The company classifies its services as employer-paid fee, applicant-paid fee, out-placement
contract, and executive-search contract. The direct work on any service is an hour of time.
Therefore, the primary stage cost driver to identify most costs with services will be employee time.

Unit-level:
• Salaries and Wages – Employee time (direct identification)
• Payroll Taxes – Employee time
• Employee Benefits – Employee time
• Travel Expenses – Direct identification
• Repairs and Maintenance – Direct identification at preliminary stage
• Auto Expenses – Miles driven
• Professional Fees – Direct identification at preliminary stage

Batch-level:
• None

Product-level:
• Bad Debt Expense – Dollar value

Facility-level:
• Office Supplies – Number of employees
• Dues and Publications – Dollar value
• Utilities – Square footage of office space
• Rent – Square footage of office space
• Business Promotion – Dollar value
• License – Dollar value
• Property Taxes – Square footage of office space
• Insurance Costs – Square footage of office space
• State Franchise Tax – Dollar value
• Depreciation and Amortization – Square footage of office space
• Miscellaneous – Dollar value

(2) Groupings of activities:

Fringe benefits – Employee time

• Payroll Taxes
• Employee Benefits

Employee support (by employee or grouping of employees) – Employee time

(This activity group will receive charges from other activities and groupings.)

Space and occupancy – Preliminary stage cost driver is square footage.

• Utilities
• Rent
• Property Taxes
• Insurance Costs
• Depreciation and Amortization

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-12

 General expenses – Dollar value
• Bad Debt Expense
• Dues and Publications
• Business Promotion
• License
• State Franchise Tax
• Miscellaneous

Summary of cost build-up on each service

• Salaries and Wages
• Auto Expenses
• Office Supplies
• Fringe Benefits
• Employee Support
• General Expenses

(3) A manufacturing operation usually has three major functions: production, selling, and
administration. A clear demarcation exists between production and the other two functions. In
the minds of most people, a clear distinction can be made between selling and administration.
In actuality, the distinction is not always clear. The service organization, like an employment
agency, has similar functions, but they are not as clearly defined as in the manufacturing
company. Often, the same people perform the work of all three functions.

The concepts of activity-based costing (ABC) are the same for a manufacturing firm as for a
service organization. The difference is that a manufacturing firm is looking for costs to
inventory, and ABC is directed to that purpose. However, ABC is appropriate for decision-
making and control as well. Consequently, the concepts are applied to selling and
administrative functions.

The major difference in a service organization is that costs will either be direct identification,
unit-level, or facility-level. Batch-level may not occur often, and product (service) activities are
not clear enough to have many costs identified by product.

6-29.
(1) Unit cost for Single:
Direct materials $77.00
Direct labor 15.00
Overhead [($680,000 ÷ 78,000) x 34,000] ÷ 17,000 17.44
Total $109.44

Unit cost for Double:

Direct materials $94.00
Direct labor 32.00
Overhead [($680,000 ÷ 78,000) x 44,000] ÷ 11,000 34.87
Total $160.87

(2) Unit cost for Single:

Direct materials $77.00
Direct labor 15.00
Machine setups [($120,000 ÷ 1,400) x 800] ÷ 17,000 4.03
Power consumption [($450,000 ÷ 116,000) x 44,000] ÷ 17,000 10.04
Shipments [($110,000 ÷ 1,100) x 700] ÷ 17,000 4.12
Total $110.19

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-13

 Unit cost for Double:
Direct materials $94.00
Direct labor 32.00
Machine setups [($120,000 ÷ 1,400) x 600] ÷ 11,000 4.68
Power consumption [($450,000 ÷ 116,000) x 72,000] ÷ 11,000 25.39
Shipments [($110,000 ÷ 1,100) x 400] ÷ 11,000 3.64
Total $159.71

6-30.
(1) Cost estimation using labor hours:

$855,000 + $450,000 + $720,000 + $225,000 = $2,250,000

($2,250,000 ÷ 300,000) x 35,000 = $262,500

(2) Cost estimation using ABC:

($855,000 ÷ 300,000) x 35,000 $99,750

($450,000 ÷ 150,000) x 12,000 36,000
($720,000 ÷ 120,000) x 10,000 60,000
($225,000 ÷ 100,000) x 8,000 18,000
Total $213,750

6-31.
Old system:

