Concept explainers
FiberCom, Inc., a manufacturer of fiber optic communications equipment, uses a
Required:
- 1. Explain why manufacturers use a predetermined overhead rate to apply manufacturing overhead to their jobs.
- 2. How much manufacturing overhead would FiberCom have applied to jobs through November 30 of the year just completed?
- 3. How much manufacturing overhead would have been applied to jobs during December of the year just completed?
- 4. Determine the amount by which manufacturing overhead is over applied or under applied as of December 31 of the year just completed.
- 5. Determine the balance in the Finished-Goods Inventory account on December 31 of the year just completed.
- 6. Prepare a Schedule of Cost of Goods Manufactured for FiberCom, Inc. for the year just completed. (Hint: In computing the cost of direct material used, remember that FiberCom includes both direct and indirect material in its Raw-Material Inventory account.)
1.
Explain the reason for using the predetermined overhead rate by the manufacturers to apply manufacturing overhead to their jobs.
Explanation of Solution
Predetermined Overhead Rate: Predetermined overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. This is generally evaluated at the beginning of each reporting period. The evaluation takes into account the estimated manufacturing overhead cost and the estimated allocation base that includes direct labor hours, direct labor in dollars, machine hours and direct materials.
The predetermined overhead rates are used by the manufacturers to allocate it to the production jobs the costs incurred for the production are not directly traceable to the particular job. This could result the management to have the timely and accurate job-cost information. The predetermined overhead rates are easy to apply and avoid fluctuations.
2.
Calculate the manufacturing overhead would Incorporation FC have applied to jobs through November 30 for the year just completed.
Explanation of Solution
Calculate the manufacturing overhead would Incorporation FC have applied to jobs through November 30 for the year just completed.
Thus the manufacturing overhead applied is $1,095,000.
3.
Calculate the manufacturing overhead would Incorporation FC have applied to jobs during December for the year just completed.
Explanation of Solution
Calculate the manufacturing overhead would Incorporation FC have applied to jobs during December for the year just completed.
Thus the manufacturing overhead applied is $90,000.
4.
Calculate the amount by which the manufacturing overhead is overapplied or underapplied as of December 31 for the job completed.
Explanation of Solution
Underapplied overhead:
When there is a debit balance in the manufacturing overhead account during the month end, it indicates that overheads applied to jobs are less than the actual overhead cost incurred by the business. Therefore, the debit balance in the manufacturing overhead account is referred to as underapplied overhead.
Overapplied overhead:
When there is a credit balance in the manufacturing overhead account during the month end, indicates that overheads applied to jobs is more than the actual overhead cost incurred by the business. Therefore, the credit balance in the manufacturing overhead account is referred to as over- applied overhead.
Calculate the amount by which the manufacturing overhead is overapplied or underapplied as of December 31 for the job completed.
Particulars | Calculation | Amount ($) |
Actual overhead | $1,196,000 | |
Applied overhead | ($1,185,000) | |
Underapplied overhead | $11,000 |
Table (1)
Thus, the underapplied overhead is $11,000.
5.
Calculate the balance in the finished-goods inventory account on December 31 of the year just completed.
Explanation of Solution
Calculate the balance in the finished-goods inventory account on December 31 of the year just completed.
Particulars | Amount ($) |
November 30 balance for Job No. N11-013 | $ 55,000 |
December direct material | 4,000 |
December direct labor | 12,000 |
December overhead | 15,000 |
Total finished-goods inventory | $ 86,000 |
Table (2)
Thus, the total finished-goods inventory is $86,000.
6.
Prepare the schedule of cost of goods manufactured for Incorporation FC for the year just completed.
Explanation of Solution
Cost of goods manufactured: Cost of goods manufactured refers to the cost incurred for a making a product, that are available for sales at the end of the accounting period.
Prepare the schedule of cost of goods manufactured for Incorporation FC for the year just completed.
Incorporation FC | ||
Schedule of Cost of Goods Manufactured | ||
For the Year Ended December 31 | ||
Particulars | Amount ($) | Amount ($) |
Direct material: | ||
Raw-material inventory, 1/1 | $105,000 | |
Raw-material purchases | $1,063,000 | |
Raw material available for use | $1,168,000 | |
Deduct: Indirect material used | $134,000 | |
Raw-material inventory 12/31 | $85,000 | $219,000 |
Raw material used | $949,000 | |
Direct labor | $925,000 | |
Manufacturing overhead: | ||
Indirect material | $134,000 | |
Indirect labor | $375,000 | |
Utilities | $267,000 | |
Depreciation | $420,000 | |
Total actual manufacturing overhead | $1,196,000 | |
Less: Underapplied overhead | $11,000 | |
Overhead applied to work in process | $1,185,000 | |
Total manufacturing costs | $3,059,000 | |
Add: Work-in-process inventory, 1/1 | $60,000 | |
Subtotal | $3,119,000 | |
Less: Work-in-process inventory, 12/31 (1) | $150,200 | |
Cost of goods manufactured | $2,968,800 |
Table (3)
Working note (1):
Calculate the work-in process inventory as of 12/31.
