Ch.2 Notes & HW PDF

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Professor Burt - Chapter 2 Lecture Notes & HW Solutions...

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Ch.2 - Job-Order Costing: Calculating Unit Product Costs ● Job-order costing: used in situations when ○ 1. Many different products are produced each period ○ 2. Products are manufactured to order ○ 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job ● Direct Cost: Direct Material → Job 1, Job 2, Job 3 ● Direct Cost: Direct Labor → Job 1, Job 2, Job 3 ○ Charge direct material and direct labor costs to each job as work is performed ● Indirect Cost: Manufacturing Overhead → Job 1, Job 2, Job 3 ○ Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job

● Manufacturing Overhead Rates ○ What is a predetermined manufacturing overhead rate (POHR)? ○ Why do we need to have / compute one? ○ How do we compute a predetermined overhead rate? ■ Apply overhead cost to jobs using a predetermined overhead rate ● Why use an Allocation Base? ○ An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assigned manufacturing overhead to individual jobs ○ We use an allocation base because: ■ It is impossible or difficult to trace overhead costs to particular jobs ■ Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary

■ Many types of manufacturing overhead costs are fixed even though output fluctuates ● Manufacturing Overhead Application ○ The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins ○ POHR = (Estimated total manufacturing overhead cost for the coming period) / Estimated total units in the allocation base for the coming period ● The need for a POHR ○ Predetermined overhead rates that rely upon estimated data are used because: ■ Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period ■ Actual overhead costs can fluctuate seasonally, misleading decision makers ● Computing POHR ○ 1. Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production. ○ 2. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. ○ 3. Use the following equation to estimate the total amount of manufacturing overhead: ■ Y = a + bX ● Where, Y = The estimated total manufacturing overhead cost ● a = The estimated total fixed manufacturing overhead cost ● b = The estimated variable manufacturing overhead cost per unit of the allocation base ● X = The estimated total amount of the allocation base

● Total Manufacturing Cost = ○ Direct Materials ○ Direct Labor ○ Mfg. Overhead ● Unit Product Cost ○ Units Completed / ○ Total Cost

● Example:

● POHR = Total Overhead / Estimated direct labor hours for the year ● Job-Order Costing-A Managerial Perspective ○ Inaccurately assigning manufacturing costs to jobs adversely influences planning and decisions made by managers ○ Job-order costing systems can accurately trace direct materials and direct labor costs to jobs ○ But… job order-costing systems can fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs

Sweeten Company had no jobs in progress at the beginning of March and no beginning inventories. The company has two manufacturing departments--Molding and Fabrication. It started, completed, and sold only two jobs during March—Job P and Job Q. The following additional information is available for the company as a whole and for Jobs P and Q (all data and questions relate to the month of March):

Sweeten Company had no underapplied or overapplied manufacturing overhead costs during the month. Required: For questions 1-8, assume that Sweeten Company uses a plantwide predetermined overhead rate with machine-hours as the allocation base. For questions 9-15, assume that the company uses departmental predetermined overhead rates with machine-hours as the allocation base in both departments. 1. What was the company’s plantwide predetermined overhead rate? ● Y = 10,000 + 1.40(2500) = $13500 ● Y = 15,000 + 2.20(1500) = $18300 ○ = $31,800 / 4000 = $7.95 2. How much mfg. overhead was applied to Job P and how much was applied to Job Q? ● Job P: $2,300 * 7.95 = $18,285 ● Job Q: $1,700 * 7.95 = $13,515 3. What was the total manufacturing cost assigned to Job P? ● Direct Materials: $13,000 ● Direct Labor Cost: $21,000 ● Overhead: $18,285 ● Total Cost: $52,285

