,Solution manual for Accounting Tools for Business Decision Making 8th
Edition Paul D. Kimmel
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, SOLUTIONS TO CASES FOR
MANAGEMENT DECISION MAKING
CASE 1
1. A predetermined manufacturing overhead rate means that all
manufacturing overhead costs, are allocated to each job based on a cost
driver. Often this is done based on the expected volume of units produced.
That is, products that are produced in higher volume are allocated more
overhead.
In the case of Wall Décor, in addition to volume sold, the base used is
the cost of each print sold. That is, each print is allocated an amount of
manufacturing overhead based on the cost of the print. The management
of Wall Décor felt that this approach was logical because it was expected
that more expensive prints would be more likely to be framed, and that the
processing of framing requires the incurrence of considerably more
overhead costs.
2. The advantages of using the cost of each print as the manufacturing
overhead cost driver are that: (1) it is relatively inexpensive to implement in
a business, (2) it is easy to explain, and (3) it keeps accounting records in
compliance with GAAP.
The primary disadvantage of using the cost of each print as the
manufacturing overhead cost driver is that it may not result in a reasonable
estimate of the cost of a job, batch, or service. That is, the assumed
relationship—that the cost of the print is related to the amount of overhead
cost incurred—may be incorrect. Many of the overhead costs incurred are
the result of the framing and matting processes. However, the approach
used by Wall Décor will result in a high overhead allocation to expensive
prints, even if those prints are not framed. Furthermore, even if overhead
costs are related to the cost of prints, and substantially more unframed
prints are sold than framed prints, then an inordinate amount of overhead
will still be allocated to the unframed prints simply because more of those
are sold. By allocating overhead in an inappropriate fashion, product costs
are distorted, and, as a consequence, management decision making is
affected.
Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only) Case 1-1
,CASE 1 (Continued)
3. Under a job order costing system, a predetermined overhead rate must be
used, since the cost of jobs must be calculated throughout the year (rather
than just at year-end). This predetermined overhead rate is based on
expected costs and the expected total amount of the cost driver. Therefore,
the first thing that must be done is to compute the total expected overhead
cost. This step was completed in the information provided by the
accounting and production teams. It was determined to be $375,200
(Illustration CA 1-2).
The second step is to determine the total expected cost of prints for the
period.
Unframed: 80,000 ´ $12 = $ 960,000
Steel-framed: 15,000 ´ $16 = 240,000
Wood-framed: 7,000 ´ $20 = 140,000
Total expected cost of prints $1,340,000
Once the total expected overhead cost and total expected print cost are
known, the overhead rate can be determined.
Predetermined overhead rate = $375,200 ÷ $1,340,000 = $0.28
This means that for every $1 of print cost, it is assumed that 28¢ of
manufacturing overhead costs are consumed. For example, a $12 print will
be assigned $3.36 ($12 ´ $0.28) of overhead.
Case 1-2 Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only)
,CASE 1 (Continued)
4.
Lance John Elway Lambeau Field
Armstrong Steel-Framed Print, Wood-Framed Print,
Print No Matting with Matting
Direct material
Print $12.00 $16.00 $20.00
Frame and glass 4.00 6.00
Matting 4.00
Direct labor
Picking
([10/60] ´ $12) 2.00 2.00 2.00
Matting and framing
([20/60] ´ $21) 7.00
([30/60] ´ $21) 10.50
Manufacturing overhead
(0.28 ´ $12, $16, $20) 3.36 4.48 5.60
Total product cost $17.36 $33.48 $48.10
5.
(a) Unframed prints 80,000 ´ $12 ´ $0.28 = $268,800
(b) Steel-framed prints 15,000 ´ $16 ´ $0.28 = 67,200
(c) Wood-framed prints 7,000 ´ $20 ´ $0.28 = 39,200
$375,200
(d) As a percentage, unframed prints are being allocated 71.6 percent or
($268,800 ÷ $375,200) of the total overhead cost.
