Appendix Ex 25-26 Variable cost concept of product pricing
Based on the data presented in Exercise 25-17, assume that Smart Stream Inc. uses the variable cost concept of applying the cost-plus approach to product pricing.
a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones.
b. Determine the variable cost markup percentage (rounded to two decimal places) for cellular phones.
c. Determine the selling price of cellular phones. Round to the nearest dollar.
Answer:
a. Total variable costs: ($240 × 10,000 units)……………………………………… $2,400,000
Cost amount per unit: $2,400,000 ÷ 10,000 units = $240
b. Markup percentage =
Markup percentage =
Markup percentage =
Desired Profit + Total Fixed Costs
Total Costs
EX 26-2 Average rate of return—cost savings
Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $132,000 with a $16,000 residual value and a 10-year
life. The equipment will replace one employee who has an average wage of $34,000 per year. In addition, the equipment will have operating and energy costs of $5,380 per year.
Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.
Answer:
Average Rate
of Return =
=
Average Annual Income
Average Investment
Average Savings* – Annual Depreciation – Additional Operating Costs
(Beginning Cost + Residual Value) ÷ 2
$34,000 – [($132,000 – $16,000) ÷ 10 years] – $5,380
=
($132,000 + $16,000) ÷ 2
= $17,020
$74,000
= 23%
* The effect of the savings in wages expense is an increase in income.
Accounting Q and A
EX 26-2 Average rate of return—cost savings
Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $132,000 with a $16,000 residual value and a 10-year
life. The equipment will replace one employee who has an average wage of $34,000 per year. In addition, the equipment will have operating and energy costs of $5,380 per year.
Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.
Answer:
Average Rate
of Return =
=
Average Annual Income
Average Investment
Average Savings* – Annual Depreciation – Additional Operating Costs
(Beginning Cost + Residual Value) ÷ 2
$34,000 – [($132,000 – $16,000) ÷ 10 years] – $5,380
=
($132,000 + $16,000) ÷ 2
= $17,020
$74,000
= 23%
* The effect of the savings in wages expense is an increase in income.
EX 26-1 Average rate of return
The following data are accumulated by Bio Metrics Inc. in evaluating two competing capital investment proposals:
Testing Equipment | Vehicle
Amount of investment $104,000 | $32,000
Useful life 6 years | 8 years
Estimated residual value 0 | 0
Estimated total income over the
useful life $18,720 | $15,360
Determine the expected average rate of return for each proposal.
Answer:
Testing
Equipment Vehicle
$18,720 ÷ 6……………………………………………………………… $3,120
$15,360 ÷ 8……………………………………………………………… $1,920
Average investment:
($104,000 + $0) ÷ 2……………………………………………………… $52,000
($32,000 + $0) ÷ 2……………………………………………………… $16,000
Average rate of return:
$3,120 ÷ $52,000………………………………………………………… 6%
$1,920 ÷ $16,000……………………………………………………… 12%
Appendix Ex 25-26 Variable cost concept of product pricing
Based on the data presented in Exercise 25-17, assume that Smart Stream Inc. uses the variable cost concept of applying the cost-plus approach to product pricing.
a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones.
b. Determine the variable cost markup percentage (rounded to two decimal places) for cellular phones.
c. Determine the selling price of cellular phones. Round to the nearest dollar.
Answer:
a. Total variable costs: ($240 × 10,000 units)……………………………………… $2,400,000
Cost amount per unit: $2,400,000 ÷ 10,000 units = $240
b. Markup percentage =
Markup percentage =
Markup percentage =
Desired Profit + Total Fixed Costs
Total Costs
$360,000* + $350,000 + $140,000
$2,400,000
$850,000
$2,400,000
Markup percentage = 35.42%
* $1,200,000 × 30% = $360,000
c. Cost amount per unit………………………………………………………………… $240
Markup ($240 × 35.42%)……………………………………………………………… 85
Selling price…………………………………………………………………………… $325
Appendix Ex 25-25 Total cost concept of product pricing
Based on the data presented in Exercise 25-17, assume that Smart Stream Inc. uses the total cost concept of applying the cost-plus approach to product pricing.
a. Determine the total costs and the total cost amount per unit for the production and sale of 10,000 cellular phones.
b. Determine the total cost markup percentage (rounded to two decimal places) for cellular phones.
c. Determine the selling price of cellular phones. Round to the nearest dollar.
Answer:
a. Total costs:
Variable ($240 × 10,000 units)………………………………………………… $2,400,000
Fixed ($350,000 + $140,000)……………………………………………………… 490,000
Total……………………………………………………………………………………… $2,890,000
Cost amount per unit: $2,890,000 ÷ 10,000 units = $289
b. Markup percentage =
Markup percentage =
Desired Profit
Total Costs
$360,000*
$2,890,000
Markup percentage = 12.46% (rounded)
* $1,200,000 × 30% = $360,000
c. Cost amount per unit………………………………………………………………… $289
Markup ($289 × 12.46%)……………………………………………………………… 36
Selling price…………………………………………………………………………… $325
Ex 25-24 Activity rates and product costs using activity-based costing
BriteLite Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated activity costs and activity bases are as follows:
Activity
Activity Costs
(Budgeted)
Activity Base
Casting $42,000 Machine hours
Assembly 13,500 Direct labor hours
Inspecting 5,800 Number of inspections
Setup 16,800 Number of setups
Materials handling 3,600 Number of loads
Corporate records were obtained to estimate the amount of activity to be used by the two products. The estimated activity-base usage quantities and units produced for each product and in total are provided in the table below.
