Solution Manual For Managerial Accounting 4th Edition Stacey Whitecotton Robert Libby Fred Phillips

Solution Manual for Managerial Accounting, 4th Edition, Stacey Whitecotton, Robert Libby, Fr
Solution Manual for Managerial Accounting, 4th

Edition, Stacey Whitecotton, Robert Libby, Fred
Phillips
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Chapter 4
Activity-Based Costing and Cost Management
ANSWERS TO QUESTIONS
1. Volume-based measures include drivers such as machine hours and direct labor
hours that increase in proportion to increases in production volume. Non-volume
drivers do not vary with production volume and include items such as number of
batches or square footage of the facility.
2. In the traditional cost system, indirect costs are assigned on the basis of volume-
based allocation measures such as direct labor hours or machine hours
regardless of whether they are incurred relative to that volume-based measure.
3. Traditional costing systems tend to overcost high volume products and under-
cost low volume products that are often more complex to produce.
4. Activity Based Costing (ABC) assigns indirect costs to products and services
based on the activities they require. Costs are assigned to various activity pools
and then products are “charged” for the activities they consume. Traditional
costing systems allocate overhead strictly on the basis of volume using cost
drivers such as direct labor hours or machine hours.
5. Businesses that produce a variety of products or services that differ in production

volume, resources consumed, and/or attention required during the manufacturing
process would be candidates for activity based costing.
6. ABC uses a two-stage process in which indirect costs are first assigned to
activities, and then assigned to individual products and services based on their
activities requirements.
7. The categories of activity pools include facility-level, product-level, customer-

level, batch-level, and unit-level.
8. In a service setting, unit-level activities are related to individual customers and

are called customer-level activities. Batch-level activities are related to a group of
customers and might be called group-level activities. Product level activities are
related to a type of service offering, and would be called service-level activities.
Finally, facility-level activities relate to the organization overall and might be
referred to as company-wide activities.
Managerial Accounting, 4/e 4-1

© 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
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9. Activity based costing (ABC) classifies costs into different categories because
some costs are related to production volume while others are not. Thus, ABC
groups costs on the basis of level (unit, batch, product, customer, or facility) and
appropriate cost drivers.
10. Facility-level – company payroll; customer level – customer design changes;

product-level – architectural drawing for a particular floor plan; batch – paving
costs for a planned community; unit-level – inspection costs.
11. A unit-level activity could be a driving lesson with a single student. A group-level
activity could be a defensive driving class given to a group of people. A service-
level activity could be purchasing a new video to show during the defensive
driving class, or maintaining the cars used for driving lessons. A facility-level
activity would include company-wide advertising or paying utilities and taxes.
12. The activity rate method involves computing an activity rate by dividing the total
cost pool by the estimated amount of allocation base. This activity rate is then
multiplied by the amount of allocation base consumed by each product. The
activity proportion method assigns activity costs to individual products by
calculating the proportion of the total cost driver consumed by each product line.
13. Activity based management (ABM) encompasses all of the actions that
managers take to improve operations or reduce costs based on the ABC data.
To get benefits of ABC, managers must use it to manage the underlying activities
and identify activities that would benefit from process improvements.
14. ABC can be adapted to include sustainability-related information by including

measures that relate to a sustainability goal, such as environmental impact. For
example, an ABC system could trace an environmental measure such as green
house gas (GHG) emissions to the key activities performed during the production
process, and then to the products and services that require those activities. This
would provide managers with better information for managing or reducing their
GHG emissions.
15. Benchmarking is a process in which managers can compare their own activity
rates to other firms in the industry, or to the best performing firms in other
industries. Benchmarking can be used to pinpoint areas where the company is
ahead or behind the competition, and provides managers with incentives to
improve their own operations.
16. A non-value-added activity is one that, if eliminated, would not reduce the value
of the product or service in the eyes of the customer. For a construction
company, a value-added activity would be installation of the carpet or plumbing.
A non-value-added activity would be costs of storing components of the house
such as cabinetry or appliances prior to their installation.

17. The four types of quality costs are prevention costs, appraisal or inspection
costs, internal failure costs, and external failure costs.
18. Target costing determines what the product’s cost must be in order to meet the
market price and still provide a profit for the company's shareholders. It is also
sometimes called cost planning because it requires managers to think about
costs "up-front" so that they can design and manufacture products to a cost that
will satisfy both customers (through the market price) and shareholders (through
a target profit).
19. In a JIT system, materials are purchased and units are made only as they are
needed to satisfy customer demand. JIT is a "demand pull" system, where
materials and products are pulled through the manufacturing system based on
customer demand, as opposed to a traditional manufacturing setting where
products are pushed through the system and often end up sitting in inventory.
The primary benefit of JIT is the elimination of inventory storage costs that are a
non-value-added activity.
20. Advantages of activity based costing include more accurate product costing and
better information about different products’ relative consumption of manufacturing
resources. The primary disadvantage is the complexity of ABC and the effort
needed to determine multiple cost pools and cost drivers.

Authors' Recommended Solution Time
(Time in minutes)
Cases and
Mini-exercises Exercises Problems Projects*
No. Time No. Time No. Time No. Time
1 3 1 4 PA-1 9 1 30
2 4 2 4 PA-2 9 2 30
3 4 3 5 PA-3 10 3 30
4 4 4 5 PA-4 10 4 30
5 3 5 4 PA-5 10 5 30
6 4 6 6 PB-1 9
7 4 7 5 PB-2 9
8 3 8 6 PB-3 10
9 3 9 6 PB-4 10
10 3 10 6 PB-5 10
11 3 11 6
12 3 12 6
13 3 13 7
14 3 14 7
15 4 15 7
16 3 16 6
17 3 17 5
18 3 18 5
19 5
20 5
21 5
22 4
* Due to the nature of cases, it is very difficult to estimate the amount of time students
will need to complete them. As with any open-ended project, it is possible for students
to devote a large amount of time to these assignments. While students often benefit
from the extra effort, we find that some become frustrated by the perceived difficulty of
the task. You can reduce student frustration and anxiety by making your expectations
clear, and by offering suggestions (about how to research topics or what companies to
select).

