Cost Allocation and Overhead Analysis in Manufacturing | Ejercicios de Dirección Financiera

Management Accounting – part 3

Job Order Costing

EXERCISE 3.1

Hogle Corporation is a manufacturer that uses job-order costing. On January 1, the beginning of its fiscal year, the company’s inventory balances were

as follows:

Raw

materials

$20,000

Work in process

$15,000

Finished goods

$30,000

The company applies overhead cost to jobs on the basis of machine-hours worked. For the current year, the company’s predetermined overhead rate

was based on a cost formula that estimated $450,000 of total manufacturing overhead for an estimated activity level of 75,000 machine-hours.

The following transactions were recorded for the year:

a) Raw materials were purchased on account, $410,000.

b) Raw materials were requisitioned for use in production, $380,000 ($360,000 direct materials and $20,000 indirect materials).

c) The following costs were accrued for employee services: direct labor, $75,000; indirect labor, $110,000; sales commissions, $90,000; and

administrative salaries, $200,000.

d) Sales travel costs were $17,000.

e) Utility costs in the factory were $43,000.

f) Advertising costs were $180,000.

g) Depreciation was recorded for the year, $350,000 (80% relates to factory operations, and 20% relates to selling and administrative

activities).

h) Insurance expired during the year, $10,000 (70% relates to factory operations, and the remaining 30% relates to selling and administrative

activities).

i) Manufacturing overhead was applied to production. Due to greater than expected demand for its products, the company worked 80,000

machine-hours on all jobs during the year.

j) Goods costing $900,000 to manufacture according to their job cost sheets were completed during the year.

k) Goods were sold on account to customers during the year for a total of $1,500,000. The goods cost $870,000 to manufacture according to

their job cost sheets.

Required:

1. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a proposition to close any balance in the Manufacturing Overhead

account to Cost of Goods Sold. Do not allocate the balance between ending inventories and Cost of Goods Sold.

2. Prepare an income statement for the year.

EXERCISE 3.2 Apply Overhead

Luthan Company uses a predetermined overhead rate of $23.40 per direct labor-hour. This predetermined rate was based on a cost formula that

estimated $257,400 of total manufacturing overhead for an estimated activity level of 11,000 direct labor-hours.

The company incurred actual total manufacturing overhead costs of $249,000 and 10,800 total direct labor-hours during the period.

Required:

Determine the amount of manufacturing overhead that would have been applied to all jobs during the period.

EXERCISE 3.3 Schedules of Cost of Goods Manufactured and Cost of Goods Sold

Primare Corporation has provided the following data concerning last month’s manufacturing operations.

Purchases of raw materials

$30,000

Indirect materials included in manufacturing overhead

$5,000

Direct labor

$58,000

Manufacturing overhead applied to work in process

$87,000

Underapplied

overhead

$4,000

Inventories

Beginning

Ending

Raw materials

$12,000

$18,000

Work in process

$56,000

$65,000

Finished goods

$35,000

$42,000

Required:

1. Prepare a schedule of cost of goods manufactured for the month.

2. Prepare a schedule of cost of goods sold for the month.

EXERCISE 3.4 Underapplied and Overapplied Overhead

Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on a cost formula that

estimates $218,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours.

The company incurred actual total manufacturing overhead costs of $215,000 and 11,500 total direct labor-hours during the period.

Required:

1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.

2. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to Cost of Goods Sold, what would be the effect of the

underapplied or overapplied overhead on the company’s gross margin for the period?

EXERCISE 3.5 Applying Overhead; Computing Unit Product Cost

A company assigns overhead cost to completed jobs on the basis of 125% of direct labor cost. The job cost sheet for Job 313 shows that $10,000 in

direct materials has been used on the job and that $12,000 in direct labor cost has been incurred. A total of 1,000 units were produced in Job 313.

Required:

What is the total manufacturing cost assigned to Job 313? What is the unit product cost for Job 313?

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Job Order Costing

EXERCISE 3.

Hogle Corporation is a manufacturer that uses job-order costing. On January 1, the beginning of its fiscal year, the company’s inventory balances were as follows: Raw materials $20, Work in process $15, Finished goods $30, The company applies overhead cost to jobs on the basis of machine-hours worked. For the current year, the company’s predetermined overhead rate was based on a cost formula that estimated $450,000 of total manufacturing overhead for an estimated activity level of 75,000 machine-hours. The following transactions were recorded for the year: a) Raw materials were purchased on account, $410,000. b) Raw materials were requisitioned for use in production, $380,000 ($360,000 direct materials and $20,000 indirect materials). c) The following costs were accrued for employee services: direct labor, $75,000; indirect labor, $110,000; sales commissions, $90,000; and administrative salaries, $200,000. d) Sales travel costs were $17,000. e) Utility costs in the factory were $43,000. f) Advertising costs were $180,000. g) Depreciation was recorded for the year, $350,000 (80% relates to factory operations, and 20% relates to selling and administrative activities). h) Insurance expired during the year, $10,000 (70% relates to factory operations, and the remaining 30% relates to selling and administrative activities). i) Manufacturing overhead was applied to production. Due to greater than expected demand for its products, the company worked 80, machine-hours on all jobs during the year. j) Goods costing $900,000 to manufacture according to their job cost sheets were completed during the year. k) Goods were sold on account to customers during the year for a total of $1,500,000. The goods cost $870,000 to manufacture according to their job cost sheets. Required:

Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a proposition to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. Do not allocate the balance between ending inventories and Cost of Goods Sold.
Prepare an income statement for the year. EXERCISE 3.2 Apply Overhead Luthan Company uses a predetermined overhead rate of $23.40 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $257,400 of total manufacturing overhead for an estimated activity level of 11,000 direct labor-hours. The company incurred actual total manufacturing overhead costs of $249,000 and 10,800 total direct labor-hours during the period. Required: Determine the amount of manufacturing overhead that would have been applied to all jobs during the period. EXERCISE 3.3 Schedules of Cost of Goods Manufactured and Cost of Goods Sold Primare Corporation has provided the following data concerning last month’s manufacturing operations. Purchases of raw materials $30, Indirect materials included in manufacturing overhead $5, Direct labor $58, Manufacturing overhead applied to work in process $87, Underapplied overhead $4, Inventories Beginning Ending Raw materials $12,000 $18, Work in process $56,000 $65, Finished goods $35,000 $42, Required:
Prepare a schedule of cost of goods manufactured for the month.
Prepare a schedule of cost of goods sold for the month. EXERCISE 3.4 Underapplied and Overapplied Overhead Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $218,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours. The company incurred actual total manufacturing overhead costs of $215,000 and 11,500 total direct labor-hours during the period. Required:
Determine the amount of underapplied or overapplied manufacturing overhead for the period.
Assuming that the entire amount of the underapplied or overapplied overhead is closed out to Cost of Goods Sold, what would be the effect of the underapplied or overapplied overhead on the company’s gross margin for the period? EXERCISE 3.5 Applying Overhead; Computing Unit Product Cost A company assigns overhead cost to completed jobs on the basis of 125% of direct labor cost. The job cost sheet for Job 313 shows that $10,000 in direct materials has been used on the job and that $12,000 in direct labor cost has been incurred. A total of 1,000 units were produced in Job 313. Required: What is the total manufacturing cost assigned to Job 313? What is the unit product cost for Job 313?

EXERCISE 3.6 Applying Overhead to a Job Sigma Corporation applies overhead cost to jobs on the basis of direct labor cost. Job V, which was started and completed during the current period, shows charges of $5,000 for direct materials, $8,000 for direct labor, and $6,000 for overhead on its job cost sheet. Job W, which is still in process at year-end, shows charges of $2,500 for direct materials and $4,000 for direct labor. Required: Should any overhead cost be added to Job W at year-end? If so, how much? Explain. EXERCISE 3.7 Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income Statement The following data from the just completed year are taken from the accounting records of M Company: Sales $524, Direct labor cost $70, Raw material purchases $118, Selling expenses $140, Administrative expenses $63, Manufacturing overhead applied to work in process $90, Actual manufacturing overhead costs $80, Inventories Beginning of Year End of Year Raw materials $7,000 $15, Work in process $10,000 $5, Finished goods $20,000 $35, Required:

Prepare a schedule of cost of goods manufactured. Assume all raw materials used in production were direct materials.
Prepare a schedule of cost of goods sold.
Prepare an income statement. EXERCISE 3.8 Varying Predetermined Overhead Rates KC Company makes a single product that is subject to wide seasonal variations in demand. The company uses a job-order costing system and computes predetermined overhead rates on a quarterly basis using the number of units to be produced as the allocation base. Its estimated costs, by quarter, for the coming year are given below: Quarter First Second Third Fourth Direct materials $240,000 $120,000 $ 60,000 $180, Direct labor 128,000 64,000 32,000 96, Manufacturing overhead 300,000 220,000 180,000? Total manufacturing costs (a) $668,000 $404,000 $272,000 $? Number of units to be produced (b) 80,000 40,000 20,000 60, Estimated unit product cost (a) / (b) $8.35 $10.10 $13.60? Management finds the variation in quarterly unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of total manufacturing cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product. Required:
Using the high-low method, estimate the fixed manufacturing overhead cost per quarter and the variable manufacturing overhead cost per unit. Create a cost formula to estimate the total manufacturing overhead cost for the fourth quarter. Compute the total manufacturing cost and unit product cost for the fourth quarter.
What is causing the estimated unit product cost to fluctuate from one quarter to the next?
How would you recommend stabilizing the company’s unit product cost? Support your answer with computations that adapt the cost formula you created in requirement 1. EXERCISE 3.9 Computing Predetermined Overhead Rates and Job Costs Moody Corporation uses a job-order costing system with a plant-wide overhead rate based on machine-hours. At the beginning of the year, the company made the following estimates: Machine-hours required to support estimated production 100, Fixed manufacturing overhead cost $650, Variable manufacturing overhead cost per machine-hour $3. Required:
Compute the predetermined overhead rate.
During the year, Job 400 was started and completed. The following information was available with respect to this job: Direct materials requisitioned $ Direct labor cost $ Machine-hours used 40 Compute the total manufacturing cost assigned to Job 400.

