Chapter 4 Solutions

Atkinson, Solutions Manual t/a Management Accounting, 6E
Chapter 4
Accumulating and
Assigning Costs to
Products
QUESTIONS
4-1 The cost of the raw materials entered into production is moved from the raw
materials account to the work-in-process inventory account. The cost of
manufacturing labor and overhead items are assigned to production by adding
them to the work-in-process inventory account. Overhead costs are assigned
(or allocated or apportioned) as determined by the cost system. When
manufacturing is completed, work is transferred to finished goods inventory,
and costs are moved from the work-in-process inventory account to the
finished goods inventory account. Finally, when goods are sold their costs are
moved from the finished goods inventory account to cost of goods sold.
4-2 Manufacturing organizations face greater challenges in product costing,

especially the assignment of overhead costs, than retail or service
organizations do. The basic idea behind all manufacturing costing systems is
to determine the costs that products accumulate as they consume organization
resources during manufacturing, as described above in 4-1. In retail
organizations, goods are purchased rather than manufactured; the cost of the
goods purchased is entered into an account that accumulates the cost of
merchandise inventory in the store. Stores incur various overhead costs such
as labor, depreciation on the store, lighting, and heating. The primary focus in
retail operations is the profitability of product lines or departments. Therefore,
retail organizations, like manufacturing operations, face the issue of how to
allocate various overhead costs to determine, for example, the cost of
purchasing and selling products, or department costs.
Service organizations that undertake major projects, such as in a consultancy,

focus on determining the cost of a project. In such situations, the major direct
cost, employee pay, is often a large proportion of the projects cost. The
organization will also assign various overhead costs to determine project
profitability
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4-3 A cost object is anything for which a cost is computed. Examples of cost
objects are activities, products, product lines, customers, patients,
departments, or even entire organizations.
4-4 The defining characteristic of a consumable (flexible) resource is that its cost
depends on the amount of resource that is used. Examples of consumable
resources are wood in a furniture factory, fabric in a clothing factory, and iron
ore in a steel mill. The cost of a consumable resource is often called a
variable cost because the total cost depends on how much of the resource is
consumed. The contrasting defining characteristic of a capacity-related
resource is that its cost depends on the amount of resource capacity that is
acquired and not on how much of the capacity is used. As the size of a
proposed factory or warehouse increases, the associated capacity-related cost
will increase. Examples of capacity-related costs are depreciation on
production equipment (the capacity-related resource) and salaries paid to
employees (the capacity-related resource) in a consultancy. The cost of a
capacity-related resource is often called a fixed cost because the cost of the
resource is independent of how much of the resource is used.
4-5 Direct and indirect costs are specified in relation to distinct cost objects. A
direct cost is a cost that is uniquely and unequivocally attributable to a single
cost object. If the cost fails the test of being direct it is classified as indirect
with respect to the designated cost object. For example, if the cost object is a
unit of product, then direct material (e.g., wood, steel) and direct labor are
direct costs, and manufacturing overhead costs (e.g., factory rent,
supervisors salaries) are indirect costs. However, if a department within a
plant is the chosen cost object, then the department managers salary is a
direct cost for the department (assuming the manager only manages that
department) and the cost of heat for the plant is an indirect cost.
4-6 From the time of the Industrial Revolution until the early 20th century,
manufacturing operations were mainly labor paced and direct costs comprised
the majority of product costs. Since then indirect costs in the form of
automation have gradually replaced labor costs and, for many products, are
now the major component of total product costs. This increased use of
indirect costs in manufacturing has increased the need for costing systems to
deal adequately with indirect manufacturing costs.
4-7 In the context of computing a predetermined indirect cost rate, a cost driver is
the basis used to allocate indirect costs to production. Once the cost driver is
chosen, cost analysts divide expected indirect factory costs by the number of
cost driver units to compute the predetermined indirect cost rate. Cost
analysts try to choose a cost driver that best explains the long-run behavior of
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Chapter 4: Accumulating and Assigning Costs to Products
the indirect cost. In a labor-intensive environment the cost driver of indirect

costs in the factory might be labor hours as factory workers use factory space,
utilities, and other overhead resources to make products. In a machine-
intensive environment the cost driver of indirect costs in the factory might be
machine hours because machines consume electricity, lubricant, and other
supplies to make products.
4-8 In practice, predetermined indirect cost rates are commonly called

predetermined overhead rates or cost driver rates.
4-9 Costs need to be estimated for individual jobs in order to bid for them and to
price them competitively. Costs may differ across individual jobs because
jobs may differ in their materials content, the hours of labor required to
manufacture them, and in the demand they place on capacity-related
resources. Estimated costs are also useful for comparison with actual costs
for management control purposes.
4-10 Indirect cost rates (also called predetermined indirect cost rates,
predetermined overhead rates, or cost driver rates) are determined by dividing
expected indirect factory costs by the number of cost driver units.
4-11 Overhead cost for a job is estimated by multiplying the cost driver rate(s) by
the number of units of the cost driver(s) associated with the job.
4-12 Indirect cost pools collect overhead costs into separate groups, for each of
which a separate cost driver rate is associated.
4-13 Most organizations use multiple indirect cost pools in order to improve
costing. Cost distortions arise when an indirect cost pool includes costs with
different cost drivers and where different products use the capacities
underlying the indirect costs differentially. (The increase in measurement
costs for a more detailed cost system, however, must be traded off against the
benefit of increased accuracy in estimating product costs.)
4-14 Determination of cost driver rates based on planned or actual short-term

