Question 1: (Total 9 Marks)
Indooroopilly Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266 400 and budgeted machine-hours were 18 500. Actual factory overhead was $287 920 and actual machine-hours were 19 050. Before disposition of under/over-applied overhead, the cost of goods sold was $560 000 and ending inventories were as follows:
Direct materials $60 000
WIP 190 000
Finished goods 250 000
Total $500 000
Required:
a. Determine the budgeted factory overhead rate per machine-hour.
b. Compute the over/under-applied overhead.
c. Prepare the journal entry to dispose of the variance using the write-off to cost of goods sold approach.
d. Prepare the journal entry to dispose of the variance using the proration approach.
Question 2: (Total 10 Marks)
Lewis Auto Company manufactures a part for use in its production of motor cars. When 10 000 items are produced, the costs per unit are:
Direct materials $12
Direct manufacturing labour 60
Variable manufacturing overhead 24
Fixed manufacturing overhead 32
Total $128
Monty Company has offered to sell Lewis Auto Company 10 000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180 000 if Lewis Auto accepts the supplier’s offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Lewis Auto Company? By how much?
Question 3: (Total 7 Marks)
Clinton Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $100 per month. The other existing equipment will be used for additional production of product A. One employee earning $200 per month can be terminated if product B production is dropped. Clinton’s other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows:
Product A Product B Total
Sales $10 000 $8000 $18 000
Direct materials 2500 2000 4500
Direct labour 2000 1200 3200
Equipment rental 300 2600 2900
Other allocated overhead 1000 2100 3100
Operating profit $4200 $100 $4300
Required:
Prepare an incremental analysis to determine the financial effect of dropping product B. Should the company drop Product B?
Question 4: (Total 10 Marks)
Kirkland Company manufactures a part for use in its production of hats. When 10 000 items are produced, the costs per unit are:
Direct materials $0.60
Direct manufacturing labour 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total $6.40
Mike Company has offered to sell to Kirkland Company 10 000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?
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