EXERCISE 19

ACTIVITY

Drafting engagement letter

Audit planning and discussion of audit risk
Internal control review
Preparing audit program
Fieldwork, transaction testing, completing work papers
Client discussions and rework
Drafting and issuing audit report; discussion with board of direc
Audit follow-up discussions

CT=Va + NVA
CT=(125+20+23) + (4+16+32+24+2
CT=
264
VA=
NVA=

168
100

TIME(Hours)

risk

ting work papers

ussion with board of directo

4
20
32
24
125
16
23
20

NVA
VA
NVA
NVA
VA
NVA
VA
NVA

264
SCE= VALUE ADDED PROCESSING TIME
TOTAL CYCLE TIME
SCE=
168/264
SCE=
63.60%

Zamuco, Jammila Kirstie B.

BSA III-01
21
a.

b.

c.

d.

Zamuco, Jammila Kirstie B.

BSA III-01

Value-added activities:
Measuring and cutting materials
Assembling materials
Building fireplace
Pegging logs
Cutting and framing doors/windows
Sealing joints
Total value-added time
Non-value-added activities
Receiving materials
Storing materials
Handling materials
Setting up and moving scaffolding
Waiting for inspectors

County inspections
Total non-value-added time
Total cycle time = 41 + 32 = 73 days
MCE = 41 73 = 56.2%
less time = more productive

Value-added activities are those that increase t

eyes of the customer and for which the custom
activities are those that do not increase a prod

Time
9
3
12
8
5
4
41 days
Time
2
10
7
6
6

1
32 days

the worth of the product or service in the

mer is willing to pay. Non-value-added
ucts value in the customers perspective.

Farrah Wertin plans to build a concrete walkway for her home during her vacation . The
show how project time will be allocated.
Activities
Purchase Material
Obtain Rental Equipment
Remove sod and level site
Build forms for concrete
Mix and poor concrete into forms
Level concrete and smooth
Let dry
Remove forms from concrete
Return rental tools
Clean-Up
Total Cycle Time:

Hours
5
2
20
10
5
6
24
2
1
4
79

A. Identify the value-added activities. How much of the total time is value-added?
Answer:
Activities
Remove sod and level site
Build forms for concrete
Mix and poor concrete into forms
Remove forms from concrete
Level concrete and smooth
Total Value-Added Activities:

Hours
20
10
5
2
6
43

B. Identify the non-value-added activities. How much total time is spent performing non-va
Answer:
Activities
Purchase Material
Obtain Rental Equipment
Let dry
Return rental tools
Clean-Up
Total Non-Value- Added Activities:
C. Calculate the manufacturing cycle efficiency
MCE= 43/79
MCE= 54.4%

Hours
5
2
24
1
4
36

a. Determine the total overhead cost assigned to each type of dictionary using the current
Current overhead cost for both types of dictionaries
Machine hours (Regular and Hand-sewn dictionaries)

170,000
30,000

Cost per machine hours

Total overhead assigned to regular dictionaries:
Machine Hours
Cost per machine hours

Total overhead assigned to hand-sewn dictionaries:

Machine Hours
Cost per machine hours

170,000
$10
$1,700,000

30,000
$10
$300,000

b. Determine the total overhead cost assigned to each type of dictionary if more appropria
Utilities Related
Machine Hours (Regular and Hand-sewn dictionaries)
Cost per utilities related
Inspection Related
Inspection Hours (Regular and Hand-sewn dictionaries)
Cost per inspection related
Total overhead to regular dictionaries:
Machine hours
Cost per utilities related

$800,000
200,000
$4
$1,200,000
60,000
$20

170,000
$4
$680,000

Inspection hours
Cost per inspection hours

10,000
$20
$200,000

Total overhead to regular dictionaries:

$880,000

Total overhead to hand-sewn dictionaries:

Machine hours
Cost per machine hours

30,000
$4
$120,000

Inspection hours
Cost per machine hours

50,000
$20
$1,000,000

Total overhead to hand-sewn dictionaries:

$1,120,000

c. Should the company stop producing the regular dictionaries? Explain.

Revenues
Direct Costs
Overhead Assigned
Profit before tax

Regular
6,400,000
5,000,000
880,000
520,000

y using the current allocation system.

$2,000,000
200,000
$10

y if more appropriate cost drivers were used.