ANSWERS TO MINI-EXERCISES
M4-1
Answers will vary, but students should include the idea that Catarina’s manufacturing
process must be quite different for the two products. Batch sizes, complexity of design,
need for additional quality control inspections, etc., could all have an impact.
M4-2
Factory rent – square footage

Factory utilities – square footage
Quality inspections – # of inspections
Materials handling ‒ # material moves, pounds of materials
Machine setup ‒ # of setups
Employee training ‒ # employees
Machine maintenance – machine hours
Inventory security – square footage
Supervisor salaries – square footage
M4-3
Category Potential Cost Driver

1. Facility Number of square feet
2. Batch Number of setups
3. Product Research and development hours
4. Unit Machine hours
5. Unit Number of Units
6. Product Number of development hours
7. Facility Machine hours
8. Unit Direct labor hours
9. Unit or batch Number of material moves
10. Unit or Batch Number of quality inspections
M4-4
1. External failure costs

2. Value engineering
3. Non-value-added
4. Activity-based management (ABM)
5. Cost driver
6. Product-level
7. Non-volume-based
8. First
9. Activity proportion
10. Volume-base
M4-5
O 1. Activity-Based Costing (ABC)

J 2. Appraisal or Inspection Costs
B 3. Batch-level Activities
L 4. External Failure Costs
A 5. Facility-level Activities
F 6. Just-in-Time System
I 7. Prevention Costs
C 8. Unit-level Activities
E 9. Value-Added Activity
M 10. Value Chain
M4-6
F 1. An activity, such as machine setups, that occurs before each production run.
N 2. A cost driver that captures aspects of the production process that relates to
activities other than the volume of production or sales.
D 3. Total activity cost divided by total cost driver.
B 4. All the actions taken to improve operations or reduce costs based on ABC
data.
M 5. An activity, which if eliminated, would NOT change the perceived worth of the
product or service.
H 6. A report that includes details about internal failure costs.
K 7. Costs that result from the defects caught during the inspection process.
S 8. A process to determine what costs should be in order to earn an acceptable
profit across a product life cycle.
G 9. A process which uses the cost of the product plus a markup to arrive at the
sales price.
W 10. A linked set of activities required to design, develop, produce, market, deliver
the product to customers and after-market service.
M4-7
Maintenance: $214,500 ÷ 10,000 hrs = $21.45 per machine hour

Setup: $101,400 / 150 = $676 per setup
Quality control: $153,000 ÷ 450 = $340 per inspection

M4-8
Quality Control Costs:

$125,000 ÷ 25,000 = $5.00 per inspection
Product 1: 10,000 inspections × $5.00 = $50,000
Product 2: 15,000 inspections × $5.00 = $75,000
M4-9
Quality Control Costs = $125,000

Number of inspections = 10,000 + 15,000 = 25,000 total inspections
Product 1: 10,000 inspections ÷ 25,000 inspections = 40%

$125,000 × 40% = $50,000
Product 2: 15,000 inspections ÷ 25,000 inspections = 60%

$125,000 × 60% = $75,000
M4-10
Machining: $366,600 ÷ 13,000 = $28.20 per machine hour
Setup: $69,825 ÷ 350 = $199.50 per batch
Quality control: $108,800 ÷ 800 = $136.00 per inspection
M4-11
Amount Consumed by Allocated

Cost Pool Rate Speedy Model Overhead
Machining $28.20 per mh 2,500 $ 70,500
Setup $199.50 per batch 100 19,950
Quality control $136.00 per insp 300 40,800
Total Overhead $131,250
M4-12
Cost Pool Activity Proportion for Luxury Allocated Overhead

Machining 4,680 ÷ 13,000 = 36% $366,600 × 36% = $131,976
Setup Costs 70 ÷ 350 = 20% 69,825 × 20% = 13,965
Quality Control 208 ÷ 800 = 26% 108,800 × 26% = 28,288
Total Overhead $174,229

M4-13
Transportation costs: $50,000 ÷ (5,000 + 35,000) = $1.25 per mile

Electronic processing: $75,000 ÷ (20,000+30,000) = $1.50 per processing hour
Office support: $20,000 ÷ (3,500 +1,500) = $4.00 per administrative hour
M4-14
Transportation costs: $1.25 per mile × 20 miles = $25

Electronic processing: $1.50 per processing hour × 50 processing hours = $75
Office support: $4.00 per administrative hour × 3 administrative hours = $12
Total overhead assigned: $25 + $75 + $12 = $112
M4-15
Activity Proportion for

Cost Pool Controller Services Allocated Overhead
Transportation 35,000 ÷ (5,000 + 35,000) = $50,000 × 87.5% = $43,750
costs 87.5%
Electronic 30,000 ÷ (20,000 + 30,000) = 60% $75,000 × 60% = $45,000
processing
Office support 1,500 ÷ (3,500 + 1,500) = 30% $20,000 × 30% = $6,000
Total Overhead $ 94,750
M4-16
Product design research Value-Added

Materials handling Non-Value-Added
Machining Value-Added
Assembly of components Value-Added
Finished goods inventory storage Non-Value-Added
Rework after a quality inspection Non-Value Added
Painting end product Value-Added
Raw materials inventory storage Non-Value-Added

M4-17
Product design research Product

Materials handling Unit or batch
Machining Unit
Assembly of components Unit
Finished goods inventory storage Facility
Rework after a quality inspection Unit or batch
Painting end product Unit
Raw materials inventory storage Facility
M4-18
AI 1. Review of tax return for missing items/errors.

