Manufacturing Overhead - over/under applied

Problem Question 1

College carriers manufactures backpacks that are sold to students for use as book bags.

Identify a specific item in this company's manufacturing, selling or administrative processes for which the costs would be classified as

  • a. raw materials
  • b. direct labor
  • c. variable manufacturing overhead
  • d. fixed manufacturing overhead
  • e. fixed administrative expense
  • f. fixed indirect selling expense
  • g. variable direct selling expense

Solution:

a. raw materials: - These would be the material that would go in the backpack and so the items would be fabric, zipper, shoulder straps.

b. direct labor: - This would be for labor employed directly on production and would include wages of sewing machine operator.

c. variable manufacturing overhead: - Costs related to production that vary with production and example would be electricity for sewing machine.

d. fixed manufacturing overhead:- Costs that do not change with production and example would be depreciation of sewing machine.

e. fixed administrative expense :- Costs that are constant and the example would be president's salary.

f. fixed indirect selling expense:- Expenses which are not directly related to sales and the example would be sales manager's salary.

g. variable direct selling expense:- Expenses which vary directly with sales and the example would be sales force commissions.

Problem Question 2

Deckhand accessories, Inc. manufactures women are boating shoes. Manufacturing overhead is assigned to production on a machine-hour basis. For 2009, it was estimated that manufacturing overhead would total $974,400 and that 67,200 machine hours would be used.

a. calculate the predetermined overhead application rate that will be used for absorption costing purposes during 2009

Predetermined overhead application rate = Estimated overhead/estimated machine hours = 974,400/67,200 = $14.50 per MH

b. during may, 11,720 pairs of shoes were made. Raw materials costing$56,936 were used, and direct labor costs totaled $57,600. A total of 5,680 machine hrs were worked during the month of January. Calculate the cost per pair of shoes made during January.

The total cost is:
Direct Material             56,936
Direct Labor                57,600
Overhead (14.50 X 5, 680)   82,360
Total cost                  196,896
Total pairs                 11,720
Cost per pair = 196,896/11,720 = $16.80 per pair

c. at the end of January 3,156 pairs of shoes were in ending inventory. Calculate the cost of the ending inventory and the cost of the shoes sold during January.

Cost of ending inventory = 3,156* 16.80 = $53,020.80
Cost of shoes sold = (11,720-3,156)* 16.80 = $143,875.20

Problem Question 3

Lampart co. make specialty table lamps. Manufacturing overhead is applied to production on a direct labor hour basis. During the first month of the company's fiscal yr, $173,250 of manufacturing overhead is applied to production on a direct labor basis. During the first month of the company's fiscal year, $173,250 of manufacturing overhead was applied to work in process inventory using the predetermined overhead application rate of $15 per direct labor hr.

a. calculate the number of hrs. of direct labor used during November.

Direct Labor hours* $15 = $173,250
Direct Labor hours = $173,250 / $15 = 11,550 Hours

b. actual manufacturing overhead costs incurred during November totaled $166,425. Calculate the amount of over-or under applied overhead for November.

Since $173,250 was budgeted and $166,425 was actually incurred:
$173,250 - $166,425 = $6,825 Over-applied

c. identify two possible explanations for the over- or under applied overhead.

1) Rate
2) Hours

d. explain the account appropriate for the over-or under applied overhead at the end of November

Over applied overhead is the amount by which the factory overhead added to work-in-process inventory at a predetermined overhead rate (and credited to factory overhead applied) exceeds the actual overhead shown in factory overhead control

Problem Question 4

Staley toy co. makes toy flutes. Two manufacturing overhead application bases are used. Some overhead is applied on the basis of machine hrs at the rate of $7.50 per machine hr, and the balance of the overhead is applied at the rate of 200% of direct labor cost

a. calculate the cost per unit of a production run of 4,260 toy flutes that required

  1. Raw materials costing $2,880
  2. 108 direct labor hrs costing $1,836
  3. 180 machine hrs.

Calculation of the cost per unit of a production runs of 4,260 toy flutes

Particulars Total (4,260 units)Per unit
Raw materials $ 2,880 $ 0.676050
Direct Labor $ 1,836 $ 0.430986
Prime Cost $ 4,716 $ 1.107036
Overheads :-
Machine hrs (hrs * rate) 180 hrs * $ 7.50 per machine hr $ 1,350 $ 7.500000
Direct labor (200 % of direct labor cost) $ 3,672 $ 0.861971
Total Cost $ 9,738 $ 2.285915

b. at the end of February, 3,930 of these toy flutes had been sold. Calculate the ending inventory value of the toy flutes still in inventory at February 28.

