I need help on page 50. Exercise 3 about dayteccompany

ACCT 252 MANAGERIAL ACCOUNTING CLASS NOTES REQUIRED To accompany Noreen, Brewer, Garrison 2nd ed. textbook Chapter 2 - Management Accounting and Cost Concepts I. Comparison of Financial and Managerial Accounting. Both rely on the same basic accounting database. However, the two disciplines have important differences: 1. Managerial Accounting. Is concerned with information for the internal use of management rather than external reporting. Emphasizes the future rather than summarizing past activities. Emphasizes relevance and flexibility of data as opposed to precision and verifiability. Places more emphasis on non-monetary data and timeliness and less emphasis on precision. Emphasizes the segments of an organization rather than the organization as a whole. Is not governed by GAAP. Is not required by external regulatory bodies or by lenders. Exercise 1 Primary Information Source Managerial Financial Business Decision 1. Plan the budget for next quarter...................................................................... 2. Measure profitability of all individual stores.................................................. 3. Prepare financial reports according to GAAP................................................ 4. Determine location and size for a new plant................................................... 5. Determine amount of dividends to pay stockholders..................................... 6. Evaluate a purchasing department's performance........................................ 7. Report financial performance to board of directors...................................... 8. Estimate product cost for new line of shoes.................................................... Exercise 2 Circle the one that relates to managerial accounting: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. USERS EMPHASIS ON OBJECTIVITY TIMELINESS PRECISION LOOKS AT... RULES TYPES OF ACCT SYSTEM REQUIRED? HOW OFTEN UNITS OF MEASURE ( inside company / outside company ) ( past events / future planning ) ( very objective / objective and/or subjective) ( must timely for decision making / after the fact, historical ) ( must be very precise / relevance more important ) ( whole or segments / whole business ) ( GAAP / none ) ( double entry system vs. any ) ( no / yes ) ( information generated as needed / periodically ) ( $ / $ or other nonfinancial ) 1 II. Identifying Product Costs & understanding the effects of product costs and S&A (period) costs Exercise 3 Eiffel Manufacturing Company makes small replicas of major landmarks that it sells to souvenir shops. The company was started on January 1, 2009, when it (1) acquired $60,000 cash from the issue of common stock. During 2009, the company (2) purchased and used raw materials that cost $16,000 cash. It (3) paid wages of $22,000 cash to the workers who made the replicas. Finally, (4) manufacturing overhead costs, including rental fees paid for facilities and equipment, amounted to $12,000 cash. The company started and completed the production of 1,000 replicas during 2009. Required a. Determine the amount of expense Eiffel incurred in 2009, assuming none of the replicas was sold in 2009. b. Record the accounting events associated with making the 1,000 replicas in the financial statements model shown below. The event pertaining to the issue of common stock is recorded in the model as an example. Assets = Equity Events 1 Cash 60,000 + Inventory + = = Common Stock 60,000 + Retained Earnings. + 2 3 4 Sub-total 5 6 7 Totals c. Determine the cost per unit of the 1,000 replicas, then determine the sales price per unit assuming the products are sold for cost plus 40% of cost. d. Record the sale of 800 replicas (5 - to record the sales revenue and 6 - to record the cost). e. Record (7) the payment of a $4,000 sales commission to the salesperson who sold the replicas. 2 Exercise 4 Klyn Manufacturing Company experienced the following accounting events during its first year of operation. Except for the depreciation adjusting entries, all transactions are cash transactions. 1. Acquired $61,000 cash from the issue of common stock. 2. Paid $6,800 for the materials that were used to make its products. All products started were completed during the period. 