Assignment 2: Required Assignment 1—Cost and Decision-Making Analysis

Question 1

Company predetermined overhead application rate= estimated manufacturing overhead

Estimated direct labor hours

n/b: as we have not been given estimates e use budgeted and actual manufacturing overheads.

Estimated direct labor hours= direct labor = $ 4,350,000/$ 85000= 51.17 hrs

Direct labor charges

POHR = $ 5,460,000/ 51.17 hours = $ 106,703.14

Question 2

Additions to work in progress inventory

Work in process percentage= work in process cost = $156000/5600000 =2.7%

total direct material cost

Additions = actual –budgeted cost

Direct material= $5600000-$5460000 =$140000

Direct labor = $4350000 -$4200000= $150000

Manufacturing overhead=2.7%*4200000

=$113,400

Question 3

Finished goods inventory

December 31st 2001 balance sheet = $156800

Total finished goods inventory= (direct material + indirect material – uncleared inventory)

$5600000+ $65000 - $156000= $5,509,000.

Question 4

Actual direct labor hours 51.17hrs

* Predetermined overhead rate $ 106,703.14

Manufacturing overhead applied $5,459,999.67

Less: manufacturing overhead incurred $ 5,460,000

Manufacturing overhead under applied $ - 0.33

Because manufacturing overhead is under applied, the cost of goods sold would increase by $ 0.33 and the gross margin would decrease by $ 0.33.

Question 5

Administrative overhead refers to the costs that are not involved in the production or development of goods and services. These overheads are not included in the manufacturing costs. The reason they are not included is because they cannot be directly attached to any manufactured unit sold (Rajasekaran , 2010). An administrative overhead benefit cannot be carried forward into the future periods therefore it is considered as a current period cost. An example of administrative overhead includes telephone charges, travel and entertainment costs, audit and legal fees, sales salaries wages and commissions.

The selling and administrative overheads are considered as part of the company’s expenses but cannot be traced to the sale of a specific product ( Motilal Banarsidass, 2011). Commissions on sales that can be directed to a product sales can, however, be considered as a direct cost. It is acceptable to put such a cost in the cost of goods category since they can be directly associated with a sale of a product. A company’s break-even point increased by the selling and administrative cost and a company needs to sell more to make a profit. From a management perspective, it is critical to maintaining tight control over selling and administrative costs. This is achieved by reviewing discretionary costs, and comparing actual costs to budgeted costs.

References

Motilal Banarsidass. (2011). Principles of Management Accounting. Chicago: Motilal Banarsidass . Rajasekaran , V. (2010). Cost Accounting. London: Pearson Education.