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Accounting Problems: Varying Predetermined Overhead Rates and Javadi Company

(See attached file for full problem description)

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EXERCISE 2-10 Varying Predetermined Overhead Rates (LO3, LO5)
Javadi Company makes a composting bin that is subject to wide seasonal variations in demand. Unit Product costs are computed on a quarterly basis by dividing each quarter's manufacturing costs ( materials, labor, and overhead) by the quarter's production in units. The company estimated costs, by quarter, for the coming year are given below:

__________________Quarter_____________________
First Second Third Fourth
Direct Materials $240,000 $120,000 $60,000 $180,000
Direct labor 96,000 48,000 24,000 72,000
Manufacturing costs 228,000 204,000 192,000 216,000
Total manufacturing costs $564,000 $372,000 $276,000 $468,000

Number of units to be produced 80,000 40,000 20,000 60,000
Estimated unit product cost $7.05 $9.30 $13.80 $7.80

Management finds the variation in the unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead, since it is the largest element of cost. Accordingly, you have been asked to find more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company's overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.

Required:
1. The company uses a job - order costing system. How would you recommend that manufacturing overhead cost be assigned to production? Be specific, and show computations.
2. Recompute the company's unit costs in accordance with your recommendations in (1) above.

Chapter 3

EXERCISE 3-9 Assigning Overhead to Products in ABC (LO3)
Refer to the data in Exercise 3-8 for Sultan Company. The activities during the year were distributed across the company's four products as follows:

Actual Product Product Product Product
Activity Cost Pool Activity A B C D
Labor related 25,000 DLHs 6,000 10,000 4,000 5,000
Purchase orders 200 orders 60 30 20 90
Parts management 110 parts type 30 25 40 15
Board etching 1,800 boards 500 900 400 0
General Factory 22,000 MHs 3,000 8,000 5,000 6,000

Chapter 4
Required:
Compute the amount of overhead cost applied to each product during the year.

PROBLEM 4-17 Comprehensive Process Costing Problem - Weighted -Average
Method (LO1, LO2, LO3, LO4, LO5)

Techno Co. produces a special kind of tool that is widely used by construction. The tool is produced in two processes: bending and drilling. Raw materials are introduced at various points in the Bending Department; labor and overhead costs are incurred evenly through the bending operation. The bent output is then transferred to the Drilling Department.
The following incomplete Work in Process account has been provided for the Bending Department for May:

Work in Process - Bending Department
May 1 inventory (12,000 units; materials 80%
complete; labor and overhead 60%
complete) 45,369
May costs dded:
Raw materials (270,000 units) 394,210
Direct labor 638,144
Overhead 493,584

? Completed and transferred
To drilling ( ? Units)
May 31 inventory (9,000; materials
90% complete; labor
and overhead 60% complete) ?

The May 1 work in process inventory in the Bending Department consists of the following cost elements: raw materials, $13,385; direct labor, $18,880; and overhead, $13,104. Costs incurred during May in the Drilling Department were: materials used, $100,800; direct labor, $250,600; and overhead cost applied to production, $189,000.
The company accounts for units and costs using the weighted-average method.

Required:
1. Prepare journal entries to record the costs incurred in both the Bending Department and the Drilling Department during May. Key your entries to the items (a) through (g) below.
a. Raw materials were issued for use in production.
b. Direct labor costs were incurred.
c. Manufacturing overhead costs for the entire factory were incurred, $685,000. (Credit Accounts Payable.)
d. Manufacturing overhead cost was applied to production using a predetermined overhead rate.
e. Units that were complete as to processing in the Bending Department were transferred to eh Drilling Department, $1,536,990.
f. Units that were complete as to processing in the Drilling Department were transferred to Finished Good, $1,650,000.
g. Completed units were sold on account, $2,700,000. the Cost of Goods Sold was $1,600,000.
2. Post the journal entries from (1) above T-accounts. The following account balances existed at the beginning of May. (the beginning balance in the Bending Department's Work in Process account is given above.)

Raw Materials $500,000
Work in Process-Drilling Department $10,000
Finished Goods $110,000
After posting the entries to the T-accounts, find the ending balance in the inventory accounts and the manufacturing overhead accounts.

3. Prepare a production report for the Bending Department for May.

Attachments

Solution Preview

Please see attached file.

Chapter 2
EXERCISE 2-10 Varying Predetermined Overhead Rates (LO3, LO5)
Javadi Company makes a composting bin that is subject to wide seasonal variations in demand. Unit Product costs are computed on a quarterly basis by dividing each quarter's manufacturing costs ( materials, labor, and overhead) by the quarter's production in units. The company estimated costs, by quarter, for the coming year are given below:

__________________Quarter_____________________
First Second Third Fourth
Direct Materials $240,000 $120,000 $60,000 $180,000
Direct labor 96,000 48,000 24,000 72,000
Manufacturing costs 228,000 204,000 192,000 216,000
Total manufacturing costs $564,000 $372,000 $276,000 $468,000

Number of units to be produced 80,000 40,000 20,000 60,000
Estimated unit product cost $7.05 $9.30 $13.80 $7.80

Management finds the variation in the unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead, since it is the largest element of cost. Accordingly, you have been asked to find more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company's overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.

Required:
1. The company uses a job - order costing system. How would you recommend that manufacturing overhead cost be assigned to production? Be specific, and show computations.
2. Recompute the company's unit costs in accordance with your recommendations in (1) above.

Solution:
1. To determine the factory overhead applied, we use a predetermined overhead rate whereby at the beginning of the year each production department makes an estimated of the total overhead costs and expected activity for the year. The estimated overhead costs are then divided by the estimated activity to get the predetermined overhead rate.

First, we need to determine the total overhead costs and expected activity for the year.

First Second Third Fourth = Year
Manufacturing costs ...

Solution Summary

This solution is comprised of a detailed explanation to answer the request of the assignment in two attached files. The T-Accounts and Production Report are included in the Excel file. Discussion and journal entries are provided in the attached Word document.

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