usage will result in rates that are too high in periods of low demand and that
are too low in periods of high demand. Thus, product costs are distorted in
such a costing system. If management uses cost-plus pricing, a death spiral
can result, as follows. If expected demand goes down, the cost driver rate will
increase, causing the cost-plus price to increase. Increasing prices cause
demand to fall, which leads to further price increases as the cost driver rate
increases the cost-plus price.
104
4-15 Unlike direct material costs and direct labor costs, overhead costs cannot be
traced easily to each job. When actual costs are recorded for a job during the
course of a fiscal period, the total overhead costs for the period and
consequently, the actual cost driver rate is not yet determined. Therefore,
costs are applied to jobs using predetermined rates.
4-16 Yes. A separate cost driver rate should be determined for each cost pool when
multiple cost drivers (where cost driver refers to a cause of costs, as
discussed in Chapter 3) are involved, or else job cost estimates may be
distorted. The increase in measurement costs for a more detailed cost system,
however, must be traded off against the benefit of increased accuracy in
estimating product costs. Though not covered in the textbook, students may
note that if the different cost drivers vary together in the same proportion (for
example, if machine hours and direct labors hours are used in the same
proportions as the total number of units increases), then any one of them will
be sufficient.
4-17 The three options for dealing with the difference between actual and applied
capacity (overhead) costs are: (1) Charge the difference to cost of goods sold;
(2) Prorate the difference to work in process, finished goods, and cost of goods
sold; (3) Decompose the difference into two parts: the difference between
actual and budgeted indirect costs, and the difference between budgeted and
applied indirect costs.
4-18 Computing the cost driver rate by using the planned level of the cost driver
will result in rates that are too high in periods of low demand and that are too
low in periods of high demand. If management uses cost-plus pricing, a death
spiral can result, as follows. If expected demand goes down, the cost driver
rate will increase, causing the cost-plus price to increase. Increasing prices
cause demand to fall, which leads to further price increases as the cost driver
rate increases the cost-plus price. This cycle can continue until there is no
further demand, hence the term death spiral.
4-19 Estimating practical capacity begins with an estimate of theoretical capacity.

Suppose a machine is nominally available for 100 hours each week. That is,
theoretical capacity is 100 hours each week. A common rule of thumb is to
allow about 20% of theoretical capacity or, in this case, 20 hours for activities
such as maintenance, setup, and repair. In the case of labor hired for the year,
theoretical capacity is 2,080 hours (52 weeks, 40 hours per week). However,
workers on average have 3 weeks off and, with breaks, work about 35 hours
per week. Therefore, practical capacity is 1,715 hours (49 weeks, 35 hours
per week). In this case practical capacity is about 82% (1,715/2,080) of
105
theoretical capacity. Alternatively, for both machines and labor, detailed

records of nonproductive time may provide a more accurate level of practical
capacity.
4-20 Conversion costs are the costs of converting raw materials into finished
products. They include all manufacturing costs that are not direct materials
costs; that is, conversion costs consist of production labor and factory
overhead costs.
4-21 Continuous processing plants are characterized by the fact that production
flows continuously, semi-continuously, or in large batches from one process
stage to the next. At each successive process stage, further progress is made
toward converting the raw materials into finished products. Therefore, the
product costing system must accumulate conversion costs assigned to
individual products for successive process stages. Product costs must also
reflect the input materials in each process stage.
The total cost of all products is determined by adding up all material and
conversion costs used to produce the products and then dividing by the
number of products produced to get a cost per unit. More specifically, the
steps are:
1. Identify the physical flow of units
2. Compute the equivalent units for materials and conversion costs
3. Identify the costs of materials and conversion costs
4. Compute the cost per equivalent unit.
4-22 Multistage process costing systems have the same objective as job order
costing systems. Both types of systems assign material, labor, and
manufacturing overhead costs to products to determine product costs. The
two types of systems differ, however, on some dimensions. In a job order
environment, production requirements vary across different jobs, so
production occurs job by job and costs are measured for individual jobs. In a
multistage process environment, production requirements are homogeneous
across products or jobs, so production occurs continuously, semi-
continuously, or in large batches, and costs are measured for individual
process stages.
4-23 Production departments are those directly responsible for transforming raw
materials into finished products or for providing services for customers.
Service departments do not directly produce goods or services for customers,
but instead provide services to the departments or activities that produce
106
goods or services. In a manufacturing setting, production engineering and

machine maintenance are service departments for the production departments.
EXERCISES
4-24 (a) Famous Flanges previous cost driver rate was $4,000,000 100,000 = $40 per
machine hour. With the drop in demand, the cost driver rate is now
$4,000,000 80,000 = $50 per machine hour. The company will consequently
raise its prices because the products will have higher reported costs. If demand
decreases further and the company continues to use the same method to
determine its cost driver rate, the rate will continue to increase, and the
company will want to raise its prices even more. However, the rising
prices may contribute to further declines in demand, leading the company
into a downward spiral.
(b)Famous Flange should use the practical capacity quantity of machine hours
to determine the cost driver rate in order to avoid the fluctuations
described in part (a) and to understand the cost driver rates at the point
where the cost of the resources provided (the numerator) is matched with
the practical capacity usage provided (the denominator). If resource usage
is less than practical capacity, the company should monitor the cost of
unused capacity. Famous Flange may be able to reduce the capacity costs
or to find other profitable uses for the capacity.
4-25 The practical capacity number of machine hours per month is (6.5 hours per
shift) (2 shifts per day) (22 days per month) (40 machines) = 11,440.
4-26 The practical capacity number of labor hours per year is (34 hours per worker
per week) (30 workers per shift) (2 shifts per day) (48 weeks per year)
= 97,920.
107
4-27 (a) Direct material Quantity Price Amount

