Download - Ch 05 Job Costing
Job-Order Costing
Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
Widely used in services (accounting, law, medicine),as well as in manufacturing.
Products or services are manufactured to order.
Cost are traced or allocated to jobs.
Cost records must be maintained for each distinct product or job.
Widely used in services (accounting, law, medicine),as well as in manufacturing.
Products or services are manufactured to order.
Cost are traced or allocated to jobs.
Cost records must be maintained for each distinct product or job.
Chapter 6Chapter 6
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Job-Order Cost Accounting
Job-Order Cost Accounting
Job-Order Cost Accounting
Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct
labor hour (DLH).Let’s do it
Job-Order Cost Accounting
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined
before the period begins.
Application of Manufacturing Overhead
Ideally, the allocation base is a cost driver that causes
overhead to vary.
Ideally, the allocation base is a cost driver that causes
overhead to vary.
The allocation base must be traceable to the
individual jobs.
The allocation base must be traceable to the
individual jobs.
Actual amount of the allocation base such as units produced, direct labor hours, or machine
hours incurred during the period.
Actual amount of the allocation base such as units produced, direct labor hours, or machine
hours incurred during the period.
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
For each direct labor hour worked on a job, $4.00 of factory overhead will be
applied to the job.
For each direct labor hour worked on a job, $4.00 of factory overhead will be
applied to the job.
Overhead Application Example
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Overhead Application Example
Overhead Application Example
Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)Direct
Materials Direct Materials
Indirect Materials
Indirect Materials
Actual Applied
Job-Order System Cost Flows
Mfg. Overhead
Payroll SuspenseWork in Process(Job Cost Sheet)
Direct
Materials
Overhead Applied
OverheadApplied to
Work inProcess
Direct Labor
Direct Labor
IndirectLabor
IndirectLabor
Indirect Materials
Actual AppliedIf actual and applied
manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
Job-Order System Cost Flows
TotalFactoryPayroll
Finished Goods(Job cost sheets)
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost of Goods Sold (Job cost sheets)
Work in Process(Job cost sheets)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsSold
Cost ofGoodsSold
Job-Order System Cost Flows
Individual job cardsare subsidiary ledgers for each of these control accounts.
Plantwide Overhead Rate
Companies tend to use direct labordirect labor as the overhead allocation base.
Departmental Overhead Rates
A two-stage process isnecessary because different
departments may have different cost drivers.
Finishing DepartmentFinishing Department
Shipping DepartmentShipping Department
Painting DepartmentPainting Department
Departmental Overhead Rates
Cost poolsCost pools
Stage One:Stage One:Costs assignedCosts assignedto poolsto pools
IndirectIndirectLaborLabor
IndirectIndirectMaterialsMaterials
OtherOtherOverheadOverhead
Department1
Department2
Department3
Departmental Overhead Rates
Department1
Department2
Department3
Products
Cost poolsCost pools
Direct Labor Hours
MachineHours
RawMaterials
Cost
Stage One:Stage One:Costs assignedCosts assignedto poolsto pools
Stage Two:Stage Two:Costs appliedCosts appliedto productsto products
Departmental Allocation Bases
IndirectIndirectMaterialsMaterials
OtherOtherOverheadOverhead
IndirectIndirectLaborLabor
Handout 5 (a):
Job Order Costing, Overhead Allocations,
Journal Entries
Handout 5(a) Job order costing; overhead allocation; journal entries Deltoid Exercise Apparati, Inc. installs weight training equipment in health
clubs and private homes. The firm uses job order costing, and applies overhead
to specific jobs using a predetermined overhead rate (“normal” costing).
Deltoid uses direct labor dollars as a basis for setting a predetermined overhead
rate for the period. The firm has budgeted total direct labor costs of $1,200,000
and budgeted total overhead costs are $2,400,000. The firm had no beginning
inventories and experienced the following transactions and events in the current
period.
Provide journal entries to reflect the following events.(Note that the
predetermined overhead rate is 200% of direct labor dollars.)
(a) The firm purchased materials for $1,200,000. Of this amount, $800,000
was charged to job cards as direct materials, and $200,000 was charged
as indirect materials to factory overhead.
(a) The firm purchased materials for $1,200,000. Of this amount, $800,000 was
charged to job cards as direct materials, and $200,000 was charged as indirect
materials to factory overhead.
