Ontario, Inc.

manufactures two types of medical devices, Standard and Enhanced, and applies
overhead on the basis of direct-labour hours. Information about the company's products follows.

Standard: Enhanced:
Estimated production volume, 3,000 units Estimated production volume, 4,000 units
Direct-material cost, $25 per unit Direct-material cost, $40 per unit
Direct labour per unit, 3 hours at $12 per hour Direct labour per unit, 4 hours at $12 per hour

Ontario, Inc.'s overhead can be identified with three major activities: order processing ($150,000),
machine processing ($560,000), and product inspection ($90,000). These activities are driven by
the number of orders processed, machine hours worked, and inspection hours, respectively. Data
relevant to these activities follow.

Top management is very concerned about declining profitability despite a healthy increase in sales
volume. The decrease in income is especially puzzling because the company recently undertook a
massive plant renovation during which new, highly automated machinery was installed—
machinery that was expected to produce significant operating efficiencies.

Required:
1. Assuming the use of direct-labour hours to apply overhead to production, compute the unit manufacturing costs o
products if the expected manufacturing volume is attained. (traditional)

Standard
3000
25
3
$12
300
18,000
Standard Enhanced 2,000
DM
DL
MOH
Total cost

2. Assuming use of ABC, compute the unit manufacturing costs of the Standard and
Enhanced products if the expected manufacturing volume is attained. Show all relevant
information.
 Activity Application
Activity Cost
Cost Driver Rate

Standard
3000
25
Application
Activity Standard Enhanced
Rate 3
$12
300
18,000
2,000

Standard Enhanced
DM
DL
MOH
Total cost
Total cost
Difference

3. Ontario, Inc.'s selling prices are based heavily on cost please comment on you analysis.
manufacturing costs of each

Enhanced
4000 Prod Volume
40 DM Cost/unit
4 hrs (DL/unit)
$12 per hr
200 Orders
22,000 Mach Hrs
8,000 Inp Hrs

150,000 Order Proc

560,000 Mach Proc
90,000 Prod Insp
Enhanced
4000 Prod Volume
40 DM Cost/unit

4 hrs (DL/unit)
$12 per hr
200 Orders
22,000 Mach Hrs
8,000 Inp Hrs

150,000 Order Proc

560,000 Mach Proc
90,000 Prod Insp
800,000
TuTu Ltd. is a global manufacturer of engines for trucks. Because of high quality of engines, TuTu has enjoyed a decent profit m
fifteen years. Due to the growing environmental concerns, TuTu expanded its core product market of traditional engines (TA-0
types of engines (HB-02 and ET-03) for hybrid and electric trucks in 2016. The firm believes that the two new products have gr
and its competition of traditional engines may become more intense in 5 years.

TuTu was most excited about entering the market for engines for electric trucks as it experienced a strong demand for ET-03.
compete with TuTu in this market. TuTu believes that excellent-quality reputation and first-mover are its competitive advanta
Although current volumes are relatively small, TuTu plans to expand this product to reach three times the current volume sinc
market potential for this product. However, in the beginning of 2017, TuTu was surprised of a big drop of profit margin shown
statement. Although the demand for traditional engines is stable, CFO of TuTu, Grace Rizzo thinks that it might have to lower p
or more to increase sales and stay competitive.

The following table provides key information about the product lines:

TUTU LTD.
Income Statement (in $ millions)
Year Ended December 31, 2016
TA-01 HB-02 ET-03 Total
Sales $880 $495 $262 $1,637
Direct costs:
Direct materials 200 120 40 360
Direct labour 54 26 10 90
Manufacturing overhead ? ? ? 1,098
Net Income ? ? ? 89

The firm allocates this overhead using direct labour cost used by each product. TuTu's management realizes that moving to en
trucks is a major shift in their product and market focus. Moreover, they know that factory personnel have complained about
coordination required for producing different types of engines; for example, more parts need inspection and more effort has s
control. Ryan Walters, TuTu’s director of cost management, has been learned a product-costing method called activity-based
questioning the accuracy of the current product cost system. Thus, management wants Ryan to conduct a detailed study of pr

Analyzing the overhead, Ryan discovers the following information:

Activity Cost (in millions)

Labour related $315
Machine related 372
Production order 84
First part inspection 144
Inventory management 105
Receiving and shipping 42
General administration 36
Total $1,098

Ryan decides to settle on forming five pools and allocate costs of each cost pool to products as follows:

1. Labour-related costs, allocated to products using labour cost.

2. Machine-related costs, allocated to products using machine hours.
3. Costs related to executing a production order (this would include first part inspections), allocated using the # of batches.
4. Costs related to inventory management, receiving, and shipping, allocated using the # of receiving transactions.
5. General administration will be equally allocated to three product lines.