P 2. Training of employees on new tax software.
IF 3. Correction of errors found on review of tax returns.
IF 4. Reprinting of corrected tax returns.
EF 5. Legal costs resulting from lawsuits related to incorrect tax returns.

ANSWERS TO EXERCISES
E4-1
Activity Level Cost Driver Value-Added?

Storing inventory Facility Sq. footage Non-value-added
Creating molds Unit, product, batch # molds used Value-added
Pouring plaster Unit, batch # units Value-added
Firing pots in kiln Batch, unit # batches fired Value-added
Sanding and finishing Unit # units, labor Value-added
hours
Painting Unit # units, labor hrs Value-added
Performing quality Batch, product # inspections Non-value-added
control
Ordering materials Facility, batch, # orders Non-value-added
product
Delivering an order to a Batch # deliveries Value-added
large customer
Insuring the Facility Sq. footage Non-value-added
manufacturing facility
Reconfiguring Batch # batches Non-value-added
machinery between
batches
E4-2
Activity Cost 1. Costs Included in Pool 2. Total 3. Unit, 4. Cost

Pool Cost of Batch, Driver
Pool Produ
ct, or
Facilit
y
Engineering Design engineering $220,000 Product Engineering
Hours
Equipment Manufacturing equipment setup $ 7,200 Batch Number of
setup Indirect labor (manufacturing equipment 8,300 setups
setup) $15,500
Quality Testing raw materials $ 45,000 Product Number of
Control Quality inspections 57,000 inspections/
$102,000 tests
Factory Plant Insurance $ 86,100 Facility Square feet
Facilities Property taxes 23,000
Electricity, plant 14,000
Depreciation, plant 18,800
$141,900
Manufacturing Electricity, manufacturing equipment 51,250 Unit Machine
Equipment Depreciation, manufacturing equipment, 36,700 hours
Maintenance worker (manufacturing 22,500
equipment) $110,450

E4-3
Req. 1
Machining: $312,000 / 80,000 = $3.90 per machine hour
Design costs: $73,600 / 8,000 = $9.20 per design hour
Setup costs: $71,600 / 500 = $143.20 per batch
Req. 2
Machining: unit-level
Design: customer- or product-level
Setup: batch-level
E4-4
Activity Driver for Overhead Assigned to

Cost Pool Activity Rate Product A Product A
Machining $3.90 / mh X 30,000 = $ 117,000
Design costs $9.20 / design hr. X 3,200 = 29,440
Setup costs $143.20 / batch X 50 = 7,160
Total overhead $153,600

Cost Pool Activity Rate Product B Product B
Machining $3.90 / mh X 40,000 = $156,000

Cost Pool Activity Rate Product C Product C
Machining $3.90 / mh X 10,000 = $ 39,000

E4-5
Req. 1
Total Activity Activity Proportion Overhead Assigned

Cost Pool Cost for Product A to Product A
Machining 30,000 ÷ 80,000 =
$ 312,000 x 37.5% $ 117,000
Design costs 3,200 ÷ 8,000 =
$ 73,600 x 40% 29,440
Setup costs 50 ÷ 500 =
$ 71,600 x 10% 7,160

Cost Pool Cost for Product B to Product B
Machining 40,000 ÷ 80,000 =
$ 312,000 x 50% $156,000
Design costs 1,800 ÷ 8,000 =
$ 73,600 x 22.50% 16,560
Setup costs 175 ÷ 500 =
$ 71,600 x 35% 25,060

Cost Pool Cost for Product C to Product C
Machining 10,000 / 80,000 =
$ 312,000 x 12.5% $ 39,000
Design costs 3,000 / 8,000 =
$ 73,600 x 37.50% 27,600
Setup costs 275 / 500 =
$ 71,600 x 55% 39,380
Req. 2
The amount of overhead assigned to each product will be the same using activity rates
and activity proportions so long as there is no rounding error.

E4-6
Req. 1
Material handling: $60,000 ÷ 960 = $62.50 per material move
Machine maintenance: $51,750 ÷ 75,000 = $0.69 per machine hour (MH)
Req. 2
Product A Product B
Material handling cost 600 moves × $62.50 $ 37,500 360 moves × $62.50 = $ 22,500
=
Machine maintenance cost 42,000 MHs × $0.69 28,980 33,000 MHs × $0.69 = 22,770
=
Total overhead assigned $ 66,480 $ 45,270
Req. 3
Product A Product B
Material handling cost 600/960 moves= 360/960 moves
62.5% × $60,000 = $ 37,500 =37.5% × $60,000 = $ 22,500
Machine maintenance cost 42,000/75,000 MHs 33,000/75,000 MHs =
=56% × $51,750 = 28,980 44% × $51,750 = 22,770
Total overhead assigned $ 66,480 $ 45,270
Req. 4
There is no difference in the amount of overhead allocated under the activity rate and
activity proportion methods unless there are rounding differences.
E4-7
Req. 1
Product A: $112,500 × 70% = $78,750
Product B: $112,500 × 30% = $33,750
Req. 2
$112,500 ÷ 59,800 Machine hours = $1.88 per machine hour (rounded)
Product A: 22,100 × $1.88 = $41,548*

