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Chapter 19: Q42PGB_2 (page 1081)

Rennie Plant Service completed a special landscaping job for Brenton Company. rennie uses ABC and has the following predetermined overhead allocation rates:

Activity Predetermined

Allocation Base Overhead Allocation Rate

Designing Number of designs \( 290 per design

Planting Number of plants \) 20 per plant

The Rennie job included \(1,500 in plants; \)800 in direct labor; one design; and 30 plants.

Requirements

2. If Brenton paid $3,690 for the job, what is the operating income or loss?

Short Answer

Expert verified

Operating Income: $2,000

Step by step solution

01

Step-by-Step-SolutionStep 1: Operating income

Operating income is the difference between the net income and the operating cost. Operating income denotes the amount earned in performing a complete cycle of operation. Operating cost includes the direct labor cost, material cost, and overhead cost.

Operating income earned is spent on after production activities to make sales and the residual amount is called the net profit.

02

Computation of operating income

OperatingIncome=Pricepaid-Totalcost=$3,690-$1,690=$2,000

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Most popular questions from this chapter

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

2. Prior to 2018, Eason used a single plantwide overhead allocation rate system with direct labor hours as the allocation base. Compute the predetermined overhead allocation rate based on direct labor hours for 2018. Use this rate to determine the estimated indirect manufacturing cost per wheel rim for each model, to the nearest cent.

Question:Blanchette Plant Service completed a special landscaping job for Kerry Company. Blanchette uses ABC and has the following predetermined overhead allocation rates:

Activity Predetermined

Allocation Base Overhead Allocation Rate

Designing Number of designs \( 290 per design

Planting Number of plants \) 20 per plant

The Kerry job included \(750 in plants; \)1,300 in direct labor; one design; and 30 plants.

Requirements

3. If Blanchette desires an operating income of 30% of cost, how much should the company charge for the Kerry job?

Refer to Exercise E19-20. For 2019, Eason鈥檚 managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using activitybasedn costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company鈥檚 standard and deluxe models for 2019:

Standard Deluxe

Sales price \( 800.00 \) 940.00

Direct materials 31.00 48.00

Direct labor 45.00 52.00

Because of limited machine hour capacity, Eason can produce either2,000 standard rims or2,000 deluxe rims.

Requirements

3. Which course of action will yield more income for Eason?

PetSmart, Inc. is a large specialty pet retailer of services and solutions for the needs of pets. In addition to selling pet food and pet products, PetSmart also offers dog grooming services including bath, nail trim, teeth brushing, aromatherapy to reduce everyday stress, and nail polish and stickers. PetSmart even offers a Top Dog service that includes a premium shampoo, milk bath conditioner, scented cologne spritz, teeth brushing, and bandana or bow.

Assume PetSmart, Inc. expects to incur \(380,000 of indirect costs this year. The company allocates indirect costs based on the following activities:

___________________________________________________________________

Activity Estimated Allocation Base Estimated Quantity

Cost of Allocation

Base____

Admission \) 60,000 Number of admissions 20,000

Cleaning 240,000 Cleaning direct labor hours 100,000

Grooming 80,000 Grooming direct labor hours 4,000

Total indirect costs \( 380,000________________________________________

Requirements.

2. Assume a customer brought in Sophie, a beagle, for Top Dog service. PetSmart used the following resources:

_____________________________________________

Allocation Base Sophie, Beagle

Number of admissions 1

Cleaning direct labor hours 1

Grooming direct labor hours 0.5______

Determine the total cost of the Top Dog service for Sophie assuming the total direct materials cost was \)3.50 and the total direct labor cost was $12 per DLHr.

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


Activity

Predicted Reduction in Activity Units

Predetermined Overhead Allocation Rate per unit

Inspection of incoming raw materials

395

\( 44

Inspection of finished goods

395

26

Number of defective units discovered in-house

1,500

54

Number of defective units discovered by customers

275

73

Lost profits due to dissatisfied customers

100

103

Requirements

1. Calculate the predicted quality cost savings from the design engineering work.

2. Roxi spent \)106,000 on design engineering for the new skateboard. What is the net benefit of this 鈥減reventive鈥� quality activity?

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