Problem 7-17 (45 minutes)

1. Under the traditional direct labor-dollar based costing system,

manufacturing overhead is applied to products using the predetermined
overhead rate computed as follows:

Predetermined = Estimated total manufacturing overhead cost

overhead rate
Estimated total direct labor dollars
=

$508,625
= $3.13 per DL$
$162,500

The product margins using the traditional approach would be computed

as follows:
Sales ...................................
Direct materials ....................
Direct labor ..........................
Manufacturing overhead
applied @ $3.13 per direct
labor-dollar........................
Total manufacturing cost ......
Product margin ....................

EX300

TX500

Total

$1,200,000
366,325
120,000

$500,000
162,550
42,500

$1,700,000
528,875
162,500

375,600
861,925
$ 338,075

133,025
338,075
$161,925

508,625
1,200,000
$ 500,000

Note that all of the manufacturing overhead cost is applied to the

products under the companys traditional costing system.

Problem 7-17 (continued)

2. The first step is to determine the activity rates:

Activity Cost Pools

(a)
Total
Cost

(b)
Total Activity

(a) (b)
Activity Rate

Machining ............. $198,250 152,500 MHRs

$1.30 per MHR
Setups .................. $150,000
375 setup hrs.
$400 per setup hr.
Product sustaining . $100,000
2 products $50,000 per product
*The Other activity cost pool is not shown above because it includes
organization-sustaining and idle capacity costs that should not be
assigned to products.
Under the activity-based costing system, the product margins would be
computed as follows:
Sales .........................
Direct materials ..........
Direct labor ................
Advertising expense ...
Machining ..................
Setups .......................
Product sustaining ......
Total cost ..................
Product margin ..........

EX300

$1,200,00
0
366,325
120,000
50,000
117,000
30,000
50,000
733,325
$ 466,675

TX500

$500,000

Total

$1,700,00
0
162,550
528,875
42,500
162,500
100,000
150,000
81,250
198,250
120,000
150,000
50,000
100,000
556,300
1,289,625
$(56,300) $ 410,375

Problem 7-17 (continued)

3. The quantitative comparison is as follows:

Traditional Cost System

Direct materials .................................

Direct labor .......................................
Manufacturing overhead ....................
Total cost assigned to products ..........
Selling and administrative ..................
Total cost ..........................................

EX300
(a)
(a) (c)
Amount
%

TX500
(b)
(b) (c)
Amount
%

Total
(c)
Amount

$366,325
120,000
375,600
$861,925

69.3% $162,550
73.8%
42,500
73.8% 133,025
$338,075

30.7% $ 528,875
26.2%
162,500
26.2%
508,625
1,200,000
550,000
$1,750,000

$366,325
120,000
50,000

69.3% $162,550
73.8%
42,500
33.3% 100,000

30.7% $ 528,875
26.2%
162,500
66.7%
150,000

117,000
30,000
50,000
$733,325

59.0%
20.0%
50.0%

41.0%
80.0%
50.0%

Activity-Based Costing System

Direct costs:
Direct materials ..............................
Direct labor ....................................
Advertising expense ........................
Indirect costs:
Machining .......................................
Setups............................................
Product sustaining ..........................
Total cost assigned to products ..........
Costs not assigned to products:
Selling and administrative ................
Other .............................................
Total cost ..........................................

81,250
120,000
50,000
$556,300

198,250
150,000
100,000
1,289,625
400,000
60,375
$1,750,000

Problem 7-17 (continued)

The traditional and activity-based cost assignments differ for three
reasons. First, the traditional system assigns all $508,625 of
manufacturing overhead to products. The ABC system assigns only
$448,250 of manufacturing overhead to products. The ABC system does
not assign the $60,375 of Other activity costs to products because they
represent organization-sustaining costs. Second, the traditional system
uses one unit-level activity measure, direct labor dollars, to assign
73.9% of all overhead to the EX300 product line and 26.1% of all
overhead to the TX500 product line. The ABC system assigns 59.0% of
Machining costs to the EX300 product line and 41.0% to the TX500
product line. The ABC system assigns 20.0% of Setup costs (a batchlevel activity) to the EX300 product line and 80.0% to the TX500
product line. The ABC system assigns 50% of Product sustaining costs
(a product-level activity) to each product line. Third, the traditional
system does not trace any advertising expenses to the two products.
The ABC system traces $50,000 of advertising to the EX300 and
$100,000 of advertising to the TX500 product line.

