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?
Trending nowThis is a popular solution!
Chapter 19 Solutions
ACCOUNTING-W/CENGAGENOWV2 ACCESS
- The 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_forwardAmberjack Company is trying to decide on an allocation base to use to assign manufacturing overhead to jobs. The company has always used direct labor hours to assign manufacturing overhead to products, but it is trying to decide whether it should use a different allocation base such as direct labor dollars or machine hours. Actual and estimated data for manufacturing overhead, direct labor cost, direct labor hours, and machine hours for the most recent fiscal year are summarized here: Estimated Value Actual Value Manufacturing overhead cost $ 597,000 $ 658,000 Direct labor cost $ 399,000 $ 453,000 Direct labor hours 16,800 hours 18,300 hours Machine hours 7,800 hours 8,800 hours Required: Based on the company’s current allocation base (direct labor hours), compute the following:Predetermined overhead rate. Note: Round your answer to 2 decimal places. Applied manufacturing overhead. Note: Round your intermediate calculations to 2 decimal places and final answer…arrow_forwardA company uses job-order costing with manufacturing overhead (MOH) applied on the basis of machine hours (MHs). In the past, the company's pre-determined overhead rate (POHR) has fluctuated from period to period due primarily to differences in the expected usage of their machine. For this period, the machine has a capacity of 450 MHs, but based on anticipated production, only 375 MHs are expected to be required. The company's MOH is relatively fixed, estimated at $11,250 for both levels of MHs. At the end of the period, actual production used 413 MHs and total actual MOH amounted to $10.500. 1. How much less MOH would be applied during the month using capacity MHs rather than the traditional method?arrow_forward
- A company uses job-order costing with manufacturing overhead (MOH) applied on the basis of machine hours (MHS). In the past, the company's pre- determined overhead rate (POHR) has fluctuated from period to period due primarily to differences in the expected usage of their machine. For this period, the machine has a capacity of 450 MHs, but based on anticipated production, only 375 MHs are expected to be required. The company's MOH is relatively fixed, estimated at $11,250 for both levels of MHs. At the end of the period, actual production used 386 MHs and total actual MOH amounted to $10,500. How much less MOH would be applied during the month using capacity MHs rather than the traditional method? Multiple Choice $772 less applied to MOH using capacity. None of the answers are correct $1358 less applied to MOH using capacity. $1,930 less applied to MOH using capacity $1,544 less applied to MOH using capacityarrow_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_forwardHermann is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the truck wheels product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs. Activity Cost Pools Setting up machines Assembling Inspection Setting up machines Assembling Inspection $228,000 380,000 273,600 Compute the activity-based overhead rates for these three cost pools. Estimated Overhead Costs A tA Estimated Use of Cost Drivers 1,000 setups 76,000 labor hours 1,200 inspections Overhead Rates /setup /DLH /inspectionarrow_forward
- Savallas Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year: Computer-hours 82,000 Fixed manufacturing overhead cost $ 1,275,000 Variable manufacturing overhead per computer-hour $ 3.10 During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year: Computer-hours 50,000 Manufacturing overhead cost $ 1,016,000 Inventories at year-end: Raw materials $ 440,000 Work in process $ 180,000 Finished goods $ 1,030,000 Cost of goods sold $ 2,780,000 Required: 1. Compute the…arrow_forwardUSt or goods Will have to be increased by the amount of the over applied overhead. None of the above Managers at X company think machine hours is the best activity base for manufacturing overhead. The annual estimated overhead costs was $3,000.000. The annual estimated machine hours were 30,000 hours. The company used 60 hours of processing on Job No.102 during the period and incurred overhead costs totaling $2,850,000. How much overhead should be applied to Job No.102? $6,000 $5,700 $100 None of the abovearrow_forwardAs an assistant cost accountant for Firewall Industries, you have been assigned to review the activity base for the predetermined factory overhead rate. The president, JoJo Gunn, is concerned about the wide fluctuation in the amount of over- or underapplied overhead in recent years. An analysis of the company's operations and use of the current overhead rate (direct labor cost) has narrowed the possible alternative overhead bases to direct labor cost and machine hours. For the past five years, the following data have been gathered: ww mwwwww M M w Year 5 Year 4 Year 3 Year 2 Year 1 Actual overhead $ 790,000 $ 870,000 $ 935,000 $ 845,000 $ 760,000 Applied overhead 777,000 882,000 924,000 840,000 777,000 (Over-) underapplied overhead $ 13,000 $ (12,000) %24 $ 11,000 5,000 $ (17,000) Direct labor cost $3,885,000 $4,410,000 $4,620,000 $4,200,000 $3,885,000 Machine hours 93,000 104,000 111,000 100,400 91,600 8,49 840,000 1. Calculate a predetermined factory overhead rate for each…arrow_forward
- The printing industry has become highly automated. Job costing in the printing industry would likely have the following general framework. Job cost equals: None of these answer choices are correct. direct materials cost, plus outside purchase costs, plus overhead cost applied on the basis of labor hours. direct materials cost, plus conversion costs applied on the basis of labor hours. direct materials cost, plus direct labor cost plus applied overhead based on machine hours. materials purchases, labor incurred and applied overhead based on labor hoursarrow_forwardCarver Company uses a plantwide overhead rate based on direct labor costs. Suppose that Carver raises its wage rate for direct labor during the year. How would that affect the overhead applied? The total cost of jobs?arrow_forwardCompany XYZ hired Ali as a factory security guard. The company agreed to pay Ali based on the number of shift hours he works. The salary of Ali can be classified as: Select one: O a. A variable direct labor cost O b. A fixed selling and administrative cost O c. A variable selling and administrative cost O d. A fixed manufacturing overhead cost O e. A variable manufacturing overhead costarrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning