Concept explainers
To calculate: The Departmental

Answer to Problem 6IE
Solution: The Departmental overhead rates and amount of overhead assigned to each product are as follows:
Molding | Assemble and Pack | |
Departmental Overhead rate | $ 35.80 | $ 18.75 |
Basic | Advance | Total | |
Total Overhead assigned to products | $ 804,545 | $ 545,455 | $ 1,350,000 |
The revised segmented income statement is as follows:
Segmented Income Statement | Basic | Advance | Total |
Number of Units Produced and Sold | 20000 | 10000 | 30000 |
Sales | $ 3,000,000 | $ 2,000,000 | $ 5,000,000 |
Cost of Goods Sold using the Departmental overhead rate | $ 2,204,545 | $ 1,445,455 | $ 3,650,000 |
Gross Margin | $ 795,455 | $ 554,545 | $ 1,350,000 |
Selling and Administrative Expenses | $ 720,000 | $ 480,000 | $ 1,200,000 |
Net operating Income/ (Loss) | $ 75,455 | $ 74,545 | $ 150,000 |
Explanation of Solution
The Departmental overhead rates and amount of overhead assigned to each product are calculated as follows:
Molding | Assemble and Pack | |
$ 787,500 | $ 562,500 | |
Allocation basis | Machine Hours | Direct Labor Hours |
Allocation basis Quantity (B) | 22,000 | 30,000 |
Departmental Overhead rate (A/B) | $ 35.80 | $ 18.75 |
Basic | Advance | Total | |
Machine Hours in Molding Deptt. (A) | 12,000 | 10000 | |
Molding Deptt. Overhead rate (B) | $ 35.80 | $ 35.80 | |
Molding Deptt. Overhead assigned (C) =A*B = | $ 429,545.45 | $ 357,954.55 | $ 787,500 |
Direct Labor Hours in Assemble and Pack deptt. (D) | 20,000 | 10000 | |
Assemble and Pack deptt. Overhead rate (E) | $ 18.75 | $ 18.75 | |
Assemble and Pack deptt. Overhead assigned (F) = D*E= | $ 375,000.00 | $ 187,500.00 | $ 562,500 |
Total Overhead assigned to products (C+F) | $ 804,545 | $ 545,455 | $ 1,350,000 |
The revised segmented income statement is prepared as follows:
Segmented Income Statement | Basic | Advance | Total |
Number of Units Produced and Sold | 20000 | 10000 | 30000 |
Sales (A) | $ 3,000,000 | $ 2,000,000 | $ 5,000,000 |
Cost of Goods Sold using the Plan wide overhead rate | $ 2,300,000 | $ 1,350,000 | $ 3,650,000 |
Less: Overhead assigned using the Plant wide overhead rate | $ (900,000) | $ (450,000) | $(1,350,000) |
Add: Overhead assigned using the Departmental overhead rate | $ 804,545 | $ 545,455 | $ 1,350,000 |
Cost of Goods Sold using the Departmental overhead rate (B) | $ 2,204,545 | $ 1,445,455 | $ 3,650,000 |
Gross Margin (C) =A-B = | $ 795,455 | $ 554,545 | $ 1,350,000 |
Selling and Administrative Expenses (D) | $ 720,000 | $ 480,000 | $ 1,200,000 |
Net operating Income/ (Loss) (C-D) | $ 75,455 | $ 74,545 | $ 150,000 |
Requirement-3:
To calculate: The activity rates and allocated overhead cost and selling and administrative costs for each product

Answer to Problem 6IE
Solution: The activity rates and allocated overhead cost and selling and administrative costs for each product are as follows:
Activity Cost Pool | Activity Measure | Allocation Rate |
B/A | ||
Machining | Machine hours in Molding | $ 18.98 |
Assemble and pack | Direct Labor hours in Assemble and Pack | $ 9.42 |
Order Processing | Number of Customer orders | $ 511.11 |
Setups | Setup hours | $ 618.18 |
Total |
Allocation of Overhead: | |||
Basic | Advance | Total | |
Allocated Overhead | $ 867,777.78 | $ 402,222.22 | $ 1,270,0000 |
Selling and Administrative Cost: | |||
Basic | Advance | Total | |
Sales Commission | $ 150,000 | $ 200,000 | $ 350,000 |
Traceable Fixed Advertising costs | $ 150,000 | $ 200,000 | $ 350,000 |
Balance Selling and Administrative Cost | $ 500,000 |
Explanation of Solution
The activity rates and allocated overhead cost and selling and administrative costs for each product are calculated as follows:
Activity Cost Pool | Activity Measure | Activity Quantity | Manufacturing Overhead | Allocation Rate |
A | B | B/A | ||
Machining | Machine hours in Molding | 22000 | $ 417,500 | $ 18.98 |
Assemble and pack | Direct Labor hours in Assemble and Pack | 30000 | $ 282,500 | $ 9.42 |
Order Processing | Number of Customer orders | 450 | $ 230,000 | $ 511.11 |
Setups | Setup hours | 550 | $ 340,000 | $ 618.18 |
Other | Number of units | 30000 | $ 80,000 | $ 2.67 |
Total | $ 1,350,000 |
Allocation of Overhead: | ||||
Basic Model: | ||||
Activity Cost Pool | Activity Measure | Activity Quantity | Allocation Rate | Allocated Overhead |
A | B | =A*B | ||
Machining | Machine hours in Molding | 12000 | $ 18.98 | $ 227,727.27 |
Assemble and pack | Direct Labor hours in Assemble and Pack | 20000 | $ 9.42 | $ 188,333.33 |
Order Processing | Number of Customer orders | 400 | $ 511.11 | $ 204,444.44 |
Setups | Setup hours | 400 | $ 618.18 | $ 247,272.73 |
Total | $ 867,777.78 | |||
Advanced Model: | ||||
Activity Cost Pool | Activity Measure | Activity Quantity | Allocation Rate | Allocated Overhead |
A | B | =A*B | ||
Machining | Machine hours in Molding | 10000 | $ 18.98 | $ 189,772.73 |
Assemble and pack | Direct Labor hours in Assemble and Pack | 10000 | $ 9.42 | $ 94,166.67 |
Order Processing | Number of Customer orders | 50 | $ 511.11 | $ 25,555.56 |
Setups | Setup hours | 150 | $ 618.18 | $ 92,727.27 |
Total | $ 402,222.22 |
Selling and Administrative Cost: | |||
Basic | Advance | Total | |
Sales (A) | $ 3,000,000 | $ 2,000,000 | $ 5,000,000 |
Sales Commission (B) = A*5% and A*10% | $ 150,000 | $ 200,000 | $ 350,000 |
Traceable Fixed Advertising costs (C) | $ 150,000 | $ 200,000 | $ 350,000 |
Balance Selling and Administrative Cost (D) =(1200000-B-C) | $ 500,000 |
Requirement-4:
To prepare: The Contribution format segment income statement

Answer to Problem 6IE
Solution: The Contribution format segment income statement is as follows:
Contribution Format Segmented Income Statement | |||
Basic | Advance | Total | |
Sales | $ 3,000,000 | $ 2,000,000 | $ 5,000,000 |
Variable Expenses: | |||
Variable Cost of Goods Sold | $ 1,400,000 | $ 900,000 | $ 2,300,000 |
Sales Commission | $ 150,000 | $ 200,000 | $ 350,000 |
Total Variable Expenses | $ 1,550,000 | $ 1,100,000 | $ 2,650,000 |
Segment Contribution Margin | $ 1,450,000 | $ 900,000 | $ 2,350,000 |
Traced Fixed Expenses: | |||
Overhead assigned using the Activity based Costing | $ 867,778 | $ 402,222 | $ 1,270,000 |
Traceable Fixed Selling and Administrative Expenses | $ 150,000 | $ 200,000 | $ 350,000 |
Total Traced Fixed Expenses | $ 1,017,778 | $ 602,222 | $ 1,620,000 |
Segment Income | $ 432,222 | $ 297,778 | $ 730,000 |
Common Fixed Expenses: | |||
Other overheads (unused capacity) | $ 80,000 | ||
Common Fixed Selling and Administrative Expenses | $ 500,000 | ||
Total Common Fixed Expenses | $ 580,000 | ||
Net operating Income/ (Loss) | $ 150,000 |
Explanation of Solution
The Contribution format segment income statement is prepared as follows:
Contribution Format Segmented Income Statement | |||
Basic | Advance | Total | |
Sales (A) | $ 3,000,000 | $ 2,000,000 | $ 5,000,000 |
Variable Expenses: | |||
Cost of Goods Sold using the Plan wide overhead rate | $ 2,300,000 | $ 1,350,000 | $ 3,650,000 |
Less: Overhead assigned using the Plant wide overhead rate | $ (900,000) | $ (450,000) | $(1,350,000) |
Variable Cost of Goods Sold (B) | $ 1,400,000 | $ 900,000 | $ 2,300,000 |
Sales Commission (C) | $ 150,000 | $ 200,000 | $ 350,000 |
Total Variable Expenses (D) = B+C = | $ 1,550,000 | $ 1,100,000 | $ 2,650,000 |
Segment Contribution Margin (E) =A-D = | $ 1,450,000 | $ 900,000 | $ 2,350,000 |
Traced Fixed Expenses: | |||
Overhead assigned using the Activity based Costing | $ 867,778 | $ 402,222 | $ 1,270,000 |
Traceable Fixed Selling and Administrative Expenses | $ 150,000 | $ 200,000 | $ 350,000 |
Total Traced Fixed Expenses (F) | $ 1,017,778 | $ 602,222 | $ 1,620,000 |
Segment Income (G) = E-F= | $ 432,222 | $ 297,778 | $ 730,000 |
Common Fixed Expenses: | |||
Other overheads (unused capacity) | $ 80,000 | ||
Common Fixed Selling and Administrative Expenses | $ 500,000 | ||
Total Common Fixed Expenses (H) | $ 580,000 | ||
Net operating Income/ (Loss) (G-H) | $ 150,000 |
Requirement-5:
To calculate: The breakeven point in dollars for Advanced Model

Answer to Problem 6IE
Solution: The breakeven point in dollars for Advanced Model is $ 1,338,272
Explanation of Solution
The breakeven point in dollars for Advanced Model is calculated as follows;
Breakeven Point ($) for Advanced Model: | |
Total Traced Fixed Expenses (A) | $ 602,222 |
Contribution Margin (B) | $ 900,000 |
Sales (C) | $ 2,000,000 |
Contribution Margin % (D) = B/C | 45.00% |
Breakeven Point ($) = A/D = | $ 1,338,272 |
Requirement-6:
To show: The difference between the activities based costing and plant wide and Departmental approach

Answer to Problem 6IE
Solution: ABC costing method does not use the plant wide overhead rate like plant wide and Departmental approach, rather it uses different allocation rate for different production activity.
Explanation of Solution
In case of the plant wide and Departmental approaches, the manufacturing overhead costs are allocated to the products using a single overhead allocation rate.
Activity based costing (ABC) costing method is generally used to allocate the overhead costs to the product using activity rates differently for each activity. Unlike plant wide and Departmental approaches, the ABC costing method does not use the plant wide overhead rate, rather it used different allocation rate for different production activity.
Hence, ABC costing method uses different allocation rate for different production activity.
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Chapter IE Solutions
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