Problem 1 - Job Order Costing: A Comprehensive Problem
Georgia Woods, Inc., manufactures furniture to customers' specifications and uses job order costing. A predetermined overhead rate is used in applying manufacturing overhead to individual jobs. In Department One, overhead is applied on the basis of machine-hours, and in Department Two, on the basis of direct labor hours. At the beginning of the current year, management made the following budget estimates to assist in determining the overhead application rate.
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Department One
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Department Two
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Direct labor cost
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$300,000
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$225,000
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Direct labor hours
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20,000
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15,000
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Manufacturing overhead
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$420,000
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$337,500
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Machine-hours
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12,000
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7,500
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Production of a batch of custom furniture ordered by City Furniture (job no. 58) was started early in the year and completed three weeks later on January 29. The records for this job show the following cost information.
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Department One
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Department Two
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Job order: City Furniture (job no. 58):
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Direct materials cost
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$10,100
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$7,600
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|
Direct labor cost
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$16,500
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$11,100
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Direct labor hours
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1,100
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740
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Machine-hours
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750
|
500
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Selected additional information for January is as follows.
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Department One
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Department Two
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Direct labor hours-month of January
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1,600
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1,200
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Machine-hours-month of January
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1,100
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600
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Manufacturing overhead incurred in January
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$39,010
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$26,540
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Instructions -
a. Compute the predetermined overhead rate for each department.
b. What is the total cost of the furniture produced for City Furniture?
c. Prepare the entries required to record the sale (on account) of the furniture to City Furniture. The sales price of the order was $147,000.
d. Determine the over- or underapplied overhead for each department at the end of January.
Problem 2 - ABC versus Use of a Single Activity Base
Dixon Robotics manufactures three robot models: the A3B4, the BC11, and the C3P0. Dixon allocates manufacturing overhead to each model based on machine-hours. A large portion of the company's manufacturing overhead costs is incurred by the Maintenance Department. This year, the department anticipates that it will incur $100,000 in total costs. The following estimates pertain to the upcoming year.
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Model
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Estimated Machine-Hours
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Estimated Units of Production
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A3B4
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20,000
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6,250
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BC11
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15,000
|
5,000
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C3PO
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5,000
|
2,500
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Ed Smith, Dixon's cost accountant, suspects that unit costs are being distorted by using a single activity base to allocate Maintenance Department costs to products. Thus, he is considering the implementation of activity-based costing (ABC).
Under the proposed ABC method, the costs of the Maintenance Department would be allocated to the following activity cost pools using the number of work orders as an activity base: (1) the repairs pool and (2) the janitorial pool. Of the 2,000 work orders filed with the Maintenance Department each year, approximately 400 relate to repair activities, and 1,600 relate to janitorial activities.
Machinery repairs correlate with the number of production runs of each robot model. Thus, the repairs pool would be allocated to robots based on each model's corresponding number of production runs. Janitorial services correlate with square feet of production space. Thus, the janitorial pool would be allocated to products based on the square feet of production space devoted to each robot model. The following table provides a summary of annual production run activity and square footage requirements.
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Model
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Estimated Number of Production Runs
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Estimated Square Feet of Production Space Used
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A3B4
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50
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5,000
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BC11
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150
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10,000
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C3PO
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200
|
25,000
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Instructions -
a. Calculate the amount of Maintenance Department costs that would be allocated to each robot model (on a per-unit basis) using machine-hours as a single activity base.
b. Calculate the amount of Maintenance Department costs that would be allocated to each robot model (on a per-unit basis) using the proposed ABC method.
c. Are cost allocations distorted using machine-hours as a single activity base? Explain your answer.