Chapter 13 Exercises

Step-by-Step Exercises

First, calculate each product’s total cost and profit under the traditional costing system.

Question 1

TorqueTech, which allocates manufacturing overhead based on machine hours, sells two products: AlphaGrip and FlexLite. TorqueTech budgeted total manufacturing overhead of $107,250. Information about each product is as follows:

Calculate each product’s total cost and profit under the traditional costing system.

Question 2

Apex Audio manufactures three speaker models, paying its labor $25.00 to manufacture them. They budgeted to sell 600 units of StudioLite, each requiring 3 labor hours and $85.00 in materials. Each of the 250 budgeted units of BassBoost requires 4 labor hours and $120.00 in materials. They also budgeted to sell 150 units of ProStage, each needing 6 hours per unit and $150.00 in materials.

Apex is budgeting $185,000 in manufacturing overhead, allocated based on direct labor hours. Selling prices are $320 for StudioLite, $500 for BassBoost, and $620 for ProStage.

Calculate each product’s total cost and profit under the traditional costing system.

Question 3

EcoTrail Gear manufactures four products, paying direct labor $20.00 per hour, incurring $174,000 in manufacturing overhead, allocating manufacturing overhead based on direct labor cost, and planning the following for the upcoming period:

• QuickChill Coolers: 1,000 units
  • 1.5 direct labor hours per unit
  • $40.00 in direct materials cost per unit
  • Selling price: $180.00
• TrailTech Lanterns: 500 units
  • 2.5 direct labor hours per unit
  • $60.00 in direct materials cost per unit
  • Selling price: $250.00
• SolarMate Panels: 200 units
  • 5 direct labor hours per unit
  • $140.00 in direct materials cost per unit
  • Selling price: $480.00
• StreamCharge Batteries: 300 units
  • 2 direct labor hours per unit
  • $90.00 in direct materials cost per unit
  • Selling price: $220.00

Calculate each product’s total cost and profit under the traditional costing system.

Next, identify the activities involved in production, the manufacturing overhead costs associated with each activity, and the cost drivers that have a causal relationship with those costs.

Question 4

JetBox has budgeted $120,000 in total manufacturing overhead, distributed across three activities as follows:

Potential cost drivers include the number of inspections, the number of setups, and the number of material moves.

Identify the activities involved in production, the manufacturing overhead costs associated with each activity, and the cost drivers that have a causal relationship with those costs.

Question 5

Horizon Trailwear has $200,000 in overhead, expected to be allocated as follows:

• 40% to Pattern Cutting – using automated lasers to cut fabric pieces
• 25% to Stitching Supervision – overseeing multiple sewing lines
• 20% to Quality Control – evaluating stitching consistency
• 15% to Packaging – boxing, labeling, and tagging garments

Cost driver options:

• Supervisor hours
• Number of units packed
• Number of inspections
• Number of fabric panels

Identify the activities involved in production, the manufacturing overhead costs associated with each activity, and the cost drivers that have a causal relationship with those costs.

Question 6

SafePack Containers budgets $300,000 in total manufacturing overhead. Based on past production analysis, they estimate that injection molding machine use accounts for ⅖ of total overhead cost, setup activities account for ⅕ of total overhead cost, material handling accounts for ⅙ of total overhead cost, inspection activities account for ⅙ of total overhead cost and packing accounts for ¹⁄₁₅ of total overhead cost.

The manager believes that boxes sealed, material moves, machine hours, number of inspections, and setup events would be appropriate cost drivers in an activity-based costing system.

Identify the activities involved in production, the manufacturing overhead costs associated with each activity, and the cost drivers that have a causal relationship with those costs.

Next, for each activity pool, divide the budgeted overhead costs by the budgeted amount of the cost driver to calculate a rate for each pool.

Question 7

FreshBrew Systems allocates overhead to activities based on relevant cost drivers. The company collected the following data last quarter:

Calculate a rate for each activity pool.