Overhead rate = ($200,000 + $100,000 + $300,000) ÷ ($40,000 + $60,000)

= $600,000 ÷ $100,000
= 600% of labor cost

Overhead cost = 600% x ($3,750 + $6,740) = 6 x $10,490 = $62,940

Labor cost – Painting $3,750

Labor cost – Polishing 6,740
Materials cost 7,700
Overhead 62,940
Total job cost $81,130

ABC System:

Painting department overhead = $100,000 + $200,000 (1,000 ÷ 4,000) = $150,000

Polishing department overhead = $300,000 + $200,000 (3,000 ÷ 4,000) = $450,000

Labor cost – Painting $3,750

Labor cost – Polishing 6,740
Materials cost 7,700
Overhead – Painting ($150,000 ÷ 50,000) (3,890) 11,670
Overhead – Polishing ($450,000 ÷ 1,000) (52) 23,400
Total job cost $53,260

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-14

 The total job cost is $27,870 lower with the ABC system because of the assignment of
overhead using departmental cost drivers. Other jobs would receive higher overhead
assignments.

6-32.
(1) The total overhead cost charged to this flight is calculated as follows:

Loading and unloading cargo [($250,000  2,000,000) x 40,000] $5,000

Directing planes to and from gates [($110,000  5,500) x 1.5] 30
Loading and unloading baggage [($300,000  100,000) x 200] 600
Communicating with pilots [($80,000  2,000) x .9] 36
Fueling planes [($450,000  10,000) x 2.2] 99
Deicing planes [($75,000  1,000) x 0] 0
Locating mishandled bags [($200,000  5,000) x3] 120
Total overhead costs charged to flight $5,885

(2) Using an overall rate based on number of bags loaded and unloaded, we obtain the following:

$1,465,000  100,000 = $14.65 per bag

The cost charged to the flight would only be $2,930 ($14.65 x 200 bags). This overall rate leads to
a major distortion in cost allocation. Other flights would have to subsidize this flight if an overall
rate is used. Activity-based costing is better because it more accurately traces costs to the flight
that uses the resources and causes the activities incurring the costs.

6-33.
(1) Costs charged through preliminary stage cost drivers.

Charging of building costs:

Repair $864,800 x (9,000  100,000) $77,832
Computer $864,800 x (19,000  100,000) 164,312
Machine $864,800 x (14,400  100,000) 124,531
Finishing $864,800 x (57,600  100,000) 498,125
Total Building costs $864,800

Charging of Repair ($500,000 + $77,832 = $577,832)

Machine $577,832 x (22,400 32,000) $404,482
Finishing $577,832 x (9,600  32,000) 173,350
Total Repair costs $577,832

Charging of Computer ($300,000 + $164,312 = $464,312)

$464,312 x 70% = $325,018
Machine $325,018 x (16,800  21,000) $260,000
Finishing $325,018 x (4,200  21,000) 65,004
Total Computer costs $325,018

Summary of costs: Machine Finishing

Original costs $400,000 $200,000
Building charges 124,531 498,125
Repair charges 404,482 173,350
Computer charges 260,014 65,004
Total $1,189,027 $936,479

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-15

(2) Charging costs to jobs: #TK451 #RG566
Machine:
[($1,189,027 x 40%) ÷ 5,000] x 200 $19,024
[($1,189,027 x 40%) ÷ 5,000] x 50 $4,756
[($1,189,027 x 60%) ÷ 100,000] x 100 713
[($1,189,027 x 60%) ÷ 100,000) x 300 2,140

Finishing:
[($936,479 x 70%) ÷ 400,000) x 200 328
[($936,479 x 70%) ÷ 400,000) x 100 164
[($936,479 x 30%) ÷ 20,000) x 80 1,124
[($936,479 x 30%) ÷ 20,000) x 900 12,642
Total cost of jobs $21,189 $19,702

6-34.
(1) Volume-based costing:

Total overhead cost = $25,000 + $15,000 + $10,000 = $50,000

Study #15
$6,020 + $15,660 + (140 ÷ 10,000)($50,000) = $6,020 + $15,660 + $700 = $22,380

Study #19
$5,425 + $12,235 + (110 ÷ 10,000)($50,000) = $5,425 + $12,235 + $550 = $18,210

Study #23
$4,885 + $19,650 + (175 ÷ 10,000)($50,000) = $4,885 + $19,650 + $875 = $25,410

