Q42PGB_2 - Horngren'S Financial And Managerial Accounting

Question

Rennie Plant Service completed a special landscaping job for Brenton Company. rennie uses ABC and has the following predetermined overhead allocation rates:

                  Activity                                                                   Predetermined

                                                  Allocation Base               Overhead Allocation Rate

                Designing               Number of designs                  \( 290 per design

                  Planting                Number of plants                     \) 20 per plant

 

The Rennie job included \(1,500 in plants; \)800 in direct labor; one design; and 30 plants.

 

Requirements

2. If Brenton paid $3,690 for the job, what is the operating income or loss?

Step-by-Step Solution

Answer

Operating Income: $2,000

Step-by-Step-Solution Step 1: Operating income

Operating income is the difference between the net income and the operating cost. Operating income denotes the amount earned in performing a complete cycle of operation. Operating cost includes the direct labor cost, material cost, and overhead cost. 

Operating income earned is spent on after production activities to make sales and the residual amount is called the net profit.

Step 2: Computation of operating income

$$\begin{gathered} \mathbf{Operating}\mathbf{ }\mathbf{Income}\mathbf{=}\mathbf{Price}\mathbf{ }\mathbf{paid}\mathbf{-}\mathbf{Total}\mathbf{ }\mathbf{cost} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{690}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{690} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000} \end{gathered}$$