6. No. Unframed prints are being allocated too much manufacturing overhead
and framed prints too little manufacturing overhead. In designing the
allocation approach, management had assumed that since the average
cost of framed prints would exceed the average cost of unframed prints,
more of the overhead would be allocated to framed prints. However, the
cause of the apparent misallocation is that the volume of unframed prints
is much greater than the volume of framed prints. This dramatic difference
in volume far outweighs the difference in price. Therefore, unframed prints
as a category end up absorbing the bulk of the overhead costs. This does
not seem appropriate since a review of the manufacturing overhead costs
shows that many of the overhead costs are associated with the framing and
matting component of the production area, such as salaries, rent of factory
equipment, and information systems.
Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only) Case 1-3
,CASE 1 (Continued)
7. The high-volume unframed prints will be overcosted and the low-volume
framed prints will be undercosted. This will occur because the category of
prints that are sold most frequently will generally carry the greatest amount
of overhead. For example, in reference to the solution to question 4, the
framed and matted print is being allocated only $5.60, but an unframed print
is allocated $3.36 of manufacturing overhead. This is not logical because
a substantial portion of manufacturing overhead costs is dedicated to
framing and matting prints.
As a result, Wall Décor might end up selling framed prints at a price that is
too low to cover its cost. Changing the way the overhead is allocated may
improve the profit center’s performance.
Case 1-4 Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only)
, CASE 2
1. ABC is beneficial when traditional overhead allocation results in inaccurate
product costing. Wall Dêcor should investigate the product costing system
because in order to sell the unframed prints the stores must mark them up
only slightly above their cost, while the framed prints enjoy a large profit
margin. Traditional overhead allocation often results in inappropriate
overhead allocation when one product is a high-volume item (in this case,
the unframed prints) and another product is a more complex, low-volume
item (in this case, the framed prints).
Another indication that ABC would be beneficial occurs when company
managers have begun to develop their own costing systems because they
have lost faith in the traditional system. In this case, the production
manager does not have faith in the company’s costing system and instead
has developed her own costing system.
2. The activity-based overhead rates can be calculated by dividing the
estimated overhead associated with each activity by the expected use of
the cost driver.
Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only) Case 2-1
,CASE 2 (Continued)
Estimated Expected Use of Activity-Based
Activity Cost Driver Overhead Cost Driver Overhead Rate
Picking Number of prints $ 30,600 (80,000 + 15,000 + 7,000) = $0.30 per pick
prints 102,000 prints
Inventory Number of $ 91,700 Prints: $0.70 per
selection and components: 80,000 components component
management Print (1) Print and frame:
Print and frame (2) 15,000 ´ 2 = 30,000
Print, mat, and components
frame (3) Print, mat, and frame:
7,000 ´ 3 = 21,000
components
Total = 131,000 components
Website Number of prints
optimization at capacity
Unframed $ 25,800 Unframed prints— $0.258 per print
100,000 print capacity
Framed $103,200 Framed or framed and $4.128 per framed
matted prints— or framed and
25,000 capacity matted print
Framing and Number of $123,900 Print and frame: $2.10 per
matting components at 16,000 ´ 2 = 32,000 component
capacity components at capacity
Print, mat, and frame:
9,000 ´ 3 = 27,000
components at capacity
Total = 59,000 components
$375,200
Case 2-2 Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only)
,CASE 2 (Continued)
3.
Lance John Elway Lambeau Field
Armstrong Steel-Framed Print, Wood-Framed Print,
Description Print No Matting with Matting
Direct materials
Print $12.00 $16.00 $20.00
Frame and glass 4.00 6.00
Matting 4.00
Total 12.00 20.00 30.00
Direct labor
Picking
([10/60] ´ $12) 2.00 2.00 2.00
Matting and framing
([20/60] ´ $21) 7.00
([30/60] ´ $21) 10.50
Total 2.00 9.00 12.50
Manufacturing overhead by
activity
Picking prints
@ $0.30 per pick 0.30 0.30 0.30
Inventory selection and
management
@ $0.70 per component
(1, 2, and 3) 0.70 1.40 2.10
Website optimization
@ $0.258 per print 0.258 0.00 0.00
@ $4.128 per framed or
framed and matted 4.128 4.128
Framing and matting
@ $2.10 per component 4.20 6.30
Total 1.258 10.028 12.828
Total product cost $39.028 $55.328
$15.258
4. In Case 1 the high-volume prints consumed the greatest amount of
overhead because it was assumed all manufacturing overhead was driven
by print cost combined with sales volume, regardless of the mix of
unframed prints and framed prints. Since far more unframed prints were
sold, most of the overhead was allocated to unframed prints.
Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only) Case 2-3
, CASE 2 (Continued)
Under ABC, this changes. Although still based on estimates, ABC first
provides an analysis of how resources were consumed by activity. Next,
in the second step of allocation, activity costs are allocated to unframed
prints and framed prints using different types of drivers. These drivers are
designed to model how manufacturing overhead
resources were consumed at the product level. For example, the last
activity (framing and matting) is allocated to framed items only. The reason
is that unframed prints do not consume framing and matting equipment,
space, and general overhead resources.
The primary implication for the company is that the product costs will be
more accurate, which will result in better product pricing and more
accurate evaluation of the relative profitability of the products.
5. There are some costs that are very difficult to allocate because it is difficult
to determine a meaningful cost driver that captures differences across
products. Time and resources dedicated to web optimization for an
integrated system fall into this category. In this case, in order to reflect the
significant difference between the amount of time spent on web
optimization by the IT staff on unframed prints versus framed prints, the
total cost of web optimization was first split between these two categories.
Time of IT staff was used to subdivide the cost by resource consumption
between unframed prints and framed prints. This allocation, although it
may appear simple, is sometimes very difficult to accomplish in the real
world. Once identified, management can see that much of IT’s resources
are being consumed by framed and matted items.
6. The advantage of ABC versus traditional predetermined overhead
allocation is that ABC allocates costs based on the activities that generate
those costs. This results in more accurate product costing. By breaking
costs down into more refined categories, product costing will be even
more accurate. However, having more categories is costly from a record-
keeping perspective. Increasingly, there is an effort by ABC consultants to
“keep it simple” so as to reduce the cost of implementing ABC. It is
believed that many of the benefits of ABC can be attained with relatively
simple systems.
Case 2-4 Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only)
Edition Paul D. Kimmel
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
, SOLUTIONS TO CASES FOR
MANAGEMENT DECISION MAKING
CASE 1
1. A predetermined manufacturing overhead rate means that all
manufacturing overhead costs, are allocated to each job based on a cost
driver. Often this is done based on the expected volume of units produced.
That is, products that are produced in higher volume are allocated more
overhead.
In the case of Wall Décor, in addition to volume sold, the base used is
the cost of each print sold. That is, each print is allocated an amount of
manufacturing overhead based on the cost of the print. The management
of Wall Décor felt that this approach was logical because it was expected
that more expensive prints would be more likely to be framed, and that the
processing of framing requires the incurrence of considerably more
overhead costs.
2. The advantages of using the cost of each print as the manufacturing
overhead cost driver are that: (1) it is relatively inexpensive to implement in
a business, (2) it is easy to explain, and (3) it keeps accounting records in
compliance with GAAP.
The primary disadvantage of using the cost of each print as the
manufacturing overhead cost driver is that it may not result in a reasonable
estimate of the cost of a job, batch, or service. That is, the assumed
relationship—that the cost of the print is related to the amount of overhead
cost incurred—may be incorrect. Many of the overhead costs incurred are
the result of the framing and matting processes. However, the approach
used by Wall Décor will result in a high overhead allocation to expensive
prints, even if those prints are not framed. Furthermore, even if overhead
costs are related to the cost of prints, and substantially more unframed
prints are sold than framed prints, then an inordinate amount of overhead
will still be allocated to the unframed prints simply because more of those
are sold. By allocating overhead in an inappropriate fashion, product costs
are distorted, and, as a consequence, management decision making is
affected.
Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only) Case 1-1
,CASE 1 (Continued)
3. Under a job order costing system, a predetermined overhead rate must be
used, since the cost of jobs must be calculated throughout the year (rather
than just at year-end). This predetermined overhead rate is based on
expected costs and the expected total amount of the cost driver. Therefore,
the first thing that must be done is to compute the total expected overhead
cost. This step was completed in the information provided by the
accounting and production teams. It was determined to be $375,200
(Illustration CA 1-2).
