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Questions on Overhead Allocation

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Jack owns a small factory that produces buttons for garment industry. Jack wants to buy a new machine and has applied to a bank for financing. The loan officer has asked for operating statements for the past year. The company's net income has not been very good over the last year, and inventory has grown substantially. Jack is concerned that the bank will not loan the money as they will not be as optimistic as he is about Jack's future sales and the company's ability to reduce its inventory. Yesterday Jack had the following conversation with the company's controller.

Jack: You know that I have applied for a bank loan and that the bank wants copies of our operating statements for the last 12 months.
Controller: I can have those ready for you today.
Jack: I would like you to make some changes before you prepare those statements.
Controller: what changes?
Jack: I want you to increase our predetermined overhead rate by 25% and then recalculate the inventory figures and last year's income statement using the new rate. Also, move my salary and our office rent into the manufacturing overhead pool. I will need those statements in the morning.

1.What effect would the change in predetermined overhead rate have on the company's inventory values?
2.What effect would the reclassification of Jack's salary and the office rent have on the company's product costs?
3.What parts of a financial statement would reveal Jack's changes to the loan officer?

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1.What effect would the change in predetermined overhead rate have on the company's inventory values?

When the predetermined overhead rate is increased by 25%, then the unit cost (consisting of direct labor, direct material, and manufacturing overhead) would increase. This would cause the ...

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Solution contains answers to the following questions:

1.What effect would the change in predetermined overhead rate have on the company's inventory values?
2.What effect would the reclassification of Jack's salary and the office rent have on the company's product costs?
3.What parts of a financial statement would reveal Jack's changes to the loan officer?

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See Also This Related BrainMass Solution

Cost Allocation Sample Question: Direct Method

2. Computer Information Services is a computer software consulting company. Its three major functional areas are computer programming, information systems consulting, and software training. Carol Birch, a pricing analyst in the Accounting Department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Birch is considering three different methods of allocating overhead costs-the direct method, the step method, and the reciprocal method. Birch assembled the following data on overhead from its two service departments, the Information Systems Department and the Facilities Department.

Service Departments User Departments
Info Computer
Systems Facilities Program Consult Training Total
Budgeted Overhead $50,000 $25,000 $75,000 $110,000 $85,000 $345,000
Info Systems (hrs) 400 1,100 600 900 3,000
Facilities (Sq ft) 200,000 400,000 600,000 800,000 2,000,000

Information systems is allocated on the basis of hours of computer usage; facilities are allocated on the basis of floor space.

Required:

Allocate the service department costs to the user departments using the direct method. (Round to the nearest dollar and provide total user department costs).

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