Ryan collects the following operation data:

TA-01 HB-02 ET-03

Sales volume (units) 100,000 45,000 12,000
machine hour/unit 0.16 0.2 0.5
# of parts/unit 2 6 20
# of batches/product line 5 20 15

# of receiving transactions/product line 40 110 200

Required
a. Using the current allocation system, calculate the unit product cost of each product line and complete the income

b. Based on Ryan’s approach (ABC), allocate costs of five cost pool to each product line and determine the product

c. Evaluate the profitability of these three product lines. Do you agree with TuTu management observations that the
disagree with TuTU management, explain why your evaluation the profitability of three products lines is more accura

d. What actions would you recommend for TuTu's management?

a. Using the current allocation system, calculate the unit product cost of each product line and complete th
statement.

TUTU LTD.
Income Statement (in $ millions)
Year Ended December 31, 2016
TA-01 HB-02 ET-03 Total
Sales $880 $495 $262 $1,637
Direct costs:
Direct materials $200 $120 $40 $360
Direct labour $54 $26 $10 $90

Manufacturing
$1,098
overhead
Total Direct Costs $1,548
Net Income $89

b. Based on Ryan’s approach (ABC), allocate costs of five cost pool to each product line and determine the
unit for each product line.

Activity Cost
Activity Activity Cost TA-01 HB-02 ET-03
Driver

Activity Activity Rate TA-01 HB-02 ET-03

Total TA-01 HB-02 ET-03

Sales
Direct costs:
Direct materials
Direct labour
MOH
Total Direct Costs

Net Income

Traditional Method
ABC Method
c. Evaluate the profitability of these three product lines. Do you agree with TuTu management observations
ET-03, is the most profitable product. If you disagree with TuTU management, explain why your evaluation t
three products lines is more accurate.
TuTu has enjoyed a decent profit margin for the past
market of traditional engines (TA-01) to include two
hat the two new products have great profit potential

nced a strong demand for ET-03. Few competitors can

mover are its competitive advantage in this new market.
ree times the current volume since there is substantial
a big drop of profit margin shown in the 2016 income
hinks that it might have to lower prices of TA-01 by 5%

gement realizes that moving to engines for electric

ersonnel have complained about the increased
d inspection and more effort has spent on inventory
ting method called activity-based costing and
n to conduct a detailed study of product costs.
allocated using the # of batches.
receiving transactions.

ct line and complete the income statement.

line and determine the product cost per unit for each product line.

nagement observations that the product, ET-03, is the most profitable product. If you
e products lines is more accurate.

product line and complete the income

oduct line and determine the product cost per

Activity Rate Driver Data

TA-01 HB-02 ET-03
Sales volume (units) 100,000 45,000 12,000
machine hour/unit 0.16 0.2 0.5
# of parts/unit 2 6 20
# of batches/product
line 5 20 15
# of receiving
transactions/product 40 110 200
line
Tu management observations that the product,
explain why your evaluation the profitability of
Bob’s Copy Services Company (BCS) sells and services photocopying machines. Its sales department sells the
machines and consumables, including ink and paper, and its service department provides an after sales service
to its customers. The after-sales service includes planned maintenance of the machine and repairs in the event
of a machine breakdown.

Customers are charged an amount per copy. The charge differs depending on the size of the machine (see below).

On average, each customer has a service contract for two photocopying machines.

BCS’ existing costing system uses a single plant-wide pre-determined overhead rate, based on total sales
revenue from copy charges. This is used to charge the cost of the service department’s support activities to
each size of machine. The CFO believes that this approach is generating inaccurate information and this has
led to some poor decision-making.

BCS’ CFO is considering implementing an activity-based costing (ABC) system and has obtained the following
information about the support activities of the service department:

Activity Cost Driver Overheads per annum ($'000s)

Customer account handling Number of customers 126
Planned maintenance scheduling Number of planned maintenance visits 480
Unplanned maintenance scheduling Number of unplanned maintenance visits 147
Spare part procurement Number of purchase orders 243
Quality control Number of machines 600
Total overheads (note) 1,596

Note: the company intends to use the same total overheads number as part of the costing calculation for their
traditional costing approach as well as the planned ABC approach.