Hand-sewn
5,600,000
4,400,000
1,120,000
80,000

Exercise # 36

A. 60 beds X 360 Days = 21600

B. 3,620,400/21600 = 167.8
C.
Rooms
Laundry
Nursing care
Physical Therapy
General Services

[504,000 / (35 X 360days)]

[151,200 / (60 X 180)]
(1,314,000 / 43,800)
(960,000 / 8000)
(691200 / 21600)

$40
14
30
120
32

D. ABC Method:
Rooms
Laundry
Nursing care
Physical Therapy
General Services
TOTAL

Cost
$40

Allocation based
6
14
3
30
6
120
30
32
6

240
42
180
3600
192
4254

E. ABC Method
Rooms
Laundry
Nursing care
General Services
TOTAL

(40
(14
(30
(32

/2X6)
X 3)
X 60)
X 6)

$120
42
180
192
$534

Traditional : 168 x 6 = 1008

Traditional : 168 x 6 = 1008

a.

Base wages: $63,000,000 3,150,000 = $20 per regular hour worked

Health care benefits: $10,500,000 2,100 = $5,000 per worker
Payroll taxes: $5,018,832 $71,697,600 = $0.07 per $1 of factory wages
Overtime: $8,697,600 288,000 = $30.20 per overtime hour
Training: $1,875,000 300 = $6,250 per new hire

Retirement benefits: $6,898,500 2,100 = $3,285 per worker

Workers compensation: $1,199,940 2,100 = $571.40 per worker

b.
Although more labor-related items are driven by the number of factory worker
account for most of the labor cost.

c.
It can be inferred that the use of overtime hours minimizes some cost drivers. In
of overtime hours would help contain health care benefits, training costs, retirement ben
compensation.

hour.The costs per unit for each produ

UMBRELLAS
DirecT Material

$12

Direct labor

18

Overhead

24

TOTAL

$54

Because profitability has been lagging and competition has been getting mo
costing system for 2014 .In analyzing the 2013 data, management determined
activities: quality control, setups, material handling and equipment operation.

Quality Control
$630,000

Setups
$600,000

Management determined that the following allocation bases and total 20

ACTIVITY
Quality Control
Setups
Material Handling

Equipment Operation

Volume measures for 2013 for each product a

Number of units produced

Number of setups
Pounds of material used
Number of machine hours

UMBRELLAS
300,000
600
1,200,000
600,000

QUESTION AND AND ANSWER:

A.) How much of the direct labor time is needed to produce an umbrella
Overhead
24
Umbrella
Gazebo
180
Chaise lounge
60

B.) For 2013, determine the total overhead allocated to each product g
Overhead
24
Umbrella
Gazebo
180
Chaise lounge
60
TOTAL

C.) For 2013, determine the total overhead that would have been alloca
used. Compute the cost per unit for each product group.
Allocation Rates:
Quality Control
Setups
Material Handling
Equipment Operation

$630,000
$600,000
$1,800,000
$14,970,000

OverHead Cost Al
Umbrellas
Quality control:
$1.50 300,000
$1.50 30,000
$1.50 90,000
Setups:
$200 600
$200 1,300
$200 1,100
Material handling:
$0.30 1,200,000
$0.30 3,000,000
$0.30 1,800,000
Equipment operation:
$4.99 600,000
$4.99 1,100,000
$4.99 1,300,000
Total overhead
Number of units
Cost per unit
*Rounded
Total cost per unit:
DM
DL
OH
Total

$450,000

120,000

360,000

2,994,000

$3,924,000
300,000
$13.08

$12.00
18
13.08
$43.08

Traditional Product Cost

$54
D. Outdoor Texas has a policy of setting sales prices basede on product costs. How would the sales

ANSWER: If prices are set based on product costs, activity-based costing would g

hour.The costs per unit for each product group in 2013 were as follows:

GAZEBOS

CHAISE LOUNGES

$120

$12

135

45

180

60

$435

$117

and competition has been getting more intense, Outdoor Texas is considering implemen
2013 data, management determined that its $12,030,000 of factory overhead could be
al handling and equipment operation. Data for the 2013 costs associated with each of t

Material Handling
$1,800,000

Equipment Operation
$14,970,000

following allocation bases and total 2013 volumes for each allocation base could have b
BASE
Number of units produced
Number of setups
Pounds of material used

Number of machine hours

measures for 2013 for each product and each allocation base were as follows:
GAZEBOS
30,000
1,300
3,000,000
1,100,000

CHAISE LOUNGES
90,000
1,100
1,800,000
1,300,000

is needed to produce an umbrella, a gazebo, and a chaise lounge?

