1. Rex's Biscuits
Rex has a bakery that specializes in dog treats in a variety of sizes and flavors. Rex uses a flexible budget to forecast manufacturing overhead, which is then allocated to produts based on oven hours. The annual flexible overhead budget is estimated to be $200,000 plus $15 per oven hour. The budgeted number of even hours for the year is 20,000. A the end of the year, it turns out that 22,000 even hours were used and actual overhead costs totaled $530,000.
A. Calculate the ovehead application rate at the beginning of the year.
B. Calculate the amount of under or over-absorbed overhead for the yeer.
C. The policy is to write off any under or over-absorbed overhead to cost of goods sold at the end of the year. Will Rex's net income rise or fall this year when the under or ovee-absorbed overhead is closed out?
2. Sail New England
Sail New England prduces small sailboats for beginning sailors and for small boat regattas. Sales in the most recent year were $5,000,000 with profits before taxes of $600,000. Annual S,G,& A expenses are approximaely $1000,000, direct materials and direct labor for products sold were $1,900,000 and $600,000, respctively.
Sail New England has a loan outstanding of $700,000 with its current bank, and has come to your bank to see if you will offer better terms to replace the existing loan. The CFO has forwarded you their annual report in preparation for a meeting to discuss the loan. While reviewing their annual report, you find the following footnote:
Note 1: Under-absorbed overhead of $600,000 was prorated to inventories (75%) and cost of goods sold (25%).
A. How does tthis footnote affect your evaluation of Sail New England and its credit-worthiness?
B. What questions do you want to ask the president and CFO regarding the footnote?