Calculating Overhead Rate And Manufacturing Costs For M Evan
Calculating Overhead Rate and Manufacturing Costs for M Evans & Sons
The task involves analyzing the manufacturing process of M Evans & Sons, a company that produces radio parts. The objective is to compute the predetermined overhead application rate, reconcile the manufacturing costs for distinct jobs, prepare journal entries, maintain T-accounts, and finally determine the gross profit after adjusting for manufacturing overhead variances. This comprehensive approach provides insight into the company's cost management, inventory valuation, and profitability analysis.
Paper For Above instruction
Introduction
Manufacturing companies like M Evans & Sons rely heavily on accurate costing methods to ensure profitability and efficient resource management. The process involves calculating a predetermined overhead rate based on budgeted figures, applying overhead costs to individual jobs, and recording all relevant transactions within accounting records. Proper costing allows for precise valuation of work-in-process and finished goods inventories and supports management decisions regarding pricing and cost control.
Calculation of Overhead Rate
The predetermined factory overhead rate (OAR) is crucial for applying overhead costs accurately to each job. It is typically calculated using estimated factory overheads divided by estimated total direct labor hours. For M Evans & Sons, the estimated data provided are:
- Estimated factory overheads: $480,000
- Estimated direct labor hours: 400,000 hours
Applying the formula:
Overhead Absorption Rate (OAR) = Total Estimated Factory Overhead / Total Estimated Direct Labor Hours
OAR = $480,000 / 400,000 hours = $1.20 per direct labor hour
This rate means that for every direct labor hour worked, $1.20 of overhead will be applied to the job.
Calculation of Total Manufacturing Costs for Each Job
Each job incurs direct materials, direct labor, and applied manufacturing overhead. Using the data provided:
| Job | Direct Materials ($) | Direct Labour ($) | Direct Labour Hours | Manufacturing Overhead Applied ($) | Total Manufacturing Cost ($) |
|---|---|---|---|---|---|
| 101 | 10,000 | 22,000 | 5,500 | $1.20 × 5,500 = 6,600 | 10,000 + 22,000 + 6,600 = 38,600 |
| 102 | 8,000 | 19,000 | 4,750 | $1.20 × 4,750 = 5,700 | 8,000 + 19,000 + 5,700 = 32,700 |
| 103 | 9,000 | 20,500 | 5,125 | $1.20 × 5,125 = 6,150 | 9,000 + 20,500 + 6,150 = 35,650 |
| 104 | 15,000 | 29,025 | 7,256 | $1.20 × 7,256 = 8,707 | 15,000 + 29,025 + 8,707 = 52,732 |
Note: The direct labor hours per job are based on the proportional distribution of total hours as inferred from data; actual hours should be provided for precise calculation. For the purpose of this analysis, these assumptions serve the illustration.
Recording Journal Entries
The series of journal entries necessary for recording transactions are listed below, each with corresponding debits and credits:
- Purchasing materials on account:
- Debit Materials Inventory $50,000; Credit Accounts Payable $50,000
- Incurred manufacturing wages:
- Debit Wages Expense $106,500; Credit Wages Payable $106,500
- Issued direct materials and used direct labor in manufacturing:
- Debit Work in Process (Job 101, 102, 103, 104) with respective materials and labor costs; Credit Materials Inventory and Wages Payable accordingly.
- Issued indirect materials:
- Debit Manufacturing Overhead $8,000; Credit Materials Inventory $8,000
- Charged indirect manufacturing wages:
- Debit Manufacturing Overhead $15,975; Credit Wages Payable $15,975
- Recorded depreciation expense on factory equipment:
- Debit Manufacturing Overhead $30,000; Credit Accumulated Depreciation $30,000
- Other overhead costs incurred:
- Debit Manufacturing Overhead $11,275; Credit Accounts Payable (or appropriate account) $11,275
- Applied factory overhead to jobs:
- Debit Work in Process $6,600 (Job 101), $5,700 (Job 102), etc. as per calculated overhead; Credit Manufacturing Overhead
- Transferred finished jobs to finished goods inventory:
- Debit Finished Goods Inventory; Credit Work in Process for total costs per job.
- Shipped jobs and billed customers with markup:
- Debit Accounts Receivable; Credit Sales Revenue; and record Cost of Goods Sold based on total costs, applying the 40% markup as specified.
Preparation of T-Accounts
Open T-accounts for Work in Process and Finished Goods Inventory:
| Work in Process Inventory | Debit | Credit |
|---|---|---|
| Beginning Balance | 0 | |
| Direct Materials Used | Sum of all materials issued | |
| Direct Labour Incurred | Sum of all wages | |
| Applied Overhead | Total applied overhead | |
| Finished Goods Transfer | Total transferred | |
| Ending Balance | ||
| Finished Goods Inventory | Debit | Credit |
|---|---|---|
| Beginning Balance | 0 | |
| Cost of Goods Manufactured | Sum of all jobs transferred from WIP | |
| Ending Balance |
The precise ending balances depend on the total transferred-in amounts and actual costs computed from transaction records.
Manufacturing Overhead Variance and Adjustment
The total actual overhead incurred includes indirect materials, wages, depreciation, and other costs totaling:
- Indirect materials: $8,000
- Wages overhead: $15,975
- Depreciation: $30,000
- Other overheads: $11,275
Total actual overhead = $65,250
The applied overhead (sum of applied amounts) is calculated from the predetermined rate and labor hours, which, based on earlier calculations, total approximately:
- Job 101: $6,600
- Job 102: $5,700
- Job 103: $6,150
- Job 104: $8,707
Total applied overhead = $27,157.50
The variance is the difference between actual and applied overheads:
Overhead Variance = Actual Overhead - Applied Overhead = $65,250 - $27,157.50 = $38,092.50
This variance needs to be adjusted by debiting or crediting the Cost of Goods Sold account as appropriate—a debit if the actual exceeds applied (underapplied), credit if overapplied.
Gross Profit Calculation
Sales revenue is computed with a markup of 40% on the cost of each job. Assuming total costs for jobs 101 to 102 are known, the sales are:
Sales = Cost × 1.40
Gross profit = Sales revenue - Cost of goods sold.
Suppose, for example, total costs of jobs sold are $71,300; then:
Sales = $71,300 × 1.40 = $99,820
Gross profit = $99,820 - $71,300 = $28,520
This figure represents the gross profit after accounting for manufacturing costs and overhead adjustments, highlighting the profitability of the company's operations.
Conclusion
Efficient cost management and accurate application of manufacturing overhead are vital for M Evans & Sons to maintain profitability. Calculating the predetermined overhead rate enables the company to allocate overhead costs systematically to each job, facilitating precise product costing. Proper journal entries, T-account management, and variance analysis support effective financial reporting. Ultimately, understanding these costs aids management in pricing decisions, identifying inefficiencies, and enhancing overall operational performance.
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