Part A327 1,000 units $60 $60,000
Part B149 1,000 units 120 120,000
Total direct material cost $180,000
Direct labor Hours Rate Amount
Assembly 6,000 $10 $60,000
Inspection 1,000 12 12,000
Total direct labor cost 7,000 $72,000
Overhead costs Amount
7,000 Direct labor hours
$5 per hour $35,000
Total cost $287,000
Number of units produced 1,000
(b) Selling price per monitor $350
Cost per monitor 287
Gross margin per monitor $ 63
4-28 Direct material Quantity Price Amount

Engine oil 11 ounces $2 $22
Lubricant 2 ounces 3 6
Total direct material cost $28
Direct labor Hours Rate Amount
Direct labor 3 $15 $45
Overhead costs Amount
3 Direct labor hours $10 per hour $ 30
Total cost $103
4-29 (a) Cost driver rate:
$5,000,000
$2,500,000 direct labor cost
2 direct labor cost
108
(b) Consulting engagement cost:
Labor cost $25,000

Overhead cost
2 labor cost 50,000
Total cost $75,000
4-30 (a) Cost driver rate for the machine department:
$350,000/14,000 machine hrs = $25/machine hr
Cost driver rate for the finishing department:
$280,000/$350,000 = 80% of DL cost
(b)
Machining Finishing
Department Department Total
Direct materials cost $8,000 $1,400 $9,400
Direct labor cost 250 800 1,050
Manufacturing overhead 1,250a 640b 1,890
Total costs of Job 101 $9,500 $2,840 $12,340
a
$1,250 = $25 50
b
$640 = 80% of 800
4-31 (a) Plantwide cost driver rate:
$60,000
4,000 direct labor hours
$15 per direct labor hour
(b) Departmental cost driver rates:
Cutting Department:
$25,000
4,000 machine hours
$6.25 per machine hour
109
Assembly Department:
$35,000
$11.67 per direct labor hour
(c) The company may favor the method in (b) if overhead costs in the
cutting department have a cause-and-effect relationship with machine
hours, while those in the assembly department have a cause-and-effect
relationship with direct labor hours. The company may use the method
in (a) because it is simpler than the method in (b), which is potentially
more accurate.
4-32 (a) Month Actual Machine Hours Monthly Overhead Costs

January 1,350 $51.85
February 1,400 $50.00
March 1,500 $46.67
April 1,450 $48.28
May 1,450 $48.28
June 1,400 $50.00
July 1,400 $50.00
August 1,400 $50.00
September 1,500 $46.67
October 1,600 $43.75
November 1,600 $43.75
December 1,600 $43.75
Total Hours 17,650
(b) The cost driver rate should be determined as the ratio of the estimated
cost accumulated in the cost pool to the practical capacity of the cost
driver (the basis for assigning overhead). For Morrisons machine-
related overhead costs, the computation is:
$70,000 12 months
1,500 machine hours 12 months
If the cost driver rate is based instead on actual or budgeted activity

quantities that fluctuate over time, then overhead costs assigned to
products will be understated in periods of high demand and overstated
in periods of low demand, as shown in part (a). If Morrisons overhead
costs are caused by multiple variables (cost drivers, as defined in
110
Chapter 3), the company may develop a more accurate cost system by
using multiple cost driver rates.
4-33 Ingredient A: $0.40 10,000 $4,000

Ingredient B: $0.60 20,000 12,000 $16,000
Conversion costs: $0.55 30,000 $16,500
Total costs $32,500
Number of gallons of blended vegetable juice 27,000
Cost per gallon of blended vegetable juice $1.204
4-34 Direct materials $232,000

Direct labor 120,000
Overhead costs 60,000
Disposal costs of waste product 20,000
Total costs $432,000
Number of pounds of Goody 200,000
Cost per pound of Goody $2.16
4-35
Materials Conversion
Completed and transferred out
gallons 6000 100% 6000 6000
Ending work-in-process gallons 4000 25%; 4000 10% 1000 400
Equivalent units of production 7000 6400
4-36 (a) Allocation of machine setup costs:

300
Assembly Dept.: $40,000 $30,000
300 100
100
Finishing Dept.: $40,000 $10,000
300 100
(b) Allocation of inspection costs:

200
Assembly Dept.: $15,000 $4,285.71
200 500
500
Finishing Dept.: $15,000 $10,714.29
200 500
111
4-37 Service Departments Production Departments

S1 S2 P1 P2
Overhead costs
$65,000 $55,000 $160,000 $240,000
Allocation of S1 costs (65,000) 15,000 20,000 30,000
Allocation of S2 costs (70,000) 33,600 36,400
Total allocated
overhead costs $0 $0 $213,600 $306,400
4-38 (a) P1 P2
30 30
S1: $300,000 $150,000 $300,000 $150,000
30 30 30 30
50
25 $300,000 $200,000
S2: $300,000 $100,000 25 50
25 50
$250,000 $350,000
(b) S1 S2 P1 P2
Directly
identified
costs $300,000 $300,000
Allocation of
S1 costs ($300,000) 120,000 $90,000 $90,000
Allocation of
S2 costs (420,000) 140,000 280,000
Totals $0 $0 $230,000 $370,000
(c) S1 $300,000 0.25S2