4. If Job P included 20 units, what was its unit product cost? ● $52,285 / 20 = $2614.25 5. What was the total manufacturing cost assigned to Job Q? ● Direct Materials: $8000 ● Direct Labor Cost: $7500 ● Overhead: $13515 ● Total Cost: $29,015 6. If Job Q included 30 units, what was its unit product cost? ● $29,015/30 = $967.17 9. What were the company’s predetermined overhead rates in the Molding Department and the Fabrication Department? ● Y = a + bX ○ Y = 10,000 + 1.40(2500) = $13500 / 2500 = $5.40 ○ Y = 15,000 + 2.20(1500) = $18300 / 1500 = $12.20 10. How much manufacturing overhead was applied from the Molding Department to Job P and how much was applied to Job Q? ● Y = a + bX ○ Job P -Predetermined overhead Rate x hours: 5.40(1700) = $9180 ○ Job Q -Predetermined overhead Rate x hours: 5.40(800) = $4320 11. How much manufacturing overhead was applied from the Fabrication Department to Job P and how much was applied to Job Q? ○ Job P - $12.20(600) = $7320 ○ Job Q - $12.20(900) = $10980 12. If Job P included 20 units, what was its unit product cost? ● Direct Materials: 13000 ● Direct Labor: 21000 ● Manufacturing Overhead: (Overhead Rate of Job P Molding + Fabrication): $16500 ○ Total: 50500 / 20 = $2525 13. If Job Q included 30 units, what was its unit product cost? ● Direct Materials: 8000 ● Direct Labor: 7500

● Manufacturing Overhead:15300 ○ Total Manufacturing Cost: 30,800 / 30 = 1026.67 Harris Fabrics computes its plantwide predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 37,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $565,000 of fixed manufacturing overhead cost for the coming period and variable manufacturing overhead of $3.00 per direct labor-hour. Harris’s actual manufacturing overhead cost for the year was $748,885 and its actual total direct labor was 37,500 hours. Compute the company’s plantwide predetermined overhead rate for the year. 565000 + 3 POHR = $748,885 / 37,500 = 19.97 Y = 565,000 + (3*37,000) Y = 677,500 / 37000 = 18.27 Luthan Company uses a plantwide predetermined overhead rate of $23.10 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $277,200 of total manufacturing overhead cost for an estimated activity level of 12,000 direct labor-hours. The company incurred actual total manufacturing overhead cost of $269,000 and 11,000 total direct labor-hours during the period. Determine the amount of manufacturing overhead cost that would have been applied to all jobs during the period. 23.10 * 11000 = 254,100

Total manufacturing cost is equal to ● Direct Labor: 225 ● Direct Materials: 280 ● Total Direct Labor Hours = 225 / 15 = $14 ● Manufacturing Overhead applied: 21 x 15 = 315 ● Direct Materials + Direct Labor + Mfg. Overhead applied = 315+ 225 + 280 = 820 Unit product cost: Total manufacturing cost / number of units in the job: 820/90 = 9.111

Newhard Company assigns overhead cost to jobs on the basis of 116% of direct labor cost. The job cost sheet for Job 313 includes $31,968 in direct materials cost and $10,200 in direct labor cost. A total of 1,800 units were produced in Job 313. Required: a. What is the total manufacturing cost assigned to Job 313? ● Direct Material: $31,968 ● Direct Labor: $10,200 ● Manufacturing Overhead Applied: $10,200 * 116% = $11832 ○ Total Manufacturing Cost: 54000 b. What is the unit product cost for Job 313? Total Manufacturing Cost / Units = 54000 / 1800 = 30

Predetermined Overhead Rate: ● Y = a + bX ● Y = (4,410,000 + 2(245,000)) / 245000 ○ Y = 20 per machine hour Direct Materials: $1886 Direct Labor: $1353 Overhead applied: Predetermined plantwide overhead rate x Actual Quantity of MH ● 20 x 88 = 1760 Total Manufacturing Cost: 1886 + 1353 + 1760 = $4999

1. Predetermined overhead Rate: a. Y = a + bX i. (651,000 + 4.30(154,000))/154000 = 8.53 2. Total Manufacturing Cost: a. Direct Materials: $350 b. Direct Labor: $240 c. Total Manufacturing Overhead: 8.53*30 = 255.9 i. Total Manufacturing Cost: 845.90 3. If Job 400 includes 60 units, what is the unit product cost for this job? ● Unit Product Cost: 845.90 / 60 = $14.09

4. If Moody uses a markup percentage of 110% of its total manufacturing cost, then what selling price per unit would it have established for Job 400? ● Selling Price Per Unit: Total Manufacturing Cost = 845.90*1.1 = $930.49 + $845.90 = 1776.39 / 60 = $29.6...