Clancy’s Carpet Cleaning Services uses ABC to allocate overhead costs and has computed the following predetermined overhead allocation rates:
Activity Allocation Base Allocation Rate
Supplies Number of square feet $ 0.05 per square foot
Travel Number of customer sites $ 20.00 per site
Clancy cleans the carpets for an apartment management firm. When a renter moves out, the apartment management firm contacts Clancy to clean the carpets in preparation for a new tenant. During the past month, Clancy cleaned the carpets of 23 apartments with 1,200 square feet each. What amount of indirect costs should Clancy allocate to the apartment firm for the month?
Total Indirect Cost: $1,840
The Alright Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):
Direct materials cost $ 80.00
Direct labor cost 20.00
Activity-based costs allocated ?
Total manufacturing product cost ?
The activities required to build the component follow:
Activity Allocation Base Cost Allocated to Each Unit
Start station Number of raw component chassis 4 * $ 1.50 = $ 6.00
Dip insertion Number of dip insertions ? * 0.30 = 9.60
Manual insertion Number of manual insertions 10 * 0.50 = ?
Wave solder Number of components soldered 4 * 1.90 = 7.60
Backload Number of backload insertions 7 * ? = 4.20
Test Number of testing hours 0.43 * 90.00 = ?
Defect analysis Number of defect analysis hours 0.15 * ? = 12.00
Total activity-based costs $ ?
2. Why might managers favor this ABC system instead of Alright’s older system, which allocated all manufacturing overhead costs on the basis of direct labor hours?
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
2. Stella spent $103,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?
Darby Corp. is considering the use of activity-based costing. The following information is provided for the production of two product lines:
Activity Cost Allocation Base
Setup $ 105,000 Number of setups
Machine maintenance 60,000 Number of machine hours
Total indirect manufacturing costs $ 165,000
Product A Product B Total
Direct labor hours 7,000 5,000 12,000
Number of setups 30 170 200
Number of machine hours 1,600 2,400 4,000
Darby plans to produce 375 units of Product A and 250 units of Product B. Compute the ABC indirect manufacturing cost per unit for each product.
Question: Gateway produces electronic calculators. Suppose Gateway’s standard cost per calculator is $25 for direct materials and $68 for conversion costs. The following data applyto August activities:
Direct materials purchased (on account) $ 8,300
Conversion costs incurred 20,500
Number of calculators produced 300 calculators
Number of calculators sold (on account, at $105 each) 295 calculators
1. Prepare summary journal entries for August using JIT costing, including the entryto adjust the Conversion Costs account.
2. The beginning balance of Finished Goods Inventory was $1,300. Use a T-accountto find the ending balance of Finished Goods Inventory.
Koehler makes handheld calculators in two models: basic and professional. Koehler estimated $721,000 of manufacturing overhead and 515,000 machine hours for the year. The basic model actually consumed 230,000 machine hours, and the professional model consumed 285,000 machine hours.
Compute the predetermined overhead allocation rate using machine hours (MHr) as the allocation base. How much overhead is allocated to the basic model? To the professional model?
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