The following data have also been collected for each machine size:

Photocopier size
Small Medium Large
Charge per copy $0.03 $0.04 $0.05
Avg # of copies per year per machine 60,000 120,000 180,000
# of machines 300 800 500
Planned maintenance visits per machine per year 4 6 12
Unplanned maintenance visits per machine per year 1 1 2
Total number of purchase orders per year 500 1,200 1,000
Cost of parts per maintenance visit $100 $300 $400
Labour cost per maintenance visit $60 $80 $100

Required:
(a) Calculate the annual profit per machine for each of the three sizes of machine, using the current basis for
charging costs of support activities to machines.

(b) Re-calculate annual profit per machine for each of the three sizes of machine, using an ABC approach.
(c) Compare and briefly comment upon your results in parts (a) and (b) above, i.e. the profit per machine
under the current costing system versus the ABC system.

(d) List TWO potential benefits to the company of using an ABC system.

(e) List TWO reasons why BCS might choose not to adopt an ABC system.

Part A
(a) Calculate the annual profit per machine for each of the three sizes of machine, using the current basis for
charging costs of support activities to machines.
Small Medium Large TOTAL
Sales Volume [units]
# of Machines
Sales per Machine
% of Total
Total Overhead per Size
Overhead Rate per Machine

Sales per Machine

Overhead per Machine
Margin per Machine

Part B
(b) Re-calculate annual profit per machine for each of the three sizes of machine, using an ABC approach.

Activity/Cost pool Driver Small Medium Large

Activity/Cost pool Driver Small Medium Large

 Small Medium Large
Sales per Machine
Overhead per Machine
Margin per Machine

Margin per unit Comparison

Traditional
ABC
Difference

Part C

Part D

Part E
e (see below).

heads per annum ($'000s)

 Total
TOTAL Rate
Overhead

TOTAL
Part 1
Snow Travel to
Job Support Other Total
Removal Jobs
Wages 80% 10% 0% 10% 100%
Supplies 100% 0% 0% 0% 100%
Snow removal equipment depr. 80% 0% 0% 20% 100%
Vehicle expenses 0% 60% 0% 40% 100%
Office expenses 0% 0% 45% 55% 100%
President's compensation 0% 0% 40% 60% 100%

Snow Travel to
Job Support Other Total
Removal Jobs
Wages $150,000
Supplies $40,000
Snow removal equipment depr. $20,000
Vehicle expenses $40,000
Office expenses $60,000
President's compensation $80,000
Total $390,000

80% of $150,000 = $120,000

Part 2
(a) (b) (a) ÷ (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Snow Removal 32,000 100 sq' m
Travel to Jobs 15,000 KM
Job Support 400 jobs

Part 3
(a) (b) (a) ÷ (b)
 Activity Rate Activity ABC Cost
Activity Cost Pool
Snow Removal 3,500 sq' m
Travel to jobs 75 KM
Job Support 1 job

Part 4
Sales $446.25
Costs:
Snow removal
Travel to jobs
Job support
Total Costs
Product margin

Part 5

Part 6
given

given
given

given
Part 1 Distribution of Resource Consumption Across Activity Cost Pools
Removing Estimating & Work on Non-
Other Total
Asbestos Job Setup Routine Jobs
Wages & Salaries 40% 10% 35% 15% 100%
Disposal Fees 70% 0% 30% 0% 100%
Equipment Depreciation 50% 0% 40% 10% 100%
On-site Supplies 55% 15% 20% 10% 100%
Office expenses 10% 40% 30% 20% 100%
License & Insurance 50% 0% 40% 10% 100%

Snow
Travel to Jobs Job Support Other Total
Removal
Wages & Salaries $200,000
Disposal Fees $600,000
Equipment Depreciation $80,000
On-site Supplies $60,000
Office expenses $190,000
License & Insurance $370,000
Total $1,500,000

Part 2
(a) (b) (a) ÷ (b)
Activity Cost Pool Total Cost Total Activity Activity Rate
Removing Asbestos 500,000 1000 sq' m
Estimating & Job Setup 200 jobs
Work on Non-Routine Jobs 25 non-r jobs

Part 3
Subpart A Routine two-thousand-square-metre job:
# of Square Meters in Job
Removing asbestos
Estimating and job setup
Non-routine job
Total cost of the job
Avg Cost per 1,000 sq' meters

Subpart B Routine four-thousand-square-metre job:

# of Square Meters in Job
Removing asbestos
Estimating and job setup
Non-routine job
Total cost of the job
Avg Cost per 1,000 sq' meters

Subpart C Non-routine two-thousand-square-metre job:

# of Square Meters in Job
Removing asbestos
Estimating and job setup
Non-routine job
Total cost of the job
Avg Cost per 1,000 sq' meters

Part 4
given

given