S2 $300,000 0.4S1
112
Therefore,
S1 $300,000 0.25$300,000 0.4S1

$375,000 01
. S1
0.9S1 $375,000
$375,000
S1 $416,667
0.9
S2 $300,000 0.4 $416,667 $466,667
Allocation of S1 and S2 costs to P1 and P2
P1 P2
S1: $416,667 30% $125,000 $416,667 30% $125,000
S2: $466,667 25% $116,667 $466,667 50% $233,333
$241,667 $358,333
The summary below incorporates the allocation of 0.25 S2 =

$116,667 to S1 and 0.4 S1= $166,667 to S2.
S1 S2 P1 P2
Directly identified $300,000 $300,000
costs
Allocation of S1 costs (416,667) 166,667 $125,000 $125,000
Allocation of S2 costs 116,667 (466,667) 116,667 233,333
Total $0 $0 $241,667 $358,333
113
PROBLEMS
4-39 (a) Plantwide cost driver rate = $15,000,000/100,000 machine hours
= $150 per machine hour
Applied overhead = $150 90,000 = $13,500,000
(b) Actual overhead applied overhead
= $14,200,000 $13,500,000 = $700,000
Overhead is underapplied, so an adjustment will be made to increase

the previously recorded cost of goods sold by $700,000.
(c) Work in process, finished goods, and cost of goods sold will be
increased by $700,000 times 20%, 45%, and 35%, respectively. These
increases are $140,000, $315,000, and $245,000, respectively.
(d) Actual overhead estimated overhead
= $14,200,000 $15,000,000 = $800,000
Estimated overhead applied overhead
= $15,000,000 $13,500,000 = $1,500,000
(e) The approach in part (d) develops information that helps identify the
reasons for the difference between actual and applied costs, and is
therefore relevant for internal decision making purposes. The difference
between actual and estimated overhead cost is $800,000. The lower
actual cost creates a favorable effect on income, relative to the
budgeted cost. The difference between estimated and applied overhead
cost results from idle capacity. Recall that the machine hour practical
capacity was 100,000 while the actual machine hours used totaled
90,000. This means that idle capacity was 10,000 (100,000 90,000)
machine hours with an associated idle capacity cost of $1,500,000
(10,000 $150). Management will likely seek explanations for why
actual overhead differed from estimated overhead, and why applied
overhead differed from estimated overhead. In response to these
explanations, management might revise the overhead budget or explore
new product opportunities to use the idle capacity.
114
4-40 (a) Cost driver rate:
Salaries of mechanics $120,000

Fringe benefits 54,000
General and administrative 18,000
Depreciation 42,000
Total conversion costs $234,000
Billable hours 4,500
Conversion cost per billable hour $52.00
Markup 1.25
Cost driver rate $65.00 per DL hr
(b) Job 254:
Job 254
Materials $47.40
Conversion cost plus markup: 0.7 DL hours $65 45.50
Total price $92.90
115
4-41
Job 101 Job 102 Job 103
Beginning Work in Process $25,500 $32,400 $0
Department 1 Driver Driver Driver

Direct materials $40,000 $26,000 $58,000
Direct labora 500 DL hrs 6,000 400 DL hrs 4,800 300 DL hrs 3,600
Manufacturing
overheadb $40,000 DM 60,000 $26,000 DM 39,000 $58,000 DM 87,000

Direct materials $3,000 $5,000 $14,000
Manufacturing
overheadb 1200 mh 9,600 1500 mh 12,000 2700 mh 21,600

Direct materials $0 $0 $0
Manufacturing
overheadb $22,500 DL 45,000 $27,000 DL 54,000 $37,500 DL 75,000
Total Costs $215,200 $204,700 $303,000
a
Direct labor rates:
Department 1: $12 per DL hr
b
Cost driver rates:
Department 1: 150% of DM cost
Department 2: $8 per machine hr
Department 3: 200% of DL cost
(a) Total cost of completed Job 101 $215,200
(b) Total cost of completed Job 102 $204,700
(c) Work-in-process for Job 103 at June 30 $303,000
116
4-42 (a) Allocating costs in proportion to the number of actual passengers can
be justified by the argument that the service center costs should be
spread equally over all passengers because each passenger uses
approximately the same amount of service center resources.
Week Boston Cambridge

1 $4,800 $2,400
2 4,500* 2,700
3 5,118 2,482
4 5,200** 2,600
5 5,100 2,100
1,500
* 7,200 $4,500
2 ,400
1,700
** 7,800 $5,200
2 ,550
(b) Another alternative is to allocate $3 = $7,200/2,400 per passenger.

Using this approach to allocate service center costs is justified by the
argument that the service center costs are caused primarily by the
capacity that is made available rather than the actual usage of the
committed resources.
Week Boston Cambridge Unallocated

1 $4,800* $2,400
2 4,500 2,700
3 4,950 2,400 $250
4 5,100 2,550 150
5 5,100 2,100
* 1,600 passengers $3 per passenger
Another alternative is to allocate normal costs 2:1 (1,600:800) based

on long run demand and additional help costs in the proportion of
additional demand. This method best reflects the factors that cause the
costs to be incurred.
117
Week Boston Cambridge

1 $4,800 $2,400
2 4,800 2,400
3 5,200* 2,400
4 5,200** 2,600
5 4,800 2,400
* 5,200 = 4,800 + (7,600 7,200)
7,800 (1,700 1,600)

