Chapter 6, Problem 55P

Donovan & Parents produces soccer shorts and jerseys for youth leagues. Most of the production is done by machine. Data on operations and costs for March follow:

Management asks the firm’s cost accountant to compute product costs. The accountant first assigns overhead costs to two pools: overhead related to direct materials and overhead related to machine-hours. The analysis of overhead accounts by the cost accountant follows:

Required

1. a.      Compute the predetermined overhead rates assuming that Donovan uses machine-hours to allocate machine-related overhead costs and materials costs to allocate materials-related overhead costs.
2. b.      Compute the total costs of production and the cost per unit for each of the two products for March.

To determine

Find the predetermined overhead rates using machine-hours and materials costs for the allocation.

Answer to Problem 55P

The value of machine related predetermined overhead rate is $18.

The value of materials related predetermined overhead rate is 45% of the cost.

Explanation of Solution

Predetermined overhead rate:

The predetermined overhead rate is the rate computed for applying manufacturing overheads to the work-in-process inventory. This rate can be computed by dividing the total amount of manufacturing overheads by the base of allocation.

Analysis of overhead accounts by the cost accountant is as follows:

Account	Amount	Related to:
Utilities	$    48,000.00	Machine-hours
Supplies	$    33,600.00	Materials
Machine depreciation and maintenance	$  105,600.00	Machine-hours
Purchasing and storing materials	$    38,400.00	Materials
Miscellaneous	$    40,800.00	Machine-hours

Table (1)

Compute machine-hours related predetermined rate:

$\begin{array}{c}\text{Predetermined}\text{rate}\text{=}\frac{\text{Utilities}\text{+}\text{machine}\text{depreciation}\text{\&}\text{maintenance+}\text{miscellaneous}}{\text{Total}\text{machine-hours}}\\ =\frac{\$48,000+\$105,600+\$40,800}{10,800}\\ =\frac{\$194,400}{10,800}\\ =\$18\end{array}$

Hence, the machine-hours related predetermined rate is $18.

Compute materials cost related predetermined rate:

$\begin{array}{c}\text{Predetermined}\text{rate}\text{=}\frac{\text{Supplies}\text{+}\text{Purchasing}\text{and}\text{storing}\text{materials}}{\text{Direct}\text{materials}\text{costs}}\times 100\\ =\frac{\$33,600+\$38,400}{\$160,000}\times 100\\ =\frac{\$72,000}{\$160,000}\times 100\\ =45\%\end{array}$

Thus, the materials cost related predetermined rate is 45% of the cost.

To determine

Calculate the total costs of production and the cost per unit for the two products.

Answer to Problem 55P

The total cost of product J is $280,000 and for product S is $198,400.

Cost per unit of product J is $8.75 and for product S is $12.4.

Explanation of Solution

Compute total cost of product J:

$\begin{array}{c}\text{Total}\text{cost}\text{=}\text{Machine-hours}\text{related}\text{cost}\text{(1)}\text{+}\text{materials}\text{related}\text{cost}\text{(2)}\\ \text{+}\text{Direct}\text{materials}\text{+}\text{Direct}\text{labor}\\ \text{=}\text{\$64,000}\text{+}\text{\$19,200}\text{+}\text{\$86,400}\text{+}\text{\$28,800}\\ \text{=}\text{\$198,400}\end{array}$

Compute total cost of product S:

$\begin{array}{c}\text{Total}\text{cost}\text{=}\text{Machine-hours}\text{related}\text{cost}\text{(3)}\text{+}\text{materials}\text{related}\text{cost}\text{(4)}\\ \text{+}\text{Direct}\text{materials}\text{+}\text{Direct}\text{labor}\\ \text{=}\text{\$96,000}\text{+}\text{\$32,800}\text{+}\text{\$108,000}\text{+}\text{\$43,200}\\ \text{=}\text{\$280,000}\end{array}$

Thus, the value of total cost for the product J and product S are $198,400 and $280,000 respectively.

Compute cost per unit for product J:

$\begin{array}{c}\text{Cost}\text{per}\text{unit}\text{=}\frac{\text{Total}\text{cost}}{\text{Number}\text{of}\text{units}}\\ \text{=}\frac{\text{\$280,000}}{\text{32,000}}\\ \text{=}\text{\$8}\text{.75}\end{array}$

Compute cost per unit for product S:

$\begin{array}{c}\text{Cost}\text{per}\text{unit}\text{=}\frac{\text{Total}\text{cost}}{\text{Number}\text{of}\text{units}}\\ \text{=}\frac{\text{\$198,400}}{\text{16,000}}\\ \text{=}\text{\$12}\text{.4}\end{array}$

Thus, the cost per unit value for the product J and product S are $8.75 and $12.4 respectively.

Working note 1:

Compute machine related cost for product J:

$\begin{array}{c}\text{Machine}\text{hours}\text{related}\text{cost}\text{=}\text{Machine}\text{related}\text{Predetermined}\text{rate}\text{×}\text{Machine-hours}\\ =\$18\times 6000\\ =\$108,000\end{array}$

Working note 2:

Computation materials related cost for product J:

$\begin{array}{c}\text{Materials}\text{related}\text{cost}\text{=}\text{Materials}\text{related}\text{45\%}\text{of}\text{cost}\text{×}\text{Direct}\text{materials}\text{cost}\\ \text{=}\text{45\%}\text{×}\text{\$96,000}\\ \text{=}\text{\$43,200}\end{array}$

Working note 3:

Compute machine related cost for product S:

$\begin{array}{c}\text{Machine}\text{hours}\text{related}\text{cost}\text{=}\text{Machine}\text{related}\text{Predetermined}\text{rate}\text{×}\text{Machine-hours}\\ =\$18\times 4,800\\ =\$86,400\end{array}$

Working note 4:

Computation materials related cost for product S:

$\begin{array}{c}\text{Materials}\text{related}\text{cost}\text{=}\text{Materials}\text{related}\text{45\%}\text{of}\text{cost}\text{×}\text{Direct}\text{materials}\text{cost}\\ \text{=}\text{45\%}\text{×}\text{\$64,000}\\ \text{=}\text{\$28,800}\end{array}$