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Department
Accounting
Course
ACCTG322
Professor
Trish Stringer
Semester
Winter

Description
Midterm Review Class #1.1- COGM; Income Statement, Cost Behaviour On January 30, 2013, the manufacturing facility of Trucks R Us was severely damaged by a fire. As a result, the company’s direct materials, work-in-process, and finished goods inventories were destroyed. The company did have access to certain incomplete accounting records, which revealed the following: Beginning inventories at January 1, 2013: Direct Materials $ 32,000 Work in Process $ 68,000 Finished Goods $ 30,000 Key ratios for the month of January 2013 are as follows: Manufacturing Overhead = 40% of conversion costs Prime costs = 70% of total manufacturing costs for the period Gross margin = 20% of sales Ending Work in Process (WIP) is always 10% of the total manufacturing costs for the period. All costs are incurred uniformly in the manufacturing process. Actual operations data for the month of January 2013: Sales $ 900,000 Direct material purchases $ 320,000 Direct labour incurred $ 360,000   Required 1: Prepare a statement of cost of goods manufactured (COGM). Notes: Conversion costs = DL + OH Prime costs = DM + DL Manufacturing costs (see COGM statement) = DM + DL +OH There is no Raw Materials Inventory it is just DM inventory. Therefore there is no indirect consumption of Raw materials. Trucks R Us Statement of Cost of Goods Manufactured For the period January 1 to 30, 2012 Direct Materials: DM Beginning inventory (Jan. 1) $ 32,000 Add: Purchases 320,000 Direct Materials available $ 352,000 Less: DM Ending inventory (Jan. 30) Total Direct Materials used Direct Labour 360,000 Overhead Total manufacturing costs for the period Add: Beginning Work-in-Process Inventory (Jan. 1) 68,000 Total costs to account for Less: Work-in-Process Inventory (Jan. 30) Cost of Goods Manufactured [1] Given: MOH = 40% of conversion costs. Conversion costs = DL + Factory OH. (1 mark for the formula or being able to proceed to the next step) MOH = 40% x (DL + Factory OH) Given DL = $360,000 MOH = (0.40) ($360,000 + Factory OH) (1 mark) MOH = $144,000 + 0.40 Factory OH MOH – 0.40 MOH = $144,000 0.60 MOH = $144,000 MOH = $144,000 / 0.60 MOH = $240,000(1 mark) (So, 3 marks for getting the $240,000) [2]Given: Prime costs = 70% of mfg. costs added for the period Jan. 1-30 Prime costs = DM + DL. Therefore DM + DL = 70% x manufacturing costs added for the period Manufacturing costs = DM + DL + OH. Therefore DM + DL = 70% x (DM + DL + OH) (1 mark for the formula or being able to get to this point) DM + DL = 0.70DM + 0.70DL + 0.70OH DM – 0.70DM + DL – 0.70DL = 0.70 OH 0.30DM + 0.30DL = 0.70OH Now we know that OH = $240,000 [calculated in [1] above] We were given that DL = $360,000 0.30 DM+ 0.30 x 360,000= 0.70 x $240,000 0.30 DM + $108,000 = $168,000 0.30 DM = $168,000 - $108,000 0.30 DM = $60,000 DM = $60,000 / 0.30 DM = $200,000(2 marks for the correct number or a correct process to get to this point) (So, 3 marks for getting the $200,000) [3] Therefore DM Ending inventory must be $152,000 (2 marks for the correct number or a correct process to get to this point) as DM available – DM Ending = DM used $352,000 – DM ending = $200,000 $352,000 – $200,000 = DM Ending [4] Therefore total manufacturing costs must be $800,000 as … [5]Given: Ending Work-in-Process Inventory is always 10% of the monthly manufacturing costs: 0.10 x $800,000 = $80,000. Trucks R Us Statement of Cost of Goods Manufactured For the period January 1 to 30, 2012 Direct Materials: DM Beginning inventory (Jan. 1) $ 32,000 ½ mark* Add: Purchases 320,000 ½ mark* Direct Materials available $ 352,000 Less: DM Ending inventory (Jan. 30) [3] 152,000 2 marks Total Direct Materials used [2] $ 200,000 3 marks Direct Labour 360,000 ½ mark* Overhead [1] 240,000 3 marks Total manufacturing costs for the period [4] $ 800,000 2 marks Add: Beginning Work-in-Process Inventory 68,000 ½ mark* (Jan. 1) Total costs to account for $ 868,000 Less: Work-in-Process Inventory (Jan. 30) 80,000 2 marks [5] Cost of Goods Manufactured $ 788,000 * These numbers are all given in the problem. The ½ mark is for putting it in the COGM statement. Required 2: Calculate the total cost of inventory lost, identifying each category where possible (i.e. Direct Materials, Work in process and Finished Goods) at January 31, 2013. DM above WIP above FG = Sales – COGS = GM 900,000 – COGS = 20% of Sales (or 