Product B: 37,700 × $1.88 = $70,876*
*Difference of $76 total due to rounding

E4-8
Req.1
Material handling: $90,000 ÷ 500 = $180 / move
Maintenance: $22,500 ÷ 59,800 = $.3763 / machine hour
Req. 2
Product A
Material handling: 200 moves × $180 $36,000.00
Maintenance: 22,100 MH × $.3763 8,316.23
Total OH $44,316.23*
Product B
Material handling: 300 moves × $180 $54,000.00
Maintenance: 37,700 MH × $.3763 14,186.51
Total OH $68,186.51*
*Difference of $2.74 due to rounding of maintenance cost.
E4-9
Req. 1
$39,060 ÷ 600 labor hours = $65.10/LH
Standard Floor Mat: 400 × $65.10 = $26,040

Deluxe Floor Mat: 200 × $65.10 = $13,020
Req. 2
$39,060 ÷ 7,150 machine hours = $5.4629/MH
Standard Floor Mat: 4,150 × $5.4629 = $22,671.04

Deluxe Floor Mat: 3,000 × $5.4629 = $16,388.70

E4-10
Req. 1
Material handling: $3,750 ÷ 100 = $37.50/move
Quality control: $13,860 ÷ 1,000 = $13.86/inspection
Maintenance: $21,450 ÷ 7,150 = $3.00/machine hour
Req. 2
Activity Activity Requirements Total Cost
Rate (Standard Mat) Assigned
Material handling $37.50 per move 30 moves $ 1,125
Quality control $13.86 per inspection 400 inspections 5,544
Machine maintenance $3.00 per machine hour 4,150 machine hours 12,450
Total cost assigned $19,119
Req. 3
Activity Activity Requirements Total Cost
Rate (Deluxe Mat) Assigned
Material handling $37.50 per move 70 moves $ 2,625
Quality control $13.86 per inspection 600 inspections 8,316
Machine maintenance $3.00 per machine hour 3,000 machine hours 9,000
Total cost assigned $19,941
E4-11
Req. 1
Moving to an ABC system will likely give the company more accurate cost information,
which should result in better decision-making within the company. However, there are
additional costs that will be incurred, such as the cost of tracking cost driver and cost
pool information.
Req. 2
The following table summarizes the results of the two volume-based cost systems and
activity based costing. The traditional volume-based cost system overcosted the
standard floor mat and undercosted the deluxe floor mat compared to ABC. The
traditional volume-based cost system based on machine hours did not result in as much
of a cost distortion compared to activity based costing.

E4-11 (continued)
Standard Floor Mat Deluxe Floor Mat

Traditional costing $26,040 $13,020
(DL hours)
Traditional costing $22,671 $16,389
(Machine hours)
Activity based $19,119 $19,941
Costing

E4-12
Req. 1
Traditional rate: Overhead ÷ Volume-based driver
= $150,000 ÷ 24,000 total labor hours
= $6.25 per DL hour
Fabric case line: 15,000 × $6.25 = $93,750 overhead assigned
Req. 2
Activity rates:
Material moves: $110,000 ÷ 1,100 = $100 per material move
Setup: $40,000 ÷ 120 = $333.3333 per setup
Fabric case line:

Material handling: 440 moves × $100 = $44,000.00
Setup cost: 40 setups × $333.3333 = 13,333.33
Total overhead assigned $57,333.33
Activity proportions:
Total Fabric % Leather %

Material moves 1,100 40% 60%
Number of setups 120 33.3333% 66.6667%
Fabric case line:

Material handling: $110,000 × 40% = $44,000.00
Setup cost: $40,000 × 33.3333% = 13,333.33
Req. 3
The Fabric case was overcosted under the traditional cost system compared to ABC.
The total overhead cost assigned to this product was $93,750 under the traditional
system versus about $57,333 in the ABC system, for a difference of $36,417.

E4-13
Req. 1
= $150,000 ÷ 24,000 total labor hours
= $6.25 per DL hour
Leather case line: 9,000 × $6.25 = $56,250 overhead assigned
Req. 2
Activity rates:
Setup: $40,000 ÷ 120 = $333.3333 per setup
Leather case line:

Material handling: 660 moves × $100 = $66,000.00
Setup cost: 80 setups × $333.3333 = 26,666.66
IF ACTIVITY PROPORTIONS ARE USED
Total Fabric % Leather %

Material moves 1,100 40% 60%
Number of setups 120 33.3333% 66.6667%
Leather case line:

Material handling: $110,000 × 60% = $66,000.00
Setup cost: $40,000 × 66.6667% = $26,666.68
Req. 3
The Leather case was undercosted under the traditional cost system compared to ABC.
The total overhead cost assigned to this product was $56,250 under the traditional
system versus about $92,667 in the ABC system, for a difference of $36,417.

