Activity based costing: Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product. Manufacturing overheads allocation: Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows T o t a l o v e r h e a d c o s t t o b e a l l o c a t e d T o t a l d i r e c t l a b o r h o u r s * D i r e c t l a b o r h o u r s u s e d f o r m a n u f a c t u r i n g a p a r t i c u l a r p r o d u c t Requirement 1: The manufacturing cost and the gross profit per unit for the given products using overhead rates based on direct labor hours.

Question

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Answer 1

Question

Chapter 4, Problem 1PSA

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 1:

The manufacturing cost and the gross profit per unit for the given products using overhead rates based on direct labor hours.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $26.37 and for Product B is $84.65 if overhead costs are assigned based on direct labor hours.

The gross profit per unit of product A is $ 3.63 and product B is $ 35.35

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Total overhead cost allocated	111, 0006, 200*3, 000=53, 710	111, 0006, 200*3, 200=57, 290
Total overhead cost allocated per unit (c )	53, 71010, 000=$5.371	57, 2902, 000=$28.645
Total production cost (a+b+c)	$26.37	$84.65
Market price	$30	$120
Gross profit = Market price−Total production cost	$3.63	$35.35

Total indirect manufacturing cost/production overhead

Engineering support	24, 500
Electricity	34, 000
Setup costs	52, 500
Total production overheads	$111, 000

Thus, per unit manufacturing cost and gross profit of each product using direct labor hours as the basis of overhead allocation have been computed.

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 2:

The gross profit generated by each customer of product A and Product B using direct labor hours as basis of overhead allocation and cost of providing customer service to each customer.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 72.60 and for product B is $176.75

The cost of servicing each customer is $ 90. This implies that the net loss from each customer for product A is $17.4 and net profit from each customer for product B is $86.75.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$3.63	$35.35
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$36, 300	$70, 700	$107, 000
Number of customers	500	400	900
Gross profit for each customer	$72.60	$176.75	$118.89
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$(17.4)	86.75

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 3:

The manufacturing cost and gross profit per unit of each product line using ABC.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $24.30 and for Product B is $95.03 if overhead costs are assigned based on ABC.

The gross profit per unit of product A is $ 5.70 and product B is $ 24.97

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Machine hours per unit	0.1 MH	1.2 MH
Total Machine hours required	0.1*10, 000=1, 000	1.2*2, 000=2, 400	3, 400
Total engineering modifications	12	58	70
Number of batches	125	225	350
Engineering support cost allocated (c )	24, 50070*12=$4, 200	24, 50070*58=$20, 300	24, 500
Total electricity cost allocated(d)	34, 0003, 400*1, 000=$10, 000	34, 0003, 400*2, 400=$24, 000	$34, 000
Total setup costs allocated (e)	52, 500350*125=$18, 750	52, 500350*225=$33, 750	$52, 500
Total production overhead cost allocated (c+d+e)	$32, 950	$78, 050	$111, 000
Production overhead per unit (f)	32, 95010, 000=$3.295	78, 0502, 000=$39.025
Total production cost (a+b+f)	$24.30	$95.025
Market price	$30	$120
Gross profit = Market price−Total production cost	$5.70	$24.975

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 4:

The gross profit generated by each customer of product A and Product B using ABC as basis of overhead allocation and to determine if gross profit per customer adequate.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 114 and for product B is $124.88

The cost of servicing each customer is $ 90. This implies that the net profit from each customer for product A is $24 and net profit from each customer for product B is $34.88.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$5.70	$24.975
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$57, 000	$49, 950
Number of customers	500	400	900
Gross profit for each customer	$114	$124.88
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$24	$34.88

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.

Expert Solution

Answer to Problem 1PSA

Activity based costing gives better information to the managers of the company when compared with the traditional basis of allocation based on direct labor hours.

By using activity based costing, the major cost driver for allocating a particular overhead has been identified and the costs have been allocated to the product based on these cost drivers which provides more accurate costing data.

