Scannell Industries manufactures a variety of custom products. The company has traditionally used a plantwide manufacturing overhead rate based on machine hours to allocate manufacturing overhead to its products. The company estimates that it will incur $ 1,820, 000 in total manufacturing overhead costs in the upcoming year and will use 10,000 machine hours.
Up to this point, hazardous waste disposal fees have been absorbed into the plantwide manufacturing overhead rate and allocated to all products as part of the manufacturing overhead process. Recently, the company has been experiencing significantly increased waste disposal fees for hazardous waste generated by certain products, and as a result, profit margins on all products have been negatively impacted. Company management wants to implement an activity-based costing system so that managers know the cost of each product, including its hazardous waste disposal costs.
Expected usage and costs for manufacturing overhead activities for the upcoming year are as follows:
During the year, Job 352 is started and completed. Usage for this job follows:
.
Requirement 1. Calculate the cost of
Job 352Job 352
using the traditional plantwide manufacturing overhead rate based on machine hours.
Begin by calculating the plantwide overhead rate. First identify the formula used to compute the plantwide overhead rate, then compute the rate. (Abbreviations used: MOH = manufacturing overhead; mfg. = manufacturing)
| / | = | Plantwide mfg. overhead rate | |||
| / | = |
Calculate the cost of Job 352.
| Job Cost Record | Manufacturing |
| JOB 352 | Costs |
| Total job cost |
Requirement 2. Calculate the cost of Job 352 using activity-based costing.
Begin by calculating the allocation rate for each activity. First determine the formula to compute the allocation rate in an activity-based costing system, then compute the rate for each activity. (Abbreviations used: est. = estimated, MH=machine hours, Mach.=Machine, Eng.=Engineering)
| Activity cost | ||||||
| / | = | allocation rate | ||||
| Mach. maintenance | / | = | per MH |
| Eng. change orders | / | = | per order | |||
| Waste disposal | / | = | per pound |
Calculate the cost of Job 352 using activity-based costing.
| Job Cost Record | Manufacturing |
| JOB 352 | Costs |
| Total job cost |
Requirement 3. If you were a manager, which cost estimate would provide you more useful information? How might you use this information?
1. The cost estimate based on the ________________________ would provide more useful information because this cost estimate.
A. activity-based costing rates B. traditional plantwide manufacturing overhead rate
2. takes into account __________________________ This information can be used to
____________________.
2) Farmer’s Fine Furnishings manufactures upscale custom furniture. Farmer’s
currently uses a plantwide overhead rate based on direct labor hours to allocate its
$ 1,290,000 of manufacturing overhead to individual jobs. However, Deana Howards,
owner and CEO, is considering refining the company’s costing system by using departmental overhead rates. Currently, the Machining Department incurs $ 870,000 of manufacturing overhead while the Finishing Department incurs $ 420,000 of manufacturing overhead. Deana has identified machine hours (MH) as the primary manufacturing overhead cost driver in the Machining Department and direct labor (DL) hours as the primary cost driver in the Finishing Department.
Read the requirements:
Requirement 1. Compute the plantwide overhead rate assuming that
Farmer’sFarmer’s
expects to incur
30 comma 00030,000
total DL hours during the year.
First identify the formula, then compute the rate. (Round your answer to the nearest whole dollar.)
| / | = | Plantwide overhead rate | ||||
| / | = |
|
Requirement 2. Compute departmental overhead rates assuming that Farmer’s expects to incur 14,500
MH in the Machining Department and 17,500 DL hours in the Finishing Department during the year.
First identify the formula, then compute the rate for each department. (Round your answers to the nearest whole dollar.)
| Departmental | ||||||
| / | = | overhead rate | ||||
| Machining | / | = | per mach. hour |
| Finishing | / | = | per DL hour |
Requirement 3. If Farmer’s continues to use the plantwide overhead rate, how much manufacturing overhead would be allocated to Job 450 and Job 455?
First identify the formula, then calculate the amount of manufacturing overhead that would be allocated to the jobs if the plantwide overhead rate is used. (Round your answers to the nearest whole dollar.)
| Manufacturing overhead | ||||||
| x | = | allocated | ||||
| Job 450 | x | = | ||||
| Job 455 | x | = |
Requirement 4. If Farmer’s uses departmental overhead rates, how much manufacturing overhead would be allocated to Job 450 and Job 455?
Use the following table to calculate the amount of manufacturing overhead that would be allocated to the jobs if the departmental overhead rates are used. (Round your answers to the nearest whole dollar.)
| Job 450 | Job 455 | |
| Machining | ||
| Finishing | ||
| Total overhead allocation |
Requirement 5. Based on your answers to Requirements 3 and 4, does the plantwide overhead rate overcost or undercost either job? Explain. If Farmer’s sells its furniture at 125% of cost, will its choice of allocation systems affect product pricing? Explain.
The single plantwide rate _______ Job 450 by $ _________ and ________ Job 455 by $ ___________.
Since Farmer’s sets its sales price at 125% of cost, and the job cost is _________ by the allocation system it uses, its sales price will __________ by the allocation system it uses.
