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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 \(640,000 of indirect costs this year, and she expects her firm to work 4,000direct labor hours. Western’s systems consultants provide direct labor at a rate of \)280per hour. Clients are billed at 160% of direct labor cost. Last month, Western’s consultantsspent 170 hours on Halbert’s engagement.

Requirements

1. Compute Western’s 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×No.ofhours=$280×170=$47,600IndirectcostassignedtoHalbert=Predeterminedoverheadrate×No.ofhoursspentforHalbert=$160×170=$27,200IndirectcostassignedtoHalbert=Predeterminedoverheadrate×No.ofhoursspentforHalbert=$160×170=$27,200

03

3) Computation of operating income from Halbert

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

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Most popular questions from this chapter

The Oakman Company manufactures products in two departments: Mixing and Packaging. The company allocates manufacturing overhead using a single plantwide rate with direct labor hours as the allocation base. Estimated overhead costs for the year are $810,000, and estimated direct labor hours are 360,000. In October, the company incurred 20,000 direct labor hours.

Requirements

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

Loiselle manufactures high-quality speakers. Suppose Loiselle is considering spending the following amounts on a new quality program:

___________________________________________________________________

Additional 20 minutes of testing for each speaker \( 625,000

Negotiating and training suppliers to obtain higher-quality

materials and on-time delivery 430,000

Redesigning the speakers to make them easier to manufacture 1,250,000

Loiselle expects this quality program to save costs as follows:

__________________________________________________

Reduce warranty repair costs \) 275,000

Avoid inspection of raw materials 580,000

Avoid rework because of fewer defective units 825,000_

It also expects this program to avoid lost profits from the following:

___________________________________________________

Lost profits due to disappointed customers $ 920,000

Lost production time due to rework 278,000

Requirements

1. Classify each of these costs into one of the four categories of quality costs (prevention, appraisal, internal failure, or external failure).

2. Should Loiselle implement the quality program? Give your reasons.

The Alright Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):

Direct materials cost \( 80.00

Direct labor cost 20.00

Activity-based costs allocated ?

Total manufacturing product cost ?

The activities required to build the component follow:

Activity Allocation Base Cost Allocated to Each Unit

Start station Number of raw component chassis 4 * \) 1.50 = \( 6.00

Dip insertion Number of dip insertions ? * 0.30 = 9.60

Manual insertion Number of manual insertions 10 * 0.50 = ?

Wave solder Number of components soldered 4 * 1.90 = 7.60

Backload Number of backload insertions 7 * ? = 4.20

Test Number of testing hours 0.43 * 90.00 = ?

Defect analysis Number of defect analysis hours 0.15 * ? = 12.00

Total activity-based costs \) ?

Requirements

2. Why might managers favor this ABC system instead of Alright’s older system, which allocated all manufacturing overhead costs on the basis of direct labor hours?

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

1. What is the total cost of the Brenton job?

Define value engineering. How is it used to control costs?
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