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Overhead based on labor hours
Job 9823 Job 9824
Material $ 1,000 $ 2,000
c. Given that depreciation on equipment accounts for 75 percent of applied
P7. [LO 5]
a. Net Income, if over-applied overhead is immaterial and assigned to Cost of Goods
Sold.
OH applied = .75 x $700,000 = $525,000
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b. Net Income, if over applied overhead is material and prorated among appropriate
accounts.
Adjusted
Balance Proportion Adjustment Balance
WIP Inventory $ 80,000 0.071 $ 5,325 $ 74,675
P8. [LO 5]
a. If overapplied overhead is assigned to Cost of Goods Sold, the adjusted
balance will be:
b. If overapplied overhead is assigned to Work in Process Inventory, Finished
Goods Inventory, and Cost of Goods Sold, the adjusted balances will be:
Adjusted
Balance Proportion Adjustment Balance
WIP Inv. $ 66,000 0.12 $ 6,000 $ 60,000
P9. [LO 4, 5, 6]
a. Indirect cost per hour of service is $65:
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b. Estimated cost of services for a potential client:
P10. [LO 2, 4]
P11. [LO 4, 5]
a. The predetermined overhead rate is $2.57 per direct labor dollar
($9,000,000 ÷ 3,500,000 = $2.57).
P12. [LO 4, 5]
a. Job 201 $17,000 × $3.25 = $ 55,250
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b. Job 201 $9,500 × $3.33 = $ 31,635
P13. [LO 2, 4, 5]
a. Confectioners’ sugar (2,100 lbs. $0.80) $1,680
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Raw Materials Inventory 7,896
Work in Process Inventory 5,400
Wages Payable 5,400
(To record direct labor cost)
Manufacturing Overhead 6,150
Utilities Payable 400
Finished Goods Inventory 21,446
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Cost of Goods Sold 24,446
Lane Confectioners
b. Income Statement for the Month of March
P14. [LO 4, 5] Approximately 66 percent of overhead costs ($160,000 + $135,000) ÷
P15. [LO 5, 6]
Overhead is overapplied
P16. [LO 5, 6]
a. The predetermined overhead rate is $17 per repair technician hour ($170,000 ÷
b. Overhead applied = $17 7,000 = $119,000
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c. The journal entry to close the account to Cost of Goods Sold is:
P17. [LO 4, 5, 6]
a. The predetermined overhead rate is $2,750 per hour of operating room use.
b. The total cost of the knee surgery is $24,250:
Pharmacy $ 450
Case 2-1. [LO General chapter concepts and ethics]
BRIXTON SURGICAL DEVICES
Summary
The COO and CFO of a public company are coming up with “schemes” to manage
earnings up in an effort to beat an aggressive earnings target which determines their
bonus compensation.
• Indicates how profit can be “boosted” by overproduction.
Questions to ask students
1. What’s the situation at Brixton Surgical Devices?
2. How do Ed and Robin plan to increase profit?
3. Are their planned methods ethical and how will they affect shareholder value?
Discussion
Ed (the COO) and Robin (the CFO) realize that their company is not likely to meet their
earnings target and, in consequence, they won’t receive bonuses. To increase profit,
they plan to offer discounts to customers for orders in October and November that can
be shipped in December. This strategy is sometimes referred to as “channel stuffing”
3. Will an individual or an organization be harmed by any of the alternatives?
5. Would someone I respect find any of the alternatives objectionable?
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Case 2-2. [LO 4. 5, 6]
YSL MARKETING RESEARCH
Summary
Marketing research firm is bidding on a job and is considering various costs.
• Requires calculation of full cost and consideration of incremental costs including
opportunity costs.
Questions to ask students
2. What is the expected full cost of the Surenex engagement?
Discussion
Begin the discussion by asking a student to summarize the situation facing YSL
Marketing Research. The company has been asked to conduct a survey for Surenex—a
firm that has the potential to be a valued long-run client. However, Surenex is not
currently willing to pay YSL’s normal billing rates, due to its current cash-flow
challenges.
a. A student is then asked to calculate the full cost of the project.
Full Cost
Partner salary (40 hours $120) $4,800
Overhead calculation
Estimated overhead $ 496,000
b. What is the lowest amount that Connie can bill on this engagement without
hurting company profit? The point of this question is to show that the answer is
neither the full cost ($14,528) nor the variable cost of the job (assuming the
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variable costs are salaries and direct charges). To answer the question, students
must consider the fact that if the Surenex job is undertaken, YSL will need to turn
Professional compensation $4,800
4,000
c. The discussion concludes with the question, “What should Connie consider in
addition to the amount just calculated?” Hopefully, a student will recognize that
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Case 2-3. [LO 4, 5]
DUPAGE POWDER COATING
Summary
A company has bought a computer-controlled, electrostatic powder coating system. The
result is overhead has increased (due to depreciation of the system) and labor hours
have decreased. Since labor hours is the overhead allocation base, the overhead rate
Questions to ask students
1. What’s the situation at DuPage Powder Coating?
2. What would the job have cost in the prior year and what did it cost this year?
3. Why have the cost of small jobs increased?
4. Should the company increase the prices of small jobs since costs have
increased?
Discussion
a. The cost of the job in the current year is:
Direct material $500
b. The cost of the job in the prior year was:
Direct material $500
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The new overhead rate is determined as follows:
Expected total overhead $1,440,000