Dr. Materials inventory $1,200.000
Cr. Accounts payable $1,200,000
Dr. Work in process (direct materials) $800,000
Dr. Overhead control $200,000
Cr. Materials inventory $1,000,000
(b) Total payroll expenses for the period were $2,400,000,
comprised of $1,600,000 of direct labor charged to job cards,
and $800,000 of indirect labor charged to factory overhead.
(b) Total payroll expenses for the period were $2,400,000,
comprised of $1,600,000 of direct labor charged to job cards,
and $800,000 of indirect labor charged to factory overhead.
Dr. Payroll suspense $2,400.000
Cr. Sundry payables $2,400,000
Dr. Work in process (direct labor) $1,600,000
Dr. Overhead control $800,000
Cr. Payroll suspense $2,400,000
Dr. Work in process (applied overhead) $3,200,000
Cr. Overhead control $3,200,000
(c) Additional overhead expenses totaling $1,600,000 were incurred and charged
to factory overhead.
Dr. Overhead control $1,600,000
Cr. Sundry credits $1,600,000
(a) Direct labor costs of $400,000 are included in the ending work-in-process
inventory, and direct labor costs of $200,000 are included in the ending
finished goods inventory.
This information implies that the remaining direct labor costs of
$1,000,000 are included in cost of goods sold. In addition,
applied overhead equal to 200% of direct labor is included in
each of these three accounts (ending work in process, finished
goods and cost of goods sold).
(b) Direct material costs of $200,000 are included in the ending work-in-process
inventory, and direct material costs of $100,000 are included in the ending
finished goods inventory.
This information implies that $500,000 of direct materials are included in cost of goods sold.
Because there were no beginning inventories, and we know the amounts of direct materials, labor, and applied overhead during the period, as well as the ending balances in the inventories and cost of goods sold, we can determine the current manufacturing costs, cost of goods completed, over/ under applied overhead, and cost of goods sold. This information is shown in T- accounts below.
Italicized numbers are contained in the journal entries provided above. Non-italicized numbers are inferred given the journal entries and supplementary information above. Beg. $ -0- Beg. $ -0- $1,200,000 $800,000 DM $800,000 $4,200,000 $200,000 DL $1,600,000 OH $3,200,000 End. $200,000 * End. $1,400,000
Materials inventory Work in process inventory
Beg. $ -0- $3,000,000 $4,200,000 $3,500,000 * $3,500,000 * End. $700,000
Finished goods inventory Cost of goods sold Sales
$2,400,000 $1,600,000 $ 200,000 $3,200,000 $ 800,000 $ 800,000 $1,600,000 Bal. $600,000 (over-applied)
Payroll Overhead Control
*Composition and amounts of ending inventories and cost of sales: Cost component:
Work in process, end
Finished goods, end
Cost of goods sold
Total
Direct material $200,000 $100,000 $500,000 $800,000 Direct labor $400,000 $200,000 $1,000,000 $1,600,000 Applied OH $800,000 $400,000 $2,000,000 $3,200,000 Total * $1,400,000 * $700,000 * $3,500,000 $5,600,000
(f) Total sales for the period are $3,000,000.
Dr. Accounts receivable $3,000,000
Cr. Sales $3.000,000
(g) Goods completed are transferred to finished goods inventory:
Dr. Finished goods $4,200,000
Cr. Work in process $4,200,000
(h) Cost of sales is recognized before disposition of the overhead variance:
Dr. Cost of goods sold $3.500,000
Cr. Finished goods $3.500,000
Disposition of the overhead variance:
(1) Assume that overhead variances are charged (or credited) to cost of
goods sold, and determine: (a) valuation of the ending inventories; (b) cost of goods
sold; and (c) gross margin for the period. Provide a journal entry to close the overhead
variance balance.
Disposition of the overhead variance:
(1) Assume that overhead variances are charged (or credited) to cost of
goods sold, and determine: (a) valuation of the ending inventories; (b) cost of goods
sold; and (c) gross margin for the period. Provide a journal entry to close the overhead
variance balance.
If the entire overhead variance is credited to cost of goods sold, the
ending inventory valuations are as shown above (in the T-accounts),
and the cost of sales is reduced from $3,500,000 to $2,900,000.
Gross margin is $100,000 (sales of $3,000,000 less cost of sales of
$2,900,000).The journal entry is as follows:
Dr. Overhead control $600,000
Cr. Cost of goods sold $600,000
Re-do the calculations required in part (2) above assuming that Deltoid’s overhead variances are pro-rated to inventories and cost of sales based upon the amounts of applied overhead in the ending balances in these accounts (before the variances and the revenue and expense accounts are closed).