** 5,200
(1,700 1,600) (850 800)
$120,000 $160,000

(8,000 12,000) direct labor hours
$280,000

4-43 (a) Plantwide cost driver rate
Job Cost Sheet: Job #714

Direct materials
Milling $800
Assembly 50
Total direct material cost $850
Direct labor
Milling $100
Assembly 600
Total direct labor cost 700
Manufacturing Overhead
50 Direct labor hours $14 per hour 700
Total cost $2,250
118
$120,000
Cost driver rate Milling
(b) 12,000 machine hours
$10 per machine hour
$160,000
Cost driver rate Assembly
Job Cost Sheet: Job #714

Direct materials
Milling $800
Assembly 50
Total direct material cost $850.00
Direct labor
Milling $100
Assembly 600
Total direct labor cost 700.00
Overhead
Milling: 18 machine hours $10 per hour $180.00
Assembly: 40 direct labor hours $13.33 per hour 533.20
Total overhead cost 713.20
Total cost $2,263.20
(c)
Part (a) Part (b)
Manufacturing cost $2,250.00 $2,263.20
25% markup 562.50 565.80
Bid price $2,812.50 $2,829.00
(d) The company may favor the method in (b) if overhead costs in the
milling department have a cause-and-effect relationship with machine
hours, while those in the assembly department have a cause-and-effect
relationship with direct labor hours. In this case, the computed total
manufacturing cost in part (a) is of similar magnitude to the cost in part
(b), and therefore the bid prices are also of similar magnitude. Given
this result, one might be inclined to use the simpler method in part (a)
rather than the more accurate but more complex method in part (b).
However, comparisons across different products may produce greater
differences in computed costs and bid prices.
119
4-44 (a) Cutting Grinding Drilling Total

Overhead
cost $504,000 $2,304,000 $2,736,000 $5,544,000
Direct
labor hours 60,000 96,000 144,000 300,000
Plantwide cost driver rate:
$5,544,000
Overhead cost applied to Job ST101:
$18.48 (2,000 + 2,500 + 3,000) = $138,600.
(b) Cost driver rate: Cutting
$504,000
960,000
Cost driver rate: Grinding
$2,304,000
Cost driver rate: Drilling
$2,736,000
Overhead cost applied to Job ST101:
Dept Rate Units of Driver Used Overhead Cost

Cutting $0.525 20,000 MH $10,500
Grinding $24.00 2,500 DLH 60,000
Drilling $19.00 3,000 DLH 57,000
$127,500
(c) The company may favor departmental cost driver rates if overhead costs in
the cutting department have a cause-and-effect relationship with machine
120
hours, while those in the grinding and drilling departments have a cause-
and-effect relationship with direct labor hours. The company may use a
plantwide cost driver rate because it is simpler than using multiple
departmental rates, though the departmental rate method is potentially
more accurate.
4-45 (a) Cost driver rate for machining:
$500,000
$25 per machine hour
20,000 machine hours
Cost driver rate for finishing:
$400,000
80% of direct labor cost.
$500,000
(b) Machining Finishing

Department Department Total
Direct material cost $12,000 $2,000 $14,000
Direct labor cost 300 1,200 1,500
Manufacturing 2,000a 960b 2,960
overhead
Total costs of Job 511 $14,300 $4,160 $18,460
a
2 ,000 $25 80
b $960 80% of 1,200
(c) Gonzalez Company likely believes that its manufacturing overhead costs
are driven by different factors in each manufacturing department.
Specifically, overhead costs in the machining department have a cause-
and-effect relationship with machine hours, while those in the finishing
department have a cause-and-effect relationship with direct labor costs.
121
4-46 (a)
Mixing and Reaction Pulverizing
Blending Chambers and Packing
Total conversion costs $424,600 $1,551,000 $559,900
Total number of process hours 8,760 35,040 8,760
Conversion cost per process hour $48.470 $44.264 $63.916
(b)
Costs C206 C208
Materials:
Raw materials $1,488.00 $1,488.00
Packing materials $175.20 $280.80
$1,663.20 $1,768.80
Conversion costs:
Mixing and blending: 6 hrs $48.470 290.82 290.82
Reaction chamber: 24 hrs $44.264 1,062.34 1,062.34
Pulverizing and packing: 4 hrs $63.916, 255.66
8 hrs $63.916 511.33
Total conversion costs $1,608.82 $1,864.49
Total cost $3,272.02 $3,633.29
4-47 (a)
Completed and
transferred out units 8000 100% 8,000 8,000
Ending WIP units 4000 40%; 4000 25% 1,600 1,000
EUs of production 9,600 9,000
(b)
Materials Conversion Total
Costs, beginning of October $1,050 $3,240 $4,290
Added during October 8,200 22,620 30,820
To be accounted for $9,250 $25,860 $35,110
EUs of production 9,600 9,000
Cost per equivalent unit $0.96 $2.87 $3.83
(c)
122
Costs, beginning of October $1,050 $3,240
Corresponding equivalent units 1,400 1,200
Cost per equivalent unit $0.75 $2.70
Costs added during October $8,200 $22,620

Corresponding equivalent units* 8,200 7,800
Cost per equivalent unit $1.00 $2.90
*Equivalent units: Materials Conversion

Completed during October from
beginning WIP 2000 30% = 600 2000 40% = 800
Equivalent units in ending WIP 4000 40% = 1600 4000 25% = 1000
Started and completed during
October:
(12,000 2,000 4,000) 100% 6000 6000
Total EU s in October 8200 7800
The costs per equivalent increased in October (materials increased

from $0.75 to $1 and conversion cost increased from $2.70 to $2.90).
The weighted average method produces weighted average equivalent
unit costs of $0.96 and $2.87 for materials and conversion cost,
respectively.
123
4-48 (a) Service Departments Production Departments