(2) Activity-based costing: Study #15 Study #19 Study #23

Direct materials $6,020 $5,425 $4,885
Direct labor 15,660 12,235 19,650
Other costs:
Phoning (500 ÷ 80,000) x $25,000 156
(300 ÷ 80,000) x $25,000 94
(700 ÷ 80,000) x $25,000 219
Mailing (7,000 ÷ 40,000) x $15,000 2,625
(6,000 ÷ 40,000) x $15,000 2,250
(2,000 ÷ 40,000) x $15,000 750
Personal (900 ÷ 50,000) x $10,000 180
(1,300 ÷ 50,000) x $10,000 260
(1,600 ÷ 50,000) x $10,000 320
Total study costs $24,641 $20,264 $25,824

6-35.
Prior system:
Overhead costs = ($160,000 ÷ 4,000) x 400 = $16,000

ABC system:
Overhead costs = [($120,000 ÷ 20,000) x 500] + [($40,000 ÷ 100) x 20
= $3,000 + $8,000 = $11,000

The overhead costs allocated to roller blades is $5,000 lower with the ABC system.
6-36.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-16

 Allocations from Maintenance:
To Fabrication – $90,000 x (200  1,000) = $18,000
To Assembly – $90,000 x (800  1,000) = $72,000

Allocations from Receiving:

To Fabrication – $40,000 x (30  150) = $8,000
To Assembly – $40,000 x (120  150) = $32,000

Overhead rate for Fabrication:

($150,000 + $18,000 + $8,000)  1,700 = $103.53 per labor hour
($280,000 + $72,000 + $32,000)  550 = $698.18 per machine hour

6-37.
(1) First alternative Standard Deluxe
Materials handling:
$120,000 x [2,000  (2,000 + 4,000)] $40,000
$120,000 x (4,000  6,000) $80,000
Receiving:
$40,000 x [600  (600 + 400)] 24,000
$40,000 x (400 1,000) 16,000
Engineering:
$90,000 x [5,000  (5,000 + 3,000)] 56,250
$90,000 x (3,000  8,000) 33,750
Depreciation on machinery:
$60,000 x [20,000  (20,000 + 40,000)] 20,000
$60,000 x (40,000 60,000) 40,000
Power:
$30,000 x [15,000  (15,000 + 30,000)] 10,000
$30,000 x (30,000  45,000) 20,000
Setups:
$84,000 x [70  (70 + 30)] 58,800
$84,000 x (30  100) 25,200
Maintenance:
$80,000 x [1,500  (1,500 + 2,500)] 30,000
$80,000 x (2,500  4,000) 50,000
Packing for shipment:
$35,000 x  [2,000 (2,000 + 3,000)] 14,000
$35,000 x (3,000  5,000) 21,000
Total $253,050 $285,950

(2) Second alternative Standard Deluxe

Materials-related costs:
$160,000 x [$80,000  ($80,000 + $240,000)] $40,000
$160,000 x ($240,000  $320,000) $120,000
Engineering:
$90,000 x [5,000  (5,000 + 3,000)] 56,250
$90,000 x (3,000  8,000) 33,750
Manufacturing overhead:
$254,000 x [20,000  (20,000 + 40,000)] 84,667
$254,000 x (40,000  60,000) 169,333
Packing for shipment:

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-17

 $35,000 x [2,000  (2,000 + 3,000)] 14,000
$35,000 x (3,000  5,000) 21,000
Total $194,917 $344,083

(3) Difference in alternatives.

Using cost drivers for each individual cost is a more accurate means of linking costs with the
products. Grouping of activities and using the dominant cost driver mean certain costs are not
traced to products by the best cost driver. The impact of grouping according to the alternatives
above is to undercoat the standard model by $58,133 ($253,050 less $194,917) and to
overcost the deluxe model by a similar amount. If prices are in any way cost based, the deluxe
model is subsidizing the standard model.

