Problem 1

Box-it Corporation manufactures a variety of special packaging boxes used in the pharma industry.
The company’s Nevada plant is semiautomated, but the special nature of the boxes requires some
manual labor. The controller has chosen the following activity cost pools, cost drivers and pool rates
for Nevada plant’s product-costing systems.

Activity cost pool Overhead Cost Driver Budgeted Cost Driver

Cost Level for rate
Cost driver
Purchasing and Material handling 200,000 Raw material $1000,000 20% of
costs Material
cost
Product design 100,000 Hours in design 5000 Hrs $20/hr
dept
Machine set up cost 70,000 Production runs 1000 runs $70/run
Machine depreciation & 300,000 Machine Hours 100,000 hrs $3/hr
Maintenance
Factory depreciation, taxes and 200,000 Machine Hours 100,000 hrs $2/hr
utilities
Other manufacturing overheads 150,000 Machine Hours 100,000 hrs $1.5/hr
Total 1020,000

Two recent production orders had the following requirements:

20,000 Units of Jumbo Box 10,000 Units of Big Box

Direct Labour hours 42 Hr 21 Hr
Raw material cost $40,000 $35,000
Hours in design department 10 25
Production runs 2 4
Machine hours 24 20

Required:

1. Compute the total overhead that should be assigned to each of the two production orders,
Jumbo box and Big box.
2. Compute the overhead cost per box in each order.
3. Suppose the Nevada plant were to use a single predetermined overhead rate based on
direct-labor hours. The total budgeted direct labour hours is 4,000 hours.
a. Compute the predetermined overhead rate per direct-labor hour.
b. Compute the total overhead cost that would be assigned to the order for Jumbo box and the
order for Big box
c. Compute the overhead cost per box in each order.

4. Why do the two product-costing systems yield such widely differing overhead costs per box?
 ACCOUNTING: AMANAGERIAL EMPHASIS

Delphi Automotive Systems Ltd. (DASL) designs, manuid.

5-35 Plant wide indirect-cost
and sells automotive
rates.
parts. It has three main
gn, engineerin
operating departments: design, engineering cuures,
and
production.
aided design (CAD) equipment.
Design-the design of parts, using state of the
art, computer nts
and testing oftheir specifications.
Engineering- the prototyping of parts
.Production-the manufacture of parts.
had long-term contracts with major automobile assembly compani anies.
For many years, (DASL) allocates variable manufact
These contracts had large production runs
DASL'S costing system
overhead costs for c
uring
machine-hours. Actual variable manufacturing urrent
Overhead on the basis of machine-hours used in curo.
and its rent
had three contracts in current year,
year were 76,17,200. DASL
follows:
year were assigned as
240
Tata Motors
5,500
Maruti Udyog
2,160
Hyundai Motors
8,000
overhead rate for current year.
quired 1. Compute the plantwide variable manufacturing
current year.
overhead allocated to each contract in
2. Compute the variable manufacturing
machine-hours to provide an accurate estimate of
the variable
3. What conditions must hold for
overhead incurred on each individual contract at DASL
in current year?
manufacturing
of Dalnhi
 resources to its programs?

5-44 Activity-based costing, hierarchy. (CMA, adapted) Basista Coffee Ltd. (BCL) buys coffee
cost
beans frorm around the world and roasts. blends, and packages them for resale. The major cost
 ACCOUNTING: A MANAGERIAL EMPHASIS

is direct materials; however, there is substantial manufacturing overhead in the

the predominantly
automated roasting and packing process. The company uses relatively little direct labor,
Some of the coffees are very popular and sell in large volumes, whereas a few of the newe
sell in very low volumes. BCL prices its coffee at budgeted cost, including allocated
ted overhead
markup on cost of 30 percent.
overhead, plus a
Data for the current year budget include
manufacturing overhead f ks0,00,000, which hash
allocated on the basis of each product's budgeted direct-labor cost. The budget direct-Habor
current year totals R6,00,000. Purchases and use of materials (mostly coffee beans) are budro
total 60,00,000. geted
The budgeted direct costs for one-kg bags of two of the company's products are:
Indian Malaysian
Direct materials 742 732
Direct labor 3 3

BCL's controller believes the existing costing system may be providing misleading cost infomaio
She has developed an activity-based analysis of curent year budgeted manufacturing overts
costs shown in the following table.

Activity Cost Driver Cost Driver Ran

Purchasing Purchase orders T5,00
Materials handling Setups 4,00
Quality control Batches 2,400
Roasting Roasting-hours 100
Biending Blending-hours 100
Packaging Packaging-hours 100
Data regarding the current year production of the Indian and
Malaysian coffee follow. There will e
beginning or ending materials inventory for either of these coffees.
Particulars Indian
Expected sales Malaysian
1,00,000 kg 2,000 kg
Purchase orders 4 4
Batches
10
Setups
30 12
Roasting-hours 1,000 20
Blending-hours 500 10
Packaging-hours 100
ired 1. Using BCL's existing costing system:
a. Determine the
company's current year budgeted
labor cost as the
direct

b. Determine the
single allocation base. manufacturing overhead rate using
current year
budgeted
and

1 kg of costs and
Malaysian coffee. selling prices of 1 kg of
of Indian
Inaia" cofre
2. Use the
controller's activity-based 1k
of: approach to estimate the cost for
current year budgeie
a. Indian coffee
b. Malaysian coffee
Q: Drone Inc. manufactures two models of “Selfie Drones” - small toy helicopters which follow
users around taking aerial video while the user participates in extreme sports. Whether the user is
rafting down a raging river, or renewing their life insurance, all activities can be documented by
the products two models: “Sport” or “Pro”. The company will use activity-based costing to apply
its estimated $350,000 of overhead costs to its products. Information about its overhead follows:
Activity (Cost Driver) Estimated Expected Activity
MOH
Total Sport Pro
Assembly (Machine Hours) $40,000 5,000 3,000 2,000
Quality control (# of 110,000 550 250 300
inspections)
Machine Setups (# of Setups) 200,000 200 70 130
$350,000

The following cost data is known:

Sport Pro
Direct Materials $300 $500
Direct Labour 50 80
Number of units produced 250 units 150 units

Required: (3 Marks)
i. Compute the activity rates for each activity.
ii. Determine the expected unit cost of each product.