Divide by rate per DL
30
80% of an hour or 48 mins.
6 DLHs
30
2 DLHs
30

head allocated to each product group using the traditional allocation based o
Multiply by number of units
TOTAL OVERHEAD
300,000
7,200,000
30,000
5,400,000
90,000
5,400,000
$18,000,000

head that would have been allocated to each product group if activity-based c
ach product group.
Divide by:
420,000.00
3,000.00
6,000,000.00
3,000,000.00

$1.5 per unit

$200 per setup
$0.3per pound
$4.99 per machine hours

OverHead Cost Allocation

Gazebos

Chaise Lounge

$45,000
$135,000

260,000
220,000

900,000
540,000

5,489,000
6,487,000
$7,382,000
90,000
$ 82.02*

$6,694,000
30,000
$223.13*

$120.00
135
223.13
$478.13
$435
basede on product costs. How would the sales prices unsing activity based costing differ from those obtained
overhead allocation?

on product costs, activity-based costing would generate lower prices for umbrellas and higher prices for the oth

ollows:

s considering implementing an activity basedctory overhead could be asssigned to four basic

sociated with each of the four activities follow.

Total Costs
$18,000,000

ation base could have been used for ABC:

ere as follows:

e lounge?

al allocation based on DLHs.

up if activity-based costing were

Chaise Lounge

$135,000

220,000

540,000

6,487,000
$7,382,000
90,000
$ 82.02*

$12.00
45
82.02
$139.02

$117
ng differ from those obtained using the traditional

s and higher prices for the other two products.

Problem 51. (ABC; product profitability)

a. How much overhead cost should be assigned to each

Activity Pools
General Administration
Project Costing
Accounts payable/receivi
Accounts receivable
Payroll/mail sort & deliver
Personnel recruiting
Employee insur. processin
Proposals
Sales meetings, sales aids
Shipping
Ordering
Duplicating costs
Blueprinting

409,000
48,000
139,000
47,000
30,000
38,000
14,000
139,000
202,000
24,000
48,000
46,000
77,000

Assignment of overhead costs:

General Administration
Project Costing
Accounts payable/receiving
Accounts receivable
Payroll/mail sort & delivery
Personnel recruiting
Employee insur. processing
Proposals
Sales meetings, sales aids
Shipping
Ordering
Duplicating costs
Blueprinting
Total
Office overhead
Total overhead

Altamont
$
155,420
21,600
62,550
24,440
10,200
15,200
4,760
54,210
96,960
9,600
20,160
19,780
34,650
529,530
195,000
724,530

b. What is the contribution of each office before subtrac

Sales
Direct material
Direct labor
Net contribution

Altamont
$1,500,000
-281,000
-382,000
$837,000

c. What is the profitability of each office using activity-b

Sales
Direct material
Direct labor
Overhead
Total contribution
Income Traditional

Altamont
$1,500,000
-281,000
-382,000
-724,530
$112, 470
111,200

d. Evaluate the concerns of management regarding the

The traditional costing technique currently used proved that it does not
due to the fact that when activity based costing is used it becomes clea
office is much profitable.

be assigned to each office based on activity-based costing concepts?

Activity Driver
Direct Labor
# of timesheet entries
# of vendor invoices
# of client invoices
# of employees
# of new hires
# of insur. Claims filed
# of proposals
Contracted sales
# of projects
# of purchase orders
# of copies duplicated
# of blueprints
Ballard
$

NUMBER OF ACTIVITIES BY LOCA

Altamont
386346.00
6,300
1,035
572
34
8
238
195
$1,821,600
100
126
160,734
38,790

Circleville
Total
122,700 $
130,880 $
13,920
12,480
52,820
23,630
18,330
4,230
11,700
8,100
7,600
15,200
5,460
3,780
68,110
16,680
74,740
30,300
12,000
2,400
16,320
11,520
17,940
8,280
27,720
14,630
449,360
282,110
286,100
203,500
735,460
485,610

Definition of terms:
409,000 Activity pools- cost c
48000 overhead cost is assign
139000 Activity driver- are th
47000 cause the total cost in
30000 to increase.
38000
14000
139000
202000
24000
48000
46000
77000
1261000
684600
1945600

office before subtracting the results obtained in (a)?

Ballard
$1,419,000
-421,000
-317,000
$681,000

Circleville
$1,067,000
-185,000
-325,000
$557,000

ffice using activity-based costing?

Ballard
$1,419,000
-421,000
-317,000
-735,460
$(54,460)
78,700

Circleville
$1,067,000
-185,000
-325,000
-485,610
$71,390
-60,500

ment regarding the traditional costing technique currently used.

ed proved that it does not provide a more accurate picture of profitability of each office,
ng is used it becomes clear that the Ballard office is much less profitable and the Circlev

ng concepts?