Question 8

SolarSkim allocates overhead across four key activities:

• Soldering: $40,000, driven by 2,000 soldering hours
• Panel Testing: $30,000, based on 600 test cycles
• Frame Assembly: $20,000, across 400 frame kits used
• Labeling and Packaging: $10,000, for 2,000 units packed

Calculate a rate for each activity pool.

Question 9

AquaCrate assigns overhead based on five major activities in its purifier production line. During the most recent quarter, the company spent $90,000 on Pump Installation, which used 3,000 pump install hours, and $60,000 on Electrical Wiring, spread across 1,500 wiring kits. An additional $40,000 was allocated to Leak Testing, which covered 800 units tested. Another $30,000 went to Seal Inspection, with 1,200 inspection events logged, and the final $20,000 was budgeted for Final Packaging, which involved sealing 4,000 cartons.

Calculate a rate for each activity pool.

Next, assign overhead to each product line using the activity-based costing system by multiplying each activity rate by the amount of cost driver used by each product line. Add direct costs to calculate total product costs under ABC and subtract total product costs from revenue to calculate total profit under ABC.

Question 10

IceFlare manufactures insulated cooler products and is transitioning to activity-based costing. It has identified three key activities with their corresponding cost driver rates shown below:

Production and cost information for IceFlare’s two product lines is as follows:

Calculate total profit under ABC.

Question 11

ZenFire Grills produces three models of outdoor cooking equipment. The company applies manufacturing overhead using three activity pools. The rates for each activity are as follows:

• Assembly Supervision: $60/hour supervised
• Welding: $40/welding hour
• Final Inspection: $20/unit inspected

Production details for each product line are as follows:

• MiniGrill: 400 units, 300 hours supervised, 250 welding hours, 80 units inspected
• MidGrill: 200 units, 400 hours supervised, 300 welding hours, 40 units inspected
• ProGrill: 100 units, 500 hours supervised, 400 welding hours, 20 units inspected

Direct material and labor costs per unit and selling prices are as follows:

Calculate total profit under ABC.

Question 12

Vertex Audio Solutions produces high-end wireless speaker systems for home and professional use. The company uses activity-based costing and has identified five key activities in its production process. Driver Installation costs are allocated based on technician hours, Enclosure Fabrication is allocated based on laser cutting hours, Bluetooth Module Integration is allocated based on the number of circuit modules installed, Custom Tuning is allocated based on the number of tuning sessions, and Final Assembly is allocated based on the number of units assembled. The activity rates are $30 per technician hour, $25 per laser cutting hour, $15 per module installed, $40 per tuning session, and $10 per unit assembled.

In the most recent quarter, Vertex produced and sold 120 units of StudioWave, 100 units of BassCore, 80 units of ProAmp, and 150 units of MiniGo. StudioWave required 900 technician hours, 500 laser cutting hours, 100 modules, 50 tuning sessions, and 120 final assemblies. BassCore required 800 technician hours, 400 laser hours, 200 modules, 30 tuning sessions, and 100 final assemblies. ProAmp required 700 technician hours, 300 laser hours, 300 modules, 20 tuning sessions, and 80 final assemblies. MiniGo required 600 technician hours, 200 laser hours, 400 modules, 10 tuning sessions, and 150 final assemblies.

Direct costs per unit were $160 for StudioWave, $150 for BassCore, $140 for ProAmp, and $130 for MiniGo. To ensure profitability, Vertex set the selling price per unit at $540 for StudioWave, $550 for BassCore, $580 for ProAmp, and $360 for MiniGo.

Calculate total profit under ABC.

Finally, compare costs and profits under the two systems. Which product(s) are overcosted and which are undercosted under traditional costing? Use the insights from this analysis to recommend pricing, product mix, or operational changes to improve overall profitability.

Question 13

SureSet Fasteners manufactures two types of industrial bolts: AnchorMax and FlexTite. Under the traditional costing system, overhead is applied based on machine hours. Using this method, both products appeared to have similar profit margins.

However, a recent ABC analysis showed significant variation in the resources consumed by each product.

