Case 1: Greetings Inc : Job Order Costing Essay

683 Words Oct 3rd, 2012 3 Pages
Chapter 2

Case 1: Greetings Inc.: Job Order Costing

Solution:

1. As seen in the case, using a traditional job-order costing system Wall Décor charges the actual costs of direct materials and direct labor to its specific jobs- unframed prints, steel-framed and no matting prints, wood-framed and mating prints. Since costs of manufacturing overhead related to production operations as whole, these costs cannot be assigned to specific jobs on the basis of actual costs incurred. Instead, Wall Décor assigns manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate. The accountant team of Wall Décor calculates this rate as total estimated manufacturing overhead
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a) Total overhead cost allocated to unframed prints = 80,000 × 12 × 0.28 = 268,800
b) Total overhead cost allocated to steel framed prints = 0.28 × 15,000 × 16 = 67,200
c) Total overhead cost allocated to wood framed prints = 0.28 × 7,000 × 20 = 39,200
d) [pic]Percentage of total overhead cost allocated to unframed prints = 268,800 / 375,200 = 71.6%

6. The amount of overhead allocated to the three product categories is not reasonable. Because unframed prints get the highest amount of overhead since the volume is large but the activities required for unframed prints are much less. Framed prints require more activities as well as skilled labor but get a much lower share of overhead costs.

7. Keeping this overhead allocation approach based on the cost of prints will affect the business of Wall Décor. Because by this method the cost of unframed print is much higher than it should be and the cost of framed prints is lower than it should be. In this situation, Wall Décor may sell more framed