COST ACCOUNTING

Question

A manufacturing firm produces subcomponents for the production of refrigerator in the local market. The company uses a job - order costing system in which a predetermined overhead rates are used to apply manufacturing overhead cost to jobs.All cost related to a particular job are recorded in a job cost sheet.The finished products goes through two processes machining and assembly. The predetermined overhead in the assembly department is based on labour hours and machining department based on machine hours. The following estimates were made at the beginning of the year:

Department

Machining Assembly

Direct labour hours 4,000 60,000

Machine hours 45,000 2000

Direct materials cost $650,000 $400,000

Direct labour cost $360,000 $300,000

Manufacturing overhead cost $135,000 $270,000

A special order of 1000 componentswas received from a company in a neighbouring countryand was accepted and completed during the year. The company's cost record shows the following information concerning the job:

Department

Machining Assembly

Machine hours 120 30

Direct labour hours 40 100

Direct materials cost $370 $890

Direct labour cost $280 $150

Required:

i.Explain the purpose of a job cost sheet in a job order costing system and the information that can be obtained from a job cost sheet.

(4 marks)

ii.Compute the predetermined overhead rate used during the year in the Machining and Assembly department.

(2 marks)

iii.Compute the total overhead cost applied to the special order.

(2 marks)

iv.Compute the total production cost charged for the special order and the cost per component.

(4 marks)

v.At the end of the year the actual cost and operating data for all jobs done during the year:

Department

Machining Assembly

Machine hours 42,000 3,200

Direct labour hours 5,500 64,000

Direct materials cost $600,000 $440,000

Direct labour cost $390,000 $280,000

Manufacturing overhead cost $130,000 $280,000

Compute the amount of overappliedor underapplied in each department .

(4marks)

vi.Discuss the possible reasons for overheads to be overapplied andunderapplied.

(4 marks)