(2) Re-do the calculations required in part (2) above assuming that Deltoid’s overhead variances are
pro-rated to inventories and cost of sales based upon the amounts of applied overhead in the
ending balances in these accounts (before the variances and the revenue and expense accounts
are closed).
Account
Applied
overhead in
Ending balance
Percent of total
applied
overhead
Times over-applied
overhead of
$600,000
Work in process
inventory
$800,000
25.0%
$150,000
Finished goods
inventory
$400,000
12.5%
$ 75,000
Cost of goods sold $2,000,000 62.5% $375,000
Total $3,200,000 100.0% $600,000
Dr. Overhead control $600,000
Cr. Cost of goods sold $375,000
Cr. Work in process $150,000
Cr. Finished goods $75,000
If the overhead variance is apportioned among cost of goods sold and the ending inventories, the cost of sales is reduced from $3,500,000 to $3,125,000. Gross margin is a negative $125,000 (sales of $3,000,000 less cost of sales of $3,125,000).
Handout 5 (b):
Job Order Costing, Plant-wide and Departmental
Overhead Rates
This exercise demonstrates overhead applications using (a) a single plant-wide rate, (b) separate plant-wide rates for variable and fixed overheads, (c) departmental rates for variable and fixed overheads. The following budgeted and actual overhead data for the year 2008 has been prepared for Departments A and B, and in total for the entire manufacturing plant: Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
1. Assume that the company develops a single, plant-wide combined (fixed and variable) overhead rate for the period. Determine the plant-wide overhead rate, the applied overhead, and the amount of over-/under-applied overhead for the period.
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
1. Assume that the company develops a single, plant-wide combined (fixed and variable) overhead rate for the period. Determine the plant-wide overhead rate, the applied overhead, and the amount of over-/under-applied overhead for the period.
POHR = Budgeted total overhead / Budgeted DLH = $1,400,000 / 200,000DLH = $7.00 Applied OH = POHR x Actual DLH = $7.00 x 220,000DLH = $1,540,000 Under/over applied overhead = Actual OH – Applied OH = $1,500,000 - $1,540,000 = $40,000 over-applied
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
2. Assume that the company develops separate plant-wide overhead rates for variable and fixed overheads. Determine the predetermined rates, the applied overheads, and the amounts of over-/under-applied overhead for both variable and fixed overhead.
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
2. Assume that the company develops separate plant-wide overhead rates for variable and fixed overheads. Determine the predetermined rates, the applied overheads, and the amounts of over-/under-applied overhead for both variable and fixed overhead.
Variable overhead: PVOHR = Budgeted variable overhead / Budgeted DLH = $800,000 / 200,000DLH = $4.00 Applied VOH = PVOHR x Actual DLH = $4.00 x 220,000DLH = $880,000 Under/over applied variable overhead = Actual VOH – Applied VOH = $900,000 - $880,000 = $20,000 under-applied
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
2. Assume that the company develops separate plant-wide overhead rates for variable and fixed overheads. Determine the predetermined rates, the applied overheads, and the amounts of over-/under-applied overhead for both variable and fixed overhead.
Variable overhead: PVOHR = Budgeted variable overhead / Budgeted DLH = $800,000 / 200,000DLH = $4.00 Applied VOH = PVOHR x Actual DLH = $4.00 x 220,000DLH = $880,000 Under/over applied variable overhead = Actual VOH – Applied VOH = $900,000 - $880,000 = $20,000 under-applied
Fixed overhead: PFOHR = Budgeted fixed overhead / Budgeted DLH = $600,000 / 200,000DLH = $3.00 Applied FOH = PFOHR x Actual DLH = $3.00 x 220,000DLH = $660,000 Under/over applied fixed overhead = Actual FOH – Applied FOH = $600,000 - $660,000 = $60,000 over-applied
Note: The under-applied variable overhead of $20,000 plus the over-applied fixed overhead of $60,000 add
up to the total over-applied overhead of $40,000 determined using the combined rate in part 1, above.
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
3. Assume that the company develops combined (fixed and variable) predetermined overhead
rates separately for each of the two departments. Determine the departmental overhead rates, the applied overhead, and the amount of over-/under-applied overhead in each department for the period.
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
3. Assume that the company develops combined (fixed and variable) predetermined overhead
rates separately for each of the two departments. Determine the departmental overhead rates, the applied overhead, and the amount of over-/under-applied overhead in each department for the period.
