Problem - Cost accumulation in two departments
Country Products manufactures quilt racks. Pine is introduced in Department 1, where the raw material is cut and assembled. In Department 2, completed racks are stained and packaged for shipment Department 1 applies overhead on the basis of machine hours; Department 2 applies overhead on the basis of direct labor hours. The company's predetermined overhead rates were computed using the following information:
Department 1 Department 2
Expected overhead $465,000 $380,600
Expected DLHs 4,000 22,000
Expected MHs 30,000 2,500
Sue Power contacted Country Products to produce 500 quilt racks as a special order. Power wanted the racks made from teak and to be made larger than the company's normal racks. Country Products designated Power's order as Job #462.
During July, Country Products purchased $346,000 of raw material on account, of which $19,000 was teak. Requisitions were issued for $340,000 of raw material including all the teak. There were 285 direct labor hours worked (at a rate of $11 per DLH) and 2,400 machine hours recorded in Department 1; of these hours, 25 DLHs and 320 MHs were on Job #462. Department 2 had 1,430 DLHs (at a rate of $18 per DLH) and 180 MHs; of these, 158 DLHs and 20 MHs were worked on Job #462 Assume that all wages are paid in cash.
Job #462 was completed on July 28 and shipped to Power. She was billed cost plus 20 percent.
a. What are the predetermined overhead rates for Departments l and 2?
b. Prepare journal entries for the July transactions.
c. What were the cost and selling price per unit of Job #462? What was the cost per unit of the raw material?
d. Assume that enough pine had been issued in July for 20,000 quilt racks. The RM Inventory manager is a friend of Power and he conveniently ~forgot'' to trace the cost of the teak specifically to Job #462.
e. What would have been the effect of this error on the raw material cost, total cost, and selling price for each unit in Job #462?