3. Paid salaries of $4,300 to selling and administrative employees. 4. Paid wages of $7,200 to production workers. 5. Paid $9,000 to buy furniture for the offices of selling and administrative staff. The furniture was acquired on January 1. It had a $1,000 estimated salvage value and a 5-year useful life. Code the furniture purchase as Event No. 5a. Code the recognition of the annual depreciation as Event No. 5b. 6. Paid $23,000 to buy manufacturing equipment. The equipment was acquired on January 1. It had a $3,000 estimated salvage value and a 4-year useful life. Code the equipment purchase as Event No. 6a. Code recognition of the annual depreciation as Event No. 6b. Completed 4,000 units of product. Determine the cost per unit and the sales price per unit assuming the sales price is cost plus 60% of cost. 7. Record the sale of 3,000 units of product. Code the recognition of revenue as Event No. 7a. Code the recognition of cost of goods sold as Event No. 7b. Required Record these events in the horizontal financial statements model below. The first event is recorded. Assets Event No. 1 2 Cash 61,000 + Office Furn.* Manuf. + Equip.* +Inventory Equity = = Com. Stock + Retained Earnings 61,000 3 4 5a 5b 6a 6b 7a 7b Totals 3 Exercise 3 Solution a. The amount of expense is zero. All of the costs are product costs. Because no inventory was sold in 2003, all of the cost would still be in the finished goods inventory account. Assets Cash 1 2 3 4 5 6 7 Totals + = Inv. 60,000 (16,000) (22,000) (12,000) 56,000 + + 16,000 + 22,000 + 12,000 + + (40,000) (4,000) + 62,000 + 10,000 Equity Com. Ret. = Stock Earnings = 60,000 + = + = + = + = + 56,000 = + (40,000) = + (4,000) = 60,000 + 12,000 (5) Sales Revenue ($70 x 800 units = $56,000) (6) Cost of Goods Sold ($50 x 800 units = $40,000) c. Product costs ($16,000 + $22,000 + $12,000) 1,000 units = $50 per unit. Sales Price [$50 + ($50 x .4)] = $70 Exercise 4 Solution Assets Event No. 1 2 3 4 5a 5b 6a 6b 7a 7b Total Office Cash + Furn.* + 61,000 + + (6,800) + + (4,300) + + (7,200) + + (9,000) + 9,000 + + (1,600) + (23,000) + + + + 22,800 + + + + 33,500 + 7,400 + = Equity Manuf. Com. Ret. Equip.* + Inv. = Stk. + Ear. + = 61,000+ + 6,800= + + = + (4,300) + 7,200= + + = + + = + (1,600) 23,000 + = + (5,000) + 5,000= + + = + 22,800 + (14,250)= + (14,250) 18,000 + 4,750= 61,000+ 2,650 The cost per unit is $4.75 [($6,800 + $7,200 + $5,000) 4,000 units]. Cost of goods sold is $14,250 ($4.75 x 3,000 units). The sales price per unit is $7.60 [$4.75 + (.6 x $4.75)]. Sales revenue is $22,800 ($7.60 x 3,000 units). 4 III. Business Types 1. Merchandising 2. Manufacturing 3. Service IV. Product Costing 1. Definition of an ASSET: An asset is something that has FUTURE BENEFIT. Assets are listed on the balance sheet (e.g., cash, inventory, buildings, accounts receivable, etc.) Expenses, on the other hand, are deducted from revenue on the income statement. Their effect is to reduce net income (rent, salary, insurance, income tax, etc.) 2. COST of an Asset The assets cost includes all "ordinary and necessary" costs to get the asset "ready for use". When a company purchases a machine, the cost of that machine will include the purchase price + sales tax + shipping plus installation charges and even testing charges. When a company purchases inventory, what is included in the cost of that inventory? 3. Product Costs vs. Period (Selling & Administrative) Costs Costs can be assets or expenses. As a company spends money producing a product (creating an asset), those costs are debited to an inventory (asset) account. At some point, the asset is completed and the company is trying to sell the asset. After that point, costs incurred are expensed. In our simplistic 252 world, costs incurred in the manufacturing plant are assets and costs incurred in the administrative building are expenses. a. Three Types of Product Costs. Product costs, or Manufacturing Costs, are incurred to make a product, i.e., an asset called inventory. Manufacturing costs are grouped into three main categories: direct materials, direct labor, and manufacturing overhead. Direct materials consist of those raw material inputs that become an integral part of a finished product and can be easily traced (i.e., traced "directly") into it. Examples include aircraft engines on a Boeing 777, the Intel processing chip in a personal computer, and the blank videocassette in a pre-recorded Spiderman video. Direct labor consists of that portion of labor cost that can be easily traced (i.e., traced "directly") to a product. Direct labor consists of the costs of workers who work directly with the product as is it being made. Manufacturing overhead consists of all manufacturing costs other than direct materials and direct labor. These costs are Indirect Costs because they cannot be easily and conveniently traced to products. Examples include miscellaneous supplies such as thread used making jeans, supervisors, janitors, factory facility charges, etc. Product costs are recorded in the ASSET called inventory. These costs show up in Cost of Goods Sold Expense when the inventory is sold. b. Non-manufacturing costs, also known as period costs (or as selling & administrative costs). In addition to manufacturing costs, an organization incurs many other costs. Typically, for financial reporting purposes most of these other costs are classified as selling (marketing) costs and administrative costs (or "S&A costs"). Selling Costs include the costs of making sales, taking customer orders, and delivering the product to customers. Administrative Costs include all executive, organizational, and clerical costs that are not classified as production or marketing costs. 5 4. Why do managers care about product costs? a. b. c. d. to help determine selling price for planning, to forecast future costs and budgets to control current operations and costs (was product cost above/below budget?) to determine \"Inventory\" balance on balance sheet & \"Cost of Goods Sold\" amount on income statement 5. Cost per unit. To calculate cost per unit, the total of all product costs is divided by the total number of products made. Cost per unit times number of units sold = Cost of Good Sold. Cost per unit times number of units not sold = Ending Inventory (in dollars). Exercise 5 Walton Co. was started on January 1, 2011, when it acquired $85,000 cash by issuing stock. Walton immediately purchased office furniture and manufacturing equipment costing $10,000 and $54,000 respectively. The office furniture had a five-year useful life and a zero salvage value. The manufacturing equipment had a $4,000 salvage value and an expected useful life of five years. The company paid $11,000 for salaries of administrative personnel and $16,000 for wages to production personnel. Finally, the company paid $16,000 for raw materials that were used to make inventory. All inventory was started and completed during the year. Walton completed production on 7,000 units of product and sold 6,000 units at a price of $15 each in 2011. (Assume all cash transactions.) Event 1. 2a. 2b. 3a. 3b. 4. 5. 6. 7a. 7b. Total Assets Cash + 85,000 (10,000) (54,000) Invent. 10,000 (11,000) (16,000) (16,000) 90,000 68,000 16,000 16,000 (36,000) 6,000 + = Equity Manuf. Common + Equip*. = Stock + Ret. Ear. = (85,000) 10,000 = 54,000 = (2000) = (10,000) = = (11,000) = = = = 8,000 44,000 = 85,000 41,000 Office Furn.* See also 'continued from above', middle of the following page. Exercise 6 (Use form on following page). Spears Manufacturing Company was started on January 1, 2011, when it acquired $200,000 cash by issuing stock. Spears immediately purchased office furniture and manufacturing equipment costing $20,000 and $38,000, respectively. The office furniture had a four-year useful life and a zero salvage value. The manufacturing equipment had a $2,000 salvage value and an expected useful life of six years. The company paid $14,000 for salaries of administrative personnel and $18,000 for wages of production personnel. Finally, the company paid $24,000 for raw materials that were used to make inventory. All inventory was started and completed during the year. Spears completed production on 8,000 units of product and sold 6,000 units at a price of $14 each in 2011. (Assume all cash transactions.) 6 7 Event No. 1. 2a. 2b. 3a. 3b. 4. 5. 6. 7a. 7b. Total Assets Cash + 200,000 (20,000) (38,000) (14000) (18000) (24000) 84000 Invent. (18000) (24000) ? + = Equity Manuf. Common + Equip*. = Stock + Ret. Ear. = 200,000 20,000 = 38,000 = (9500) = (6000) = = (14000) = = = = Office Furn.