6-38.
(1) Cost per unit for X:
Direct materials $3.23
Direct labor 2.22
Overhead [73,200 x (10,000 12,500)] 11,000 5.32
Total $10.77

Gross margin for X:

$12.70 – $10.77 = $1.93

Cost per unit for Y:

Direct materials $3.09
Direct labor 2.10
Overhead [73,200 x (2,500 12,500)] 3,000 4.88
Total $10.07

Gross margin for Y:

$12.50 – $10.07 = $2.43

(2) Cost per unit for X:

Direct materials $3.23
Direct labor 2.22
Inspection Costs [16,200 x (80 180)] 11,000 0.65
Purchasing Costs [8,000 x (10  40)] 11,000 0.18
Machine costs [49,000 x (2,100  4,900)] 11,000 1.91
Total $8.19

Gross margin for X:

$12.70 – $8.19 = $4.51

Cost per unit for Y:

Direct materials $3.09
Direct labor 2.10
Inspection Costs [16,200 x (100  180)]  3,000 3.00
Purchasing Costs [8,000 x (30  40)]  3,000 2.00
Machine costs [49,000 x (2,800  4,900)]  3,000 9.33
Total $19.52

Gross margin for Y:

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-18

 $12.50 – $19.52 = ($7.02)

(3) By comparing Parts (1) and (2), we see that the volume-based allocation using labor hours
overcosted Product X. Thus, the price charged for X was higher than the competition.
Conversely, Product Y was grossly undercosted; and, consequently, the price charged was
much lower than the competition’s price. Part (2) shows that with activity-based costing, the
price charged for Product Y has resulted in a negative gross margin.

6-39.
Old costing method: ($160 + $1,500) + 3 ($160 + $1,500) = 4 ($160 + $1,500) = $6,640

New costing method: Support

Occupancy Staff Art Writing
Direct costs $100,000 $100,000 $60,000 $40,000
From Occupancy:
To Support (0.2 x $100,000) (20,000) 20,000
To Art (0.5 x $100,000) (50,000) 50,000
To Writing (0.3 x $100,000) (30,000) 30,000
$0 $120,000 $110,000 $70,000
From Support Staff:
To Art (.4 x $120,000) (48,000) 48,000
To Writing (.6 x $120,000) (72,000) 72,000
Total cost $0 $158,000 $142,000
Art or writing hours ÷ 5,000 ÷ 2,000

Rate per hour $31.60 $71.00

($160 + $1,500) + 20 ($31.60) + 50 ($71) = 1,660 + $632 + $3,550 = $5,842

The ad campaign would have an assigned cost of $798 more with the old costing system.

6-40.
(1) Overhead rates for individual activity centers:

Material Handling
Budgeted costs $312,400
Budgeted production orders:
Gears 10,000 x $60 $600,000
Shafts 2,000 x $80 160,000
Casings 700 x $100 70,000 $830,000
Overhead rate: $312,400  $830,000 $0.3764

Production Scheduling:
Budgeted costs $116,000
Budgeted production orders:
Gears 40
Shafts 20
Casings 10 70
Overhead rate: $116,000  70 $1,657.1429

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-19

 Setups:
Budgeted costs $144,600
Budgeted setups:
Gears 20
Shafts 10
Casings 14 44
Overhead rate: $144,600  44 $3,286.3636

Manual Machinery:
Budgeted costs $ 986,000
Budgeted direct labor hours
Gears 20,000
Shafts 10,000
Casings 8,400 38,400
Overhead rate: $986,000  38,400 $25.6771

Automated Machinery:
Budgeted costs $3,212,000
Gears 30,000
Shafts 15,000
Casings 2,800 47,800
Overhead rate: $3,212,000  47,800 $67.1967

Finishing:
Budgeted costs: $1,798,000
Budgeted direct labor hours: 38,400
Overhead rate: $1,798,000  38,400 $ 46.8229

Packaging and Shipping:

Budgeted costs $234,000
Budgeted orders shipped:
Gears 1,000
Shafts 1,500
Casings 70 2,570
Overhead rate: $234,000  2,570 $91.0506

(2) Overall overhead rate:

Budgeted costs:
Materials Handling $312,400
Production Scheduling 116,000
Setups 144,600
Manual Machinery 986,000
Automated Machinery 3,212,000
Finishing 1,798,000
Packaging and Shipping 234,000 $6,803,000
Total direct labor hours 38,400
Overhead rate $177.1615

(3) Overhead charged to products: Gears Shafts Casings

Materials Handling:
$600,000; $160,000; $70,000 x $0.3764 $225,840 $60,224 $26,348