PROBLEM 3.12 Predetermined Overhead Rate; Disposition of Underapplied or Overapplied Overhead L Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year: Machine-hours 75, Fixed manufacturing overhead cost $795, Variable manufacturing overhead per computer-hour $1. During the year, a glut of furniture on the market resulted in cutting back production and a buildup of furniture in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year: Machine-hours 60, Manufacturing overhead cost $850, Inventories at year-end: Raw materials $30, Work in process (includes overhead applied of 36,000) $100, Finished goods (includes overhead applied of 180,000) $500, Cost of goods sold (includes overhead applied of 504,000) $1,400, Required:

Compute the company’s predetermined overhead rate.
Compute the underapplied or overapplied overhead.
Assume that the company closes any underapplied or overapplied overhead directly to Cost of Goods Sold. Prepare the appropriate journal entry.
Assume that the company allocates any underapplied or overapplied overhead to Work in Process, Finished Goods, and Cost of Goods Sold on the basis of the amount of overhead applied that remains in each account at the end of the year. Prepare the journal entry to show the allocation for the year.
How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated rather than closed directly to Cost of Goods Sold? PROBLEM 3.13 Schedule of Cost of Goods Manufactured; Overhead Analysis GT Products operates a job-order costing system and applies overhead cost to jobs on the basis of direct materials used in production (not on the basis of raw materials purchased). Its predetermined overhead rate was based on a cost formula that estimated $800,000 of manufacturing overhead for an estimated allocation base of $500,000 direct material dollars to be used in production. The company has provided the following data for the just completed year: Purchase of raw materials $510, Direct labor cost $ 90, Manufacturing overhead costs: Indirect labor $170, Property taxes $ 48, Depreciation of equipment $260, Maintenance $ 95, Insurance $ 7, Rent, building $180, Beginning Ending Raw Materials $ 20,000 $ 80, Work in Process $150,000 $ 70, Finished Goods $260,000 $400, Required:
a. Compute the predetermined overhead rate for the year. b. Compute the amount of underapplied or overapplied overhead for the year.
Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials.
Compute the unadjusted cost of goods sold for the year. (Do not include any underapplied or overapplied overhead in your cost of goods sold figure.) What options are available for disposing of underapplied or overapplied overhead?
Job 215 was started and completed during the year. What price would have been charged to the customer if the job required $8,500 in direct materials and $2,700 in direct labor cost and the company priced its jobs at 25% above the job’s cost according to the accounting system?
Direct materials made up $24,000 of the $70,000 ending Work in Process inventory balance. Supply the information missing below: Direct materials $24, Direct labor? Manufacturing overhead? Work in process inventory $70,

CASE 3.14 Plant-wide versus Departmental Overhead Rates; Underapplied or Overapplied Overhead Teledex Company manufactures products to customers’ specifications and operates a job order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost. The following estimates were made at the beginning of the year: Department (^) Total Plant Fabricating Machining Assembly Direct labor $200,000 $ 1 00,000 $300,000 $600, Manufacturing overhead $350,000 $ 4 00,000 $90,000 $840, Jobs require varying amounts of work in the three departments. The Koopers job, for example, would have required manufacturing costs in the three departments as follows: Department (^) Total Plant Fabricating Machining Assembly Direct materials $3,000 $200 $1,400 $4, Direct labor $2,800 $500 $6,200 $9, Manufacturing overhead???? The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs. Required:

Assuming use of a plantwide overhead rate: a. Compute the rate for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job.
Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions: a. Compute the rate for each department for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job.
Explain the difference between the manufacturing overhead that would have been applied to the Koopers job using the plantwide rate in question 1 (b) and using the departmental rates in question 2 (b).
Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost (direct materials, direct labor, and applied overhead). What was the company’s bid price on the Koopers job? What would the bid price have been if departmental overhead rates had been used to apply overhead cost?
At the end of the year, the company assembled the following actual cost data relating to all jobs worked on during the year. Department (^) Total Plant Fabricating Machining Assembly Direct materials $190,000 $16,000 $114,000 $320, Direct labor $210,000 $108,000 $262,000 $580, Manufacturing overhead $360,000 $420,000 $84,000 $864, Compute the underapplied or overapplied overhead for the year (a) assuming that a plantwide overhead rate is used, and (b) assuming that departmental overhead rates are used.

Cost Allocation and Overhead Analysis in Manufacturing, Ejercicios de Dirección Financiera

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Job Order Costing

EXERCISE 3.