Concept explainers
Factory overhead rate
Salvo Inc., a specialized equipment manufacturer, uses a
Our accounting system doesn’t make any sense to me. It tells me that every labor hour carries an additional burden of $1,500. This means that direct labor makes up only 6% of our total product cost yet it drives all our costs. In addition, these rates give my design engineers incentives to "design out" direct labor by using machine technology. Yet, over the past years as we have had less and less direct labor, the overhead rate keeps going up and up. I won’t be surprised if next year the rate is $2,000 per direct labor hour. I’m also concerned because small errors in our estimates of the direct labor content can have a large impact on our estimated costs. Just a 30-minute error in our estimate of assembly time is worth $750. Small mistakes in our direct labor time estimates really swing our bids around. I think this puts us at a disadvantage when we are going after business.
- 1. What is the engineer’s concern about the overhead rate going “up and up”?
- 2. What did the engineer mean about the large overhead rate being a disadvantage when placing bids and seeking new business?
- 3. What do you think is a possible solution?
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Chapter 17 Solutions
EBK FINANCIAL & MANAGERIAL ACCOUNTING
- how I can calculate and resolve this problem? Comans Corporation has two production departments, Milling and Customizing. The company uses a job-order costing system and computes a predetermined overhead rate in each production department. The Milling Department’s predetermined overhead rate is based on machine-hours and the Customizing Department’s predetermined overhead rate is based on direct labor-hours. At the beginning of the current year, the company had made the following estimates: Milling Customizing Machine-hours 25,000 10,000 Direct labor-hours 15,000 4,000 Total fixed manufacturing overhead cost $132,500 $22,000 Variable manufacturing overhead per machine-hour $ 1.80 Variable manufacturing overhead per direct labor-hour $ 3.90 During the current month the company started and finished Job A319. The following data were recorded for this job: Job A319: Milling Customizing Machine-hours 70 20 Direct labor-hours 30 40 Direct materials…arrow_forwardThe cost accountant for M. Company wants to determine the cost of factory overhead. Based on observation and discussions with plant workers, you feel that five accounts are most relevant. Two are fixed- supervisory salaries and depreciation- and the remaining three are variable. Indirect labor is primarily used to move materials and varies with a number of moves. The largest component of utilities is electricity to run production machinery; which is driven by machine hours. Purchasing seems to be driven by the number of purchase orders. The accounts and their balances for the past six months are shown below: Indirect Plant and Labor Supervisory Equipment Cost Utilities Purchasing Salaries Depreciation July $14,250 $12,000 $38,200 $20,000 $6,500 Aug 15,800 10,600 35,400 23,000…arrow_forwardO’Leary Corporation manufactures special purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O’Leary uses a normal job costing system. Direct labor at O’Leary is paid $20 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows. Year 1 Year 2 Direct labor-hours worked 67,600 54,600 Manufacturing overhead costs incurred Indirect labor $ 2,784,000 $ 2,184,000 Employee benefits 1,014,000 819,000 Supplies 676,000 546,000 Power 633,000 528,000 Heat and light 139,200 139,200 Supervision 777,990 658,050 Depreciation 2,000,500…arrow_forward
- “Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $4,000. It seems we’re either too high to get the job or too low to make any money on half the jobs we bid.” Teledex Company manufactures products to customers’ specifications and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year: Department Fabricating Machining Assembly Total Plant Manufacturing overhead $ 362,250 $ 414,000 $ 93,150 $ 869,400 Direct labor $ 207,000 $ 103,500 $ 310,500 $ 621,000 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 Fabricating Machining Assembly Total Plant Direct materials $ 3,700…arrow_forwardO’Leary Corporation manufactures special-purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O’Leary uses a normal job costing system. Direct labor at O’Leary is paid $28 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows. Year 1 Year 2 Direct labor-hours worked 69,200 56,200 Manufacturing overhead costs incurred Indirect labor $ 2,848,000 $ 2,248,000 Employee benefits 1,038,000 843,000 Supplies 692,000 562,000 Power 649,000 544,000 Heat and light 142,400 142,400 Supervision 782,630 662,850 Depreciation 2,048,500…arrow_forwardO’Leary Corporation manufactures special-purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O’Leary uses a normal job costing system. Direct labor at O’Leary is paid $28 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows. Year 1 Year 2 Direct labor-hours worked 69,200 56,200 Manufacturing overhead costs incurred Indirect labor $ 2,848,000 $ 2,248,000 Employee benefits 1,038,000 843,000 Supplies 692,000 562,000 Power 649,000 544,000 Heat and light 142,400 142,400 Supervision 782,630 662,850 Depreciation 2,048,500…arrow_forward
