Query regarding

solution_2.xls

first model


	Observation	MH	DLH	Total Overhead Costs
	January	5,600	2,000	$ 320,000
	February	7,000	2,500	$ 340,000
	March	8,000	4,000	$ 470,000
	April	8,400	3,300	$ 440,000
	May	6,400	2,250	$ 300,000
	June	8,000	2,600	$ 390,000
	July	6,800	3,000	$ 420,000
	August	8,000	2,500	$ 400,000
	September	6,500	3,250	$ 430,000
	October	6,000	2,300	$ 400,000
	November	9,600	3,600	$ 460,000
	December	6,000	2,750	$ 380,000
	High MH	9,600		$ 460,000
	Low MH	5,600		$ 320,000
a	OH Costs = a + b(MH)
	where, b		35
	a		$ 124,000
	Thus, the equation is OH costs = $1,24,000 +35(MH)
b
i	The three regression models estimated are:
	1. DLH and Overhead Cost
	2. MH and Overhead Cost
	3. MH and DLH
ii	The third model (MH and DLH) is the best because it incorporates all the variables of the data.
iii	Second model : MH and Overhead Cost
	Estimated Overhead Cost			$ 447,572.34
iv	First Model :DLH and Overhead Cost
	Lower interval			$ 86,005.70
	Upper interval			$ 260,629.48
v	First Model :DLH and Overhead Cost
	Lower interval			$ 49,126.42
	Upper interval			$ 297,508.77
NOTE : To view the detailed calculation click on the cell containing the figure


	Cash Revenue (per year)				$ 330,000
	Cash Expenses (per year)				$ 200,000
	Cost of Equipment				$ 380,000
	Salvage Value at the end of 7th year				$ 60,000
	Tax rate				40%
	Life				8
	Depreciation				Straight line method
	Cost of capital				12%
	Year	0	1	2	3	4	5	6	7
	Initial Investment	$ -380,000
	Cash Revenue (net)		$ 130,000	$ 130,000	$ 130,000	$ 130,000	$ 130,000	$ 130,000	$ 130,000
	Depreciation		$ 40,000	$ 40,000	$ 40,000	$ 40,000	$ 40,000	$ 40,000	$ 40,000
	Net profit (before tax)		$ 90,000	$ 90,000	$ 90,000	$ 90,000	$ 90,000	$ 90,000	$ 90,000
	Tax		$ 36,000	$ 36,000	$ 36,000	$ 36,000	$ 36,000	$ 36,000	$ 36,000
	Net profit (after tax)		$ 54,000	$ 54,000	$ 54,000	$ 54,000	$ 54,000	$ 54,000	$ 54,000
	After tax cash Flow	$ -380,000	$ 94,000	$ 94,000	$ 94,000	$ 94,000	$ 94,000	$ 94,000	$ 154,000
	Accumulative	$ -380,000	$ -286,000	$ -192,000	$ -98,000	$ -4,000	$ 90,000	$ 184,000	$ 338,000
a	After tax cash flow for the first year				$ 94,000
b	ARR on average investment for first year				15.00%
c	Payback period (years)				4.04
d	NPV				$ 76,134.07
e	IRR				17.75%
NOTE : To view the detailed calculation click on the cell containing the figure


	Cost of direct materials				$ 255,000
	Conversion cost				$ 158,000
	Beginning WIP Cost :
		Materials			$ 145,000
		Conversion			$ 22,000
	Beginning WIP Inventory (units)				15,000
	Units started(units)				25,000
	Ending WIP Inventory(units)				10,000
	Units completed and transferred				30,000
a	Equivalent Units For materials				40,000
	Equivalent Units For conversion costs				36,000
b	Total amount				$ 580,000
c	Cost per Equivalent Units For materials				$ 10.00
	Cost per Equivalent Units For conversion costs				$ 5.00
d	Ending WIP				$ 130,000
e	Units transferred out to finished goods				$ 450,000
f	General Journal
	Date	Description	Debit	Credit
		Finished Goods	450,000
		WIP		450,000
		(Being transfer to finished goods)
g	Equivalent Units For materials				25,000
	Equivalent Units For conversion costs				31,500
NOTE : To view the detailed calculation click on the cell containing the figure


