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Chapter 19: Q25E (page 1073)

Question:Refer to Exercise E19-24. The president of Western suspects that her allocation of indirect costs could be giving misleading results, so she decides to develop an ABCsystem. She identifies three activities: documentation preparation, information technologysupport, and training. She figures that documentation costs are driven by thenumber of pages, information technology support costs are driven by the number ofsoftware applications used, and training costs are driven by the number of direct laborhours worked. Estimates of the costs and quantities of the allocation bases follow:

Activity

Estimated Cost

Allocation Base

Estimated quantity of allocation base

Documentation Preparation

\( 85,850

Pages

1,317 Pages

Information technology support

150,150

Applications used

715 applications

Training

424,000

Direct labor hours

4,000 hours

Total Indirect costs

\) 640,000

Compute the predetermined overhead allocation rate for each activity. Round to thenearest dollar.

Short Answer

Expert verified

Predetermined Overhead Allocation Rate

Documentation Preparation:$50

Information Technology Support:$210

Training:$106

Step by step solution

01

Step-by-Step-SolutionStep1: Documentation Preparation

Predeterminedoverheadrate=EstimatedCostQuantityofallocationbase=$65,8501,317=$50

02

Information Technology Support

Predeterminedoverheadrate=EstimatedCostQuantityofallocationbase=$150,150715=$210

03

Training

Predeterminedoverheadrate=EstimatedCostQuantityofallocationbase=$424,0004,000=$106

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Most popular questions from this chapter

Question:Lally, Inc. produces universal remote controls. Lally uses a JIT costing system. One of the company’s products has a standard direct materials cost of \(9 per unit and a standardconversion cost of \)35 per unit. During January 2018, Lally produced 500 unitsand sold 495 units on account at \(45 each. It purchased \)4,800 of direct materials onaccount and incurred actual conversion costs totaling \(14,000.

Requirements

1. Prepare summary journal entries for January.

2. The January 1, 2018, balance of the Raw and In-Process Inventory account was\)70. Use a T-account to find the January 31 balance.

3. Use a T-account to determine whether conversion costs are overallocated orunderallocated for the month. By how much? Prepare the journal entry to adjustthe Conversion Costs account.

Question:Gateway produces electronic calculators. Suppose Gateway’s standard cost per calculator is \(25 for direct materials and \)68 for conversion costs. The following data applyto August activities:

Direct materials purchased (on account) \( 8,300

Conversion costs incurred 20,500

Number of calculators produced 300 calculators

Number of calculators sold (on account, at \)105 each) 295 calculators

Requirements

1. Prepare summary journal entries for August using JIT costing, including the entryto adjust the Conversion Costs account.

2. The beginning balance of Finished Goods Inventory was $1,300. Use a T-accountto find the ending balance of Finished Goods Inventory.

The Alexander 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 \( 81.00

Direct labor cost 21.00

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

3 X \)1.50 = \(4.50

Dip Insertion

Number of dip insertions

? X 0.50 = 14.50

Manual Insertion

Number of manual insertions

13 X 0.40 = ?

Wave solder

Number of components solders

3 X 1.50 = 4.50

Backload

Number of backload insertions

7 X ? = 2.80

Test

Number of testing hours

0.39 60.0 = ?

Defect analysis

Number of defect analysis hours

0.10 X ? = 4.00

Total activity-based costs

\) ?

Requirements

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

Refer to Exercise E19-20. For 2019, Eason’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using activity based costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s 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

1. If Eason’s managers rely on the ABC unit cost data computed in Exercise E19-20, which model will they produce? Carry each cost to the nearest cent. (Ignore selling and administrative expenses for this calculation.)

Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company’s original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of \(22 per direct labor hour.

A task force headed by Harris’s CFO recently designed an ABC system with four activities. The ABC system retains the current system’s two direct cost categories. Overhead costs are reflected in the four activities. Pertinent data follow:

___________________________________________________________________

Activity Allocation Base Predetermined Overhead

Allocation Rate____

Materials handling Number of parts \) 0.85

Machine setup Number of setups 500.00

Assembling Number of assembling hours 80.00

Shipping Number of shipments 1,500.00_______

Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B. Budget data relating to the contracts follow:

____________________________________________________________

Job A Job B__

Number of parts 15,000 2,000

Number of setups 6 4

Number of assembling hours 1,500 200

Number of shipments 1 1

Total direct labor hours 8,000 600

Number of units produced 100 10

Direct materials cost \( 220,000 \) 30,000

Direct labor cost \( 160,000 \) 12,000__

Requirements

3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
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