E4-14
Req. 1
= $303,560 ÷ 55,000 machine hours
= $5.5193 per machine hour
Standard model: 25,000 × $5.5193 = $137,983 overhead assigned
Deluxe model: 30,000 × $5.5193 = $165,579 overhead assigned
Req. 2
Setup: $163,560 ÷ 580 = $282 per setup
Standard model:
Material handling: 550 moves × $100.00 = $55,000
Setup cost: 80 setups × $282.00 = 22,560
Total overhead assigned $77,560
Deluxe model:
Material handling: 850 moves × $100.00 = $ 85,000
Setup cost: 500 setups × $282.00 = 141,000

E4-15
Req. 1
Activity Activity cost Cost Total activity Activity rate
driver driver
Facilities Square feet $2,300,000 200,000 $11.50/sq. foot
Services Number of $660,000 20,000 $ 33/student
students
Instruction Number of $3,360,000 1,200 $ 2,800/course
courses
Req. 2
Activity cost driver by type of student
(Activity Proportion)
Activity Activity cost Cost Undergraduate CPE Total
driver
Facilities Square feet $2,300,000 170,000 30,000 200,000
85% 15% 100%
Services Number of $660,000 12,000 8,000 20,000
students 60% 40% 100%
Instruction Number of $3,360,000 800 400 1,200
courses 66.67% 33.33% 100%
Req. 3
Activity Activity cost Cost Undergraduate CPE
driver
Facilities Square feet $2,300,000 $1,955,000 $345,000
($11.50 × ($11.50 × 30,000)
170,000) or 15% ×
or 85% × $2,300,000
$2,300,000
Services Number of $660,000 $396,000 $264,000
students ($33 × 12,000) ($33 × 8,000)
or 60% × or 40% ×
$660,000 $660,000
Instruction Number of $3,360,000 $2,240,000 $1,120,000
courses ($2,800 × 800) ($2,800 × 400)
or 66.67% × or 33.33% ×
$3,360,000 $3,360,000
Total cost $4,591,000 $1,729,000
assigned
Number of ÷ 12,000 ÷ 8,000
students
Cost per $382.58 $216.13
student (rounded) (rounded)

E4-16
Req. 1
Washing, pressing & filtering: $1,537,500/(45,000 +105,000) = $10.25 per hour
Bottling: $412,500/(300,000 + 75,000) = $1.10 per bottle
Req. 2
Standard Extra Virgin
Activity Activity Activity Overhead Activity for Overhead
Rate for assigned to Extra Virgin assigned to
Standard Standard Extra Virgin
WPF $10.25 45,000 $461,250 105,000 $1,076,250
Bottling $1.10 300,000 $330,000 75,000 $82,500
Total $791,250 $1,158,750
Req. 3
Direct Materials $900,000 $600,000
Direct Labor $375,000 $150,000
ABC Overhead (Req. 2) $791,250 $1,158,750
Total manufacturing costs $2,066,250 $1,908,750
Req. 4
Revenue $5,100,000 $2,100,000
Cost of goods sold (Req. 3) $2,066,250 $1,908,750
Gross Profit $3,033,750 $191,250

E4-17
Value-added activities Time

Answering client questions 3 hours
Client consultations (in-home) 5 hours
Designing 3 hours
On-site supervision of installers 4.5 hours
Total 15.5 hours
Non-value-added activities Time

Advertising 1 hour
Billing clients 3.5 hours
Cleaning the office 1.5 hours
Completing paperwork for client file 1 hour
Entertaining prospective clients for lunch 3 hours
Staff meeting 2 hours
Total 12 hours
E4-18
Req. 1-3
Student answers will vary, but each should demonstrate an understanding of JIT and its
implications. Benefits include reduced inventory storage costs and less likelihood of
obsolete inventory. Possible consequences result when suppliers are not dependable.
If a supplier halts work, company has no “cushion” and is affected quickly.
Req. 4
Answers will vary as this is student’s opinion. Position should be well supported.
E4-19
Req. 1
40% profit = $32 if the selling price is $80, which means the target cost must be $48.
Company will not meet its goal at the current cost of $49.50.
Req. 2
$80 − ($80 × 40%) = $48
Req. 3
Steps the company might take include cost cutting measures such as finding lower
priced materials or negotiating a reduction in labor wages. Alternatively, the company
might also increase the selling price while keeping costs stable.

E4-20
Req. 1
$1,200 − (30% × $1,200) = $840
Req. 2
$1,200 − (40% × $1,200) = $720
Req. 3
$1,200 − (15% × $1,200) = $1,020
E4-21
Student answers will vary, but should demonstrate understanding of the concepts and
how they are related to ABM.
E4-22
IF 1. Cost of scrapped product.

EF 2. Damage to the company’s reputation.
IF 3. Cost of rework.
P 4. Quality training.
AI 5. Costs of the quality control department.
IF 6. Cost of downtime created by quality problems.
P 7. Simplifying the product design to reduce defects..
EF 8. Product replacement costs.

ANSWERS TO PROBLEMS – SET A
PA4-1
Req. 1
$171,500 ÷ 10,000 machine hours = $17.15 per machine hour
Basic model: 5,000 × $17.15 = $85,750 overhead assigned

Luxury model: 5,000 × $17.15 = $85,750 overhead assigned
Req. 2
Material handling: $14,000 ÷ 70 moves = $200 per move
Quality control: $37,500 ÷ 375 inspections = $100 per inspection
Maintenance: $120,000 ÷ 10,000 machine hours = $12 per machine hour
Req. 3
Basic model:
Material handling: 20 moves × $200 per move = $ 4,000
Quality control: 250 inspections × $100 per inspection = 25,000
Maintenance: 5,000 machine hrs × $12 per machine hour = 60,000
Req. 4
Luxury model:
Material handling: 50 moves × $200 per move = $10,000
Maintenance: 5,000 machine hrs × $12 per machine hour = 60,000
Req. 5
The traditional system assigned too much overhead to the luxury model and not enough
to the basic model. ABC is more accurate because it assigned overhead based on
actual consumption of resources.

