Question

In: Accounting

Gene Simmons Company uses normal costing in each of its three manufacturing departments. Manufacturing overhead is...

Gene Simmons Company uses normal costing in each of its three manufacturing departments. Manufacturing overhead is applied to production on the basis of direct labor cost in Department A, machine hours in Department B, and direct labor hours in Department C. In establishing the predetermined overhead rates for the current year, the following budgeted data was available:

A B C

Manufacturing Overhead $900,000 $840,000 $760,000

Direct Labor Cost $600,000 $100,000 $600,000

Direct Labor Hours 50,000 40,000 40,000

Machine Hours 100,000 120,000 125,000

The following actual information is available for January of the current year for each department:

Direct Materials Used $92,000 $86,000 $64,000

Direct Labor Cost $48,000 $35,000 $50,400

Manufacturing Overhead $76,000 $75,000 $72,100

Direct Labor Hours Used 4,000 3,500 4,200

Machine Hours Used 8,000 10,500 12,600

REQUIRED:

A. What two disadvantages are associated with actual costing? How does normal costing "solve" these problems?

B. Compute the pre-determined overhead rate for the current year for each department.

C. Compute the manufacturing overhead applied in January in each department.

D. Compute under- or over-applied overhead at the end of January in each department--be sure to label the amount as under- or over-applied.

E. How will the balance of the Factory Overhead account of each department be reported on the financial statements at the end of (1) January and (2) the year?

Solutions

Expert Solution

A. The two disadvantages of actual costing are: 1. The overhead rates cannot be computed till after the end of period when all actual data is accumulated and analyzed. 2. Since actual costing uses the actual overhead costs incurred and the actual production, there are fluctuations in the overhead rate from month to month since both costs and activity levels are varying every month.

Normal costing resolves the two issues mentioned above by using a pre-determined rate which is computed at the beginning of the period and it also results in a more uniform overhead rate being used every month.

B.

Department
A B C
Manufacturing overhead $ 900000 840000 760000
Direct labor cost $ 600000
Direct labor hours 40000
Machine hours 120000
Pre-determined overhead rate 150% $                  7.00 $             19.00
of DLC per MH per DLH

C.

Department
A B C
Pre-determined overhead rate 150% $                  7.00 $             19.00
Direct labor cost $ 48000
Direct labor hours 4200
Machine hours 10500
Manufacturing overhead applied $ 72000 73500 79800

D.

Department
A B C
Actual manufacturing overhead $ 76000 75000 72100
Manufacturing overhead applied $ 72000 73500 79800
Under- or over-applied overhead $ 4000 1500 7700
Under-applied Under-applied Over-applied

E.(1) At the end of January, the factory overhead accounts for department A and B where overheads are under-applied will report a debit balance while for department C where overheads are over-applied will report a credit balance.

E.(2) At the end of the year, all the debit and credit balances in the factory overhead accounts will be closed to the cost of goods sold or pro-rated to the work in process inventory, finished goods inventory, and the cost of goods sold.


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