# The solution to Cost accounting

Exercise 8-1 ABC Cost Hierarchy [LO1]

Classify each of the activities as either a unit-level, batch-level, product-level, or organization sustaining activity.

a.
Various individuals manage the parts inventories
__________

b.
A clerk in the factory issues purchase orders for a job
__________

c.
The personnel department trains new production workers
__________

d.
The factory's general manager meets with other department heads such as marketing to coordinate plans
__________

e.
Direct labor workers assemble products
__________

f.
Engineers design new products
__________

g.
The materials storekeeper issues raw materials to be used in jobs
__________

h.
The maintenance department performs periodic preventative maintenance on general-use equipment
__________

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Question 2: (9 points)
Exercise 8-2 First-Stage Allocation [LO2]

VaultOnWheels Corporation operates a fleet of armored cars that make scheduled pickups and deliveries for its customers in the Phoenix area. The company is implementing an activity-based costing system that has four activity cost pools: Travel, Pickup and Delivery, Customer Service, and Other. The activity measures are miles for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool, and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure. The following costs will be assigned using the activity-based costing system:

Driver and guard wages
\$
840,000

Vehicle operating expense

270,000

Vehicle depreciation

150,000

Customer representative salaries and expenses

180,000

Office expenses

40,000

340,000

Total cost
\$
1,820,000

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The distribution of resource consumption across the activity cost pools is as follows:

Travel
Pickup and Delivery
Customer Service
Other
Totals

Driver and guard wages

40
%

45
%

10
%

5
%

100
%

Vehicle operating expense

75
%

5
%

0
%

20
%

100
%

Vehicle depreciation

70
%

10
%

0
%

20
%

100
%

Customer representative salaries and expenses

0
%

0
%

85
%

15
%

100
%

Office expenses

0
%

25
%

35
%

40
%

100
%

0
%

5
%

55
%

40
%

100
%

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Required:

Carry out the first-stage allocations of costs to activity cost pools. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "\$" sign in your response.)

Travel
Pickup and Delivery
Customer Service
Others
Totals

Driver and guard wages
\$
____________
\$
____________
\$
____________
\$
____________
\$
____________

Vehicle operating expense

____________

____________

____________

____________

____________

Vehicle depreciation

____________

____________

____________

____________

____________

Customer representative salaries and expenses

____________

____________

____________

____________

____________

Office expenses

____________

____________

____________

____________

____________

____________

____________

____________

____________

____________

Total cost
\$
____________
\$
____________
\$
____________
\$
____________
\$
____________

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Question 3: (9 points)

Exercise 8-3 Compute Activity Rates [LO3]

As You Like It Gardening is a small gardening service that uses activity-based costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the size of customer lawns, the size of customer garden beds, the distance to travel to customers, and the number of customers. In addition, the cost of maintaining garden beds depends on whether the beds are low-maintenance beds (mainly ordinary trees and shrubs) or high-maintenance beds (mainly flowers and exotic plants). Accordingly, the company uses the five activity cost pools listed below:

Activity Cost Pool
Activity Measure

Caring for lawn
Square feet of lawn

Caring for garden beds-low maintenance
Square feet of low-maintenance beds

Caring for garden beds-high maintenance
Square feet of high-maintenance beds

Travel to jobs
Miles

Customer billing and service
Number of customers

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The company has already carried out its first-stage allocations of costs. The company's annual costs and activities are summarized as follows:

Activity cost Pool
Estimated
Cost
Expected Activity

Caring for lawn
\$
77,400
180,000
square feet of lawn

Caring for garden beds-low maintenance
\$
30,000
24,000
square feet of low-maintenance beds

Caring for garden beds high maintenance
\$
57,600
18,000
square feet of high-maintenance beds

Travel to jobs
\$
4,200
15,000
miles

Customer billing and service
\$
8,700
30
customers

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Required:

Compute the activity rate for each of the activity cost pools. (Omit the "\$" sign in your response. Round your answers to 2 decimal places.)

Activity Cost Pool
Activity Rate

Caring for lawn
\$
____________
per square foot of lawn

Caring for garden beds- low maintenance
\$
____________
per square foot of low maintenance beds

Caring for garden beds- high maintenance
\$
____________
per square foot of high maintenance beds

Travel to jobs
\$
____________
per mile

Customer billing and service
\$
____________
per customer

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Question 4: (10 points)
Exercise 8-5 Product and Customer Profitability Analysis [LO4, LO5]

Updraft Systems, Inc., makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management has designed an activity-based costing system with the following activity cost pools and activity rates:

Activity Cost Pool
Activity Rate

Supporting manufacturing
\$
18
per direct labor-hour

Order processing
\$
192
per order

Custom designing
\$
261
per custom design

Customer service
\$
426
per customer

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Management would like an analysis of the profitability of a particular customer, Eagle Wings, which has ordered the following products over the last 12 months:

Standard
Model
Custom
Design

Number of gliders

10

2

Number of orders

1

2

Number of custom designs

0

2

Direct labor-hours per glider

28.5

32.0

Selling price per glider
\$
1,650
\$
2,300

Direct materials cost per glider
\$
462
\$
576

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The company's direct labor rate is \$19 per hour.

Required:

Using the company's activity-based costing system, compute the customer margin of Eagle Wings. (Omit the "\$" sign in your response.)

Customer margin
\$
____________

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Question 5: (9 points)

Exercise 8-6 (Appendix 8A) Preparing an Action Analysis Report [LO6]

Pro Golf Corporation produces private label golf clubs for pro shops throughout North America. The company uses activity-based costing to evaluate the profitability of serving its customers. This analysis is based on categorizing the company's costs as follows, using the ease of adjustment color coding scheme described in Appendix 8A:

Ease of

Direct materials
Green

Direct labor
Yellow

Indirect labor
Yellow

Factory equipment depreciation
Red

Red

Selling and administrative wages and salaries
Red

Selling and administrative depreciation
Red

Marketing expenses
Yellow

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Management would like to evaluate the profitability of a particular customer-the Peregrine Golf Club of Eagle, Colorado. Over the last 12 months this customer submitted one order for 80 golf clubs that had to be produced in two batches due to differences in product labeling requested by the customer. Summary data concerning the order appear below:

Number of clubs

80.00

Number of orders

1.00

Number of batches

2.00

Direct labor-hours per club

0.30

Selling price per club
\$
48.00

Direct materials cost per club
\$
25.40

Direct labor rate per hour
\$
21.50

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A cost analyst working in the controller's office at the company has already produced the action analysis cost matrix for the Peregrine Golf Club that follows:

Action Analysis Cost Matrix for Peregrine Golf Club

Activity Cost Pools

Volume
Batch Processing
Order Processing
Customer Service

Activity
24

direct labor-hours
2

batches
1

order
1

customer
Total