Explanation of Solution

When overhead are allocated based on direct labor hours, total production overhead may be clubbed and then allocated to the products based on direct labor hours used in the production process, which is a random method of allocation

However, in activity based costing, the major cost driver of each overhead expense is identified and the costs are allocated based on the data available for these cost drivers which implies a more detailed and accurate allocation of costs.

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Answer 2

Question

Chapter 4, Problem 1PSA

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 1:

The manufacturing cost and the gross profit per unit for the given products using overhead rates based on direct labor hours.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $26.37 and for Product B is $84.65 if overhead costs are assigned based on direct labor hours.

The gross profit per unit of product A is $ 3.63 and product B is $ 35.35

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Total overhead cost allocated	111, 0006, 200*3, 000=53, 710	111, 0006, 200*3, 200=57, 290
Total overhead cost allocated per unit (c )	53, 71010, 000=$5.371	57, 2902, 000=$28.645
Total production cost (a+b+c)	$26.37	$84.65
Market price	$30	$120
Gross profit = Market price−Total production cost	$3.63	$35.35

Total indirect manufacturing cost/production overhead

Engineering support	24, 500
Electricity	34, 000
Setup costs	52, 500
Total production overheads	$111, 000

Thus, per unit manufacturing cost and gross profit of each product using direct labor hours as the basis of overhead allocation have been computed.

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 2:

The gross profit generated by each customer of product A and Product B using direct labor hours as basis of overhead allocation and cost of providing customer service to each customer.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 72.60 and for product B is $176.75

The cost of servicing each customer is $ 90. This implies that the net loss from each customer for product A is $17.4 and net profit from each customer for product B is $86.75.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$3.63	$35.35
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$36, 300	$70, 700	$107, 000
Number of customers	500	400	900
Gross profit for each customer	$72.60	$176.75	$118.89
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$(17.4)	86.75

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 3:

The manufacturing cost and gross profit per unit of each product line using ABC.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $24.30 and for Product B is $95.03 if overhead costs are assigned based on ABC.

The gross profit per unit of product A is $ 5.70 and product B is $ 24.97

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Machine hours per unit	0.1 MH	1.2 MH
Total Machine hours required	0.1*10, 000=1, 000	1.2*2, 000=2, 400	3, 400
Total engineering modifications	12	58	70
Number of batches	125	225	350
Engineering support cost allocated (c )	24, 50070*12=$4, 200	24, 50070*58=$20, 300	24, 500
Total electricity cost allocated(d)	34, 0003, 400*1, 000=$10, 000	34, 0003, 400*2, 400=$24, 000	$34, 000
Total setup costs allocated (e)	52, 500350*125=$18, 750	52, 500350*225=$33, 750	$52, 500
Total production overhead cost allocated (c+d+e)	$32, 950	$78, 050	$111, 000
Production overhead per unit (f)	32, 95010, 000=$3.295	78, 0502, 000=$39.025
Total production cost (a+b+f)	$24.30	$95.025
Market price	$30	$120
Gross profit = Market price−Total production cost	$5.70	$24.975

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 4:

The gross profit generated by each customer of product A and Product B using ABC as basis of overhead allocation and to determine if gross profit per customer adequate.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 114 and for product B is $124.88

The cost of servicing each customer is $ 90. This implies that the net profit from each customer for product A is $24 and net profit from each customer for product B is $34.88.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$5.70	$24.975
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$57, 000	$49, 950
Number of customers	500	400	900
Gross profit for each customer	$114	$124.88
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$24	$34.88

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.

Expert Solution

Answer to Problem 1PSA

Activity based costing gives better information to the managers of the company when compared with the traditional basis of allocation based on direct labor hours.

By using activity based costing, the major cost driver for allocating a particular overhead has been identified and the costs have been allocated to the product based on these cost drivers which provides more accurate costing data.