- How can I resolve this problem? White Company has two departments, Cutting and Finishing. The company uses a job-order costing system and computes a predetermined overhead rate in each department. The Cutting Department bases its rate on machine-hours, and the Finishing Department bases its rate on direct labor-hours. At the beginning of the year, the company made the following estimates: Department Cutting Finishing Direct labor-hours 8,800 62,000 Machine-hours 65,700 1,500 Total fixed manufacturing overhead cost $ 380,000 $ 489,000 Variable manufacturing overhead per machine-hour $ 2.00 — Variable manufacturing overhead per direct labor-hour — $ 4.75 Required: 1. Compute the predetermined overhead rate for each department. 2. The job cost sheet for Job 203, which was started and completed during the year, showed the following: Department Cutting Finishing Direct labor-hours 4 12 Machine-hours 90 4…arrow_forward"Blast it!" said David Wilson, president of Teledex Company. "We've just lost the bid on the Koopers job by $3,000. It seems we're either too high to get the job or too low to make any money on half the jobs we bid." Teledex Company manufactures products to customers' specifications and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year: Manufacturing overhead Direct labor Fabricating Department Machining Assembly Total Plant $ 365,750 $ 418,000 $ 94,050 $ 877,800 $ 209,000 $ 104,500 $ 313,500 $ 627,000 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: Direct materials Direct labor Manufacturing overhead Fabricating $ 3,900 $ 4,600 ? Department Machining $ 200 $ 500 ?…arrow_forward“Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $3,000. It seems we’re either too high to get the job or too low to make any money on half the jobs we bid.” Teledex Company manufactures products to customers’ specifications and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year: Department Total Plant Fabricating Machining Assembly Manufacturing overhead $ 355,250 $ 406,000 $ 91,350 $ 852,600 Direct labor $ 203,000 $ 101,500 $ 304,500 $ 609,000 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 $ 3,300 $ 200 $…arrow_forward
- “Blast it!” said David Wilson, president of Teledex Company. “We’ve just lost the bid on the Koopers job by $3,000. It seems we’re either too high to get the job or too low to make any money on half the jobs we bid.” Teledex Company manufactures products to customers’ specifications and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year: Department Fabricating Machining Assembly Total Plant Manufacturing overhead $ 360,500 $ 412,000 $ 92,700 $ 865,200 Direct labor $ 206,000 $ 103,000 $ 309,000 $ 618,000 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 Fabricating Machining Assembly Total Plant Direct materials $ 3,600…arrow_forward"Blast it" said David Wilson, president of Teledex Company. "We've just lost the bid on the Koopers jon by $2,000. It seems we're either too high to get the job or too low to make any money on half the jobs we bid". Teledex Company manufactures products to customers specification and uses a job-order costing system. The company uses a plantwide predetermined overhead rate based on direct labor cost to apply its manufacturing overhead (assumed to be all fixed) to jobs. The following estimates were made at the beginning of the year: Department Fabricating Machining Assembly Total Plant manufacturing overhead $350,000 $400,000 $90,000 $840,000 direct labor $200,000 $100,000 $300,000 $600,000 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: Departments Fabricating Machining…arrow_forwardDarnell Poston, owner of Poston Manufacturing, Inc., wants to determine the cost behavior oflabor and overhead. Darnell pays his workers a salary; during busy times, everyone works to getthe orders out. Temps (temporary workers hired through an agency) may be hired to pack and prepare completed orders for shipment. During slower times, Darnell catches up on bookkeep-ing and administrative tasks while the salaried workers do preventive maintenance, clean the lines and building, etc. Temps are not hired during slow times. Darnell found that workers’ sal-aries, temp agency payments, rentals, utilities, and plant and equipment depreciation are the largest dollar accounts. He believes that workers’ salaries and plant and equipment depreciationare fixed, temp agency payments are associated with the number of orders (since temp workers are used to pack and prepare completed orders for shipment), and electricity is associated with the number of machine hours. When the number of different parts…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
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