Concept explainers
(1)
Ascertain the predetermined factory overhead rate for each alternative base for F Industries.
(1)
Explanation of Solution
Predetermined factory overhead rate
Normally,
The predetermined overhead rate for alternative activity base is prepared as follows:
Direct labor cost:
Machine hours:
The total factory overhead is calculated by totaling all year’s actual overhead incurred in production. There are two activity bases. One is direct labor cost and another is machine hours. The total direct labor cost is determined by adding all year’s direct labor cost incurred. The total machine hours spent is determined by adding all year’s machine hours.
Working notes:
Total overhead for (Year 1 – Year 5) is calculated as follows:
Factory Overhead (Actual) | Amount($) |
Year 1 | 790,000 |
Year 2 | 870,000 |
Year 3 | 935,000 |
Year 4 | 845,000 |
Year 5 | 760,000 |
4,200,000 |
Table (1)
Total direct labor cost, (Year 1 – Year 5) is computed as below:
Direct labor cost | Amount($) |
Year 1 | 3,885,000 |
Year 2 | 4,410,000 |
Year 3 | 4,620,000 |
Year 4 | 4,200,000 |
Year 5 | 3,885,000 |
21,000,000 |
Table (2)
Total machine hours, (Year 1 – Year 5) is computed as follows:
Machine hours | Hours |
Year 1 | 93,000 |
Year 2 | 104,000 |
Year 3 | 111,000 |
Year 4 | 100,400 |
Year 5 | 91,600 |
500,000 |
Table (3)
The predetermined overhead rate for direct labor cost is 20% of direct labor cost and predetermined overhead rate for machine hours is $8.40 per machine hour.
(2)
Ascertain the over- or under applied overhead based on two predetermined overhead rates.
(2)
Explanation of Solution
Actual Overhead ($) | Applied Overhead($) | (Over-) underapplied ($) | ||
(a) | (b) | (c) = (a) – (b) | ||
Year 5 | Direct Labor cost | 790,000 | 777,000(1) | 13,000 |
Machine Hours | 790,000 | 781,200 (6) | 8,800 | |
Year 4 | Direct Labor cost | 870,000 | 882,000(2) | (12,000) |
Machine Hours | 870,000 | 873,600 (7) | (3,600) | |
Year 3 | Direct Labor cost | 935,000 | 924,000(3) | 11,000 |
Machine Hours | 935,000 | 932,400 (8) | 2,600 | |
Year 2 | Direct Labor cost | 845,000 | 840,000(4) | 5,000 |
Machine Hours | 845,000 | 843,360 (9) | 1,640 | |
Year 1 | Direct Labor cost | 760,000 | 777,000(5) | (17,000) |
Machine Hours | 760,000 | 769,440 (10) | (9,440) |
Table (4)
When actual overhead incurred is less than applied overhead, the overhead is said to be overapplied. Alternatively, when actual overhead incurred is greater than applied overhead, the overhead is said to be under applied.
Working note (1):
The applied overhead for direct labor activity base is calculated as follows:
Working note (2):
Working note (3):
Working note (4):
Working note (5):
Working note (6):
The applied overhead for machine hour’s activity base is calculated as follows:
Working note (7):
Working note (8):
Working note (9):
Working note (10):
(3)
Suggest in applying the best predetermined overhead rate as computed.
(3)
Explanation of Solution
The best predetermined overhead rate is machine hours. The total overhead applied is based on both machine hours and direct labor cost. The over- or underapplied overhead ranges from $9,440 (Overapplied) to $8,800 (Underapplied) when the rates are based on machine hours. The over- or underapplied overhead ranges from $17,000 (Overapplied) to $13,000 (Underapplied) when the rates are based on machine hours.
When comparing both, we could see less fluctuation in under or over applied overhead based on predetermined overhead rate based on machine hours in the year by year basis.
