systems design: job-order costing
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Systems Design: Job-Order Costing
Chapter 3
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
Many different products are produced each period.
Products are manufactured to order.
Cost are traced or allocated to jobs.
Cost records must be maintained for each distinct product or job.
Many different products are produced each period.
Products are manufactured to order.
Cost are traced or allocated to jobs.
Cost records must be maintained for each distinct product or job.
Chapter 4Chapter 4
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Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
Typical job order cost applications: Special-order printing Building construction
Also used in the service industry Hospitals Law firms
Typical job order cost applications: Special-order printing Building construction
Also used in the service industry Hospitals Law firms
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Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
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Job-Order Costing
Directmaterial
Directmaterial
Direct labor
Direct labor
Manufacturingoverhead (OH)
Applied to eachjob using a
predeterminedrate
Manufacturingoverhead (OH)
Applied to eachjob using a
predeterminedrate
Traced directly to each job
Traced directly
to each job
The JobThe Job
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Sequence of Events in a Job-Order Costing System
Receive orders from customers
Receive orders from customers
Schedulejobs
Schedulejobs
Begin production
Begin production
Ordermaterials
Ordermaterials
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Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge direct
material and direct labor
costs to each job as
work is performed.
Charge direct
material and direct labor
costs to each job as
work is performed.
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
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Apply overhead to
each job using a
predeter-mined rate.
Apply overhead to
each job using a
predeter-mined rate.
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
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Job-Order Cost Accounting
The primary document for tracking the costs
associated with a given job is the job
cost sheet.
Let’s investigate
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PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Job-Order Cost Accounting
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Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Let’s see one
A materials requisition form is used to
authorize the use of materials on a job.
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Materials Requisition Form
Will E. Delite
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Materials Requisition Form
Will E. Delite
Type, quantity, and total cost of material charged to job A-143.
Type, quantity, and total cost of material charged to job A-143.
Cost of material is charged to job A-143.
Cost of material is charged to job A-143.
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Job-Order Cost Accounting
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Job-Order Cost Accounting
Workers use time tickets to record the time spent on each
job.
Let’s see one
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Employee Time Ticket
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Job-Order Cost Accounting
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Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct
labor hour (DLH).Let’s do it
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Job-Order Cost Accounting
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Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined
before the period begins.
Application of Manufacturing Overhead
Ideally, the allocation base is a cost driver that causes
overhead.
Ideally, the allocation base is a cost driver that causes
overhead.
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Actual amount of the allocation base such as units produced, direct labor hours, or machine
hours incurred during the period.
Actual amount of the allocation base such as units produced, direct labor hours, or machine
hours incurred during the period.
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
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Application of Manufacturing Overhead
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
Overhead applied = POHR × Actual activity
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Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
The Need for a Predetermined Manufacturing Overhead Rate
$
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PearCo applies overhead based on direct labor hours. Total estimated overhead for the year is
$640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are
160,000.
What is PearCo’s predetermined overhead rate per hour?
Overhead Application Example
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For each direct labor hour worked on a job, $4.00 of factory overhead will be
applied to the job.
For each direct labor hour worked on a job, $4.00 of factory overhead will be
applied to the job.
Overhead Application Example
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
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Overhead Application Example
What amount of overhead willPearCo apply to Job X-32?
What amount of overhead willPearCo apply to Job X-32?
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Overhead Application Example
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Overhead Application Example
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Quick Check
If the number of wooden crates in the order on the previous page is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.
If the number of wooden crates in the order on the previous page is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.
Total spending would change by $105 only if all of the costs were variable with respect to the number of units produced. Direct materials is variable, but much of the overhead and perhaps even direct labor may be fixed.
Total spending would change by $105 only if all of the costs were variable with respect to the number of units produced. Direct materials is variable, but much of the overhead and perhaps even direct labor may be fixed.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.
If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
If overhead contains fixed costs, what will happen to product costs computed by the accounting system if lower unit sales volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.
If overhead contains fixed costs, what will happen to product costs computed by the accounting system if lower unit sales volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.
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Quick Check
If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
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Let’s summarize the document flow
in a job-order costing system.
Job-Order CostingDocument Flow Summary
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
MaterialsRequisition
MaterialsRequisition
Manufacturing Overhead Account
Manufacturing Overhead Account
Direct materials
Indirect materials
Materials usedmay be either
direct orindirect.
