Integration Exercise 7 Normal Costing versus Actual Costing [LO 2-1, LO 2-2, LO
ID: 2565213 • Letter: I
Question
Integration Exercise 7 Normal Costing versus Actual Costing [LO 2-1, LO 2-2, LO 2-3, LO 3-3, LO 3-4, LO 6-1, LO 6-2]
Darwin Company manufactures only one product that it sells for $200 per unit. The company uses plantwide overhead cost allocation based on the number of units produced. It provided the following estimates at the beginning of the year:
During the year, the company had no beginning inventories of any kind and no ending raw materials or work in process inventories. All raw materials were used in production as direct materials. An unexpected business downturn caused annual sales to drop to 38,000 units. In response to the decline in sales, Darwin decreased its annual production to 40,000 units. The company’s actual costs for the year were as follows:
Required:
1. Assuming the company uses normal costing (as described in Chapters 2 and 3):
a. Compute the plantwide predetermined overhead rate.
b. Compute the unit product cost for each unit produced during the year.
c. Prepare a schedule of cost of goods manufactured and a schedule of cost of goods sold. Assume that any underapplied or overapplied overhead is closed entirely to cost of goods sold.
d. Compute absorption costing net operating income for the year.
2. Assuming the company uses actual costing (as described in Chapter 6):
a. Compute the unit product cost for each unit produced during the year.
b. Compute absorption costing net operating income for the year.
Explanation / Answer
Solution:
1-a) Plantwide Overhead Rate
- Plant-wide overhead rate means predetermined overhead rate of plant as a whole.
- Predetermined Overhead Rate is the rate which is used to apply manufacturing overhead to products or job orders.
- Normally, it is calculated at the beginning of the period.
- It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).
- Allocation bases may be direct labor hours, direct labor costs, machine hours etc..
Plantwide Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base
Here, the allocation base is Number of units produced = 50,000 Units
Variable manufacturing overhead per unit produced
$12
Fixed Manufacturing Overhead Per Unit
($1,000,000 / 50,000 Units)
$20
Plantwide Overhead Rate
$32 per unit
1-b) Unit Product Cost
Product Cost is the cost incurred in making the product. It includes the cost incurred on direct material, direct labor, variable manufacturing overhead and fixed manufacturing overhead.
It does not include selling and admin overhead costs.
Unit Product Cost
Direct materials
$78
Direct labor
60
Manufacturing Overhead per unit (as calculated in part 1a)
32
Unit Product Cost
$170
1-c) schedule of cost of goods manufactured and a schedule of cost of goods sold
Schedule of Cost of Goods manufactured
$$
Cost of Goods Manufactured:
Direct material costs (40,000 Units x $78)
$3,120,000
Direct labor costs (40,000 Units x $60)
$2,400,000
Manufacturing Overhead (40,000 Units x $32)
$1,280,000
Total Cost of Goods Manufactured
$6,800,000
Schedule of Cost of Goods manufactured
$$
Cost of Goods Manufactured
$6,800,000
Add: Beginning Finished Goods Inventory
$0
Less: Ending Finished Goods Inventory (2,000 Units x Product Cost $170)
-$340,000
(Units Produced 40,000 - Sold Units 38,000 = 2,000 Units)
Cost of Goods Sold (unadjusted)
$6,460,000
Less: Under applied Overhead (Refer note 1)
$200,000
Adjusted Cost of Goods Sold
$6,660,000
Note 1--- Under applied Overheads
Fixed Manufacturing Overheads = $1,000,000
Applied Fixed manufacturing overhead based on budgeted production units = 40,000 Units Produced x Fixed Overhead Rate
= 40,000 Units x 20
= $800,000
Since the applied overheads are less than the fixed manufacturing overhead costs, the overheads are under applied.
Under Applied Overheads = $200,000 (1,000,000 – 800,000)
Under Applied Overheads are charged to Cost of Goods Sold.
1-d) Absorption costing net operating income
Absorption Costing Income Statement
$$
Sales Revenue (38,000 Units x $200)
$7,600,000
Cost of Goods Sold (adjusted)
$6,660,000
Gross Profit
$940,000
Selling and administrative expenses:
Variable selling and administrative (38,000 Units x 15)
$570,000
Fixed selling and administrative expenses
$350,000
Total Selling and administrative expenses
$920,000
Net Operating Income
$20,000
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Pls ask separate question for remaining part.
Variable manufacturing overhead per unit produced
$12
Fixed Manufacturing Overhead Per Unit
($1,000,000 / 50,000 Units)
$20
Plantwide Overhead Rate
$32 per unit
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