Exercise 4.8: Computing Predetermined Overhead Rates And Job

exercise 4 8 Computing Predetermined Overhead Rates And Job Costs

Calculate the predetermined overhead rate based on machine-hours, determine the total manufacturing cost for a specific job, analyze underapplied or overapplied overhead, and assess the impact of overhead adjustments on net operating income. Also, perform cost classification and cost behavior analysis for a furniture company, compute average product costs at full capacity and at reduced production levels, and explore how changes in sales volume, pricing, packaging, and automation influence the company's cost structure, break-even point, and profitability. Additionally, complete cost schedules for Harris Company and prepare contribution income statements based on different production levels and cost behaviors.

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In today's competitive manufacturing environment, understanding and accurately allocating overhead costs, classifying expenses, and analyzing cost behaviors are essential for effective managerial decision-making. The exercises provided encompass these key areas, illustrating their practical applications in real-world scenarios such as job costing, product costing, CVP analysis, and strategic cost management.

Firstly, calculating the predetermined overhead rate is fundamental for applying manufacturing overhead to jobs in a cost-efficient manner. Using the data of Kody Corporation, with estimated machine-hours and overhead costs, the rate is computed by dividing the total estimated overheads (fixed plus variable) by the total estimated machine-hours. For instance, with estimated fixed manufacturing overhead of $659,000 and variable overhead of $4.80 per machine-hour, and an estimated 154,000 machine-hours, the predetermined overhead rate is calculated as:

Predetermined Overhead Rate = (Fixed MOH + Variable MOH per MH * Estimated Machine-hours) / Estimated Machine-hours

= ($659,000 + $4.80 * 154,000) / 154,000 ≈ $8.23 per MH.

This rate enables a company to assign overhead costs to jobs systematically. For Job 500, with 40 machine-hours, direct materials of $340, and direct labor costs of $260, the total manufacturing cost includes direct materials, direct labor, and applied overhead (40 MH * $8.23), resulting in a comprehensive cost assessment. Such detailed calculations assist managers in pricing, budgeting, and assessing profitability.

Furthermore, analyzing manufacturing overhead under- or overapplied provides insights into cost control. Using actual total machine-hours of 145,100 and actual overhead costs of $1,319,508, the total applied overhead is determined by multiplying actual machine-hours by the predetermined rate. Comparing this applied overhead to actual overhead reveals whether overhead was underapplied or overapplied, influencing net income if closed to Cost of Goods Sold. In practice, an overapplied overhead indicates overcosting, potentially leading to excess profit recognition if unadjusted.

Transitioning to cost classification, the Dorilane Company example demonstrates categorizing expenses as variable or fixed, and as product or period costs. Accurate classification informs cost-volume-profit (CVP) analysis, helping managers understand how costs change with production volume. The company’s fixed costs such as factory supervision, property taxes, and depreciation, and variable costs like direct materials and factory supplies, are essential for calculating average product costs and assessing cost behavior at different production levels.

At full capacity, the average product cost per set is the sum of total costs divided by the number of units produced, inclusive of direct materials, labor, and allocated overheads. When production decreases to 1,000 sets, the average cost typically increases due to fixed costs being spread over fewer units, exemplifying economies of scale and the importance of efficient capacity utilization.

CVP analysis further explores how changes in sales volume, pricing, and marketing strategies impact profitability. For PEM, Inc., with a contribution margin (CM) ratio of approximately 50%, the break-even point can be calculated in units and dollars. The effect of advertising expenses, pricing adjustments, and packaging modifications on contribution margin, and thus on net income, underscores the importance of incremental analysis for strategic decisions.

Particularly, assessing the profitability impact of increasing advertising or introducing new packaging involves calculating the marginal contribution from additional sales, considering the change in costs and pricing. As sales increase or decrease, the company's profit margin fluctuates, emphasizing the need for precise, data-driven planning.

In addition, automation impacts cost structure by reducing variable costs significantly but increasing fixed costs. The recalculated contribution margin ratio and break-even point illustrate how automation may enhance profitability or pose risks depending on sales volume. For instance, if sales are expected to exceed the new breakeven point post-automation, the company can benefit from higher margins. Conversely, if sales are uncertain, automation might increase financial risk.

The example of Harris Company consolidates these concepts, requiring the completion of cost schedules and contribution income statements. These activities reinforce understanding of how total costs develop over a relevant range of output and how different sales prices and production levels influence profitability. It underscores the importance of adjusting cost structures for strategic planning and operational efficiency.

Overall, these exercises demonstrate core managerial accounting principles: the use of predetermined rates for overhead allocation, precise cost classification for decision-making, understanding cost behavior for planning, and analyzing the effects of operational changes on financial outcomes. Effective application of these principles enables managers to make informed, strategic decisions that optimally balance costs, revenues, and profits in dynamic manufacturing settings.

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