Personnel Maintenance Machining Assembly
Directly identified
costs $100,000 $200,000 $400,000 $300,000
Allocation of
Personnel Dept.
costs (100,000) 11,111a 88,889b
Allocation of
Maintenance
Dept. costs (200,000) 176,471c 23,529d
$0 $0 $587,582 $412,418
5 7,500
a
$100,000 c
$200,000
45 8,500
40 1,000
b
$100,000 d
$200,000
45 8,500
$587,582

(b) Cost driver rate: Machining 10,000 machine hours
$412,418

Cost driver rate: Assembly 10,000 direct labor hours
Direct materials and labor costs: $ 450.00
Overhead costs from Machining Department
($58.7582 3 machine hours) 176.27
Overhead costs from Assembly Department
($41.2418 5 direct labor hours) 206.21
Total unit cost $ 832.48
Markup (30%) 249.74
Bid price $1,082.22
124
(c) Service Departments Production Departments

Personnel Maintenance Machining Assembly
Directly
identified costs $100,000 $200,000 $400,000 $300,000
Allocation of
Maintenance
Dept. costs 30,000a (200,000) 150,000b 20,000c
Allocation of
Personnel
Dept. costs (130,000) 14,444d 115,556e
$0 $0 $564,444 $435,556
1,500 5
a $200,000 d
$130,000
10,000 45
7 ,500 40
b
$200,000 e
$130,000
10,000 45
1,000
c
$200,000
10,000
$564, 444

10, 000machinehours
(d) Cost driver rate: Machining $56. 4444 permachinehour
$435, 556

10, 000directlaborhours
Cost driver rate: Assembly $43.5556perdirectlaborhour
Direct materials and labor costs: $450.00

Overhead costs from Machining Department
($56.4444 3 machine hours) 169.33
Overhead costs from Assembly Department
($43.5556 5 direct labor hours) 217.78
Total unit cost $837.11
Markup (30%) 251.13
Bid price $1,088.24
4-49 (a) Service Departments Production Departments

125
Maintenance Grounds Fabricating Assembly

Directly
Allocation of
Maintenance
Dept. costs (18,000) 12,000a 6,000b
Allocation of
Grounds Dept.
costs (14,000) 6,000c 8,000d
$0 $0 $63,000 $39,000
12,000 15,000
a
$18,000 c
$14,000
18,000 35,000
6,000 20,000
b
$18,000 d
$14,000
18,000 35,000
(b) Service Departments Production Departments

Directly
Allocation of
Maintenance
Dept. costs (18,000) 1,385a 11,077b 5,538c
Allocation of
Grounds
Dept. costs (15,385) 6,594d 8,791e
$0 $0 $62,671 $39,329
1,500 15,000
a
$18,000 d
$15,385
19,500 35,000
12 ,000 20,000
b
$18,000 e
$15,385
19 ,500 35,000
6,000
c
$18,000
19,500
126
(c) Service Departments Production Departments

Directly
identified
costs $18,000.0000 $14,000.0000 $45,000.0000 $25,000.0000
Allocation of
Maintenance
Dept. costs
($19,221.9959) ($19,221.9959) 1,478.6151a 11,828.9206b 5,914.4603c
Allocation of
Grounds
Dept. costs
($15,478.6151) 1,221.9959d (15,478.6151) 6,109.9796e 8,146.6395f
$0 $0 $62,938.9002 $39,061.0998
Note: These calculations were done by spreadsheet and rounded.
1,500 3,000
a $19,221.9959 d $15,478.6151
19,500 38,000
12,000 15,000
b $19,221.9959 e $15,478.6151
19,500 38,000
6,000 20,000
c $19,221.9959 f $15,478.6151
19,500 38,000
3,000
M $18,000 G
38,000
1,500
G $14,000 M
19,500
Therefore,
3,000 1,500
M $18,000 $14,000 M
38,000 19,500
0.993927126 M = $19,105.26316
M = $19,221.995927
1,500
G $14,000 $19,221.995927
19,500
G = $15,478.61507
4-50 (a) Service Dept. Cost Allocation: Direct Method

Service Departments Production Departments
Maintenance Power Casting Assembly
127
Directly
identified
costs $750,000 $450,000 $150,000 $110,000
Allocation of
Maint. Dept.
Costsa (750,000) 500,000a 250,000
0a0a
Allocation of
Power Dept.
Costsb (450,000) 250,000 200,000
$0 $0 $900,000 $560,000
a
80,000 40,000
750,000 500,000; 750,000 250,000
80,000 40,000 80,000 40,000
b
200,000 160,000
450,000 250,000; 450,000 200,0
200,000 160,000 200,000 160,000
$900,000
Cost driver rate: Casting
80,000 machine hours
$560,000
Cost driver rate: Assembly
128
Direct labor and material costs $32.000

Overhead costs:
Casting (1 $11.25) $11.250
Assembly (0.5 $9.33) 4.665 15.915
Unit cost $47.915
Number of units per month 1,000.000
Total manufacturing costs per month $47,915.000
Mark up (25%) $11,978.750
Bid price (per month) $59,893.750
(b) Service Dept. Cost Allocation: Sequential Method
Service Departments Production Departments