Identify which product was overcosted and which was undercosted using the traditional method. What recommendation would you make about pricing or sales emphasis?

Question 14

TrailFusion makes off-road bikes in three lines: Explorer, Summit, and Custom-X. Using traditional costing based on labor hours, the Summit line appeared the most profitable.

But under ABC, which uses activities like welding, tuning, and inspection, the results flipped:

• Explorer: Traditional Profit = $12,000 | ABC Profit = $14,000
• Summit: Traditional Profit = $18,000 | ABC Profit = $10,000
• Custom-X: Traditional Profit = $5,000 | ABC Profit = $11,000

Which product(s) were undercosted under traditional costing, and which were overcosted? What strategic decisions might the company reconsider based on these results?

Question 15

Lightform Fixtures produces lighting for commercial buildings. Under the traditional costing system, overhead was allocated based on direct labor cost, and the company believed its most complex product, the LuxEdge, was highly profitable. However, when the company implemented an activity-based costing system using drivers such as design changes, number of assembly steps, and material handling events, it discovered a different story.

While the BrightBar, CeilingRay, and GlowCore lines each turned out to be slightly more profitable under ABC than under traditional costing, the LuxEdge product showed a 40% lower profit under ABC. This raised questions about how much overhead LuxEdge was truly consuming.

Why might LuxEdge have appeared more profitable under traditional costing? What recommendations would you give the company regarding pricing, design changes, or whether to continue offering LuxEdge?

Complete Problems

Question 16

TimberForm Designs produces solid wood furniture for commercial use. It currently manufactures two major product lines: Standard Tables and Custom Conference Tables. The Standard Tables are mass-produced with minimal customization, while the Custom Conference Tables are built to customer specifications, including unique shapes, finishes, and inlay options.

The company currently uses a traditional job costing system and applies all manufacturing overhead based on direct labor cost. However, management believes the current system may distort product costs and is evaluating a switch to activity-based costing. TimberForm’s target profit margin is 25% on all product lines. The company pays its direct labor $20 per hour.

Manufacturing overhead is budgeted at $1,200,000. The company has identified three primary activities used in the production process:

• Machine Setup, where materials and equipment are prepared for a new production run. The estimated cost of this activity is $360,000, driven by the number of setups.
• Cutting and Shaping, where raw wood is machined into the desired dimensions and forms for each product. This activity is estimated to cost $600,000, driven by machine hours.
• Finishing, where stains, varnishes, sealant, and custom decorative features are added. This activity is accomplished in batches for efficiency and is estimated to cost $240,000, driven by the number of finishing batches.

Additional information about each product line is provided below:

Standard Tables

• Annual production: 2,000 units
• Selling price per unit: $800
• Direct material cost per unit: $80
• Direct labor hours per unit: 3
• Finishing batches: 40
• Machine hours: 2,500
• Setups: 50

Custom Conference Tables

• Annual production: 200 units
• Selling price per unit: $2,800
• Direct material cost per unit: $320
• Direct labor hours per unit: 10
• Finishing batches: 100
• Machine hours: 3,000
• Setups: 60

Calculate the total product cost and profit for each product line using both the traditional costing system and the activity-based costing system. Then, compare the results. What changes to pricing, product mix, or operations would you recommend based on your analysis?

Question 17

Riverview Naturals produces small-batch, premium packaged foods for retail and specialty grocery chains. It currently manufactures four product lines, each sold in cartons that contain multiple individually packaged items. The company applies all manufacturing overhead based on direct labor hours.

Profits have been lower than expected across all products lately, although sales have stayed relatively constant. Management suspects that the product costs may not be accurate, so they are evaluating a switch to activity-based costing (ABC).

The company’s target profit margin is 20%. The hourly wage for direct labor is $18, and total budgeted manufacturing overhead is $1,800,000.

The activities involved in production and the percent of overhead cost for each is listed below:

Production data for each product line is shown below:

Calculate the total product cost and profit for each product line using both the traditional costing system and the activity-based costing system. Then, compare the results. What changes to pricing, product mix, or operations would you recommend based on your analysis?