		A	B	C	Total
	MH	3,000	5,000	2,000	10,000
	DLH	25,000	15,000	10,000	50,000
	Units produced	5,000	2,000	1,000	8,000
	DM Costs	$ 50,000	$ 28,000	$ 30,000	$ 108,000
	DL Costs	$ 220,000	$ 95,000	$ 62,000	$ 377,000
	Manufacturing OH Costs				$ 270,000
					$ 755,000
a	Predetermined Overhead Costs (per machine hours)				$ 27.00
b		A	B	C
	Units produced	5,000	2,000	1,000
	DM Costs	$ 50,000	$ 28,000	$ 30,000
	DL Costs	$ 220,000	$ 95,000	$ 62,000
	Manufacturing OH Costs	$ 81,000	$ 135,000	$ 54,000
	Total Cost	$ 351,000	$ 258,000	$ 146,000
	Unit cost	$ 70.20	$ 129.00	$ 146.00
c	Predetermined Overhead Costs (per direct labour hours)				$ 5.40
d		A	B	C
	Units produced	5,000	2,000	1,000
	DM Costs	$ 50,000	$ 28,000	$ 30,000
	DL Costs	$ 220,000	$ 95,000	$ 62,000
	Manufacturing OH Costs	$ 135,000	$ 81,000	$ 54,000
	Total Cost	$ 405,000	$ 204,000	$ 146,000
	Unit cost	$ 81.00	$ 102.00	$ 146.00
NOTE : To view the detailed calculation click on the cell containing the figure


			Job A	Job B	Job C	Total
	WIP, June 1		$ 40,000	$ 60,000	$ 50,000	$ 150,000
	June production activity:
	Materials requisition and used		$ 30,000	$ 40,000	$ 30,000	$ 100,000
	Direct labour cost		$ 15,000	$ 30,000	$ 45,000	$ 90,000
	Machine hours		2,000	3,000	4,000	9,000
	Estimated Manufacturing OH			$ 300,000
	Estimated Machine hours			20,000
a	Predetermined Overhead rate (per machine hours)			$ 15.00
b			Job A	Job B	Job C
	Assigned manufacturing OH costs		$ 30,000	$ 45,000	$ 60,000
	Total Costs		$ 75,000	$ 115,000	$ 135,000
c	General Journal
	Date	Description		Debit	Credit
		WIP Inventory		100,000
		Raw material			100,000
		(Being the total amount of Materials requisition and used in June)
d	General Journal
	Date	Description		Debit	Credit
		WIP Inventory		135,000
		Manufacturing Overhead			135,000
		(Being the total amount of overhead applied in June)
e	General Journal
	Date	Description		Debit	Credit
		Finished Goods		75,000
		WIP Inventory			75,000
		(Being transfer completed Job A)
NOTE : To view the detailed calculation click on the cell containing the figure


	WIP				$ 120,000
	Finished Goods				$ 180,000
	COGS				$ 300,000
	Factory Overhead Over Applied				$ 30,000
	Amount of factory overhead applied in 2013				$ 250,000
a	General Journal
	Date	Description	Debit	Credit
		WIP Inventory	250,000
		Factory Overhead		250,000
		(Being the total amount of overhead applied at the end of 2013)
b	Actual Overhead for the year			$ 220,000
c	General Journal
	Date	Description	Debit	Credit
		Factory Overhead	30,000
		Cost of goods sold		30,000
		(Being transfer of over applied overhead)
d	General Journal
	Date	Description	Debit	Credit
		Factory Overhead	30,000
		Work in Progress		6,000
		Finished Goods		9,000
		Cost of goods sold		15,000
		(Being factory overhead account balance disposed)
e	The second method of allocating Factory Overhead account balance among WIP, Finished Goods and Cost of goods sold is more accurate. This is because the factory overhead has been incurred in the manufacturing process which has been applied to work in progress inventory, finished goods and cost of good sold. Thus, the over/under applied factory overhead should be disposed among all the three heads, proportionately.
NOTE : To view the detailed calculation click on the cell containing the figure