Question

Brighton Services repairs locomotive engines. It employs 100 full-time workers at $22 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	$	1,050,400
Direct labor		5,280,000
Manufacturing overhead		1,020,000

Of the $1,020,000 manufacturing overhead, 40 percent was variable overhead and 60 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	$	138,700		$	504,000
102		108,000			314,000
103		95,500			195,300
Total manufacturing overhead					272,700
Total marketing and administrative costs					125,000

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

	Actual Manufacturing Overhead
	Variable		Fixed
101	$	31,400	$	105,500
102		29,000		89,700
103		6,100		11,000
	$	66,500	$	206,200

In the first quarter of this year, 30 percent of marketing and administrative cost was variable and 70 percent was fixed. You are told that Jobs 101 and 102 were sold for $874,000 and $580,000, respectively. All over- or underapplied overhead for the quarter is written off to Cost of Goods Sold.

Required:

a. Present in T-accounts the actual manufacturing cost flows for the three jobs in the first quarter of this year.

b. Using last year's overhead costs and direct labor-hours as this year's estimate, calculate predetermined overhead rates per direct labor-hour for variable and fixed overhead.

c. Present in T-accounts the normal manufacturing cost flows for the three jobs in the first quarter of this year. Use the overhead rates derived in requirement (b).

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

Answer 1

Requirement a: Prepare the T-accounts as follows

Notes: Total material = $138,700 + $108,000 + $95,500

Total wages = $504,000 + $314,000 + $195,300

Total Cost Job 101 = $138,700 + $504,000 + $31,400 + 105,500

Total Cost Job 102 = $108,000 + $314,000 + $29,000 + $89,700

Requirement b: Compute predetermined overhead rates as follows

Total direct labor-hours           = Total direct labor cost ÷ Labor cost per hour

                                                = $5,280,000 ÷ $22 per hour

                                                = 240,000 hours

Variable manufacturing overhead       = $1,020,000 × 40%

                                                            = $480,000

Predetermined variable overhead rate = Total variable manufacturing overhead ÷ labor hours

                                                            = $480,000 ÷ 240,000 hours

                                                            = $1.70 per hour     

Fixed manufacturing overhead           = $1,020,000 × 60%

                                                            = $612,000

Predetermined fixed overhead rate    = Total fixed manufacturing overhead ÷ labor hours

                                                            = $612,000 ÷ 240,000 hours

                                                            = $2.55 per hour

Requirement c: Prepare the T-accounts as follows

Notes: Variable manufacturing overhead is allocated as follows

Job. 101	$504,000	÷ $22	= 22,909	× $1.7	= $38,945
Job. 102	$314,000	÷ $22	= 14,273	× $1.7	= $24,264
Job. 103	$195,300	÷ $22	= 8,877	× $1.7	= $15,091

Fixed manufacturing overhead is allocated as follows

Job. 101	$504,000	÷ $22	= 22,909	× $2.55	= $58,418
Job. 102	$314,000	÷ $22	= 14,273	× $2.55	= $36,395
Job. 103	$195,300	÷ $22	= 8,877	× $ 2.55	= $22,637

Requirement d: Compute operating profit or loss as follows

Particulars	Actual	Normal
Sales Revenue ($874,000 + $580,000)	$1,454,000	$1,454,000
Deduct: Cost of Goods Sold	($1,320,300)	($1,222,722)
Gross Margin	$133,700	$231,278
Deduct: Underapplied overhead		($76,950)
Deduct: Marketing and Administrative costs	($125,000)	($125,000)
Operating profit	$8,700	$29,328