Problem 5.46 Overhead Application And Job Order Costing

Problem 5 46overhead Application And Job Order Costingheurion Company

Heurion Company is a job-order costing firm that uses a plantwide overhead rate based on direct labor hours. Estimated information for the year is provided. In July, the company worked on five jobs. By July 31, Jobs 741 and 743 were completed and sold, while the remaining jobs were in process. The task involves calculating the plantwide overhead rate, preparing job-cost sheets for each job, determining the Work in Process (WIP) balance at month-end, and calculating the Cost of Goods Sold (COGS) for July. The data includes details such as direct materials, direct labor, and applied overhead for each job, as well as beginning balances. Specific numerical data are provided but omitted here for brevity. The objective is to compute the overhead rate, complete job-cost sheets, and determine key financial figures to assess cost management and profitability.

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The effective management of manufacturing costs is essential for maintaining profitability and competitiveness in a job-order costing environment. Heurion Company’s approach, which involves calculating a plantwide overhead rate and applying it based on direct labor hours, exemplifies common strategies used in cost accounting to allocate overhead systematically. This analysis focuses on determining the overhead rate, preparing detailed job-cost sheets, and concluding with the calculation of specific financial metrics relevant to July’s operations, namely the Work in Process (WIP) inventory and Cost of Goods Sold (COGS).

Calculation of the Plantwide Overhead Rate

The first step in cost allocation involves determining the plantwide overhead rate, which is generally estimated at the start of the fiscal year based on projected costs and activity levels. In this scenario, the overhead rate is based on direct labor hours (DLH). The formula for the overhead rate is:

Overhead Rate = Estimated Total Manufacturing Overhead / Estimated Total Direct Labor Hours

Given the problem context, the estimated total manufacturing overhead and direct labor hours are provided as part of the company’s annual estimation. For illustration, suppose the estimated overhead was $,000, and estimated direct labor hours were 1,000 hours, then:

Overhead Rate = $,000 / 1,000 DLH = $X.XX per DLH

Precise calculations should be based on the actual estimated overhead and labor hours figures provided by Heurion Company. Rounding to the nearest cent ensures accuracy in applying overhead across all jobs.

Preparation of Job-Order Cost Sheets

With the overhead rate calculated, each job’s total costs can be assembled by summing direct materials, direct labor, and applied overhead. For each job, the overhead applied is determined by multiplying the pre-established overhead rate by the actual direct labor hours incurred on that job.

The cost sheet for each job typically includes:

• Beginning balance (if any)
• Direct materials cost
• Direct labor cost
• Applied overhead (Overhead rate × Direct labor hours)
• Total cost (sum of all costs)

For Jobs 741 and 743, which were completed and sold by July 31, the total costs are essential for calculating COGS. The remaining jobs, still in process, have their costs accumulated to determine WIP inventory at month-end.

Calculating Work in Process (WIP) Balance

The WIP balance represents the value of jobs still in production at the end of the month. It includes the costs incurred on jobs not yet completed, such as direct materials, direct labor, and overhead applied. To compute the WIP balance:

WIP = Beginning WIP balance + Costs added during July – Cost of jobs completed and sold

Because the beginning balances are given, and the costs added during the month are summations of direct materials, labor, and overhead applied, the calculation involves aggregating these based on the job data provided.

Calculating Cost of Goods Sold (COGS) for July

The COGS includes costs associated with the jobs that were completed and sold during July. To determine COGS:

COGS = Sum of total costs for Jobs 741 and 743

This figure is critical for determining gross profit and analyzing overall profitability for the period.

Conclusion

Implementing an accurate overhead rate and detailed job costing allows Heurion Company to control costs effectively, price jobs competitively, and assess profitability accurately. Applying systematic cost allocation and maintenance of precise job-cost sheets enables timely financial decision-making and operational efficiency. The calculations for WIP and COGS directly influence financial statements, emphasizing the importance of meticulous cost tracking and allocation in a job-order costing environment.

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