# Offshore company makes 2 different types of boats sail and fishing

ffshore Company makes 2 different types of boats sail and fishing boats. The company consists of two different departments, design & engineering, and production. The company has decided to allocate overhead costs in each of the two cost pools. Data on estimated overhead follows:

Estimated

Sail

Fish

Activity:

Driver

Estimate

Estimate

Design

# of designs

\$180,000

22 designs

18 designs

Production

Labor hours

\$945,000

4,000 hours

3,500 hours

If the company produces and sells 22 sail boats, and each sail boat requires 180 labor hours, how much overhead will be assigned to each sail boat produced?

Kind, Meek, and Clean, attorneys-at-law, specialize in three areas: criminal, civil, and family law. When specifications for a new computer system were established, the partners agreed to allocate usage based on each department’s needs. Criminal law division needed 60% of the capacity, civil law 25%, and family law 15%. Variable costs for the computer department would be allocated on the number of computer minutes each division used. The computer department’s budgeted fixed costs are \$700,000, and the budgeted variable costs \$150,000. The firm estimates that 400,000 minutes of computer time will be used year. What amount of the computer department’s fixed costs will be allocated to the civil and family law divisions, respectively? (Compute cost allocation rates to 3 significant digits.)

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\$233,333 and \$233,333

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\$37,500 and \$22,500

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\$212,500 and \$127,500

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\$175,000 and \$105,000

Rand Company sells fine collectible statues and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping and Rand has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected and shipped. The final cost pool is used for general operations and supervision of the department and the cost driver is the number of shipments. Information about the department is summarized below:

Cost Pool

Total Costs

Cost Driver

Annual Activity

Packaging and shipping

\$170,000

Number of boxes shipped

25,000 boxes

Final inspection

\$200,000

Number of individual items shipped

100,000 items

General operations and supervision

\$85,000

Number of orders

10,000 orders

A new customer orders a single item (which obviously can be shipped in a single box). What is the shipping department cost that will be allocated to this order?

El Dorado Company has two production plants. Recently, the company conducted an ABM study to determine the cost of activities involved in processing orders for parts at each of the plants. How might an operations manager use this information to manage the cost of processing orders?

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Set up an ABC costing system.

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Identify benchmarks.

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Close down the plant with the highest cost to increase profits.

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Compare the cost to process an order at each plant and the nature of the orders to determine if costs are out of control. If out of control, investigate.

Common costs

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a) are fixed costs that are not directly traceable to an individual product line.

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b) normally not avoidable.

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c) Both A and B are true.

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d) Neither A nor B is true.

Collegebooks Company has two locations, downtown and on campus. During March, the company reported net income of \$237,000 and sales of \$1.2 million. The contribution margin in the downtown store was \$320,000 (32% of sales). The contribution margin in the campus store is \$110,000. Direct fixed costs are \$90,000 in the downtown store and \$93,000 in the campus location. How much are total variable costs?

The following below needs to be completed in excel. Please show results:
PROBLEM 6-10. Cost Allocation and Apparent Profitability
Diamonds, Etc. manufactures jewelry settings and sells them to retail stores. In the past, most settings were made by hand, and the overhead allocation rate in the prior year was \$12 per labor hour (\$2,400,000 overhead ÷ 200,000 labor hours). In the current year, overhead increased by \$800,000 due to acquisition of equipment. Labor, however, decreased by 40,000 hours because the equipment allows rapid creation of the settings. One of the company’s many customers is a local jewelry store, Jasmine’s Fine Jewelry. This store is relatively small, and the time to make an order of jewelry pieces is typically less than 10 labor hours. On such jobs (less than 10 labor hours), the new equipment is not used, and thus the jobs are relatively labor intensive.
Required
a. Assume that in the current year, the company continues to allocate overhead based on labor hours. What would be the overhead cost of a 10-labor-hour job requested by Jasmine’s Fine Jewelry? How does this compare to the overhead cost charged to such a job in the prior year?
b. Assume that the price charged for small jobs does not change in the current year. Are small jobs less profitable than they were in the past?
Curtis Corporation is beginning to manufacture Mighty Mint, a new mouthwash in a small spray container. The product will be sold to wholesalers and large drugstore chains in packages of 30 containers for \$20 per package. Management allocates \$225,000 of fixed manufacturing overhead costs to Mighty Mint. The manufacturing cost per package of 30 containers for expected production of 100,000 packages is as follows:
Direct material   \$ 7.50
Direct labor       4.00
Total     \$15.00

The company has contacted a number of packaging suppliers to determine whether it is better to buy or manufacture the spray containers. The lowest quote for the containers is \$1.85 per 30 units. It is estimated that purchasing the containers from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Curtis’s manufacturing space is highly constrained. By purchasing the spray containers, the company will not have to lease additional manufacturing space, which is estimated to cost \$17,000 per year. If the containers are purchased, one supervisory position can be eliminated. Salary plus benefits for this position are \$72,000 per year.
Required
Should Curtis make or buy the containers? What is the incremental cost (benefit) of buying the containers as opposed to making them?

PROBLEM 7-10. Drop a Product/Opportunity Cost
Midwestern Sod Company produces two products: fescue grass and Bermuda grass.
Fescue Grass      Bermuda Grass
Selling price per square yard       \$3.00     \$3.85
Less variable cost per square yard (water, fertilizer, maintenance)             .83          1.55
The company has 130,000 square yards of growing space available. In the past year, the company dedicated 65,000 square yards to fescue and 65,000 square yards to Bermuda grass. Annual fixed costs are \$130,000, which the company allocates to products based on relative growing space.
Martha Lopez, the chief financial officer of Midwestern Sod, has suggested that in the coming year, all 130,000 square yards should be devoted to Bermuda grass. The president vetoed her suggestion, saying “I know that right now home construction is booming in our area, and we can sell all the grass we can produce, irrespective of what type. But you know a lot of developers really like that fescue grass, and I’d hate to disappoint them by not offering it.”
Required

What is the opportunity cost of the president’s decision to stick with both types of grass?

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