Solution manual cost accounting by carter 14e ch12

Six bases used for applying factory overhead are units produced, direct materials cost, direct labor cost, direct labor hours, machine hours, and transactions.. If factory overhead costs

Q12-1 Supervisors’ salaries, indirect labor, overtime

premium, supplies, indirect materials, payroll

tax, factory insurance, and depreciation.

Q12-2 The most important reason for variation in

fac-tory overhead is the presence of fixed and

variable expenses Therefore, as production

volume changes from month to month, the

costs will do likewise However, overhead also

will change because of improved or decreased

efficiencies and changes in prices paid for

overhead items such as supplies and repairs.

Q12-3 Predetermined rates are used when it

becomes obvious that any other method of

charging overhead results in inequitable

cost-ing and delays the reportcost-ing of financial

results Charging actual overhead to jobs and

products can result in charging unreasonable

amounts of overhead to various periods and

in delayed reporting of cost data The use of

predetermined rates also enhances control

through analysis of over- or underapplied

fac-tory overhead.

Q12-4 Six bases used for applying factory overhead

are units produced, direct materials cost,

direct labor cost, direct labor hours, machine

hours, and transactions Important

considera-tions in selecting a base are the relaconsidera-tionship

(correlation) of the base used and the use of

overhead items in manufacturing operations,

as well as the clerical practicability of using a

particular base.

Q12-5 Predetermined rates are used to charge

over-head and become the basis for determining

the cost of a job or product Therefore, the

rea-sonableness of such costs is to a large extent

determined by the reasonableness of the

rates Since these costs are used for costing

inventories and play an important role in

estab-lishing sales prices, the selection of proper

pre-determined rates can be appreciated.

Q12-6 An objective in selecting the base for a

prede-termined factory overhead rate is to ensure

the application of factory overhead in

reason-able proportion to a beneficial or causal

rela-tionship to jobs, products, or work performed

or to be performed, i.e., for estimating pur-poses Ordinarily, the base selected should be closely related to functions represented by the applied overhead cost If factory overhead costs are predominantly labor oriented, such

as supervision and indirect labor, the proper base would probably be direct labor hours If factory overhead costs are predominantly related to the cost incurred in the ownership and operation of the machinery, the proper base would probably be machine hours Another objective in selecting the base is

to minimize clerical cost and effort relative to the benefits attained When two or more bases provide approximately the same applied overhead cost to specific units of pro-duction, the simplest base should be used Q12-7 (a) Theoretical capacity is actually the

maxi-mum production possible from a given plant with no allowance made for cessation

of operations for holidays, weekends, mate-rials shortages, or machine breakdowns (b) Practical capacity is theoretical capacity less an allowance for interruptions such

as breakdowns, delays in receiving sup-plies, and worker absences Practical capacity is usually 75 to 85 percent of theoretical capacity.

(c) Expected actual capacity is practical capacity adjusted for the lack of sufficient demand in a single operating period and may be used in building operating budg-ets when expected capacity differs sub-stantially from normal capacity.

(d) Normal capacity is practical capacity adjusted to give consideration to the lack

of sufficient demand over a period long enough to include cyclical and seasonal fluctuations This is usually the basis for long-range planning, standards, and preferably for the determination of over-head rates.

Q12-8 The underapplied overhead will be higher If

maximum capacity is used and lower if nor-mal is used If this cost is charged to the

current period, then maximum capacity will

produce a lower, and normal capacity a

higher, operating profit.

Q12-9 (a) Idle capacity costs arise from idle

employ-ees and idle facilities Idle employemploy-ees give

rise to costs such as base wages paid,

employer’s share of payroll taxes, and

other fringe benefit costs Idle facilities

cause capacity costs due to deterioration

with time, approaching obsolescence,

costs for upkeep, readiness,

mainte-nance, repairs, shelter, and protection of

valuables such as insurance.

