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# Five problems: Overhead, Variable Costing Income Statements

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Exercise 5-14
White Company, Cutting and Finishing Department
Compute the predetermined overhead rate to be used in each department.
Figure the cost of Job 203.

Problem 5-23
High Desert Potteryworks, job-order costing system
Compute the predetermined overhead rate during the year for Molding Department and Painting Department
What was the amount of overapplied or underapplied overhead in each department?

Exercise 5A-2
Overhead rates and capacity issues
Security Pension Services
Marta Brinksi

Problem 6-18 variable costing, sales constant, production varies, lean productions
Bill Sharp of Essex Company
Absorption costing, variable costing, unit product cost

Exercise 7-15
Hiram's Lakeside, calculating and interpreting activity-based costing data

------------------------

SEE ATTACHED FOR BETTER FORMATTING:

EXERCISE 5-14 Departmental Overhead Rates [L02, L03, L04]
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

Required:
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:

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 plantwide overhead 1'ate based on direct labor cost,. rather than using departmental
rates? Explain. No computations are necessary.

Multiple Departments; Applying Overhead [L03, L04, L05]
High Desert Potteryworks makes a variety of pottery products that it sells to retailers such as Home Depot. The company uses a job-order costing system in 'which predetermined overhead rates are used to apply manufacturing overhead cost to jobs. The predetermined overhead rate in the Molding Department is based on machine-hours, and the rate in the Painting Depattment is based on direct labor cost. At the beginning of the year, the company's management made the following estimates:

The following information pertains to Job. 205, which was started on August 1 and completed on
August 10.

Department

Molding Painting
Direct labor-hours ........................................................ 30 85
Machine-hours ............................................................. 110 20
Materials placed into production .................................. \$470 \$332
Direct labor cost ........................................................... \$290 \$680

Systems Design: Job-Order Costing !!!

Required:
1. Compute the predetermined overhead rate used during the year in the Molding Department. Compute the rate used in the Painting Department.
2. Compute the total overhead cost applied to Job 205.
3. What would be the total cost recorded for Job 205? If the job contained 50 units, what would be the unit product cost?
4. At the end of the year, the records of High Desert Potteryworks revealed the following actual cost and operating data for all jobs worked on during the year:

What was the amount of underapplied or overapplied overhead in each department at the end of the year?

5A- Overhead Rates and Capacity' Issues [L03, L04, L05, LOB]
Security Pension Services helps clients to set up and administer pension plans that are in compliance with tax laws and regulatory requirements. The firm uses a job-order costing system in which overhead is applied to clients' accounts on the basis of professional staff hours charged to the accounts. Data concern ing two recent years appear below:

"Professional staff hours available" is a measure of the capacity of the firm. Any hours available that are not charged to clients' accounts represent unused capacity. All of the firm's overhead is fixed.
Required:
1. Marta Brinksi is an established client whose pension plan was set up many years ago. In both 2008 and 2009, only 2.5 hours of professional staff time were charged to Ms. Brinksi's account. If the company bases its predetermined overhead rate on the estimated overhead cost and the estimated professional staff hours to be charged to clients, how much overhead cost would have been applied to Ms. Blinksi's account in 2008? In 2009?
2. Suppose that the company bases its predetermined overhead rate on the estimated overhead cost and the estimated professional staff hours to be charged to clients as in (1) above. Also suppose that the actual professional staff hours charged to clients' accounts and the actual overhead costs turn out to be exactly as estimated in both years. By how much would the overhead be underapplied or overapplied in 2008? In 2009?
3. Refer back to the data concerning Ms. Brinksi in (1) above. If the company bases its predetermined overhead rate on the professional staff hours available, how much overhead cost would have been applied to Ms. Brinksi's account in 2008? In 2009?

4. Suppose that the company bases its predetermined overhead rate on the professional staff hours avail­ able as in (3) above. Also suppose that the actual professional staff hours charged to clients' accounts and the actual overhead costs turn out to be exactly as estimated in both years. By how much would
-the overhead be underapplied or overapplied in 2008? In 2009?

{PROBLEM 6- Variable Costing Income Statements; Sales Constant, Production Varies; (ean Production [LOl, L02, L03, L04]
"This makes no sense at all," said Bill Sharp, president of Essex Company. "We sold the same number of units this year as we did last year, yet our profits have more than doubled. Who made the goof-the computer or the people who operate it?" The statements to which Mr. Sharp was referring are shown below (absorption costing basis):

Sales (20,000 units each year) ............................................... Cost of goods sold ..................................................................
Gross margin .......................................................................... Selling and administrative expenses ......................................
Net operating income .............................................................