Explanation of Solution

When overhead are allocated based on direct labor hours, total production overhead may be clubbed and then allocated to the products based on direct labor hours used in the production process, which is a random method of allocation

However, in activity based costing, the major cost driver of each overhead expense is identified and the costs are allocated based on the data available for these cost drivers which implies a more detailed and accurate allocation of costs.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 4, Problem 1PSA

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 1:

The manufacturing cost and the gross profit per unit for the given products using overhead rates based on direct labor hours.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $26.37 and for Product B is $84.65 if overhead costs are assigned based on direct labor hours.

The gross profit per unit of product A is $ 3.63 and product B is $ 35.35

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Total overhead cost allocated	111, 0006, 200*3, 000=53, 710	111, 0006, 200*3, 200=57, 290
Total overhead cost allocated per unit (c )	53, 71010, 000=$5.371	57, 2902, 000=$28.645
Total production cost (a+b+c)	$26.37	$84.65
Market price	$30	$120
Gross profit = Market price−Total production cost	$3.63	$35.35

Total indirect manufacturing cost/production overhead

Engineering support	24, 500
Electricity	34, 000
Setup costs	52, 500
Total production overheads	$111, 000

Thus, per unit manufacturing cost and gross profit of each product using direct labor hours as the basis of overhead allocation have been computed.

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 2:

The gross profit generated by each customer of product A and Product B using direct labor hours as basis of overhead allocation and cost of providing customer service to each customer.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 72.60 and for product B is $176.75

The cost of servicing each customer is $ 90. This implies that the net loss from each customer for product A is $17.4 and net profit from each customer for product B is $86.75.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$3.63	$35.35
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$36, 300	$70, 700	$107, 000
Number of customers	500	400	900
Gross profit for each customer	$72.60	$176.75	$118.89
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$(17.4)	86.75

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 3:

The manufacturing cost and gross profit per unit of each product line using ABC.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $24.30 and for Product B is $95.03 if overhead costs are assigned based on ABC.

The gross profit per unit of product A is $ 5.70 and product B is $ 24.97

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Machine hours per unit	0.1 MH	1.2 MH
Total Machine hours required	0.1*10, 000=1, 000	1.2*2, 000=2, 400	3, 400
Total engineering modifications	12	58	70
Number of batches	125	225	350
Engineering support cost allocated (c )	24, 50070*12=$4, 200	24, 50070*58=$20, 300	24, 500
Total electricity cost allocated(d)	34, 0003, 400*1, 000=$10, 000	34, 0003, 400*2, 400=$24, 000	$34, 000
Total setup costs allocated (e)	52, 500350*125=$18, 750	52, 500350*225=$33, 750	$52, 500
Total production overhead cost allocated (c+d+e)	$32, 950	$78, 050	$111, 000
Production overhead per unit (f)	32, 95010, 000=$3.295	78, 0502, 000=$39.025
Total production cost (a+b+f)	$24.30	$95.025
Market price	$30	$120
Gross profit = Market price−Total production cost	$5.70	$24.975

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 4:

The gross profit generated by each customer of product A and Product B using ABC as basis of overhead allocation and to determine if gross profit per customer adequate.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 114 and for product B is $124.88

The cost of servicing each customer is $ 90. This implies that the net profit from each customer for product A is $24 and net profit from each customer for product B is $34.88.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$5.70	$24.975
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$57, 000	$49, 950
Number of customers	500	400	900
Gross profit for each customer	$114	$124.88
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$24	$34.88

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.

Expert Solution

Answer to Problem 1PSA

Activity based costing gives better information to the managers of the company when compared with the traditional basis of allocation based on direct labor hours.

By using activity based costing, the major cost driver for allocating a particular overhead has been identified and the costs have been allocated to the product based on these cost drivers which provides more accurate costing data.