3) Farris & Company is an architectural firm specializing in home remodeling for private clients and new office buildings for corporate clients. Farris charges customers at a billing rate equal to 134% of the client’s total job cost. Aclient’s total job cost is a combination of (1) professional time spent on the client
($ 64 per hour cost of employing each professional) and (2) operating overhead allocated to the client’s job. Farris allocates operating overhead to jobs based on professional hours spent on the job.
Farris estimates its five professionals will incur a total of 10,000 professional hours working on client jobs during the year.
Amy Little hired Farris to design her kitchen remodeling. A total of 20 professional hours were incurred on this job. In addition, Little’s remodeling job required one of the professionals to travel back and forth to her house for a total of 155 miles. The blueprints had to be copied four times because Little changed the plans several times. In addition, 21 hours of secretarial time were used lining up the subcontractors for the job.
Requirement 1. Calculate the current indirect cost allocation rate per professional hour. (Round your answer to the nearest cent.)
The current indirect cost allocation rate per professional hour is $ _________.
Requirement 2. Calculate the total amount that would be billed to
Little given the current costing structure. Determine the formula, then calculate the amount that would be billed to Little given the current costing structure. (Round all amounts to the nearest cent.)
| x | = | Amount billed to client | |||
| x | = |
Requirement 3. Calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs.
Determine the formula, then calculate the activity cost allocation rates that could be used to allocate operating overhead costs to client jobs. (Round the rates to the nearest cent.)
| / | = | Activity cost allocation rate | ||||
| Transportation to clients | / | = | per mile | |||
| Blueprint copying | / | = | per copy | |||
| Office support | / | = | per secretarial hour |
Requirement 4. Calculate the amount that would be billed to
Little using ABC costing.
Determine the formula, then calculate the amount that would be billed to Little using ABC costing. (Round all amounts to the nearest cent.)
| x | = | Amount billed to client | |||
| x | = |
Requirement 5. Which type of billing system is more fair to clients? Explain.
The ____ billing system is more fair to clients because they are charged according to ______
For example, copying blueprints is _________. Under the fairer system, clients are charged
__________ blueprint copies that their job required. The fairer system better recognized the extent to which ______ costs are incurred by each unique client job.
4) Chaney Products has adopted an ABC costing system. The following manufacturing activities, indirect manufacturing costs, and cost drivers have been identified:
The Job Cost Record for Job
#624 revealed that direct materials requisitioned for the job totaled
$ 1,020. The Job Cost Record also showed that direct labor for this job totaled 99 hours at a wage rate of
$ 29 per hour. Other data collected on the resources used by Job
#624 included:
Read the requirements
Requirement 1. Calculate the activity cost allocation rate for each of the five pools listed in the table. (Round the allocation rate to the nearest cent. Abbreviations used: DL = direct labor; MH = machine hour.)
| Activity cost | ||||||
| / | = | allocation rate | ||||
| Machine setup | / | = | per setup |
| Machining | / | = | per MH | |||
| Polishing | / | = | per cloth |
| Quality control | / | = | per test | |||
| Facility level costs | / | = | per DL hour |
Requirement 2. Calculate the total cost of Job #624 (use an ABC costing system).
Job Cost Record
Manufacturing
JOB # 624
Costs
____________ _______________
____________ _______________
____________ _______________
Total job cost ______________
Requirement 3. Why would ABC provide a more accurate allocation of manufacturing overhead (MOH) than a plantwide rate?
The cost estimate based on ABC would provide a more accurate allocation of MOH than a plantwide rate because this cost estimate takes into account _________ This information can be used to _________.
Requirement 4. Assume that Chaney Products used a traditional costing system rather than an ABC system. Its plantwide MOH rate would have been determined using direct labor (DL) hours as the allocation base. How much cost distortion would have occurred on this job?
Begin by calculating the plantwide overhead rate. First identify the formula used to compute the plantwide overhead rate, then compute the rate. (Round the rate to the nearest whole dollar.)
| / | = | Plantwide overhead rate | ||
| / | = |
How much cost distortion would have occurred on this job? (Use parentheses or a minus sign for under-costed amounts.)
Job #624
Plantwide overhead allocated ____________
Less: ABC ____________
Cost distortion difference _____________
Speakers Direct manufactures high-quality speakers. Suppose
Speakers Direct is considering spending the following amounts on a new quality program:
Speakers Direct expects this quality program to save costs as follows:
It also expects this program to avoid lost profits from the following
| 1. | Classify each of these costs into one of the four categories of quality costs (prevention, appraisal, internal failure, external failure). |
| 2. | Should Speakers Direct implement the quality program? Give your reasons. |
1. First classify each of these costs into one of the four categories of quality costs, then prepare a cost-benefit analysis of the proposed quality program based on the four categories identified. (Use a minus sign or parentheses for savings amounts.)
| Cost (Benefit) Analysis Costs Saving | ||
| Prevention costs: | ||
| ________________ | ||
| Appraisal costs: | ||
| Internal failure costs: | ||
| External failure costs: | ||
| Net cost (benefit) from implementing quality program ________ _ |
2. Should Speakers Direct implement the quality program?
Speakers Direct _______ the new quality program. The company________ $ __________ by
implementing the new program.
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