Question

Pat Miranda, the new controller of Vault Hard Drives, Inc., has just returned from a seminar on the choice of the activity level in the predetermined overhead rate. Even though the subject did not sound exciting at first, she found that there were some important ideas presented that should get a hearing at her company. After returning from the seminar, she arranged a meeting with the production manager, J. Stevens, and the assistant production manager, Marvin Washington Pat: I ran across an idea that I wanted to check out with both of you. It's about the way we compute predetermined overhead rates. J.: We're all ears. Pat: We compute the predetermined overhead rate by dividing the estimated total factory overhead for the coming year, which is all a fixed cost, by the estimated total units produced for the coming year. Marvin: We've been doing that as long as I've been with the company. And it has been done that way at every other company I've worked at, except at most places they divide by direct labor-hours. Pat: We use units because it is simpler and we basically make one product with minor variations. But, there's another way to do it. Instead of basing the overhead rate on the estimated total units produced for the coming year, we could base it on the total units produced at capacity. Marvin: Oh, the Marketing Department will love that. It will drop the costs on all of our - products. They'll go wild over there cutting prices. Pat: That is a worry, but I wanted to talk to both of you first before going over to Marketing. Aren't you always going to have a lot of unused capacity costs? Pat: That's correct, but let me show you how we would handle it. Here's an example based on our budget for next year. ath in rate of Budgeted (estimated) production Budgeted sales Capacity Selling price Variable manufacturing cost Total manufacturing overhead cost Call Fixed) Selling and administrative expenses (all fixed) Beginning inventories 83.000 units 83, een units 100, eee units $72 per unit $18 per unit $ 1,000,000 $ 2,366,000 Traditional Approach to Computation of the Predetermined Overhead Rate 22.0 per mit Estimated total manufacturing overhead cost $1.909.000 Estimated total units produced 83.000

Answer 1

Answer:

Answer-2:
Net income	$     207,000
Add: Selling and administrative expense	2,366,000
Gross margin	2,573,000
Add: Variable manufacturing cost (79,000 × $18.00)	1,422,000
Add: Fixed manufacturing overhead (79,000 × $23.00)	1,817,000
Revenue	5,812,000
Actual selling price per unit	$         72.00
Units to be produced for net operating of $207,000	80,722
Answer-3:
Net income	$     207,000
Add: Selling and administrative expense	2,366,000
Gross margin	2,573,000
Add: Variable manufacturing cost (79,000 × $18.00)	1,422,000
Add: Fixed manufacturing overhead (79,000 × $19.09)	1,508,110
Revenue	5,503,110
Actual selling price per unit	$         72.00
Units to be produced for net operating of $207,000	76,432