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

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

$P r e d e t e r m i n e d o v e r h e a d a l l o c a t i o n r a t e a s p e r d i r e c t l a b o r h o u r = \frac{T o t a l I n d i r e c t C o s t}{N u m b e r o f d i r e c t l a b o r h o u r} = \frac{$ 640, 000}{4, 000} = $ 160$

2) Computation of total cost assigned to Halbert engagement

$D i r e c t l a b o r c o s t a s s i g n e d t o H a l b e r t = L a b o r h o u r r a t e \times N o . o f h o u r s = $ 280 \times 170 = $ 47, 600 I n d i r e c t c o s t a s s i g n e d t o H a l b e r t = P r e d e t e r m i n e d o v e r h e a d r a t e \times N o . o f h o u r s s p e n t f o r H a l b e r t = $ 160 \times 170 = $ 27, 200 I n d i r e c t c o s t a s s i g n e d t o H a l b e r t = P r e d e t e r m i n e d o v e r h e a d r a t e \times N o . o f h o u r s s p e n t f o r H a l b e r t = $ 160 \times 170 = $ 27, 200$

3) Computation of operating income from Halbert

$S e r v i c e r e v e n u e f r o m H a l b e r t = D i r e c t l a b o r c o s t t o H a l b e r t \times \frac{160}{100} = $ 47, 600 \times \frac{160}{100} = $ 76, 160 O p e r a t i n g I n c o m e f r o m H a l b e r t = S e r v i c e r e v e n u e - T o t a l C o s t = $ 76, 160 - $ 74, 800 = $ 1, 360$

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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

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

Short Answer

Step by step solution

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

2) Computation of total cost assigned to Halbert engagement

3) Computation of operating income from Halbert

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