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Managerial Accounting Overhead Allocation

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1) Duggan Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $290,030 for the year, and machine usage is estimated at 126,100 hours.
For the year, $308,864 of overhead costs are incurred and 132,300 hours are used.

Compute the manufacturing overhead rate for the year. (Round answers to 2 decimal places, e.g. 1.25.)

2) The ledger of Custer Company has the following work in process account.

Work in Process—Painting
5/1 Balance 4,200 5/31 Transferred out ?
5/31 Materials 6,570
5/31 Labor 3,500
5/31 Overhead 1,370
5/31 Balance ?

Production records show that there were 420 units in the beginning inventory, 30% complete, 1,590 units started, and 1,400 units transferred out. The beginning work in process had materials cost of $2,500 and conversion costs of $1,700. The units in ending inventory were 40% complete. Materials are entered at the beginning of the painting process.

(a) How many units are in process at May 31?

(b) What is the unit materials cost for May? (Round unit costs to 2 decimal places, e.g. 2.25.)

(c) What is the unit conversion cost for May? (Round unit costs to 2 decimal places, e.g. 2.25.)

3) Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the company's operations.

Standard Custom
Direct labor costs $51,100 $103,000
Machine hours 1,400 1,200
Setup hours 110 420

Total estimated overhead costs are $303,900. Overhead cost allocated to the machining activity cost pool is $196,100, and $107,800 is allocated to the machine setup activity cost pool.

Compute the overhead rate using the traditional (plant wide) approach. (Round answers to 2 decimal places, e.g. 12.25%.)

Predetermined overhead rate ? % of direct labor cost

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Solution Summary

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See Also This Related BrainMass Solution

Management Accounting: Overhead Allocation for Energetic Ltd

i need to produce a spreadsheet. The spreadsheet should be designed in a way that would allow an inexperienced user to alter any variable and for the product costs and pie charts to update automatically.

i also need help starting a report to senior management that should:
(i) explain clearly your proposed overhead allocation approach and why you believe it to be more effective than the previous one
(ii) comment on the key findings from the new overhead allocation system
(iii) discuss any limitations that you think the new approach still has.

Introduction
Task 1 is designed to test your knowledge and understanding of overhead cost analysis and also to improve your spreadsheet design skills. The task requires you to produce a spreadsheet that shows an overhead analysis and total costs of two products showing the results both graphically and as tables of figures.
Task 1
Energetic Ltd is a company that builds bespoke bicycles for racing. It produces two models the Econo-bike and the Luxi-bike. Annual production is expected to be 2000 units of the Econo-bike and 1000 units of the Luxi-bike. Both models are based on carbon fibre frames and Energetic Ltd buys these from the manufacturer for €800 each. The other direct costs and requirements of the building for each bike are shown in the table below.

Cost Econo-bike (€) Luxi-bike(€)
Forks 120 180
Wheels 80 110
Components 75 190
Saddle and handlebars 75 110

Workshop labour hours 7 per bike 12 per bike
Finishing department labour hours 12 per bike 20 per bike
Workshop machine hours 12 per bike 14 per bike
Finishing department machine hours 4 per bike 6 per bike

Average wage rate (Workshop) €13.00 per hour
Average wage rate (Finishing department) €18.00 per hour

In addition to the workshop and finishing department Energetic Ltd operate a quality control department and a parts warehouse. Total wages in the quality control department are €200,000 per year and in the warehouse €160,000 per year.

Total manufacturing overhead costs for the company are as shown in the table below:

Overhead Total annual cost
Premises costs €350,000
Light and power €160,000
Training €40,000
Plant depreciation €100,000

In addition, the company has provided the following information:

Workshop Finishing Dept Quality Dept Warehouse
Floor area (square meters) 800 1000 120 500
Number of staff 10 20 6 4
Value of Plant €250,000 €120,000 0 €60,000
Quality control visits per year 250 380
Deliveries from warehouse per year 690 890

The company uses absorption costing to allocate overheads to product costs. Currently, the company is using a simple blanket absorption rate across the company based on the number of units produced. However, Energetic Ltd has experienced a drastic increase in overheads over the last few years combined with increased competition in the industry. Therefore, senior management has decided to monitor their production overheads more closely. They also intend to include the reduction of overheads as part of the departmental performance targets to encourage departments to work more efficiently. However, they have been informed by their accountant that the existing overhead allocation system is too crude to allow a detailed overhead analysis.

You have been asked by one of the senior managers to prepare a report to management proposing a new overhead allocation system. They do not want to give up absorption costing at this stage but hope that you might come up with a more accurate way of allocating the overheads to products. As part of this task they would like you to create a spreadsheet that will work out the full product costs while showing how the overheads are allocated to the departments. They intend to use this spreadsheet for monitoring the overheads over the next few years. Therefore it is essential that the spreadsheet is designed in such a way that it can be easily updated every year. They also want to be able to carry out "what-if" analysis on the figures (this means they need a spreadsheet in which they can alter any variable and see the effect this has on overall costs. They also want the spreadsheet to include pie charts showing the overall cost make up of each of the two products.

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