0.2 * 900,000) = 180,000 900,000 – 180,000 = COGS COGS = 720,000 Midterm Review Class #1.2- Plantwide versus Departmental Overhead Rates; Underapplied or Overapplied Overhead “Don’t tell me we’ve lost another bid!” exclaimed Sandy Kovallas, president of Lenko Products Inc. “I’m afraid so” replied Doug Martin, the operations vice-president. “One of our competitors underbid us by about $10,000 on the Hasting job.” “I just can’t figure it out,”said Kovallas, “It seems we’re either too high to get the job or too low to make any money on half the jobs we bid. What’s happened?” Lenko Products manufactures specialized goods to customers’ specifications and operates a job- order costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labour cost. The following estimates were made at the beginning of the year: MachiningCu Attnembly Total Direct labour $300,000 $200,000 $400,000 $900,000 Manufacturing $540,000 $800,000 $100,000 $1,440,000 overhead Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows: Machining AC settbgly Total Direct materials $12,000 $900 $5,600 $18,500 Direct labour $6,500 $1,700 $13,000 $21,200 Manufacturing overhead ? ? ? ? The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs. Required 1: Assuming the use of a plantwide overhead rate: a. Compute the rate for the current year. Predetermined = Estimated total manufacturing overhead cost Overhead rate Estimated total amount of the allocation base = $1,440,000 $900,000 direct labour cost = 160% Direct labour cost b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. $21,200 × 160% = $33,920. Required 2: Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions” a. Compute the rate for each department for the current year. Cutting Machining Assembly Department Department Department Estimated manufacturing overhead cost (a)...................$540,000 $800,000 $100,000 Estimated direct labour cost (b).... $300,000 $200,000 $400,000 Predetermined overhead rate (a) ÷ (b)................................180%....... 400% 25% b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. CuttingDepartment: $6,500 × 180% .......................................$11,700.......... MachiningDepartment: $1,700 × 400% ..........................................6,800......... AssemblyDepartment: $13,000 × 25% ..........................................3,250......... Total applied overhead.................................$21,750........ Required 3: Explain the difference between the manufacturing overhead that would have been applied to the Hastings job using the plantwide rate in question 1(b) above and using the departmental rates in question 2(b). The bulk of the labour cost on the Hastings job is in the Assembly Department, which incurs very little overhead cost. The department has an overhead rate of only 25% of direct labour cost as compared to much higher rates in the other two departments. Therefore, as shown above, use of departmental overhead rates results in a relatively small amount of overhead cost charged to the job. However, use of a plantwide overhead rate in effect redistributes overhead costs proportionately between the three departments (at 160% of direct labour cost) and results in a large amount of overhead cost being charged to the Hastings job, as shown in Part 1. This may explain why the company bid too high and lost the job. Too much overhead cost was assigned to the job for the kind of work being done on the job in the plant. If a plantwide overhead rate is being used, the company will tend to charge too little overhead cost to jobs that require a large amount of labour in the Cutting or Machining Departments. The reason is that the plantwide overhead rate (160%) is much lower than the rates if these departments were considered separately. Required 4: Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost (direct materials, direct labour, and applied overhead). What was the company’s bid price on theh Hastings job? What would the bid price have been if departmental overhead rates had been used to apply overhead cost? The company’s bid price was: Direct materials................................................$ 18,500............... Direct labour......................................................21,200................ Manufacturing overhead applied (above) ............................33,920 Total manufacturing cost...........................................73,620........ Bidding rate...
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