Chapter 21, Problem 5CP

a.

To determine

Calculate the overhead rate and identify the expected cost per unit produced for job no. 110.

Explanation of Solution

Job order costing: Job order costing is one of the methods of cost accounting under which cost is collected and gathered for each job, work order, or project separately. It is a system by which a factory maintains a separate record of each particular quantity of product that passes through the factory. Job order costing is used when the products produced are significantly different from each other.

Calculate the plant wide overhead rate for job no. 110 using direct labor hours:

Given:

Budgeted Plant wide overhead cost is $250,000

Budgeted department overhead for Department A is $150,000

Budgeted department overhead for Department B is $600,000

Expected direct labor hours for Department A is 35,000 hours

Expected direct labor hours for Department B is 15,000 hours

Calculate the plant wide overhead rate:

$\begin{array}{c}\text{Overhead rate}=\frac{\text{Total expected overhead}}{\text{Total expected direct labor hours}}\\ =\frac{\left(\$250,000+\$150,000+\$600,000\right)}{\left(35,000\text{ hours}+15,000\text{ hours}\right)}\\ =\frac{\$1,000,000}{50,000\text{ hours}}\\ =\$20\text{ per direct labor hour}\end{array}$

Thus, the plant wide overhead rate is $20 per direct labor hour.

Calculate the manufacturing costs for job no.110:

Particulars	Amount ($)	Amount ($)
Direct materials	$25,000
Direct labor for Department A (2,200 hours)	$45,000
Direct labor for Department B	$10,000
Manufacturing overhead $\left(3,000\text{ hours}\times \text{\$20}\right)$	$60,000
Total cost		$140,000

Table (1)

Hence, the manufacturing cost is $14 per unit$\left(\frac{\$140,000}{10,000\text{}\text{units}}\right)$.

b.

To determine

Recalculate the projected manufacturing costs for job no. 110 using three separate rates: one rate for plant wide overhead and two separate department overhead rates, using machine hours.

Explanation of Solution

Job order costing: Job order costing is one of the methods of cost accounting under which cost is collected and gathered for each job, work order, or project separately. It is a system by which a factory maintains a separate record of each particular quantity of product that passes through the factory. Job order costing is used when the products produced are significantly different from each other.

Overhead Rate: Overhead rate is a measure used to allocate the estimated overhead cost to the products or job orders during a particular period.

Compute the plant wide overhead rate.

$\begin{array}{c}\begin{array}{l}\text{Plantwide Overhead rate of }\\ \text{(Using machine hours)}\end{array}\}=\frac{\text{Budgeted Plantwide Overhead }}{\text{Expected Total Machine Hours}}\\ =\frac{\$250,000}{\left(10,000\text{ hours}+40,000\text{ hours}\right)}\\ =\frac{\$250,000}{50,000\text{ hours}}\\ =\$5\text{ per machine hour}\end{array}$

The plant wide overhead rate is $5 per machine hour.

Compute two separate department overhead rates.

Particulars	Department A	Department B
Budgeted department overhead (A)	$150,000	$600,000
Expected machine hours (B)	10,000 hours	40,000 hours
Overhead rate $\left(\text{A}\right)÷\left(\text{B}\right)$	$15 per machine hour	$15 per machine hour

Table (2)

As per Table (2), the overhead rate for both the Departments is $15 per machine hour.

Recalculate the projected manufacturing costs for Job no. 110.

Particulars	Amount ($)	Amount ($)
Direct materials	$25,000
Direct labor for Department A	$45,000
Direct labor for Department B	$10,000
Manufacturing overhead – Plant $\left(200\text{ hours}+1,200\text{ hours}\right)\times \$5\text{ per machine hour}$	$7,000
Manufacturing overhead – Plant $\left(200\text{ hours}\times \$15\text{ per machine hour}\right)$	$3,000
Manufacturing overhead – Plant $\left(1,200\text{ hours}\times \$15\text{ per machine hour}\right)$	$18,000
Total cost		$108,000

Table (3)

Hence, the total cost is $10.80 per unit$\left(\frac{\$108,000}{\text{10,000 units}}\right)$.

c.

To determine

Determine the bid for job no. 110 using (1) the overhead rate from part a, and (2) the overhead rate from part b and explain the reasons for the differences in bids. Identify the overhead allocation methods that should be recommended and explain the reasons.

Explanation of Solution

Job order costing: Job order costing is one of the methods of cost accounting under which cost is collected and gathered for each job, work order, or project separately. It is a system by which a factory maintains a separate record of each particular quantity of product that passes through the factory. Job order costing is used when the products produced are significantly different from each other.

Overhead Rate: Overhead rate is a measure used to allocate the estimated overhead cost to the products or job orders during a particular period.