* ? *In the horizontal analyses above, record accumulated depreciation as negative amounts under these columns. Continued from above. A. Total product cost. B. Average cost per unit of inventory produced in 2011. C. Amount of cost of goods sold that would appear on the 2011 income statement. D. Amount of ending inventory balance that would appear on the 12/31/2011 balance sheet. E. Amount of net income that would appear on the 2011 income statement. F. Retained earnings that would appear on the 12/31/2011 balance sheet. G. Total assets that would appear on the 12/31/2011 balance sheet. Exercise 5 Exercise 6 Exercise 7 In reviewing Oden Company's September accounting records, the chief accountant noted the following depreciation costs: Factory buildings $30,000 Computers used in manufacturing $4,800 A building used to display finished products $9,600 Trucks used to deliver merchandise to customers $16,800 Forklifts used in the factory $26,400 Furniture used in the president's office $10,800 Elevators in administrative buildings $7,200 Factory machinery $10,800 a. What amount of depreciation cost would be classified as a period cost (and expense)? b. Assume 3,000 units of product were manufactured and 2,000 of those were sold during the month of September. What amount of depreciation cost would be included in cost of goods sold? 8 V. More on Direct and Indirect Costs (Direct costs = material and labor; indirect costs = overhead). Direct product costs are material and labor costs that can be conveniently and easily traced to a product. Indirect product costs are all other product costs and are classified as overhead. A cost would be considered indirect for one of two reasons: either it is impractical or it is impossible to trace the cost to the cost object. For example, it is impossible to trace the factory managers' salary in a multi-product plant to any particular product made in the plant. Even if a product were dropped entirely, we would ordinarily expect the factory manager's salary to remain the same. On the other hand, other costs are treated as indirect costs because it would not be practical to treat them otherwise. For example, it might be possible to measure the precise amount of solder used on each circuit board produced at an HP plant, but it wouldn't be worth the effort. Instead, solder would typically be considered indirect materials and would be included in overhead Indirect labor is a product cost that is part of manufacturing overhead. These are salaries and wages of people working in the plant, but not \"hands-on\" the product. Includes, e.g., janitors, engineers, and plant manager. Indirect material is also a product cost that is part of manufacturing overhead. This is material that goes into the product but the cost is difficult to trace to each item. Example: thread in making clothes is difficult to trace due to waste (large balls of thread can wad up and have to be thrown away. That cost has to be allocated to the product as well as the thread used in the product. Or it may be difficult to trace due to a small cost, like one screw or one squirt of glue. In these cases the total cost of the material has to be allocated to the product (take the total cost divide by number of products made, for example) rather than directly assigned to each product. Note that supplies like oil for the machinery or cleaning supplies are not indirect materials because they are not in the product. They are an overhead cost called Factory Supplies. ALL product costs that are not Direct Labor or Direct Materials are considered overhead. VI. Variable vs. Fixed expenses. A fixed cost does not change with changes in the volume of activity (within a range of activity known as an activity's relevant range). For example, rent does not change whether the plant produces 10,000 or 12,000 units that month. A variable cost changes in proportion to changes in the volume of activity. For example, direct materials to make 12,000 units would be proportionately more than to make 10,000 units of product. Exercise 8 Classify the following product costs as V or F and D or I with respect to units produced. Cost Item Cost Behavior To Units of Product Variable Fixed Direct Indirect 1. Paper used in textbook production 2. Production superintendent's salary 3. Wages of laborers assembling a product 4. Electricity for operation of machines 5. Factory janitorial salaries 6. Clay used in brick production 7. Rent on a factory building 8. Wood used in ski production 9. Screws used in furniture production 10. A product supervisor's salary 11. Cloth used in suit production 12. Lubricants used in manufacturing 9 machinery Exercise 9 1. Product Cost Cost by Behavior (w.r.t. units produced) Variable Fixed 1. Taxes on factory................................................................. 