Explanation of Solution

When overhead are allocated based on direct labor hours, total production overhead may be clubbed and then allocated to the products based on direct labor hours used in the production process, which is a random method of allocation

However, in activity based costing, the major cost driver of each overhead expense is identified and the costs are allocated based on the data available for these cost drivers which implies a more detailed and accurate allocation of costs.

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Answer 4

Question

Chapter 4, Problem 1PSA

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 1:

The manufacturing cost and the gross profit per unit for the given products using overhead rates based on direct labor hours.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $26.37 and for Product B is $84.65 if overhead costs are assigned based on direct labor hours.

The gross profit per unit of product A is $ 3.63 and product B is $ 35.35

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Total overhead cost allocated	111, 0006, 200*3, 000=53, 710	111, 0006, 200*3, 200=57, 290
Total overhead cost allocated per unit (c )	53, 71010, 000=$5.371	57, 2902, 000=$28.645
Total production cost (a+b+c)	$26.37	$84.65
Market price	$30	$120
Gross profit = Market price−Total production cost	$3.63	$35.35

Total indirect manufacturing cost/production overhead

Engineering support	24, 500
Electricity	34, 000
Setup costs	52, 500
Total production overheads	$111, 000

Thus, per unit manufacturing cost and gross profit of each product using direct labor hours as the basis of overhead allocation have been computed.

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 2:

The gross profit generated by each customer of product A and Product B using direct labor hours as basis of overhead allocation and cost of providing customer service to each customer.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 72.60 and for product B is $176.75

The cost of servicing each customer is $ 90. This implies that the net loss from each customer for product A is $17.4 and net profit from each customer for product B is $86.75.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$3.63	$35.35
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$36, 300	$70, 700	$107, 000
Number of customers	500	400	900
Gross profit for each customer	$72.60	$176.75	$118.89
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$(17.4)	86.75

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 3:

The manufacturing cost and gross profit per unit of each product line using ABC.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $24.30 and for Product B is $95.03 if overhead costs are assigned based on ABC.

The gross profit per unit of product A is $ 5.70 and product B is $ 24.97

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Machine hours per unit	0.1 MH	1.2 MH
Total Machine hours required	0.1*10, 000=1, 000	1.2*2, 000=2, 400	3, 400
Total engineering modifications	12	58	70
Number of batches	125	225	350
Engineering support cost allocated (c )	24, 50070*12=$4, 200	24, 50070*58=$20, 300	24, 500
Total electricity cost allocated(d)	34, 0003, 400*1, 000=$10, 000	34, 0003, 400*2, 400=$24, 000	$34, 000
Total setup costs allocated (e)	52, 500350*125=$18, 750	52, 500350*225=$33, 750	$52, 500
Total production overhead cost allocated (c+d+e)	$32, 950	$78, 050	$111, 000
Production overhead per unit (f)	32, 95010, 000=$3.295	78, 0502, 000=$39.025
Total production cost (a+b+f)	$24.30	$95.025
Market price	$30	$120
Gross profit = Market price−Total production cost	$5.70	$24.975

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 4:

The gross profit generated by each customer of product A and Product B using ABC as basis of overhead allocation and to determine if gross profit per customer adequate.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 114 and for product B is $124.88

The cost of servicing each customer is $ 90. This implies that the net profit from each customer for product A is $24 and net profit from each customer for product B is $34.88.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$5.70	$24.975
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$57, 000	$49, 950
Number of customers	500	400	900
Gross profit for each customer	$114	$124.88
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$24	$34.88

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.

Expert Solution

Answer to Problem 1PSA

Activity based costing gives better information to the managers of the company when compared with the traditional basis of allocation based on direct labor hours.

By using activity based costing, the major cost driver for allocating a particular overhead has been identified and the costs have been allocated to the product based on these cost drivers which provides more accurate costing data.

