Chapter 5, Problem 5ESB

a

To determine

Allocate the quality-control cost among the products by assuming it is driven by the unit-level activities.

Explanation of Solution

Unit level cost:

The performance is based on the every single unit of product or service. Examples are indirect labor, production supplies, and inspection cost.

The calculation of allocation rate is as follows:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Cost to be allocated (Quality control cost)}}{\text{Cost driver (Direct labor hours) }}\\ =\frac{\$270,000}{50,000\text{ hours}}\\ =\$5.40\text{ per direct labor hour}\end{array}$

Hence, the allocation rate per direct labor hour is $5.40.

The calculation of total cost allocated for handy is as follows:

$\begin{array}{c}\text{Allocated cost (handy)}=\text{Labor hours}\times \text{Per direct labor hour}\\ =26,000\text{ hours}\times \$5.40\\ =\$140,000\end{array}$

Hence, the allocated cost for handy is $140,000.

The calculation of total cost allocated for action is as follows:

$\begin{array}{c}\text{Allocated cost (action)}=\text{Labor hours}\times \text{Per direct labor hour}\\ =24,000\text{ hours}\times \$5.40\\ =\$129,000\end{array}$

Hence, the allocated cost for action is $129,000.

b

To determine

Allocate the quality-control cost of the products by assuming it is driven by the batch-level activities.

Explanation of Solution

Batch level cost:

Batch level is performed based on each group or batch. Examples are setup cost, quality control cost, and material handling cost.

The calculation of allocation rate is as follows:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Cost to be allocated (Quality control cost)}}{\text{Cost driver (Number of batches) }}\\ =\frac{\$270,000}{\text{60 batches}}\\ =\$4,500\text{ per batch}\end{array}$

Hence, the allocation rate per batch is $4,500.

The calculation of total cost allocated for handy is as follows:

$\begin{array}{c}\text{Allocated cost (handy)}=\text{Number of batches}\times \text{Per batch}\\ =38\text{ batches}\times \$4,500\\ =\$171,000\end{array}$

Hence, the allocated cost for handy is $171,000.

The calculation of total cost allocated for action is as follows:

$\begin{array}{c}\text{Allocated cost (action)}=\text{Number of batches}\times \text{Per batch}\\ =22\text{ batches}\times \$4,500\\ =\$99,000\end{array}$

Hence, the allocated cost for action is $99,000.

c

To determine

Allocate the quality-control cost among the products by assuming it is driven by the product-level activities.

Explanation of Solution

Product level cost:

Product level supports the products of particular services or products. Examples are specific to product advertising cost and engineering, and design cost.

The calculation of allocation rate is as follows:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Cost to be allocated (Quality control cost)}}{\text{Cost driver (Number of engineers) }}\\ =\frac{\$270,000}{\text{15 engineers}}\\ =\$18,000\text{ per engineer}\end{array}$

Hence, the allocation rate per engineer is $18,000.

The calculation of total cost allocated for handy is as follows:

$\begin{array}{c}\text{Allocated cost (handy)}=\text{Number of engineers}\times \text{Per engineer cost}\\ =10\text{ engineers}\times \$18,000\\ =\$180,000\end{array}$

Hence, the allocated cost for handy is $180,000.

The calculation of total cost allocated for action is as follows:

$\begin{array}{c}\text{Allocated cost (action)}=\text{Number of engineers}\times \text{Per engineer cost}\\ =5\text{ engineers}\times \$18,000\\ =\$90,000\end{array}$

Hence, the allocated cost for action is $90,000.

d

To determine

Allocate the quality-control cost among the products by assuming it is driven by the facility-level activities.

Explanation of Solution

Facility level cost:

Facility level supports all the operations that are carried in the company. Examples are landscaping cost, and depreciation on manufacturing facility.

The calculation of allocation rate is as follows:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Cost to be allocated (Quality control cost)}}{\text{Cost driver (Number of square feet) }}\\ =\frac{\$270,000}{1265,000\text{ square feet}}\\ =\$2.16\text{ per square feet}\end{array}$

Hence, the allocation rate per square feet is $2.16.

The calculation of total cost allocated for handy is as follows:

$\begin{array}{c}\text{Allocated cost (handy)}=\text{Number of square feets}\times \text{Per square feet}\\ =40,000\text{ square feet}\times \$2.16\\ =\$86,400\end{array}$

Hence, the allocated cost for handy is $86,400.

The calculation of total cost allocated for action is as follows:

$\begin{array}{c}\text{Allocated cost (action)}=\text{Number of square feets}\times \text{Per square feet}\\ =85,000\text{ square feet}\times \$2.16\\ =\$183,600\end{array}$

Hence, the allocated cost for action is $378,000.