Managerial Accounting 16th Edition Garrison Solutions Manual Download
Managerial Accounting 16th Edition Garrison Solutions Manual Download
Managerial Accounting 16th Edition Garrison Solutions Manual Download
Solutions to Questions
7-1 Activity-based costing differs from ABC system. Tapping the knowledge of cross-
traditional costing systems in a number of ways. functional employees also lessens their resistance
In activity-based costing, nonmanufacturing as to ABC because they feel included in the
well as manufacturing costs may be assigned to implementation process.
products. And, some manufacturing costs—
including the costs of idle capacity—may be 7-4 Unit-level activities are performed for
excluded from product costs. An activity-based each unit that is produced. Batch-level activities
costing system typically includes a number of are performed for each batch regardless of how
activity cost pools, each of which has its unique many units are in the batch. Product-level
measure of activity. These measures of activity activities must be carried out to support a product
often differ from the allocation bases used in regardless of how many batches are run or units
traditional costing systems. produced. Customer-level activities must be
carried out to support customers regardless of
7-2 When direct labor is used as an allocation what products or services they buy. Organization-
base for overhead, it is implicitly assumed that sustaining activities are carried out regardless of
overhead cost is directly proportional to direct the company’s precise product mix or mix of
labor. When cost systems were originally customers.
developed in the 1800s, this assumption may
have been reasonably accurate. However, direct 7-5 Organization-sustaining costs, customer-
labor has declined in importance over the years level costs, and the costs of idle capacity should
while overhead has been increasing. This not be assigned to products. These costs
suggests that there is no longer a direct link represent resources that are not consumed by the
between the level of direct labor and overhead. products.
Indeed, when a company automates, direct labor
is replaced by machines; a decrease in direct 7-6 In activity-based costing, costs must first
labor is accompanied by an increase in overhead. be allocated to activity cost pools and then they
This violates the assumption that overhead cost is are allocated from the activity cost pools to
directly proportional to direct labor. Overhead products, customers, and other cost objects.
cost appears to be driven by factors such as
product diversity and complexity as well as by 7-7 Because people are often involved in
volume, for which direct labor has served as a more than one activity, some way must be found
convenient measure. to estimate how much time they spend in each
activity. The most practical approach is often to
7-3 Top managers provide leadership that is ask employees how they spend their time. It is
needed to properly motivate all employees to also possible to ask people to keep records of
embrace the need to implement ABC. Top how they spend their time or observe them as
managers also have the authority to link ABC data they perform their tasks, but both of these
to the employee evaluation and reward system. alternatives are costly and it is not obvious that
Cross-functional employees are also important the data would be any better. People who know
because they possess intimate knowledge of they are being observed may change how they
operations that is needed to design an effective behave.
c. Even though the number of units ordered is exactly the same, the
profitability picture has shifted radically and is summarized below:
Lower-end, Higher-end,
Fewer orders, More orders,
More units per order Fewer units per
order
Customer margin,
activity-based
costing ................. $840 $(6,600)
Product margin,
traditional costing . $(10,800) $1,600
The reasons for these changes are complex. One reason is that the
difference between the selling price and the direct materials and
direct labor costs has increased.
Lower-end, Higher-end,
Fewer orders, More orders,
More units per order Fewer units per order
Selling price ............. $595 $795
Direct materials ........ 180 185
Direct labor .............. 50 90
Excess of selling
price over direct
material and
direct labor.......... $365 $520
Under the traditional costing method, $500 of manufacturing
overhead is allocated to each. Consequently, the product margin is
$20 per unit. When 80 units are ordered, the result is a total product
margin of $1,600 (= $20 per unit × 80 units).
Under activity-based costing, the additional costs of processing 20
orders rather than 4 orders increases the order-related overhead
from $4,960 to $24,800. This swamps the fact that the selling price
has gone up a lot more than the direct materials and direct labor
costs.
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Solutions Manual, Chapter 7 9
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
10 Managerial Accounting, 16th Edition
Chapter 7: Applying Excel (continued)
3. With the change in the selling and administrative percentages, the result
is:
3-6.
