Problem:
The Riverston plant produces sheet metal shell casings for electronic equipment for one large customer. The shell casings are manufactured on a computerized, numerically controlled (NC) machine that cuts, drills, and bends the metal to form the shell casings for the electronic equipment. Two different shell casings are produced: CASING 1 and CASING 2.
Riverston has a single plantwide overhead account. Actual machine minutes on the NC machine are used to distribute overhead to the two products. There were no beginning inventories of work in process or finished goods. The following table summarizes the planned and actual production data for the year:
|
|
CASING 1
|
CASING 2
|
|
Planned Unit Production
|
6,500
|
3,400
|
|
Budgeted machine minutes per unit
|
x 6.2
|
x 9.8
|
|
Expected machine minutes
|
40,300
|
33,320
|
|
Actual units produced
|
7,200
|
3,900
|
|
Actual volume (machine minutes)
|
44,640
|
38,220
|
The following data summarize the flexible overhead budget:
|
|
Fixed
|
Variable (per Minute)
|
|
Depreciation
|
$ 695,000
|
|
|
Indirect labor
|
|
$ 0.80
|
|
Indirect materials
|
|
1.00
|
|
Property taxes
|
28,000
|
|
|
Utilities
|
55,000
|
0.90
|
|
Other
|
42,000
|
0.30
|
|
Total
|
$ 820,000
|
$ 3.00
|
At the end of the year, the following overhead amounts had been incurred:
|
|
Actual
|
|
Depreciation
|
$ 695,000
|
|
Indirect labor
|
71,288
|
|
Indirect materials
|
84,860
|
|
Property taxes
|
31,000
|
|
Utilities
|
133,074
|
|
Other
|
68,858
|
|
Total
|
$ 1,084,080
|
Any over- or underabsorbed overhead is written off to cost of goods sold. The ending finished goods inventory consists of 2,000 units of CASING 1 and 1,000 units of CASING 2, representing 13,400 minutes and 10,300 minutes of actual machine time, respectively.
i. Calculate the overhead absorption rate set at the start of the year. Show calculations step by step.
ii. Calculate the over- or underabsorbed overhead for the year. Show calculations step by step.
iii. The firm is considering switching to variable costing. What effect would this decision have on Riverston’s reported profit for this year? To implement variable costing at the end of the year, variable overhead is calculated as $3.00 per machine minute times the actual number of machine minutes. Fixed overhead is the difference between total actual overhead and variable overhead. Show calculations step by step and provide a detailed explanation.
iv. Instead of defining fixed overhead as all overhead in excess of variable overhead as in part (c), assume the following: Fixed overhead is budgeted fixed overhead ($820,000), and variable overhead is the difference between total actual overhead and budgeted fixed overhead. What is the difference between absorption net income and variable costing income given theses new assumptions? Show calculations step by step and provide a detailed explanation.