Ch_5_solutions

Ch_5_solutions - (10 min.) S 5-8 Req. 1 Indirect cost =...

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Unformatted text preview: (10 min.) S 5-8 Req. 1 Indirect cost = Estimated total indirect costs allocation rate Estimated total quantity of cost allocation base = $706,000 5,000 hours = $141.20 / hour Req. 2 Webb Greg Direct labor (100 hours $350 / hour) $35,000 $35,000 Indirect costs (100 hours $141.20 / hour) 14,120 14,120 Total costs $49,120 $49,120 Each engagement used the same direct labor hours, so direct labor and indirect costs (allocated based on direct labor hours) are the same for both engagements. Req. 3 Webb Greg Service revenue (150% $35,000) $52,500 $52,500 Direct labor (from Req. 2 ) 35,000 35,000 Indirect costs (from Req. 2 ) 14,120 14,120 Total costs 49,120 49,120 Operating income $ 3,380 $ 3,380 (5-10 min.) S 5-9 There are several warning signs that Missions cost system may be broken: 1. One client (Webb) is complaining that the firm's fees are too high, while the other client (Greg) called to say he is happy with the fees. This causes a question as to whether Webbs fees are too high and Gregs fees are too low. 2. The client complaining about the high fees is an engagement where Nelson felt especially efficient and capable. On the other hand, the client happy with his fees is a complex engagement where Nelson felt less efficient. 3. Mission's competitor (Delta Applications) is able to undercut her fees even in Mission's area of expertise and still earn a good profit. 4. Mission's cost system has not changed since the firm was founded. 5. Mission allocates indirect costs using a single allocation base direct labor hours. These signals suggest it is time for Nelson to reevaluate her cost system. (5 min.) S 5-11 1 Chapter 5 Activity-Based Costing and Other Cost Management Tools Mission, Inc. ABC Cost Allocation Rates Documentation Preparation Information Technology Support Training Estimated indirect cost of activity $100,000 $156,000 $450,000 Divide by estimated quantity of cost allocation base 3,125 pages 780 applications 5,000 hours Cost allocation rate for activity $ 32 / page $ 200 / application $ 90 / hour (5-10 min.) S 5-16 a. JIT b. Traditional c. Traditional d. JIT e. Traditional f. JIT g. JIT h. Traditional i. JIT j. JIT k. JIT l. JIT m. Traditional 2 Managerial Accounting Solutions Manual (5-10 min.) S 5-17 Examples of quality costs that Bombardier might incur include: Prevention costs Costs of training employees to run equipment more effectively Preventive maintenance on machinery Developing new designs that are easier to manufacture Purchasing higher quality raw materials Working with suppliers to achieve on-time delivery of defect-free raw materials....
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Ch_5_solutions - (10 min.) S 5-8 Req. 1 Indirect cost =...

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