2. Factory machinery depreciation...................................... 3. Coolants for machinery.................................................... 4. Wages of assembly workers.............................................. 5. Lace to hold the leather together..................................... 6. Leather cover for soccer balls........................................... 7. Annual flat fee paid for office security............................ Cost by Traceability Direct Indirect Exercise 10 Part 1 Classify each cost and its amount as (a) either fixed or variable and (b) either product or period. Costs Plastic for casing$12,000........................................ Wages of assembly workers$60,000...................... Property taxes on factory$4,500............................ Cost by Behavior (w.r.t. units produced) Variable Fixed Cost by Function Product Period Accounting staff salaries$45,000........................... Drum stands (1,000 stands outsourced)$25,000................................... Rent cost of equipment for sales staff$7,000.................................................... Upper management salaries$100,000.................................................... Annual flat fee paid for factory machine maintenance service$9,000.................................... Sales commissions$10 per unit.............................. Machinery depreciation$10,000............................ Part 2 Compute the manufacturing cost per drum set assuming they produced 1,000 drums sets and sold 800 of them. 10 VII. Schedule of Cost of Goods Manufactured and Income Statement Review: Three product costs are Direct Materials, Direct Labor, and Manufacturing Overhead. Product costs are recorded in the ASSET called inventory. They show up in Cost of Goods Sold expense when sold. Period costs are all other costs incurred, such as salesperson's commissions, advertising, legal fees, salaries of people working in non-production areas, such as accounting, personnel, and marketing. Period (selling and administrative) costs are EXPENSES, not assets. Now more detail: there are THREE inventory accounts used in a manufacturing firm: Raw Materials Inventory, Work-in-Process Inventory, and Finished Goods Inventory. *********************************************************************** What you have in inventory + what you bought or made - what you used or sold = what's left *********************************************************************** SCHEDULE OF COST OF GOODS MANUFACTURED: Raw Material Inventory Beginning raw mat inv + raw mat purchases - raw mat transferred to WIP = Ending raw mat inventory Work in Process Inventory Finished Goods Inventory Beginning WIP inv Beginning fin goods inv + Direct materials (RawMat) + Cost of gds manufactured + Direct labor = Cost of goods available for + Manufacturing overhead sale - Cost of gds manufactured - Cost of goods sold = Ending WIP inventory = Ending fin goods inventory INCOME STATEMENT: Sales - Cost of Goods Sold (note: these are PRODUCT costs) = Gross Margin - Operating and other expenses (note: these are PERIOD, or selling & administration, costs) = Net income Exercise 11 Compute cost of goods sold for year 2011 using the following information: Finished goods inventory, 12/31/2010 Goods in process inventory, 12/31/2010 Goods in process inventory, 12/31/2011 Cost of goods manufactured, year 2011 Finished goods inventory, 12/31/2011 $321,500 74,550 81,200 972,345 297,200 Exercise 12 Compute Cost of Goods Manufactured for 2011. Direct materials Direct labor Factory overhead costs Goods in process, 12/31/2010 Goods in process, 12/31/2011 $192,500 65,150 26,000 