FINANCE

EXERCISE 4–1 Compute the Predetermined Overhead Rate [LO4–1]

Logan Products computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 40,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $466,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $3.00 per direct labor-hour. Logan’s actual manufacturing overhead for the year was $713,400 and its actual total direct labor was 41,000 hours.

Required:

Compute the company’s predetermined overhead rate for the year.

EXERCISE 4–4 Determine Underapplied or Overapplied Overhead [LO4–4]

Kirkaid Company recorded the following transactions for the just completed month:

a. $84,000 in raw materials were requisitioned for use in production. Of this amount, $72,000 was for direct materials and the remainder was for indirect materials.

b. Total labor wages of $108,000 were incurred. Of this amount, $105,000 was for direct labor and the remainder was for indirect labor.

c. Additional actual manufacturing overhead costs of $197,000 were incurred.

d. A total of $218,000 in manufacturing overhead was applied to jobs.

Required:

Determine the underapplied or overapplied overhead for the month.

EXERCISE 4–7 Predetermined Overhead Rate; Applying Overhead; Underapplied or Overapplied Overhead [LO4–1, LO4–2, LO4–4]

Medusa Products uses a job-order costing system. Overhead costs are applied to jobs on the basis of machine-hours. At the beginning of the year, management estimated that the company would work 85,000 machine-hours and incur $170,000 in manufacturing overhead costs for the year.

Required:

1. Compute the company’s predetermined overhead rate.

2. Assume that during the year the company actually worked only 80,000 machine-hours and incurred $168,000 of manufacturing overhead costs. Compute the amount of underapplied or overapplied overhead for the year.

3. Explain why the manufacturing overhead was underapplied or overapplied for the year.

EXERCISE 4–11 Underapplied and Overapplied Overhead [LO4–4]

Cretin Enterprises uses a predetermined overhead rate of $21.40 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $171,200 of total manufacturing overhead for an estimated activity level of 8,000 direct labor-hours.

The company incurred actual total manufacturing overhead costs of $172,500 and 8,250 total direct labor-hours during the period.

Required:

1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.

2. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to cost of goods sold, what would be the effect of the underapplied or overapplied overhead on the company’s gross margin for the period?

EXERCISE 4–12 Applying Overhead; Cost of Goods Manufactured [LO4–2, LO4–4, LO4–6]

The following cost data relate to the manufacturing activities of Black Company during the just completed year:

Manufacturing overhead costs incurred:
Property taxes, factory. . . . . . . . . . . . . . . . . . . . . . . $ 3,000
Utilities, factory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Indirect labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Depreciation, factory. . . . . . . . . . . . . . . . . . . . . . . . 24,000
Insurance, factory. . . . . . . . . . . . . . . . . . . . . . . . . . .  6,000
Total actual manufacturing overhead costs. . . . . . $48,000
Other costs incurred:
Purchases of raw materials. . . . . . . . . . . . . . . . . . . $32,000
Direct labor cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000
Inventories:
Raw materials, beginning. . . . . . . . . . . . . . . . . . . . $ 8,000
Raw materials, ending. . . . . . . . . . . . . . . . . . . . . . . $ 7,000
Work in process, beginning. . . . . . . . . . . . . . . . . . . $ 6,000
Work in process, ending. . . . . . . . . . . . . . . . . . . . . . $ 7,500

The company uses a predetermined overhead rate to apply overhead cost to jobs. The rate for the year was $5 per machine-hour; a total of 10,000 machine-hours was recorded for the year. All raw materials ultimately become direct materials—none are classified as indirect materials.

Required:

1. Compute the amount of underapplied or overapplied overhead cost for the year.

2. Prepare a schedule of cost of goods manufactured for the year using the indirect method.

EXERCISE 4–13 Varying Predetermined Overhead Rates [LO4–1, LO4–2, LO4–3]

Javadi Company makes a single product that is subject to wide seasonal variations in demand. The company uses a job-order costing system and computes predetermined overhead rates on a quarterly basis using the number of units to be produced as the allocation base. Its estimated costs, by quarter, for the coming year are given below:

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Management finds the variation in quarterly unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of total manufacturing cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product.

Required:

1. Using the high-low method, estimate the fixed manufacturing overhead cost per quarter and the variable manufacturing overhead cost per unit. Create a cost formula to estimate the total manufacturing overhead cost for the fourth quarter. Compute the total manufacturing cost and unit product cost for the fourth quarter.

2. What is causing the estimated unit product cost to fluctuate from one quarter to the next?

3. How would you recommend stabilizing the company’s unit product cost? Support your answer with computations that adapt the cost formula you created in requirement 1.

EXERCISE 4–14 Apply Overhead to a Job [LO4–2]

Winston Company applies overhead cost to jobs on the basis of direct labor cost. Job X, which was started and completed during the current period, shows charges of $18,000 for direct materials, $10,000 for direct labor, and $15,000 for overhead on its job cost sheet. Job Q, which is still in process at year-end, shows charges of $20,000 for direct materials, and $8,000 for direct labor.

Required:

Should any overhead cost be added to Job Q at year-end? If so, how much? Explain.

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