7-41. Predetermined Overhead Rates: Ethical Issues Wanda Instrumentation produces navigational equipment for ships, aircraft (both staffed and drones), and land vehicles. The parts are produced to specification by their customers. Depending on the customer and the type of job, the customer pays according to the terms of either a "fixed-price" contract (the price does not depend directly on the cost of the job) or a "cost-plus" contract (the price is equal to recorded cost plus a fixed fee). Wanda expects only two clients (Ivanhoe Aviation and Rolf's Shipyard) in Year 2. The work done for Ivanhoe will all be done under cost-plus contracts, while the work done for Rolf's will all be done under fixed-price contracts. Selected budget data for Year 2 include the following: Direct labor cost ($000)..... Direct materials cost ($000). Manufacturing overhead ($000).. Ivanhoe Aviation $ 660 1,980 Rolf's Shipyard $2,340 1,620 Unassigned Required a. Compute the predetermined rate assuming that Wanda Instrumentation uses direct labor costs to apply overhead. b. Compute the predetermined rate assuming that Wanda Instrumentation uses direct materials cost to apply overhead. c. Which allocation base will provide higher income for Wanda Instrumentation? d. Is it ethical to choose an allocation method based on which one leads to higher income for the firm? 00012 $6,480
7-41. Predetermined Overhead Rates: Ethical Issues Wanda Instrumentation produces navigational equipment for ships, aircraft (both staffed and drones), and land vehicles. The parts are produced to specification by their customers. Depending on the customer and the type of job, the customer pays according to the terms of either a "fixed-price" contract (the price does not depend directly on the cost of the job) or a "cost-plus" contract (the price is equal to recorded cost plus a fixed fee). Wanda expects only two clients (Ivanhoe Aviation and Rolf's Shipyard) in Year 2. The work done for Ivanhoe will all be done under cost-plus contracts, while the work done for Rolf's will all be done under fixed-price contracts. Selected budget data for Year 2 include the following: Direct labor cost ($000)..... Direct materials cost ($000). Manufacturing overhead ($000).. Ivanhoe Aviation $ 660 1,980 Rolf's Shipyard $2,340 1,620 Unassigned Required a. Compute the predetermined rate assuming that Wanda Instrumentation uses direct labor costs to apply overhead. b. Compute the predetermined rate assuming that Wanda Instrumentation uses direct materials cost to apply overhead. c. Which allocation base will provide higher income for Wanda Instrumentation? d. Is it ethical to choose an allocation method based on which one leads to higher income for the firm? 00012 $6,480
Chapter1: Financial Statements And Business Decisions
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Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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Transcribed Image Text:7-41. Predetermined Overhead Rates: Ethical Issues
Wanda Instrumentation produces navigational equipment for ships, aircraft (both staffed and drones), and land vehicles. The parts are produced to specification
by their customers. Depending on the customer and the type of job, the customer pays according to the terms of either a "fixed-price" contract (the price does
not depend directly on the cost of the job) or a "cost-plus" contract (the price is equal to recorded cost plus a fixed fee). Wanda expects only two clients (Ivanhoe
Aviation and Rolf's Shipyard) in Year 2. The work done for Ivanhoe will all be done under cost-plus contracts, while the work done for Rolf's will all be done
under fixed-price contracts.
Selected budget data for Year 2 include the following:
Direct labor cost ($000).....
Direct materials cost ($000).
Manufacturing overhead ($000)..
Ivanhoe
Aviation
$ 660
1,980
Rolf's
Shipyard
$2,340
1,620
Unassigned
Required
a Compute the predetermined rate assuming that Wanda Instrumentation uses direct labor costs to apply overhead.
b. Compute the predetermined rate assuming that Wanda Instrumentation uses direct materials cost to apply overhead.
c. Which allocation base will provide higher income for Wanda Instrumentation?
d. Is it ethical to choose an allocation method based on which one leads to higher income for the firm?
(LO 7-3,5)
$6,480
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