Question: TriTech Company has been allocating overhead to
TriTech Company has been allocating overhead to individual product lines based on each line’s relative shares of direct labor hours. For the upcoming year, the company estimated that manufacturing overhead will be $1,800,000 and estimated direct labor hours will be 120,000. The company also has the following estimates:
Among many other products, TriTech has two switches, Standard and Elite switches. Standard switches are a high-volume product that the company makes in large batches, while Elite switches are a specialty product that is fairly low in sales volume.
Information about Standard and Elite usage of the different activities follows:
Required:
a. Calculate the predetermined overhead rate based on direct labor hours (traditional allocation). Use this predetermined overhead rate to calculate the amount of overhead to apply to Standard and Elite switches, based on their usage of direct labor hours.
b. Calculate the individual ABC pool rates by taking the total amount of overhead for each cost pool and dividing that total by the total amount of activity for that pool. Allocate overhead to each of the two products using these three activity rates.
c. Compare the overhead calculated in part a to that calculated in part b. Why are they different? Which allocation method (traditional or ABC) most likely results in a better estimate of product cost?
Transcribed Image Text:
Total Amount Total Amount of Activity Cost Pool Cost Driver Maintenance costs Direct labor hours $ 700,000 120,000 Setup costs Engineering costs Number of setups Number of design changes 500,000 200 600,000 400 $1,800,000 Standard Elite Direct labor hours 3,000 300 Number of setups Number of design changes 14 20
> The Portland Brewing Company is a small craft brewer that produces five standard varieties of beer. The beers sell for $6 per six-pack, and the company currently sells 10,000 six-packs per month. The company is considering producing a seasonal beer that
> The Brindle Corporation is considering an initiative to assess customer profitability. The company’s CFO, John Bradley, stated his position as follows: “I strongly suspect that some of our customers are losers—in other words, they’re not covering product
> Consider a company that manufactures and sells personal computers (let’s call the company Bell Computers). Recently the company lowered its prices dramatically. The company is very efficient and needs only 5 days of inventory, collects its receivables wi
> Refer to the information in Exercise 8-17. For the coming year, the Triumph Corporation has told the Julius Company that it will be switched to an activity-based pricing system or it will be dropped as a customer. In addition to regular prices, Julius wi
> Selzer & Hollinger, a legal services firm, is considering outsourcing its payroll function. It has received a bid from ABC Payroll Services for $22,000 per year. ABC Payroll will provide all payroll processing, including employee checks and payroll tax r
> Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $300,000 per year. Highline states that its bid will cover all services and planting materials required to “k
> Joan Paxton, VP of marketing for Supertone Recording Equipment, has developed a marketing plan for presentation to the company’s president. The plan calls for television ads, something the company has never used. As part of her presenta
> Primus is a firm of consultants that focuses on process reengineering and quality improvement initiatives. Northwood Industries has asked Primus to conduct a study aimed at improving on-time delivery. Normal practice for Primus is to bill for consultant
> Five Star Tools is a small family-owned firm that manufactures diamond-coated cutting tools (chisels and saws) used by jewelers. Production involves three major processes. First, steel “blanks” (tools without the diamo
> Briefly explain how traditional methods of allocating overhead to products might under allocate costs to low-production-volume products.
> Explain one possible advantage to having two cost pools for each service department: one for variable costs and one for fixed costs.
> Is the following statement true: “Cost allocation refers to the process of assigning direct costs”? Discuss.
> How does activity-based costing differ from the traditional costing approach?