Question 18

RoboTek Systems manufactures advanced robotic components used in industrial automation. The company’s three main product lines differ in scale, complexity, and configuration requirements:

• Pick-and-Place Arms are lightweight, high-volume units designed for fast assembly-line operations.
• Collaborative Robot Arms are mid-volume units designed to safely work alongside humans and often require fine-tuning.
• Heavy-Lift Robot Bases are low-volume, highly customized platforms engineered for demanding manufacturing environments.

RoboTek currently uses a traditional costing system that applies all overhead based on direct labor hours. RoboTek pays its direct labor workforce $25 per hour and has budgeted $2,400,000 in manufacturing overhead. The company’s target profit margin is 20%.

Management has recently added the Heavy-Lift Robot Bases line, and they know that as a low-volume product that is more customized than its other products, its addition may have resulted in cost distortion given that they use a traditional, volume-driven costing system. Thus, they want to conduct a trial run of an activity-based system to confirm this suspicion.

The company has identified four key support activities that consume overhead resources:

• Workstation Calibration involves configuring robotic control parameters for each model and re-running tests until alignment tolerances are met. Budgeted cost: $360,000.
• Specialized Machining includes precision milling, cutting, and surface treatments required for each product’s chassis and joints. Budgeted cost: $1,080,000.
• Final Testing and Adjustment includes end-of-line quality checks and fine-grain movement adjustments performed by robotic engineers. Budgeted cost: $540,000.
• Parts Handling includes internal transport, unpacking, and staging of electronic and mechanical components used during production. Budgeted cost: $420,000.

Potential cost drivers to be used for these activities include the number of component transfers, hours of final testing, the number of calibration procedures, and machining hours.

Additional data for each product line is shown below:

Calculate the total product cost and profit for each product line using both the traditional costing system and the activity-based costing system. Then, compare the results. What changes to pricing, product mix, or operations would you recommend based on your analysis?

Question 19

ThreadWorks Studio specializes in custom-printed apparel for schools, small businesses, and large events. It currently offers three major product lines:

• Team Uniform Packages, which include fully customized jerseys, shorts, and accessories tailored to each team’s specifications.
• Branded T-Shirts, the company’s highest-volume item, often produced in bulk for promotional use.
• Event Merchandise Kits, bundled apparel and accessories prepared for conferences and festivals with detailed labeling and individualized packaging.

ThreadWorks currently applies all manufacturing overhead based on direct labor hours. The company pays $16 per hour for direct labor and budgets $150,000 for annual manufacturing overhead. The target profit margin is 18%.

ThreadWorks has identified the following support activities:

• Artwork and Setup, budgeted to cost $45,000, which involves digitizing custom logos, creating proofs, and preparing screens or digital printer files.
• Printing and Curing, budgeted to cost $75,000, which includes machine use, drying time, and operator supervision across multiple printing technologies.
• Packing and Fulfillment, budgeted to cost $30,000, which involves sorting, folding, bagging, and labeling orders for shipment based on customer specs.

Team Uniform Packages are produced in quantities of 1,000 units annually. Each package requires 2 direct labor hours to produce, with direct materials costing $10 per unit. These customized uniforms sell for $140.00 per package. The product line uses 1,300 machine hours throughout the year, generates 100 artwork and setup requests, and involves individually packing and labeling 750 orders.

Branded T-Shirts are ThreadWorks’ highest-volume product, with 10,000 units produced annually. They require only 0.3 direct labor hours per shirt and $2.00 in materials. Each shirt sells for $18.00. Over the year, this product line involves 2,000 individually packed orders, requires 900 artwork/setup requests, and consumes 2,400 machine hours.

Event Merchandise Kits are bundled apparel packages, with 1,500 kits produced annually. Each kit requires 0.75 direct labor hours and $6.00 of direct materials and sells for $45.00. This product line generates 350 artwork/setup requests, involves 1,250 individually packed shipments, and uses 1,300 machine hours.

