Music Master Components produces parts for concert hall sound systems. The parts are produced to specification by their customers, who pay either a fixed price (the price does not depend directly on the cost of the job) or price equal to recorded cost plus a fixed fee (cost plus). For the upcoming year (year 2), Music Master expects only two clients (Client 1 and Client 2). The work done for Client 1 will all be done under fixed-price contracts while the work done for Client 2 will all be done under cost-plus contracts.
Manufacturing overhead for year 2 is estimated to be $10 million. Other budgeted data for year 2 include:
$$\begin{array} { l c c }
& \text { Client 1 } & \text { Client 2 } \
\text { Machine Hours (thousands) } & 4,000 & 4,000 \
\text { Direct Labor Costs (\$000's) } & \$ 5,000 & \$ 15,000
\end{array}$$
Required:
a. Compute the predetermined rate assuming that Music Master Components uses machine-hours to apply overhead.
b. Compute the predetermined rate assuming that Music Master Components uses direct labor cost to apply overhead.
c. Which allocation base will provide a higher income for Music Master Components?
d. Is it ethical to choose an allocation method based on which one leads to higher income for the firm?

Question

Music Master Components produces parts for concert hall sound systems. The parts are produced to specification by their customers, who pay either a fixed price (the price does not depend directly on the cost of the job) or price equal to recorded cost plus a fixed fee (cost plus). For the upcoming year (year 2), Music Master expects only two clients (Client 1 and Client 2). The work done for Client 1 will all be done under fixed-price contracts while the work done for Client 2 will all be done under cost-plus contracts.
Manufacturing overhead for year 2 is estimated to be $10 million. Other budgeted data for year 2 include:
 $$\begin{array} { l c c } 
& \text { Client 1 } & \text { Client 2 } \
\text { Machine Hours (thousands) } & 4,000 & 4,000 \
\text { Direct Labor Costs (\$000's) } & \$ 5,000 & \$ 15,000
\end{array}$$ 
Required:
a. Compute the predetermined rate assuming that Music Master Components uses machine-hours to apply overhead.
b. Compute the predetermined rate assuming that Music Master Components uses direct labor cost to apply overhead.
c. Which allocation base will provide a higher income for Music Master Components?
d. Is it ethical to choose an allocation method based on which one leads to higher income for the firm?

Quizplus · Accepted Answer

The Answer of Music Master Components produces parts for concert hall sound systems. The parts are produced to specification by their customers, who pay either a fixed price (the price does not depend directly on the cost of the job) or price equal to recorded cost plus a fixed fee (cost plus). For the upcoming year (year 2), Music Master expects only two clients (Client 1 and Client 2). The work done for Client 1 will all be done under fixed-price contracts while the work done for Client 2 will all be done under cost-plus contracts.
Manufacturing overhead for year 2 is estimated to be $10 million. Other budgeted data for year 2 include:
 $$\begin{array} { l c c } 
& \text { Client 1 } & \text { Client 2 } \
\text { Machine Hours (thousands) } & 4,000 & 4,000 \
\text { Direct Labor Costs (\$000's) } & \$ 5,000 & \$ 15,000
\end{array}$$ 
Required:
a. Compute the predetermined rate assuming that Music Master Components uses machine-hours to apply overhead.
b. Compute the predetermined rate assuming that Music Master Components uses direct labor cost to apply overhead.
c. Which allocation base will provide a higher income for Music Master Components?
d. Is it ethical to choose an allocation method based on which one leads to higher income for the firm?

Music Master Components Produces Parts for Concert Hall Sound Systems