MegaTech ("MT") designs and manufactures electronic components for use in sophisticated equipment. These components have applications in the manufacture of weapons. There are two manufacturing departments, X and Y, in the company. Department X carries out product design and preparation of materials for the components. Department Y assembles and finishes the production with highly automated machinery and equipment. Direct labour consists of designers in Department X and skilled testers in Department Y. During the year 2014, direct labour cost is $80 per hour. The company uses job-order costing and costs its products with normal costs. Factory overhead costs (FOH) are charged to the jobs with plant-wide application rate based on direct labour hours (DLH). Factory overheads under or over applied are closed to cost of goods sold at the end of each quarter.

MT bids for commercial jobs in through open tenders. In addition, MT takes on special assignment jobs from the Ministry of Defence. The company bills its customers only when jobs are completed and delivered. For Ministry of Defence jobs, the government allows MT to bill at total product costs for the jobs plus a 15% mark-up.

Appended below are cost data for the three jobs that MT worked on during the 1st quarter of 2014.

Cost of beginning inventory as at 1 January 2014:

Job E101

direct materical $1400

Direct labour $3200

Factory overhead $4000

Total $8600

Cost incurred during the 1st quarter of 2014:

Job E101

direct material: $6600

Direct labour: $36,000

Job E102

direct material: $8300

Direct labour: $112,000

Job E103

direct material: $1300

Direct labour: $4,000

Estimated data for the year 2014 are as follows:

Department X

Estimated factory overhead : $2,000,000

Estimated Direct Labour Hours :40,000

Department Y

Estimated factory overhead : $3,500,000

Estimated Direct Labour Hours :10,000

Job E102 was awarded by the Ministry of Defence for the design and manufacture of a special chip for a new gun. Jobs E101 and E103 are successful tenders with bid prices of $99,900 and $129,000 respectively. As at end of the 1st quarter of 2014, Jobs E101 and E102 were completed but only Job E101 was delivered and billed. Job E103 is only expected to be completed in the 2nd quarter. There was no direct materials inventory as at 1st Jan and 31st March 2014. Actual factory overhead costs incurred for the quarter amounted to $218,600.

MT managers are paid basic salary plus performance bonus linked to the profit of the company. At the quarterly meeting held in early April 2014, the general manager of the company proposed to use machine hours (MH) instead of direct labour hours for plant-wide factory overhead application. He tabled some data on machine hours provided by engineers for discussion, as follows:

Estimated machine hours for the year 2014:

Department X: 5000

Department Y:50,000

Actual machine time used during the 1st quarter of 2014:

Job E101 : 490

Job E102: 2,900

Job E103: 50

Questions:

(a) Compute the costs of work-in-process and finished goods as at 31st March 2014.

(b) compute the gross profit for the 1st quarter of 2014.

(c) What are the necessary journal entries to record the following transactions. Journal narrations are not required.

1. The incurrence of direct material and factory overhead costs for the 1st quarter of 2014.
2. The flow of direct materials, direct labour and factory overhead costs to work-in- process, finished goods and cost of goods sold during the 1st quarter of 2014.
3. The delivery of job(s) completed in the 1st quarter of 2014.
4. The closing of under or over applied factory overhead as at end of 1st quarter, 2014.

(d) What could be likely reasons why the general manager proposed a change in the application of factory overhead? Explain with supporting figures, if applicable.

(e) Do you agree with the general manager's proposal to use machine hours for plant-wide factory overhead application? Explain why or why not.

(f) Based on the information provided, suggest method(s) for overhead application which you believe is (are) better than the existing methods used or proposed. Explain.