Explanation of Solution

When overhead are allocated based on direct labor hours, total production overhead may be clubbed and then allocated to the products based on direct labor hours used in the production process, which is a random method of allocation

However, in activity based costing, the major cost driver of each overhead expense is identified and the costs are allocated based on the data available for these cost drivers which implies a more detailed and accurate allocation of costs.

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Answer 5

Chapter 4, Problem 1PSA

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 1:

The manufacturing cost and the gross profit per unit for the given products using overhead rates based on direct labor hours.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $26.37 and for Product B is $84.65 if overhead costs are assigned based on direct labor hours.

The gross profit per unit of product A is $ 3.63 and product B is $ 35.35

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Total overhead cost allocated	111, 0006, 200*3, 000=53, 710	111, 0006, 200*3, 200=57, 290
Total overhead cost allocated per unit (c )	53, 71010, 000=$5.371	57, 2902, 000=$28.645
Total production cost (a+b+c)	$26.37	$84.65
Market price	$30	$120
Gross profit = Market price−Total production cost	$3.63	$35.35

Total indirect manufacturing cost/production overhead

Engineering support	24, 500
Electricity	34, 000
Setup costs	52, 500
Total production overheads	$111, 000

Thus, per unit manufacturing cost and gross profit of each product using direct labor hours as the basis of overhead allocation have been computed.

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 2:

The gross profit generated by each customer of product A and Product B using direct labor hours as basis of overhead allocation and cost of providing customer service to each customer.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 72.60 and for product B is $176.75

The cost of servicing each customer is $ 90. This implies that the net loss from each customer for product A is $17.4 and net profit from each customer for product B is $86.75.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$3.63	$35.35
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$36, 300	$70, 700	$107, 000
Number of customers	500	400	900
Gross profit for each customer	$72.60	$176.75	$118.89
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$(17.4)	86.75

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 3:

The manufacturing cost and gross profit per unit of each product line using ABC.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $24.30 and for Product B is $95.03 if overhead costs are assigned based on ABC.

The gross profit per unit of product A is $ 5.70 and product B is $ 24.97

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Machine hours per unit	0.1 MH	1.2 MH
Total Machine hours required	0.1*10, 000=1, 000	1.2*2, 000=2, 400	3, 400
Total engineering modifications	12	58	70
Number of batches	125	225	350
Engineering support cost allocated (c )	24, 50070*12=$4, 200	24, 50070*58=$20, 300	24, 500
Total electricity cost allocated(d)	34, 0003, 400*1, 000=$10, 000	34, 0003, 400*2, 400=$24, 000	$34, 000
Total setup costs allocated (e)	52, 500350*125=$18, 750	52, 500350*225=$33, 750	$52, 500
Total production overhead cost allocated (c+d+e)	$32, 950	$78, 050	$111, 000
Production overhead per unit (f)	32, 95010, 000=$3.295	78, 0502, 000=$39.025
Total production cost (a+b+f)	$24.30	$95.025
Market price	$30	$120
Gross profit = Market price−Total production cost	$5.70	$24.975

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 4:

The gross profit generated by each customer of product A and Product B using ABC as basis of overhead allocation and to determine if gross profit per customer adequate.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 114 and for product B is $124.88

The cost of servicing each customer is $ 90. This implies that the net profit from each customer for product A is $24 and net profit from each customer for product B is $34.88.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$5.70	$24.975
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$57, 000	$49, 950
Number of customers	500	400	900
Gross profit for each customer	$114	$124.88
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$24	$34.88

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

To determine

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.

Expert Solution

Answer to Problem 1PSA

Activity based costing gives better information to the managers of the company when compared with the traditional basis of allocation based on direct labor hours.

By using activity based costing, the major cost driver for allocating a particular overhead has been identified and the costs have been allocated to the product based on these cost drivers which provides more accurate costing data.