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Chapter 2 Solutions
MANAGERIAL ACCOUNTING-ACCESS
- Communications Jamarcus Bradshaw, plant manager of Georgia Paper Companys papermaking mill, was looking over the cost of production reports for July and August for the Papermaking Department. The reports revealed the following: Jamarcus was concerned about the increased cost per ton from the output of the department. As a result, he asked the plant controller to perform a study to help explain these results. The controller, Leann Brunswick, began the analysis by performing some interviews of key plant personnel in order to understand what the problem might be. Excerpts from an interview with Len Tyson, a paper machine operator, follow: Len: We have two papermaking machines in the department. I have no data, but I think paper machine No. 1 is applying too much pulp and, thus, is wasting both conversion and materials resources. We haven't had repairs on paper machine No. 1 in a while. Maybe this is the problem. Leann: How does too much pulp result in wasted resources? Len: Well, you see, if too much pulp is applied, then we will waste pulp material. The customer will not pay for the extra product; we just use more material to make the product. Also, when there is too much pulp, the machine must be slowed down in order to complete the drying process. This results in additional conversion costs. Leann: Do you have any other suspicions? Len: Well, as you know, we have two productsgreen paper and yellow paper. They are identical except for the color. The color is added to the papermaking process in the paper machine. I think that during August these two color papers have been behaving very differently. I don't have any data, but it just seems as though the amount of waste associated with the green paper has increased. Leann: Why is this? Len: I understand that there has been a change in specifications for the green paper, starting near the beginning of August. This change could be causing the machines to run poorly when making green paper. If this is the case, the cost per ton would increase for green paper. Leann also asked for a database printout providing greater detail on Augusts operating results. September 9 Requested by: Leann Brunswick Papermaking DepartmentAugust detail Prior to preparing a report, Leann resigned from Georgia Paper Company to start her own business. You have been asked to take the data that Leann collected, and write a memo to Jamarcus Bradshaw with a recommendation to management. Your memo should include analysis of the August data to determine whether the paper machine or the paper color explains the increase in the unit cost from July. Include any supporting schedules that are appropriate. Round any calculations to the nearest cent.arrow_forwardSan Mateo Optics, Inc., specializes in manufacturing lenses for large telescopes and cameras used in space exploration. As the specifications for the lenses are determined by the customer and vary considerably, the company uses a job-order costing system. Manufacturing overhead is applied to jobs on the basis of direct labor hours, utilizing the absorption- or full-costing method. San Mateos predetermined overhead rates for 20x1 and 20x2 were based on the following estimates. Jim Cimino, San Mateos controller, would like to use variable (direct) costing for internal reporting purposes as he believes statements prepared using variable costing are more appropriate for making product decisions. In order to explain the benefits of variable costing to the other members of San Mateos management team, Cimino plans to convert the companys income statement from absorption costing to variable costing. He has gathered the following information for this purpose, along with a copy of San Mateos 20x1 and 20x2 comparative income statement. San Mateo Optics, Inc. Comparative Income Statement For the Years 20x1 and 20x2 San Mateos actual manufacturing data for the two years are as follows: The companys actual inventory balances were as follows: For both years, all administrative expenses were fixed, while a portion of the selling expenses resulting from an 8 percent commission on net sales was variable. San Mateo reports any over-or underapplied overhead as an adjustment to the cost of goods sold. Required: 1. For the year ended December 31, 20x2, prepare the revised income statement for San Mateo Optics, Inc., utilizing the variable-costing method. Be sure to include the contribution margin on the revised income statement. 2. Describe two advantages of using variable costing rather than absorption costing. (CMA adapted)arrow_forwardRIRA Company makes attachments such as backhoes and grader and bulldozer blades for construction equipment. The company uses a job order cost system. Management is concerned about cost performance and evaluates the job cost sheets to learn more about the cost effectiveness of the operations. To facilitate a comparison, the job cost sheets for Job 206 (for 50 backhoe buckets completed in October) and Job 228 (for 75 backhoe buckets completed in December) were pulled and presented as follows: Management is concerned about the increase in unit costs over the months from October to December. To understand what has occurred, management interviewed the purchasing manager and quality manager. Purchasing Manager: Prices have been holding steady for our raw materials during the first half of the year. I found a new supplier for our bulk steel that was willing to offer a better price than we received in the past. I saw these lower steel prices and jumped on them, knowing that a reduction in steel prices would have a very favorable impact on our costs. Quality Manager: Something happened around mid-year. All of a sudden, we were experiencing problems with respect to the quality of our steel. As a result, weve been having all sorts of problems on the shop floor in our foundry and welding operation. a. Analyze the two job cost sheets and identify why the unit costs have changed for the backhoe buckets. Complete the following schedule to help in your analysis: b. How would you interpret what has happened in light of your analysis and the interviews?arrow_forward
- Nutts management is very concerned about the cost of overhead on its jobs. When jobs are complete, overhead costs should be between 15% and 20% of total costs. For example, the labor cost on Job 8958 is 25% of total costs, higher than the norm. Open Job 8961 and click the Chart sheet tab. A pie chart appears showing the cost components on that job. Record the labor cost percentage in the space provided. Repeat this for each of the jobs worked on in August. Did Nutt maintain good cost control on all its jobs? Explain. Worksheet. During September, Job 8963 required two additional material requisitions to complete the job. Open JOB8963 and modify the job cost sheet to include an area for four direct material requisition entries instead of three. Then enter the following two materials requisitions onto the worksheet: Preview the printout to make sure it will print neatly on one page, and then print the worksheet. Save the completed worksheet as JOBT. Chart. Open JOB8964 and click the Chart sheet tab. Prepare a bar chart for JOB8964 showing the amount of material, labor, and overhead required to complete the job. Use the Chart Data Table found in rows 4246 as a basis for preparing the chart. Enter your name somewhere on the chart. Save the file again as J0B8964. Print the chart.arrow_forwardCynthia Rogers, the cost accountant for Sanford Manufacturing, is preparing a management report that must include an allocation of overhead. The budgeted overhead for each department and the data for one job are as follows: Using the departmental overhead application rates, and allocating overhead on the basis of direct labor hours, overhead applied to Job 231 in the Tooling Department would be: a. 44.00. b. 197.50. c. 241.50. d. 501.00.arrow_forwardThe following describes the job responsibilities of two employees of Barney Manufacturing. Joan Dennison, Cost Accounting Manager. Joan is responsible for measuring and collecting costs associated with the manufacture of the garden hose product line. She is also responsible for preparing periodic reports that compare the actual costs with planned costs. These reports are provided to the production line managers and the plant manager. Joan helps to explain and interpret the reports. Steven Swasey, Production Manager. Steven is responsible for the manufacture of the high-quality garden hose. He supervises the line workers, helps to develop the production schedule, and is responsible for seeing that production quotas are met. He is also held accountable for controlling manufacturing costs. Required: CONCEPTUAL CONNECTION Identify Joan and Steven as line or staff and explain your reasons.arrow_forward
- Darnell Poston, owner of Poston Manufacturing, Inc., wants to determine the cost behavior of labor and overhead. Darnell pays his workers a salary; during busy times, everyone works to get the 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 bookkeeping 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 salaries, temp agency payments, rentals, utilities, and plant and equipment depreciation are the largest dollar accounts. He believes that workers salaries and plant and equipment depreciation are 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 stored by Poston exceeds the space in the materials storeroom, Darnell rents nearby warehouse space. He can rent as much or as little space as he wants on a month-to-month basis. Therefore, he believes warehouse rental payments are variable with the number of parts purchased and stored. The account balances for the past six months as well as the six-month total are as follows: Information on number of machine hours, orders, and parts for the six-month period follows: Required: 1. Calculate the monthly average account balance for each account. Calculate the average monthly amount for each of the three drivers. 2. Calculate fixed monthly cost and the variable rates for temp agency payments, warehouse rent, and electricity. Express the results in the form of an equation for total cost. 3. In July, Darnell predicts there will be 420 orders, 250 parts, and 5,900 machine hours. What is the total labor and overhead cost for July? 4. What if Darnell buys a new machine in July for 24,000? The machine is expected to last 10 years and will have no salvage value at the end of that time. What part of the cost equation will be affected? How? What is the new expected cost in July?arrow_forwardPareto chart and cost of quality report for a manufacturing company The president of Mission Inc. has been concerned about the growth in costs over the last several years. The president asked the controller to perform an activity analysis to gain a better insight into these costs. The activity analysis revealed the following: The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap. Instructions 1. Prepare a Pareto chart of the company activities. 2. Classify the activities into prevention, appraisal, internal failure, external failure, and not costs of quality (producing product). Classify the activities into value-added and non-value-added activities. 3. Use the activity cost information to determine the percentages of total costs that are prevention, appraisal, internal failure, external failure, and not costs of quality. 4. Determine the percentages of total costs that are value-added and non-value-added. 5. Interpret the information.arrow_forwardThe management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed; thus, they must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past eight quarters have been collected: Required: 1. Prepare a scattergraph by plotting power costs against machine hours. Does the scatter-graph show a linear relationship between machine hours and power cost? 2. Using the high and low points, compute a power cost formula. 3. Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination. 4. Rerun the regression and drop the point (20,000; 26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better?arrow_forward
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