PA4-2
Req. 1
Indoor model: 21,000 × $3.40 = $ 71,400 overhead assigned

Outdoor model: 20,000 × $3.40 = 68,000 overhead assigned
Total $139,400
Req. 2
Activity Driver and Activity Proportions

Indoor Line Outdoor Line Total
Material 575 moves 425 moves 1,000 moves
handling
575 / 1,000 = 57.5% 425 / 1,000 = 42.5%
Quality control 6,000 inspections 4,000 inspections 10,000 inspections
6,000 / 10,000 = 60% 4,000 / 10,000 = 40%
Machine 21,000 machine hours 20,000 machine hours 41,000 machine hours
maintenance
21,000 / 41,000 = 20,000 / 41,000
51.22%* = 48.78%*
*Rounded to 4 decimal places
Req. 3
Indoor model:
Material handling: $20,000 × 57.5% = $11,500.00
Quality control: $82,500 × 60% = 49,500.00
Maintenance: $36,900 × 51.22% = 18,900.18
Req. 4
Outdoor model:
Material handling: $20,000 × 42.5% = $ 8,500.00
Quality control: $82,500 × 40% = 33,000.00
Maintenance: $36,900 × 48.78% = 17,999.82

PA4-2 (continued)
Req. 5
The traditional system assigned too much overhead to the outdoor model and not
enough to the indoor model. ABC is more accurate because it assigned overhead
based on actual consumption of resources.
PA4-3
Req. 1
Home model: 1,700 × $58.40 = $99,280 overhead assigned

Work model: 1,300 × $58.40 = 75,920 overhead assigned
Total overhead cost $175,200
Req. 2
Home Work
Direct materials $ 30.00 $ 48.00
Direct labor 20.00 30.00
Overhead 141.83a 189.80b
Unit cost $191.83 $267.80
a $99,280 ÷ 700 units
b $75,920 ÷ 400 units
Req. 3
Home Work
Price per unit $ 300.00 $ 500.00
Unit cost 191.83 267.80
Gross margin $ 108.17 $ 232.20
Req. 4
Setup costs: $68,800 ÷ 100 setups = $688 per setup
Quality control: $58,400 ÷ 730 inspections = $80.00 per inspection
Req. 5
Overhead Assigned Overhead Assigned
To Home To Work
Setup cost 42 × $688 = $28,896 58 × $688 = $39,904
($688 per setup)
Quality control 340 × $80 = 27,200 390 × $80 = 31,200
($80 per inspection)
Maintenance 1,700 × $16 = 27,200 1,300 × $16 = 20,800
($16 per machine hr)
Total overhead cost $83,296 $91,904
PA4-3 (continued)
Req. 6
Home Work
Unit cost $168.99 $307.76
a $83,296 ÷ 700 units
b $91,904 ÷ 400 units
Req. 7
Home Work
Price per unit $ 300.00 $ 500.00
Unit cost 168.99 307.76
Gross margin $131.01 $192.24
Req. 8
Home Work
Gross margin $108.17 $232.20
(Traditional)
Gross margin $131.01 $192.24
(ABC)

PA4-4
Req. 1
Machine hours are split evenly between the two product lines. Thus, each line would be
assigned 50% of the total overhead.
Sandy Beach model: $22,360 × 50% = $ 11,180 overhead assigned

Rocky River model: $22,360 × 50% = 11,180 overhead assigned
Total overhead cost $ 22,360
Req. 2
Sandy Rocky
Beach River
Overhead 9.32 a 11.65b
Unit cost $44.32 $58.65
a $11,180 ÷ 1,200 units (rounded)
b $11,180 ÷ 960 units (rounded)
Req. 3
Sandy Rocky
Beach River
Price per unit $ 70.00 $ 90.00
Unit cost 44.32 58.65
Gross margin $ 25.68 $ 31.35
Req. 4
Maintenance: $6,160 ÷ 2,800 machine hours = $2.20 per machine hour
Req. 5
To Sandy Beach To Rocky River
Setup cost $130 × 14 = $1,820 $130 × 26 = $ 3,380
($130 per setup)
Quality control $25 × 140 = 3,500 $25 × 300 = 7,500
Maintenance
($2.20 per machine hour) $2.20 × 1,400 = 3,080 $2.20 × 1,400 = 3,080
Total overhead cost $ 8,400 $ 13,960

PA4-4 (continued)
Req. 6
Sandy Rocky
Beach River
Unit cost $42.00 $61.54
a $8,400 ÷ 1200 units
b $13,960 ÷ 960 units
Req. 7
Sandy Rocky
Beach River
Unit cost 42.00 61.54
Gross margin $28.00 $28.46
Req. 8
Sandy Rocky
Beach River
(Traditional)
(ABC)
PA4-5
Student answers will vary, but should demonstrate a thorough understanding of the
topic being discussed.

ANSWERS TO PROBLEMS–SET B
PB4-1
Req. 1
$47,125 ÷ 20,000 machine hours = $2.356 per machine hour (rounded)
Traditional model: 8,000 × $2.356 = $18,848 overhead assigned

Acrylic model: 12,000 × $2.356 = 28,272 overhead assigned
$47,120*
*$5 rounding error
Req. 2
Quality control: $5,625 ÷ 1,875 inspections = $3 per inspection
Req. 3
Traditional model:
Quality control: 1,000 inspections × $3.00 per inspection = 3,000
Maintenance: 8,000 machine hours × $1.20 per machine hour = 9,600
Req. 4
Acrylic model:
Quality control: 875 inspections × $3.00 per inspection = 2,625
Maintenance: 12,000 machine hours × $1.20 per machine hour = 14,400
Req. 5
The traditional system assigned too much overhead to the Acrylic model and not
enough to the Traditional model. ABC is more accurate because it assigned overhead
based on actual consumption of resources.