> The Eldon Company has two production plants. Recently, the company conducted an ABM study to determine the cost of activities involved in processing orders for parts at each of the plants. Required: How might an operations manager use this information
> Auburn Banking and Loan Company has a graphic design department that designs loan forms and other documents used by the company’s two subsidiaries, Auburn Personal Banking and Auburn Business Banking. For practical purposes, the costs of the graphic desi
> Morton Manufacturing allocates factory overhead using one cost pool with direct labor hours as the allocation base. Morton has two production departments, P1 and P2. The new accountant at Morton estimates that next year, the total factory overhead costs
> Auburn Banking and Loan Company has six service departments—human resources, duplicating, janitorial, accounting, graphic design, and food services—whose costs are allocated to the company’s two subsidiaries, Auburn Personal Banking and Auburn Business B
> Vance Mason, the manager of the service department at the Proton Electronics Company, is evaluated based on the profit performance of his department. The profit of the department is down this year because the service department’s share of allocated gener
> Custom Metal Works received an offer from a big-box retail company to purchase 3,000 metal outdoor tables for $220 each. Custom Metal Works accountants determine that the following costs apply to the tables: Direct material……………………..$125 Direct labor…………
> The building maintenance department for the Taylor Manufacturing Company budgets annual costs of $5,250,000 based on the expected operating level for the coming year. The costs are allocated to two production departments. Taylor is considering two alloca
> Auburn Banking and Loan Company has six service departments: 1. Human Resources (hires employees and manages benefits) 2. Duplicating (performs copy services) 3. Janitorial (provides routine cleaning services) 4. Accounting (provides accounting servi
> The Warner Development Company has a security department that provides security services to other departments within the company. Department managers are responsible for working with the head of security to ensure that their departments are protected. R
> The provost at San Francisco University is considering allocating the cost of campus security to the university’s various colleges (Arts and Science, Business, Engineering, Nursing, etc.). In this regard, she is considering three allocation bases: 1. Co
> Mansard Hotels has five luxury hotels located in Boston, New York, Chicago, San Francisco, and Los Angeles. For internal reporting purposes, each hotel has an income statement showing its revenue and direct expenses. Additionally, the company allocates t
> Explain how the allocation process can make a fixed cost appear variable, leading to a poor decision.
> When would activity-based costing give more relevant costs than traditional costing systems?
> Why might noncontrollable costs be allocated to a department?
> What is a responsibility accounting system?
> Why is it generally a good idea to allocate budgeted, rather than actual, service department costs?
> If a company is allocating cafeteria costs to all departments within the company, what allocation base might result in a cause-and-effect relationship?
> Explain what a cost objective is and give two examples.
> Eastside Medical Testing performs five different tests (T1–T5) to detect drug use. Most clients are referred to the company by potential employers who pay for the tests. Revenue and costs related to the tests, for the most recent fiscal
> QuantumTM manufactures electronic testing and measurement instruments. Many products are custom-designed with recent orders for function generators, harmonic analyzers, logic analyzers, temperature measurement instruments, and data-logging instruments. T
> The American Produce Company purchased a truckload of cantaloupes (weighing 4,000 pounds) for $900. American Produce separated the cantaloupes into two grades: superior and economy. The superior-grade cantaloupes had a total weight of 3,200 pounds, and t
> Bailey Products produces two joint products (A and B). Prior to the split-off point, the company incurs costs of $6,000. Product A weighs 30 pounds, and Product B weighs 120 pounds. Product A sells for $100 per pound, and Product B sells for $35 per poun
> Bailey Products produces two joint products (A and B). Prior to the split-off point, the company incurs costs of $6,000. Product A weighs 30 pounds, and Product B weighs 120 pounds. Product A sells for $100 per pound, and Product B sells for $35 per poun
> For each of the following situations, indicate a qualitative factor that should be considered prior to making a decision: a. A company that produces and sells bottled water is considering outsourcing its bottling operation. The company will still source
> Computer Village sells computer equipment and home office furniture. Currently the furniture product line takes up approximately 50 percent of the company’s retail floor space. The president of Computer Village is trying to decide wheth
> Imperial produces whirlpool tubs. Currently the company uses internally manufactured pumps to power water jets. Imperial has found that 40 percent of the pumps have failed within their 12-month warranty period, causing huge warranty costs. Because of the
> The Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below: Variable costs Cost per Unit Direct material…………………$ 950 Direct labor…………………………650 Variable o
> Go to the financial glossary Investorwords.com at www.investorwords. com and look up the phrases sunk cost and opportunity cost. Required: Why are sunk costs never relevant to a decision whereas opportunity costs are always relevant?
> Jordan Walken owns and operates an electronics store in Seattle, Washington. Her accountant has prepared a product line income statement that is reproduced below. (Jordan’s two lines are music devices and accessories.) In preparing the
> Describe a decision and provide an example of a fixed cost that is incremental in the context of the decision. Then provide an example of a fixed cost that is not incremental in the context of the decision.
