Gene Simmons Company uses normal costing in each of its three manufacturing depa
ID: 2404973 • Letter: G
Question
Gene Simmons Company uses normal costing in each of its three manufacturing departments. Manufacturing overhead is applied to production on the basis of direct labor cost in Department A, machine hours in Department B, and direct labor hours in Department C. In establishing the predetermined overhead rates for the current year, the following budgeted data was available:
A B C
Manufacturing Overhead $900,000 $840,000 $760,000
Direct Labor Cost $600,000 $100,000 $600,000
Direct Labor Hours 50,000 40,000 40,000
Machine Hours 100,000 120,000 125,000
The following actual information is available for January of the current year for each department:
Direct Materials Used $92,000 $86,000 $64,000
Direct Labor Cost $48,000 $35,000 $50,400
Manufacturing Overhead $76,000 $75,000 $72,100
Direct Labor Hours Used 4,000 3,500 4,200
Machine Hours Used 8,000 10,500 12,600
REQUIRED:
A. What two disadvantages are associated with actual costing? How does normal costing "solve" these problems?
B. Compute the pre-determined overhead rate for the current year for each department.
C. Compute the manufacturing overhead applied in January in each department.
D. Compute under- or over-applied overhead at the end of January in each department--be sure to label the amount as under- or over-applied.
E. How will the balance of the Factory Overhead account of each department be reported on the financial statements at the end of (1) January and (2) the year?
Explanation / Answer
A. The two disadvantages of actual costing are: 1. The overhead rates cannot be computed till after the end of period when all actual data is accumulated and analyzed. 2. Since actual costing uses the actual overhead costs incurred and the actual production, there are fluctuations in the overhead rate from month to month since both costs and activity levels are varying every month.
Normal costing resolves the two issues mentioned above by using a pre-determined rate which is computed at the beginning of the period and it also results in a more uniform overhead rate being used every month.
B.
C.
D.
E.(1) At the end of January, the factory overhead accounts for department A and B where overheads are under-applied will report a debit balance while for department C where overheads are over-applied will report a credit balance.
E.(2) At the end of the year, all the debit and credit balances in the factory overhead accounts will be closed to the cost of goods sold or pro-rated to the work in process inventory, finished goods inventory, and the cost of goods sold.
Department A B C Manufacturing overhead $ 900000 840000 760000 Direct labor cost $ 600000 Direct labor hours 40000 Machine hours 120000 Pre-determined overhead rate 150% $ 7.00 $ 19.00 of DLC per MH per DLHRelated Questions
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