Materials usedmay be either
direct orindirect.
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Manufacturing Overhead Account
Manufacturing Overhead Account
An employee’stime may be eitherdirect or indirect.
An employee’stime may be eitherdirect or indirect.
Direct Labor
Indirect Labor
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Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
Manufacturing Overhead Account
OtherActual OHCharges
OtherActual OHCharges
Job Cost Sheets
Job Cost Sheets
AppliedOverhead
MaterialsRequisition
MaterialsRequisition
EmployeeTime Ticket
EmployeeTime Ticket
IndirectMaterial
IndirectLabor
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Job-Order System Cost Flows
Let’s examine the cost flows in a
job-order costing system..
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Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)Direct
Materials Direct Materials
Indirect Materials
Indirect Materials
Actual Applied
Job-Order System Cost Flows
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Job-Order System Cost Flows
Next let’s add labor costs and
applied manufacturing
overhead.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
Materials
Overhead Applied
OverheadApplied to
Work inProcess
Direct Labor
Direct Labor
IndirectLabor
IndirectLabor
Indirect Materials
Actual AppliedIf actual and applied
manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
Job-Order System Cost Flows
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Job-Order System Cost Flows
Now let’s complete the
goods and sell them. Still with
me?
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Finished Goods
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsSold
Cost ofGoodsSold
Job-Order System Cost Flows
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Job-Order System Cost Flows
Let’s return to PearCo and see what we will
do if actual and applied overhead are
not equal.
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PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor
hours.
How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s
predetermined overhead rate of $4.00 per direct labor hour.
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor
hours.
How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s
predetermined overhead rate of $4.00 per direct labor hour.
Overhead Application Example
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
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Work inProcess
FinishedGoods
Cost of Goods Sold
$30,000may be allocated
to these accounts.
Overapplied and Underapplied Manufacturing Overhead
$30,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
PearCo’s Method
OR
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Overapplied and Underapplied Manufacturing Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
$30,000
$30,000
AdjustedBalance
OverheadAppliedto jobs
$680,000
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Quick Check
What effect will the overapplied overhead have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
What effect will the overapplied overhead have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
What effect will the overapplied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
What effect will the overapplied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
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Overapplied and Underapplied Manufacturing Overhead - Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
PearCo’s Method
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Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
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Job-Order Costing – Typical Accounting Entries
Let’s look at summary journal entries for a job-
order costing system.
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Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
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Cost Flows – Material Usage
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
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Cost Flows – Labor
The cost of direct labor incurred increases Work in Process and the cost of indirect labor
increases Manufacturing Overhead.
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Cost Flows – Actual Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they
are incurred.
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Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing Overhead is applied to jobs.
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Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
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Cost Flows – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished
Goods from Work in Process.
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Cost Flows – Sales
When finished goods are sold, two entries are required: (1) to record the sale; & (2) to record COGS and reduce Finished Goods.
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End of Chapter 3
The Predetermined Overhead Rate &
Capacity
Appendix 3a
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Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a. The predetermined overhead rate goes up when activity goes down.
b. The predetermined overhead rate stays the same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity goes down.
When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a. The predetermined overhead rate goes up when activity goes down.
b. The predetermined overhead rate stays the same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity goes down.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Quick Check
When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a.The predetermined overhead rate goes up when activity goes down.
b.The predetermined overhead rate stays the same; it is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity goes down.
When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a.The predetermined overhead rate goes up when activity goes down.
b.The predetermined overhead rate stays the same; it is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity goes down.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Basing the rate on capacity
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearCapacity 50,000 casesPredetermined overhead rate $2.00 per caseFixed selling and admin. expense $500,000 per year
Revenue 1,600,000$ Cost of goods sold 1,040,000 Gross margin 560,000 Cost of idle capacity 20,000 Selling and admin. expense 500,000
Net operating income 40,000$
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearExpected volume 40,000 casesPredetermined overhead rate $2.50 per caseFixed selling and admin. expense $500,000 per year
Revenue 1,600,000$ Cost of goods sold 1,060,000 Gross margin 540,000 Cost of idle capacity - Selling and admin. expense 500,000
Net operating income 40,000$
Basing the rate on expected volume
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