PB4-2
Req. 1
Basic line: 18,000 × $2.505 = $45,090 overhead assigned

Industrial line: 16,000 × $2.505 = 40,080 overhead assigned
Total overhead cost $85,170
Req. 2
Quality control: $43,350 ÷ 1,445 inspections = $30 per inspection
Maintenance: $20,400 ÷ 34,000 machine hours = $.60 per machine hour
Req. 3
Basic Line:
Maintenance: 18,000 machine hours × $.60 per machine hour = 10,800
Req. 4
Industrial line:
Maintenance: 16,000 machine hours × $.60 per machine hour = 9,600
Req. 5
The traditional system assigned too much overhead to the Basic line and not enough to
the Industrial line. ABC is more accurate because it assigned overhead based on actual
consumption of resources.

PB4-3
Req. 1
$159,670 ÷ 2,250 machine hours = $70.96 per machine hour (rounded)
Cherry: 1,500 × $70.96 = $106,440 overhead assigned

Strawberry: 750 × $70.96 = 53,220 overhead assigned
$159,660*
*$10 rounding error
Req. 2
Cherry Strawberry
Unit cost $ 1.71 $1.33
a $106,440 ÷ 140,000 units (rounded)
b $53,220 ÷ 190,000 units (rounded)
Req. 3
Cherry Strawberry
Unit cost 1.71 1.33
Gross margin $ 0.79 $ 1.17
Req. 4
Engineering: $19,170 ÷ 135 engineering hours = $142 per engineering hour

PB4-3 (continued)
Req. 5
To Cherry To Strawberry
Setup cost $750 × 40 = $30,000 $750 × 60 = $45,000
($750 per setup)
Quality control $40 × 275 = 11,000 $40 × 350 = 14,000
Maintenance $18 × 750 = 13,500
($18 per machine hour) $18 × 1,500 = 27,000
Engineering $142 × 65 = 9,230 $142 × 70 = 9,940
($142 per hour)
Total overhead cost $77,230 $ 82,440
Req. 6
Cherry Strawberry
Unit cost $ 1.50 $ 1.48
a $77,230 ÷ 140,000 units (rounded)
b $82,440 ÷ 190,000 units (rounded)
Req. 7
Cherry Strawberry
Unit cost 1.50 1.48
Req. 8
Cherry Strawberry
(Traditional)
(ABC)

PB4-4
Req. 1
Junior: 350 × $ 484.746 = $169,661.10 overhead assigned

Expert: 650 × $484.746 = 315,084.90 overhead assigned
$ 484,746.00
Req. 2
Junior Expert
Overhead 42.42 a 35.01 b
Unit cost $185.42 $ 225.01
a $169,661.10 ÷ 4,000 units (rounded)
b $315,084.90 ÷ 9,000 units (rounded)
Req. 3
Junior Expert
Price per unit $ 390.00 $ 615.00
Unit cost 185.42 225.01
Gross margin $ 204.58 $ 389.99
Req. 4
Quality control: $163,020 ÷ 1,650 inspections = $98.80 per inspection
Engineering: $106,522 ÷ 964 engineering hours = $110.50 per engineering hour
Req. 5

To Junior To Expert
Setup cost $934 × 60 = $56,040 $934 × 86 = $80,324
($934 per setup)
Quality control $98.80 × 975 = 96,330 $98.80 × 675 = 66,690
($98.80 per inspection)
Maintenance $78.84 × 350 = 27,594 $78.84 × 650 = 51,246
($78.84 per machine hr)
Engineering $110.50 × 352 = 38,896 $110.50 × 612 = 67,626
($110.50 per hr)
Total overhead cost $218,860 $265,886

PB4-4 (continued)
Req. 6
Junior Expert
Overhead 54.72 a 29.54 b
Total unit cost $ 197.72 $ 219.54
a $218,860 ÷ 4,000 units (rounded)
b $ 265,886 ÷ 9,000 units (rounded)
Req. 7
Junior Expert
Price per unit $ 390.00 $ 615.00
Total unit cost 197.72 219.54
Gross margin $ 192.28 $ 395.46
Req. 8
Junior Expert
Gross margin $ 204.58 $ 389.99
(Traditional)
Gross margin $ 192.28 $ 395.46
(ABC)
PB4-5
Student answers will vary, but should demonstrate a thorough understanding of the
topic being discussed.

ANSWERS TO CASES AND PROJECTS
S4-1
Answers to this question will vary considerably depending on the products chosen by
each student.
S4-2
Answers to this case will vary depending on the company identified by each student. Of
particular importance in the discussion are the questions about difficulties, benefits, and
impacts on other aspects of business and on ultimate success. You should spend time
discussing which difficulties are avoidable and how they might be avoided by other
companies (or by other segments of the same company). Also, changes to other areas of a
company are often overlooked when implementing ABC. Thus, examples and discussion of
these will help students see the far-reaching impact of a change in inventory costing
system.
S4-3
Answers to this case will vary, but the student should recognize that the ABC system will
impact how overhead costs are allocated between the two product lines. Under the current
costing method (based on units produced), the total overhead cost is split equally between
the two products. But the civilian helicopters consumer a disproportionate share of the set-
ups, engineering time, and quality inspections. Switching to an ABC system would increase
the amount of cost assigned to the civilian contracts and decrease the amount assigned to
military contracts. Because the military contracts are based on cost-plus pricing, while the
civilian contracts are set by market forces, this presents a conflict. Students should provide
a logical defense for their choice of cost system. It is worth pointing out that the military
contract will most likely specify the allocation method that should prevent the contractor
from using the accounting system to inflate the cost of the product.
S4-4
The goal of this case is to get students to think about product and service variety and how it
can affect the cost of a product or service. The activities involved in serving a customer at
Subway are largely the same regardless of the type of sandwich they order. But the costs
of preparing a meal in a sit-down restaurant such as Applebee's will vary considerably
depending on what menu item is ordered. These differences are reflected in the prices
charged, but should also be reflected in the indirect costs assigned to various menu items.
For example, a restaurant that frequently revises its menu items will incur more product-
related costs than a restaurant that sticks to the same menu items for an extended period
of time. This will be reflected in the cost structure of the restaurant.

