Question

Bonita instructions

Bonita Wings, Inc. manufactures airplanes for use in stunt shows. Bonita’s factory is highly automated, using the latest in robotic technology. To keep costs low, the company employs as few factory workers as possible. Since each plane has different features (such as its shape, weight, and color), Bonita uses a job order costing system to accumulate product costs.

At the end of 2016, Bonita’s accountants developed the following expectations for 2017 based on the marketing department’s sales forecast:

Budgeted overhead cost		$1,110,000
Estimated machine hours		54,000
Estimated direct labor hours		8,000
Estimated direct materials cost		$1,520,000

Bonita’s inventory count, completed on December 31, 2016, revealed the following ending inventory balances:

Raw Materials Inventory		$251,000
Work in Process Inventory		$625,000
Finished Goods Inventory		$2,180,000

The company’s 2017 payroll data revealed the following actual payroll costs for the year:

Job Title		Number Employed		Wage Rate per Hour		Annual Salary per Employee		Total Hours Worked per Employee
President and CEO		1				$224,000
Vice president and CFO		1				$178,000
Factory manager		1				$40,600
Assistant factory manager		1				$33,500
Machine operator		5		$14.5				2,250
Security guard, factory		2				$20,400
Forklift operator		2		$7.5				2,000
Corporate secretary		1				$36,400
Janitor, factory		2		$6				2,150

The following information was taken from Bonita’s Schedule of Plant Assets. All assets are depreciated using the straight-line method.

Plant Asset		Purchase Price		Salvage Value		Useful Life
Factory building		$4,000,000		$150,000		20 Years
Administrative office		$650,000		$125,000		30 Years
Factory equipment		$2,000,000		$20,000		12 Years

Other miscellaneous costs for 2017 all paid in cash included:

Cost		Amount
Factory insurance (fully expired)		$12,000
Administrative office utilities		$5,500
Factory utilities		$30,000
Office supplies (fully consumed)		$5,200

Additional information about Bonita’s operations in 2017 includes the following:

•	Raw materials purchases for the year amounted to $1,946,000. All materials were purchased on account.
•	The company used $1,860,000 in raw materials during the year. Of that amount, 85% was direct materials and 15% was indirect materials.
•	Bonita applied overhead to Work in Process Inventory based on direct materials cost.
•	Airplanes costing $3,450,000 to manufacture were completed and transferred out of Work in Process Inventory.
•	Bonita uses a markup of 80% to price its airplanes. Sales for the year were $6,570,000. All sales are made on account. (Note: This transaction requires two journal entries.)

Answer 1

a)

Predetermined overhead rate = Budgeted overhead cost / Estimated direct materials cost.

(because it is required to be calculated as a % of direct material cost). Therefore,

Budgeted overhead cost = $1,110,000

Estimated direct materials cost = $1,520,000

Predetermined overhead rate = 73.02% of the direct material cost.

(1110000/1520000 = 73.02%)