Maintenance Power Casting Assembly
Directly
identified
costs $750,000 $450,000 $150,000 $110,000
Allocation of
Maint. Dept.
costs (750,000) $300,000 300,000 150,000
Allocation of
Power Dept.
costs (750,000) 416,667 333,333
$0 $0 $866,667 $593,333
$866, 667

80, 000
Cost driver rate: Casting $10.833 per machine hour
$593, 333

60, 000
Cost driver rate: Assembly $9.889 per labor hour
129

Overhead costs:
Casting (1 $10.833) $10.833
Assembly (0.5 $9.889) 4.944 15.777
Unit cost $47.777
Mark up (25%) $11,944.250
M $750,000 01
.P
(c)
P $450,000 0.4 M
Therefore,
M = $750,000 + 0.1 (450,000 + 0.4 M)
M = $795,000 + 0.04 M
0.96 M = $795,000
$795,000
M $828,125
0.96
P 450,000 0.4 $828,125 $781,250
Casting Assembly
Directly
identified
costs $150,000 $110,000
Allocation
of Maint.
Dept. costs $828,125 40% = $331,250 $828,125 20% = $165,625
Allocation
of Power
Dept. costs $781,250 50% = $390,625 $781,250 40% = $312,500
$871,875 $588,125
130
$871, 875

80, 000
Cost driver rate: Casting $10.8984 per machine hour
$588,125

60, 000
Cost driver rate: Assembly $9.8021 per labor hour

Overhead costs:
Casting (1 $10.8984) $10.8984
Assembly (0.5 $9.8021) 4.9011 15.7995
Unit cost $47.7995
Mark up (25%) $11,949.8750
CASES
4-51 (a) The plantwide cost driver rate is $122,000/(2,400 + 1,440 + 720 +320)
= $25.00 per direct labor hour
Unit gross margins:

A B C D
Selling Price $ 15.00 $18.00 $20.00 $ 22.00
Materials Cost 4.00 5.00 6.00 7.00

Labor Cost 7.20 5.40 3.60 2.40
Overheada 6.00 4.50 3.00 2.00
Total Cost $ 17.20 $14.90 $12.60 $ 11.40
Gross Margin $ (2.20) $ 3.10 $ 7.40 $ 10.60

a
131
Total gross margins:

A B C D Total
Selling Price $ 150,000 $ 144,000 $120,000 $88,000 $502,000
Materials Cost 40,000 40,000 36,000 28,000 144,000

Labor Cost 72,000 43,200 21,600 9,600 146,400
Overhead 60,000 36,000 18,000 8,000 122,000
Total Cost 172,000 119,200 75,600 45,600 412,400
Gross Margin $ (22,000) $ 24,800 $ 44,400 $42,400 $ 89,600
(b) After dropping product A, the plantwide cost driver rate is $122,000/
(1,440 + 720 +320) = $49.1935 per direct labor hour
Unit gross margins:

B C D
Selling Price $18.00 $20.00 $ 22.00
Materials Cost 5.00 6.00 7.00

Labor Cost 5.40 3.60 2.40
Overheada $ 8.85 $ 5.90 $ 3.94
Total Cost $19.25 $15.50 $ 13.34
Gross Margin $ (1.25) $ 4.50 $ 8.66

a

B C D Total
Selling Price $ 144,000 $120,000 $88,000 $352,000
Materials Cost 40,000 36,000 28,000 104,000

Labor Cost 43,200 21,600 9,600 74,400
Overhead 70,839 35,419 15,742 122,000
Total Cost 154,039 93,019 53,342 300,400
Gross Margin $ (10,039) $ 26,981 $34,658 $ 51,600
132
(c) After further dropping product B, the plantwide cost driver rate is
$122,000/(720 +320) = $117.3077 per direct labor hour
Unit gross margins:

C D
Selling Price $20.00 $ 22.00
Materials Cost 6.00 7.00

Labor Cost 3.60 2.40
Overheada $14.08 $ 9.38
Total Cost $23.68 $ 18.78
Gross Margin $ (3.68) $ 3.22

a

C D Total
Selling Price $120,000 $88,000 $208,000
Materials Cost 36,000 28,000 64,000

Labor Cost 21,600 9,600 31,200
Overhead 37,53
84,462 8 122,000
Total Cost 75,13
142,062 8 217,200
Gross Margin $ (22,062) $ 12,862 $ (9,200)
Now product C appears unprofitable. After further dropping product C,

the plantwide cost driver rate is $122,000/320 = $381.25 per direct
labor hour
133
Unit gross margin for product D, the only remaining product:

D
Selling Price $ 22.00
Materials Cost 7.00

Labor Cost 2.40
Overheada $ 30.50
Total Cost $ 39.90
Gross Margin $(17.90)

a
Total gross margin for D and for the company:

D
Selling Price $88,000
Materials Cost 28,000

Labor Cost 9,600
Overhead 122,000
Total Cost 159,600
Gross Margin $(71,600)
(d) Youngsborough has encountered a type of death spiral by using

planned levels of direct labor hours in the denominator for the cost
driver rates. In Youngsboroughs situation, the capacity-related
overhead costs are fixed. Dropping unprofitable product A made the
cost driver rate increase, in turn making product B look unprofitable.
This cycle continued until Youngsborough had no products that
appeared profitable.
This situation would likely have been avoided if Youngsborough had

used practical capacity direct labor hours in the denominator for the
cost driver rate. The cost driver rate would then have remained
unchanged when the company dropped product A, so the remaining
products would appear as profitable as they were before. Of course,
the company would then have underapplied overhead (idle capacity
costs), and should explore opportunities to use the idle capacity
productively, such as increasing sales of the remaining products or
developing new profitable products. Chapter 5 addresses activity-based
134
cost systems, which can more accurately assign overhead costs when
there is large variation in overhead resources that products require.
4-52 (a) Let salaries be denoted as follows: M = manager, S =senior mechanic,

and J = junior mechanic. The estimated total conversion (labor and
overhead) costs are:
Personnel costs (1M + 4S + 4J) + Capacity-related (fixed) costs

