Question

Utease Corporation has many production plants across the midwestern United States. A newly opened plant, the Bellingham plant, produces and sells one product. The plant is treated, for responsibility accounting purposes, as a profit center. The unit standard costs for a production unit, with overhead applied based on direct labor hours, are as follows.

Manufacturing costs (per unit based on expected activity of 23,000 units or 57,500 direct labor hours):

Direct materials (3.0 pounds at $20)	$	60.00
Direct labor (2.5 hours at $90)		225.00
Variable overhead (2.5 hours at $30)		75.00
Fixed overhead (2.5 hours at $40)		100.00
Standard cost per unit	$	460.00
Budgeted selling and administrative costs:
Variable	$	10		per unit
Fixed	$	1,400,000

Expected sales activity: 19,000 units at $550 per unit

Desired ending inventories: 14% of sales

Assume this is the first year of operations for the Bellingham plant. During the year, the company had the following activity.

Units produced		22,000
Units sold		20,500
Unit selling price	$	545
Direct labor hours worked		54,500
Direct labor costs	$	4,959,500
Direct materials purchased		70,000		pounds
Direct materials costs	$	1,400,000
Direct materials used		70,000		pounds
Actual fixed overhead	$	1,200,000
Actual variable overhead	$	1,625,000
Actual selling and administrative costs	$	2,590,000

  

In addition, all over- or underapplied overhead and all product cost variances are adjusted to cost of goods sold.

Required:

e-1. Find the total over- or underapplied (both fixed and variable) overhead.

e-2. Would cost of goods sold be a larger or smaller expense item after the adjustment for over- or underapplied overhead?

f. Calculate the actual plant operating profit for the year.

Answer 1

Total over /under applied overhead:

Overhead applied

Fixed ( 22,000 units @ 100 per unit  )                                $ 2,200,000

Variable ( 22,000 units @ 75 per unit ) $ 1,650,000

Total ovehead applied                                                       $3,850,000

note: we apply overhead based on actual production taking standard cost

Actual overhead costs given

fixed                                                                                     $1,200,000

Variable 1625,000

Total actual overhead                                                       $2,825,000

Overhead overapplied = $3,850,000 -     $2,825,000

                                      = $1,025,000

e-2 After the adjustment for the over application , Cost of goods sold will be a smaller expense item