> At RM Sharpton, the engraving department is a bottleneck, and the company is considering hiring an extra worker, whose salary will be $55,000 per year, to mitigate the problem. With the extra worker, the company will be able to produce and sell 7,000 mor
> Icon.com sells software and provides consulting services to companies that conduct business over the Internet. The company is organized into two lines of business (software and consulting), and profit statements are prepared as follows: Direct costs inc
> Each month, senior managers at Vermont Wireless Technologies review cost reports for the company’s various departments. The report for the human resource (HR) group for April is as follows: Jason Fox, the new vice president of operatio
> Primary Savings and Loan of Denver is conducting an ABM study of its teller operations. In this regard, the company has identified the following major activities performed by bank tellers: 1. Process deposits 2. Process withdrawals 3. Process requests
> Talbot Partners is a consulting firm with clients across the nation. Within the company is a travel group that arranges flights and hotel accommodations for its over 2,000 consultants. The cost of operating the travel group (excluding the costs associate
> The Riverdale Printing Company prints limited edition art books with production runs of 15,000 to 100,000. It has recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to one product, Ar
> Tannhauser Financial is a banking services company that offers many different types of checking accounts. It has recently adopted an activity-based costing system to assign costs to various types of checking accounts. The following data relate to one typ
> The Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake. It makes 12 different kinds of cheesecake as well as many other types of bakery items. It has recently adopted an activity-based costing system to assign manufacturin
> The Summit Manufacturing Company produces two products. One is a recreational whitewater kayak molded from plastic and designed to perform as a durable whitewater play boat. The other product is a high-performance competition kayak molded with high-tech
> Simon Products manufactures jewelry settings and sells them to retail stores. In the past, most settings were made by hand, and the overhead allocation rate in the prior year was $12 per labor hour ($2,700,000 overhead ÷ 225,000 labor hours). In the curr
> Snowcap Electronics is a manufacturer of data storage devices. Snowcap consists of two service departments (maintenance and computing) and two production departments (assembly and testing). Maintenance costs are allocated on the basis of square footage o
> Armstrong Industries produces electronic equipment for the marine industry. Armstrong has two service departments (maintenance and computing) and two production departments (assembly and testing). Maintenance costs are allocated on the basis of square fo
> World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service department costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departmen
> Pelton Instruments manufactures a variety of electronic instruments that are used in military and civilian applications. Sales to the military are generally on a cost-plus-profit basis with profit equal to 10 percent of cost. Instruments used in military
> Brennen produces a mint syrup used by gum and candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Brennen is currently bidding on a potential order from Quality Candy for 5,000 cases of syrup. The
> Binder Manufacturing produces small electric motors used by appliance manufacturers. In the past year, the company has experienced severe excess capacity due to competition from a foreign company that has entered Problems Binder’s market. The company is
> The Kiddo Company manufactures and ships children’s stuffed animals across the nation. The following are profit statements for the company’s two lines of business: Costs that are easily associated with each line of bu
> DataPoint, Inc. has decided to discontinue manufacturing its Quantum model personal organizer. Currently the company has a number of partially completed personal organizers on hand. The company has spent $110 per unit to manufacture these organizers. To
> E-Teller manufactures ATM machines. Recently the company has begun manufacturing and marketing a machine that can recognize customer fingerprints. Demand for this machine is very strong, and the chief executive officer of E-Teller is considering dropping
> Consider the information in Exercise 7-8 and identify the following statements as true or false. a. Supervisory salary is an avoidable cost if the company decides to buy the valves. b. Depreciation of building is an avoidable cost if the company decides
> The Tufanzi Furniture Company manufactures leather furniture. The manufacturing process uses a variety of metal pieces, such as brackets, braces, and casters. Carla Reid, the resource officer of Tufanzi, has been asked to determine whether it is advisabl
> The following are six cost pools established for a company using activity-based costing. The pools are related to the company’s products using cost drivers. Cost pools: 1. Inspection of raw materials 2. Production equipment repairs and maintenance 3.
