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Chapter 19: Q1RQ (page 1063)
What is the formula to compute the predetermined overhead allocation rate?
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Question:Oscar, Inc. manufactures bookcases and uses an activity-based costing system. Oscar鈥檚 activity areas and related data follow:
Activity | Budgeted Cost of Activity | Allocation Base | Predetermined Overhead Allocation Rate |
Materials handling | \( 240,000 | Number of parts | \)1.00 |
Assembly | 3,500,000 | Number of assembling direct labor hours | 17.00 |
Finishing | 190,000 | Number of finished units* | 4.50 |
*Refers to number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory
Oscar produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:
Product | Total Units Produced | Total Direct materials Costs | Total Direct Labor Costs | Total Number of Parts | Total Assembling Direct Labor Hours |
Standard bookcase | 7,000 | \(91,000 | \)105,000 | 28,000 | 10,500 |
Unfinished bookcase | 7,500 | 82,500 | 75,000 | 22,500 | 7,500 |
Requirements
2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard bookcases at \(5 each and to the unfinished bookcases at \)3 each. Similar analyses were conducted of post-manufacturing activities such as distribution, marketing, and customer service. The post-manufacturing costs were \(20 per standard bookcase and \)18 per unfinished bookcase. Compute the full product costs per unit.
Darrel & Co. makes electronic components. Chris Darrel, the president, recently instructed Vice President Jim Bruegger to develop a total quality control program. 鈥淚f we don鈥檛 at least match the quality improvements our competitors are making,鈥� he told Bruegger, 鈥渨e鈥檒l soon be out of business.鈥� Bruegger began by listing various 鈥渃osts of quality鈥� that Darrel incurs. The first six items that came to mind were:
a. Costs incurred by Darrel customer representatives traveling to customer sites to repair defective products, \(13,000.
b. Lost profits from lost sales due to reputation for less-than-perfect products, \)35,000.
c. Costs of inspecting components in one of Darrel鈥檚 production processes, \(40,000.
d. Salaries of engineers who are redesigning components to withstand electrical overloads, \)65,000.
e. Costs of reworking defective components after discovery by company inspectors, \(50,000.
f. Costs of electronic components returned by customers, \)70,000.
Classify each item as a prevention cost, an appraisal cost, an internal failure cost, or an external failure cost. Then determine the total cost of quality by category.
Question:Western, Inc. is a technology consulting firm focused on Web site development and integration of Internet business applications. The president of the company expectsto incur \(640,000 of indirect costs this year, and she expects her firm to work 4,000direct labor hours. Western鈥檚 systems consultants provide direct labor at a rate of \)280per hour. Clients are billed at 160% of direct labor cost. Last month, Western鈥檚 consultantsspent 170 hours on Halbert鈥檚 engagement.
Requirements
1. Compute Western鈥檚 predetermined overhead allocation rate per direct labor hour.
2. Compute the total cost assigned to the Halbert engagement.
3. Compute the operating income from the Halbert engagement.
Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company鈥檚 original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of \(22 per direct labor hour.
A task force headed by Harris鈥檚 CFO recently designed an ABC system with four activities. The ABC system retains the current system鈥檚 two direct cost categories. Overhead costs are reflected in the four activities. Pertinent data follow:
___________________________________________________________________
Activity Allocation Base Predetermined Overhead
Allocation Rate____
Materials handling Number of parts \) 0.85
Machine setup Number of setups 500.00
Assembling Number of assembling hours 80.00
Shipping Number of shipments 1,500.00_______
Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B. Budget data relating to the contracts follow:
____________________________________________________________
Job A Job B__
Number of parts 15,000 2,000
Number of setups 6 4
Number of assembling hours 1,500 200
Number of shipments 1 1
Total direct labor hours 8,000 600
Number of units produced 100 10
Direct materials cost \( 220,000 \) 30,000
Direct labor cost \( 160,000 \) 12,000__
Requirements
1. Compute the budgeted product cost per unit for each job, using the original costing system (with two direct cost categories and a single overhead allocation rate).
Refer to Short Exercise S19-8. Spectrum Corp. desires a 25% target gross profit after covering all product costs. Considering the total product costs assigned to the Products C and D in Short Exercise S19-8, what would Spectrum have to charge the customer to achieve that gross profit? Round to two decimal places.
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