= $75,000 + (4 $65,000) + (4 $45,000) + $96,800
= $611,800.
Estimated total number of hours on customer jobs
8 1,750 95% 13,300 hours
Therefore, the cost driver rate

$611,800
$46 per hour
13,300 hours
Furthermore,
x
51.06 1 46
100
so x = 11.
135
(b) Class A Repairs Class B Repairs

Estimated
total
conversion
costs 611800
, 60% $367,080 611,800 40% $244,720
Estimated
total 1 1
hours on 13,300 6,650 13,300 6,650
customer 2 2
jobs
Conversion
cost
per
customer 367,080 $55.20 per hour 244,720
$36.80 per hour
job hour 6,650 6,650
Price per
hour $55.2 111
. $61.27 per hour $36.8 111
. $40.85 per hour
(c) Job 101: 4.5 A 1.5B

Job 102: 2B
(Note: A Class A repair hours, B Class B repair hours)
Under the present accounting system, costs charged to:
Job 101: 6 51. 06 $306. 36

Job 102: 2 51. 06 $102.12
Under the proposed accounting system, costs charged to:
Job 101: 4.5 61. 27 1.5 40.85 $337. 00

(if all the calculations are performed in Excel; with the rates shown, the
total is $336.99).
Job 102: 2 40.85 $81. 70
Therefore, under the present accounting system:
Job 101 is undercosted and underpriced.

Job 102 is overcosted and overpriced.
136
(d) Depending on competition for repairs, the proportion of Class B repairs

may increase and the proportion of Class A repairs may decrease
because of the price change.
(e) The current costing system is simple to administer and results in pricing
at a uniform labor rate (that includes coverage of overhead costs). The
proposed costing system more accurately reflects resource usage, but is
more complex to administer and to communicate to customers in
pricing.
137

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Atkinson, Solutions Manual t/a Management Accounting, 6E

4-2 Manufacturing organizations face greater challenges in product costing,

Service organizations that undertake major projects, such as in a consultancy,

the indirect cost. In a labor-intensive environment the cost driver of indirect

4-8 In practice, predetermined indirect cost rates are commonly called

4-14 Determination of cost driver rates based on planned or actual short-term

4-19 Estimating practical capacity begins with an estimate of theoretical capacity.

theoretical capacity. Alternatively, for both machines and labor, detailed

goods or services. In a manufacturing setting, production engineering and

4-27 (a) Direct material Quantity Price Amount

4-28 Direct material Quantity Price Amount

4-29 (a) Cost driver rate:

(b) Consulting engagement cost:

Labor cost $25,000

4-30 (a) Cost driver rate for the machine department:

$350,000/14,000 machine hrs = $25/machine hr

Cost driver rate for the finishing department:

$280,000/$350,000 = 80% of DL cost

4-31 (a) Plantwide cost driver rate:

(b) Departmental cost driver rates:

4-32 (a) Month Actual Machine Hours Monthly Overhead Costs

If the cost driver rate is based instead on actual or budgeted activity

4-33 Ingredient A: $0.40 10,000 $4,000

4-34 Direct materials $232,000

4-36 (a) Allocation of machine setup costs:

(b) Allocation of inspection costs:

4-37 Service Departments Production Departments

(c) S1 $300,000 0.25S2

S1 $300,000 0.25$300,000 0.4S1

The summary below incorporates the allocation of 0.25 S2 =

Allocation of S1 costs (416,667) 166,667 $125,000 $125,000

Allocation of S2 costs 116,667 (466,667) 116,667 233,333

Total $0 $0 $241,667 $358,333

4-39 (a) Plantwide cost driver rate = $15,000,000/100,000 machine hours

= $150 per machine hour

Applied overhead = $150 90,000 = $13,500,000

(b) Actual overhead applied overhead

= $14,200,000 $13,500,000 = $700,000

Overhead is underapplied, so an adjustment will be made to increase

(d) Actual overhead estimated overhead

= $14,200,000 $15,000,000 = $800,000

Estimated overhead applied overhead

= $15,000,000 $13,500,000 = $1,500,000

4-40 (a) Cost driver rate:

Salaries of mechanics $120,000

(b) Job 254:

Department 1 Driver Driver Driver

Department 2 Driver Driver Driver

Department 3 Driver Driver Driver

Total Costs $215,200 $204,700 $303,000

(a) Total cost of completed Job 101 $215,200

(b) Total cost of completed Job 102 $204,700

(c) Work-in-process for Job 103 at June 30 $303,000

Week Boston Cambridge

(b) Another alternative is to allocate $3 = $7,200/2,400 per passenger.

Week Boston Cambridge Unallocated

Another alternative is to allocate normal costs 2:1 (1,600:800) based

Week Boston Cambridge

7,800 (1,700 1,600)

Job Cost Sheet: Job #714

Job Cost Sheet: Job #714

4-44 (a) Cutting Grinding Drilling Total

Plantwide cost driver rate: