predetermined rate assuming that Wanda Instrumentation uses direct labor costs to apply overhead. predetermined rate assuming that Wanda Instrumentation uses direct materials cost to apply overhead.
predetermined rate assuming that Wanda Instrumentation uses direct labor costs to apply overhead. predetermined rate assuming that Wanda Instrumentation uses direct materials cost to apply overhead.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
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
$6,480
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)
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