Production Scheduling:
40; 20; 10 x $1,657.1429 66,286 33,143 16,571

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-20

 Setups:
20; 10; 4 x $3,286.3636 65,727 32,864 46,009

Manual Machinery:
20,000; 10,000; 8,400 x $25.6771 513,542 256,771 215,688

Automated Machinery:
30,000; 10,000; 2,800 x $67.1967 2,015,901 1,007,951 188,151

Finishing:
20,000; 10,000; 8,400 x $46.8229 936,458 468,229 393,312

Packaging and Shipping:

1,000; 1,500; 70 x $91.0506 91,051 136,576 6,374
Total overhead costs $3,914,805 $1,995,758 $892,453

Overall overhead rate:

20,000 x $177.1615 $3,543,230
10,000 x $177.1615 $1,771,615
8,400 x $177.1615 $1,488,157

(4) Overall overhead rate based on units produced:

Budgeted overhead costs $6,803,002
Budgeted units produced 12,700
Overhead rate per unit $535.6693

(5) Overhead per unit rate applied to products:

Gears: 10,000 x $535.6693 $5,356,693
Shafts: 2,000 x $535.6693 $1,071,339
Casings: 700 x $535.6693 $374,969

(6) Allocating the costs of activities on the basis of units produced distorts the relationship
between the activities and the costs assigned to the products. Gears require different levels of
the activities than do casings, yet units of production ignore this fact.

6-41.
(1) Volume-based costing:
Total overhead = ($275,000 + $62,000 + $159,000 + $88,000) = $584,000

Allocation to North Ryde Post = (140,000 ÷ 230,000) ($584,000) = $355,478

Unit cost for North Ryde Post = $355,478 ÷ 140,000 = $2.54

Allocation to Macquarie Daily = (90,000 ÷ 230,000) ($584,000) = $228,522

Unit cost for Macquarie Daily = $228,522 ÷ 105,000 = $2.18

(2) Activity-based costing:

North Ryde Post

Design ($275,000) (30 ÷ 40) $206,250
Receiving ($62,000) (800 ÷ 1,000) 49,600
Setup ($159,000) (4,800 ÷ 5,600) 136,286
Shipping ($88,000) (4,900 ÷ 6,300) 68,444

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-21

 Total $460,580
Divided by number of periodicals ÷ 140,000
Overhead cost per unit $3.29

Macquarie Daily
Design ($275,000) (10 ÷ 40) $68,750
Receiving ($62,000) (200 ÷ 1,000) 12,400
Setup ($159,000) (800 ÷ 5,600) 22,714
Shipping ($88,000) (1,400 ÷ 6,300) 19,556
Total $123,420
Divided by number of periodicals ÷ 105,000
Overhead cost per unit $1.18

6-42. Total cost per tour: 10-Day Tour 21-Day Tour

Direct labor A$670,000 A$1,770,000
Direct materials 10,800 22,400
Advertising [$56,700 x (150 ÷ 325); (175 ÷ 325)] 26,169 30,530
Organizing itinerary [$89,300 x (55 ÷ 127); (72 ÷ 127)] 38,673 50,627
Touring [$380,500 x (2,725 ÷ 5,855); (3,130 ÷ 5,855)] 177,220 203,410
Total cost A$922,862 A$2,076,967
Divided by number of tours ÷ 55 ÷ 72
Total cost per tour A$16,779 A$28,847

6-43.
Product-line profitability analysis:
Total store overhead = $22,000 + $27,600 + $19,200 = $68,800

Ordering cost 0.3 x $68,800 = $20,640

Customer support cost 0.2 x $68,800 = $13,760
Stocking shelves cost 0.4 x $68,800 = $27,520
Delivery cost 0.1 x $68,800 = $6,880

Packaged Non-Food
Produce Foods Items
Sales $135,500 $190,900 $111,800
Cost of sales (55,000) (69,000) (48,000)
Ordering cost:
$20,640 x (120 ÷ 205) (12,082)
$20,640 x (50 ÷ 205) (5,034)
$20,640 x (35 ÷ 205) (3,524)
Customer support cost:
$13,760 x (80,000 ÷ 180,000) (6,116)
$13,760 x (70,000 ÷ 180,000) (5,351)
$13,760 x (30,000 ÷ 180,000) (2,293)
Stocking shelves cost:
$27,520 x (720 ÷ 1,825) (10,857)
$27,520 x (590 ÷ 1,825) (8,897)
$27,520 x (515 ÷ 1,825) (7,766)
Delivery cost:
$6,880 x (310 ÷ 1,035) (2,061)
$6,880 x (350 ÷ 1,035) (2,327)
$6,880 x (375 ÷ 1,035) (2,493)