Department A: POHR = Budgeted total overhead / Budgeted DLH = $400,000 / 160,000DLH = $2.50 Applied OH = POHR x Actual DLH = $2.50 x 190,000DLH = $475,000 Under/over applied overhead = Actual OH – Applied OH = $500,000 - $475,000 = $25,000 under-applied
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
3. Assume that the company develops combined (fixed and variable) predetermined overhead
rates separately for each of the two departments. Determine the departmental overhead rates, the applied overhead, and the amount of over-/under-applied overhead in each department for the period.
Department A: POHR = Budgeted total overhead / Budgeted DLH = $400,000 / 160,000DLH = $2.50 Applied OH = POHR x Actual DLH = $2.50 x 190,000DLH = $475,000 Under/over applied overhead = Actual OH – Applied OH = $500,000 - $475,000 = $25,000 under-applied
Department B: POHR = Budgeted total overhead / Budgeted DLH = $1,000,000 / 40,000DLH = $25.00 Applied OH = POHR x Actual DLH = $25.00 x 30,000DLH = $750,000 Under/over applied overhead = Actual OH – Applied OH = $1,000,000 - $750,000 = $250,000 under-applied
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
4. Contrast the total amounts of applied overheads and over-/under absorbed overheads that you determined in answering the questions above. Which amounts provide more useful information to managers?
Note that the actual total overhead for the two departments combined is
$1,500,000, and the total applied overhead is $1,225,000. The total under-applied
overhead is therefore $275,000. This reveals a significantly more negative variance
than was apparent using a single plant-wide rate to absorb overhead. The underlying
reason for the disparate measurements is because the overhead rates differ
substantially between the departments, and the department with the higher rate had
lower production (fewer labor hours) than were budgeted. Consequently, that higher-
rate department should have had a large reduction in variable overhead spending, but
that reduction apparently was not realized.
5. Assume that the company is developing a bid price for a special customer order. The project is estimated to require 20,000 direct labor hours. Determine the total variable overhead that would be estimated for the project based on plant-wide and departmental overhead rates, under each of the following assumptions:
(a) The 20,000 required direct labor hours would consist of
16,000 hours in Department A and 4,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.
5. Assume that the company is developing a bid price for a special customer order. The project is estimated to require 20,000 direct labor hours. Determine the total variable overhead that would be estimated for the project based on plant-wide and departmental overhead rates, under each of the following assumptions:
(a) The 20,000 required direct labor hours would consist of
16,000 hours in Department A and 4,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.
First, we determine that the departmental variable overhead rate is $1.25 in Department A ($200,000 / 160,000DLH), and is $15.00 in Department B ($600,000 / 40,000DLH).
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
5. Assume that the company is developing a bid price for a special customer order. The project is estimated to require 20,000 direct labor hours. Determine the total variable overhead that would be estimated for the project based on plant-wide and departmental overhead rates, under each of the following assumptions:
(a) The 20,000 required direct labor hours would consist of
16,000 hours in Department A and 4,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.
First, we determine that the departmental variable overhead rate is $1.25 in Department A ($200,000 / 160,000DLH), and is $15.00 in Department B ($600,000 / 40,000DLH).
Plant-wide rate: 20,000DLH x $4.00 = $80,000 Departmental rates: A: 16,000DLH x $1.25 = $20,000 B: 4,000DLH x $15.00 = $60,000 TOTAL = $80,000 There is no difference in the two estimates of variable overhead because the required labor
hours are distributed across the two departments in the same proportions as are the plant-wide
labor hours. Note that 80% (20%) of the plant-wide total labor hours are budgeted for
Department A (B). The special customer order also requires 80% (20%) of its labor hours in
Department A (B).
(b) The 20,000 required direct labor hours would consist of 10,000 hours in Department A and 10,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.
Plant-wide rate: 20,000DLH x $4.00 = $80,000 Departmental rates: A: 10,000DLH x $1.25 = $ 12,500 B: 10,000DLH x $15.00 = $150,000 TOTAL = $162,500
In this case, the required labor hours are disproportionately incurred in the
higher-cost department. Because of this feature, the use of departmental rates
will provide a substantially higher estimate of variable overhead. Use of a plant-
wide overhead rate would result in an under-estimate of variable overhead in the
amount of $82,500 ($162,500 - $80,000).
6. Assume that the company has entered a “cost plus” contract with the U.S. government that provides re-imbursement of full (i.e., fixed plus variable) costs plus a mark-on of 25% above cost. The contract is expected to require 40,000 direct labor hours. Determine the total overhead reimbursement that would be received for this contract based on plant-wide and departmental overhead rates, under each of the following assumptions:
(a) The 40,000 required direct labor hours would consist of 32,000 hours in
Department A and 8,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.
