Chapter 12, Problem 4E

Exercise 4-4A    Pooling overhead cost

Ware Manufacturing Company produced 2,000 units of inventory in January 2018. It expects to produce an additional 14,000 units during the remaining 11 months of the year. In other words, total production for 2018 is estimated to be 16,000 units. Direct materials and direct labor costs are $64 and $52 per unit, respectively. Ware expects to incur the following manufacturing overhead costs during the 2018 accounting period:

Production supplies	$ 20,000
Supervisor salary	160,000
Depreciation on equipment	75,000
Utilities	20,000
Rental fee on manufacturing facilities	45,000

Required

a.    Combine the individual overhead costs into a cost pool and calculate a predetermined overhead rate assuming the cost driver is number of units.

b.    Determine the cost of the 2,000 units of product made in January.

c.    Is the cost computed in Requirement b actual or estimated? Could Ware improve accuracy by waiting until December to determine the cost of products? Identify two reasons that a manager would want to know the cost of products in January. Discuss the relationship between accuracy and relevance as it pertains to this problem.