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-22

 Profit $49,384 $100,291 $47,724

6-44.
(1) October 31 balance in the Cost of Goods Sold account:

Cr$300,000 + Cr$1,300,000 = Cr$1,600,000

(2) Overapplied (underapplied) conversion cost:

The applied conversion costs would be Cr$1,300,000; and the actual conversion costs would
total Cr$1,195,000 (Cr$995,000 + Cr$200,000). Therefore, there was overapplied conversion
cost of Cr$105,000 for October.

6-45.
(1) September entries:

Raw and In-Process Inventory Accounts Payable

(a) 45,000 | (h) 45,000 | (a) 45,000
| (e) 15,000
| (f) 85,000

Conversion Costs Wages Payable

(c) 11,000 | (h) 221,000 | (c) 11,000
(d) 120,000 | | (d) 120,000
(e) 15,000 |
(f) 85,000 |

Finished Goods Inventory

(h) 266,000 |

(2) Difference between actual and applied conversion costs:

Actual conversion costs = $11,000 + $120,000 + $15,000 + $85,000 = $231,000

Applied conversion costs = $221,000
Underapplied conversion = $10,000

6-46.
(l) a., (2) a., (3) a. Conventional costing:

Raw Materials Inventory Accounts Payable

(1a) 96,000 | (1a) 72,000 | (1a) 96,000
| (2a) 85,000

Work in Process Inventory Wages Payable

(1a) 72,000 | (3a) 180,000 | (2a) 18,000
(2a) 18,000 |
(3a) 90,000 |

Factory Overhead Finished Goods

(2a) 85,000 | (3a) 90,000 (3a) 180,000 |

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-23

(1) b., (2) b., (3) b. JIT costing:

Raw and In-Process Inventory Accounts Payable

(1b) 72,000 | (1b) 72,000 | (1b) 72,000
| (2b) 85,000

Conversion Costs Wages Payable

(2b) 103,000 | (3b) 108,000 | (2b) 18,000

Finished Goods
(3b) 180,000 |

6-47.
(1) Entries for transactions:

Raw and In-Process Inventory Accounts Payable

(a) 600 | (f) 600 | (a) 600
| (d) 3,500
Conversion Costs Wages Payable
(d) 7,500 | (f) 7,950 | (d) 4,000

Finished Goods Cash

(f) 8,550 | (g) 8,550 (g) 9,800 |

Cost of Goods Sold Sales

(g) 8,550 | | (g) 9,800

(2) Closing entries:

Cost of Goods Sold Conversion Costs

(g) 8,550 | (2) 450 (d) 7,500 | (f) 7,950
(2) 450 |

6-48.
(1) Units to minimize costs of production:
____________________
EOQ = √(2 x 75,000 x $60) / $100
= 300 units

Minimum combined cost:

75,000 / 300 = 250 runs

Cost to change setting (250 runs x $60) $15,000

Storage cost (300/2 average inventory x $100) 15,000
Minimum combined cost $30,000

(2) Combined costs of resetting:

75,000 / 1,500 = 50 runs

Cost to change setting (50 runs x $60) $3,000

Storage cost (1,500/2 average inventory x $100) 75,000
Combined cost $78,000

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-24

6-49.
(1) Carrying cost per unit:
Purchase price $165
Freight-in 8
Insurance 2
$175
Cost of capital x 16%
Carrying cost per unit $28

(2) EOQ and number of orders:

____________ ____
EOQ = √(2 x 800 x $25) / $28
= 37.8 or 38 filtration units

Number of orders = 800 / 38 = 21.05 or 22 orders per year

(3) Reorder point:

800 x (5/360) = 11.1 or 12 units

(4) Savings of EOQ:

Current policy:
Ordering costs (800 units / 50 units per order) x $25 $400
Carrying costs (50/2 average inventory) x $28 700
$1,100
EOQ policy:
Ordering costs (22 orders x $25) $550
Carrying costs (38/2 average inventory) x $28 532
$1,082
The savings of the EOQ policy is $18 ($1,100 - $1,082).

