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Chapter 19: Q24E (page 1073)

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.

Short Answer

Expert verified

Predetermined overhead allocation rate:$160

Total cost assigned to Halbert:$74,800

Operating Income from Halbert:$1,360

Step by step solution

01

Step-by-Step-SolutionStep1: 1) Computation of predetermined overhead allocation rate

Predeterminedoverheadallocationrateasperdirectlaborhour=TotalIndirectCostNumberofdirectlaborhour=$640,0004,000=$160

02

2) Computation of total cost assigned to Halbert engagement

DirectlaborcostassignedtoHalbert=Laborhourrate脳No.ofhours=$280脳170=$47,600IndirectcostassignedtoHalbert=Predeterminedoverheadrate脳No.ofhoursspentforHalbert=$160脳170=$27,200IndirectcostassignedtoHalbert=Predeterminedoverheadrate脳No.ofhoursspentforHalbert=$160脳170=$27,200

03

3) Computation of operating income from Halbert

ServicerevenuefromHalbert=DirectlaborcosttoHalbert脳160100=$47,600脳160100=$76,160OperatingIncomefromHalbert=Servicerevenue-TotalCost=$76,160-$74,800=$1,360

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Most popular questions from this chapter

The Oakman Company (see Short Exercise S19-1) has refined its allocation system by separating manufacturing overhead costs into two cost pools鈥攐ne for each department. The estimated costs for the Mixing Department, \(510,000, will be allocated based on direct labor hours, and the estimated direct labor hours for the year are 170,000. The estimated costs for the Packaging Department, \)300,000, will be allocated based on machine hours, and the estimated machine hours for the year are 40,000. In October, the company incurred 38,000 direct labor hours in the Mixing Department and 10,000 machine hours in the Packaging Department.

Requirements

1. Compute the predetermined overhead allocation rates. Round to two decimal places.

Darby Corp. is considering the use of activity-based costing. The following information is provided for the production of two product lines:

Activity Cost Allocation Base

Setup \( 105,000 Number of setups

Machine maintenance 60,000 Number of machine hours

Total indirect manufacturing costs \) 165,000

Product A Product B Total

Direct labor hours 7,000 5,000 12,000

Number of setups 30 170 200

Number of machine hours 1,600 2,400 4,000

Darby plans to produce 375 units of Product A and 250 units of Product B. Compute the ABC indirect manufacturing cost per unit for each product.

Spectrum Corp. makes two products: C and D. The following data have been summarized:

Product C Product D

Direct materials cost per unit \( 600 \) 2,400

Direct labor cost per unit 300 200

Indirect manufacturing cost per unit ? ?

Indirect manufacturing cost information includes the following:

Activity Predetermined

Overhead

Allocation Rate Product C Product D

Setup \( 1,500 per setup 35 setups 76 setups

Machine maintenance \) 10 per MHr 1,500 MHr 3,700 MHr

The company plans to manufacture 250 units of each product. Calculate the product cost per unit for Products C and D using activity-based costing.

Question:Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella鈥檚 senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.

Activity Predicted Predetermined

Reduction in Overhead Allocation

Activity Units Rate per Unit

Inspection of incoming raw materials 390 $ 44

Inspection of finished goods 390 19

Number of defective units discovered in-house 1,200 50

Number of defective units discovered by customers 325 72

Lost profits due to dissatisfied customers 75 102

Requirements

3. What major difficulty would Stella鈥檚 managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?

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.
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