Question

Problem #1 Company A has the following data: Prime costs are 180% of direct materials costs (think: what are the components of prime costs?). Actual DM costs for the year are $ 100,000. The company had estimated the overhead costs to be $400,000 and the estimated DL costs were $100,000. The company uses DL cost to allocate overhead costs to products. The actual overhead costs for the year are $360,000. Assume that there are no beginning inventories of any kind. The ending WIP for the year was valued at $ 50,000. Assume that all the finished goods were sold. a. What is the OH rate? b. What are the total applied OH costs? C. Calculate the COGM d. Calculate the underlover - applied OH costs. e. Assuming all the underover-applied OH costs are adjusted to COGS, calculate the adjusted COGS

Answer 1

a) Estimated overhead cost Estimated direct labor cost Predetermined overhead rate per direct labor cost $400,000 $100,000 $4.00 [$400000 / 100000 hours) b) Predetermined overhead rate per direct labor cost Actual direct labor cost incurred Manufacturing overhead applied (OH costs) $4.00 [Ref: Part-(a)] $80,000 (Ref: Workings] $320,000 ($4.00 x $80000] Workings: It is given that prime costs are 180% of direct material costs. Prime cost = Direct materials + Direct labor cost Direct material costs Prime cost % on direct material cost Prime cost, dollars $100,000 180% $180,000 ($100000 x 180%] So, direct labor cost will be equal to $80,000 [Prime cost - Direct material costs = $180000 - $100000 = $80000]

Prime cost, dollars Add: Manufacturing overhead applied Cost of goods manufactured (COGM) $180,000 [As calculated in workings for Part-(b)] $320,000 [As calculated in Part-(b)] $500,000 d) Manufacturing overhead applied (OH costs) $320,000 [As calculated in Part-(b)] Actual manufacturing overhead costs incurred $360,000 Under-applied manufacturing overhead cost $40,000 [Difference between $320000 & $320000] (It is considered under-applied because mfg. overhead applied is less than actual mfg. overhead incurred) e) Cost of goods manufactured (COGM) Less: Cost of ending working process (WIP) Cost of goods sold - Unadjusted Add: Under-applied manufacturing overhead Cost of goods sold (COGS) - Adjusted $500,000 [As calculated in Part-(c)] $50,000 $450,000 $40,000 [As calculated in Part-(d)] $490,000