Compute the predetermined overhead rate under current method

Question

Assignment

PART 1

Description

Managerial Accounting focuses heavily on finding solutions to numerical problems. With that in mind, most units will include a number of problems. For each problem, you will need to provide more than a simple numerical response. Your solutions should thoroughly address the issue and present the findings in a meaningful format similar to those developed within the chapters and as part of the review exercises solutions. Part value may be assigned for incorrect responses.

Question 1:

For its overhead costs, the wholesale distributor Janz Company uses activity-based costing. In terms of the company's annual overhead costs and its activity-based costing system the following data has been provided:

Overhead Costs:
Wages and salaries	$380,000
Non-wage expenses	90,000
Total	$470,000

Distribution of Resource Consumption:

	Activity Cost Pools
	Filling Orders	Product Support	Other	Total
Wages and salaries	20%	65%	15%	100%
Non-wage expenses	15%	60%	25%	100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. Shown below is the amount of activity for the year:

Activity Cost Pool	Annual Activity
Filling orders	3,100 orders
Product support	32 products
Other	Not applicable

Required:

Compute the activity rates for the Filling Orders and Product Support activity cost pools:

Question 2:

Lojay Company produces custom covers for the air conditioning units of homes and businesses. For its overhead costs the company uses an activity-based costing system. The following data has been provided by the Lojay company regarding its annual overhead costs and its activity cost pools:

Overhead Costs:
Production overhead	$89,000
Office expenses	41,500
Total	$130,500

Distribution of Resource Consumption:

	Activity Cost Pools
	Making Covers	Job Support	Other	Total
Production overhead	33%	45%	22%	100%
Office expenses	14%	54%	32%	100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The amount of activity for the year is as follows:

Activity Cost Pool	Annual Activity
Making covers	2,500 yards
Job support	200 jobs
Other	Not applicable

Required:

1) Prepare the first-stage allocation of overhead costs to the activity cost pools

2) Compute the activity rates for the Making Covers and Job Support activity cost pools

3) Prepare a revenue report where making 50 yards of covers and DM and DL cost of $950

Questions 3:

Tuggs Corporation manufactures two products, Racket and Table. Table, having been developed as an attempt to enter a market closely related to that of Racket, has been recently created. Of the two products Table is the more complex one thus requiring two and a half hours of direct labour time per unit to manufacture, compared to one hour of direct labour time for Racket. Table is produced on an automated production line.

On the basis of direct labour hours Overhead is currently assigned to the products. The company estimated it would incur $364,000 in manufacturing overhead costs and produce 4,900 units of Table and 22,100 units of Racket during the current year. Unit costs for materials and direct labour are as follows:

	Racket	Table
Direct materials	$9	$20
Direct labour	$7	$15

Required:

1. Compute the predetermined overhead rate under the current method of allocation, and determine the unit product cost of each product for the current year.

2. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

		Expected Activity
Activity Cost Pool	Estimated Overhead Cost	Racket	Table	Total
Machine setups required	$161,000	800	700	1,500
Purchase orders issued	$32,000	200	150	350
Machine hours required	$81,000	3,900	7,000	10,900
Maintenance requests issued	$90,000	310	510	820
Total	$364,000

Determine the unit product cost of each product for the current year using the data above and an activity-based costing approach

Question 4:

Gandalf and Company makes table tennis equipment for the retailers around the world.  Below you will find a number of activities and cost at Gandalf Corporation. Please list the activity as either, "Batch", "Unit", "Facility", or "Organization-sustaining".

Activity	Level
1)  Factory utilities
2)  A steering wheel is installed in a golf cart.
3)  Machine set-up.
4)  Completed golf carts are individually tested on the company's test track.
5)  Molding and sanding each unit of product
6)  An outside lawyer draws up a new generic sales contract for the company, limiting Go Pro's liability in case of accidents that involve its golf carts.
7)  Electricity is used to heat and light the factory and the administrative offices.
8)  A golf cart is painted. cost hierarchy often used to implement ABC, with the exception of
9)  Research and development
10) The company's engineer modifies the design of a model to eliminate a potential safety problem.

PART 2

Objectives

• To develop an ability to identify and assume an assigned role.
• To be able to identify and rank the importance of explicit issues.
• To illustrate the importance of hidden (undirected) issues that arise from a detailed analysis.
• To identify accounting issues (GAAP/IFRS compliance issues), assess their implications, generate alternatives, and provide recommendations within the bounds of GAAP/IFRS to meet the client's needs.
• To examine how accounting standards impact financial measures (ratios, covenants, etc.).
• To prepare a coherent report and integrated analysis that meets specific user needs.

