Chapter # 5 Exercise & Problems - Answers
Chapter # 5 Exercise & Problems - Answers
Chapter # 5 Exercise & Problems - Answers
1. a. Quality-control costs assigned to the Satin Sheen line under the traditional system:
Quality-control
Costs assigned to
Satin Sheen line = 14.5% x Rs. 27,500
= Rs. 3,988 (rounded)
b. Quality-control costs assigned to the Satin Sheen line under activity-based costing:
2. The traditional product-costing system under-costs the Satin Sheen product line, with respect to
quality-control costs, by Rs. 525 (Rs. 4,513 – Rs. 3,988).
There is no single correct answer to this exercise. There are many reasonable solutions.
Cost pool 1:
Rs.
Raw materials and components 2,950,000
Inspection of finished goods 30,000
Total 2,980,000
Cost driver: raw-material cost
Cost pool 2:
Rs.
Depreciation, machinery 1,400,000
Electricity, machinery 120,000
Equipment maintenance, wages 150,000
Equipment maintenance, parts 30,000
Total 1,700,000
Cost driver: for costs allocated to support departments, square footage; for costs assigned to products,
number of units produced.
U: Unit-level
B: Batch-level
P: Product-sustaining-level
F: Facility-level Activity
REDWOOD COMPANY
COMPUTATION OF SELLING COSTS
By Order Size and per Skein Within Each Order Size
Order Size
Small Medium Large Total
(Rs.) (Rs.) (Rs.) (Rs.)
Sales commissions a
(Unit cost: Rs. 675,000/225,000
= Rs. 3.00 per box) 6,000 135,000 534,000 675,000
Catalogs b
(Unit cost: Rs. 295,400/590,800
= Rs. 0.50 per catalog) 127,150 105,650 62,600 295,400
Total cost for all orders of a given size 185,400 296,000 654,000 1,135,400
Page 2 of 6
MANAGERIAL ACCOUNTING – CHAPTER # 5 ANSWERS
a
Retail sales in boxes x unit cost:
small, 2,000 x Rs. 3
medium, 45,000 x Rs. 3
large, 178,000 x Rs. 3
b
Catalogs distributed x unit cost
c
Catalog sales x unit cost
d
Number of retail orders x unit cost
e
Small: (2,000 x 12) + 79,000 = 103,000
Medium: (45,000 x 12) + 52,000 = 592,000
Large: (178,000 x 12) + 44,000 = 2,180,000
f
Total cost for all orders of a given size / units sold
Standard Enhanced
(Rs.) (Rs.)
Direct material 25 40
Direct labor
3 hours x Rs. 12 36
4 hours x Rs. 12 48
Manufacturing overhead:
3 hours x Rs. 32 96
4 hours x Rs. 32 ____ 128
Total cost 157 216
Order processing, machine processing, and product inspection costs of a standard unit and an Enhanced
unit:
Page 3 of 6
MANAGERIAL ACCOUNTING – CHAPTER # 5 ANSWERS
* Rs. 360,000 / 3,000 units = Rs. 120
** Rs. 440,000 / 4,000 units = Rs. 110
The manufactured cost of a Standard unit is Rs. 181, and the manufactured cost of an Enhanced unit is Rs.
198:
Standard Enhanced
(Rs.) (Rs.)
Direct material 25 40
Direct labor
3 hours x Rs. 12 36
4 hours x Rs. 12 48
Order processing, machine processing,:
and product inspection 120 110
Total cost 181 198
a. The enhanced product is over-costed by the traditional product costing system. The labor hour
application base resulted in a Rs. 216 unit cost; in contracts, the more accurate ABC approach
yielded a lower unit cost of Rs. 198. The opposite situation occurs with the Standard product,
which is under-costed by the traditional approach (Rs. 157 vs. Rs. 181 under ABC).
b. Yes, especially since the company’s selling prices are based heavily on cost. An overcosted
product will result in an inflated selling price, which could prove detrimental in a highly
competitive marketplace. Customers will be turned off and will go elsewhere, which hurts
profitability. With undercosted products, selling prices may be too low to adequately cover a
product’s more accurate (higher) cost. This situation is also troublesome and will result in a lower
income being reported for the company.
The results of the ABC calculations are in columns E, H and J. The ABC calculations are as follows:
Page 4 of 6
MANAGERIAL ACCOUNTING – CHAPTER # 5 ANSWERS
(3) Compute product cost per unit for each product line:
1. Activity based costing results in improved costing accuracy for two reasons. First, companies that
use ABC are not limited to a single driver when allocating costs to products and activities. Not all
costs vary with units, and ABC allows users to select a host of non unit-level cost drivers. Second
consumption ratios often differ greatly among activities. No single cost driver will accurately
assign costs for all activities in this situation.
Information systems: 3,100 / 5,000 = 62%; Rs. 342,000 x 62% = Rs. 212,040
E-commerce consulting: 1,900 / 5,000 = 38%; Rs. 342,000 x 38% = 129,960
Information E-Commerce
Systems Consulting
Services (Rs.)
Billings:
3,100 hours x Rs. 125 387,500
1,900 hours x Rs. 125 237,500
Less: professional staff cost:
3,100 hours x Rs. 45 (139,500)
1,900 hours x Rs. 45 (85,500)
Administrative cost (212,040) (129,960)
Income 35,960 22,040
Miscellaneous office charges 25600 / 1,000 client transactions (CT) = 25.60 per CT
Staff support, in-house computing, and miscellaneous office charges of information systems services and e-
commerce consulting:
Page 5 of 6
MANAGERIAL ACCOUNTING – CHAPTER # 5 ANSWERS
Activity Information E-Commerce
Systems Consulting
Service (Rs.)
(Rs.)
Staff support:
200 clients x Rs. 720 144,000
50 clients x Rs. 720 36,000
In-house computing:
2,600 CH x Rs. 31 80,600
1,800 CH x Rs. 31 55,800
Miscellaneous office charges:
400 CT x Rs. 25.60 10,240
600 CT x Rs. 25.60 15,360
Total 234,840 107,160
4. Yes, his attitude should change. Even though both services are needed and professionals are paid
the same rate, the income percentages show that e-commerce consulting provides a higher return
per sales rupees then information systems services (18.88% vs. 3.40%). Thus, all other things
being equal, professionals should spend more time with e-commerce.
5. Probably not. Although both services produce and attractive return, the firm is experiencing a very
tight labor market and will likely have trouble finding qualified help. In addition, the professional
staff is currently overworked, which would probably limit the services available to new clients.
Page 6 of 6