159,600 144,750 11 Chapter 5 - Systems Design: Job-Order Costing I. Overhead Applied vs. Actual Overhead Overhead \"applied\" is based on the overhead rate. E.g., say you expected to produce 1,000 units and expected total overhead to be $50,000 next year. This is just an estimate used to get the predetermined overhead rate. What is this rate, that is, what amount of overhead would be \"applied\" to each unit produced? ____________. If 1,200 units were produced, what would total overhead \"applied\" be? ______________. If actual overhead costs were $55,000, is overhead OVER or UNDER applied? _______________. By how much? ________________. II. Exercise 1 - Manufacturing Cost Flow (using horizontal analysis) NOTE: There is another problem just like this one on Blackboard in the \"Practice Problems\" folder; file name TRANSACTION ANALYSIS PROBLEM 2. Solution is available on Blackboard as well. 2011 1. Start manufacturing company by issuing common stock for $2,000 2. Purchased $1,000 of direct raw materials 3. Used $800 of direct raw materials to produce inventory. 4. Paid $400 of direct labor wages to employees to make inventory. 5. Applied $250 of manufacturing overhead cost to Work in Process Inventory. 6. Finished work ion inventory that cost $900. 7. Sold goods that cost $600 for $1,100. 8. Paid $370 for period expenses. 9. Actual manufacturing overhead amounted to $228 for the year. 10. Close overhead. 2011 Beg. Bal: Cash Overhead Raw Mat. WIP Fin.Goods 0 0 0 0 0 = C. Stock R/E 0 0 1 2 3 4 5 6 7a 7b 8 9. 10. Total 12 Year 2012 1. Acquired additional $400 of cash from issuance of common stock. 2. Purchased $1,200 of direct raw materials. 3. Used $1,300 of direct raw materials to produce inventory. 4. Paid $600 of direct labor wages to employees to make inventory. 5. Applied $320 of manufacturing overhead to Work in Process Inventory. 6. Finished work on inventory that cost $1,800 7. Sold goods that cost $1,600 for $2,800 8. Paid $500 for period expenses. 9. Actual manufacturing overhead costs amounted to $330 for the year. 10. Close overhead. 2012 Cash Overhead Raw Mat. WIP Fin.Goods = C. Stock R/E Beg. Bal: 1 2 3 4 5 6 7a 7b 8 9 10 Total 13 Year 2013 1. Paid a cash dividend of $500. 2. Purchased $1,400 of direct raw materials 3. Used $1,200 of direct raw materials to produce inventory. 4. Paid $440 of direct labor wages to employees to make inventory. 5. Applied $290 of manufacturing overhead to Work in Process Inventory. 6. Finished work on inventory that cost $2,000. 7. Sold goods that cost $2,200 for $3,500. 8. Paid $710 for period expenses. 9. Actual manufacturing overhead costs were $280 for the year. 10. Close overhead. 2013 Cash Overhead Raw Mat. WIP Fin.Goods = C. Stock R/E Beg. Bal: 1 2 3 4 5 6 7a 7b 8 9a 9b Total 14 Practice on COST OF GOODS MANUFACTURED (first three columns) & INCOME STATEMENT (4 th column) 2011 Materials Beg. inv $ 0 +Purchases ________ =subtotal -Mat. transferred ( ) =End. inv. 2012 Materials Beg. inv $ +Purchases ________ =subtotal -Mat. transferred ( ) =End. inv. 2013 Materials Beg. inv $ +Purchases ________ =subtotal -Mat. transferred ( ) =End. inv. WIP $ 0 Beg. inv +Mat. tans +Dir labor + Mfg OH (applied) =subtotal -Cost of gds. mfd. =End. inv. WIP Beg. inv $ +Mat. tans +Dir labor + Mfg OH (applied) =subtotal -Cost of gds. mfd. =End. inv. WIP Beg. inv $ +Mat. tans +Dir labor + Mfg OH (applied) =subtotal -Cost of gds. mfd. =End. inv. Beg. inv. + Cost of goods manufactured = Cost of goods avail. for sale - Cost of gds sold =End. inv. Fin. Goods $ 0 Inc. Stmt. $ Sales - Cost of Goods Sold +/- OH/CGS adj. =Gross Margin -Operating Exp = Net Income . . . Fin. Goods Beg. inv. $ + Cost of goods manufactured = Cost of goods avail. for sale - Cost of gds sold =End. inv. Inc. Stmt. Sales $ - Cost of Goods Sold +/- OH/CGS adj. . =Gross Margin -Operating Exp . = Net Income . Fin. Goods Beg. inv. $ + Cost of goods manufactured = Cost of goods avail. for sale - Cost of gds sold =End. inv. Inc. Stmt. Sales $ - Cost of Goods Sold +/- OH/CGS adj. . =Gross Margin -Operating Exp . = Net Income . III. Overhead Allocation Traditionally, firms allocate overhead based on (1) number of units made, (2) machine hours, (3) direct labor hours or (4) direct labor rate. A company may use \"machine hours\" for