Determine the bid price for Job No. 110.

Particulars	Amount
(1) Bid price using the overhead rate from part a
Total cost (Refer Table (1))	$140,000
Add: Increase in percentage by 40% of total cost	$56,000
Bid price using the plant wide overhead rate	$196,000
(2) Bid price using the overhead rate from part b
Manufacturing cost (Refer Table (3))	$108,000
Add: Increase in percentage by 40% of manufacturing cost	$43,200
Bid price using the plant wide overhead rate	$151,200

Table (4)

Thus, the bid for job no. 110 using (1) Bid price using the overhead rate from part a, and (2) Bid price using the overhead rate from part b is $196,000 and $151,200 respectively.

The bids prices vary due to differences in manufacturing overhead that are applied to the job using the two allocation methods. The two reasons for the changes in overhead are:

• Due to the difference in the time taken to complete by the labor vs. the machine hours.
• Due to the application of single vs. multiple overhead rates.

The allocation method used in Part b would be recommended because the departmental overhead is due mostly to the machine-related expenses. Using multiple-overhead rates allows allocating the expenses that closely reflects the utilization of resources.

d.

To determine

Compute the under or over applied overhead for Company G plant during the year and explain the impact on net income of assigning the under or over applied overhead to cost of goods sold rather than prorating the amount between inventories and cost of goods sold.

Explanation of Solution

Job order costing: Job order costing is one of the methods of cost accounting under which cost is collected and gathered for each job, work order, or project separately. It is a system by which a factory maintains a separate record of each particular quantity of product that passes through the factory. Job order costing is used when the products produced are significantly different from each other.

Overhead Rate: Overhead rate is a measure used to allocate the estimated overhead cost to the products or job orders during a particular period.

Determine the applied overhead using machine hours.

Particulars	Amount ($)	Amount ($)
Plant wide  $\left[\$5\times 52,500\left(10,500+42,000\right)\text{ machine hours}\right]$	$262,500
Department A  $\left(\$15\times 10,500\text{ machine hours}\right)$	$157,500
Department B  $\left(\$15\times 42,000\text{ machine hours}\right)$	$630,000
Total overhead applied		$1,050,000

Table (5)

Thus, the total overhead applied is $1,050,000. The actual overhead is $1,020,000$\left(\$240,000+\$160,000+\$620,000\right)$ . Hence, it is identified that overhead rate is Over applied by $30,000$\left(\$1,050,000-\$1,020,000\right)$. The over applied overhead rate can be corrected by reducing the cost of goods sold and it will increase the net income for the current year more than would have resulted if it was prorated between the cost of goods sold and inventories.

e.

To determine

Explain whether Company G located in Country SF should buy the $12 per unit part from the subcontractor or continue to make the parts for job no. 110 itself.

Explanation of Solution

The cost per unit computed in part b is $10.80 per unit, which is less than the contractor’s price of $12.00 per unit. Company G should continue to make parts for Job No. 110 for themselves in the committed bid price.

f.

To determine

Identify the change required in Part e if the plant located in country SF could use the facilities necessary to produce parts for job no. 110 for another job that could earn an incremental profit of $20,000

Explanation of Solution

If the parts are bought from the subcontractor, then the incremental cost would be $12,000 $\left[\left(\$12.00-\$10.80\right)\times 10,000\text{ units}\right]$ and this cost is lesser than the incremental profit earned by producing the other job. Hence, the Company G’s total profit would be increased by $8,000$\left(\$20,000-\$12,000\right)$, if the products are produced by the subcontractor for job 110 and to product the other job the company would use the idle time.

g.

To determine

Identify the additional international environmental issues, other than price that would be required to be evaluated by the management of Company G in Location SF.

Explanation of Solution

The legal/political, economic, cultural, and technological environmental categories affect international operations. In the economic category, an important problem is the exchange rate transaction risk, which would be determined by whether the contracts are denominated in U.S. dollars or Mexican pesos.

In a legal/political category, issues include NAFTA regulations and the general risk that are undertaken by carrying out business in a politically less stable environment. The impact of import duties and possibly higher shipping costs on profits should also be taken into consideration.

Finally, the skill level of the labor force in terms of producing a high-quality product should also be a considered.

h.

To determine

Identify the types of changes that would be required to make the approach successful if Company G decides to undertake a target costing approach to pricing its jobs.

Explanation of Solution

Target cost: In a competitive market, companies cannot set prices because the supply and demand factors affect the product price. The companies should therefore, control costs, in order to earn a desired profit.

To successfully implement target costing, Company G would need to adopt a more customer-oriented approach. The marketing department of Company G would need to determine the prices, the customers are willing to pay for the products of Company G. Under this approach, target returns would need to be determined so that the target costs can be calculated