Complete Activities A And B In Good Form

Complete The Following Activities A And B In Good Form Use Excel Or

Complete the following activities (A and B) in good form. Use excel or word only. Provide all supporting calculations to show how you arrived at your numbers. Application of Job Order Costing Scanlon Company has a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The following estimates were used in preparing the predetermined overhead rate for the most recent year: Machine-hours ............................... 95,000 Manufacturing overhead cost ........ $1,710,000 During the most recent year, a severe recession in the company’s industry caused a buildup of inventory in the company’s warehouses. The company’s cost records revealed the following actual cost and operating data for the year: Machine-hours ............................................................................. 75,000 Manufacturing overhead cost ...................................................... $1,687,500 Amount of applied overhead in inventories at year-end: Work in process ........................................................................ $337,500 Finished goods .......................................................................... $253,125 Amount of applied overhead in cost of goods sold .................. $759,375 Required: A. Compute the company's predetermined overhead rate for the year and the amount of underapplied or overapplied overhead for the year. B. Determine the difference between net operating income for the year if the underapplied or overapplied overhead is allocated to the appropriate accounts rather than closed directly to Cost of Goods Sold.

Paper For Above instruction

The assignment requires calculating the predetermined overhead rate, the amount of underapplied or overapplied overhead, and assessing the impact on net operating income if such overhead variances are allocated rather than closed directly to Cost of Goods Sold (COGS). This analysis involves understanding the company's cost accounting system, particularly the calculation of manufacturing overhead based on machine-hours, and evaluating the financial implications of overhead variances on income statements.

Introduction

In manufacturing cost accounting, accurately allocating overhead costs is vital for determining product costs, setting prices, and assessing financial performance. Job-order costing systems assign overhead to specific jobs based on a predetermined rate, often based on estimated activity levels such as machine-hours. Variations between estimated and actual overhead lead to underapplied or overapplied overhead, which can distort profit analysis if not properly adjusted. This paper explores the computation of the predetermined overhead rate for Scanlon Company, evaluates the overhead variance, and discusses the implications of allocating this variance on net operating income.

Calculation of Predetermined Overhead Rate

The predetermined overhead rate (POHR) is calculated using estimated overhead costs divided by estimated activity levels, in this case, machine-hours:

• Estimated manufacturing overhead cost = $1,710,000
• Estimated machine-hours = 95,000 hours

Thus,

POHR = Estimated overhead / Estimated machine-hours

= $1,710,000 / 95,000 hours = $18 per machine-hour

Therefore, the company applied $18 of overhead to each machine-hour worked during the year.

Application of Overhead and Actual Data

Actual machine-hours worked during the year were 75,000 hours, and actual overhead incurred was $1,687,500.

The company applied overhead based on actual machine-hours using the predetermined rate:

Applied overhead = POHR × Actual machine-hours = $18 × 75,000 = $1,350,000

Assessment of Overapplied or Underapplied Overhead

The difference between applied overhead and actual overhead indicates whether overhead was overapplied or underapplied:

Overapplied overhead = Applied overhead - Actual overhead

= $1,350,000 - $1,687,500 = -$337,500

This negative value signifies that overhead was underapplied by $337,500 for the year.

Allocating Overapplied or Underapplied Overhead to Income Statement

Instead of closing this variance directly to COGS, it can be allocated among work in process inventory, finished goods inventory, and COGS based on their respective applied overhead amounts:

• Work in Process inventory overhead applied: $337,500
• Finished goods: $253,125
• Cost of Goods Sold: $759,375

To allocate the underapplied overhead, compute the proportion of applied overhead attributable to each account:

• Total applied overhead = $1,350,000
• Proportion in each account:
• WIP: $337,500 / $1,350,000 ≈ 25%
• Finished Goods: $253,125 / $1,350,000 ≈ 18.75%
• COGS: $759,375 / $1,350,000 ≈ 56.25%

Applying these proportions to the total underapplied amount ($337,500):

• WIP: 25% of $337,500 = $84,375
• Finished Goods: 18.75% of $337,500 = $63,281.25
• COGS: 56.25% of $337,500 = $189,843.75

Adding these amounts to the respective accounts adjusts the reported costs, impacting net operating income. Specifically, the increase in COGS due to the underapplied overhead reduces net income accordingly.

Impact on Net Operating Income

If the underapplied overhead is allocated to the income statement, net operating income decreases by the total underapplied amount of $337,500. Conversely, if the overhead variance is closed directly to COGS, net income reduces by the same amount. However, allocating the variance provides a more precise reflection of cost performance, especially when significant variances occur due to economic downturns or operational shifts.

Conclusion

In conclusion, the predetermined overhead rate for Scanlon Company was $18 per machine-hour based on estimated costs. The actual overhead incurred was higher than applied, resulting in an underapplied overhead of $337,500. Proper allocation of this variance among inventory and COGS is essential for accurate financial reporting and decision-making. Adjusting net operating income by distributing the overhead variance offers a clearer picture of the company’s true profitability, particularly during periods of economic downturn and inventory buildup.

References

• Drury, C. (2018). Management and Cost Accounting. Springer.
• Hilton, R. W., & Platt, D. E. (2017). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
• Kaplan, R. S., & Cooper, R. (2013). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Improve Decision Making. Harvard Business Review Press.
• Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Managerial Accounting. Wiley.
• Blocher, E., Stout, D., Juras, P., & Cokins, G. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.
• Needles, B. E., & Powers, M. (2015). Financial & Managerial Accounting. Cengage Learning.
• Shim, J. K., & Siegel, J. G. (2018). Financial Management and Analysis. Barron's Educational Series.