Year1 Year2
\$700,000
460,000
240,000
200,000
\$ 40,000

The statements above show the results of the first two years of operation. In the first year, the company produced and sold 20,000 units; in the second year, the company again sold 20,000 units, but it increased production as shown below:

Year 1 Year2
Production in units ........................................................................... 20,000 25,000
Sales in units ................................................................................... 20,000 20,000
Variable manufacturing cost per unit produced ............................... \$8 \$8
Variable selling and administrative expense per unit sold ............... \$1 \$1
Fixed manufacturing overhead costs (total) ..................................... \$300,000 \$300,000

Essex Company applies fixed manufacturing overhead costs to its only product on the basis of each year's production. Thus, a new fixed manufacturing overhead rate is computed each year.
Required:
1. Compute the unit product cost for each year under:
a. Absorption costing.
b. Variable costing.
2. Prepare a contribution format variable costing income statement for each year.
3. Reconcile the variable costing and absorption costing net operating income figures for each year.
4. Explain to the president why, under absorption costing, the net operating income for Year 2 was higher than the net operating income for Year 1, although the same number of units was sold in each year.
5. a. Explain how operations would have differed in Year 2 if the company had been using Lean Production and ending inventories had been eliminated.
b. If Lean Production had been used during Year 2, what would the company's net operating income have been under absorption costing? Explain the reason for any difference between this income figure and the figure reported by the company in the statements above.

I RCISE 7-l;balculating and Interpreting Activity-Based Co ting Data [L03, L04]
Hiram's Lakeside is a popular restaurant located on Lake Washington in Seattle. The owner of the restaurant has been trying to better understand costs at the restaurant and has hired a student intern to conduct an activity-based costing study. The intern, in consultation with the owner, identified three major activities and then completed the first-stage allocations of costs to the activity cost pools. The results appear below.

Activity Cost Pool

Serving a party of diners ............. Serving a diner ............................ Serving drinks..............................

Activity Measure

Number of parties served Number of diners served Number of drinks ordered

Total Cost

\$33,000
\$138,000
\$24,000

Total Activity

6,000 parties
15,000 diners
10,000 drinks

The above costs include all of the costs of the restaurant except for organization-sustaining costs such as rent, property taxes, and top-management salaries.
A group of diners who ask to sit at the same table are counted as a party. Some costs, such as the costs of cleaning linen, are the same whether one person is at a table or the table is full. Other costs, such as washing dishes, depend on the number of diners served.
Prior to the activity-based costing study, the owner knew very little about the costs of the restaurant. She knew that the total cost for the month (including organization-sustaining costs) was \$240,000 and that
15,000 diners had been served. Therefore, the average cost per diner was \$16.
Required:
1. According to the activity-based costing system, what is the total cost of serving each of the following parties of diners?
a. A party of four diners who order three drinks in total.
b. A party of two diners who do not order any drinks.
c. A lone diner who orders two drinks.
2. Convert the total costs you computed in (1) above to costs per diner. In other words, what is the average cost per diner for serving each of the following parties?
a. A party of four diners who order three drinks in total.
b. A party of two diners who do not order any drinks.
c. A lone diner who orders two drinks.
3. Why do the costs per diner for the three different parties differ from each otl1er and from the overall average cost of \$16 per diner?

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#### Solution Preview

Posting includes:

Exercise 5-14
White Company, Cutting and Finishing Department
Compute the predetermined overhead rate to be used in each department.
Figure the cost of Job 203.

Problem 5-23
High Desert Potteryworks, job-order costing system
Compute the predetermined overhead rate during the year for Molding Department and Painting Department
What was the amount of overapplied or underapplied overhead in each department?

Exercise 5A-2
Overhead rates and capacity issues
Security Pension Services
Marta Brinksi

Problem 6-18 variable costing, sales constant, production varies, lean productions
Bill Sharp of Essex Company
Absorption costing, variable costing, unit product cost

Exercise 7-15
Hiram's Lakeside, calculating and interpreting activity-based costing data

------------------------

SEE ATTACHED FOR BETTER FORMATTING:

EXERCISE 5-14 Departmental Overhead Rates [L02, L03, L04]
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

Required:
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:

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 plantwide overhead 1'ate based on direct labor cost,. rather than using departmental
rates? Explain. No computations are necessary.

Multiple Departments; Applying Overhead [L03, L04, L05]
High Desert Potteryworks makes a variety of pottery products that it sells to retailers such as Home Depot. The company uses a job-order costing system in 'which predetermined overhead rates are used to apply manufacturing overhead cost to jobs. The predetermined overhead rate in the Molding Department is based on machine-hours, and the rate in the Painting Depattment is based on direct labor cost. At the beginning of the year, the company's management made the following estimates:

The following information pertains to Job. 205, ...

#### Solution Summary

Your tutorial is attached in EXCEL. Click in cells to see calculations. Instructional comments are on the sheets.

