Home Work Set # 9

1) A company has two production departments with the following characteristics:

Prod. Dept. A Prod. Dept. B

Direct Labor hours per month 20,000 10,000

Machine Hours - 10,000

The company manufactures two products I and II. Product I requires one direct-labor
hour in department A only and product II requires one direct-labor hour each in
departments A and B. Also, product II requires one machine hour per unit in Dept. B,
whereas product I does not require any machine hour. The company manufactures
10,000 units each of products I and II per year.

The following costs are budgeted for the month and are the basis for computing the
predetermined overhead rate.

Depreciation of machinery and equipment $ 50,000

Building Costs $ 30,000
Power Costs $ 5,100
Total $ 85,100.

(a) Compute a single predetermined overhead rate for the company based on
direct-labor hours.

(b) How much overhead will each product be assigned, assuming that the
company uses a single predetermined overhead rate ?

(c) Assume the following Activities:

Machine Cost (Includes Depreciation and Power)

Cost Driver used : Machine hours

Facilities Cost (Building Cost)

Cost Driver used : Labor Hour

Now determine the overhead cost for product I and II using Activity-Based
Costing.

2) A company manufactures many types of packaging boxes. The management decides

to use the following Activities and Cost Drivers .
Acitivities Cost/year Cost Driver Consumption of
Cost Driver per year

Purchasing, Storage $ 200,000 Raw material cost $ 1,000,000

and material handling

Engineering and $ 100,000 Hours in design 5,000 hours

Product Design

Set up Costs $ 70,000 Number of setups 1,000 setups

M/c. Depreciation $ 300,000 Machine hours 100,000 hours

and maintenance

Factory depreciation $ 200,000 Machine hours 100,000 hours

taxes insurance
and utilities

Other manufacturing $ 150,000 Machine hours 100,000 hours

overhead costs

Total $ 1,020,000

The requirements of two of the products ( A and B) are as follows:

Product A (per 20,000 Product B (per

units) 10,000 units)

Direct Labor Hours 42 hours 21 hours

Raw-Material cost $ 40,000 $ 35,000

Hours in Design 10 25

Set ups 2 4

Machine hours 24 20

(a) Compute the overhead cost per unit of products A and B, using Activity- based
costing.

(b) Compute the overhead cost per unit of products A and B, based on direct labor hours.
Assume that the total direct labor hours per year is 4,000
3) A 4.5 % $ 1000 bond series is offered to the public for $ 960 to assure its sales.
The broker charges a $ 10 commission on each bond sold. If the bond matures in 10
years, what is the cost of capital to the company ? ( 5.157 %)

4) Present after-tax earnings / share of a company is $ 10.00. The stock sells for 50.00
per share. Current dividends are $ 6.00 per share per year. The company expects to hold
the ratio of retained earnings to earnings constant in the future. Present book value of a
share of stock is $ 60.00 and the company will try to hold the percentage earnings on
book value constant over time. Determine the companys cost of capital. (18.67 %)

5) Assume that in the above problem, the commission per share is $ 2.00, the handling
cost per share is $ 3.00 and the discount per share is $ 5.00. Determine the companys
cost of capital. (21.67 %)