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Chapter 19: Q2RQ (page 1063)
How is the predetermined overhead allocation rate used to allocate overhead?
Estimated overhead costs are distributed among goods and services using the specified overhead rate.
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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 n 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
2. If the managers rely on the single plantwide overhead allocation rate cost data, which model will they produce?
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.
Willitte Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling \( 95,000 Number of kilos 19,000 kilos
Packaging 200,000 Number of machine hours 5,000 hours
Quality assurance 112,500 Number of samples 1,875 samples
Total indirect costs \) 407,500
Actual production information includes the following:
Commercial Containers Travel Packs
Units produced 2,400 containers 50,000 packs
Weight in kilos 9,600 5,000
Machine hours 1,680 500
Number of samples 240 750
Requirements
3. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)
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
2. Determine the amount of overhead allocated in October.
The following information is provided for Orbit Antenna Corp., which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas.
Activity Cost Allocation Base
Setup \( 58,000 Number of setups
Machine maintenance 30,000 Number of machine hours
Total indirect manufacturing costs \) 88,000
Lo-Gain Hi-Gain Total
Direct labor hours 1,200 3,800 5,000
Number of setups 40 40 80
Number of machine hours 3,000 2,000 5,000
Orbit Antenna plans to produce 125 Lo-Gain antennas and 225 Hi-Gain antennas.
Requirements
2. Compute the ABC indirect manufacturing cost per unit for each product.
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