Particulars | D12-002 | D12-003 | Total |
Direct material | $37,900 | $26,000 | $63,900 |
Direct labor | $20,000 | $16,800 | $36,800 |
Applied overhead: | |||
$37,500 | $0 | $37,500 | |
$0 | $12,000 | $12,000 | |
Total | $ 95,400 | $ 54,800 | $ 150,200 |
Table (4)
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Chapter 3 Solutions
MANAGERIAL ACCOUNTING-ACCESS
- Brees, Inc., a manufacturer of golf carts, has just received an offer from a supplier to provide 2,600 units of a component used in its main product. The component is a track assembly that is currently produced internally. The supplier has offered to sell the track assembly for 66 per unit. Brees is currently using a traditional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours. The estimated traditional full cost of producing the track assembly is as follows: Prior to making a decision, the companys CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following: 3 setups1,160 each (The setups would be avoided, and total spending could be reduced by 1,160 per setup.) One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the track assembly operation is 12,300 and could be totally avoided if the part were purchased. Engineering work: 470 hours, 45/hour. (Although the work decreases by 470 hours, the engineer assigned to the track assembly line also spends time on other products, and there would be no reduction in his salary.) 75 fewer material moves at 30 per move. Required: 1. Ignore the special study, and determine whether the track assembly should be produced internally or purchased from the supplier. 2. Now, using the special study data, repeat the analysis. 3. Discuss the qualitative factors that would affect the decision, including strategic implications. 4. After reviewing the special study, the controller made the following remark: This study ignores the additional activity demands that purchasing would cause. For example, although the demand for inspecting the part on the production floor decreases, we may need to inspect the incoming parts in the receiving area. Will we actually save any inspection costs? Is the controller right?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_forwardJohn Sheng, a cost accountant at Starlet Company, is developing departmental factory overhead application rates for the companys Tooling and Fabricating departments. The budgeted overhead for each department and the data for one job are as follows: Using the departmental overhead application rates, total overhead applied to Job 231 in the Tooling and Fabricating departments will be: a. 225. b. 303. c. 537. d. 671.arrow_forward
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- Rulers Company is a neon sign company that estimated overhead will be $60,000, consisting of 1,500 machine hours. The cost to make Job 416 is $95 in neon, 15 hours of labor at $13 per hour, and five machine hours. During the month, it incurs $95 in indirect material cost, $130 in administrative labor, $320 in utilities, and $350 in depreciation expense. What is the predetermined overhead rate if machine hours are considered the cost driver? What is the cost of Job 416? What is the overhead incurred during the month?arrow_forwardVargas, Inc., produces industrial machinery. Vargas has a machining department and a group of direct laborers called machinists. Each machinist is paid 25,000 and can machine up to 500 units per year. Vargas also hires supervisors to develop machine specification plans and to oversee production within the machining department. Given the planning and supervisory work, a supervisor can oversee three machinists, at most. Vargass accounting and production history reveal the following relationships between units produced and the costs of direct labor and supervision (measured on an annual basis): Required: 1. Prepare two graphs: one that illustrates the relationship between direct labor cost and units produced, and one that illustrates the relationship between the cost of supervision and units produced. Let cost be the vertical axis and units produced the horizontal axis. 2. How would you classify each cost? Why? 3. Suppose that the normal range of activity is between 2,400 and 2,450 units and that the exact number of machinists is currently hired to support this level of activity. Further suppose that production for the next year is expected to increase by an additional 400 units. How much will the cost of direct labor increase (and how will this increase be realized)? Cost of supervision?arrow_forwardFirenza Company manufactures specialty tools to customer order. Budgeted overhead for the coming year is: Previously, Sanjay Bhatt, Firenza Companys controller, had applied overhead on the basis of machine hours. Expected machine hours for the coming year are 50,000. Sanjay has been reading about activity-based costing, and he wonders whether or not it might offer some advantages to his company. He decided that appropriate drivers for overhead activities are purchase orders for purchasing, number of setups for setup cost, engineering hours for engineering cost, and machine hours for other. Budgeted amounts for these drivers are 5,000 purchase orders, 500 setups, and 2,500 engineering hours. Sanjay has been asked to prepare bids for two jobs with the following information: The typical bid price includes a 40 percent markup over full manufacturing cost. Required: 1. Calculate a plantwide rate for Firenza Company based on machine hours. What is the bid price of each job using this rate? 2. Calculate activity rates for the four overhead activities. What is the bid price of each job using these rates? 3. Which bids are more accurate? Why?arrow_forward
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