1. Amounts (in thousands) Molding Component Assembly Total

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1 5-32 (30 min.) Plantwide versus department overhead cost rates. 1. Amounts (in thousands) Molding Component Assembly Total Manufacturing department overhead $21,000 $16,200 $22,600 $59,800 Service departments: Power 18,400 Maintenance 4,000 Total budgeted plantwide overhead $82,200 Budgeted direct manufacturing labor-hours (DMLH): Molding 500 Component 2,000 Assembly 1,500 Total budgeted DMLH 4,000 Plantwide overhead rate = Budgeted plantwide overheard Budgeted DMLH = $82,200 = $20.55 per DMLH 4, The department overhead cost rates are shown in Solution Exhibit MumsDay Corporation should use department rates to allocate plant overhead because: (1) the cost drivers of resources used in each department differ and (2) the departments do not use resources from the support departments in the same proportion. Hence, department rates better capture cause-and-effect relationships at MumsDay than does a plantwide rate. 4. MumsDay should further subdivide the department cost pools into activity-cost pools if (a) significant costs are incurred on different activities within the department, (b) the different activities have different cost drivers, and (c) different products use different activities in different proportions.

2 SOLUTIO EXHIBIT 5-32 Departments (in thousands) Service Manufacturing Power Maintenance Molding Component Assembly 2 (a) Departmental overhead costs $18,400 $4,000 $21,000 $16,200 $22,600 Allocation of maintenance costs (direct method) $4,000 90/125, 25/125, 10/125 (4,000) 2, Allocation of power costs $18, /800, 320/800, 120/800 (18,400) 8,280 7,360 2,760 Total budgeted overhead of manufacturing departments $ 0 $ 0 $32,160 $24,360 $25,680 2 (b) Allocation Base 875 MH 2,000 DMLH 1,500 DMLH Budgeted Rate (Budgeted overhead Alloc. Base) $36.75/MH $12.18/DMLH $17.12/DMLH

3 5-33 (40 min.) Activity-based costing, unused capacity. 1. Simple Costing System Basca Thermo Total Number of units 30,000 15,000 Direct manuf. labor hours (DMLH) per unit Cost per DMLH $20 Total DMHL (30,000 2; 15, ) 60,000 37,500 97,500 Total indirect costs to be allocated ($3,000,000 + $600,000 + $582,000 + $900,000 + $90,000 + $315,000 + $390,000) $5,877,000 Indirect cost rate per DMLH ($5,877,000 97,500 DMLH) $ Allocated indirect costs ($ ,000; 37,500) $3,616,615 $2,260,385 Direct material cost per unit $ $ Direct manuf. labor cost per unit ($20 per DMLH 2 DMLH/unit; 2.5 DMLH/unit) Indirect cost per unit ($3,616,615 30,000; $2,260,385 15,000) Total cost per unit $ $

4 2. ABC System Cost Total cost of activity Cost Driver Units Consumed during 2006 (see (1)) Cost Allocation Rate for Activity Driver (given) Basca Thermo Total Activity (1) (2) (3) (4) (5) (6) = (4) + (5) (7) = (3) (6) Design (cost driver consumption given) No. of changed $ 900, $30,000 per changed components component Setups ((30,000 units 500 units per batch) 10 hrs. per batch; (15, ) 16) Setup hours 600, ,400 3,000 $200 per setup hour Material handling (0.20 hours per load 55 loads per batch (30, ) batches; (15, )) Material handling hours 582, ,250 2,910 $200 per materialhandling hour Manuf. operations (cost driver consumption given) Machine hours 3,000,000 45,000 30,000 75,000 $40 per machine hour Shipping (cost driver consumption given) No. of shipments 90, $300 per shipment Distribution (1 cu. ft. per motor 30,000 motors; ,000) Cu. ft. of motors delivered 315,000 30,000 22,500 52,500 $6 per cubic foot Administration (see requirement 1) DML hours 390,000 60,000 37,500 97,500 $4 per direct manuf. labor hour Total indirect costs $5,877,

5 30,000 15,000 Basca Units Thermo Units Total per Unit Total per Unit Total Cost Description (1) (2) = (1) 30,000 (3) (4) = (3) 15,000 (5) = (1) + (3) Direct Costs Direct materials ($100 30,000; $150 15,000) $3,000,000 $ $2,250,000 $ $ 5,250,000 Direct manufacturing labor ($20/hr. 60,000 hrs.; $20/hr. 37,500 hrs.) 1,200, , ,950,000 Total direct costs 4,200, ,000, ,200,000 Indirect Costs of Activities Design Basca, 10 parts-sq. ft. 30, , Thermo, 20 parts-sq. ft. 30, , ,000 Setup Basca, 600 setup hours $ , Thermo, 2,400 setup-hours $ , ,000 Materials handling Basca, 660 hrs. $ , Thermo, 2,250 hrs. $ , ,000 Manufacturing operations Basca, 45,000 machine-hour s $40 1,800, Thermo, 30,000 machine-hours $40 1,200, ,000,000 Shipping Basca, 120 shipments , Thermo, 180 shipments , ,000 Distribution Basca, 30,000 cubic feet delivered $6 180, Thermo, 22,500 cubic feet delivered $6 135, ,000 Administration Basca, 60,000 dir. manuf. labor-hours $4 240, Thermo, 37,500 dir. manuf. labor-hours $4 150, ,000 Total indirect costs allocated 2,808, ,069, ,877,000 Total Costs $7,008,000 $ $6,069,000 $ $13,077, Cost per unit Basca Thermo Simple system $ $ Activity-based Cost System $ $ Activity-based cost as % of original 90% 115% The simple and activity-based costs per unit differ because the pattern of consumption of direct manufacturing labor-hours (the indirect cost driver in the simple system) is very different from the pattern of consumption of the six new cost drivers by Basca and Thermo products. In particular, using the new activity-based cost drivers, we see that Thermo consumes significantly more of design, setup, material handling and shipping resources. This is driven by the fact that Thermo has more change components, smaller batch sizes, larger number of components and a greater number of smaller-size shipments than Basca. In the ABC analysis Thermo is therefore more costly per unit than in the simple system. These differences are important to Bronco Electric because it can use the information to price the motors based on their consumption of resources, and also, it can use the activity-consumption information to reduce costs and to optimize its operations for maximum value-added from indirect resources. 5-5

6 4. Basca Thermo Total Number of units 30,000 15,000 Old cubic feet per motor New cubic feet per motor Distribution costs $315,000 Distribution capacity in cu. ft.* (30,000 motors 1 cu. ft. per motor; 15, ) 30,000 22,500 52,500 Distribution cost per cu. ft. ($315,000 52,500) $ 6.00 Cu. ft. of distribution capacity used (30,000 motors 0.9 cu. ft. per motor; 15, ) 27,000 18,000 45,000 Cost of distribution resources consumed (27,000 cu. ft. $6/cu. ft.; 18,000 6) $162,000 $108,000 $270,000 Excess distribution capacity ($315,000 $270,000) $ 45,000 * We are given that Bronco s distribution system was operating at capacity at the old number of units and old cu. ft. per motor. 5. In the short run, Bronco can try to sell the excess distribution capacity of 7,500 (52,500 45,000) cu. ft. (costing $45,000) to other businesses. In the long run, Bronco should focus on reducing bulkiness of shipments as much as possible and minimizing or eliminating excess distribution capacity, to match the demand for distribution resources. 5-6

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