Greenway Irrigation Systems uses job order costing and applies manufacturing overhead to individual jobs by using predetermined overhead rates. In the Fabrication Department, overhead is applied on the basis of machine-hours, and in the Installation Department, it is applied on the basis of direct labor hours. At the beginning of the current year, management made the following budget estimates as a step toward determining the overhead application rates. Fabrication Installation Direct labor $ 132,000 $ 300,000 Manufacturing overhead $ 600,000 $ 180,000 Machine-hours 8,000 1,200 Direct labor hours 6,000 15,000 Production of a 5,350 linear-foot irrigation system for Thompson Orchards (job no. 399) was started and completed in March of the current year. Cost records for this job reveal the following information. Fabrication Installation Job no. 399 (5,350 linear-foot system): Cost of materials used on job $ 7,200 $ 3,600 Direct labor cost 1,800 9,600 Direct labor hours 80 450 Machine-hours 60 20 Required: a. Determine the overhead rate that should be used for each department in applying overhead costs to job no. 399. b. What was the total cost of job no. 399, and what was its cost per linear-foot? c. Prepare the journal entries required to record the sale (on account) of job no. 399 to Thompson Orchards. The total sales price was $49,000. d. Assume that actual overhead costs for the year were $612,000 in the Fabrication Department, and $175,000 in the Installation Department. Assume also that actual machine-hours in the Fabrication Department were 8,200, and actual direct labor hours in the Installation Department were 14,500 during the year. On the basis of this information, determine the over- or underapplied overhead in each department for the year.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Greenway Irrigation Systems uses job order costing and applies manufacturing overhead to individual jobs by using predetermined overhead rates. In the Fabrication Department, overhead is applied on the basis of machine-hours, and in the Installation Department, it is applied on the basis of direct labor hours. At the beginning of the current year, management made the following budget estimates as a step toward determining the overhead application rates.
| Fabrication | Installation | ||||||
| Direct labor | $ | 132,000 | $ | 300,000 | |||
| Manufacturing overhead | $ | 600,000 | $ | 180,000 | |||
| Machine-hours | 8,000 | 1,200 | |||||
| Direct labor hours | 6,000 | 15,000 | |||||
Production of a 5,350 linear-foot irrigation system for Thompson Orchards (job no. 399) was started and completed in March of the current year. Cost records for this job reveal the following information.
| Fabrication | Installation | ||||||
| Job no. 399 (5,350 linear-foot system): | |||||||
| Cost of materials used on job | $ | 7,200 | $ | 3,600 | |||
| Direct labor cost | 1,800 | 9,600 | |||||
| Direct labor hours | 80 | 450 | |||||
| Machine-hours | 60 | 20 | |||||
Required:
a. Determine the overhead rate that should be used for each department in applying overhead costs to job no. 399.
b. What was the total
c. Prepare the
d. Assume that actual overhead costs for the year were $612,000 in the Fabrication Department, and $175,000 in the Installation Department. Assume also that actual machine-hours in the Fabrication Department were 8,200, and actual direct labor hours in the Installation Department were 14,500 during the year. On the basis of this information, determine the over- or underapplied overhead in each department for the year.
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