Part B Application of Job Order Costing
Scanlon Company has a job-order costing system and applies manufacturing overhead cost to
products on the basis of machine-hours. The following estimates were used in preparing the
predetermined overhead rate for the most recent year:
Machine-hours............................... 95,000
Manufacturing overhead cost ........ $1,710,000
During the most recent year, a severe recession in the company's industry caused a buildup of
inventory in the company's warehouses. The company's cost records revealed the following actual
cost and operating data for the year:
Machine-hours............................................................................. 75,000
Manufacturing overhead cost ...................................................... $1,687,500
Amount of applied overhead in inventories at year-end:
Work in process........................................................................ $337,500
Finished goods.......................................................................... $253,125
Amount of applied overhead in cost of goods sold.................. $759,375
Required:
a. Compute the company's predetermined overhead rate for the year and the amount of underapplied
or overapplied overhead for the year.
b. Determine the difference between net operating income for the year if the underapplied or
overapplied overhead is allocated to the appropriate accounts rather than closed directly to Cost of
Goods Sold.
Answer
Allocation of underapplied overhead:
The company's predetermined overhead rate for the year is: $1,710,000/95,000 MHs = $18 per MH
The amount of underapplied/overapplied overhead is:
Actual Overhead
$1687,500
Applied Overhead ($18*75,000) (-)
$1,350,000
Under Applied Overhead
$337,500
Allocation of underapplied overhead:
Overhead applied in work in process
$337,500
25.00%
Overhead applied in finished goods
$253,125
18.75% $63,281
Overhead applied in cost of goods sold (+)
$759,375
56.25% $189,844
Total overhead applied
$ 1,350,000
100.0%
$84,375
$337,500
The entire amount of underapplied overhead $337,500 is added to Cost of Goods Sold where no
allocation occurs.
Allocation results in only $189,844 being added to Cost of Goods Sold.
Net operating income would be higher under allocation by $337,500 - $189,844 = $147,656.
Part E: Activity-Based Costing
Welk Manufacturing Corporation has a traditional costing system in which it applies
manufacturing overhead to its products using a predetermined overhead rate based on direct
labor-hours (DLHs). The company has two products, H16Z and P25P, about which it has
provided the following data:
Direct materials per unit ................
Direct labor per unit ......................
Direct labor-hours per unit ............
Annual production .........................
H16Z P25P
$10.20 $50.50
$8.40 $25.20
0.40
1.20
30,000 10,000
The company’s estimated total manufacturing overhead for the year is $1,464,480 and
the company’s estimated total direct labor-hours for the year is 24,000.
The company is considering using a variation of activity-based costing to determine its
unit product costs for external reports. Data for this proposed activity-based costing
system appear below:
Activities and Activity Measures
Supporting direct labor (DLHs) .................
Setting up machines (setups) .....................
Parts administration (part types) ................
Total ...........................................................
Supporting direct labor ......
Setting up machines ...........
Parts administration ...........
Estimated Overhead
Cost
$ 552,000
132,480
780,000
$1,464,480
H16Z P25P
Total
12,000 12,000 24,000
864
240 1,104
600
960 1,560
Required:
a. Determine the manufacturing overhead cost per unit of each of the company's two
products under the traditional costing system.
b. Determine the manufacturing overhead cost per unit of each of the company's two
products under activity-based costing system.
Answer
a. Traditional Manufacturing Overhead Costs
Predetermined overhead rate = $1,464,480 ÷ 24,000 DLHs = $61.02 per DLH
Direct labor-hours......................................
Predetermined overhead rate per DLH......
Manufacturing overhead cost per unit.......
H16Z P25P
0.40
1.20
$61.02 $61.02
$24.41 $73.22
b. ABC Manufacturing Overhead Costs
Total Expected
Estimated
Activity Rate
Overhead Cost
Activity
Supporting direct labor
$552,000
24,000 DLHs
$23 per DLH
Setting up machines
$132,480
1,104 setups
$120 per setup
Parts administration
$780,000
1,560-part types
$500 per part
type
Activity Rate
Activity
ABC cost
Supporting direct labor
$23 per
DLH
12,000 DLHs
$276,000
Setting up machines
$120 per
setup
864 setups
$103,680
Parts administration
$500 per
part type
600-part types
$300,000
Overhead cost for H16Z
Total
$679,680
Annual Production
$30,000
Manufacture Overhead
cost per unit
$22.66
Overhead cost for P25P
Activity Rate
Activity
ABC cost
Supporting direct labor
$23 per
DLH
12,000 DLHs
$276,000
Setting up machines
$120 per
setup
240setups
$28,800
Parts administration
$500 per
part type
960-part types
$ 480,000
Total
$784,800
Annual Production
$10,000
Manufacture Overhead
cost per unit
$78.48