Value of ending inventory at February 28:

Total units = 4,260 units
Closing inventory units = Total units - Units sold 
4,260 units – 3,930 units = 330 units
Total cost = $ 2.285915 per unit
$ 2.285915 per unit * 330 units = $ 754.35195

Problem Question 5

Galvaset industries manufactures and sells custom made windows. Its job costing system was designed using an activity based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead costs drivers (activities). Assume that the direct labor rate is $20 per hr and that there were no beginning inventories. The following information was available for 2009, based on an expected production level of 50,000 units for the yr, which will require 200,000 direct labor hrs

Activity budgeted costs cost driver used cost
(cost driver) for 2009 as allocation base allocation rate
Materials handling $325,000 number of parts used $0.25 per part
Cutting and lathe work 2,340,000 number of parts used 1.80 per part
Assembly &inspection 5,000,000 direct labor hours 25.00 per hr

The following production, costs and activities occurred during the month of march:

Units Produced Direct materials costs Number of parts used direct labor hrs
3,800 $142,000 83,600 17,180

a. calculate the total manufacturing costs and the cost per unit of the windows produced during the month of march (using the activity-based costing approach)

Calculate the total manufacturing costs and the cost per unit using activity based costing approach

First calculate the manufacturing overheads cost using the activity based costing

In the activity based costing, the activity base rates are used to apply costs to the products. The activity base for material handling and cutting and lathe work is number of parts used, and for assembly and inspection are direct labor hours.

Activity Activity-Base Usage Activity-Rate Activity-Cost
Material handling 83,600 parts used $0.25 per part $ 20,900
Cutting and lathe work 83,600 parts used $1.80 per part $ 150,480
Assembly and Inspection 17,180 direct labor hours $25.00 per hr $ 4,295,000
Activity based cost $ 4,466,380

The total manufacturing overheads applied to product using activity based costing is $ 4,466,380. Now calculate the total manufacturing costs and cost per unit of the product for 3,800 units produced.

Particulars Total cost Cost per unit(3,800 units)
Direct material cost $ 142,000 $ 37.368421
Direct labor costs (17,180 hours * $20 per hr) $ 343,600 $ 90.421053
Prime cost $ 485,600 $ 127.789474
Manufacturing overhead $ 7,665,000 $ 2,017.105262
Total cost $ 8,150,600 $ 2,144.894736

b. assume instead that Galvaset industries applies manufacturing overhead on a direct labor hrs basis (rather than using the activity-based costing system previously described). Calculate the total manufacturing costs and the cost per unit of the windows produced during the month of march.

Particulars Total cost Cost per unit(3,800 units)
Direct material cost $ 142,000 $ 37.368421
Direct labor costs (17,180 hours * $20 per hr) $ 343,600 $ 90.421053
Prime cost $ 485,600 $ 127.789474
Overheads:
Material handling: $ 20,900 $ 5.500000
Cutting and lathe work $ 150,480 $ 39.600000
Assembly and Inspection $ 4,295,000 $ 1,130.263157
Total overheads $ 4,466,380 $ 1,175.363157
Total cost $ 4,951,980 $ 1,303.152631

c. compare the per unit cost figures calculated in parts a and b. which approach do you think provides better information for manufacturing managers? Explain your answers.

The traditional costing method (part a) allocates more windows costs then ABC (part b) allocates, so the part b in the better option for the manufacturing managers to adopt the activity based costing method because the actual cost for per window is $ 1,303.152631 is less than the traditional cost of $ 2,144.894736, the ABC shows the realistic cost and it improve the cost of production as cost increases profits decreases, so then better option is Activity based costing.

Problem question 6

Millan, inc. manufactures digital voice recorders. During 2008, total costs associated with manufacturing 208,000 of the new MV-5253 model (introduced this yr) were as follows:

Raw materials....................................................... $1,788,800
Direct labor........................................................... 2,953,600
Variable manufacturing overhead............................ 748,800
Fixed manufacturing overhead............................... 707,200

a. calculate the cost per recorder under both variable costing and absorption costing

Calculation of unit product cost (cost per recorder):

Particulars Variable Costing 2,08,000 units Absorption Costing 2,08,000 units
Total Per unit Total Per unit
Raw materials $1,788,800 $ 8.6 $1,788,800 $ 8.6
Direct labor 2,953,600 $ 14.2 2,953,600 $ 14.2
Variable manufacturing overhead 748,800 $ 3.6 748,800 $ 3.6
Fixed manufacturing overhead 707,200 $ 3.4
Total Production Cost $ 5,491,200 $ 26.4 $ 6,198,400 $ 29.8

b. if 20,400 of these recorders were in finished goods inventory at the end of 2008, by how much and in what direction ( higher or lower) would 2008 cost of goods sold be different under costing than under absorption costing?

Answer:- Inventory under Variable costing :

Total Variable cost = $ 26.4 per unit
$ 26.4 per unit * 20,400 units = $ 528,560

Inventory under absorption costing :

Total absorption cost = $ 29.8 per unit
$ 29.8 per unit * 20,400 units = $ 607,920

As per Variable costing the value of finished goods is $ 528,560 and as per absorption costing the value of finished goods is $ 607,920

c. express the digital voice recorder cost in a cost formula. What does these formula suggests the total of making an additional 1,700 recorders would be?

Particulars Absorption Costing 2,09,700 units
Total Per unit
Raw materials $1,803,420 $ 8.6
Direct labor 2,977,740 $ 14.2
Variable manufacturing overhead 754,920 $ 3.6
Fixed manufacturing overhead 707,200 $ 3.3724
Total Production Cost $ 6,243,280 $ 29.7724

By making an additional 1,700 recorders the Total Production Cost is decreased by $ 0.0276 per unit.