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1 Midterm Review Class #1.1- COGM; Inventory balances On January 30, 2013, the manufacturing facility of Trucks R Us was severely damaged by a fire. As a result, the company s direct materials, work-in-process, and finished goods inventories were destroyed. The company did have access to certain incomplete accounting records, which revealed the following: Beginning inventories at January 1, 2013: Direct Materials $ 32,000 Work in Process $ 68,000 Finished Goods $ 30,000 Key ratios for the month of January 2013 are as follows: Manufacturing Overhead = Prime costs = Gross margin = 40% of conversion costs 70% of total manufacturing costs for the period 20% of sales Ending Work in Process (WIP) is always 10% of the total manufacturing costs for the period. All costs are incurred uniformly in the manufacturing process. Actual operations data for the month of January 2013: Sales $ 900,000 Direct material purchases $ 320,000 Direct labour incurred $ 360,000 Prepare a statement of cost of goods manufactured (COGM). Calculate the total cost of inventory lost, identifying each category where possible (i.e. Direct Materials, Work in process and Finished Goods) at January 31, 2013.

2 Midterm Review Class #1.2- Plantwide versus Departmental Overhead Rates; Underapplied or Overapplied Overhead Don t tell me we ve lost another bid! exclaimed Sandy Kovallas, president of Lenko Products Inc. I m afraid so replied Doug Martin, the operations vice-president. One of our competitors underbid us by about $10,000 on the Hasting job. I just can t figure it out, said Kovallas, It seems we re either too high to get the job or too low to make any money on half the jobs we bid. What s happened? Lenko Products manufactures specialized goods to customers specifications and operates a joborder costing system. Manufacturing overhead cost is applied to jobs on the basis of direct labour cost. The following estimates were made at the beginning of the year: Direct labour $300,000 $200,000 $400,000 $900,000 Manufacturing overhead $540,000 $800,000 $100,000 $1,440,000 Jobs require varying amounts of work in the three departments. The Hastings job, for example, would have required manufacturing costs in the three departments as follows: Direct materials $12,000 $900 $5,600 $18,500 Direct labour $6,500 $1,700 $13,000 $21,200 Manufacturing overhead???? The company uses a plantwide overhead rate to apply manufacturing overhead cost to jobs. Assuming the use of a plantwide overhead rate: a. Compute the rate for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions a. Compute the rate for each department for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job. Required 3: Explain the difference between the manufacturing overhead that would have been applied to the Hastings job using the plantwide rate in question 1(b) above and using the departmental rates in question 2(b).

3 Required 4: Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost (direct materials, direct labour, and applied overhead). What was the company s bid price on theh Hastings job? What would the bid price have been if departmental overhead rates had been used to apply overhead cost? Required 5: At the end of the year, the company assembled the following actual cost data relating to all jobs worked on during the year: Direct materials $780,000 $90,000 $410,000 $1,260,000 Direct labour $320,000 $210,000 $340,000 $870,000 Manufacturing overhead $560,000 $830,000 $92,000 $1,482,000 Compute the underapplied or overapplied overhead for the year a. Assuming that a plantwide overhead rate is used, b. Assuming that departmental overhead rates are used

4 Midterm Review Class #1.3- Activity-Based Costing as an Alternative to Traditional Product Costing For many years, Dover Company manufactured a single product called a mono-circuit. Then, three years ago, the company automated a portion of its plant and at the same time introduced a second product called a bi-circuit that has become increasingly popular. The bi-circuit product is a more complex product than the mono-circuit, requiring two hours of direct labour time per unit to manufacture, and extensive machining in the automated portion of the plant. In addition, it requires numerous inspections to ensure that high quality is maintained. The mono-circuit requires only one hour of direct labour time per unit, only a small amount of machining, and few quality control checks. Manufacturing overhead costs are assigned to the products on the basis of direct labour hours. Despite the growing popularity of the company s new bi-circuit, profits have declined steadily. Management is beginning to believe that the company s costing system may be faulty. Unit costs for materials and labour for the two products follow: Mono-Circuit Bi-Circuit Direct materials $40 $80 Direct labour ($18 per hour) $18 $36 Management estimates that the company will incur $3,000,000 in manufacturing overhead costs during the current year and that 40,000 units of the mono-circuit and 10,000 units of the bicircuit will be produced and sold. Compute the predetermined overhead rate assuming that the company continues to apply manufacturing overhead cost to products on the basis of direct labour hours. Using this rate and other data from the problem, determine the unit product cost of each product. Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. Some preliminary work has been done and the data that have been collected are displayed below: Activity Cost Pool (and Activity Measure) Estimated Activity Measure Overhead Mono- Bi-Circuit Costs Circuit Maintaining parts inventory (number of part types) $360, Processing purchase orders (number of orders) $540,000 2,000 1,000 Quality control (number of tests) $600,000 2,000 6,000 Machine-related (machine-hours) $1,500,000 20,000 30,000 Determine the predetermined overhead rate (i.e. activity rate) for each of the four activity costs pools.

5 Required 3: Using the predetermined manufacturing overhead rates that you computed in part (2) above, do the following: a. Determine the total amount of manufacturing overhead cost that would be applied to each product using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each product. b. Compute the unit product cost of each product. Required 4: Look at the data you have computed in parts (1) through (3) above. In terms of manufacturing overhead cost, what factors make the bi-circuit more costly to produce than the mono-circuit? Is the bi-circuit as profitable as the company thinks it is? Explain.

70% of total manufacturing costs for the period

70% of total manufacturing costs for the period Midterm Review Class #1.1- COGM; Income Statement, Cost Behaviour On January 30, 2013, the manufacturing facility of Trucks R Us was severely damaged by a fire. As a result, the company s direct materials,

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