Explanation of Solution

When overhead are allocated based on direct labor hours, total production overhead may be clubbed and then allocated to the products based on direct labor hours used in the production process, which is a random method of allocation

However, in activity based costing, the major cost driver of each overhead expense is identified and the costs are allocated based on the data available for these cost drivers which implies a more detailed and accurate allocation of costs.

Answer 6

Chapter 4, Problem 1PSA

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 1:

The manufacturing cost and the gross profit per unit for the given products using overhead rates based on direct labor hours.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $26.37 and for Product B is $84.65 if overhead costs are assigned based on direct labor hours.

The gross profit per unit of product A is $ 3.63 and product B is $ 35.35

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Total overhead cost allocated	111, 0006, 200*3, 000=53, 710	111, 0006, 200*3, 200=57, 290
Total overhead cost allocated per unit (c )	53, 71010, 000=$5.371	57, 2902, 000=$28.645
Total production cost (a+b+c)	$26.37	$84.65
Market price	$30	$120
Gross profit = Market price−Total production cost	$3.63	$35.35

Total indirect manufacturing cost/production overhead

Engineering support	24, 500
Electricity	34, 000
Setup costs	52, 500
Total production overheads	$111, 000

Thus, per unit manufacturing cost and gross profit of each product using direct labor hours as the basis of overhead allocation have been computed.

Answer 7

Chapter 4, Problem 1PSA

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows
Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 1:

The manufacturing cost and the gross profit per unit for the given products using overhead rates based on direct labor hours.

Answer 8

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $26.37 and for Product B is $84.65 if overhead costs are assigned based on direct labor hours.

The gross profit per unit of product A is $ 3.63 and product B is $ 35.35

Answer 9

Expert Solution

Answer 10

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Total overhead cost allocated	111, 0006, 200*3, 000=53, 710	111, 0006, 200*3, 200=57, 290
Total overhead cost allocated per unit (c )	53, 71010, 000=$5.371	57, 2902, 000=$28.645
Total production cost (a+b+c)	$26.37	$84.65
Market price	$30	$120
Gross profit = Market price−Total production cost	$3.63	$35.35

Total indirect manufacturing cost/production overhead

Engineering support	24, 500
Electricity	34, 000
Setup costs	52, 500
Total production overheads	$111, 000

Thus, per unit manufacturing cost and gross profit of each product using direct labor hours as the basis of overhead allocation have been computed.

Answer 13

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 2:

The gross profit generated by each customer of product A and Product B using direct labor hours as basis of overhead allocation and cost of providing customer service to each customer.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 72.60 and for product B is $176.75

The cost of servicing each customer is $ 90. This implies that the net loss from each customer for product A is $17.4 and net profit from each customer for product B is $86.75.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$3.63	$35.35
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$36, 300	$70, 700	$107, 000
Number of customers	500	400	900
Gross profit for each customer	$72.60	$176.75	$118.89
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$(17.4)	86.75

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

Answer 14

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 2:

The gross profit generated by each customer of product A and Product B using direct labor hours as basis of overhead allocation and cost of providing customer service to each customer.

Answer 15

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 72.60 and for product B is $176.75

The cost of servicing each customer is $ 90. This implies that the net loss from each customer for product A is $17.4 and net profit from each customer for product B is $86.75.

Answer 16

Expert Solution

Answer 17

Expert Solution

Answer 18

Expert Solution

Answer 19

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$3.63	$35.35
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$36, 300	$70, 700	$107, 000
Number of customers	500	400	900
Gross profit for each customer	$72.60	$176.75	$118.89
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$(17.4)	86.75

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

Answer 20

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 3:

The manufacturing cost and gross profit per unit of each product line using ABC.

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $24.30 and for Product B is $95.03 if overhead costs are assigned based on ABC.

