Assignment

I. Abbey Products Company is studying the results of applying factory overhead to production. The following data have been used: estimated factory overhead, $60,000; estimated materials costs, $50,000; estimated direct labor costs, $60,000; estimated direct labor hours, 10,000; estimated machine hours, 20,000; work in process at the beginning of the month, none.

The actual factory overhead incurred for November was $80,000, and the production statistics on November 30 are as follows:

Required:

1. Compute the predetermined rate, based on the following:

a. Direct labor cost
b. Direct labor hours
c. Machine hours

2. Using each of the methods, compute the estimated total cost of each job at the end of the month.

3. Determine the under- or overapplied factory overhead, in total, at the end of the month under each of the methods.

4. Which method would you recommend? Why?

II. Hughes Products Inc. uses a job order cost system. Selected transactions dealing with factory items for the month follow:

a. Requisitioned indirect materials from storeroom, $3,200.
b. Purchased, on account, factory supplies for future needs, $4,400.
c. Purchased parts, on account, for repairing a machine, $1,400.
d. Requisitioned factory supplies from storeroom, $900.
e. Returned other defective factory supplies to vendor, $700.
f. Factory rent accrued for the month, $2,400.
g. Returned previously requisitioned factory supplies to store room, $350.
h. Depreciation of machinery and equipment, $2,800.
i. Payroll taxes liability for month, $3,200.
j. Heat, light, and power charges payable for the month, $6,400.
k. Expired insurance on inventories, $1,350.
l. Factory overhead applied to production, $34,600.
m. Indirect labor for the month, $2,600.
n. Goods completed and transferred to finished goods: materials, $14,400; labor, $40,400; factory overhead, $30,400.

Required:

Record the previous transactions. Assume that the records include a control account and a subsidiary ledger for factory overhead, to which the entries will be posted at some later date.

III. Video Options Ltd. manufactures two types of DVD players: standard and deluxe. It attempts to set selling prices based on a 50% markup on manufacturing costs to cover selling and administrative expenses and to earn an acceptable return for shareholders. Bill Merch, vice president-Marketing, is confused because the numbers provided by Terry Green, controller, indicate that standard DVD players should be priced at $150 per unit and deluxe DVD players at $300 per unit. The competition is selling comparable models for $145 and $525, respectively. Merch informs Green that there must be something wrong with the job costing system. He had recently attended a seminar where the speaker stated that "All production costs are not a function of how many units are produced, or of how many labor hours, labor dollars, or machine hours are expended." He knows that the company uses direct labor dollars as its only cost allocation base. Bill thinks that perhaps this explains why the product costs and, therefore selling prices, are so different from those of the competitors. Currently, the costs per unit are determined as follows:

Factory overhead is currently applied using a plantwide rate based on direct labor cost. This year's rate was computed as follows:

Budgeted factory overhead:

Direct labor support............................................................ $ 300,000
Machine support ............................................................... 400,000
Setup costs..................................................................... 200,000
Design costs.................................................................... 100,000
Total.............................................................................. $1,000,000

Budgeted direct labor cost is $333,333.

Budgeted factory overhead rate ¼ $1,000,000/$333,333 ¼ 300% of direct labor dollars

Green, knowing that you had recently studied ABC in your cost accounting course, employs you as a consultant to determine what effect its usage would have on the product costs. You first gathered the following data:

Required:

1. From the data that you gathered, determine the best allocation base for each of the four components of factory overhead.

2. Compute an overhead rate for each of the four components.

3. Determine the new unit cost for standard and deluxe models using ABC.

4. Why are the product costs so dramatically different when ABC is used?

5. Would Video Options' selling prices be closer to those of the competition if ABC were used?