(b) When idle capacity is present, an attempt

should be made to segregate idle

employees and idle facilities through

proper reclassification The accumulation

of the cost attributable to these idle

work-ers or facilities in excess of a reasonable

budgeted amount might be in some kind

of overhead account to be treated

sepa-rately as a “management by exception”

factor Idle capacity costs should be

accounted for separately for these

rea-sons: (1) to prevent distortion and

confu-sion in the analysis of production costs;

(2) to facilitate income determination; (3)

to control operations; and (4) to plan next

year’s budget adequately.

(c) Excess capacity cost has been identified

with those capacity costs that result from

greater production capacity than the

com-pany could ever hope to use, or from

unbalanced equipment or machinery

within departments In creating the

fore-cast budget, it is important to isolate the

excess capacity cost so that

manage-ment can be made aware of its

responsi-bility regarding the excess investment in

labor and machines.

Q12-10 (a) Analyze and identify the overhead

trans-actions.

(b) Journalize the transactions.

(c) Enter transactions in general and sub-sidiary ledgers.

Q12-11 Overhead applied to production is entered

as a credit in the factory overhead control account Actual overhead is debited to the same account Therefore, overhead has been overapplied when the account has a credit balance.

Q12-12 Overhead can be overapplied because (a)

actual overhead was less than budgeted; (b) capacity utilized was greater than that esti-mated in computing overhead rates; (c) the overhead estimate was too high (a mistake); (d) the production estimate was too low (a mistake); (e) combinations of the above Q12-13 Over- or underapplied factory overhead may

be prorated among work in process, finished goods, and cost of goods sold, or it may be treated entirely as a period cost The first method would have a smaller effect on cost

of goods sold and therefore on the net income for the period.

Q12-14 The existence of large underabsorbed

vari-ances does not necessarily mean that unit costs are incorrect An analysis of the under-absorbed figures will indicate (a) whether actual overhead is too high or whether expenses have been incorrectly estimated; and (b) what part of the underabsorption is caused by unused capacity If actual over-head is considered to be too high and there

is idle capacity, unit costs computed are more reasonable than they would be if over-head rates were computed to absorb all of the actual overhead.

EXERCISES E12-1

(1) $1,750,000 fixed overhead and $720 variable overhead per ton, calculated as

follows:

For both the normal capacity and expected actual capacity, the problem states the total budgeted overhead cost and the number of tons of activity The high-low method of estimating cost behavior can be used to determine the over-head budget, using those two points:

Budgeted

Variable

overhead rate

Budgeted fixed overhead = $5,350,000 total overhead

– ($720 × 5,000) variable overhead

= $5,350,000 – $3,600,000 = $1,750,000

or, budgeted

– ($720 × 6,000) variable overhead

= $6,070,000 – $4,320,000 = $1,750,000

720 000

1 000 tons 720 a iable overhead per ton

E12-1 (Concluded)

(2) The predetermined rate at practical capacity would be $938.75 per ton Using

the budget for fixed and variable overhead, a predetermined overhead rate can

be calculated at any level of activity within the relevant range Assuming prac-tical capacity is within that range, the calculation is:

Predetermined

overhead rate at

practical capacity

(8,000 tons)

Budgeted fixed overhead + Budgeted variable

or, $720 variable overhead per ton + ($1,750,000/8,000 tons)

= $720 per ton + $218.75 per ton = $938.75 per ton.

E12-2

Work in process balance, September 30 $12,200

Less materials still in process 5,560

Factory overhead and direct labor still in process $ 6,640

Charged to Work in Process

Factory overhead $15,840 44%* × $6,640 = $2,921.60

Direct labor 20,160 56 × 6,640 = 3,718.40

*$15,840 ÷ $36,000 = 44%

(or)

$15,840 (factory overhead) ÷ $20,160 (direct labor) = 7857

Let X = direct labor still in process

Then, X + 7857X = $6,640

1.7857X = $6,640

X = $3,718.4297 direct labor still in process 7857X = $2,921.5702 factory overhead still in process

$6,639.9999

=overhead at tons= + ×

tons

8 000

8 000

1 750 000 720 8 000

8 000

, ,

$ , , ($ , )

, ttons

,

$ , , ,

1 750 000 5 760 000

8 000

7 510 000

8 000 $ 938 75 per ton .

