Job-Order Costing: Focus on Overhead and Cost Drivers
Garcia. Inc. uses a job-order costing system for its products, which pass from the Machining Department to the Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The company applies manufacturing overhead using machine hours in the Machining Department and direct-labor cost in the Assembly Department. The following information relates to the year just ended:
| Machining Department | Assembly Department |
Budgeted manufacturing overhead | $4,000,000 | $3,080,000 |
Actual manufacturing overhead | 4,260,000 | 3,050,000 |
Budgeted direct-labor cost (based on practical capacity) | 1,500,000 | 5,600,000 |
Actual direct-labor cost | 1,450,000 | 5,780,000 |
Budgeted machine hours (based on practical capacity) | 400,000 | 100,000 |
Actual machine hours | 425.000 | 110,000 |
The data that follow pertain to job no. 775. the only job in production at year-end.
| Machining Department | Assembly Department |
Direct material | $24,500 | $ 6,700 |
Direct labor | 27,900 | 58,600 |
Machine hours | 360 | 150 |
Selling and administrative expense amounted to $2,500,000.
Required:
1. Assuming the use of normal costing, determine the predetermined overhead rates used in the Machining Department and the Assembly Department.
2. Compute the cost of the company's year-end work-in-process inventory.
3. Determine whether overhead was under- or overapplied during the year in the Machining ' Department.
4. Repeat requirement (3) for the Assembly Department.
5. If the company disposes of under- or overapplied overhead as an adjustment to Cost of Goods Sold, would the company's Cost of Goods Sold account increase or decrease? Explain.
6. How much overhead would have been charged to the company's Work-in-Process account during the year?
7. Comment on the appropriateness of the company's cost drivers (i.e.. the use of machine hours in Machining and direct-labor cost in Assembly).
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