Question 1

Basic Concepts of Measuring and Assigning Costs

Job-order production is characterized by firms that producecustomized or built-to-order products . For job-order production systems, costs are accumulated by job. This approach to assigning costs is called a job-order costing system. In a job-order cost system, unit costs are calculated byTotal Job Costs/Output . Unit costs are very important because managers need accurate cost information when making decisions.

Actual costing and normal costing are two possible ways of measuring and assigning costs associated with production. Actual costing assigns the actual costs of direct materials, direct labor and overhead to production. Normal costing assigns the actual costs of direct materials and direct labor to production but uses a predetermined overhead rate to assign overhead costs.

Reasons that actual cost systems are not commonly used include: Check all that apply.

___ overhead costs typically are incurred non-uniformly throughout the year.

___ production levels are often non-uniform throughout the year.

___ they cannot provide accurate unit cost information on a timely basis.

Normal costing systems are widely used and require that overhead costs be assigned using a predetermined rate. A predetermined overhead rate is calculated at the beginning of the year by dividing the total estimated annual overhead by the total estimated level of production activity, as measured by a unit-level driver:

Predetermined Overhead Rate = Estimated Annual Overhead/Estimated Annual Activity Level

For example, if the estimated overhead is $100,000 and the estimated annual activity is 10,000 direct labor hours, then

Predetermined Overhead Rate = $_________ per direct labor hour.

Once a predetermined rate is calculated, it is used to apply (assign) overhead to production. Applied overhead is found by multiplying the predetermined overhead rate by the actual activity for the period:

Applied Overhead = Predetermined Overhead Rate x Actual Activity Level

Suppose that a company has a predetermined rate of $5 per direct labor hour. During the first week in January, the company used 1,000 direct labor hours. The overhead assigned to the weeks production using the predetermined overhead rate:

Applied Overhead = $___________

Applied overhead is the amount of overhead assigned to production as production unfolds. At the end of the year, any difference between the actual overhead cost incurred and the applied overhead must be reconciled. First, the difference between the actual overhead and the applied overhead is called an overhead variance:

Overhead Variance = Actual Overhead Applied Overhead

If the actual overhead is greater than the applied overhead, then the variance is called underapplied overhead and means that the product cost has been . If the actual overhead is less than the applied overhead, then the variance is called overapplied overhead and means that the product cost has been .

Overhead variances are virtually inevitable because it is impossible to perfectly estimate future overhead costs and production activity. However, at year-end, costs reported on the financial statements must be actual amounts. Thus, something must be done with the overhead variance. Usually the overhead variance is simply assigned to Cost of Goods Sold because the variance is typically relatively small and not material. Underapplied overhead is Cost of Goods Sold while overapplied overhead is Cost of Goods Sold. Thus, we have the following:

Adjusted Cost of Goods Sold = Unadjusted Cost of Goods Sold Overhead Variance

Therefore, if overhead is underapplied by $1,000 and unadjusted cost of goods sold is $20,000, then adjusted cost of goods sold is .

Departmental Overhead Rates

Overhead has thus far been applied using a plantwide overhead rate. A plantwide rate is a single rate calculated using all estimate overhead for a plant divided by the estimated activity level for the entire plant. However, some believe that multiple overhead rates give more accurate cost assignments. Departmental overhead rates are a widely used type of multiple rate. The plantwide overhead pool is divided into overhead cost pools for each department. Thus, the sum of the overhead costs assigned to each department the total plantwide overhead. A departmental rate is calculated as follows:

Departmental Overhead Rate = Estimated Department Overhead/Estimated Departmental Activity Level

For example, if the Machining Department has estimated overhead of $100,000 and expects to use 25,000 machine hours, then the Machining Department Overhead Rate is $ per machine hour. Overhead is assigned to production by multiplying each departmental rate by the amount of the activity used for production in each department and then summing the amounts assigned in each department to obtain the total overhead assigned. The total amount of overhead applied by all departments for the year is then subtracted from the total actual overhead to obtain the overhead variance for the year.

Question 2

Basic Concepts of Measuring and Assigning Costs

Thane is a company that manufactures metal shelving units. At the beginning of the year, Thane Company estimated the following costs:

Budgeted (Estimated) Overhead: $540,000

Direct labor hours: 18,000 (expected actual capacity)

Thane had the following actual data at the end of the year:

Overhead $590,000

Direct labor hours: 20,000

Cost of goods sold (before adjusting for overhead variance) $980,000

Overhead is applied using direct labor hours using a predetermined rate.

Calculate the following (round to nearest whole dollar):

Predetermined overhead rate: $ per direct labor hour.

Overhead applied during year: $

Overhead variance for the year: $

Adjusted Cost of Goods Sold: $

Departmental Overhead Rates

At the beginning of the year, Thane Company estimated the following:

	Machining Department	Assembly Department	Total
Overhead	$360,000	$180,000	$540,000
Direct labor hours	6,000	12,000	18,000
Machine hours	20,000	5,000	25,000

Thane uses departmental overhead rates to assign overhead to production. In the machining department, overhead is assigned using machine hours. In the assembly department, overhead is assigned using direct labor hours. Actual data for the year are given below:

	Machining Department	Assembly Department	Total
Overhead	$400,000	$190,000	$590,000
Direct labor hours	6,000	14,000	20,000
Machine hours	22,000	6,000	28,000

Calculate the following (round to nearest whole dollar):

Machining Department Overhead Rate: $ per

Assembly Department Overhead Rate: $ per

Overhead applied in Machining for the year: $

Overhead applied in Assembly for the year: $

Overhead variance for:

Machining Department: $

Assembly Department: $

Question 3

Xania Inc. uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Xanias plant manager has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Xania has the following data for its two departments for the coming year:

	Department A		Department B
Overhead costs (expected)	$80,000		$70,000
Normal activity (machine hours)	10,000		4,800

Required:

1. Compute a predetermined overhead rate for the plant as a whole based on machine hours. Round your answer to two decimal places. $10.14 per machine hour

2. Compute predetermined overhead rates for each department using machine hours. (Note: Round to three decimal places, if necessary.)

Department A	8$ per machine hour
Department B	14.583$ per machine hour

3. Conceptual Connection: Job 73 used 20 machine hours from Department A and 50 machine hours from Department B. Job 74 used 50 machine hours from Department A and 20 machine hours from Department B. Compute the overhead cost assigned to each job using the plantwide rate computed in Requirement 1. Repeat the computation using the departmental rates found in Requirement 2. Round final answers to the nearest cent, if necessary.

	Job 73	Job 74
Plantwide	$	$
Departmental	$	$

Which of the two approaches gives the fairer assignment? Departmental rates

4. Conceptual Connection: Repeat Requirement 3, assuming the expected overhead cost for Department B is $95,000 (not $70,000). Round overhead rates to the nearest cent.

	Job 73	Job 74
Plantwide	$	$
Departmental	$	$

For this company, would you recommend departmental rates over a plantwide rate? Yes