Solutions to Cases

CASE 6A – Glaser Health Products

(1) Classification of costs by division

Operations:
• Depreciation on factory equipment
• Depreciation on factory building
• Assembly foreman’s salary
• Supplies for the Machining Department
• Electricity for the Assembly Department
• Lost material (scrap) in the Machining Department
• Direct labor in the Assembly Department
• Packing supplies
• Payroll fringe benefits for workers in the Shipping Department
• Supplies for Production Scheduling
• Cost of repairing parts improperly manufactured in the Machining Department
• Paint for the Assembly Department
• Heat, light, and power for the factory

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-25

 Sales:
• Advertising manager’s salary
• Salespersons’ salaries
• Salespersons’ travel expenses
• Advertising supplies
• Supplies for the Sales Office
• Sales commissions

Administrative:
• Depreciation on office equipment
• Cost of hiring new employees
• Leasing of computer equipment for the Accounting Department.

(2) and (3) Classification of activities for ABC and selection of cost driver

Operations:
(a) Unit-level:
• Depreciation on factory equipment – Machine hours
• Assembly foreman’s salary – Assembly direct labor hours
• Supplies for the Machining Department – Machine hours
• Electricity for the Assembly Department – Assembly labor hours
• Lost materials (scrap) in the Machining Department – Included in the cost of the
direct materials
• Direct labor in the Assembly Department – Direct Identification

(b) Batch-level:
• Costs of repairing parts improperly manufactured in the Machining Department –
Number of units manufactured
• Paint for the Assembly Department – Number of units painted or assembly direct
labor hours
• Payroll fringe benefits for workers in the Shipping Department – Shipping labor
hours or number of orders shipped
• Packing supplies – Number of orders shipped

(c) Product-level:
• Supplies for Production Scheduling – Number of products

(d) Facility-level:
• Depreciation on factory building – Square footage
• Heat, light, and power for the factory – Square footage

Sales:
(a) Unit-level:
• Sales commissions – Direct identification

(b) Product-level:
• Advertising manager’s salary – Number of products
• Salespersons’ salaries – Number of products or sales
• Salespersons’ travel expenses – Number of products or sales
• Advertising supplies – Number of products or sales
• Supplies for the Sales Office – Number of products or sales

Administrative:
(a) Facility-level:

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-26

 • Depreciation on office equipment – Number of products or sales dollars
• Cost of hiring new employees – Number of employees
• Leasing of computer equipment for the Accounting Department – Number of
products, sales dollars, or employees

(4) Preliminary stage cost drivers:

Operations:
(a) Product-level (These costs are traced to groupings of products. A primary stage cost
driver is needed to trace costs to individual products.):
• Supplies for Production Scheduling – Number of products

(b) Facility-level (These costs are traced to groupings of activities related to Assembly,
Machining, etc. A primary stage cost driver is needed to trace costs to individual
products.):
• Depreciation on factory building – Square footage
• Heat, light, and power for the factory – Square footage

Sales:
(a) Product-level (These are already stated in terms of preliminary stage cost drivers and
will be identified with other activity groupings for selection of primary stage cost
drivers.):
• Advertising manager’s salary – Number of products
• Salespersons’ salaries – Number of products
• Salespersons’ travel expenses – Number of products
• Advertising supplies – Number of products
• Supplies for the Sales Office – Number of products

Administrative:
(a) Facility-level (These are already stated in terms of preliminary stage cost drivers and will
be identified with other activity groupings for selection of primary stage cost drivers.):
• Depreciation on office equipment – Number of products
• Costs of hiring new employees – Number of employees
• Leasing of computer equipment for the Accounting Department – Number of
products

(5) Primary stage cost drivers:

Operations
(a) Unit-level (These costs are already stated in terms of primary stage cost drivers.):
• Depreciation on factory equipment – Machine hours
• Assembly foreman’s salary – Assembly direct labor hours
• Supplies for the Machining Department – Machine hours
• Electricity for the Assembly Department – Assembly labor hours
• Lost materials (scrap) in the Machining Department – Included in the cost of direct
materials
• Direct labor in the Assembly Department – Direct identification

(b) Batch-level (These costs are already stated in terms of primary stage cost drivers.):
• Costs of repairing parts improperly manufactured in the Machining Department –
Number of units manufactured
• Paint for the Assembly Department – Number of units painted or assembly direct
labor hours
• Payroll fringe benefits for workers in the Shipping Department – Shipping labor
hours

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-27

 (c) Product-level costs identified with product groupings will have a primary cost driver:
Number of units of each product produced.