Problem 10-12 (45 minutes)

1. a.
Standard Quantity Allowed
for Actual Output,
at Standard Price
(SQ SP)
21,600 feet*
$3.00 per foot
= $64,800

Actual Quantity of
Input,
at Standard Price
(AQ SP)
21,000 feet**
$3.00 per foot
= $63,000

Actual Quantity of
Input,
at Actual Price
(AQ AP)
21,000 feet**
$3.20 per foot
= $67,200

Materials quantity
Materials price
variance = $1,800 F
variance = $4,200 U
Spending variance = $2,400 U
* 12,000 units 1.80 feet per unit = 21,600 feet
** 12,000 units 1.75 feet per unit = 21,000 feet
Alternatively, the variances can be computed using the formulas:
Materials quantity variance = SP (AQ SQ)
= $3.00 per foot (21,000 feet 21,600 feet)
= $1,800 F
Materials price variance = AQ (AP SP)
= 21,000 feet ($3.20 per foot $3.00 per foot)
= $4,200 U

Problem 10-12 (continued)

1. b.
Standard Hours Allowed
for Actual Output,
at Standard Rate
(SH SR)
10,800 hours*
$18.00 per hour
= $194,400

Actual Hours of Input,

at Standard Rate
(AH SR)
11,400 hours**
$18.00 per hour
= $205,200

Actual Hours of Input,

at Actual Rate
(AH AR)
11,400 hours**
$17.40 per hour
= $198,360

Labor efficiency variance

Labor rate variance
= $10,800 U
= $6,840 F
Spending variance = $3,960 U
* 12,000 units 0.90 hours per unit = 10,800 hours
** 12,000 units 0.95 hours per unit = 11,400 hours
Alternatively, the variances can be computed using the formulas:
Labor efficiency variance = SR (AH SH)
= $18.00 per hour (11,400 hours 10,800 hours)
= $10,800 U
Labor rate variance = AH (AR SR)
= 11,400 hours ($17.40 per hour $18.00 per hour)
= $6,840 F

Problem 10-12 (continued)

1. c.
Standard Hours Allowed
for Actual Output,
at Standard Rate
(SH SR)
10,800 hours*
$5.00 per hour
= $54,000

Actual Hours of Input,

at Standard Rate
(AH SR)
11,400 hours**
$5.00 per hour
= $57,000

Actual Hours of Input,

at Actual Rate
(AH AR)
11,400 hours**
$4.60 per hour
= $52,440

Variable overhead
Variable overhead
efficiency variance
rate variance
= $3,000 U
= $4,560 F
Spending variance = $1,560 F
* 12,000 units 0.90 hours per unit = 10,800 hours
** 12,000 units 0.95 hours per unit = 11,400 hours
Alternatively, the variances can be computed using the formulas:
Variable overhead efficiency variance = SR (AH SH)
= $5.00 per hour (11,400 hours 10,800 hours)
= $3,000 U
Variable overhead rate variance = AH (AR SR)
= 11,400 hours ($4.60 per hour $5.00 per hour)
= $4,560 F
2.

Materials:
Quantity variance ($1,800 12,000 units)......
Price variance ($4,200 12,000 units) ...........
Labor:
Efficiency variance ($10,800 12,000 units) ..
Rate variance ($6,840 12,000 units) ...........
Variable overhead:
Efficiency variance ($3,000 12,000 units) ....
Rate variance ($4,560 12,000 units) ...........
Excess of actual over standard cost per unit ........

$0.15 F
0.35 U $0.20 U
0.90 U
0.57 F
0.25 U
0.38 F

0.33 U
0.13 F
$0.40 U

Problem 10-12 (continued)

3. Both the labor efficiency and variable overhead efficiency variances are
affected by inefficient use of labor time.
Excess of actual over standard cost per unit .......
Less portion attributable to labor inefficiency:
Labor efficiency variance ...................................
Variable overhead efficiency variance .................
Portion due to other variances ...........................

$0.40 U
0.90 U
0.25 U

1.15 U
$0.75 F

In sum, had it not been for the apparent inefficient use of labor time,
the total variance in unit cost for the month would have been favorable
by $0.75 rather than unfavorable by $0.40.
4. Although the excess of actual cost over standard cost is only $0.40 per
unit, the total amount of $4,800 (= $0.40 per unit 12,000 units) is
substantial. Moreover, the details of the variances are significant. The
materials price variance is $4,200 U, the labor efficiency variance is
$10,800 U, the labor rate variance is $6,840 F, the variable overhead
efficiency variance is $3,000 U, and the variable rate variance is $4,560
F. Taken together, the two variances that reflect apparent inefficient use
of the labor time total $13,800 U. Each of these variances may warrant
further investigation.