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Chapter 19: Q19-12RQ (page 1063)
Explain the difference between the target price and target cost.
Target price is related to the customer鈥檚 will to pay for the project and the target cost is the maximum cost that a business incurs to achieve the target price keeping in view of desired profit.
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Haworth Company is a management consulting firm. The company expects to incur \(167,500 of indirect costs this year. Indirect costs are allocated based on the following activities:
Activity | Estimated cost | Allocation Base | Estimated quantity of allocation base | Predetermined Overhead allocation rate |
Site visits | \) 45,000 | Number of visits | 900 visits | \( 50 per visit |
Documentation Preparation | 122,500 | Number of pages | 3,500 Pages | \) 35 per page |
Total Indirect costs | \( 167,500 |
Haworth bills clients at 120% of the direct labor costs. The company has estimated direct labor costs at \)240 per hour. Last month, Haworth completed a consulting job for Client 76 and used the following resources:
Allocation Base Client 76
Direct labor hours 60
Visits 5
Pages 50
Determine the total cost of the consulting job and the operating income earned.
Bubba and Danny are college friends planning a skiing trip to Killington before the new year. They estimated the following for the trip:
Estimated Activity Allocation
Costs Allocation Base Bubba Danny
Food \( 400 Pounds of food eaten 24 26
Skiing 300 Number of lift tickets 2 0
Lodging 280 Number of nights 2 2
\) 980
Requirements
2. Danny does not like the idea of sharing the costs equally because he plans to stay in the room rather than ski. Danny suggests that each type of cost be allocated to each person based on the above-listed allocation bases. Using the activity allocation for each person, calculate the amount that each person would pay based on his own consumption of the activity.
Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018:
Activity Allocation Base Predetermined Overhead
Allocation Rate
Materials handling Number of parts $ 4.00 per part
Machine setup Number of setups 400.00 per setup
Insertion of parts Number of parts 26.00 per part
Finishing Number of finishing hours 90.00 per hour
Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:
Standard Deluxe
Parts per rim 4.0 7.0
Setups per 500 rims 18.0 18.0
Finishing hours per rim 1.0 5.5
Total direct hours per rim 5.0 6.0
The company expects to produce 500 units of each model during the year.
Requirements
3. Compute the estimated ABC indirect manufacturing cost per unit of each model for 2018. Carry each cost to the nearest cent.
Turbo Champs Corp. uses activity-based costing to account for its motorcycle manufacturing process. Company managers have identified three supporting manufacturing activities: inspection, machine setup, and machine maintenance. The budgeted activity costs for 2018 and their allocation bases are as follows:
Activity Total Budgeted Cost Allocation Base
Inspections \( 5,700 Number of inspections
Machine setup 22,000 Number of setups
Machine maintenance 6,000 Finishing of machine hours
Total \) 33,700
Turbo Champs expects to produce 20 custom-built motorcycles for the year. The motorcycles are expected to require 100 inspections, 40 setups, and 100 machine hours.
Requirements
2. Compute the expected indirect manufacturing cost of each motorcycle.
Jaunkas Corp. manufactures mid-fi and hi-fi stereo receivers. The following data have been summarized:
Mid-Fi Hi-Fi
Direct materials cost per unit \( 400 \) 1,800
Direct labor cost per unit 600 400
Indirect manufacturing cost per unit ? ?
Indirect manufacturing cost information includes the following:
Activity | Predetermined Overhead Allocation Rate | Mid-Fi | Hi-Fi |
Setup | \( 1,400 per setup | 36 setups | 36 setups |
Inspection | \) 700 per inspection hour | 35 inspection hours | 20 inspection hours |
Machine maintenance | $ 13 per machine hour | 1,900 machine hours | 1,150 machine hours |
The company plans to manufacture 125 units of the mid-fi receivers and 250 units of the hi-fi receivers. Calculate the product cost per unit for both products using activity-based costing.
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