Concept explainers
Compare the cost allocations to M Products and R Markets under simplified costing and activity-based costing, and indicate the difference as undercosted or overcosted.

Explanation of Solution
Budgeted overhead allocation rate: The budgeted overhead allocation rate is the rate at which the overhead is allocated. This is calculated by dividing the total fixed and variable
Prepare
M Products | R Markets | |
Professional labor cost: | ||
50 hours×$60 (1) | $3,000 | |
20 hours×$60 (1) | $1,200 | |
Professional support: | ||
50 hours×$40 (2) | 2,000 | |
20 hours×$40 (2) | 800 | |
Total | $5,000 | $2,000 |
Working Note (1):
Compute the cost of professional labor per hour.
Working Note (2):
Computed the cost of professional support per hour.
Prepare job cost sheets for the two clients using activity-based costing.
M Products | R Markets | |
Professional labor cost: | ||
30 hours×$100 (3) | $3,000 | |
5 hours×$100 (3) | $500 | |
Associate labor cost: | ||
20 hours×$40 (4) | 800 | |
15 hours×$40 (4) | 600 | |
Design support: | ||
$3,800×.22 (5) | 836 | |
$1,100×.22 (5) | 242 | |
Staff support: | ||
50 hours×$26.67 (6) | 1,334 | |
20 hours×$26.67 (6) | 533 | |
Total | $5,970 | $1,875 |
Working Note (3):
Compute the cost of partner labor per hour.
Working Note (4):
Computed the cost of associate labor per hour.
Working Note (5):
Computed the cost of design support per partner and associate.
Working Note (6):
Computed the cost of staff support per partner and associate.
Calculate the difference between the total cost using simplified system and activity-based system:
M Products | R Markets | |
Cost using simplified system | $5,000 | $2,000 |
Cost using activity-based system | $5,970 | $1,875 |
Difference | $(970) | $125 |
Using the simplified costing system, the job of R markets was overcosted by an amount of $125, and the job of M job was undercosted by $970. Using the simplified costing system, the job of M Products required 60% partner hours (30/50), and hence it was undercosted, whereas the job of R Markets required only 25% (5/20) partner hours, and hence, it was slightly overcosted.
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Chapter 9 Solutions
Principles of Cost Accounting
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