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January 30.docx

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Wilfrid Laurier University
Esther Maier

January 30, 2014 bu247 Capacity-Related Resource – cost depends on amount of resource capacity that is acquired -fixed cost Direct cost – cost that is uniquely and unequivocally to a single cost object -almost all variable cost Indirect cost – cost that fails the test of being direct -capacity related cost Indirect cost pools -easiest and most cost effective method -accumulate similar things for example one for fixed and one for variable cost Predetermined overhead rates -looks for stability and predict the cost rate -look for long run behaviour Practical capacity *** makes the most sense -knowing you cannot run 100% of the time -use a realistic rate -important to design the cost pool the best they can *usually uses monthly records to determine Reconciling the Difference between Actual and Applied Indirect Costs 1. difference directly to COGS 2. make fair allocation for the three accounts (work in process, finished goods, COGS) 3. find the different between the actual and indirect cost and see why there is such a big difference Planned Level of Operations High demand and base on lower actual – price would be decrease Low demand and cost driver rate increase – price would increase = death spiral Maintain machine properly to make it last longer, but would need to consider the time for maintenance Need to consider the set up time for material Using practical capacity to relate to the best estimation P3­31 Eastern Wood Products has two production departments, cutting and assembly. The company has been using a plant wide cost driver rate  computed by driving plant wide overhead costs by total plant wide direct labour hours. The estimates for overhead costs and practical capacity  quantities of cost drivers for the current year follow: Required compute the plant wide cost driver rate determine the department cost driver rates based on direct labour hours for assembly and machine  hours for cutting provide reasons why Eastern Wood might use the method in part A or the one in part B **a company might be using the method in  part B if they are making a decision that will effect one department. Part B gives more information that will help us accommodate for the affects each  department Item Cutting Assembly Total Manufacturing overhead $25 000 $35 000 $60 000 Direct labour hour 1000 3000 4000 Machine hours 4000 2000 6000 Plant wide ($60 $15 (answer to part A) 000/4000) Departmental (answer to $25 000/4000=$6.25 $35 000/3000= 11.67 part b) *pick assembly line as cost driver rate on exam since direct labour hour and machine hour is 1000 hour apart *departmental rate gives us a better and more realistic number to help us make decision since it separates cutting and assemble, while plant wide rate would be more simple 3-32 Morrison Company Morrison Company carefully records it costs because it bases pricing is based on the cost of goods it manufactures. Morrison also carefully records it  machine usage and other operating information. Manufacturing costs are computed monthly, and prices for the next month are determined by adding  a 20% markup to each product's manufacturing costs. The cost driver rate is based on machine hours as follows **table Profits have been acceptable until the past year, when Morrison began to face increased competition. The marketing manager reported that  Morrison's sales force finds the company's pricing puzzling. When demand is high, the company's prices are low, and when demand is low, the  company's prices are high. Practical capacity is 1500 machine hours per month. Practical capacity is exceed in some months by operating the  machines overtime beyond regular shift hours. Monthly machine related overhead costs, all fixed, are $70 000 per month Required Compute the monthly overhead cost driver rates that Morrison used last year Suggest a better approach to developing cost driver rates for  Morrison and explain why you method is better $70 000 x 12/(15 000 x12) = $46.67 **this should be the rate that we should be using instead.  Therefore, when demand goes up and down, we are not distorting our information. This will also give us a much more accurate picture of what is  going on. Using actual production will distort the information Basis for cost driver rate Month Actual MH Month Actual MH January 1350 70 000/ 1350 = July 1400 70 000/ 1400 = $51.85 $50.00 February 1400 70 000/ 1400 = August 1400 70 000/ 1400 = $50.00 $50.00 March 1500 70 000/ 1500= September 1500 70 000/ 1500= $46.67 $46.67 April 1450 70 000/ 1450= October 1600 70 000/1600= $48.28 $43.75 May 1450 70 000/ 1450= November 1600 70 000/1600= $48.28 $43.75 June 1400 70 000/ 1400 = December 1600 70 000/1600= $50.00 $43.75 Total hours 17650 *rate: $70 000/ Actual MH a) Compute the monthly overhead cost driver rates that Morrison used last year b) Suggest a better approach to developing cost driver rates for Morrison and explain why your method is better $70 000 x 12 / $1500 x 12 = $46.67 3-39 Hoyt Company Hoyt Company uses a plant wide cost driver rate with machine hours as the cost driver. At the beginning of last year, Hoyt Company estimated its  capacity related (overhead) as $15 000 000 for practical capacity of 100 000 machine hours per year. During the year, actual overhead costs were  $14 200 000 and production required 90 000 machine hours Required: determine Hoyt Company's plant wide cost driver rate and calculated the overhead cost applied to production last year Suppose the  company charges the difference between actual and applied overhead costs to COGS at the end of the year. Calculated the difference and state  whether the result will be an increase or decrease in the previously recorded COGS Suppose not that the company prorates the difference between  actual and applied overhead costs to work in process (20%), finish goods (45%), and cost of goods sold (35%) by how much will the three accounts  be increased or decreased from their previously recorded amounts? **it is best to break up it all up so we get a fair representation of the accounts. If  the amounts are small, then it is okay to write it all to COGS. Otherwise, breaking it apart will give us a more accurate view of the costs now suppose  that the company wishes to decompose the difference between actual and applied overhead costs to gain further insight into the difference. Compute  the difference between actual and estimated overhead costs and the difference between estimated overhead costs and applied overhead costs **this  tells us where to focus our attention on. what insight does management gain from the approach in part d as compared to the approaches in part b  and c? **the numbers can give us a better signal of what is going on Hoyt Company Estimated Actual Capacity related(overhead costs) $15 000 000 $14 200 000 Practical capacity: machine hours 100 000 90 000 per year Plant wide overhead rate: $150 $15 000 000/ 100 000 Applied Overhead: $150 x 90 000 $13 500 000 Difference: COGS +$700 000 Difference: Pro- rated WIP 20% +$140 000 debit Finished goods 45% +$315 000 debit COGS 35% +$245 000 debit Difference between actual & $(800 000) Step one of part d estimated OH $14 200 000 - $15 Favourable difference 000 000 Difference between estimated OH $1 500 000 Step two of part d & applied $15 000 000 - $13 500 Unfavourable 00 difference * 140 000 and 315 000 would be on the balance sheet *if amount is small then write it off to cogs P3-43 Airport Coach Service Company Airport Coach Services Company operates scheduled coach service from Boston's Logan Airport to downtown Boston and to Cambridge. A common  scheduling service centre at the airport is responsible for ticketing and customer service for both routes. The service centre is regularly staffed to  service traffic of 2400 passengers pe
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