Q24E - Horngren'S Financial And Managerial Accounting

Question

Question: Western, Inc. is a technology consulting firm focused on Web site development and integration of Internet business applications. The president of the company expectsto incur \(640,000 of indirect costs this year, and she expects her firm to work 4,000direct labor hours. Western’s systems consultants provide direct labor at a rate of \)280per hour. Clients are billed at 160% of direct labor cost. Last month, Western’s consultantsspent 170 hours on Halbert’s engagement.

Requirements

1. Compute Western’s predetermined overhead allocation rate per direct labor hour.

2. Compute the total cost assigned to the Halbert engagement.

3. Compute the operating income from the Halbert engagement.

Step-by-Step Solution

Answer

Predetermined overhead allocation rate:$160

Total cost assigned to Halbert:$74,800

Operating Income from Halbert:$1,360

Step-by-Step-Solution Step1: 1) Computation of predetermined overhead allocation rate

$$\begin{gathered} Predeterminedoverheadallocationrateasperdirectlaborhour=\frac{TotalIndirectCost}{Numberofdirectlaborhour} \\ =\frac{\$640,000}{4,000} \\ =\$160 \end{gathered}$$

Step 2: 2) Computation of total cost assigned to Halbert engagement

$$\begin{gathered} DirectlaborcostassignedtoHalbert=Laborhourrate\times No.ofhours \\ =\$280\times 170 \\ =\$47,600 \\ IndirectcostassignedtoHalbert=Predeterminedoverheadrate\times No.ofhoursspentforHalbert \\ =\$160\times 170 \\ =\$27,200 \\ IndirectcostassignedtoHalbert=Predeterminedoverheadrate\times No.ofhoursspentforHalbert \\ =\$160\times 170 \\ =\$27,200 \end{gathered}$$

Step 3: 3) Computation of operating income from Halbert

$$\begin{gathered} ServicerevenuefromHalbert=DirectlaborcosttoHalbert\times \frac{160}{100} \\ =\$47,600\times \frac{160}{100} \\ =\$76,160 \\ OperatingIncomefromHalbert=Servicerevenue-TotalCost \\ =\$76,160-\$74,800 \\ =\$1,360 \end{gathered}$$