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Job Costing, Cost Estimation, Estimating Overhead Rates

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See the attached document "Problem Cost Estimation, Estimating Overhead Rates, Job Costing, Decision-Making: O'Leary Corporation for all properly formatted information.

O'Leary Corporation manufactures special purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications).O'Leary uses a normal job costing system. Direct labor at O'Leary is paid $17 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates). See the attached document "Problem Cost Estimation, Estimating Overhead Rates, Job Costing, Decision-Making: O'Leary Corporation for all properly formatted information.

Required:
a. What was the amount in the beginning Finished Goods and beginning Work-In-Process accounts for year 3?

b. O'Leary incurred direct materials cost of $57,000 and used an additional 300 hours in year 3 to complete job MC-275. What was the final total cost charged to job MC-275?

c. What was the over-applied or under-applied overhead for year 3?

d. O'Leary prorates any over-applied or under-applied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-In-Process Inventory. Prepare the journal entry to prorate the Over-applied or Under-applied Overhead computed in requirement (C).

e. A customer has asked O'Leary to bid on a job to be completed in year 4. O'Leary estimates that the job will require about $92,500 in direct materials and 5,000 direct labor-hours. Because of the economy, O'Leary expects demand for their services to be low in year 4, and the CEO wants to bid aggressively, but does not want to lose any money on the project. O'Leary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount O'Leary can bid on the job and still not incur a loss?

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Solution Summary

This solution is comprised of a cost accounting problem that deals with several different topics. These topics include: how to calculate work-in-process inventory, finished goods inventory, over-applied overhead, and record the required journal entry to prorate the over-applied overhead. An additional part of the problem requires decision making.
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Compute predetermined overhead rate for each department; apply it

White Company has two departments, Cutting and Finishing. The company uses a job-order costing system and computes a predetermined overhead rate in each department. The Cutting Department bases its rate on machine-hours, and the Finishing Department bases its rate on direct labor cost. At the beginning of the year, the company made the following estimates:
Department
Cutting Finishing
Direct labor-hours 6,000 30,000
Machine hours 48,000 5,000
Manufacturing overhead cost $360,000 $486,000
Direct labor cost $50,000 $270,000

1. Compute the predetermined overhead rate to be used in each department.
2. Assume that the overhead rates that you computed in (1) above are in effect. The job cost sheet for Job 203, which was started and completed during the year, showed the following:

Department
Cutting Finishing
Direct labor-hours 6 20
Machine hours 80 4
Manufacturing overhead cost $500 $310
Direct labor cost $70 $150,000

Compute the total overhead cost applied to job 203

3. Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plant-wide overhead rate based on direct labor cost, rather than using departmental rates? Explain.

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