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This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Appendix 4A 71
Case 4A-6 (continued)
ALTERNATIVE SOLUTION:
Most students will compute the manufacturing overhead cost per pound
of the two coffees as shown above. However, the per pound cost can
also be computed as shown below.
This alternative approach provides
additional insight into the data and facilitates emphasis of some points
made in the chapter.
Kenya Dark
Viet Select
Total
Per Pound
(÷ 80,000)
Total
Per Pound
(÷ 4,000)
Purchasing ...........
$ 1,120
$0.014
$2,240
$0.560
Material handling ..
6,176
0.077
3,088
0.772
Quality control ......
2,880
0.036
1,440
0.360
Roasting ..............
13,200
0.165
660
0.165
Blending ..............
2,400
0.030
120
0.030
Packaging ............
1,200
0.015
60
0.015
Total ....................
$26,976
$0.337
$7,608
$1.902
pound
for the Kenya Dark coffee is just 1.4 cents, whereas the purchase
when activity-based costing is used.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
72 Managerial Accounting for Managers, 4th Edition
Appendix 4B
The Predetermined Overhead Rate and Capacity
Exercise 4B-1 (30 minutes)
1. There were no beginning or ending inventories, so all of the jobs were
started, finished, and sold during the month. Therefore cost of goods
sold equals the total manufacturing cost. We can verify that by
computing the cost of goods sold as shown below:
Manufacturing costs charged to jobs:
Direct materials ...........................................
$ 4,820
Direct labor (all variable) ..............................
9,640
Manufacturing overhead applied
($74 hour × 124 hours) .............................
9,176
Total manufacturing cost charged to jobs ........
23,636
Add: Beginning work in process inventory ........
0
23,636
Deduct: Ending work in process inventory .......
0
Cost of goods manufactured ...........................
$23,636
Beginning finished goods inventory .................
$ 0
Add: Cost of goods manufactured ...................
23,636
Goods available for sale ..................................
23,636
Deduct: Ending finished goods inventory .........
0
Cost of goods sold ..........................................
$23,636
shown below:
Manufacturing overhead incurred .......................................
$10,870
Manufacturing overhead applied ($74 hour × 124 hours) ....
9,176
Overhead underapplied......................................................
$ 1,694
Solutions Manual, Appendix 4B 73
Exercise 4B-1 (continued)
Consequently, the income statement would appear as follows:
Samanca Cabinets
Income Statement
Sales ....................................................
$39,860
Cost of goods sold (see above) ..............
23,636
Gross margin ........................................
16,224
Underapplied manufacturing overhead ...
$1,694
Selling and administrative expenses .......
9,350
11,044
Net operating income ............................
$ 5,180
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
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
74 Managerial Accounting for Managers, 4th Edition
Exercise 4B-2 (30 minutes)
1. The overhead applied to Ms. Miyami’s account would be computed as
follows:
2016
2017
Estimated overhead cost (a) .............................
$144,000
$144,000
Estimated professional staff hours (b) ...............
2,400
2,250
Predetermined overhead rate (a) ÷ (b) ..............
$60
$64
Professional staff hours charged to
Ms. Miyami’s account .....................................
× 5
× 5
Overhead applied to Ms. Miyami’s account .........
$300
$320
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.
2016
2017
Predetermined overhead rate (see above) .........
$60
$64
Actual professional staff hours charged to
clients’ accounts (by assumption) ...................
× 2,400
× 2,250
Overhead applied .............................................
$144,000
$144,000
Actual overhead cost incurred (by assumption) ..
144,000
144,000
Under- or overapplied overhead ........................
$ 0
$ 0
3. If the predetermined overhead rate is based on the professional staff
hours available, the computations would be:
2016
2017
Estimated overhead cost (a) ...............................
$144,000
$144,000
Professional staff hours available (b) ...................
3,000
3,000
Predetermined overhead rate (a) ÷ (b) ...............
$48
$48
Professional staff hours charged to Ms. Miyami’s
account ..........................................................
× 5
× 5
Overhead applied to Ms. Miyami’s account ..........
$240
$240
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Appendix 4B 75
Exercise 4B-2 (continued)
4. If the actual overhead cost and the actual professional staff hours
charged to clients’ accounts turn out to be exactly as estimated
overhead would be underapplied as shown below.
2016
2017
Predetermined overhead rate (see 3 above) (a) ...
$48
$48
Actual professional staff hours charged to
clients’ accounts (by assumption) (b) ...............
× 2,250
× 2,400
Overhead applied (a) × (b) ................................
$108,000
$115,200
Actual overhead cost incurred (by assumption) ....
144,000
144,000
Underapplied overhead ......................................
$ 36,000
$ 28,800
statement as Cost of Unused Capacity.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
76 Managerial Accounting for Managers, 4th Edition
Problem 4B-3 (60 minutes)
1. The overhead applied to the Slug Fest job would be computed as
follows:
2016
2017
Estimated studio overhead cost (a) ...................
$90,000
$90,000
Estimated hours of studio service (b) .................
1,000
750
Predetermined overhead rate (a) ÷ (b) ..............
$90
$120
Slug Fest job’s studio hours .............................
× 30
× 30
Overhead applied to the Slug Fest job ..............
$2,700
$3,600
2016
2017
Predetermined overhead rate (see above) (a) ....
$90
$120
Actual hours of studio service provided (b) ........
× 900
× 600
Overhead applied (a) × (b) ...............................
$81,000
$72,000
Actual studio cost incurred ................................
90,000
90,000
Underapplied overhead .....................................
$ 9,000
$18,000
2. If the predetermined overhead rate is based on the hours of studio
service at capacity, the computations would be:
2016
2017
Estimated studio overhead cost (a) ...................
$90,000
$90,000
Hours of studio service at capacity (b) ...............
1,800
1,800
Predetermined overhead rate (a) ÷ (b) ..............
$50
$50
Slug Fest job’s studio hours .............................
× 30
× 30
Overhead applied to the Slug Fest job ..............
$1,500
$1,500
Overhead is underapplied for both years under this method as well:
2016
2017
Predetermined overhead rate (see above) (a) .......
$50
$50
Actual hours of studio service provided (b) ...........
× 900
× 600
Overhead applied (a) × (b) ................................
$45,000
$30,000
Actual studio cost incurred ...................................
90,000
90,000
Underapplied overhead ........................................
$45,000
$60,000
