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Exercise 3B-1 (continued)
Consequently, the income statement would appear as follows:
Wixis Cabinets
Income Statement
Sales ....................................................
$43,740
Cost of goods sold (see above) ..............
26,510
Gross margin ........................................
17,230
Cost of unused capacity .........................
$1,920
Selling and administrative expenses .......
8,180
10,100
Net operating income ............................
$ 7,130
2. When the predetermined overhead rate is based on capacity, overhead
is ordinarily underapplied because manufacturing overhead ordinarily
contains significant amounts of fixed costs. Suppose, for example, that
Exercise 3B-2 (30 minutes)
1. The overhead applied to Mrs. Brinksi’s account would be computed as
follows:
2012
2013
Estimated overhead cost (a) .............................
$310,500
$310,500
Estimated professional staff hours (b) ...............
4,500
4,600
Predetermined overhead rate (a) ÷ (b) ..............
$69.00
$67.50
Professional staff hours charged to Ms. Brinksi’s
account .........................................................
× 2.5
× 2.5
Overhead applied to Ms. Brinksi’s account..........
$172.50
$168.75
2. If the actual overhead cost and the actual professional hours charged
turn out to be exactly as estimated there would be no underapplied or
overapplied overhead.
2012
2013
Predetermined overhead rate (see above) .........
$69.00
$67.50
Actual professional staff hours charged to cli-
ents’ accounts (by assumption) ......................
× 4,500
× 4,600
Overhead applied .............................................
$310,500
$310,500
Actual overhead cost incurred (by assumption) ..
310,500
310,500
Underapplied or overapplied overhead ...............
$ 0
$ 0
3. If the predetermined overhead rate is based on the professional staff
hours available, the computations would be:
2012
2013
Estimated overhead cost (a) ...............................
$310,500
$310,500
Professional staff hours available (b) ...................
6,000
6,000
Predetermined overhead rate (a) ÷ (b) ...............
$51.75
$51.75
Professional staff hours charged to Ms. Brinksi’s
account ..........................................................
× 2.5
× 2.5
Overhead applied to Ms. Brinksi’s account ...........
$129.38
$129.38
Problem 3B-3 (60 minutes)
1. The overhead applied to the Verde Baja job is computed as follows:
2012
2013
Estimated studio overhead cost (a) .................
$160,000
$160,000
Estimated hours of studio service (b) ...............
1,000
800
Predetermined overhead rate (a) ÷ (b) ............
$160
$200
Verde Baja job’s studio hours .........................
× 40
× 40
Overhead applied to the Verde Baja job ..........
$6,400
$8,000
Overhead is underapplied for both years as computed below:
2012
2013
Predetermined overhead rate (see above) (a) ..
$160
$200
Actual hours of studio service provided (b) ......
750
500
Overhead applied (a) × (b) .............................
$120,000
$100,000
Actual studio cost incurred ..............................
160,000
160,000
Underapplied overhead ...................................
$ 40,000
$ 60,000
2. If the predetermined overhead rate is based on the hours of studio ser-
vice at capacity, the computations would be:
2012
2013
Estimated studio overhead cost at capacity (a)
$160,000
$160,000
Hours of studio service at capacity (b) .............
1,600
1,600
Predetermined overhead rate (a) ÷ (b) ............
$100
$100
Verde Baja job’s studio hours .........................
× 40
× 40
Overhead applied to the Verde Baja job ..........
$4,000
$4,000
Overhead is underapplied for both years under this method as well:
2012
2013
Predetermined overhead rate (see above) (a) ..
$100
$100
Actual hours of studio service provided (b) ......
750
500
Overhead applied (a) × (b) .............................
$ 75,000
$ 50,000
Actual studio cost incurred ..............................
160,000
160,000
Underapplied overhead ...................................
$ 85,000
$110,000
Case 3B-4 (120 minutes)
1. Traditional approach:
Actual total manufacturing overhead cost incurred
(assumed to equal the original estimate) .................
$4,000,000
Manufacturing overhead applied
(160,000 units × $25 per unit) ...............................
4,000,000
Overhead underapplied or overapplied .......................
$ 0
Vault Hard Drives, Inc.
Income Statement: Traditional Approach
Sales (150,000 units × $60 per unit) ............
$9,000,000
Cost of goods sold:
Variable manufacturing
(150,000 units × $15 per unit) ...............
$2,250,000
Manufacturing overhead applied
(150,000 units × $25 per unit) ...............
3,750,000
6,000,000
Gross margin ..............................................
3,000,000
Selling and administrative expenses .............
2,700,000
Net operating income ..................................
$ 300,000
New approach:
Vault Hard Drives, Inc.
Income Statement: New Approach
Sales (150,000 units × $60 per unit) ....................
$9,000,000
Cost of goods sold:
Variable manufacturing
(150,000 units × $15 per unit) .......................
$2,250,000
Manufacturing overhead applied
(150,000 units × $20 per unit) .......................
3,000,000
5,250,000
Gross margin ......................................................
3,750,000
Cost of unused capacity [(200,000 units –
160,000 units) × $20 per unit] ..........................
800,000
Selling and administrative expenses .....................
2,700,000
Net operating income ..........................................
$ 250,000
Case 3B-4 (continued)
New approach:
Under the new approach, the reported net operating income can be in-
creased by increasing the production level. This results in less of a deduc-
Additional net operating income required to attain target
net operating income ($500,000 – $250,000) (a) ..........
$250,000
Overhead applied per unit of output (b) ..........................
$20 per unit
Additional output required to attain target net operating
income (a) ÷ (b) .........................................................
12,500 units
Estimated number of units produced ..............................
160,000 units
Actual number of units to be produced ...........................
172,500 units
Vault Hard Drives, Inc.
Income Statement: New Approach
Sales (150,000 units × $60 per unit) ...................
$9,000,000
Cost of goods sold:
Variable manufacturing
(150,000 units × $15 per unit) ......................
$2,250,000
Manufacturing overhead applied
(150,000 units × $20 per unit) ......................
3,000,000
5,250,000
Gross margin .....................................................
3,750,000
Cost of unused capacity [(200,000 units –
172,500 units) × $20 per unit] .........................
550,000
Selling and administrative expenses ....................
2,700,000
Net operating income .........................................
$ 500,000