Dept. A Dept. B Plant-wide Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 200,000 160,000DLH
$ 600,000 40,000DLH
$ 800,000 200,000DLH
Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 $ 600,000 Variable overhead Direct labor hours
$ 300,000 190,000DLH
$ 600,000 30,000DLH
$ 900,000 220,000DLH
6. Assume that the company has entered a “cost plus” contract with the U.S. government that provides re-imbursement of full (i.e., fixed plus variable) costs plus a mark-on of 25% above cost. The contract is expected to require 40,000 direct labor hours. Determine the total overhead reimbursement that would be received for this contract based on plant-wide and departmental overhead rates, under each of the following assumptions:
(a) The 40,000 required direct labor hours would consist of 32,000 hours in
Department A and 8,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.
(a) The 40,000 required direct labor hours would consist of 32,000 hours in Department A and 8,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.
Plant-wide rate: 40,000DLH x $7.00 = $280,000 Departmental rates: A: 32,000DLH x $2.50 = $80,000 B: 8,000DLH x $25.00 = $200,000 TOTAL = $280,000 There is no difference in the two estimates of overhead because the required labor
hours are distributed across the two departments in the same proportions as are the
plant-wide labor hours. Note that 80% (20%) of the plant-wide total labor hours are
budgeted for Department A (B). The government contract also requires 80% (20%) of
its labor hours in Department A (B).
(b) The 40,000 required direct labor hours would consist of 15,000 hours in Department A and 25,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.
Plant-wide rate: 40,000DLH x $7.00 = $280,000 Departmental rates: A: 15,000DLH x $2.50 = $37,500 B: 25,000DLH x $25.00 = $625,000 TOTAL = $662,500
In this case, the required labor hours are disproportionately incurred in the higher-
cost department. Because of this feature, the use of departmental rates will provide
a substantially higher application of overhead to the government contract. Use of a
plant-wide overhead rate would result in a lower application of overhead in the
amount of $382,500 ($662,500 - $280,000). Because costs are reimbursed at a 25%
mark-up, the company would receive a lower reimbursement in the amount of
$478,125 ($382,500 x 125%) if the plant-wide overhead rate were used to cost the
contract.
Handout 5(c)
Multiple choice items
1. Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. For the month of October, Avery's estimated manufacturing overhead cost was $300,000 based on an estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual direct labor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead? A. $25,000 overapplied B. $25,000 underapplied C. $5,000 overapplied D. $5,000 underapplied
1. Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. For the month of October, Avery's estimated manufacturing overhead cost was $300,000 based on an estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual direct labor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead? A. $25,000 overapplied B. $25,000 underapplied C. $5,000 overapplied D. $5,000 underapplied
The POHR is $3.00 ($300,000 / 100,000dlh).
Applied OH = $330,000 ($3 x 110,000dlh).
Overapplied OH = $5,000 ($325,000 - $330,000)
2. Woodman Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. Estimated and actual data for direct labor and manufacturing overhead for last year are as follows:
The manufacturing overhead for Woodman Company for last year was: A. overapplied by $20,000 B. overapplied by $40,000 C. underapplied by $20,000 D. underapplied by $40,000
2. Woodman Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. Estimated and actual data for direct labor and manufacturing overhead for last year are as follows:
The manufacturing overhead for Woodman Company for last year was: A. overapplied by $20,000 B. overapplied by $40,000 C. underapplied by $20,000 D. underapplied by $40,000
POHR = $1.20 ($720,000 / 600,000dlh).
Applied OH = $660,000 ($1.20 x 550,000).
Under-applied OH = $20,000 ($680,000 - $660,000).
3. Darrow Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. Last year, the company worked 10,000 direct labor-hours and incurred $80,000 of actual manufacturing overhead cost. If overhead was underapplied by $2,000, the predetermined overhead rate for the company for the year must have been: A. $7.80 B. $8.00 C. $8.20 D. $8.40
3. Darrow Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. Last year, the company worked 10,000 direct labor-hours and incurred $80,000 of actual manufacturing overhead cost. If overhead was underapplied by $2,000, the predetermined overhead rate for the company for the year must have been: A. $7.80 B. $8.00 C. $8.20 D. $8.40
Actual overhead of $80,000 is underapplied by $2,000 so applied overhead is $78,000. The activity is 10,000dlh, implying a POHR of $7.80 ($78,000 / 10,000).