Reference no: EM131599112

Question 1:

Support department cost allocation; plantwide versus departmental overhead rates; product costing; cost drivers: manufacturer

Rising Fast Pty Ltd manufactures a complete line of fibreglass attaché cases and suitcases. The firm has three manufacturing departments: Moulding, Component and Assembly. There are also two support departments: Power and Maintenance. The sides of the cases are manufactured in the Moulding Department. The frames, hinges and locks are manufactured in the Component Department. The cases are completed in the Assembly Department. Varying amounts of materials and time are required to manufacture each type of case.

Rising Fast has always used a plantwide overhead rate. Direct labour hours are used to assign overhead to products. The predetermined overhead rate is calculated by dividing the company's total estimated overhead by the total estimated direct labour hours to be worked in the three manufacturing departments.

Liam Bolt, manager of cost accounting, has recommended that Rising Fast use departmental overhead rates. The planned operating costs and expected levels of activity for the coming year have been developed by Bolt and are presented by department in the following schedules. (All numbers are in thousands.)

Question:

1. (a) Calculate the plantwide overhead rate for Rising Fast for the coming year using the same method as used in the past.

(b) Estimate the overhead cost of an Elite attaché case that requires 4 direct labour hours and 5 machine hours in the Moulding Department, 3 direct labour hours in the Component Department and 2 direct labour hours in the Assembly Department.

2. Liam Bolt has been asked to develop departmental overhead rates for comparison with the plantwide rate. The following steps are to be followed in developing the departmental rates:

(a) Allocate the total Maintenance Department costs to the three manufacturing departments, using the direct method.

(b) Allocate the Power Department costs to the three manufacturing departments, using the direct method.

(c) Calculate departmental overhead rates for the three manufacturing departments, using a machine hour cost driver for the Moulding Department and a direct labour hour cost driver for the Component and Assembly departments.

3. Estimate the overhead cost of the Elite attaché case using the departmental overhead rates.

4. Should Rising Fast use a plantwide rate or departmental rates to assign overhead to products? Explain your answer.

Question 2: Product cost classification: manufacturer

The following cost data for the current year relate to Heartstrings Pty Ltd, a greetings card manufacturer:

Service department costs1                              $ 50 000

Direct labour: wages                                       242 500

Direct labour: on-costs                                    47 500

Indirect labour: on-costs                                  15 000

On-costs for production supervisor                    4 500

Administrative costs                                         75 000

Rental of office space for sales personnel2         7 500

Sales commissions                                           2 500

Product promotion costs                                    5 000

Direct material                                                 1 050 000

Advertising expense                                         49 500

Depreciation on factory building                         57 500

Cost of finished goods inventory at year end       57 500

Indirect labour: wages                                       70 000

Production supervisor's salary                            22 500

Total overtime premiums paid                            27 500

Cost of idle time: production employees3            20 000

Question: Calculate each of the following costs for the year:

1. Total prime costs.

2. Total manufacturing overhead costs.

3. Total conversion costs.

4. Total product costs (for external reporting purposes).

5. Total period costs.

Question 3: Cost flows in a job costing system; schedule of cost of goods manufactured; automation: manufacturer

Vision Pty Ltd, a manufacturer of fibre-optic communications equipment, uses a job costing system. Since the production process is heavily automated, manufacturing overhead is applied on the basis of machine hours using a predetermined overhead rate. The current annual rate of $45 per machine hour is based on estimated manufacturing overhead costs of $3 600 000 and an estimated cost driver level of 80 000 machine hours.

Operations for the current year have been completed, and all the accounting entries have been made for the year except the application of manufacturing overhead to the jobs worked on during December, the transfer of costs from work in process to finished goods for the jobs completed in December, and the transfer of costs from finished goods to cost of goods sold for the jobs that have been sold during December.

Summarised data as at 30 November, and for December, are presented in the following table. Job numbers T11-007, N11-013 and N11-015 were completed during December. All completed jobs except Job number N11-013 had been turned over to customers by the close of business on 31 December.

Question:

1. How much manufacturing overhead would Vision have applied to jobs to 30 November?

2. How much manufacturing overhead would be applied to jobs by Vision during December?

3. Determine the amount by which the manufacturing overhead is over applied or under applied as at 31 December.

4. Determine the balance in Vision's finished goods inventory account on 31 December.

5. Prepare a schedule of cost of goods manufactured for Vision Pty Ltd for the year. (Hint: In calculating the cost of direct material used, remember that Vision includes both direct and indirect material in its raw material inventory account.)