Solution Manual for Managerial Accounting, 4th Edition, Stacey Whitecotton, Robert Libby, Fr
S4-5
Frequency of industrial accidents – Social Measure (employee safety). Could also be

categorized as economic based on the cost savings from lost work days. Toyota appears to
be doing well on this measure. Although the trend for Toyota is relatively flat, it is far below
the average for other industries and for competitors in the auto industry. Employee training
and routine maintenance of equipment are two factors that could be considered to further
improve this metric. Fewer work accidents can impact economic performance by
minimizing lost work days and reducing worker compensation claims.
Percentage of employee’s who smoke – Social measure (employee wellness). The

percentage of employees who smoke has decreased, but it is difficult to tell whether this is
due to company initiatives or general trends in society. A healthier workforce will ultimately
impact economic performance through changes in productivity, longer employee work-life,
etc.
Use of childcare and nursing care leave programs – Social measure (employee work-life
balance). The number of employees who took advantage of childcare and nursing care
leave programs has generally increased, with a slight dip in the number of females utilizing
the program during FY13. Managers may want to investigate what may have caused the
downward shift to determine if the change is systematic or random. Helping employees
manage their work-life balance contributes to economic results through higher employee
satisfaction, reduced turn-over and reduced training costs.
Total waste volume and waste volume per unit produced – Environmental measure. The
total volume of waste and amount of waste per unit has generally decreased over time, but
increased significantly from 2012 to 2013. Managers may want to investigate to determine
what may have caused the increase and determine if it is possible to further reduce waste.
Reducing the amount of waste can impact economics by reducing the cost of disposal and
reducing the cost of material inputs (if the waste can be recycled back into the production
process).
% of employees satisfied with job and work environment – Social (employee satisfaction).
This measure has shown some improvement, but it is difficult to evaluate without knowing
what the company’s goal is for this measure. More than 70% of employees are currently
satisfied with their work environment. Managers could investigate the responses from the
30% who are less satisfied to identify areas for improvement. Employee satisfaction
ultimately impacts financial results through reduced turnover and employee training costs.

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5. Businesses that produce a variety of products or services that differ in production

7. The categories of activity pools include facility-level, product-level, customer-

8. In a service setting, unit-level activities are related to individual customers and

Managerial Accounting, 4/e 4-1

10. Facility-level – company payroll; customer level – customer design changes;

14. ABC can be adapted to include sustainability-related information by including

Managerial Accounting, 4/e 4-2

Managerial Accounting, 4/e 4-3

Managerial Accounting, 4/e 4-4

Factory rent – square footage

Category Potential Cost Driver

1. External failure costs

O 1. Activity-Based Costing (ABC)

Maintenance: $214,500 ÷ 10,000 hrs = $21.45 per machine hour

Managerial Accounting, 4/e 4-6

Quality Control Costs:

Quality Control Costs = $125,000

Product 1: 10,000 inspections ÷ 25,000 inspections = 40%

Product 2: 15,000 inspections ÷ 25,000 inspections = 60%

Machining: $366,600 ÷ 13,000 = $28.20 per machine hour

Setup: $69,825 ÷ 350 = $199.50 per batch

Quality control: $108,800 ÷ 800 = $136.00 per inspection

Amount Consumed by Allocated

Cost Pool Activity Proportion for Luxury Allocated Overhead

Managerial Accounting, 4/e 4-7

Transportation costs: $50,000 ÷ (5,000 + 35,000) = $1.25 per mile

Transportation costs: $1.25 per mile × 20 miles = $25

Total overhead assigned: $25 + $75 + $12 = $112

Activity Proportion for

Product design research Value-Added

Managerial Accounting, 4/e 4-8

Product design research Product

AI 1. Review of tax return for missing items/errors.

Managerial Accounting, 4/e 4-9

Activity Level Cost Driver Value-Added?

Activity Cost 1. Costs Included in Pool 2. Total 3. Unit, 4. Cost

Managerial Accounting, 4/e 4-10

Design costs: $73,600 / 8,000 = $9.20 per design hour

Setup costs: $71,600 / 500 = $143.20 per batch

Activity Driver for Overhead Assigned to

Activity Driver for Overhead Assigned to

Activity Driver for Overhead Assigned to

Managerial Accounting, 4/e 4-11

Total Activity Activity Proportion Overhead Assigned

Total Activity Activity Proportion Overhead Assigned

Total Activity Activity Proportion Overhead Assigned

Managerial Accounting, 4/e 4-12

Machine maintenance: $51,750 ÷ 75,000 = $0.69 per machine hour (MH)

Product A: 22,100 × $1.88 = $41,548*

Managerial Accounting, 4/e 4-13

Standard Floor Mat: 400 × $65.10 = $26,040

Standard Floor Mat: 4,150 × $5.4629 = $22,671.04

Managerial Accounting, 4/e 4-14