The gross profit per unit of product A is $ 5.70 and product B is $ 24.97

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Machine hours per unit	0.1 MH	1.2 MH
Total Machine hours required	0.1*10, 000=1, 000	1.2*2, 000=2, 400	3, 400
Total engineering modifications	12	58	70
Number of batches	125	225	350
Engineering support cost allocated (c )	24, 50070*12=$4, 200	24, 50070*58=$20, 300	24, 500
Total electricity cost allocated(d)	34, 0003, 400*1, 000=$10, 000	34, 0003, 400*2, 400=$24, 000	$34, 000
Total setup costs allocated (e)	52, 500350*125=$18, 750	52, 500350*225=$33, 750	$52, 500
Total production overhead cost allocated (c+d+e)	$32, 950	$78, 050	$111, 000
Production overhead per unit (f)	32, 95010, 000=$3.295	78, 0502, 000=$39.025
Total production cost (a+b+f)	$24.30	$95.025
Market price	$30	$120
Gross profit = Market price−Total production cost	$5.70	$24.975

Answer 21

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 3:

The manufacturing cost and gross profit per unit of each product line using ABC.

Answer 22

Expert Solution

Answer to Problem 1PSA

The manufacturing cost per unit for Product A is $24.30 and for Product B is $95.03 if overhead costs are assigned based on ABC.

The gross profit per unit of product A is $ 5.70 and product B is $ 24.97

Answer 23

Expert Solution

Answer 24

Expert Solution

Answer 25

Expert Solution

Answer 26

Explanation of Solution

	Product A	Product B	Total
Direct material cost per unit (a)	15	24
Direct labor hours	0.3	1.6
Direct labor cost per unit @$20 per DLH (b)	0.3*$20=$6	1.6*$20=$32
Total direct labor hours = DLH per unit*total units produced	0.3*10, 000=3, 000	1.6*2, 000=3, 200	6, 200
Machine hours per unit	0.1 MH	1.2 MH
Total Machine hours required	0.1*10, 000=1, 000	1.2*2, 000=2, 400	3, 400
Total engineering modifications	12	58	70
Number of batches	125	225	350
Engineering support cost allocated (c )	24, 50070*12=$4, 200	24, 50070*58=$20, 300	24, 500
Total electricity cost allocated(d)	34, 0003, 400*1, 000=$10, 000	34, 0003, 400*2, 400=$24, 000	$34, 000
Total setup costs allocated (e)	52, 500350*125=$18, 750	52, 500350*225=$33, 750	$52, 500
Total production overhead cost allocated (c+d+e)	$32, 950	$78, 050	$111, 000
Production overhead per unit (f)	32, 95010, 000=$3.295	78, 0502, 000=$39.025
Total production cost (a+b+f)	$24.30	$95.025
Market price	$30	$120
Gross profit = Market price−Total production cost	$5.70	$24.975

Answer 27

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 4:

The gross profit generated by each customer of product A and Product B using ABC as basis of overhead allocation and to determine if gross profit per customer adequate.

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 114 and for product B is $124.88

The cost of servicing each customer is $ 90. This implies that the net profit from each customer for product A is $24 and net profit from each customer for product B is $34.88.

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$5.70	$24.975
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$57, 000	$49, 950
Number of customers	500	400	900
Gross profit for each customer	$114	$124.88
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$24	$34.88

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

Answer 28

To determine

Concept introduction:

Activity based costing:

Activity based costing is the method of cost allocation of overhead expenses by first identifying the costs pool for any specific overhead and then identifying the costs related to a particular product.

Manufacturing overheads allocation:

Manufacturing overheads are the overheads incurred in manufacturing plants for manufacturing a product. Enterprises use several methods of allocating these factory overheads like on direct labor hours, activity based method etc. In overhead cost allocation using direct labor hours, the total direct labor hours incurred are identified and the costs are allocated between products using the direct labor hours incurred in manufacturing the particular product. The formula for cost allocation for a particular product based on direct labor hours would be as follows

Total overhead cost to be allocatedTotal direct labor hours*Direct labor hours used for manufacturing a particular product

Requirement 4:

The gross profit generated by each customer of product A and Product B using ABC as basis of overhead allocation and to determine if gross profit per customer adequate.