The second step is to determine the total expected cost of prints for the
period.
Unframed: 80,000 ´ $12 = $ 960,000
Steel-framed: 15,000 ´ $16 = 240,000
Wood-framed: 7,000 ´ $20 = 140,000
Total expected cost of prints $1,340,000
Once the total expected overhead cost and total expected print cost are
known, the overhead rate can be determined.
Predetermined overhead rate = $375,200 ÷ $1,340,000 = $0.28
This means that for every $1 of print cost, it is assumed that 28¢ of
manufacturing overhead costs are consumed. For example, a $12 print will
be assigned $3.36 ($12 ´ $0.28) of overhead.
Case 1-2 Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only)
,CASE 1 (Continued)
4.
Lance John Elway Lambeau Field
Armstrong Steel-Framed Print, Wood-Framed Print,
Print No Matting with Matting
Direct material
Print $12.00 $16.00 $20.00
Frame and glass 4.00 6.00
Matting 4.00
Direct labor
Picking
([10/60] ´ $12) 2.00 2.00 2.00
Matting and framing
([20/60] ´ $21) 7.00
([30/60] ´ $21) 10.50
Manufacturing overhead
(0.28 ´ $12, $16, $20) 3.36 4.48 5.60
Total product cost $17.36 $33.48 $48.10
5.
(a) Unframed prints 80,000 ´ $12 ´ $0.28 = $268,800
(b) Steel-framed prints 15,000 ´ $16 ´ $0.28 = 67,200
(c) Wood-framed prints 7,000 ´ $20 ´ $0.28 = 39,200
$375,200
(d) As a percentage, unframed prints are being allocated 71.6 percent or
($268,800 ÷ $375,200) of the total overhead cost.
6. No. Unframed prints are being allocated too much manufacturing overhead
and framed prints too little manufacturing overhead. In designing the
allocation approach, management had assumed that since the average
cost of framed prints would exceed the average cost of unframed prints,
more of the overhead would be allocated to framed prints. However, the
cause of the apparent misallocation is that the volume of unframed prints
is much greater than the volume of framed prints. This dramatic difference
in volume far outweighs the difference in price. Therefore, unframed prints
as a category end up absorbing the bulk of the overhead costs. This does
not seem appropriate since a review of the manufacturing overhead costs
shows that many of the overhead costs are associated with the framing and
matting component of the production area, such as salaries, rent of factory
equipment, and information systems.
Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only) Case 1-3
,CASE 1 (Continued)
7. The high-volume unframed prints will be overcosted and the low-volume
framed prints will be undercosted. This will occur because the category of
prints that are sold most frequently will generally carry the greatest amount
of overhead. For example, in reference to the solution to question 4, the
framed and matted print is being allocated only $5.60, but an unframed print
is allocated $3.36 of manufacturing overhead. This is not logical because
a substantial portion of manufacturing overhead costs is dedicated to
framing and matting prints.
As a result, Wall Décor might end up selling framed prints at a price that is
too low to cover its cost. Changing the way the overhead is allocated may
improve the profit center’s performance.
Case 1-4 Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only)
, CASE 2
1. ABC is beneficial when traditional overhead allocation results in inaccurate
product costing. Wall Dêcor should investigate the product costing system
because in order to sell the unframed prints the stores must mark them up
only slightly above their cost, while the framed prints enjoy a large profit
margin. Traditional overhead allocation often results in inappropriate
overhead allocation when one product is a high-volume item (in this case,
the unframed prints) and another product is a more complex, low-volume
item (in this case, the framed prints).
Another indication that ABC would be beneficial occurs when company
managers have begun to develop their own costing systems because they
have lost faith in the traditional system. In this case, the production
manager does not have faith in the company’s costing system and instead
has developed her own costing system.
2. The activity-based overhead rates can be calculated by dividing the
estimated overhead associated with each activity by the expected use of
the cost driver.
Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only) Case 2-1
,CASE 2 (Continued)
Estimated Expected Use of Activity-Based
Activity Cost Driver Overhead Cost Driver Overhead Rate
Picking Number of prints $ 30,600 (80,000 + 15,000 + 7,000) = $0.30 per pick
prints 102,000 prints
Inventory Number of $ 91,700 Prints: $0.70 per
selection and components: 80,000 components component
management Print (1) Print and frame:
Print and frame (2) 15,000 ´ 2 = 30,000
Print, mat, and components
frame (3) Print, mat, and frame:
7,000 ´ 3 = 21,000
components
Total = 131,000 components
Website Number of prints
optimization at capacity
Unframed $ 25,800 Unframed prints— $0.258 per print
100,000 print capacity
Framed $103,200 Framed or framed and $4.128 per framed
matted prints— or framed and
25,000 capacity matted print
Framing and Number of $123,900 Print and frame: $2.10 per
matting components at 16,000 ´ 2 = 32,000 component
capacity components at capacity
Print, mat, and frame:
9,000 ´ 3 = 27,000
components at capacity
Total = 59,000 components
$375,200
Case 2-2 Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only)
,CASE 2 (Continued)
3.
Lance John Elway Lambeau Field
Armstrong Steel-Framed Print, Wood-Framed Print,
Description Print No Matting with Matting
Direct materials
Print $12.00 $16.00 $20.00
Frame and glass 4.00 6.00
Matting 4.00
Total 12.00 20.00 30.00
Direct labor
Picking
([10/60] ´ $12) 2.00 2.00 2.00
Matting and framing
([20/60] ´ $21) 7.00
([30/60] ´ $21) 10.50
Total 2.00 9.00 12.50
Manufacturing overhead by
activity
Picking prints
@ $0.30 per pick 0.30 0.30 0.30
Inventory selection and
management
@ $0.70 per component
(1, 2, and 3) 0.70 1.40 2.10
Website optimization
@ $0.258 per print 0.258 0.00 0.00
@ $4.128 per framed or
framed and matted 4.128 4.128
Framing and matting
@ $2.10 per component 4.20 6.30
Total 1.258 10.028 12.828
Total product cost $39.028 $55.328
$15.258
4. In Case 1 the high-volume prints consumed the greatest amount of
overhead because it was assumed all manufacturing overhead was driven
by print cost combined with sales volume, regardless of the mix of
unframed prints and framed prints. Since far more unframed prints were
sold, most of the overhead was allocated to unframed prints.
Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only) Case 2-3
, CASE 2 (Continued)
Under ABC, this changes. Although still based on estimates, ABC first
provides an analysis of how resources were consumed by activity. Next,
in the second step of allocation, activity costs are allocated to unframed
prints and framed prints using different types of drivers. These drivers are
designed to model how manufacturing overhead
resources were consumed at the product level. For example, the last
activity (framing and matting) is allocated to framed items only. The reason
is that unframed prints do not consume framing and matting equipment,
space, and general overhead resources.
The primary implication for the company is that the product costs will be
more accurate, which will result in better product pricing and more
accurate evaluation of the relative profitability of the products.
5. There are some costs that are very difficult to allocate because it is difficult
to determine a meaningful cost driver that captures differences across
products. Time and resources dedicated to web optimization for an
integrated system fall into this category. In this case, in order to reflect the
significant difference between the amount of time spent on web
optimization by the IT staff on unframed prints versus framed prints, the
total cost of web optimization was first split between these two categories.
Time of IT staff was used to subdivide the cost by resource consumption
between unframed prints and framed prints. This allocation, although it
may appear simple, is sometimes very difficult to accomplish in the real
world. Once identified, management can see that much of IT’s resources
are being consumed by framed and matted items.
6. The advantage of ABC versus traditional predetermined overhead
allocation is that ABC allocates costs based on the activities that generate
those costs. This results in more accurate product costing. By breaking
costs down into more refined categories, product costing will be even
more accurate. However, having more categories is costly from a record-
keeping perspective. Increasingly, there is an effort by ABC consultants to
“keep it simple” so as to reduce the cost of implementing ABC. It is
believed that many of the benefits of ABC can be attained with relatively
simple systems.
Case 2-4 Copyright © John Wiley & Sons, Inc. Kimmel, Accounting, 8/e, Solutions to Cases (For Instructor Use Only)
