Cost Solutions

# Cost Solutions - Cornerstones of Cost Accounting Solutions...

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Cornerstones of Cost Accounting Solutions Chapter 4 Problem 4–24 1. Plantwide rate = \$4,500,000/150,000 = \$30 per direct labor hour Standard Deluxe Prime costs .......................................................... \$150.00 \$350.00 Overhead: \$30 × 75,000 hours/30,000 units .................... 75.00 \$30 × 75,000 hours/15,000 units .................... 150.00 Unit cost ............................................................... \$225.00 \$500.00 2. Maintenance (Rate 1) ..................................... \$600,000 Maintenance hours ........................................ ÷ 30,000 Activity rate .................................................... \$20 Engineering support (Rate 2) ........................ \$900,000 Engineering hours ......................................... ÷ 45,000 Activity rate .................................................... \$ 20 Materials handling (Rate 3) ........................... \$1,200,000 Number of moves .......................................... ÷ 60,000 Activity rate .................................................... \$ 20 Setups (Rate 4) ............................................... \$ 750,000 Number of setups .......................................... ÷ 600 Activity rate .................................................... \$ 1,250 Purchasing (Rate 5) ....................................... \$ 450,000 Number of requisitions ................................. ÷ 2,250 Activity rate .................................................... \$ 200 Receiving (Rate 6) .......................................... \$ 300,000 Number of orders .......................................... ÷ 7,500 Activity rate .................................................... \$40 Paying suppliers (Rate 7) .............................. \$ 300,000 Number of invoices ....................................... ÷ 7,500 Activity rate .................................................... \$40

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Cornerstones of Cost Accounting Solutions Problem 4–24 (Concluded) Unit cost: Standard Deluxe Prime costs .......................................................... \$ 4,500,000 5,250,000 Overhead: Rate 1: \$20 × 6,000 ................................................. 120,000 \$20 × 24,000 ............................................... 480,000 Rate 2: \$20 × 13,500 ............................................... 270,000 \$20 × 31,500 ............................................... 630,000 Rate 3: \$20 × 15,000 ............................................... 300,000 \$20 × 45,000 ............................................... 900,000 Rate 4: \$1,250 × 60 ................................................. 75,000 \$1,250 × 540 ............................................... 675,000 Rate 5: \$200 × 750 .................................................. 150,000 \$200 × 1,500 ............................................... 300,000 Rate 6: \$40 × 3,000 ................................................. 120,000 \$40 × 4,500 ................................................. 180,000 Rate 7: \$40 × 3,750 ................................................. 50,000 \$40 × 3,750 ................................................. 150,000 Total ...................................................................... \$ 5,685,000 \$8,565,000 Units produced .................................................... ÷ 30,000 ÷15,000 Unit cost (ABC) .................................................... \$ 189.50 \$571.00 Unit cost (UBC) .................................................... \$ 225.00 \$500.00 The ABC costs are more accurate (better tracing—closer representation of actual resource consumption). This shows that the standard model was over-costed and the deluxe model undercosted when the plantwide overhead rate was used.
Cornerstones of Cost Accounting Solutions Problem 4–26 1. Activity rates: Providing ATM service: \$100,000/200,000 = \$0.50 per transaction Computer processing: \$1,000,000/2,500,000 = \$0.40 per transaction Issuing statements: \$800,000/500,000 = \$1.60 per statement Customer inquiries: \$360,000/600,000 = \$0.60 per minute 2. Product costing: Checking Accounts Personal Loans Gold VISA Providing ATM Service: \$0.50 x 180,000 \$90,000 \$0.50 x 20,000 \$10,000 Computer Processing’s: \$0.40 × 2,000,000 800,000 \$0.40 × 200,000 80,000 \$0.40 × 300,000 120,000 Issuing statements: \$1.60 × 300,000 480,000 \$1.60 × 50,000 80,000 \$1.60 × 150,000 240,000 Customer inquiries: \$0.60 × 350,000 210,000 \$0.60 × 90,000 54,000 \$0.60 × 160,000 96,000 Total cost 1,580,000 214,000 466,000 Units of Product 30,000 5,000 10,000 Unit Cost 52. 67 42.80 46.60

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Cornerstones of Cost Accounting Solutions 3. The revenues received are the interest earned plus the service charges (4% × average balance + \$60 per year, where appropriate). The expenses are the interest paid plus the activity charges computed in Requirement 2 [2% × average balance (where appropriate) plus \$52.67]. The profitability of each category is computed below for the average balance of each category: Accounts with a balance between \$1,000 and \$2,767 are not profitable. Since the increase in dollar volume came from this category, the decision to modify the product apparently reduced the bank’s profitability. The bank should con- sider restoring the service charge for accounts over \$1,000. The effect may be to drive off some customers—customers that are unprofitable— who are in the \$2,000 category. Unfortunately, it could also drive off customers in the \$5,000 category. Furthermore, the effect on other products has not been analyzed. It may be that many of these customers are also buying other banking products because they have their checking accounts in this bank. Perhaps a gradual restoration of the charge for the higher balances would be the best solution.
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