The activity rates are computed as follows:
(a)
Estimated (b) (a) ÷ (b)
Overhead Expected Activity
Activity Cost Pool Cost Activity Rate
Machining ............... $200,000 10,000 MH $20 per MH
Machine setups ....... $100,000 200 setups $500 per setup
Product design ........ $84,000 2 products $42,000 per product
General factory ....... $300,000 12,000 DLHs $25 Per DLH
9-10. Using the ABC system, the total overhead assigned to Products Y and Z is computed as follows:
Product Y Product Z
Expected Expected
Activity Amount Activity Amount
Machining, at $20.00 per machine-hour ............... 7,000 $140,000 3,000 $ 60,000
Machine setups, at $500.00 per setup ................. 50 25,000 150 75,000
Product design, at $42,000 per product ............... 1 42,000 1 42,000
General factory, at $25.00 per direct labor-hour ... 8,000 200,000 4,000 100,000
Total overhead cost assigned .............................. $407,000 $277,000
The Machining allocation percentages used in the ABC system are similar to the plantwide allocation
percentages because the Machining cost pool uses a unit-level activity measure (machine-hours).
Since the plantwide cost pool also uses a unit-level allocation base (direct labor-hours), it is
reasonable to expect these cost allocations percentages to be comparable.
Under the ABC system, 25% and 75% of the Machine Setups cost is allocated to Products Y and Z,
respectively, whereas the plantwide approach allocates 67% and 33% of all overhead costs to the
two products. These allocation percentages are different because Machine Setups is a batch-level
cost pool. Although Product Y is the high-volume product (14,000 units) and Product Z is the low-
volume product (6,000 units), Product Y only consumes 25% of the total machine setups and Product
Z consumes 75% of the total machine setups. The conventional system is allocating too much of the
machine setup costs to Product Y and too little of these costs to Product Z.
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Solutions Manual, Chapter 7 15
The Foundational 15 (continued)
Under the ABC system, 50% of the Product Design cost is allocated to each
product, whereas the plantwide approach allocates 67% and 33% of all
overhead costs to Products Y and Z, respectively. These percentages are
different because Product Design is a product-level cost pool. Although
Product Y is the high volume product (14,000 units) and Product Z is the
low-volume product (6,000 units), both products consume 50% of the
product design resources. The conventional system is allocating too much
of the product design costs to Product Y and too little of these costs to
Product Z.
Under the ABC system, the General Factory allocation percentages are the
same as the plantwide allocation percentages because the General Factory
cost pool is allocated to products using the same unit-level activity measure
(direct labor-hours) as the plantwide approach.
Each entry in the table is derived by multiplying the total cost for the cost category by the percentage
taken from the table below that shows the distribution of resource consumption:
Pickup
and Customer
Travel Delivery Service Other Totals
Driver and guard wages......................... 50% 35% 10% 5% 100%
Vehicle operating expense ..................... 70% 5% 0% 25% 100%
Vehicle depreciation .............................. 60% 15% 0% 25% 100%
Customer representative salaries and
expenses............................................ 0% 0% 90% 10% 100%
Office expenses..................................... 0% 20% 30% 50% 100%
Administrative expenses ........................ 0% 5% 60% 35% 100%
The activity rate for each activity cost pool is computed by dividing its estimated overhead cost by its
expected activity.
M67
Activity Cost Pool Activity Rate Activity ABC Cost
Supporting direct labor ......... $6 per direct labor-hour 500 direct labor-hours $ 3,000
Machine processing .............. $4 per machine-hour 1,500 machine-hours 6,000
Machine setups .................... $50 per setup 4 setups 200
Production orders ................. $90 per order 4 orders 360
Shipments ........................... $14 per shipment 10 shipments 140
Product sustaining ................ $840 per product 1 product 840
Total ................................... $10,540
Activity Level
a. Sales representatives’ periodic visits to
customers to keep them informed about Customer-level
the services provided by CD Express.
b. Ordering labels from the printer for a
Product-level
particular CD*.
c. Setting up the CD duplicating machine to
make copies from a particular master Batch-level
CD.
d. Loading the automatic labeling machine
Batch-level
with labels for a particular CD*.
e. Visually inspecting CDs and placing them
by hand into protective plastic cases Unit-level
prior to shipping.
f. Preparation of the shipping documents for
Product-level
the order.
g. Periodic maintenance of equipment. Organization-sustaining
h. Lighting and heating the company’s
Organization-sustaining
production facility.
i. Preparation of quarterly financial reports. Organization-sustaining
*The cost of the labels themselves would be part of direct materials.