=Budgeted total overhead at practical capacity

actical capacity

Pr iin tons

(1) 150 people × 8 hrs per day × 5 days per week × 48 weeks =

288,000 direct labor hrs.

(2) 150 people × 10 hrs per day × 4 days per week × 48 weeks =

288,000 direct labor hrs.

E12-4

Factory overhead rates:

(1) Units of production: $225,000 ÷ 25,000 units = $9

(2) Materials cost: $225,000 ÷ $500,000 = 45 = 45%

(3) Direct labor hours: $225,000 ÷ 56,250 DLH = $4

(4) Direct labor cost: $225,000 ÷ (56,250 DLH × $8) = 50 = 50%

(5) Machine hours: $225,000 ÷ 75,000 machine hours = $3

E12-5

(1) Assuming normal capacity:

(a) The factory overhead rate: ($400,000 ÷ 50,000) + $6.69 = $14.69

(b) The fixed part of the factory overhead rate: $400,000 ÷ 50,000 = $8

(2) Assuming expected actual capacity:

(a) The factory overhead rate: ($400,000 ÷ 40,000) + $6.69 = $16.69

(b) The fixed part of the factory overhead rate: $400,000 ÷ 40,000 = $10

E12-6

Actual factory overhead $281,000

Applied factory overhead (52,500 machine hours × $5.10*) 267,750

Underapplied factory overhead for the period $ 13,250

*$255,000 ÷ 50,000 budgeted machine hours = $5.10

(1) Work in Process 1,450,000

Materials 1,450,000 Work in Process 928,000

Payroll 928,000 Factory Overhead Control 561,600

Work in Process 551,000

Applied Factory Overhead 551,000 Applied Factory Overhead 551,000

Factory Overhead Control 551,000

(2) Underapplied factory overhead: $561,600 – $551,000 = $10,600

E12-8

Actual factory overhead $ 9,000

Overapplied overhead $(1,086)

*Variable factory overhead rate $2.10

Fixed factory overhead rate ($1,440 ÷ 4,000 units) 36

Total factory overhead rate $2.46

E12-9

(1) Applied factory overhead:

= $ 47 fixed portion of rate 2.10 variable portion of rate

$2.57 total rate

$2.57 × 2,700 machine hours = $6,939 applied factory overhead

(2) Actual factory overhead $7,400

Applied factory overhead 6,939

Underapplied overhead $ 461

$ , ,

16 920

36 000 machine hours

Overhead rate Estimated factory overhead

Estimated production

: =$ 5 570 000

30 000 19 ,

, =$ per drill

Actual factory overhead $832,000

Applied factory overhead (210,000 machine hours × $4) 840,000

Overapplied factory overhead $ (8,000)

E12-11

(1) Fixed portion of the factory overhead application rate:

= $1.50 per machine hour

(2) Variable portion of the factory overhead application rate:

= $2.50 per machine hour

(3) Actual factory overhead $411,000

Applied factory overhead (105,000 × $4.00) 420,000

Overapplied factory overhead $ (9,000)

E12-12

Actual factory overhead $ 14,134

Applied factory overhead (200% of $8,117) 16,234

Overapplied overhead $ (2,100)

$ , ,

250 000

100 000 machine hours

$ , ,

150 000

100 000 machine hours

Requirements (1) & (2) Requirement (3)

Work in process $ 6,000 5 % $ 2,000 4% Finished goods 38,000 31 2/3% 16,000 32% Cost of goods sold 76,000 63 1/3% 32,000 64% Total $120,000 100 % $50,000 100%

(1) Work in Process (5% of $6,000) 300

Finished Goods (31 2/3% of $6,000) 1,900

Cost of Goods Sold (63 1/3% of $6,000) 3,800

Factory Overhead Control 6,000

(2) Factory Overhead Control 6,000

Work in Process (5% of $6,000) 300 Finished Goods (31 2/3% of $6,000) 1,900

(3) Work in Process (4% of $6,000) 240

Finished Goods (32% of $6,000) 1,920

Cost of Goods Sold (64% of $6,000) 3,840

Factory Overhead Control 6,000

PROBLEMS P12-1

(1) Actual overhead incurred $3,470,000

Applied overhead* 3,325,000

Underapplied overhead $ 145,000

*actual MH × predetermined rate based on expected actual capacity

= 9,500 MH × ($3,500,000/10,000 MH)

= 9,500 MH × $350 per MH = $3,325,000

(2) The predetermined rate at practical capacity would be $316.67 per machine

hour (MH), calculated as follows:

First, find the budgeted total fixed overhead and the budgeted variable over-head rate per MH The problem states both the total budgeted overover-head cost and the number of MH of activity, at both the normal capacity and expected actual capacity levels, so the high-low method of estimating cost behavior can

be used:

Variable

overhead rate

Budgeted fixed overhead = $3,500,000 total overhead

– ($250 × 10,000) variable overhead

= $3,500,000 – $2,500,000 = $1,000,000

or, budgeted

fixed overhead = $3,000,000 total overhead

– ($250 × 8,000) variable overhead

= $3,000,000 – $2,000,000 = $1,000,000

Then, using the budget for fixed and variable overhead, a predetermined overhead rate can be calculated at any level of activity within the relevant range Assuming practical capacity is within that range, the calculation is:

, $ var

500 000

2 000 MH 250 iable overhead per MH

P12-1 (Concluded)

Predetermined

overhead rate at

practical capacity

(15,000 MH )

Budgeted fixed overhead

+ Budgeted variable

or, $250 variable overhead per MH + ($1,000,000 ÷ 15,000 MH)

= $250 per MH + $66.67 per MH = $316.67 per MH.

(3) If the actual overhead of $3,470,000 were underapplied by $10,000, then Applied

Overhead would have a credit balance of $3,470,000 – $10,000, or $3,460,000 The closing entries are:

Applied Overhead 3,460,000

Factory Overhead Control 3,460,000 Cost of Goods Sold 10,000

Factory Overhead Control 10,000

Work in process $ 200,000 2.5% Finished goods 400,000 5.0% Cost of goods sold 7,400,000 92.5% Total $8,000,000 100.0%

Work in Process (2.5 % of $10,000) 250

Finished Goods 500

Cost of Goods Sold 9,250

Factory Overhead Control 10,000

= Budgeted total overhead at practical capacity

actical capacity

Pr iin MH

= Overhead at MH = + ×

MH

15 000

15 000

1 000 000 250 15 000

15 000

, ,

$ , , ($ , )

, M MH

,

$ , ,

1 000 000 3 750 000

15 000

4 750 000

15 000 316 6 67 per MH

Depreciation on factor

(1) Total cost of Job 50:

Work in process, December 1 $ 54,000 December costs:

Materials 45,000 Direct labor (($102,000 ÷ 8,500) × 3,500) 42,000 Factory overhead ($4.50 × 3,500) 15,750

$156,750

(2) Factory overhead costs applied to Job 52 during December:

$4.50 × 2,000 = $9,000

(3) Total factory overhead costs applied during December:

$4.50 × 8,500 = $38,250

(4) Actual December factory overhead incurred:

Supplies $ 3,500 Indirect labor wages 15,000 Supervisory salaries 6,000 Building occupancy costs 3,500 Factory equipment costs 8,000 Other factory costs 5,000

$39,000

(5) An insignificant amount of over- or underapplied factory overhead would be

treated as a period cost.

(6) Actual overhead $39,000

Applied overhead 38,250 Underapplied overhead $ 750