Chapter 19: Q9RQ (page 1063)
Question: Why is ABC usually considered more accurate than traditional costing methods?
Answer
ABC considers the resources (activities) each product uses.
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Question:Western, Inc. is a technology consulting firm focused on Web site development and integration of Internet business applications. The president of the company expectsto incur \(640,000 of indirect costs this year, and she expects her firm to work 4,000direct labor hours. Western’s systems consultants provide direct labor at a rate of \)280per hour. Clients are billed at 160% of direct labor cost. Last month, Western’s consultantsspent 170 hours on Halbert’s engagement.
Requirements
1. Compute Western’s predetermined overhead allocation rate per direct labor hour.
2. Compute the total cost assigned to the Halbert engagement.
3. Compute the operating income from the Halbert engagement.
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
3. If Rennie desires an operating income of 30% of cost, how much should the company charge for the Brenton job?
Activity-based costing requires four steps. List the four steps in the order they are performed.
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
4. Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain why the costs changed.
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?
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