Assume that your company sells portable housing to both general contractors and the government. It sells jobs to contractors on a bid basis. A contractor asks for three bids from different manufacturers. The combination of low bid and high quality wins the job. However, jobs sold to the government are bid on a cost-plus basis. This means price is determined by adding all costs plus a profit based on cost at a specified percent such as 10%. You observe that the amount of
Required
Write a half-page memo to your company's chief financial officer outlining your concerns with overhead allocation.
Point Students could compare responses and discuss differences in concerns with allocating overhead.
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FUND. ACCOUNTING PRINCIPLES >CUSTOM<
- Hicks Contracting collects and analyzes cost data in order to track the cost of installing decks on new home construction jobs. The following are some of the costs that they incur. Classify these costs as fixed or variable costs and as product or period costs. Lumber used to construct decks ($12.00 per square foot) Carpenter labor used to construct decks ($10 per hour) Construction supervisor salary ($45,000 per year) Depreciation on tools and equipment ($6,000 per year) Selling and administrative expenses ($35,000 per year) Rent on corporate office space ($34,000 per year) Nails, glue, and other materials required to construct deck (varies per job)arrow_forwardTonya Martin, CMA and controller or the Parts Division of Gunderson Inc., was meeting with Doug Adams, manager of the division. The topic of discussion was the assignment of overhead costs to jobs and their impact on the divisions pricing decisions. Their conversation was as follows: Tonya: Doug, as you know, about 25% of our business is based on government contracts, with the other 75% based on jobs from private sources won through bidding. During the last several years, our private business has declined. We have been losing more bids than usual. After some careful investigation, I have concluded that we are overpricing some jobs because of improper assignment of overhead costs. Some jobs are also being underpriced. Unfortunately, the jobs being overpriced are coming from our higher-volume, labor-intensive products, so we are losing business. Dong: I think I understand. Jobs associated with our high-volume products are being assigned more overhead than they should be receiving. Then when we add our standard 40% markup, we end up with a higher price than our competitors, who assign costs more accurately. Tonya: Exactly. We have two producing departments, one labor-intensive and the other machine-intensive. The labor-intensive department generates much less overhead than the machine-intensive department. Furthermore, virtually all of our high-volume jobs are labor-intensive. We have been using a plantwide rate based on direct labor hours to assign overhead to all jobs. As a result, the high-volume, labor-intensive jobs receive a greater share of the machine-intensive departments overhead than they deserve. This problem can be greatly alleviated by switching to departmental overhead rates. For example, an average high-volume job would be assigned 100,000 of overhead using a plantwide rate and only 70,000 using departmental rates. The change would lower our bidding price on high-volume jobs by an average of 42,000 per job. By increasing the accuracy of our product costing, we can make better pricing decisions and win back much of our private-sector business. Doug: Sounds good. When can you implement the change in overhead rates? Tonya: It wont take long. I can have the new system working within four to six weekscertainly by the start of the new fiscal year. Doug: Hold it. I just thought of a possible complication. As I recall, most of our government contract work is done in the labor-intensive department. This new overhead assignment scheme will push down the cost on the government jobs, and we will lose revenues. They pay us full cost plus our standard markup. This business is not threatened by our current costing procedures, but we cant switch our rates for only the private business. Government auditors would question the lack of consistency in our costing procedures. Tonya: You do have a point. I thought of this issue also. According to my estimates, we will gain more revenues from the private sector than we will lose from our government contracts. Besides, the costs of our government jobs are distorted. In effect, we are overcharging the government. Doug: They dont know that and never would unless we switch our overhead assignment procedures. I think I have the solution. Officially, lets keep our plantwide overhead rate. All of the official records will reflect this overhead costing approach for both our private and government business. Unofficially. I want you to develop a separate set of books that can be used to generate the information we need to prepare competitive bids for our private-sector business. Required: 1. Do you believe that the solution proposed by Doug is ethical? Explain. 2. Suppose that Tonya decides that Dougs solution is not right and objects strongly. Further suppose that, despite Tonyas objections, Doug insists strongly on implementing the action. What should Tonya do?arrow_forwardYou work for a company that has two manufacturing locations. Your company repairs large ships for both the government and the private sector. The government work is done on a cost plus basis while the private sector work is on a fixed-price basis. Location 1 has overhead costs of $25,000,000 while location 2 has overhead costs of $90,000,000. Direct labor hours/costs are approximately the same at both locations. You learn that the government job (cost plus) will be assigned to location 2 while the private sector jobs (fixed price) will be assigned to location 1. Is this ethical? Explain.arrow_forward
