Last Updated 22 Sep 2020

# Costs and Direct Labor Cost

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Midterm2

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• 1. The following data have been recorded for recently completed Job 501 on its job cost sheet. Direct materials cost was \$3,067. A total of 30 direct labor-hours and 104 machine-hours were worked on the job. The direct labor wage rate is \$12 per labor-hour. The company applies manufacturing overhead on the basis of machinehours. The predetermined overhead rate is \$11 per machine-hour. The total cost for the job on its job cost sheet would be: A. \$4,571 B. \$3,757 C. \$3,090 D. 3,427

Total cost = Direct materials + Direct labor + Applied manufacturing overhead

Total cost of Job 607 = \$3,067 + (30 x \$12) + \$1,144 = \$4,571

Loraine Company applies manufacturing overhead to jobs using a predetermined overhead rate of 70% of direct labor cost. Any underapplied or overapplied overhead cost is closed to Cost of Goods Sold at the end of the month. During August, the following transactions were recorded by the company:

• 2. The amount of direct materials cost in the August 31 Work in Process inventory account was: A. \$10,200 B. \$9,000 C. \$4,800 D. \$4,200
• 3. The Cost of Goods Manufactured for August was: A. \$69,600 B. \$69,500 C. \$76,900 D. \$84,500
• 4. The balance on August 1 in the Raw Materials inventory account was: A. \$4,500 B. \$7,000 C. \$9,000 D. \$11,500
• 5. Schrick Inc. manufactures a variety of products. Variable costing net operating income was \$86,800 last year and ending inventory increased by 1,900 units. Fixed manufacturing overhead cost was \$6 per unit. What was the absorption costing net operating income last year?

A. 86,800 B. \$75,400 C. \$98,200 D. \$11,400

Fixed manufacturing overhead deferred = \$6 x 1,900 = \$11,400 Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = \$86,800 + \$11,400 = \$98,200

• 6. Ben Company produces a single product. Last year, the company's net operating income under absorption costing was \$4,400 lower than under variable costing. The company sold 8,000 units during the year, and its variable costs were \$8 per unit, of which \$3 was variable selling expense. Fixed manufacturing overhead was \$1 per unit in beginning inventory under absorption costing.

How many units did the company produce during the year? A. 12,400 units B. 3,600 units C. 7,120 units D. 7,450 units Unit fixed manufacturing overhead = (Difference in income / Change in inventory) = \$4,400 Change in inventory = \$1 Change in inventory = 4,400 units Units produced during the year = 8,000 units sold - 4,400 units change in inventory = 3,600 units Ross Company produces a single product. The company has direct materials costs of \$8 per unit, direct labor costs of \$6 per unit, and manufacturing overhead of \$10 per unit. Sixty percent of the manufacturing overhead is for fixed costs.

In addition, variable selling and administrative costs are \$2 per unit, and fixed selling and administrative costs are \$3 per unit at the current activity level. Assume that direct labor is a variable cost.

• 7. Under absorption costing, the unit product cost is: A. \$24 B. \$20 C. \$26 D. \$29
• 8. Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead cost + Fixed manufacturing overhead cost = \$8 + \$6 + \$10* = \$24 * Manufacturing overhead cost of \$10 includes variable and fixed costs. 8. Under variable costing, the unit product cost is: A. \$24 B. \$20 C. \$18 D. 21 Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = \$8 + \$6 + [\$10 x (100% - 60%)] = \$8 + \$6 + \$4= \$18
• 9. Viren Corporation has provided the following data from its activity-based costing system: The company makes 240 units of product T91H a year, requiring a total of 550 machine-hours, 90 orders, and 40 inspection-hours per year. The product's direct materials cost is \$16. 98 per unit and its direct labor cost is \$12. 09 per unit. According to the activity-based costing system, the average cost of product T91H is closest to:

A. \$79. 66 per unit B. 90. 81 per unit C. \$29. 07 per unit D. \$75. 70 per unit

• 10. Data concerning three of the activity cost pools of Bramhall LLC, a legal firm, have been provided below: The activity rate for the "meeting with clients" activity cost pool is closest to:

A. \$125 per meeting hour B. \$65 per meeting hour C. \$80 per meeting hour D. \$665,500 per meeting hour Kleppe Corporation has provided the following data from its activity-based costing accounting system: The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs that are not assigned to products.

• 11. How much indirect factory wages and factory equipment depreciation cost would be assigned to the Customer Orders activity cost pool?

A. \$240,000 B. \$72,000 C. \$68,000 D. \$480,000

• 12. How much indirect factory wages and factory equipment depreciation cost would NOT be assigned to products using the activity-based costing system? A. \$0 B. \$68,000 C. \$280,000 D. \$200,000 13. In this problem, there are three possible overhead allocation bases: direct labor (present system), machine hours (the proposed system), and number of batches.

First, calculate product costs under each of the three allocation schemes:

1. (a). Direct labor cost as the allocation base (present system): Bluethings 120,000 . 50 \$60,000 95. 238% 342,857 60,000 \$462,857 \$ 3. 857 Graythings 6,000 . 50 \$3,000 4. 762% 17,143 3,000 \$23,143 \$ 3. 857 Total 126,000 Number of units Direct labor/unit Direct labor cost % of total direct labor cost Overhead allocated Direct material cost Total cost Unit cost \$63,000 360,000 63,000 \$486,000
2. (b). Machine hours as the allocation base (proposed system): Bluethings 120,000 600 200 20 4000 95. 38% \$342,857 60,000 60,000 \$462,857 \$ 3. 857 Graythings 6,000 30 200 1 200 4. 762% \$17,143 3,000 3,000 \$23,143 \$ 3. 857 Total 126,000 Number of units/year ? number of units/batch Number of batches/year x number of hours per batch Number of machine hours/year % of total machine hours Overhead allocated Direct labor cost Direct material cost Total cost Unit cost 4200 \$360,000 63,000 63,000 \$486,000
3. (c). Number of batches as the allocation base: Bluethings 120,000 600 200 50% \$180,000 60,000 60,000 \$300,000 \$2. 50 Graythings 6,000 30 200 50% \$180,000 3,000 3,000 \$186,000 \$31. 0 Total 126,000 400 Number of units/year ? number of units/batch Number of batches/year % of total batches Overhead allocated Direct labor cost Direct material cost Total cost Unit cost \$360,000 63,000 63,000 \$486,000 Notice that allocating overhead by either direct labor or machine hours produces identical product costs. Thus, the proposed system change will not affect decision making. There are two cost drivers in Set-up Company. Unit volume drives direct materials and direct labor, but set-ups (number of batches) appear to drive overhead costs.

Allocating overhead using direct labor gives an incorrect impression of how overhead costs vary and distorts product costs. Overhead costs are incurred in setups. While run times per unit of thing is the same for blues and grays, batch sizes differ considerably. In fact, bluethings and graythings each required 200 batches. Therefore, each product line (as opposed to each unit of product) should be allocated an equal dollar amount of overhead. If this is done, then graythings become massive losers and bluethings are seen to be profitable, even with market price of \$3 per unit.

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