Activity Base | Entry | Dining | Total
Machine hours | 800 | 600 | 1,400
Direct labor hours | 500 | 400 | 900
Number of inspections. | 140 | 150 | 290
Number of setups | 80 | 60 | 140
Number of loads | 50 | 40 | 90
Units produced | 1,200 | 500 | 1,700
a. Determine the activity rate for each activity.
b. Use the activity rates in (a) to determine the total and per unit activity costs associated with each product.
Answer:
Estimated Total
Activity Activity- Activity
Cost ÷ Base Usage = Rate
Casting $42,000 1,400 mh $30 /mh
Assembly 13,500 900 dlh $15 /dlh
Inspecting 5,800 290 insp. $20 /insp.
Setup 16,800 140 setups $120 /setup
Materials handling 3,600 90 loads $40 /load
Activity
Entry Lighting Fixtures Dining Room Lighting Fixtures
Activity-
Base Activity Activity
Usage × Rate = Cost
Casting 800 mh $30 /mh $24,000 600 mh $30 /mh $18,000
Assembly 500 dlh $15 /dlh 7,500 400 dlh $15 /dlh 6,000
Inspecting 140 insp. $20 /insp. 2,800 150 insp. $20 /insp. 3,000
Setup 80 setups $120 /setup 9,600 60 setups $120 /setup 7,200
Materials handling 50 loads $40 /load 2,000 40 loads $40 /load 1,600
Total activity cost $45,900 $35,800
÷ Number of units ÷ 1,200 ÷ 500
Activity cost per unit $ 38.25 $ 71.60
Ex 25-23 Activity-based costing
Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activities—production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity bases for these activities:
Activity Activity Cost Activity Base
Production setup $ 44,000 Number of setups
Procurement 13,500 Number of purchase orders (PO)
Quality control 97,500 Number of inspections
Materials management 84,000 Number of components
Total$239,000p
The activity-base usage quantities for each product are as follows:
Setups
Purchase
Orders Inspections Components Unit Volume
Custom 290 760 1,200 500 2,000
Standard 110 140 300 200 2,000
Total 400 900 1,500 700 4,000
a. Determine an activity rate for each activity.
b. Assign activity costs to each product, and determine the unit activity cost, using the activity rates from part (a).
c. Assume that each product required one direct labor hour per unit. Determine the per unit cost if factory overhead is allocated on the basis of direct labor hours.
d. Explain why the answers in parts (b) and (c) are different.
Answer:
Production Quality
Materials
a. Setup Procurement Control
Activity cost…… $44,000 $13,500 $97,500
÷ Activity base… 400 900 1,500
Activity rate…… $110/setup $15/PO $65/inspection
Management
$84,000
700
$120/component
b. Custom Standard
Number of setups…………………… 290 110
× Rate per setup……………………… $110 $110
Number of purchase orders………
760
$ 31,900
140
$12,100
× Rate per purchase order………… $15 $15
11,400 2,100
Number of inspections…………… 1,200 300
× Rate per inspection………………… $65 $65
78,000 19,500
Number of components…………… 500 200
× Rate per component……………… $120 $120
60,000 24,000
Total product cost…………………… $181,300 $57,700
÷ Unit volume………………………… 2,000 2,000
Unit cost……………………………… $ 90.65 $ 28.85
c. The factory overhead allocated to each product on the basis of direct labor hours
would be 50%, since each product has the same 2,000 direct labor hours. The
factory overhead per direct labor hour for each product is computed as follows:
$239,000
4,000 per direct labor hour
= $59.75 per hour
Since each product requires one direct labor hour, the factory overhead cost per
unit is also $59.75 for each product.
d. The factory overhead allocated to the custom power unit is much higher under the
activity-based approach, compared to the direct labor method. The reason is that
the setup, procurement, and quality control activities are not related to the number
of direct labor hours but are instead related to the number of setups, purchase
orders, and inspections. In addition, the custom product has a more complex design
(more components) than does the standard product. As a result, the custom product
will consume more materials management activities than will the standard product.
Ex 25-22 Activity-based costing
CardioTrainer Equipment Company manufactures stationary bicycles and treadmills. The products are produced in the Fabrication and Assembly production departments. In addition to production activities, several other activities are required to produce the two products. These activities and their associated activity rates are as follows:
Activity | Activity Rate
Fabrication | $22 per machine hour (mh)
Assembly | $12 per direct labor hour (dlh)
Setup | $40 per setup
Inspecting | $18 per inspection
Production scheduling | $8 per production order
Purchasing | $5 per purchase order
The activity-base usage quantities and units produced for each product were as follows:
Stationary Bicycle | Treadmill
Machine hours 1,680 | 1,070
Direct labor hours 243 | 131
Setups 45 | 20
Inspections 158 | 94
Production orders 60 | 32
Purchase orders 240 | 98
Units produced 500 | 350
Use the activity rate and usage information to compute the total activity costs and the activity costs per unit for each product.
Answer:
Stationary Bicycle Treadmill
Activity-
Base Activity Activity
Usage × Rate = Cost
Activity-
Base Activity Activity
Usage × Rate = Cost
Fabrication 1,680 mh $22 /mh $36,960 1,070 mh $22 /mh $23,540
Assembly 243 dlh $12 /dlh 2,916 131 dlh $12 /dlh 1,572
Setup 45 setups $40 /setup 1,800 20 setups $40 /setup 800
Inspecting 158 insp. $18 /insp. 2,844 94 insp. $18 /insp. 1,692
Production
scheduling 60 prod. orders $8 /prod. order 480 32 prod. orders $8 /prod. order 256
Purchasing 240 purch. ord. $5 /purch. ord. 1,200 98 purch. ord. $5 /purch. ord. 490
Total $46,200 $28,350
÷ Number of units ÷ 500 ÷ 350
Activity cost per unit $92.40 $81.00
