Problem II – 15 Points
Doc Reefy Inc. is a manufacturing firm that uses job-order costing. The company applies
overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning
of the year in determining their predetermined overhead rate, they estimated that they would
work 31,000 machine hours and incur $248,000 in overhead costs.
Required:
Prepare journal entries in good form for only the following transactions that occurred during the
year. If no entry is required write the word "None." Omit journal entry explanations.
1. Raw materials amounting to $409,000 were used in production. $388,000 of the raw materials
are classified as direct materials and $21,000 are classified as indirect materials.
2. Factory utility costs amounting to $12,000 were incurred and paid.
3. Direct labor costs were $145,000, indirect labor costs amounted to $61,000, and selling and
administrative salaries were $190,000. All labor and salary costs were paid in cash.
4. The actual level of machine hours for the year was 29,000.
5. Sales for the year amounted to $500,000 all on account, and the cost of goods sold were
$300,000. A periodic inventory system was used.
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Problem III – 10 Points
Scherff Inc. produces a product which goes through three processes – Process 1, Process 2, and
Process 3. Process 1 is the Mixing Department; Process 2 is the Blending Department; and
Process 3 is Pouring Department. The following information pertains to the Mixing Department
to the units and costs for the month of October (% is the percentage completed):
Beginning Inventory
Direct Materials
1000 units, 50%
$10,000
Conversion
1000 units, 25%
$20,000
Started this Period
20,000 units
$400,000
20,000 units
$1,600,000
Ending Inventory
2000 units, 75%
2000 units, 50%
Required:
1. Prepare a complete production report for the month of October using the FIFO technique.
2. Prepare the journal entry transferring the goods to the Blending Department from the Mixing
Department.
Problem IV – 10 Points
Williams Inc. manufactures quality clothing. The company uses a normal costing system, using
a predetermined overhead rate to charge overhead cost to production. The overhead rate for the
current month was based on estimated overhead costs of $24,000, and 6,000 machine hours. The
following data relate to the activities for the month of December, 2016.
Manufacturing overhead costs incurred:
Property taxes……………………….. $ 1,600
Utilities, factory…………………….
2,600
Depreciation, factory……………… 13,000
Insurance, factory…………………… 4,500
Indirect labor……………………….
5,100
Other costs incurred:
Purchase of raw materials……… $15,000
Direct labor cost……………….
2,000
Selling and administrative costs… 99,000
Inventories:
Raw materials, beginning………… $ 5,000
Raw materials, ending……………
4,400
Work in process, beginning………. 3,500
Work in process, ending………….
4,500
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Actual machine hours……………….
7,000
Required:
1. Compute the predetermined overhead rate.
2. Compute the amount of applied overhead cost for the month of December.
3. Prepare the journal entry to dispose of the under- or over-applied overhead. The amount is
considered immaterial and not prorated. Omit the journal entry explanation.
Problem V – 15 Points
The Brown’s Draft Bust Company sells ten different styles of relatively inexpensive football
jerseys with identical purchase costs and selling prices. Brown is trying to determine the
desirability of opening another store, which would have the following expense and revenue
relationships (variable data on a per unit basis, fixed expenses in total):
Variable data: Selling Price $40.00; Cost of Shirt $18.00; Sales Commissions $7.00
Annual fixed expenses: Rent $80,000; Salaries $150,000; Other fixed expenses $70,000
Required:
1. What is the annual breakeven point in dollar sales and units?
2. If Brown has an effective tax rate of 40%, how many jerseys must they sell to make $80,000
after taxes?
3. Ignoring income taxes, If 21,000 jerseys are sold, what would be the stores operating income
(loss)
4. Refer to the original data. If Brown decided to do away with sales commissions and increase
salespersons salaries by $140,000 per year, what would be the point of indifference, in units,
between the two alternatives?
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5. Brown has been approached by the Bear Advertising Agency to do their advertising. If Brown
signs a contract for $150,000 for Bear to handle their account, how many additional units will
have to be sold to cover the cost?
Problem VI – 10 Points
The No-Win Company makes 20,000 units per year of a part it uses in the products it
manufactures. The unit product cost of this part is computed as follows:
Direct materials………………
$24.70
Direct labor………………….
16.30
Variable manufacturing overhead…
2.30
Fixed manufacturing overhead……
13.40
Unit product cost…………..
$56.70
An outside supplier has offered to sell the company all of these parts it needs at $51.80 a unit. If
No-Win accepts this offer, the facilities now being used to make the part could be leased to
another company. The incremental contribution margin from leasing the space would be $44,000
per year.
If the part were purchased from the outside supplier, all of the variable costs of the part would be
avoided. However, $5.10 of the fixed manufacturing overhead cost being applied to the part
would continue even if the part were purchased from the outside supplier. This fixed
manufacturing overhead cost ($5.10) would be applied to the company’s remaining products.
Ignore income taxes and the time value of money in this problem.
Required:
1. How much of the unit product cost of $56.70 is relevant in the decision of whether to
make or buy the part?
2. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making
it?
3. What is the maximum amount the company should be willing to pay an outside supplier per
unit for the part if the supplier commits to supplying all 20,000 units required each year? They
will still lease the facility if they purchase from an outside supplier.
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********** 5 Point Bonus Question **********
________________ ____________ ____________ refines a costing system by identifying
individual activities as the fundamental cost objects. (Fill-in-the-blanks – three words.)
Problem VII – 10 Points
Shelton De Inc. collected the following data to determine their overhead cost function:
Overhead Costs
Direct Labor Hours
$20,000
1,250
$28,500
1,800
$26,750
1,400
$25,900
1,375
$30,200
2,100
1. Calculate the cost function using the high-low method.
2. If direct labor hours in the coming period are expected to be 1,600, what is the estimated
overhead cost using the cost function calculated in Part 1?
3. What would the total fixed overhead be estimated at if the expected number of direct labor
hours for the coming period was 1,750?
4. If the cost function was calculated using simple regression analysis, in one sentence explain
what the primary difference would be between using simple regression analysis and the high-low
method to calculate the cost equation.
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