- Assume the company could eliminate one production supervisor with a salary of $30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.arrow_forwardThe Lombard Company produces and sells office-space dehumidifiers to companies that own or rent office space. (a) Lombard’s materials and labor costs for producing the dehumidifiers are $3,000 per unit and the fixed costs of its dehumidifier production plant are $1.85 million. If Lombard sells a dehumidifier for $5,000 per unit, what is its percent contribution margin? Show your work. (b) If Lombard used revenue-based compensation to pay its sales force, what would be a salesperson’s sales credit for selling 20 dehumidifiers at a price of $4,500? Show your work. (c) If Lombard used the profit-based compensation method described in the course to pay its sales force and sets the dehumidifier’s target price at $5,000 per unit, what would be a salesperson’s sales credit for selling 20 dehumidifiers at a price of $4,500? Show your work. (d) Explain the benefit to Lombard’s management of using the profit-based compensation method of Part (c) over revenue-based compensation for…arrow_forwardKLP provides consulting services and uses a job-order system to accumulate the cost of client projects. Traceable costs are charged directly to individual clients; in contrast, other costs incurred by KLP, but not identifiable with specific clients, are charged to jobs by using a predetermined overhead application rate. Clients are billed for directly chargeable costs, overhead, and a markup. KLP anticipates the following costs for the upcoming year: KLP's partners desire to make a $480,000 profit for the firm and plan to add a percentage markup on total cost to achieve that figure.On May 14, KLP completed work on a project for Lawson Manufacturing. The following costs were incurred: professional staff salaries, $68,000; administrative support staff, $8,900; travel, $10,500; and other operating costs, $2,600.REQUIRED:(a) Determine KLP's total traceable costs for the upcoming year and the firm's total anticipated overhead.(b) Calculate the predetermined overhead rate. The…arrow_forward
- Tate Inc. and Booth Inc. are two small manufacturing companies that are considering leasing a cutting machine together. If Tate rents the machine on its own, it will cost $26,000. If Booth rents the machine alone, it will cost $14,000. If they rent the machine together, the cost will decrease to $36,000. Q. Calculate Tate’s and Booth’s respective share of fees using the incremental cost-allocation method assuming (a) Tate is the primary party and (b) Booth is the primary party.arrow_forwardTAC Industries, Inc. sells heavy equipment to large corporations and federal, state, and local governments. Corporate sales are the result of a competitive bidding process, where TAC competes against other companies based on selling price. Sales to government, however, are determined on a cost plus basis, where the selling price is determined by adding a fixed markup percentage to the total job cost. Tandy Lane is the cost accountant for the Equipment Division of TAC Industries, Inc. The division is under pressure from senior management to improve income from operations. As Tandy reviewed the division's job cost sheets, she realized that she could increase the division's income from operations by moving a portion of the direct labor hours that had been assigned to the job order cost sheets of corporate customers onto the job order cost sheets of government customers. She believed this would create a "win-win" situation for the division by (1) reducing the cost of corporate jobs, and…arrow_forwardHansel Company has requested bids from several architects to design its new corporate headquarters. Frey Architects is bidding on the job. Frey estimates that the job will require the following direct labor. Direct Labor Estimated Hours Hourly Rate Architects 158 $ 300 Staff 316 75 Clerical 600 20 Frey applies overhead to jobs at 175% of direct labor cost. Frey wants to earn at least $70,000 profit on the architectural job. Based on past experience and market research, it estimates that the competition will bid between $289,000 and $358,000 for the job.1. What is Frey’s estimated cost of the architectural job?2. If Frey bids a price of $289,000, what is its expected profit? Will it earn its target profit of $70,000?3. What bid price would earn the desired $70,000 target profit?arrow_forward
- Fusion Metals Company is considering the elimination of its Packaging Department. Management has received an offer from an outside firm to supply all Fusion’s packaging needs. To help her in making the decision, Fusion’s president has asked the controller for an analysis of the cost of running Fusion’s Packaging Department. Included in that analysis is $9,100 of rent, which represents the Packaging Department’s allocation of the rent on Fusion’s factory building. If the Packaging Department is eliminated,the space it used will be converted to storage space. Currently Fusion rents storage space in a nearby warehouse for $11,000 per year. The warehouse rental would no longer be necessary if the Packaging Department were eliminated. Required:1. Discuss each of the figures given in the exercise with regard to its relevance in the departmentclosing decision.2. What type of cost is the $11,000 warehouse rental, from the viewpoint of the costs of the Packaging Department?arrow_forwardTAC Industries sells heavy equipment to large corporations and to federal, state, and local governments. Corporate sales are the result of a competitive bidding process, where TAC competes against other companies based on selling price. Sales to the government, however, are determined on a cost plus basis, where the selling price is determined byadding a fixed markup percentage to the total job cost. Tandy Lane is the cost accountant for the Equipment Division of TAC Industries Inc. The division is under pressure from senior management to improve income from operations. As Tandy reviewed the division’s job cost sheets, she realized that she couldincrease the division’s income from operations by moving a portion of the direct labor hours that had been assigned to the job order cost sheets of corporate customers onto the job order costs sheets of governmentcustomers. She believed that this would create a win–win for the division by (1) reducing the cost of corporate jobs and (2)…arrow_forwardCommunicationTAC Industries sells heavy equipment to large corporations and to federal, state, and local governments. Corporate sales are the result of a competitive bidding process, where TAC competes against other companies based on selling price. Sales to the government, however, are determined on a cost plus basis, where the selling price is determined by adding a fixed markup percentage to the total job cost.Tandy Lane is the cost accountant for the Equipment Division of TAC Industries Inc. The division is under pressure from senior management to improve income from operations.As Tandy reviewed the division’s job cost sheets, she realized that she could increase the division’s income from operations by moving a portion of the direct labor hours that had been assigned to the job order cost sheets of corporate customers onto the job order costs sheets of government customers. She believed that this would create a win-win for the division by (1) reducing the cost of corporate jobs…arrow_forward
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