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. |
J.: | 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. |
J.: | 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. |
Budgeted (estimated) production | 83,000 | units | |
Budgeted sales | 83,000 | units | |
Capacity | 100,000 | units | |
Selling price | $73 | per unit | |
Variable manufacturing cost | $18 | per unit | |
Total manufacturing overhead cost (all fixed) | $ | 2,158,000 | |
Selling and administrative expenses (all fixed) | $ | 2,208,000 | |
Beginning inventories | $0 | ||
Traditional Approach to Computation of the Predetermined Overhead Rate
Estimated total manufacturing overhead cost, $2,158,000 | = $26.00 per unit |
Estimated total units produced, 83,000 |
Budgeted Income Statement | ||||
Revenue (83,000 units × $73 per unit) | $ | 6,059,000 | ||
Cost of goods sold: | ||||
Variable manufacturing (83,000 units × $18 per unit) | $ | 1,494,000 | ||
Manufacturing overhead applied (83,000 units × $26 per unit) | 2,158,000 | 3,652,000 | ||
Gross margin | 2,407,000 | |||
Selling and administrative expenses | 2,208,000 | |||
Net operating income | $ | 199,000 | ||
New Approach to Computation of the Predetermined Overhead Rate Using Capacity in the Denominator
Estimated total manufacturing overhead cost at capacity, $2,158,000 | = $21.58 per unit |
Total units at capacity, 100,000 units |
Budgeted Income Statement | ||||
Revenue (83,000 units × $73 per unit) | $ | 6,059,000 | ||
Cost of goods sold: | ||||
Variable manufacturing (83,000 units × $18 per unit) | $ | 1,494,000 | ||
Manufacturing overhead applied (83,000 units × $21.58 per unit) | 1,791,140 | 3,285,140 | ||
Gross margin | 2,773,860 | |||
Cost of unused capacity [(100,000 units – 83,000 units) × $21.58 per unit] | 366,860 | |||
Selling and administrative expenses | 2,208,000 | |||
Net operating income | $ | 199,000 | ||
J.: | Whoa!! I don’t think I like the looks of that “Cost of unused capacity.” If that thing shows up on the income statement, someone from headquarters is likely to come down here looking for some people to lay off. |
Marvin: | I’m worried about something else too. What happens when sales are not up to expectations? Can we pull the “hat trick”? |
Pat: | I’m sorry, I don’t understand. |
J.: | Marvin’s talking about something that happens fairly regularly. When sales are down and profits look like they are going to be lower than the president told the owners they were going to be, the president comes down here and asks us to deliver some more profits. |
Marvin: | And we pull them out of our hat. |
J.: | Yeah, we just increase production until we get the profits we want. |
Pat: | I still don’t understand. You mean you increase sales? |
J.: | Nope, we increase production. We’re the production managers, not the sales managers. |
Pat: | I get it. Because you have produced more, the sales force has more units it can sell. |
J.: | Nope, the marketing people don’t do a thing. We just build inventories and that does the trick. |
Required:
In all of the questions below, assume that the predetermined overhead rate under the traditional method is $26 per unit, and under the new capacity-based method it is $21.58 per unit
2. Assume that actual sales is 79,000 units and the actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Under the traditional approach, how many units would have to be produced to realize net operating income of $199,000?
3. Assume that actual sales is 79,000 units and the actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Under the new capacity-based approach, how many units would have to be produced to realize net operating income of $199,000?
Pat Miranda, the new controller of Vault Hard Drives, Inc., has just returned from a seminar...
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...
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...
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...
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: Patt Marvin:...
Harvest Farms Inc. produces fertilizer and distributes the product by using company trucks. The controller of the company uses budgeted fleet hours to allocate variable manufacturing overhead. The following information relates to the company's manufacturing overhead data: Budgeted output units 800 truckloads Budgeted fleet hours 520 hours Budgeted pounds of fertilizer 28,000,000 pounds Budgeted variable manufacturing overhead costs for 800 loads $93,600.00 Actual output units produced and delivered 760 truckloads Actual fleet hours 460 hours Actual pounds of fertilizer produced...
Absorption and Variable Costing with Over- and Underapplied Overhead Flaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows: Manufacturing costs (per unit): Direct materials (2 lbs. @ 1.25) $2.50 Direct labor (0.4 hr. @ 15.00) 6.00 Variable overhead (0.4 hr. @ 5.00) 2.00 Fixed overhead (0.4 hr. @ 7.00) 2.80 Total $13.30 Selling and administrative costs: Variable $1.80 per unit Fixed $221,500 During the year, the company had...
I need help with JUST 5,6, and 7 please 3 L12 x ✓ fx I B C D E F G H I 1 Thunder Creek Company expects sales of 18,000 units in January 2018, 24,000 units in February, 30,000 units in March, 34,000 in April, and 36,000 in May. The sales price is $34 per unit. 2 Prepare a sales budget. 2018 4 Budget #1: Sales Budget Jan Feb Mar 01 Total April May 5 Budgeted units to be...
Urbana Company calculates its predetermined manufacturing overhead rates using normal capacity, which is 288,000 units. The standard cost system allows 2 direct labor hours per unit produced. Manufacturing overhead is applied using direct labor hours. The total budgeted manufacturing overhead is $3,168,000, of which $864,000 is fixed manufacturing overhead. The actual results for the year are as follows. 5. The company's variable manufacturing overhead efficiency (quantity) variance is: $24,000 F. (b) $40,000 U. $40,000 F. $24,000 U. (a) URBANA COMPANY...
Absorption and Variable Costing with Over- and Underapplied Overhead Flaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows: Manufacturing costs (per unit): Direct materials (3 lbs. @ 1.30) $3.90 Direct labor (0.4 hr. @ 17.50) 7.00 Variable overhead (0.4 hr. @ 4.00) 1.60 Fixed overhead (0.4 hr. @ 6.00) 2.40 Total $14.90 Selling and administrative costs: Variable $1.60 per unit Fixed $217,500 During the year, the company had...
Problem 8.30A a-b Alta Products Ltd. has just created a new division to manufacture and sell DVD players. The facility is highly automated and thus has high monthly fixed costs, as shown in the following schedule of budgeted monthly costs. This schedule was prepared based on an expected monthly production volume of 2,000 units. $29 67,200 Manufacturing costs Variable costs per unit Direct materials Direct labour Variable overhead Total fixed overhead Selling and administrative costs Variable Fixed During August 2020,...