Calculate the total product cost and profit for each product line using both the traditional costing system and the activity-based costing system. Then, compare the results. What changes to pricing, product mix, or operations would you recommend based on your analysis?

Question 20

RidgeForge Tools manufactures premium tool sets for professional mechanics and industrial clients. The company currently offers two primary product lines:

• Machinist Toolkits – high-volume, standardized kits sold to manufacturing clients
• Modular Wrench Systems – low-volume, configurable sets for specialized applications

RidgeForge applies all manufacturing overhead based on direct labor cost. The company pays workers $25 per hour and budgets $300,000 in total manufacturing overhead and $150,000 in direct labor cost. RidgeForge has set a target profit margin of 10%.

Product Information is as follows:

• Machinist Toolkits
  • 3,000 units produced
  • 1.5 direct labor hours per unit
  • Direct materials cost: $30 per unit
  • Selling price: $150 per unit
  • Setup and configuration events: 30
  • Machine time used: 2,000 hours
  • Inspection hours: 200
  • Material moves: 600
• Modular Wrench Systems
  • 500 units produced
  • 3 direct labor hours per unit
  • Direct materials cost: $60 per unit
  • Selling price: $320 per unit
  • Setup and configuration events: 45
  • Machine time used: 2,500 hours
  • Inspection hours: 300
  • Material moves: 900

RidgeForge is testing an activity-based costing system to see if it yields better insights into its products’ profitability. Information on overhead activities and their budgeted amounts is as follows:

• Machining operations: $90,000
• Materials handling: $60,000
• Quality inspection: $90,000
• Setup and configuration: $60,000

Calculate the total product cost and profit for each product line using both the traditional costing system and the activity-based costing system. Then, compare the results. What changes to pricing, product mix, or operations would you recommend based on your analysis?

Assignment Problem

Note: Check figures are not provided for assignment problems so your instructor may use them for homework.

Question 21

PrintWorks Pro is a regional printing company offering digital and offset print services. Its three major product lines are business cards, marketing flyers for local events and campaigns, and custom booklets that are highly customized, requiring layout and finishing.

The company currently uses direct labor hours to allocate manufacturing overhead, but management believes this may underestimate the resource demands of complex custom jobs. A consultant has recommended trying activity-based costing (ABC). PrintWorks Pro pays its production staff $20 per hour, and the company’s target profit margin is 15%.

The consultant’s notes included the following:

• “Business Cards are printed 10,000 at a time with minimal setup, totaling 200 setup events last quarter.”
• “Marketing Flyers were run in 500 batches, each of which needed to be set up, with a fair amount of trimming and packaging.”
• “Custom Booklets required 150 setup events and generated 1,000 finishing events across only 1,000 units. On the other hand, Marketing Flyers required only 100 finishing events and Business Cards only 50.”
• “Offset jobs consume more press time per unit than digital jobs. Booklets and Flyers used 3,000 and 2,500 press hours, respectively, while Business Cards used just 1,000.”

 

Calculate the total product cost and profit for each product line using both the traditional costing system and the activity-based costing system. Then, compare the results. What changes to pricing, product mix, or operations would you recommend based on your analysis?

Challenge Problem

Question 22

VeloForge manufactures high-performance bicycle frames for niche markets including professional racers, custom bike builders, and boutique urban cyclists. The company specializes in made-to-order frames, combining carbon fiber and aluminum options with multiple geometry and feature packages. VeloForge requires that all products earn at least a 30% profit margin.

Currently, VeloForge uses direct labor hours to allocate all manufacturing overhead, but rising complexity and a widening profit spread between product lines have prompted the CFO to explore activity-based costing (ABC). She has asked your team to conduct a full test of an ABC system using data from the most recent quarter.

VeloForge produces three main frame types:

• CF-Race: Lightweight carbon fiber race frames, produced in medium volume
• AL-Commuter: Durable aluminum frames for city cyclists, produced in high volume
• CF-Custom: Fully customized carbon fiber builds for elite athletes and collectors

Product data from last quarter was as follows:

Workers are paid $30 per hour, and total manufacturing overhead was $880,000 for the quarter.

