Garrison 8 Ex 5-20, PR 5-25
Garrison 8 Ex 5-20, PR 5-25
Garrison 8 Ex 5-20, PR 5-25
Mercon Wercon
Direct material cost per unit: $10.00 $ 8.00
Direct labour cost per unit: 3.00 3.75
Direct labour hours per unit: 0.20 0.25
# units produced: 10,000 40,000
3: Explain why the unit product costs differ between the two systems.
Exercise 5-20 (45 minutes)
1.The unit product costs under the company's conventional
costing system would be computed as follows:
Mercon Wurcon Total
Number of units produced (a) 10,000 40,000
Direct labour-hours per unit (b) 0.20 0.25
Total direct labour-hours (a) × (b) 2,000 10,000 12,000
Mercon Wurcon
Direct materials $10.00 $ 8.00
Direct labour 3.00 3.75
Manufacturing overhead applied:
0.20 DLH per unit × $28.00 per DLH 5.60
7.00
0.25 DLH per unit × $28.00 per DLH
Unit product cost $18.60 $18.75
The unit product costs with the proposed ABC
system can be computed as follows:
Mercon:
Activity Cost (a) (b) (a) × (b)
Pool Activity Rate Activity ABC Cost
Labour related $14per DLH 2,000DLHs $28,000
Engineering $21per engineering- 4,000engineering- 84,000
design hour hours
Total $112,000
Wurcon:
Activity Cost (a) (b) (a) × (b)
Pool Activity Rate Activity ABC Cost
Labour related $14per DLH 10,00 DLHs $140,000
0
Engineering $21per engineering- 4,000engineering- 84,000
design hour hours
Total $224,000
The unit product costs combine direct materials,
direct labour, and manufacturing overhead costs:
Mercon Wurcon
Direct materials $10.00 $ 8.00
Direct labour 3.00 3.75
Manufacturing overhead ($112,000 ÷
10,000 units; $224,000 ÷ 40,000 units)
11.20 5.60
Unit product cost $24.20 $17.35
The unit product cost of the high-volume product, Wurcon, declines
under the activity-based costing system, whereas the unit product
cost of the low-volume product, Mercon, increases.
Working on non-
routine jobs # non-routine jobs 25
2: Using exhibit 5-7 as a guide, compute the activity rates for the
cost pools.
3: Using the activity rates you have computed, determine the total
cost and average cost per thousand square metres of each of the
following jobs according to the activity-based costing system:
a: a routine 2,000 square metre asbestos removal job;
b: a routine 4,000 square metre asbestos removal job;
c: a non-routine 4,000 square metre asbestos removal job.
4: Given the results you obtained in (3), do you agree with the
estimator that the company’s present policy for bidding on jobs is
adequate?
The results of the first-stage allocation:
Working
Estimating on Non-
Removing and Job routine
Asbestos Setup Jobs Other Totals
Wages and salaries
$ 80,000 $ 20,000 $ 70,000 $ 30,000 $ 200,000
Disposal fees 420,000 0 180,000 0 600,000
Equipment
depreciation 40,000 0 32,000 8,000 80,000
On-site supplies 33,000 9,000 12,000 6,000 60,000
Office expenses 19,000 76,000 57,000 38,000 190,000
Licensing and
insurance 185,000 0 148,000 37,000 370,000
Total cost $777,000 $105,000 $499,000 $119,000 $1,500,000
According to the data in the problem, 40% of the wages and salaries cost of
$200,000 is attributable to activities related to job size.
$200,000 × 40% = $80,000
Other entries in the table are determined in a similar manner.
(a)
Activity CostTotal (b) (a) ÷ (b)
Pool Cost Total Activity Activity Rate
Removing Thousand per thousand
asbestos $777,000 500 square metres $ 1,554 square metres
Estimating and
job setup $105,000 200 jobs $ 525 per job
Working on
nonroutine jobs Non-routine
$499,000 25 jobs $19,960 per non-routine job
a.
Routine two-thousand-square-metre job:
Removing asbestos
($1,554 per thousand square metres × 2
thousand square metres) $3,108
Estimating and job setup ($525 per job × 1 job)
525
Removing asbestos
($1,554 per thousand square metres × 4 thousand
square metres) $6,216
Removing asbestos
($1,554 per thousand square metres × 2 thousand
square metres) $ 3,108
Savvy competitors are likely to bid less than $4,000 per thousand
square metres on routine work and substantially more than $4,000
per thousand square metres on non-routine work. Consequently,
Vance Asbestos Removal may find that its product mix shifts toward
non-routine work and away from routine work as customers accept
bids on non-routine work from the company and go to competitors
for routine work. This may have a disastrous effect on the
company’s profits.