Question

Brighton Services repairs locomotive engines. It employs 100 full-time workers at $17 per hour. Despite operating at capacity, last year's performance was a great disappointment to the managers. In total, 10 jobs were accepted and completed, incurring the following total costs:

Direct Materials: $1,054,400

Direct Labor: $4,760,000

Manufacturing Overhead: $1,120,000

Of the $1,120,000 manufacturing overhead, 35 percent was variable overhead and 65 percent was fixed. This year, Brighton Services expects to operate at the same activity level as last year, and overhead costs and the wage rate are not expected to change. For the first quarter of this year, Brighton Services completed two jobs and was beginning the third (job 103). The costs incurred follow:

Job	Direct Materials	Direct Labor
101	$139,100	505,000
102	112,000	314,700
103	95,900	196,000
Total Manufacturing Overhead		273,100
Total Marketing and Administrative		129,000

You are a consultant associated with Lodi Consultants, which Brighton Services has asked to help. Lodi's senior partner has examined Brighton Services' account and has decided to divide actual factory overhead by job into fixed and variable portions as follows

	Variable	Fixed
101	$31,800	105,900
102	29,400	90,100
103	6,500	9,400
Total	67,700	205,400

In the first quarter of this year, 30 percent of the marketing and administrative cost was variable and 70 percent was fixed. You are told that Jobs 101 and 102 were sold for $875,000 and $588,000 respectively. All over- or underapplied overhead for the quarter was written off to COGS

Required Questions:

1. Using last year's overhead costs and direct-labor hours as this year's estimate, calculate predetermined overhead rates per DL hour for variable and fixed overhead (based on other examples, i got $1.40 and $2.60)

2. Present inT-accounts the normal manufacturing cost flows for the three jobs in the first quarter of this year. Use the overhead rates derived in the first requirement (this is where a lot of my confusion is, many of the other examples show the t-accounts but none explain HOW to use the overhead rates to determined the values used in the t- accounts. I would really appreciate if you could explain this process!)

3. Calculate operating profit (loss) for the first quarter of this year under actual and normal costing systems

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
1.
Last Year Labor Hours	Direct Labor Cost/Rate per Hour	4760000/17	280,000	Hours
Predetermined Overhead Rate:
Variable Overhead	(1120000*35%)/280000	$                1.40
Fixed Overhead	(1120000*65%)/280000	$                2.60
2.
Variable
Actual	Applied
$                                                    67,700	$                                                 41,588
	$                                                 25,916
	$                                                 16,141
Fixed
Actual	Applied
$                                                  205,400	$                                                 77,235
	$                                                 48,131
	$                                                 29,976
working for above:
Variable Overhead:
	A	B	C=A/B	D	E=D*C
Job	Direct Labor	Rate per Hour	Direct Labor Hours	Ovh Application Rate	Overhead Cost
101	$                                               505,000	$                    17	$                     29,706	1.4	$              41,588
102	$                                               314,700	$                    17	$                     18,512	1.4	$              25,916
103	$                                               196,000	$                    17	$                     11,529	1.4	$              16,141
Total Variable Overhead					$              83,646
Fixed Overhead
	A	B	C=A/B	D	E=D*C
Job	Direct Labor	Rate per Hour	Direct Labor Hours	Ovh Application Rate	Overhead Cost
101	$                                               505,000	$                    17	$                     29,706	2.6	$              77,235
102	$                                               314,700	$                    17	$                     18,512	2.6	$              48,131
103	$                                               196,000	$                    17	$                     11,529	2.6	$              29,976
Total Variable Overhead					$           155,342
3.
		Job 101	Job 102	Total
Sale Revenue		$         875,000	$                   588,000	$                     1,463,000
Less: Cost of Goods Sold:
Direct Material		$         139,100	$                   112,000	$                         251,100
Direct Labor		$         505,000	$                   314,700	$                         819,700
Variable Factory Overhead		$            41,588	$                     25,916	$                           67,505
Fixed Veriable Factory Overhead		$            77,235	$                     48,131	$                         125,366
Gross Margin		$         112,076	$                     87,253	$                         199,329
Less: Selling and Admin Expense				$                         129,000
Net Income				$                           70,329