> Reece Herbal Supplements purchases, in bulk, a variety of dietary supplements that the company bottles, packages, and ships to health-food stores and drugstores around the country. The company has a good reputation, and its products are in high demand. L
> At Dalton Playground Equipment, the powder-coating process is a bottleneck. Typically, it takes approximately 2 hours to switch between jobs. The time is spent cleaning nozzles and paint tanks and recalibrating equipment. Currently the company runs relat
> Northwest Minerals operates a mine. During July, the company obtained 500 tons of ore, which yielded 250 pounds of gold and 62,500 pounds of copper. The joint cost related to the operation was $500,000. Gold sells for $950 per ounce, and copper sells for
> Gavin West is a commercial fisherman, and he has just returned from a trip off the coast of Maine. He has calculated the cost of his catch as follows: Wages of deckhands…………………………………………….$35,000 Gavin’s wage……………………………………………………….…18,000 Food, medical sup
> Good Earth Products produces orange juice and candied orange peels. A 1,000-pound batch of oranges, costing $500, is transformed using labor of $50 into 100 pounds of orange peels and 300 pints of juice. The company has determined that the sales value of
> Sylvan Wood Products purchases alder logs for $100 per log. After the bark is stripped, the log is spun on a veneer cutter, which peels thin layers of wood (referred to as veneer) that are sold to furniture manufacturers for $150 per 3′ × 30′ sheet of ve
> Carpets Unlimited produces and sells three lines of carpet: economy, standard, and deluxe. Jeff Choi, the chief financial officer of the company, has prepared the following report on the profitability in the past year. In the report, fixed costs are allo
> Lennon Fans manufactures three model fans for industrial use. The standard selling price and cost of each fan follow: Essentially, all overhead costs are fixed. Some of the fixed overhead costs are direct costs to particular models, and others are commo
> Midwestern Sod produces two products, fescue grass and Bermuda grass: The company has 130,000 square yards of growing space available. In the past year, the company dedicated 65,000 square yards to fescue and 65,000 square yards to Bermuda grass. Annu
> Pantheon Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement follows: Since the profit
> Mulan Carpet produced 1,200 yards of its economy-grade carpet. In the coloring process, there was a pigment defect, and the resulting color appeared to be faded. The carpet normally sells for $15 per yard: $7 of variable cost per yard and $6 of fixed cos
> The Curtis Corporation is beginning production of Mighty Mint, a new mouthwash in a small spray container. The product will be sold to wholesalers and large drugstore chains in packages of 30 containers for $20 per package. Management allocates $225,000
> Susan Crossing purchased a used Ford Focus for $12,000. Since purchasing the car, she has spent the following amounts on parts and labor: New stereo system…………$1,500 New paint job………………....2,500 New tires………………………..1,200 New muffler……………………..250 Total……
> Emerson Ventures is considering producing a new line of hang gliders. The company estimates that variable costs will be $400 per unit and fixed costs will be $400,000 per year. Required: a. Emerson has a pricing policy that dictates that a product’s pr
> Consider the information in Problem 8-11. Lauden Conference Solutions has decided to adopt an activity-based pricing scheme. On future jobs, the company will charge a 35 percent markup on the sum of product costs plus installer salaries. In addition, the
> Lauden Conference Solutions specializes in the design and installation of meeting and conference centers for large corporations. When bidding on jobs, the company estimates product cost and direct labor for installers and marks up the total cost by 35 pe
> Symphony Sound is designing a portable recording studio to be sold to consumers. The team developing the product includes representatives from marketing, engineering, and cost accounting. The recording studio will include sound-canceling monitor headphon
> Baker Plumbing Fixtures is developing a preplumbed acrylic shower unit. The team developing the product includes representatives from marketing, engineering, and cost accounting. To date, the team has developed a set of features that it plans to incorpor
> The product design team of Cervantes Golf is in the process of designing a new model of golf bag cart. The company estimates that variable costs will be $33 per unit and fixed costs will be $850,000 per year. Required: a. Suppose the company wants to s
> The Wendel Stove Company is developing a “professional”-model stove aimed at the home market. The company estimates that variable costs will be $2,700 per unit and fixed costs will be $12,600,000 per year. Required: a. Suppose the company wants to set
> Adagio Music Publishing is a boutique company that publishes and prints sheet music for composers and also records and sells CDs of their compositions. Adagio is considering purchasing a line of CDs from a well-regarded composer, Jacques Elles, from anot
> RoverPlus, a pet product superstore, is considering pricing a new RoverPlus-labeled dog food. The company will buy the premium dog food from a company in Indiana that packs the product with a RoverPlus label. Rover pays $9 for a 50-pound bag delivered to
> Elite Kitchenware has come out with a new line of dishes that it plans to test market through a series of demonstrations at the local mall throughout the month of August. If the demonstrations result in enough sales, the program will be expanded to other
> Hearthstone Appliances supplies parts for laundry and kitchen appliances. Customer orders are placed over the Internet and are generally filled in 1 or 2 days using express mail services. Angela Farnsworth, a consultant with ABM Services, has been asked
> Why are opportunity costs relevant when making decisions?
> Why are batch sizes generally larger in bottleneck departments?
> Why is the bottleneck department referred to as a drum in the Theory of Constraints?
> Why is the relative sales value a more logical basis for allocating joint costs than physical quantity?
> What is a qualitative advantage of making rather than buying a component?
> Give an example of a fixed cost that is not sunk but is still irrelevant.
> What is the proper approach to analyzing whether a product line should be dropped?
> What are avoidable costs?
> Why are sunk costs irrelevant in decision making?
> What are differential costs and revenues?
> Preston Concrete is a major supplier of concrete to residential and commercial builders in the Pacific Northwest. The company’s policy is to price deliveries at 25 percent over full cost per cubic yard (including an allowance for administrative costs). A
