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Your friend has his own business (Sisulu Ltd). He is currently using job order costing and is applying a plant-wide overhead rate. At the beginning of March, Sisulu Ltd had two jobs in process: Job 24 and Job 25, with the following accumulated cost information:
Items | Job 24 $ | Job 25 $ |
Direct materials | 5 100 | 1 500 |
Direct labour | 1 200 | 3 000 |
Applied overhead | 780 | 1 950 |
Balance, 1 March | 7 080 | 6 450 |
During March, two more jobs (26 and 27) were started. The following direct materials and direct labour costs were added to the four jobs during the month of March:
Items | Job 24 $ | Job 25 $ | Job 26 $ | Job 27 $ |
Direct materials | 2 500 | 7 110 | 1 800 | 1 700 |
Direct labour | 800 | 6 400 | 900 | 560 |
At the end of March, Jobs 24, 25 and 27 were completed. Only Job 25 was sold. On 1 March, the balance in Finished Goods was zero.
Required:
1.a Depicting the predetermined overhead rate and how cost assigned to production when predetermined overhead rate is used:
Predetermined overhead costs are generally computed at the beginning of the period, which allows the manufacturing company to assign relative costs to each of its activities. In addition, the predetermined overhead costs is mainly calculated by dividing estimated manufacturing overhead cost by estimated total units in the allocation base (Chikoto & Neely, 2014).
1.b Depicting departmental overhead and plant-wide overhead rate:
Plant wide overhead rate is mainly used as a single rate, which could be allocated to all the company’s manufacturing overhead costs. This method is mainly used to accommodate all the indirect costs, which is related to manufacturing. This method is mainly used when maximum of the activities costs same.
Departmental overhead is mainly used to segregate the excess expenditure conducted on certain activities of the manufacturing company. This method mainly accommodates the high expenses, which needs to be incurred in certain activities, while it cannot be accommodated in total manufacturing overhead cost (Gneezy, Keenan & Gneezy, 2014).
1.c Depict the overhead variance and how it is accounted for:
Overhead variance is mainly derived by applied overhead with actual overhead the difference is mainly considered as overhead variance. Typically the actual overhead is mainly deduced from applied overhead, which is been used by the company. This mainly helps in identifying the relative effective measures taken by the company to identify the exact cost of manufacturing (Snyder & Davenport, 2013).
1.d Justifying the cost of job related to price charged:
Yes cost of job is mainly related to the price charged, as each job needs certain raw material and labour, which directly increases costs of the company. Jobs costing method is mainly based on the assigning relevant cost on each activity to identify the exact costs of production. Thus, it is justifiable that cost of each job is related to price charged (Lewis, 2013).
For calculating the overhead rate, considering job 24 direct labours and applied overhead.
Particulars | Value |
Direct labour | 1200 |
Applied overhead | 780 |
overhead rate | Applied overhead / Direct labour |
overhead rate | 780 / 1200 |
overhead rate | 0.65 |
Particulars | Job 24 | Job 25 | Job 26 | Job 27 |
Beginnings Balance, 1 March (A) | 7080 | 6450 | 0 | 0 |
Direct materials (B) | 2500 | 7110 | 1800 | 1700 |
Direct labour (C) | 800 | 6400 | 900 | 560 |
Applied overhead at the end of March (D) | 520 | 4160 | 585 | 364 |
Ending Balance, 31st March E = (A+B+C+D) | 10900 | 24120 | 3285 | 2624 |
Only Job 26 was not finished, which make the work in progress value to $3285. In addition, from fished jobs 24, 25 and 27 only goods of job 27 was sold, which make Job 24 and Job 25 products as finished goods.
Finished goods | Amount |
Job 24 (A) | 10900 |
Job 27 (B) | 2624 |
Finished goods 31st march (C = A+B) | 13524 |
Brierley, J. A. (2017). Identifying the Influences on the Inclusion of Non-Manufacturing Overhead Costs in Product Costs. Advances in Business and Management, 11, 141-158.
Chikoto, G. L., & Neely, D. G. (2014). Building nonprofit financial capacity: The impact of revenue concentration and overhead costs. Nonprofit and Voluntary Sector Quarterly, 43(3), 570-588.
Gneezy, U., Keenan, E. A., & Gneezy, A. (2014). Avoiding overhead aversion in charity. Science, 346(6209), 632-635.
LeBlanc, S., Yee, S. K., Scullin, M. L., Dames, C., & Goodson, K. E. (2014). Material and manufacturing cost considerations for thermoelectrics. Renewable and Sustainable Energy Reviews, 32, 313-327.
Lewis, W. A. (2013). Overhead costs (Vol. 6). Routledge.
Öker, F., & Ad?güzel, H. (2016). Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), 39-56.
Plebankiewicz, E., & Le?niak, A. (2013). Overhead costs and profit calculation by Polish contractors. Technological and Economic Development of Economy, 19(1), 141-161.
Snyder, H., & Davenport, E. (2013). What does it really cost? Allocating indirect costs. Asian Libraries.
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