\$2.19

## Managerial Accounting Exercises / Problems

Please refer to attached Word Document for Instructions.

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Problem 1.

The following monthly budgeted data are available for a wholesale company:

Product L Product Z Product C
Sales \$400,000 \$200,000 \$800,000
Variable expenses 240,000 140,000 640,000
Contribution margin \$160,000 \$ 60,000 \$160,000

Budgeted net operating income for the month is \$130,000.

Required:

a. Calculate the break-even sales for the month.

b. Calculate the margin of safety in sales dollars.

c. Calculate the operating leverage for both budgeted and actual data.

d. Actual total sales for the month were the same as the budgeted sales--\$1,400,000. However, the sales mix changed so that sales by product were: L, \$560,000; Z, \$280,000; C, \$560,000. Calculate the expected net operating income with this new sales mix. Explain why this net operating income figure differs from the original budgeted net operating income of \$130,000.

Problem 2.

Data concerning Breedon Company's operations last year appear below:

Units in beginning inventory -0-
Units produced 12,000
Units sold 11,250

Selling price per unit \$90

Variable costs per unit:
Direct materials \$20
Direct labor 10
Variable manufacturing overhead 8
Variable selling and administrative 5

Fixed costs in total:
Fixed manufacturing overhead \$180,000
Fixed selling and administrative 150,000

Required:

a. Compute the unit product cost under both absorption and variable costing.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.

d. Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year.

Problem 3.

Maher Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price \$129

Units in beginning inventory 0
Units produced 3,700
Units sold 3,600
Units in ending inventory 100

Variable costs per unit:
Direct materials \$37
Direct labor 38
Variable manufacturing overhead 6
Variable selling and administrative 5

Fixed costs:
Fixed manufacturing overhead \$103,600
Fixed selling and administrative 50,400

Required:

a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the variable costing method.
d. Prepare an income statement for the month using the absorption costing method.
e. Reconcile the variable costing and absorption costing net operating incomes for the month.

Problem 4.

Hatch Hardwood Floors installs oak and other hardwood floors in homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Office expense \$160,000
Total \$320,000

Distribution of resource consumption:
Activity Cost Pools
Installing Job
Floors Support Other Total
Production overhead 45% 35% 20% 100%
Office expense 10% 60% 30% 100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Annual Activity
Installing floors 800 squares
Job support 160 jobs
Other Not applicable

A "square" is a measure of area that is roughly equivalent to 1,000 square feet.

Required:
a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Installing
Floors Job Support Other Total
Office expense
Total

b. Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors and Job Support activity cost pools by filling in the table below:

Installing
Floors Job Support Other Total
Office expense
Total

c. Compute the overhead cost, according to the activity-based costing system, of a job that involves installing 2.4 squares.

Problem 5.

Randall Company is a merchandising company that sells a single product. The company's inventories, production, and sales in units for the next three months have been forecasted as follows:

October November December
Beginning inventory 10,000 10,000 10,000
Merchandise purchases 60,000 70,000 35,000
Sales 60,000 70,000 40,000
Ending inventory 10,000 10,000 5,000

Units are sold for \$12 each. One fourth of all sales are paid for in the month of sale and the balance is paid in the following month. Accounts receivable at September 30 totaled \$450,000.

Merchandise is purchased for \$7 per unit. Half of the purchases are paid for in the month of the purchase and the remainder is paid in the month following purchase. Selling and administrative expenses are expected to total \$120,000 each month. One half of these expenses will be paid in the month in which they are incurred and the balance will be paid in the following month. There is no depreciation. Accounts payable at September 30 totaled \$290,000.

Cash at September 30 totaled \$80,000. A payment of \$300,000 for purchase of equipment is scheduled for November, and a dividend of \$200,000 is to be paid in December.

Required:

a. Prepare a schedule of expected cash collections in good form for each of the months of October, November, and December.

b. Prepare a schedule showing expected cash disbursements for merchandise purchases and selling and administrative expenses for each of the months October, November, and December.

c. Prepare a cash budget in good form for each of the months October, November, and December. There is no minimum required ending cash balance.

Problem 6.

A sales budget is given below for one of the products manufactured by the Key Co.:

Sales Budget
in Units
January 20,000
February 35,000
March 60,000
April 40,000
May 30,000
June 25,000

The inventory of finished goods at the end of each month must equal 20% of the next month's sales. On December 31, the finished goods inventory totaled 4,000 units.

Each unit of product requires three specialized electrical switches. Since the production of these specialized switches by Key's suppliers is sometimes irregular, the company has a policy of maintaining an ending inventory at the end of each month equal to 30% of the next month's production needs. This requirement had been met on January 1 of the current year.

Required:

Prepare a budget showing the quantity of switches to be purchased each month for January, February, and March and in total for the quarter.
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