Concept explainers
1.
Show the way in which SF Incorporation derived its plantwide predetermined overhead rate of $10 per direct labor hour.
1.
Explanation of Solution
Show the way in which SF Incorporation derived its plantwide predetermined overhead rate of $10 per direct labor hour.
Particulars | Department I | Department II |
Variable overhead | ||
Department I: | $300,000 | |
Department II: | $150,000 | |
Fixed overhead | $150,000 | $150,000 |
Total overhead | $ 450,000 | $300,000 |
Total budgeted overhead for both departments | $750,000 | |
Total expected direct-labor hours for both departments | $75,000 |
Table (1)
Determine predetermined overhead rate.
2.
Determine the price of each model stereo speaker, if the firm prices its product at its absorption
2.
Explanation of Solution
Determine the price of each model stereo speaker, if the firm prices its product at its absorption manufacturing cost plus 15%.
Particulars | Basic | Advanced |
Total cost | $400 | $500 |
Markup (15% of cost) | ||
Basic: | $60 | |
Advanced: | $75 | |
Price | $460 | $575 |
Table (2)
Therefore, the basic and advanced model stereo speaker price is $460 and $575 respectively.
3.
Determine the rates for Departments I and II for the coming year, if SF Incorporation uses departmental overhead rates.
3.
Explanation of Solution
Determine the rates for Departments I and II for the coming year, if SF Incorporation uses departmental overhead rates.
Particulars | Department I | Department II |
Budgeted overhead (A) | $450,000 | $300,000 |
Budgeted direct-labor hours (B) | $37,500 | $37,500 |
Predetermined overhead rate | $12 | $8 |
Table (3)
If SF Incorporation uses departmental overhead rates, then the predetermined overhead rate for Department I and Department II would be $12 and $8 respectively.
4.
Determine the absorption cost for each model stereo speaker using the departmental overhead rates.
4.
Explanation of Solution
Determine the absorption cost for each model stereo speaker using the departmental overhead rates.
Particulars | Basic | Advanced |
Direct material | $160 | $260 |
Direct labor | $140 | $140 |
Manufacturing overhead: Department I: | ||
Basic: | $24 | |
Advanced: | $96 | |
Department II: | ||
Basic: | $64 | |
Advanced: | $16 | |
Total absorption cost | $388 | $512 |
Table (4)
Therefore, the absorption cost for basic and advanced model stereo speaker as per the departmental overhead rates are $388 and $512 respectively.
5.
Determine the new prices for each of the speaker model using the product costs determined in requirement (4), if management of the company is very particular with its policy of setting prices equal to the absorption cost plus 15%.
5.
Explanation of Solution
Determine the new prices for each of the speaker model.
Particulars | Basic | Advanced |
Total cost (requirement 4) | $388.00 | $512.00 |
Markup (15% of cost) | ||
Basic: | $58.20 | |
Advanced: | $76.80 | |
Price | $446.20 | $588.80 |
Table (5)
Therefore, the new prices for basic and advanced model stereo speaker are $446.20 and $588.80 respectively.
6.
Suggest whether SF Incorporation should use plantwide or departmental overhead rates.
6.
Explanation of Solution
SF Incorporation should use departmental overhead rates rather than plantwide overhead rates. The overhead cost structures in the two production departments are somewhat different, and departmental rates more accurately assign overhead costs to products. The basic model speakers were overcosted and the advanced model speakers were undercosted, if the company used a plantwide overhead rate. Impact of this is results in the basic model being overpriced and the Advanced model being underpriced.
The cost and price distortion resulted from the following facts:
(i) the advanced model speakers spend most of their production time in Department I, which is costlier than Department II, and
(ii) the basic model speakers spend most of their production time in Department II, which is the least costly of the two departments.
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