Problem 1 Aire Lock installs window coverings for both commercial and residentia
ID: 2347779 • Letter: P
Question
Problem 1
Aire Lock installs window coverings for both commercial and residential customers. The following information relates to its budgeted operations for the current year.
Revenues
Commercial
Residential
$300,000
$480,000
Direct material costs
$ 30,000
$ 70,000
Direct labor costs
100,000
300,000
Overhead costs
55,000
185,000
162,000
532,000
Operating income (loss)
$115,000
($ 52,000)
The controller, Alma Ortiz, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window cov?erings are less complex to install for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:
Activity Cost Pools Estimated Overhead Cost Drivers
Scheduling and travel $84,000 Hours of travel
Setup time 77,000 Number of setups
Supervision 56,000 Direct labor cost
Expected Use of Cost Drivers per Product
Commercial Residential
Scheduling and travel 1,000 680
Setup time 450 250
Instructions
(a) Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line.
(b) Compute the operating income for the each product line, using the activity-based overhead rates.
(c) What do you believe Alma Ortiz should do?
Problem 2
Hmong Instruments manufactures two products: range instruments and pres?sure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $85,500 were estimated. An analysis of estimated overhead costs reveals the following activities.
Activities Cost Drivers Total Cost
Number of requisitions $33,000
1. Materials Handling Number of requisitions $33,000
2. Machine setups Number of setups 27,900
3. Quality inspections Number of inspections 24,600
The cost driver volume for each product was as follows.
Cost Drivers
Instruments
Gauges
Total
Number of requisitions
400
600
1,000
Number of setups
150
300
450
Number of inspections
200
400
600
Instructions
(a) Determine the overhead rate for each activity.
(b) Assign the manufacturing overhead costs for April to the two products using activity-based costing.
Problem 3
Organic Products, Inc., uses a traditional product costing system to assign overhead costs uniformly to all products. To meet Food and Drug Administration require?ments and to assure its customers of safe, sanitary, and nutritious food, Organic engages in a high level of quality control. Organic assigns its quality-control overhead costs to all products at a rate of 20% of direct-labor costs. Its direct-labor cost for the month of June for its low-calorie dessert line is $55,000. In response to repeated requests from its financial vice president, Organic management agrees to adopt activity-based costing. Data relating to the low-calorie dessert line for the month of June are as follows.
Number of Cost
Overhead
Drivers Used
Activity Cost Pools
Cost Drivers
Rate
per Activity
Inspections of material received
Number of pounds
$0.70 per pound
6,000 pounds
In-process inspections
Number of servings
$0.35 per serving
10,000 servings
FDA certification
Customer orders
$13.00 per order
450 orders
Instructions
(a) Compute the quality-control overhead cost to be assigned to the low-calorie dessert product line for the month of June: (1) using the traditional product costing system (direct labor cost is the cost driver), and (2) using activity-based costing.
(b) By what amount does the traditional product costing system undercost or overcost the low-calorie dessert line?
(c) Classify each of the activities as value-added or non?value-added.
Revenues
Commercial
Residential
$300,000
$480,000
Direct material costs
$ 30,000
$ 70,000
Direct labor costs
100,000
300,000
Overhead costs
55,000
185,000
162,000
532,000
Operating income (loss)
$115,000
($ 52,000)
Explanation / Answer
(a) Determine the overhead rate for each activity.
Materials handling $33,000 / 1,000 = $33 per requisition
Machine setups $27,900 / 450 = $62 per setup
Quality Inspection $24,600 / 600 = $41 per inspection
Instruments Gauges
Materials Handling
400 x $33 $13,200
600 x $33 $19,800
Machine setups
150 x $62 $9,300
300 x $62 $18,600
Quality Inspection
200 x $41 $8,200
400 x $41 $16,400
_______________________
Total $30,700 $54,800
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Problem 3
Organic Products, Inc.,
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