Computing Predetermined Overhead Rates And Job Costs

Computing Predetermined Overhead Rates And Job Costs

Using a job-order costing system with a plantwide overhead rate based on machine-hours, Kody Corporation estimated machine-hours required to support production as 154,000, with fixed manufacturing overhead of $659,000 and variable manufacturing overhead per machine-hour of $4.80. The assignment requires calculating the predetermined overhead rate, determining the total manufacturing cost for a specific job, and analyzing overapplied or underapplied overhead costs, including their impact on net income.

Additionally, it involves classifying costs for a furniture manufacturing company, calculating average product costs, evaluating effects of production changes, and analyzing cost behavior with profit impact. The complete analysis encompasses cost classification, contribution margin calculations, break-even analysis, and assessing how automation affects costs and profitability. The problem also includes preparing contribution format income statements, calculating the contribution margin ratio, and understanding fixed and variable cost behaviors over varying production volumes, including estimating the effects on net income with different operational decisions.

Sample Paper For Above instruction

Calculating Predetermined Overhead Rate and Job Costs

Kody Corporation operates on a job-order costing basis, applying manufacturing overheads using a plantwide rate based on machine-hours. To determine this rate at the beginning of the year, the company estimated machine-hours required for production as 154,000 hours. The fixed manufacturing overhead costs were estimated at $659,000, and the variable manufacturing overhead was estimated at $4.80 per machine-hour. The predetermined overhead rate is calculated by dividing the total estimated overhead costs by the estimated total machine-hours.

Using the provided data, the total estimated overhead costs consist of fixed and variable components:

• Fixed manufacturing overhead: $659,000
• Variable manufacturing overhead: 154,000 hours × $4.80 = $739,200

Total estimated manufacturing overhead = $659,000 + $739,200 = $1,398,200

Predetermined overhead rate = Total estimated overhead / Total estimated machine-hours = $1,398,200 / 154,000 hours ≈ $9.09 per machine-hour.

This rate signifies that for every machine-hour incurred, Kody will assign approximately $9.09 as overhead to jobs.

Regarding a specific job, Job 500, which used 40 machine-hours, the costs incurred and assigned are as follows:

• Direct materials requisitioned: $340
• Direct labor cost: $260
• Machine-hours used: 40

The manufacturing overhead assigned is computed as 40 hours × $9.09 = $363.60. The total manufacturing cost for Job 500 includes direct materials, direct labor, and overhead:

Total manufacturing cost = $340 + $260 + $363.60 = $963.60

This totals the direct and indirect costs associated with Job 500, reflecting the expenditure on materials, labor, and overhead.

Moving further, the company’s total machine-hours for the year are 145,100, and the actual overhead incurred amounts to $1,319,508. To analyze whether overhead was overapplied or underapplied, the total overhead applied is calculated by multiplying actual machine-hours by the predetermined rate: 145,100 hours × $9.09 = $1,320,159. The difference between applied and actual overhead determines overapplied or underapplied overhead: $1,320,159 - $1,319,508 = $651 overapplied. This overapplied overhead indicates that the company allocated slightly more overhead than it actually incurred.

If this overapplied amount were closed out entirely to Cost of Goods Sold (COGS), the effect would be an increase in net operating income by $651, as reducing COGS increases profit.

Cost classification analysis of the furniture manufacturing operations provides insight into variable and fixed costs, as well as distinguishing between product and period costs. The full capacity cost data include direct labor of $95,000, advertising of $99,000, factory supervision of $72,000, property taxes of $17,000, sales commissions of $61,000, factory insurance of $7,000, administrative depreciation of $2,000, factory lease costs of $17,000, indirect materials of $18,000, factory depreciation of $107,000, administrative office supplies of $4,000, and administrative salaries of $105,000. The direct materials used amounted to $434,000, with factory utilities costing $49,000.

Classifying these costs involves determining which are variable or fixed and whether they are product costs or period costs. Direct materials, direct labor, and factory utilities are variable product costs. Factory supervision, property taxes, factory insurance, factory depreciation, and indirect materials are fixed or variable factory overheads, depending on their behavior. Advertising and administrative costs such as salaries and office supplies are period costs.

Assuming an annual full capacity of 4,100 patio sets, the average product cost per set can be calculated by dividing total costs by units produced. Summing the relevant costs—direct materials, direct labor, factory overheads—and dividing by 4,100 provides the per-unit cost, which, when rounded, reflects the overall efficiency.

If production drops to 1,000 sets, the average cost per set is likely to increase due to the fixed costs being spread over fewer units, indicating economies of scale and cost behavior considerations inherent to variable and fixed costs.

Further, analyzing the company's contribution margin (CM) ratio, break-even point, and impact of sales and cost adjustments demonstrates how changes in sales volume, pricing, advertising, packaging, and automation influence profitability. For instance, with data indicating a contribution margin ratio, the break-even point in units and dollars can be obtained, and the potential impact of marketing strategies evaluated. Increasing advertising expenditures or changing product packaging costs alters fixed and variable expenses, affecting the unit sales needed for profitability.

Automation, which reduces variable costs by half at an increased fixed expense, can significantly lower the break-even point, thus potentially improving profitability if sales volume remains stable or increases. Calculating new contribution margin ratios and break-even points under different scenarios helps management make informed decisions about automation investments and operational changes.

Additionally, the company’s sales forecast of 20,900 units, combined with changes like automation, provides an analytical basis for preparing comparative contribution income statements to assess profit impacts. This involves detailed calculations of fixed and variable costs, contribution margins, and net operating income estimations under various operational configurations.

Understanding these cost behaviors and the relationships between costs, sales volume, and profit is fundamental to strategic decision-making. Cost-volume-profit (CVP) analysis emphasizes how fixed and variable costs influence profit margins, and how managerial decisions regarding pricing, production levels, or automation can optimize profit margins and sustainability.

In conclusion, applying accounting principles of cost classification, activity-based costing, and contribution margin analysis equips managers with the tools necessary for effective operational decision-making, cost control, and strategic planning to enhance profitability and competitive advantage in the manufacturing sector.

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