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Chapter 19: Q42PGB_2 (page 1081)

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

2. If Brenton paid $3,690 for the job, what is the operating income or loss?

Short Answer

Expert verified

Operating Income: $2,000

Step by step solution

01

Step-by-Step-SolutionStep 1: Operating income

Operating income is the difference between the net income and the operating cost. Operating income denotes the amount earned in performing a complete cycle of operation. Operating cost includes the direct labor cost, material cost, and overhead cost.

Operating income earned is spent on after production activities to make sales and the residual amount is called the net profit.

02

Computation of operating income

OperatingIncome=Pricepaid-Totalcost=$3,690-$1,690=$2,000

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Most popular questions from this chapter


Willette 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

1. Willitte’s original single plantwide overhead allocation rate costing system allocated indirect costs to products at $81.50 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for each product. Round to two decimal places.

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

3. What major difficulty would Stella’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?

Refer to Short Exercise S19-8. Spectrum Corp. desires a 25% target gross profit after covering all product costs. Considering the total product costs assigned to the Products C and D in Short Exercise S19-8, what would Spectrum have to charge the customer to achieve that gross profit? Round to two decimal places.

Question:Oscar, Inc. manufactures bookcases and uses an activity-based costing system. Oscar’s activity areas and related data follow:

Activity

Budgeted Cost of Activity

Allocation Base

Predetermined Overhead Allocation Rate

Materials handling

\( 240,000

Number of parts

\)1.00

Assembly

3,500,000

Number of assembling direct labor hours

17.00

Finishing

190,000

Number of finished units*

4.50

*Refers to number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Oscar produced two styles of bookcases in October: 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

7,000

\(91,000

\)105,000

28,000

10,500

Unfinished bookcase

7,500

82,500

75,000

22,500

7,500

Requirements

2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard bookcases at \(5 each and to the unfinished bookcases at \)3 each. Similar analyses were conducted of post-manufacturing activities such as distribution, marketing, and customer service. The post-manufacturing costs were \(20 per standard bookcase and \)18 per unfinished bookcase. Compute the full product costs per unit.

Question:Refer to Exercises E19-24 and E19-25. Suppose Western’s direct labor rate was $280 per hour. The Halbert engagement used the following resources last month:

Allocation Base Halbert

Direct labor hours 170

Pages 310

Applications used 80

Requirements

1. Compute the cost assigned to the Halbert engagement, using the ABC system.

2. Compute the operating income or loss from the Halbert engagement, using theABC system.
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