Processing
Processing Other
Opening Deposits and Customer Other
Accounts Withdrawals Transactions Activities Totals
Teller wages ................................ $ 8,000 $104,000 $32,000 $ 16,000 $160,000
Assistant branch manager salary .. 11,250 3,750 22,500 37,500 75,000
Branch manager salary ................ 4,000 0 8,000 68,000 80,000
Total cost .................................... $23,250 $107,750 $62,500 $121,500 $315,000
Teller wages are $160,000 and 65% of the tellers’ time is spent processing deposits and withdrawals:
$160,000 × 65% = $104,000.
Other entries in the table are determined similarly.
2. The cost of opening an account at the Westfield branch is much higher than at the lowest cost
branch ($46.50 versus $26.75). On the other hand, the cost of processing deposits and withdrawals
is lower than at the lowest cost branch ($1.08 versus $1.24). And the cost of processing other
customer transactions is higher at the Westfield branch ($12.50 versus $11.86). The other branches
may have something to learn from Westfield concerning processing deposits and withdrawals and
Westfield may benefit from learning about how some of the other branches open accounts and
process other transactions. It may be particularly instructive to compare the details of the activity
rates. For example, is the cost of opening accounts at Westfield high because of the involvement of
the assistant branch manager in this activity? Perhaps tellers open new accounts at other branches.
The apparent differences in the costs of the activities at the various branches may be due to
inaccuracies in employees’ reports of the amount of time they devote to the activities. The
differences in costs may also reflect different strategies. For example, the Westfield branch may
purposely spend more time with new customers in order to win their loyalty. The higher cost of
opening new accounts at the Westfield branch may be justified by future benefits of having more
satisfied customers. Nevertheless, comparative studies of the costs of activities may provide a useful
starting point for identifying best practices within a company and where improvements can be made.
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24 Managerial Accounting, 16th Edition
Exercise 7-9 (10 minutes)
According to these calculations, the total overhead cost of the order was $6,226.
University Memorial
Cost of goods sold to the hospital (a) ............... $30,000 $30,000
Markup percentage ......................................... × 5% × 5%
Markup in dollars (b) ....................................... $1,500 $1,500
Revenue received from hospitals (a) + (b)........ $31,500 $31,500
2. Activity Rates:
(a)
Estimated (b) (a) ÷ (b)
Overhead Expected Activity
Activity Cost Pool Cost Activity rate
Customer deliveries ............. $500,000 5,000 deliveries $100.00 per delivery
Manual order processing ...... $248,000 4,000 orders $62.00 per manual order
Electronic order processing .. $200,000 12,500 orders $16.00 per electronic order
Line item picking ................. $450,000 450,000 line items $1.00 per line item picked
Memorial:
(a) (b) (a) × (b)
Activity Cost Pool Activity Rate Activity ABC Cost
Customer deliveries ........... $100.00 per delivery 25 deliveries $2,500
Manual order processing .... $62.00 per order 30 orders 1,860
Electronic order processing $16.00 per order 0 orders 0
Line item picking ............... $1.00 per line item 250 line items 250
Total activity costs ............. $4,610
University Memorial
Sales .................................................... $31,500 $31,500
Cost of goods sold ................................. 30,000 30,000
Gross margin ........................................ 1,500 1,500
Customer deliveries ............................... 1,000 2,500
Manual order processing ........................ 0 1,860
Electronic order processing .................... 240 0
Line item picking ................................... 120 250
Total activity costs................................. 1,360 4,610
Customer margin................................... $ 140 $(3,110)
There is no activity rate for the General Factory activity because it is an organization-sustaining
activity. Organization-sustaining costs should not be allocated to products.