The proposed activity-based system would include five activity pools, described below:

Activity	Cost	Brief Description
CNC Cutting & Machining	$400,000	Precision tube cutting, automated
Frame Welding & Layup	$180,000	Aluminum welds or carbon fiber layer prep
Paint & Finish	$150,000	Manual painting, decals, and surface finishing
Custom Engineering & Fitting	$90,000	Geometry tweaks, rider fit consultations
Quality & Compliance	$60,000	Final inspection, documentation, compliance

VeloForge did not track all activity drivers directly, but had the following information:

• Machine hours for automated cutting and shaping totaled 4,000 hours last quarter. Of these, 25% on CF-Race and 100 hours were spent on CF-Custom.
• Manual fabrication hours, including frame construction and composite layer prep, totaled 6,000 hours. AL-Commuter required twice as many hours as CF-Race, which in turn used three times as many hours as CF-Custom.
• Paint and finishing effort was distributed evenly across all units produced.
• Engineering consultations were only conducted for CF-Custom and CF-Race frames. CF-Custom required three times as many sessions per frame as CF-Race. The total number of sessions was 36.
• Inspection and documentation time is required for the same number of frames for each product line, but AL-Commuter units took one and a half times as long per unit as CF-Race, and CF-Custom units took two and a half times as long per unit as CF-Race. The total inspection time was 3,300 hours.

Calculate the total product cost and profit for each product line using both the traditional costing system and the activity-based costing system. Then, compare the results. What changes to pricing, product mix, or operations would you recommend based on your analysis?

Pre-Assessment Problem

Use this problem to check whether you are fully prepared for the assessment. Work the problem under assessment conditions – don’t use any notes or other materials!

Question 23

Medipax Solutions provides outsourced packaging services to pharmaceutical manufacturers. For years, it operated efficiently with two core offerings: Blister Pack Kits, produced for over-the-counter medications, and Bottle Labeling, used for bulk prescription drugs supplied to pharmacies.

The company used a traditional costing system that allocated manufacturing overhead based on direct labor hours, which seemed sufficient when its services were relatively simple and standardized.

Last year, Medipax launched a third product line: Clinical Trial Packaging. These specialized orders are highly customized, small-batch, and governed by strict documentation and compliance protocols. While operations staff acknowledged the increased complexity, the accounting system reported strong profitability from the new product—raising no immediate red flags.

“If anything, we were puzzled that Bottle Labeling profitability dropped so suddenly after Clinical Trials started,” said the finance manager. “The volume didn’t change much. It just seemed…less profitable overnight.”

In the most recent quarter, Medipax processed 500,000 units of Blister Pack Kits, 300,000 units of Bottle Labeling, and 15,000 units of Clinical Trial Packaging.

Each unit of Blister Packs required 0.01 direct labor hours, Bottle Labeling needed 0.02, and Clinical Trials took 0.10. Production workers earn $25 per hour.

Direct materials costs were $0.30 per unit for Blister Packs, $0.45 for Bottle Labeling, and $1.50 for Clinical Trials. Selling prices were $1.10, $1.60, and $10.00 per unit, respectively. The company’s target profit margin is 25%.

Total manufacturing overhead was $300,000, applied based on direct labor hours under the current system.

After reviewing the operation, Medipax identified five key activities that drive overhead:

Activity	Budgeted Overhead	Description
Equipment Setup	$60,000	Preparing machines for a new packaging configuration
Printing & Labeling	$90,000	Generating and applying labels, barcodes, and inserts
Inspection & Compliance Checks	$50,000	Required quality and safety verifications
Packaging Line Operation	$70,000	Use of machinery to fill, seal, and load products
Data Entry & Batch Documentation	$30,000	Manual documentation for regulatory approval

Potential cost drivers for the activities are as follows:

Calculate the total product cost and profit for each product line using both the traditional costing system and the activity-based costing system. Then, compare the results. What changes to pricing, product mix, or operations would you recommend based on your analysis?