all of its products. Or it may choose to use \"machine hours\" for its products that are machine-intensive to make and \"direct labor hours\" for the products that require more hands-on work by the employees. The idea is to find what actually causes overhead to be incurred and use that as a basis. Example: A company uses Number of Units Made as the basis for allocating overhead. It predicts $50,000 in overhead costs for the following year and 5,000 units. What is the Predetermined Overhead Rate? If the company actually made 5,200 units, how much overhead would be allocated to WIP? Answer: $50,000/5,000 units = $10/unit is the Predetermined Overhead Rate $10/unit * 5,200 = $52,000 Overhead would be applied to WIP (this would increase inventory) Exercise 2 a. Lightning, Inc. uses direct labor hours as a basis for allocating overhead. Next year's estimated total overhead is $180,000 and direct labor hours are predicted to be 30,000 hours. The average labor cost is $10 per hour. What is the predetermined overhead rate? b. Repeat a, using direct labor cost as a basis. c. Thesius Group allocated overhead based on machine hours. Predicted machine hours for the following year are 65,000 and overhead costs are expected to be $1,450,000. What is the predetermined overhead rate? They expect to run the machines for 12,000 hours in January. They actually ran them 14,000 hours. How much overhead would be applied in the month of January? d. Ranger Co uses direct labor cost as a basis for allocating overhead. Predicted for the following year are: overhead $2,000,000; machine hours 100,000; direct labor hours 50,000 and direct labor cost $500,000. What is the predetermined overhead rate? How much overhead would be applied if the actual direct labor cost is $480,000? What is the entry when overhead is applied? Say actual overhead costs were $2,010,000. What is the entry to record actual overhead? Is overhead over or under applied in this case? Exercise 3 O'Brien Hats Corporation manufactures three different models of hats: Vogue, Beauty, and Deluxe. O'Brien expects to incur $576,000 of overhead cost during the next fiscal year. Other budget information follows. Vogue Beauty Deluxe Total Direct labor hours 2,400 4,200 5,400 12,000 Machine hours 1,200 1,400 1,400 4,000 a. Use direct labor hours as the cost driver (the basis) to compute the allocation rate and the budgeted overhead cost for each product. b. Use machine hours as the cost driver to compute the allocation rate and the budgeted overhead cost for each product. c. Describe a set of circumstances where it would be more appropriate to use direct labor hours as the allocation base. d. Describe a set of circumstances where it would be more appropriate to use machine hours as the allocation base. 16 Exercise 4 Bryson Construction Company expects to build three new homes during a specific accounting period. The estimated direct materials and labor costs are as follows. Expected Costs Direct labor Direct materials Home 1 $60,000 $182,000 Home 2 $89,000 $247,000 Home 3 $196,000 $380,000 Assume Bryson need to allocate two major overhead costs ($41,400 of employee fringe benefits and $40,450 of indirect materials costs) among the three jobs. Choose an appropriate cost driver for each of the overhead costs and determine the total cost of each house. Exercise 5 Walker Company makes three products in its factory: plastic cups, plastic tablecloths, and plastic bottles. The expected overhead costs for the next fiscal year include the following. Factory manager's salary Factory utility cost Factory supplies Total overhead costs $130,000 60,500 28,000 $218,500 Walker uses machine hours as the cost driver to allocate overhead costs. Budgeted machine hours for the products are as follows: Cups Tablecloths Bottles Total machine hours 420 hours 740 hours 1,140 hours 2,300 hours a. Allocate the budged overhead costs to the products. b. Provide a possible explanation as to why walker chose machines hours, instead of labor hours, as the allocation base. IV. Job Order Product Costing System The previous schedules show the flow of materials and costs through a manufacturing system. So how are the costs assigned to actual units manufactured? There are two methods of \"costing products\