Chapter 3

Problem 3-60
Plantwide versus Departmental Overhead Rates; Product
Pricing

Product Costing and Cost Accumulation in a Batch Production Environment

TeleTech Corporation manufactures two different fax machines for the business market. Cos
for the two models for the current year are as follows:
Basic System
Direct material .........................................................................................
Direct labor (20 hours at $15 per hour) .....................................................

4al F 1 getccl overheat

(departments A and B):
$8000,000
3. Gip^,r_rnenta' overhead
rate, Department A: $26 per
direct-labor hour

$ 400
300
400

Manufacturing overhead* ........................................................................

Total ........................................................................................................

$1,100

The predetermined overhead rate is $20 per direct-laber hour.

Each model of fax machine requires 20 hours of direct labor. The basic system requires'=.
department A and 15 hours in department B. The advanced system requires 15 hours in dep
5 hours in department B. The overhead costs budgeted in these two production departments
DepartmentA
Variable cost ................................................................................
Fixed cost ....................................................................................

$16 per direct-labor hour

$200,000

Depart
$4 per direct
$200,000

The firm's management expects to operate at a level of 20,000 direct-labor hours tnr
J
duction department during the current year . (This estimate is based on the practical capadj
is
department.)
Required;
1.

Show how the company's predetermined overhead rate was determined.

If the firm prices each model of fax machines at 10 percent over its cost, what will be`ii

eacn moaerr
Suppose the company were to use departmental predetermined overhead rates. CalaulaY
for each of the two production departments.
Compute the product cost of each model using the departmental overhead rates calcu ",z
requirement (3).
Compute the price to be charged for each model, assuming the company continues to
product at 10 percent above cost. Use the revised product costs calculated in requirem
^4.
Write a memo to the president of TeleTech Corporation making a recommendation a5
the firm should use a plantwide. overhead rate or departmental rates. Consider the pot
cations of the overhead rates and the firm's pricing policy. How might these considerau
the firm's ability to compete in the marketplace?

.' Cases
Case 3-61
interpreting Information from
a Job-Order Costing System
"Itib , iIb)

3. Finis3hed-goads inventory,
12131: 13,400 units
4. Actual manufacturing
overhead: $4,392,000

CompuFum, Inc. manufactures furniture for computer work stations. CompuFum uses adph?
ing system and employs absorption costing. ComuFurn's work-in-process inventory on N
consisted of the following jobs.
Job No.

Description

Units

CC723 ..............................
CH291 ..............................
PS812 ...............................

Computer caddy .
.......
Chair .................................
Printer stand .....................,

20,000
15,000 .............................

Accumi
$

25,000 ............. ...,.:,.........

Total ............................................................................
On November 30, the company's finished-goods inventory, which is evaluated using the fast i
(FIFO) method, consisted of four items.
Item

Quantity and Unit Cost

Computer caddy .............................................

7,500 units @ $64 each ...............................

19,400 units @ $35 each ...............................

Chair ..............................................................
Printer stand ...................................................
Desk ..............................................................

21,000 units @ $55 each ...............................

11.200 units @ $102 each .............................

Total ..........................................................................................

Chapter 3

Product Costing and Cost Accumulation in a Batch Production Environment

end of November, the balance in CompuFurn's Materials Inventory account, which includes
.;tile
aterials and purchased parts, was $668,000. Additions to and requisitions from the materials
di raw m
'uentory during the month of December included the following.
Raw Materials

tditians
.
difit:ans
.....................

................ ..

Purchased Parts

$242,000................. .......................................

$396,000

51,000 ......................... ...............................

104,000
10,800
87, 000
1 V ,000

^equ3sdians:
:..

3,000 ........................................................
124,000 ..............................
..............

PS812 ..._ .....................................................

) .................................. ...
^^Joti DS444 ( S,ODa desks

65,000 ..........................._...........................

010 uFurn applies manufacturing overhead on the basis of machine hours. The company's manufacg overhead budget for the year totaled $4,500,000. The company planned to use 900,000 machine
spurs during this period, which is the firm's estimated practical capacity. Through the first l l months
afthe year , a total of 830 ,000 machine hours were used, and actual manufacturing overhead amounted
I.,
During the month of December , machine hours and labor hours consisted of the following:
Machine Hours

^tcoount

Labor Hours

Labor Cost

0723 ......................................
CH291 ......................................
PS812 .......................................
03444 ......................................
hthrect Tabor ............................
Bluer ision ..............................

12,000 ...............................
4,400 ...............................
19,500 ...............................
14,000 ....... .................. .:....

11,600 .................................
3,600 .................................
14,300 .................................
12,500 .................................
3,000 .................................

$122,400
43,200

......

49,900 ...............................

45,000 ,__ ..........................

$591,100

"Total

200.500
138,000
29,400
.57,600

The jobs completed in December and the unit sales for that Month are as follows:

Jab No.

Production Items

;0723
Oi291 ....................
k3S444

Computer caddy ......

Chair ....,..,.,............. .
Desks
.........

Quantity
Completed
20,000
. 15,000
5,000

Quantity
Shipped.

Item
Computercaddy
Chair
Printer stand ....
Desk

.....
..............

17.500
21,000
18.000
s;ooo

f9yuired:
`Describe when it is appropriate for a company to use a job-order costing system.
Calculate the balance in CompuFurn, Inc.'s Work-in-Process Inventory account as of December 31.
Calculate the cost of the chairs in CompuFurn, Inc.'s finished-goods Inventory as of December 31.
ctual manufacturing overhead incurred in December amounted to $252.000. Calculate Comnurums overapplied or underapplied overhead for the year.
Explain two alternative accounting treatments for overapplied or underapplied overhead balances
when using a job-order costing system.

MA, adapted)

ffberCom, Inc., a manufacturer of fiber optic communications equipment uses a job-order cost9 system . Since the production process is heavily automated ,
manufacturing overhead is applied
R^the basis of machine hours using a predetermined overhead rate. The current annual rate of $15
r
machine hour is based on budgeted manufacturing overhead costs of $1 , 200,000 and a budgeted
2fivity level of 80,000 machine hours (the company ' s estimated practical capacity). Operations for
e year have been completed , and all of the accounting entries have been made for the year except
aplicat
ion of manufacturing overhead to the jobs worked on during December, the transfer of
from Work i
n Process to Finished Goods for the jobs completed in December , and the transF of costs from Finished Goods to Cost
of Goods Sold for the jobs that have been sold during
le'ec. mber.

Summarized data as of November 30 and for the month of December are presented in the

I Case 3-62
Cost Flows in a Job-Order
Costing System; Schedule of
Cost of Goods Manufactured;
Automation

ap ilea i.. Drerno .

cx-jn
S. Cos of go ds r a ,$2,'968, B0!