QUESTION - Galvin Corporation produces customized machine parts which are produced in small batch sizes (job lots). The engineering department designs the parts; once the design specifications are established, the equipment can be set up for batch production. After the completion of each batch, a sample is inspected for quality defects. In addition to engineering, set up, machining and inspection, there are two additional activities: providing utilities and providing space throughout the plant. Galvin uses a joborder costing system and allocates overhead using machine hours as a base. Total overhead costs and machine hours for 2012 were estimated to be $1,282,000 and 50,000 respectively.
Required
1. Compute Galvin's predetermined overhead allocation rate for 2012.
2. Galvin's two main jobs, 2012-901 and 2012-1126, consumed 15,000 and 10,000 machine hours respectively. What is the overhead amount that should be assigned to the two jobs? Assume that Job 2012-901 consisted of 300 units and Job 2012-1126 consisted of 100 units. Compute the overhead cost per unit for each job.
3. At the end of 2012, the company recorded the following actual data:
Overhead costs: $1,300,280
Machine hours: 52,000 hours
Compute the under-/over-applied overhead for 2012. Assume that Galvin Corporation closes the under-/over-applied overhead to Cost of Goods Sold. Prepare the appropriate journal entry to record this transaction.
4. Glenda Klein, Galvin's controller, recently returned from a conference on activity-based costing and decided to try it out using 2012 data. She collected the following information:
Details of overhead costs estimated at the beginning of 2012
|
Activity
|
Activity measure
|
Activity cost
|
Activity volume
|
|
Engineering
|
Engineering hours
|
$250,000
|
10,000 hours
|
|
Setups
|
Number of setups
|
224,500
|
400 setups
|
|
Machining
|
Machine hours
|
500,000
|
50,000 hours
|
|
Inspection
|
Inspection hours
|
200,000
|
5,000 hours
|
|
Providing space
|
Machine hours
|
62,500
|
50,000 hours
|
|
Providing utilities
|
Machine hours
|
45,000
|
50,000 hours
|
|
Total
|
|
$1,282,000
|
|
Resource consumption for Galvin Corporation's two main jobs, 2012-901 and 2012-1126
|
Activity measure
|
Resource consumption
|
|
Job 2012-901
|
Job 2012-1126
|
|
Engineering
|
2,000 engineering hours
|
3,000 engineering hours
|
|
Setups
|
80 setups
|
120 setups
|
|
Matching
|
15,000 machine hours
|
10,000 machine hours
|
|
Inspection
|
1,000 inspection hours
|
1,500 inspection hours
|
|
Units produced
|
300
|
100
|
Compute the predetermined overhead allocation rates for the individual activities using activity based costing.
5. How much overhead amount should Glenda assign to jobs 2012-901 and 2012-1126 (both in total and per unit)?
6. Explain why there is a difference in the overhead costs under the two different methods.
7. Glenda wondered whether the use of activity-based costing will result in ZERO under- or overapplied overhead amounts. What would your response be to Glenda?