Task 1: Applying Overhead in a Service Company; Journal Entries
Heritage Gardens uses a job-order costing system to track the costs of its landscaping projects. The company provides complete garden design and landscaping services. The following table provides data concerning the three landscaping projects that were in progress during May. There was no work in process at the beginning of May.
Actual overhead costs were $16,000 for May. Overhead costs are applied to projects on the basis of designer-hours since most of the overhead is related to the costs of the garden design studio. The predetermined overhead rate is $45 per designer-hour. The Williams and Chandler projects were completed in May; the Nguyen project was not completed by the end of the month. No other jobs were in process during May.
Required to do:
1. Compute the amount of overhead cost that would have been charged to each project during May.
2. Prepare a journal entry showing the completion of the Williams and Chandler projects and the transfer of costs to the Completed Projects (i.e., Finished Goods) account.
3. What is the balance in the Work in Process account at the end of the month?
4. What is the balance in the Overhead account at the end of the month? What is this balance called?
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Project
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Williams
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Chandler
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N guyen
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Designer-hours
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200
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80
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120
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Direct materials cost
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$4,800.00
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$1,800.00
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$3,600.00
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Direct labour cost
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$2,400.00
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$1,000.00
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$1,500.00
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Task 2. Varying Predetermined Overhead Rates
Javadi Company makes a composting bin that is subject to wide seasonal variations in demand. Unit product costs are computed on a quarterly basis by dividing each quarter’s manufacturing costs materials, labour, and overhead) by the quarter’s production in units. The company’s estimated costs, by quarter, for the coming year are given below:
Management finds the variation in unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead, since it is the largest element of cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company’s overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.
Required:
1. The company uses a job-order costing system. How would you recommend that manufacturing overhead cost be assigned to production? Be specific, and show computations.
2. Recompute the company’s unit product costs in accordance with your recommendations in (1) above.
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Quarter
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First
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Second
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Third
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Fourth
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Direct materials
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$240,000
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$120,000
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$60,000
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$180,000
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Direct labour
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96,000
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48000
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24000
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72,000
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Manufacturing overhead
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228,000
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204000
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192000
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216,000
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Total manufacturing costs
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$564,000
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$372,000
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$276,000
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$468,000
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Number of units to be produced
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80,000
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40000
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20000
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60,000
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Estimated unit product cost
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$7.05
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$9.30
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$13.80
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$7.80
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Task 3. Applying Overhead; Journal Entries; Disposition of Underapplied or Overapplied Overhead
The overhead that had been applied to production during the year is distributed among the ending
balances in the accounts as follows:
Work in Process, ending . . . . . . . . . . . . . . . $32,800
Finished Goods, ending . . . . . . . . . . . . . . . . 41,000
Cost of Goods Sold . . . . . . . . . . 336,200
Overhead applied . . . . . . . . . . . . . . . . . . . . . $410,000
For example, of the $80,000 ending balance in Work in Process, $32,800 was overhead that had been applied during the year.
Required:
1. Identify the reasons for entries (a) through (d).
2. Assume that the company closes any balance in the Manufacturing Overhead account directly to Cost of Goods Sold. Prepare the necessary journal entry.
3. Assume instead that the company allocates any balance in the Manufacturing Overhead account to the other accounts in proportion to the overhead applied during the year that is in the ending balance in each account. Prepare the necessary journal entry, with supporting computations
The following information is taken from the accounts of FasGrow Company.
T-accounts are summaries of the transactions that affected those accounts during the year.
Manufacturing Overhead
(a) 380,000 (b) 410,000
Bal. 30,000
Finished Goods
Bal. 160,000 (d) 820,000
(c) 760,000
Bal. 100,000
Task 4. Departmental Overhead Rates
Diewold Company has two departments, Milling and Assembly. The company uses a job-order cost system and computes a predetermined overhead rate in each department. The Milling Department bases its rate on machine-hours, and the Assembly Department bases its rate on direct labour cost. At the beginning of the year, the company made the following estimates:
Required:
1. Compute the predetermined overhead rate to be used in each department.
2. Assume that the overhead rates you computed in (1) above are in effect. The job cost sheet for Job 407, which was started and completed during the year, showed the following:
Compute the total overhead cost applied to Job 407.
3. Would you expect substantially different amounts of overhead cost to be charged to some jobs if the company used a plantwide overhead rate based on direct labour cost instead of using departmental rates? Explain. No computations are necessary.
Department
Milling Assembly
Direct labor-hours 8,000 75,000
Machine-hours 60,000 3,000
Manufacture overhead cost $510,000 $800,000
Direct labour cost $72,000 $640,000
Department
Milling Assembly
Direct labor-hours 5 20
Machine-hours 90 4
Manufacture overhead cost $800 $370
Direct labour cost $45 $160