Chapter 10, Problem 14P

What is depreciation, and why do companies apply it to fixed assets? Discuss at least two methods of calculating depreciation and how they affect a company’s financial reporting over time.

Optical Company estimates its manufacturing overhead to be $540,000 and its direct labor costs to be $450,000 for year 2. Optical worked three jobs for the year. Job 2-1, which was sold during year 2, had actual direct labor costs of $150,000. Job 2-2, which was completed, but not sold at the end of the year, had actual direct labor costs of $275,000. Job 2-3, which is still in work-in-process inventory, had actual direct labor costs of $100,000. The actual manufacturing overhead for year 2 was $600,000. Manufacturing overhead is applied on the basis of direct labor costs. a) How much overhead was applied to each job in year 2? b) What was the over-or underapplied manufacturing overhead for year 2? Accurate answer

At the high level of activity in August, 6,000 machine hours were run and power costs were $11,000. In February, a month of low activity, 2,500 machine hours were run and power costs amounted to $6,250. Using the high-low method, what is the estimated fixed cost element of power costs? a. $3,250 b. $4,000 c. $2,840 d. $6,600