Hubs Sprockets
Direct materials................................... $32.00 $18.00
Direct labor:
$15 per DLH × 0.80 DLHs per unit .... 12.00
$15 per DLH × 0.40 DLHs per unit .... 6.00
Overhead:
$218,000 ÷ 10,000 units................... 21.80
$54,000 ÷ 40,000 units .................... 1.35
Unit cost ............................................. $65.80 $25.35
3. The average cost per diner differs from party to party under the activity-
based costing system for two reasons. First, the cost of serving a party
($5.50) does not depend on the number of diners in the party.
Therefore, the average cost per diner of this activity decreases as the
number of diners in the party increases. With only one diner, the cost is
$5.50. With two diners, the average cost per diner is cut in half to
$2.75. With five diners, the average cost per diner would be only $1.10,
and so on. Second, the average cost per diner differs also because of
the differences in the number of drinks ordered by the diners. If a party
does not order any drinks, as was the case with the party of two, no
costs of serving drinks are assigned to the party.
The average cost per diner differs from the overall average cost of $16
per diner for several reasons. First, the average cost of $16 per diner
includes organization-sustaining costs that are excluded from the
computations in the activity-based costing system. Second, the $16 per
diner figure does not recognize differences in the diners’ demands on
resources. It does not recognize that some diners order more drinks
than others nor does it recognize the economies of scale in serving
larger parties. (The batch-level costs of serving a party can be spread
over more diners if the party is larger.)
We should note that the activity-based costing system itself does not
recognize all of the differences in diners’ demands on resources. For
example, there are undoubtedly differences in the costs of preparing the
various meals on the menu. It may or may not be worth the effort to
build a more detailed activity-based costing system that would take such
nuances into account.
$608,000
= = $2.00 per DL$
$304,000
*The Other activity cost pool is not shown above because it includes
organization-sustaining and idle capacity costs that should not be
assigned to products.
$1,980,000
= = $16.50 per DLH
120,000 DLHs *
*20,000 units of Xtreme @ 2.00 DLH per unit + 80,000 units of the
Pathfinder@ 1.0 DLH per unit = 40,000 DLHs + 80,000 DLHs = 120,000
DLHs.
Consequently, the product margins using the traditional approach would
be computed as follows:
Xtreme Pathfinder Total
Sales ................................... $2,800,000 $7,920,000 $10,720,000
Direct materials ................... 1,440,000 4,240,000 5,680,000
Direct labor ......................... 480,000 960,000 1,440,000
Manufacturing overhead
applied @ $16.50 per
direct labor-hour ............... 660,000 1,320,000 1,980,000
Total manufacturing cost ...... 2,580,000 6,520,000 9,100,000
Product margin .................... $ 220,000 $1,400,000 $ 1,620,000
Note that all of the manufacturing overhead cost is applied to the
products under the company’s traditional costing system.
*The Other activity cost pool is not shown above because it includes
organization-sustaining and idle capacity costs that should not be
assigned to products.
2. The margin earned serving the local commercial market is negative, as shown below:
Profitability Analysis
Sales ................................................... $180,000
Costs:
Animation concept .............................. $151,000
Animation production.......................... 38,625
Contract administration....................... 68,000 257,625
Margin ................................................. $(77,625)
3. It appears that the local commercial market is losing money and the company would be better off
dropping this market segment. However, as discussed in the previous problem, not all of the costs
included above may be avoidable. If more than $77,625 of the total costs of $257,625 is not
avoidable, then the company really isn’t losing money on the local commercial market and the
segment should not be dropped. These issues will be discussed in more depth in Chapters 12 and 13.
4. The margin earned on the job can be easily computed by using the
costs calculated in part (3) above.
Sales ........................ $140.00
Costs:
Cleaning carpets ..... $40.25
Travel to jobs ......... 97.50
Job support ............ 29.50 167.25
Margin ...................... $(27.25)
Requirements 2 through 5: