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13. LO.

1 (predetermined OH rate) For 2008, Southwest Industrial has a monthly


overhead cost formula of $42,900 + $6 per direct hour. The firm’s 2008 expected annual
capacity is 156,000 direct labor hours to be incurred evenly each month. Making one unit
of the company’s product requires three direct labor hours. a. Determine the total
overhead to be applied per unit of product in 2008. b. Prepare journal entries to record the
application of overhead to Work in Process Inventory and the incurrence of $128,550 of
actual overhead January 2008, when 12,780 direct labor hours are worked. c. Given the
actual overhead labor hours in part (b), how many units would you have expected to be
produced in January?

a. Expected overhead = ($42,900 x 12) + ($6 x 156,000)


= $514,800 + $936,000
= $1,450,800

Predetermined overhead rate = $1,450,800 ÷ 156,000 =


$9.30 per DL hour

Overhead per unit = $9.30 x 3 hours per unit = $27.90

b. Manufacturing Overhead 128,550


Various Accounts
128,550

Work in Process Inventory (12,780 x $9.30) 118,854


Manufacturing Overhead
118,854

c. 12,780 DL hours ÷ 3 = 4,260 units should have been


produced

14. LO.1 (Predetermined OH rate) Cairo Productions applies overhead using a combined
rate for fixed and variable overhead. The rate is 125 percent of direct labor cost. During
the first three months of the current year, actual costs were incurred as follows: Direct
Labor Cost Actual Overhead January $360,000 $440,000 February 330,000 420,000
March 340,000 421,000 a. What amount of overhead was applied to production in each of
the three months? b. What was the underapplied or overapplied overhead for each of the
three months and for the first quarter?

a. Jan: $360,000 x 1.25 = $450,000


Feb: $330,000 x 1.25 = $412,500
Mar: $340,000 x 1.25 = $425,000
b. Jan : Actual – Applied = $440,000 - $450,000 = $10,000
overapplied
Feb: Actual – Applied = $420,400 - $412,500 = $
7,900 underapplied
Mar: Actual – Applied = $421,000 - $425,000 = $
4,000 overapplied

16. LO.2 (Underapplied and overapplied overhead) At the end of 2008, Westmeier
Corporation’s accounts showed a $33,000 credit balance in Manufacturing Overhead
Control. In addition, the company had a following account balance: Work In Process
Inventrory $192,000 Finished Goods Inventory 48,000 Cost of Goods Sold
360,000 a. Prepare the necessary journal entries to close the overhead account if the
balance is considered immaterial. b. Prepare the necessary journal entries to close the
overhead account if the balance is considered material. c. Which method do you believe
is more appropriate for the company and why?

a. Manufacturing Overhead 33,000


Cost of Goods Sold 33,000

b. Manufacturing overhead 33,000


Work in Process Inventory 10,560
Finished Goods Inventory 2,640
Cost of Goods Sold 19,800

WIP $192,000 192,000 ÷ 600,000 = 32% .32 x


$33,000 = $10,560
FG 48,000 48,000 ÷ 600,000 = 8% .08 x $33,000 =
2,640
CGS 360,000 360,000 ÷ 600,000 = 60% .60 x $33,000 =
19,800
Total $600,000

c. The method in part (b) would be more appropriate in this


instance because of the magnitude of the amount of
overapplied overhead. It is 5.5 percent of the total balances
in all of the accounts containing overhead, so to close it
directly to cost of goods sold would cause a distortion of the
costs remaining in inventory.

21. LO.4 (High-Low Method) Information about SnoCo’s utility cost for the last six
months of 2008 follows, The high-low method will be used to develop a cost formula to
predict 2009 utility charges, and the number machine hours has been found to be an
appropriate cost driver. Data for the first half of 2008 are not being considered because
the utility company imposed a significant tare change as of July 1, 2008. Month Machine
Hours Utility Cost July 33,750 $6,500 August 34,000 6,100 September 33,150 5,070
October 32,000 5,980 November 31,250 5,750 December 31,000 5,860 a. What is the
cost formula for utility expense? b. What is the budgeted utility cost for September 2009
if 33,175 machine hours are projected?

a. MHs Total Cost = Variable Cost +


Fixed Cost
High activity 34,000 $ 6,100 $2,720
$3,380
Low activity 31,000 5,860 2,480 3,380
Differences 3,000 $ 240

Variable rate = $240 ÷ 3,000 MHs = $0.08 per MH

High activity variable cost = 34,000 x $0.08 = $2,720


Low activity variable cost = 31,000 x $0.08 = $2,480

Fixed cost at high activity = $6,100 - $2,720 = $3,380


Fixed cost at low activity = $5,860 - $2,480 = $3,380

Budget formula: TC = FC + VC(X)


TC = $3,380 + $0.08 MH

b. TC = $3,380 + $0.08(33,175) = $3,380 + $2,654 = $6,034

30. LO.6 & LO.7 (Absorption vs. variable costing) Eastern Chemical Company uses
variable costing to manage its internal operations. The following data relate to the
company’s first year of operations, when 50,000 25000 units were produced and 46,000
21000 units were sold. Variable costs per unit Direct material $50 Direct labor 30
Variable overhead 14 Variable selling costs 12 Fixed Costs Selling and Administrative
$750,000 Manufacturing 500,000 How much higher (or lower) would the company’s first
year net income have been if absorption costing had been used rather than variable
costing? Show Computations.

The variance between variable and absorption net income is caused by


the difference in treatment of fixed manufacturing overhead.

Fixed overhead expensed:


Variable costing $500,000
Absorption costing $500,000 x (46,000 ÷ 50,000)
460,000
Net income difference $ 40,000

The company’s net income would have been $40,000 higher


under absorption costing.

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