ECO 1002 Lecture Notes - Lecture 16: Cost Driver, Fixed Cost, Interest Expense
Document Summary
Get access
Related textbook solutions
Related Documents
Related Questions
| P23-6B Journalize and post standard cost entries, and prepare income statement | |||||||||
| Frio Company uses standard costs with its job order cost accounting system. | |||||||||
| In January, an order (Job No. 84) was received for 5,500 units of Product D . The standard | |||||||||
| cost of one unit of Product D is as follows. | |||||||||
| Direct materials | 1.5 pounds at $4.00 per pound | $6.00 | |||||||
| Direct labor | 1 hour at $9.00 per hour | 9.00 | |||||||
| Overhead | 1 hour (variable $7.40; fixed $8.00 | 15.40 | |||||||
| Standard cost per unit | $30.40 | ||||||||
| Overhead is applied on the basis of direct labor hours. Normal capacity for the month | |||||||||
| of January was 6,000 direct labor hours. During January, the following transactions | |||||||||
| applicable to Job No, 48 occurred. | |||||||||
| 1. Purchased 8,100 pounds of raw materials on account at $3.70 per pound. | |||||||||
| 2. Requisitioned 8,100 pounds of raw materials for production. | |||||||||
| 3. Incurred 5,200 hours of direct labor at a rate of $9.20 per hour. | |||||||||
| 4. Worked 5,200 hours of direct labor on Job No.84. | |||||||||
| 5. Incurred $87,500 of manufacturing overhead on account. | |||||||||
| 6. Applied overhead to Job No. 84 on basis of direct labor hours. | |||||||||
| 7. Transferred Job NO. 84 to finished goods. | |||||||||
| 8. Billed customer for Job No. 84 at a selling price of $270,000. | |||||||||
| Instructions | |||||||||
| (a) Journalize the transactions. | |||||||||
| (b) Post to the job order cost accounts. | |||||||||
| (c ) Prepare the entry to recognize the total overhead variance. | |||||||||
| (d) Prepare the January 2014 income statement for management. Assume selling and | |||||||||
| administrative expenses were $60,000. | |||||||||
| NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" . | |||||||||
| (a)(1) | Account | Value | |||||||
| Account | Value | ||||||||
| Account | Value | ||||||||
| (a)(2) | Account | Value | |||||||
| Account | Value | ||||||||
| Account | Value | ||||||||
| (a)(3) | Account | Value | |||||||
| Account | Value | ||||||||
| Account | Value | ||||||||
| (a)(4) | Account | Value | |||||||
| Account | Value | ||||||||
| Account | Value | ||||||||
| (a)(5) | Account | Value | |||||||
| Account | Value | ||||||||
| (a)(6) | Account | Value | |||||||
| Account | Value | ||||||||
| (a)(7) | Account | Value | |||||||
| Account | Value | ||||||||
| (a)(8) | Account | Value | |||||||
| Account | Value | ||||||||
| Account | Value | ||||||||
| Account | Value | ||||||||
| (b) | Raw Materials Inventory | Materials Price Variance | Work in Process Inventory | ||||||
| Value | Value | Value | Value | Value | |||||
| Value | |||||||||
| Value | |||||||||
| Factory Labor | Materials Quantity Variance | Finished Goods Inventory | |||||||
| Value | Value | Value | Value | Value | |||||
| Manufacturing Overhead | Labor Price Variance | Cost of Goods Sold | |||||||
| Value | Value | Value | Value | ||||||
| Labor Quantity Variance | |||||||||
| Value | |||||||||
| (c ) | Account | Value | |||||||
| Account | Value | ||||||||
| (d) | FRIO COMPANY | ||||||||
| Income Statement | |||||||||
| For the Month Ended January 31, 2014 | |||||||||
| Sales revenue | Value | ||||||||
| Cost of goods sold (at standard) | Value | ||||||||
| Gross profit (at standard) | Value | ||||||||
| Variances | |||||||||
| Material price | Value | ||||||||
| Materials quantity | Value | ||||||||
| Labor price | Value | ||||||||
| Labor quantity | Value | ||||||||
| Overhead | Value | ||||||||
| Total variance - favorable | Value | ||||||||
| Gross profit (actual) | Value | ||||||||
| Selling and administrative expenses | Value | ||||||||
| Net income | Value | ||||||||
Brilliant Accents Company (BAC) manufactures and sells several styles of kitchen faucet handles. The companyâs overhead allocation system uses direct labor hours as an allocation base. The following were estimates of 2015âs production and some production data for two of its styles. Note that BAC makes more than these two styles of product.
| Table 1: Estimates for 2015 | BRASS | CHROME |
| Projected sales in units | 30,000 | 50,000 |
| Per unit data: | ||
| Selling price | $40 | $20 |
| Direct materials | $ 8 | $ 4 |
| Direct labor | $15 | $ 3 |
| Hours per 1000-unit batch: | ||
| Direct labor hours | 40 | 10 |
| Machine hours | 25 | 25 |
| Setup hours | 0.5 | 1.0 |
| Inspection hours | 15 | 29 |
| Total overhead costs (primarily rent, depreciation and other fixed costs of the manufacturing plant): | $870,000 | |
| Estimated activity | ||
| Direct labor hours | 2,900 hours | |
| Machine hours | 2,400 hours | |
The companyâs controller just returned from an all-expenses-paid seminar in Maui on activity-based costing, sponsored by an ABC consulting firm. There, she surprisingly became convinced ABC was right for BAC. She decided to re-do 2015âs overhead allocation using an ABC system. She commissioned a study of the companyâs overhead costs and the related activities.
Since the examples used in the Maui seminar used setups and inspections, she used those as the activities for her ABC study. The results of her study, showing total overhead costs and activity levels for the year are:
| Table 2: Overhead costs | ||
| Activity | Estimated 2015 total activity levels | Total Cost |
| Setups | 95 setup hours | $465,000 |
| Inspections | 2,700 inspection hours | $405,000 |
| $870,000 | ||
During 2015, the company had the following actual results:
| Table 3: 2015 actual results | ||
| Total overhead costs: | $767,000 | |
| Direct labor hours | 2,750 hours | |
| Machine hours | 2,200 hours |
a. (8 points) Using the companyâs traditional cost allocation system that allocates overhead costs via direct labor hours, compute the allocated overhead costs per unit for the Brass and Chrome faucet handles.
b. (4 points) How much overhead would be over- or under-applied for the year using the traditional system?
c. (4 points) If BAC implements an activity-based costing system using the data in table 2, determine the activity cost driver rates for setup costs and inspection costs. Fully label your answer.
d. (8 points) Using the ABC cost allocation system, compute the estimated overhead costs per unit for the Brass and Chrome faucet handles.
e. (4 points) Why do the costs calculated by the two systems differ? Be specific. Generic or nonsense answers wonât get you any points.
f. (3 points) Which cost system (the traditional or the ABC system) is more accurate? That is, which cost system comes closer to calculating the true, actual overhead costs per unit for the products listed above? Explain your answer.