VITIES BY LOCATION
Ballard
Circleville
305010.00 325344.00
4,060
3,640
874
391
429
99
39
27
4
8
273
189
245
60
$1, 404, 150
$569,250
125
25
102
72
145,782
67,284
31, 032
16, 378

Total
1016700.00
14,000
2,300
1,100
100
20
700
500
$3,795,000
250
300
373,800
38,790

tion of terms:
ty pools- cost categories where each
ead cost is assigned.
ty driver- are the actual activities that
the total cost in an activity cost pool

ntly used.

y of each office,
e and the Circleville

Problem # 52

Jessica Corporation has identified the following overhead costs and cost drivers for th
Overhead Item
Machine setup
Inspection
Material handling
Engineering

Cost Driver
Number of setups
Number of inspections
Number of material moves
Engineering hours

Budgeted Cost
$20,000
130,000
80,000
50,000

The following information was collected on three jobs that were completed during th
Job 101
$5,000
$2,000
100
1
20
30
10

Direct material
Direct labor
Units completed
Number of setups
Number of inspections
Number of material moves
Engineering hours

Job 102
$12,000
$2,000
50
2
10
10
50

Budgeted direct labor cost was $100,000, and budgeted direct material cost was $28
a.

If Jessica Corp. uses activity-based costing, how much overhead cost should be assig
Machine setup: $20,000/200 = $100 per setup
Inspection: $130,000/6,500 = $20 per inspection
Material handling: $80,000/8,000 = $10 per move
Engineering: $50,000/1,000 = $50 per hour
Job 101:
Machine setup (1 x $100)
Inspection (20 x $20)
Material handling (30 x $10)
Engineering (10 x $50)
Total OH

b.

100
400
300
500
1,300

If Jessica Corp. uses activity-based costing, compute the cost of each unit of Job 102.
Job 102:
Machine setup (2 x $100)
Inspection (10 x $20)
Material handling (10 x $10)
Engineering (50 x $50)
Total OH

200
100
2,500
2,800

Cost of Job 102:

Direct material
Direct labor

OH
Total cost
Divided by number of units
Cost per unit
c.

3,000
17,000

50
340

Jessica Corp. prices its products at 140 percent of cost. If activity-based costing is us
103?
Job 103:
Machine setup (4 x $100)
Inspection (30 x $20)
Material handling (50 x $10)
Engineering (10 x $50)
Total OH

Cost of Job 103:

Direct material
Direct labor

OH
Total cost
Divided by number of units
Cost per unit
Selling price:
d.

12,000
2,000

$70 x 140%

400
600
500
500
2,000

8,000
4,000

2,000
14,000

200
70

98 per unit

If Jessica Corp. used a traditional accounting system and allocated overhead based o
would each unit of Job 103 be over- or under-costed compared to activity-based costi
implications of this difference?
Total budgeted OH cost

Total budgeted DL cost

280,000
100,000

OH per DL $

2.80

Cost of Job 103:

Direct material
Direct labor

8,000
4,000

OH ($2.80 x $4,000)
Total cost
Divided by number of units
Cost per unit

11,200
23,200

200
116

The result shows that Job 103 is overcosted using an OH allocation based on direct la
activity-based costing is $70 while the cost per unit under the traditional accounting
price would be higher than those of competitors' so the company will lose market sh
price.
e.

Identify any non-value-added activities or activities that may be currently necessary

production process. Explain what steps the company management could take to imp
lower manufacturing costs.

f.

Machine setups
Inspections
Material Handling

Review the manufacturing procedures that

require additional setups: No. of setups in
Job 103.

Review the design of the products and

processes to standardize them: No of
engineering hours in Job 102.

Examine the design of the factory related

to the number of material moves: material
moves required in Job 102.

Jessica Corp. is considering outsourcing inspections to an outside company that woul

are the potential total savings if Jessica outsources the inspections? What other facto
before making this decision?
Current:
Outsourcing:
Potential total savings:

$130,000
for inspections
6,500 inspections x $10 = $65,000
$

130,000
(65,000)

65,000

Factors to be considered before that decision:

The outsourced labor may not be as well-trained/reliable
The company will lose control over the delivery services

and cost drivers for the coming year:

Budgeted Cost
$20,000
130,000
80,000
50,000

Budgeted Activity Level

200
6,500
8,000
1,000

completed during the year:

Job 103
$8,000
$4,000
200
4
30
50
10

material cost was $280,000.

cost should be assigned to Job 101?

each unit of Job 102.

y-based costing is used, what price should it set for each unit of Job

ed overhead based on direct labor cost, by how much

o activity-based costing? What would be the management

ion based on direct labor cost. The cost per unit under
raditional accounting is $116. It seems that the new selling
ny will lose market share because of such high selling

e currently necessary but appear to be inefficient in Jessica Corp.'s

ent could take to improve the production process and potentially

e company that would perform the inspections for $10 a piece. What
ons? What other factors should company management consider

50%