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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:Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s 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
1. Calculate the predicted quality cost savings from the design engineering work.
Clason, Inc. manufactures door panels. Suppose Clason is considering spending the following amounts on a new total quality management (TQM) program:
___________________________________________________________________
Strength-testing one item from each batch of panels \( 68,000
Training employees in TQM 27,000
Training suppliers in TQM 39,000
Identifying suppliers who commit to on-time delivery of
perfect-quality materials 58,000
Clason expects the new program would save costs through the following:
___________________________________________________________________
Avoid lost profits from lost sales due to disappointed customers \) 86,000
Avoid rework and spoilage 63,000
Avoid inspection of raw materials 57,000
Avoid warranty costs 15,000
Requirements
1. Classify each cost as a prevention cost, an appraisal cost, an internal failure cost, or an external failure cost.
2. Should Clason implement the new quality program? Give your reason.
Answer
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
3. If PetSmart desires a 30% target operating income after covering all its costs, what would PetSmart have to charge the customer to achieve that operating income?
Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:
Activity | Budgeted Cost of Activity | Allocation Base | Predetermined Overhead Allocation Rate |
Materials handling | \( 230,000 | Number of parts | \)1.50 |
Assembly | 3,200,000 | Number of assembling direct labor hours | 16.00 |
Finishing | 150,000 | Number of finished units* | 3.00 |
*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory
Martin produced two styles of bookcases in April: 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 | 3,000 | \(54,000 | \)67,500 | 9,000 | 4,500 |
Unfinished bookcase | 3,500 | 56,000 | 52,500 | 7,000 | 3,500 |
Requirements
3. Which product costs are reported in the external financial statements? Which costs are used for management decision making? Explain the difference.
Consider the following characteristics of either a JIT production system or a traditional production system. Indicate whether each is characteristic of a JIT production system or a traditional production system.
a. Products are produced in large batches.
b. Large stocks of finished goods protect against lost sales if customer demand ishigher than expected.
c. Suppliers make frequent deliveries of small quantities of raw materials.
d. Employees do a variety of jobs, including maintenance and setups as well as operating machines.
e. Machines are grouped into self-contained production cells or production lines.
f. Machines are grouped according to function. For example, all cutting machines are located in one area.
g. The final operation in the production sequence “pulls” parts from the preceding operation.
h. Each employee is responsible for inspecting his or her own work.
i. Management works with suppliers to ensure defect-free raw materials.
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