(d) Facility-level costs traced to assembly activities will have a primary stage cost driver:
assembly direct labor hours. Facility-level costs traced to machining activities will have
a primary stage cost driver: Machine hours.

Sales:
(a) Unit-level (These costs are already stated in terms of primary stage cost drivers.):
• Sales commissions – Direct identification.

(b) Batch-level (These costs will have a primary stage cost driver when the amounts are
identified with the number of orders converted to amounts per unit in the order.):
• Packing supplies – Number of orders shipped.

(c) Product-level: (These costs are identified with product groupings and will have a
primary cost driver: Number of units of each product produced.)

Administrative:
(a) (These costs are identified with the number of products and will have a primary cost
driver: Number of units of each product produced.)

(6) Costs incurred by any company have degrees of remoteness in their relationship to products.
Direct identification is the closest relationship, but some costs are so distant that some
arbitrariness is needed in relating costs to products. The use of preliminary drivers helps to
trace costs to products through intermediate steps of relating costs to activities until all costs
are traced to a group of activities. This procedure improves the accuracy of costs identified
with products.

CASE 6B – Druid Valley Apartments

First, costs are assigned from resources to activities, as follows:

Activities Amounts 1 2 3 4 5 6 7 8
Administrative salaries $227,000 $9,100 $31,550 $16,550 $14,350 $16,550 $31,200 $27,700 $80,000
Custodial costs 177,000 177,000
Maintenance costs 90,000 90,000
Instructor/trainer costs 60,000 60,000
Grounds costs 55,000 55,000
Heat and electricity 42,000 4,200 8,400 16,800 4,200 8,400
Water 98,000 68,600 14,700 14,700
Office supplies 13,000 1,625 1,625 1,625 1,625 1,625 1,625 1,625 1,625
Building depreciation 795,000 755,250 39,750
Equipment depreciation 130,000 16,250 16,250 16,250 16,250 16,250 16,250 16,250 16,250
Liab and prop insurance 720,000 36,000 432,000 36,000 36,000 36,000 72,000 36,000 36,000
Advertising 51,000 45,900 5,100
Telephone 17,000 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125
Newsletter 10,000 7,500 2,500
Interest 20,000 20,000
Postage 11,000 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375
Miscellaneous 27,000 3,375 3,375 3,375 3,375 3,375 3,375 3,375 3,375
Total $2,543,000 $119,950 $1,328,050 $167,300 $144,800 $254,300 $266,800 $92,650 $169,150

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-28

Next, activity 8 is allocated evenly to all other activities, resulting in the following cost assignment:

Amounts 1 2 3 4 5 6 7
Total before allocating #8 $2,543,000 $119,950 $1,328,050 $167,300 $144,800 $254,300 $266,800 $92,650
Activity #8 169,150 24,164 24,164 24,164 24,164 24,164 24,164 24,164
Total after allocating #8 $2,543,000 $144,114 $1,352,214 $191,464 $168,964 $278,464 $290,964 $116,814

Next, we assign the costs from the remaining seven activities to the apartments and sports area:

Activities Costs Cost Driver Cost Driver 1-Bedroom 2-Bedroom Sports Area
Quantity Rate
Attracting new residents $144,114 600 $240.19 $43,234 $100,880
Servicing current residents 1,352,214 2,055 658.01 184,243 855,415 $312,556
Maintaining the buildings 191,464 400,000 0.48 43,079 131,632 16,753
Maintaining the grounds 168,964 400,000 0.42 38,017 116,163 14,784
Cleaning the apts/sports area 278,464 2,055 135.51 37,942 176,157 64,365
Providing recreation progs 290,964 290,964
Collecting rent and fees 116,814 2,055 56.84 15,916 73,897 27,001
Total $2,543,000 $362,432 $1,454,145 $726,423
Total cost per unit $2,014 $3,462

The two-bedroom unit costs over 70 percent more than the one-bedroom unit.

The sports area is costing $1,211 per unit annually ($726,423 ÷ 600). This is over 60 percent of
the cost of providing a one-bedroom unit and around 35 percent of the cost of providing a two-
bedroom unit.

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 6, Page 6-29