Short Answer
1. What are the primary reasons for using a predetermined overhead rate?
2. Why is variable costing not used extensively in external reporting?
3. How can a company product both variable and absorption costing information from a single accounting system?
4. Why is absorption costing not used for CVP analysis?
5. What are three significant cost drivers that have been disregarded by traditional product costing system?
Problem
1. Dynamic Designs, Inc. has developed a new design to produce track shoes tht are used in cross-country races. The company's shoe design is innovative in that the insole is made of a product that provides a greater cushion and adapts more easily to a runner's foot. Management estimates expected annual capacity to be 80,000 units; overhead is applied using expected annual capacity. The company's cost accountant predicts the following current year activities and related costs:
Standard unit variable manufacturing costs $140
Variable unit selling expense $6
Fixed manufacturing overhead $2,400,000
Fixed selling and administrative expenses $164,000
Selling price per unit $225
Units of sales 70,000
Units of production 81,000
Units in beginning inventory 15,000
Other than any possible under- or overapplied fixed overhead, management expects no variances from the previous manufacturing costs. Under- or overapplied fixed overhead is to be written off to Cost of Goods Sold.
Required:
1. Determine the amount of under- or overapplied fixed overhead using (a) variable costing and (b) absorption costing:
2. Prepare projected income statements using (a) variable costing and (b) absorption costing.
3. Reconcile the incomes derived in part 2
2. Falcon Crest Corporation manufactures two brands of wine: Regular and Extra Rich. Below is the current year's production date for the company
Regular Extra Rich
Direct material in pounds 225,000 110,000
Direct labor hours 45,000 65,000
Machine hours 36,000 24,000
Number of setups 1,450 2,375
Number of gallons produced 450,000 90,000
The 335,000 pounds of matrial had a total cost of $753,750. Direct labor is $21 per hour. The company has total overhead production costs of $2,212,125.
a. If Falcon Crest Corporation applies factory overhead using direct labor hours, compute the total production cost and the unit cost for each brand.
b. If Falcon Crest Corporation applies factory overhead using machine hours, compute the total production cost and the unit cost for each brand.
c. Assume that Falcon Crest Corporation has established the following activity centers, cost drivers, and costs to apply factory overhead.
Cost Pool Cost Driver Cost Volume
Equipment Maintenance # of machine hours $450,000 60,000
Production Setup # of setups $248,625 3,825
Material Handling Pounds of Materials $703,500 335,000
Storage Costs # of gallons produced $810,000 540,000
Compute the total cost and the unit cost for each brand.
d. Explain why the unit cost for each model is different across the three methods of overhead application. How can this information benefit the organization?