Chapter 12, Problem 1ATC

a.

To determine

Calculate pre-determined overhead rate assuming Shop B used direct labor hours as cost driver.

Explanation of Solution

Predetermined Overhead Rate: Predetermined overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. This is generally evaluated at the beginning of each reporting period. The evaluation takes into account the estimated manufacturing overhead cost and the estimated allocation base that includes direct labor hours, direct labor in dollars, machine hours and direct materials. The pre-determined overhead rate is calculated as follows:

$\text{Pre-determined overhead rate=}\frac{\text{Total estimated overhead costs}}{\text{Total estimated direct labor hours}}$

Calculate Pre-determined overhead rate:

Particulars	Amount
Rent on factory space	$25,000
Indirect materials	$12,000
Maintenance costs for factory equipment	$4,000
Utilities costs for factory space	$3,000
Depreciation on factory equipment	$10,000
Total estimated overhead cost (A)	$54,000
Estimated direct labor hours (B)	6,500 hours
Pre-determined overhead rate (C) $\left(\text{A}\right)÷\left(\text{B}\right)$	$8.31 per labor hour

Table (1)

Conclusion

Hence, the pre-determined overhead rate is $8.31 per labor hour.

Requirements b., c., and d.

To determine

Determine the ending balance in (b) raw materials inventory, (c) finished goods inventory, (d) work-in process inventory.

Explanation of Solution

(b)

Raw materials inventory: Raw material inventory are the primary materials which are used in the production process to get the finished product.

The ending balance of raw materials inventory is $4,500 (Refer Table (2).

(c)

Finished goods inventory: Finished goods inventory are the goods that are ready for sale after completing the production process.

The ending balance of raw materials inventory is $67,245(Refer Table (2).

(d)

Work-in-process inventory: Work-in-process inventory is the middle part of raw materials and finished goods. This inventory is the portion of the manufactured inventory for which the process has been started but not yet completed.

The ending balance of raw materials inventory is $43,235(Refer Table (2).

Working Note:

Compute the balance of raw material inventory:

Table (2)

Note for 8:

Prepare summary job cost sheet.

Summary job cost sheet
Job Number	Direct Materials	Direct Labor	Manufacturing Overhead			Total costs
			Rate	Hours	Cost
421	$33,900	$31,400	$13.50	720	$9,720	$75,020
422	$27,800	$33,100	$13.50	850	$11,475	$72,375
423	$32,800	$39,300	$13.50	900	$12,150	$84,250
424	$31,800	$23,700	$13.50	870	$11,745	$67,245
425	$22,500	$15,200	$13.50	410	$5,535	$43,235
Totals	$148,800	$142,700		3,750	$50,625	$342,125

Table (3)

Thus, the cost of manufacturing overhead is $50,625.

Note for 9:

Determine the cost of goods manufactured.

$\begin{array}{c}\begin{array}{l}\text{Cost of goods }\\ \text{manufactured}\end{array}\}=\left(\begin{array}{l}\text{Total costs }\\ \text{for Job 421}\end{array}\right)+\left(\begin{array}{l}\text{Total costs }\\ \text{for Job 422}\end{array}\right)+\left(\begin{array}{l}\text{Total costs }\\ \text{for Job 423}\end{array}\right)+\left(\begin{array}{l}\text{Total costs }\\ \text{for Job 424}\end{array}\right)\\ =\$75,020+\$72,375+\$84,250+\$67,245\\ =\$298,890\end{array}$

Note for 10.

Cash of $287,800 is the sum of sales price of Jobs 421, 422 and 423 and the cost of finished goods sold is $231,645 which is the sum total of costs of Jobs 421, 422 and 423.

Note for 11.

The total of manufacturing overhead is $49,800 (Refer table (2)). The balance of Manufacturing Overhead before over-applied overhead is $\left[\$49,800-\$50,625\left(\text{Refer Note}\left(\text{8}\right)\right)\right]$ ($825).

e.

To determine

Determine the cost of goods manufactured.

Explanation of Solution

Cost of goods manufactured: The cost of goods manufactured is the total costs incurred for the manufacturing of a product which is transferred from work-in process inventory account to the finished goods inventory account.

The Cost of goods manufactured is $298,890 (Refer Note 9).

f.

To determine

Determine the cost of goods sold.

Explanation of Solution

Cost of goods sold: Cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.

The cost of goods sold is $231,645 (Refer Note 10).

g.

To determine

Determine the amount of gross margin that would be earned from Jobs 421, 422 and 423.

Explanation of Solution

Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.

Compute the amount of gross margin that would be earned from Jobs 421, 422 and 423:

Computation of gross margin for Shop B
Job Number	Sales Price (1)	Cost of goods sold (2)	Gross Margin $\left(1\right)-\left(2\right)$
421	$100,900	$75,020	$25,880
422	$96,100	$72,375	$23,725
423	$90,800	$84,250	$6,550

Table (4)

Note: Refer table (3) for the cost of goods sold (total cost column) for each job.

Conclusion

Thus, the gross margin earned from Jobs 421, 422 and 423 are $25,880, $23,725 and $6,550 respectively.

h.

To determine

Determine the amount of over applied or under applied of overhead that would exist at the end of the year.

Explanation of Solution

Manufacturing overhead costs: The costs, which do not relate directly with the manufacturing of products, are referred to as manufacturing overhead costs or indirect costs. Manufacturing overhead cost per unit is the cost of manufacturing overhead incurred to produce one unit of product.

Determine the amount of over applied or under applied of overhead:

Given, the total of manufacturing overhead is $49,800 (Refer table (2)) and the manufacturing overhead cost applied to work in process is $50,625 (Refer Table (3)).

$\begin{array}{c}\begin{array}{l}\text{Over application}\\ \text{ of overhead}\end{array}\}=\left(\begin{array}{l}\text{Manufacturing }\\ \text{overhead costs}\\ \text{ incurred}\end{array}\right)-\left(\begin{array}{l}\text{Manufacturing overhead }\\ \text{applied to work in process}\end{array}\right)\\ =\$49,800-\$50,625\\ =(\$825)\end{array}$

Conclusion

Thus, the over applied of overhead that would exist at the end of the year is ($825).