Instructions

In order to complete your case analysis successfully

• identify the role you are playing,
• assess the financial reporting landscape considering the user needs, constraints, and business environment,
• identify the issues,
• analyze the issues (qualitatively and quantitatively), and
• provide a recommendation and conclusion.

An average grade will result from answering all questions with basic coverage and accuracy, showing all your work. Additional points come from including greater detail, astute, informed commentary where appropriate and connections to readings and other content.

Respond in a single Word doc (or comparable text editor).

Background

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. It is your first day on the job and a Manager asks you for some help with a client in the aerospace sector. Eager to please on your first day, you head over to Galaxy Incorporated and sit down with the Executive Vice President to obtain more information.

"That R2D2 model is such a stinker! I think it's time to cut back its production and shift our resources toward the new BB8 model," said Justin Medakiewicz, Executive VP of Galaxy Incorporated. "Take a look at this Income Statement I've received from accounting. The BB8 is generating over eight times as much profit as the R2D2 on one-sixth of the unit sales. I'm convinced that we should focus on the BB8 going forward." The year-end statement which Justin was referring to is shown below.

		Model
	Total	R2D2	BB8
Sales	$11,125,000	$9,000,000	$2,125,000
Cost of Goods Sold	6,900,000	5,490,000	1,410,000
Gross Margin	4,225,000	3,510,000	715,000
Less: Selling and Administrative Expenses	3,675,000	3,450,000	225,000
Operating Income	$550,000	$60,000	$490,000
Number of Units Produced and Sold		30,000	5,000

"The numbers sure look that way," replied Melissa Montoro, the company's sales manager. "But why isn't the competition interested in replicating the BB8? I know we've been producing the model for only three years, but I'm surprised that more of our competitors haven't recognized what a cash cow it is."

"I think it's our new automated plant," replied Justin. "Now it takes only two direct labour hours to produce a unit of the R2D2 and three direct labour hours to produce a unit of the BB8. That's considerably less than it used to take us."

"I agree that automation is very beneficial," replied Melissa. "I suppose that's how we're able to hold down the price of the BB8. Trekkie Corporation in the UK tried to bring out a BB8 but discovered they couldn't come close to matching our price. But Trekkie is killing us on the R2D2 by undercutting our price with some of our best customers. I suppose they'll pick up all of our R2D2 business if we move out of that market. But who cares? We don't even have to advertise the BB8; it just seems to sell itself."

"My only concern about automation is how our manufacturing overhead rate has shot up," said Justin. "Our total manufacturing overhead cost is $2,700,000. That comes out to be a hefty amount per direct labour hour, but Timothy down in accounting has been using direct labour hours as the base for computing overhead rates for years and doesn't want to change. I don't suppose it matters as long as costs get assigned to products."

"I've never understood that debit and credit stuff," replied Melissa. "But I think you've got a problem in production. I had lunch with Lily yesterday and she complained about how complex the BB8 is to produce. Apparently they have to do a lot of setups, special soldering, and other work on the BB8 just to keep production moving. And they have to inspect every single unit."

"It'll have to wait," said Justin. "I'm writing a proposal to the board of directors to phase out the R2D2. We've got to increase our bottom line or we'll all be looking for jobs."

Compute the predetermined overhead rate based on direct labour hours that the company used during the year. (There was no underapplied or overapplied overhead for the year.)

Direct materials and direct labour costs per unit for the two products are as follows:

	R2D2	BB8
Direct Materials	$75	$120
Direct Labor	$36	$54

Using these data and the rate computed in (1) above, determine the unit product cost of each product under the company's traditional costing system.

Assume that the company's $2,700,000 in manufacturing overhead cost can be assigned to six activity cost pools as follows:

			Expected Activity
Activity Cost Pool	Estimated Overhead Costs	Total	R2D2	BB8
Machine setups (number of setups)	$  312,000	$ 1,600	1,000	600
Quality control (number of inspections)	540,000	9,000	4,000	5,000
Purchase orders (number of orders)	135,000	1,200	840	360
Soldering (number of solder joints)	675,000	200,000	60,000	140,000
Shipments (number of shipments)	198,000	600	400	200
Machine-related (machine-hours)	840,000	70,000	30,000	40,000
	$2,700,000

Given these data, would you support a recommendation to expand sales of the BB8? Explain your position.

From the data you prepared in (3) above, why do you suppose the BB8 "just seems to sell itself"?

If you were president of Galaxy Incorporated, what strategy would you follow from this point forward to improve the company's overall profits?

How might Galaxy Incorporated find the ABC information helpful in managing its business?

Format your assignment according to the following formatting requirements:

1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.

2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.

3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.