Answer 29

Expert Solution

Answer to Problem 1PSA

The gross profit generated by each customer for product A is $ 114 and for product B is $124.88

The cost of servicing each customer is $ 90. This implies that the net profit from each customer for product A is $24 and net profit from each customer for product B is $34.88.

Answer 30

Expert Solution

Answer 31

Expert Solution

Answer 32

Expert Solution

Answer 33

Explanation of Solution

	Product A	Product B	Total
Gross profit per unit	$5.70	$24.975
Number of units sold	10, 000 units	2, 000 units
Total gross profit earned	$57, 000	$49, 950
Number of customers	500	400	900
Gross profit for each customer	$114	$124.88
Cost of servicing each customer	$90	$90
Net profit/(loss from each customer)	$24	$34.88

Total customer service charges=$81, 000

Total number of customer=900

So, cost of servicing each customer = 81, 000900=$90

Answer 34

To determine

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.

Expert Solution

Answer to Problem 1PSA

Activity based costing gives better information to the managers of the company when compared with the traditional basis of allocation based on direct labor hours.

By using activity based costing, the major cost driver for allocating a particular overhead has been identified and the costs have been allocated to the product based on these cost drivers which provides more accurate costing data.

Explanation of Solution

When overhead are allocated based on direct labor hours, total production overhead may be clubbed and then allocated to the products based on direct labor hours used in the production process, which is a random method of allocation

However, in activity based costing, the major cost driver of each overhead expense is identified and the costs are allocated based on the data available for these cost drivers which implies a more detailed and accurate allocation of costs.

Answer 35

To determine

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.

Answer 36

Expert Solution

Answer to Problem 1PSA

Activity based costing gives better information to the managers of the company when compared with the traditional basis of allocation based on direct labor hours.

By using activity based costing, the major cost driver for allocating a particular overhead has been identified and the costs have been allocated to the product based on these cost drivers which provides more accurate costing data.

Answer 37

Expert Solution

Answer 38

Expert Solution

Answer 39

Expert Solution

Answer 40

Explanation of Solution

When overhead are allocated based on direct labor hours, total production overhead may be clubbed and then allocated to the products based on direct labor hours used in the production process, which is a random method of allocation

However, in activity based costing, the major cost driver of each overhead expense is identified and the costs are allocated based on the data available for these cost drivers which implies a more detailed and accurate allocation of costs.

Answer 41

Ch. 4 - Prob. 1MCQ Ch. 4 - Prob. 2MCQ Ch. 4 - All of the following are examples of batch-level...Ch. 4 - Prob. 4MCQ Ch. 4 - Prob. 5MCQ Ch. 4 - Why are overhead costs allocated to products and...Ch. 4 - What are three common methods of assigning...Ch. 4 - Why are direct labor hours and machine hours...Ch. 4 - What are the advantages of using a single plant...Ch. 4 - The usefulness of a single plant wide overhead...

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Answer to Problem 1PSA

Explanation of Solution

Answer to Problem 1PSA

Explanation of Solution

Answer to Problem 1PSA

Explanation of Solution

Answer to Problem 1PSA

Explanation of Solution

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.

Answer to Problem 1PSA

Explanation of Solution

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Chapter 4 Solutions

Concept explainers

Videos

Answer to Problem 1PSA

Explanation of Solution

Answer to Problem 1PSA

Explanation of Solution

Answer to Problem 1PSA

Explanation of Solution

Answer to Problem 1PSA

Explanation of Solution

Requirement 5: To select: The method of product costing which provides better information to the managers of the company and reasons for the same.

Answer to Problem 1PSA

Explanation of Solution

Want to see more full solutions like this?

Chapter 4 Solutions

Requirement 5:

To select:

The method of product costing which provides better information to the managers of the company and reasons for the same.