ACG 2071 Lecture Notes - Lecture 4: Direct Labor Cost, Cost Driver, Financial Statement
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AirComp Corporation produces component parts for the aircraftindustry. In prior years, they maintained a job-costing systemconsisting of direct materials and direct labor cost andmanufacturing overhead. Manufacturing overhead was allocated toproduction jobs using a single-indirect cost allocation rate, whichwas $115 per direct labor hour.
For 20x1, the Company decided to change the method of allocatingmanufacturing overhead to production jobs from the single-indirectcost allocation approach to the activity-based costing (âABCâ)indirect cost allocation approach. For purposes of developing theABC allocation rates, AirCompâs cost accounting team prepared thefollowing analysis:
Activity | Cost Driver | Allocation Rate |
Material handling | Parts handled | $0.40 |
Lathe work | No. of lathe turns | $0.20 |
Milling | Machine hours | $20.00 |
Grinding | No. of parts ground | $0.80 |
Testing | No. of units tested | $15.00 |
For 20x1, AirCompâs cost accountant team prepared the followinganalysis of the direct costs and indirect cost activities for Job100 and Job 200, the only production jobs in process for theperiod:
Job 100 | Job 200 | |
Direct materials cost | $9,700 | $59,900 |
Direct labor cost | $750 | $11,250 |
No. of direct manufacturing labor hours | 25 | 375 |
No. of parts ground | 500 | 2,000 |
No. of lathe turns | 20,000 | 60,000 |
Machine hours | 150 | 1,050 |
No. of units produced during period (all are tested) | 10 | 200 |
Required
1.For each job, determine total per unit cost using direct laborhours to allocate manufacturing overhead to each job.
2.For each job, determine total per unit cost using anactivity-based costing approach to allocate manufacturing overheadcost to job.
3.Compare the per unit cost figures for each job computed instep a. and step b., above. Why do the new ABC approach differ fromthe single-indirect cost allocation systems differ in the amount ofthe per unit indirect cost allocated to each job (i.e. what was theimplications of the cost allocation method change on the amount ofper unit cost allocated to each job and what factors caused theobserved changes).
4.How might AirComp Corporation use the information from ABCallocation approach to better manage its business, i.e. what arethe advantages of using an activity-based costing approach?
Sweeten Company had no jobs in progress at the beginning ofMarch and no beginning inventories. It started only two jobs duringMarchâJob P and Job Q. Job P was completed and sold by the end ofthe March and Job Q was incomplete at the end of the March. Thecompany uses a plantwide predetermined overhead rate based ondirect labor-hours. The following additional information isavailable for the company as a whole and for Jobs P and Q (all dataand questions relate to the month of March): |
Estimated total fixed manufacturing overhead | $ | 14,400 |
Estimatedvariable manufacturing overhead per direct labor-hour | $ | 1.50 |
Estimatedtotal direct labor-hours to be worked | 3,600 | |
Total actualmanufacturing overhead costs incurred | $ | 19,500 |
Job P | Job Q | ||||
Direct materials | $ | 15,000 | $ | 9,600 | |
Direct labor cost | $ | 40,500 | $ | 12,000 | |
Actual direct labor-hoursworked | 2,700 | 800 | |||
2. Prepare a schedule of cost of goods sold
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4.
Assume that Job P includes 35 units that each sell for $2,600and that the companyâs selling and administrative expenses in Marchwere $13,000. Prepare an absorption costing income statement forMarch. |
Case 3-49
Avid Assemblers uses normal job-order costing to assign costs toproducts. The company assembles and packages 25 different productsaccording to customer specifications. Products are worked on inbatches of 20 to 40 units. Each batch is given a job number. OnOctober 1, the company had the following balances:
Raw materials | $9,800 | |
Work in process | 65,847 | |
Finished goods | 30,640 |
Work in process consisted of the following jobs:
Job 22 | Job 24 | Job 25 | |||||
Direct materials | $6,200 | $5,190 | $4,800 | ||||
Direct labour | 10,500 | 9,210 | 9,500 | ||||
Applied overhead | 7,350 | 6,447 | 6,650 | ||||
Total | $24,050 | $20,847 | $20,950 | ||||
Number of units | 20 | 40 | 30 |
Finished goods consisted of Job 23, with the following costs:
Job 23 | ||
Direct materials | $8,200 | |
Direct labour | 13,200 | |
Applied overhead | 9,240 | |
Total | $30,640 | |
Number of units | 50 |
Shown below are the direct cost data related to jobs started inOctober:
Job 26 | Job 27 | Job 28 | Total | ||||||
Direct materials | $5,180 | $5,600 | $4,200 | $14,980 | |||||
Direct labour | 11,200 | 9,340 | 5,910 | 26,450 | |||||
Number of units | 20 | 30 | 20 |
Other information:
1. | Direct materials and direct labour added tobeginning work in process in October were as follows:
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2. | Overhead is applied at a predetermined rate basedon the direct labour cost. | |||||||||||||||||||||||||||||||||||
3. | Actual expenses for October were as follows:
* 80% of employer contributions and benefits relate to factorypersonnel. | |||||||||||||||||||||||||||||||||||
4. | Purchases of direct materials (raw materials)during October amounted to $28,500. Indirect materials (supplies)are handled in a separate account. | |||||||||||||||||||||||||||||||||||
5. | Only Job Nos. 27 and 28 are still in process atclosing on October 31. Finished goods consisted only of Job No. 25at month end. | |||||||||||||||||||||||||||||||||||
6. | Avid writes off any under- and over-applied overhead to Cost ofGoods Sold in the month in which it is incurred. Requirements: |
a.Calculate Predetermined overhead rate
b.Calculate Unit cost of job 24 in October
c.Calulate the Oct 31 Balances for the following account:
Raw Materials, Work in Process, Finished Goods
d.What is the cost of goods manufactured?
e. Determine the under- or over- paid in October
Prepare the journal entry to dispose of this amount.