Sweeten Company Had No Jobs In Progress At The Beginning

Sweeten Company Had No Jobs In Progress At The Beginning Of March And

Sweeten Company had no jobs in progress at the beginning of March and no beginning inventories. It started only two jobs during March—Job P and Job Q. Job P was completed and sold by the end of the March and Job Q was incomplete at the end of the March. The company uses a plantwide predetermined overhead rate based on direct labor-hours. The following additional information is available for the company as a whole and for Jobs P and Q (all data and questions relate to the month of March): Estimated total fixed manufacturing overhead $10,000, Estimated variable manufacturing overhead per direct labor-hour $1.00, Estimated total direct labor-hours to be worked 2,000, Total actual manufacturing overhead costs incurred $12,500, Direct materials, Job P $13,000, Direct labor cost, Job P $21,000, Actual direct labor-hours worked, Job P (to be determined).

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The calculation of the company's predetermined overhead rate is an essential step in manufacturing cost accounting. This rate is used to allocate manufacturing overhead costs to individual jobs and is usually established at the beginning of the accounting period based on estimated data. Since the company employs a plantwide overhead rate based on direct labor-hours, the formulation involves dividing the total estimated manufacturing overhead costs by the estimated total direct labor-hours for the period.

Given the information available, we understand that the estimated total fixed manufacturing overhead for the period is $10,000, and the estimated variable manufacturing overhead per direct labor-hour is $1.00. The estimated total direct labor-hours to be worked are 2,000 hours. The actual total manufacturing overhead costs incurred during March amounted to $12,500, which includes both fixed and variable components.

The predetermined overhead rate formula is expressed as:

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

To compute this rate, we first need to determine the estimated total manufacturing overhead, combining fixed and variable components:

  • Estimated fixed manufacturing overhead = $10,000
  • Estimated variable manufacturing overhead = $1.00 per direct labor-hour × 2,000 hours = $2,000
  • Therefore, the total estimated manufacturing overhead = $10,000 + $2,000 = $12,000

Next, we apply the formula:

Predetermined Overhead Rate = $12,000 / 2,000 hours = $6.00 per direct labor-hour

This rate implies that for every direct labor-hour worked, $6.00 of manufacturing overhead costs will be allocated. It provides a basis for charging overhead to jobs P and Q based on the actual direct labor-hours incurred during March, thereby facilitating accurate cost allocation and financial reporting.

Furthermore, understanding this rate enables the company to evaluate its overhead costs against actual expenses incurred, which in March totaled $12,500. It also supports managerial decisions regarding pricing, budgeting, and cost control, ensuring the company's operations remain efficient and profitable.

References

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