BKAM2013 Management Accounting I

Topic 3: Cost Assignment

Exercise 1

Differentiate between actual costing and normal costing.

Exercise 2

WoodPro Technology Sdn Bhd makes office furniture from quality woods. The
company uses a job-order costing system and predetermined overhead rates to
apply manufacturing overhead cost to jobs. The predetermined overhead rate in
the Preparation Department is based on machine hours, and the rate in the
Fabrication Department is based on direct materials cost. At the beginning of the
year, the company’s management made the following estimates for the year:

Department
Preparation Fabrication
Machine hours............................ 80,000 21,000
Direct labor hours....................... 35,000 65,000
Direct materials cost................... RM190,000 RM400,000
Direct labor cost.......................... RM280,000 RM530,000
Manufacturing overhead cost...... RM416,000 RM720,000

Job 123 was started on 1 November 2006 and completed on 12 December 2006.
The company’s cost records show the following information on the job:

Department
Preparation Fabrication
Machine hours............................ 350 70
Direct labor hours....................... 80 130
Direct materials cost................... RM940 RM1,200
Direct labor cost.......................... RM710 RM980

REQUIRED:

(a) Compute the predetermined overhead rate used during the year in the
Preparation Department and Fabrication Department.

(b) Compute the total overhead cost applied to job 123.

(c) What would be the total cost recorded for job 123? If the job contained 25
units, what would be the unit product cost?

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(d) At the end of the year, the records of WoodPro Technology Sdn Bhd
revealed the following actual cost and operating data for all jobs worked
on during the year:

Department
Preparation Fabrication
Machine hours........................... 73,000 24,000
Direct labor hours...................... 30,000 68,000
Direct materials cost.................. RM165,000 RM420,000
Manufacturing overhead cost..... RM390,000 RM740,000

What was the amount of underapplied or overapplied overhead in each

department at the end of the year?

Exercise 3

“Don’t tell me we have lost another bid!” exclaimed Roha, president of Rohami
Sdn Bhd. “I’m afraid so,” replied Ramy, the operation vice president. “One of our
competitors underbid us by about RM10,000 on the RR2 job.” “I just can’t figure it
out,” said Roha. “It seems we are either too high to get the job or too low to make
any money on half the jobs we bid any more. What’s happened?”

Roha Sdn Bhd manufactures specialized goods to customers’ specifications and

operates a job-order costing system. Manufacturing overhead cost is applied to
jobs on the basis of direct labor cost. The following estimates were made at the
beginning of the year:

Department
Cutting Machining Assembly Total Plant
Direct labor RM300,000 RM200,000 RM400,000 RM900,000
Manufacturing overhead RM540,000 RM800,000 RM100,000 RM1,440,000

Jobs require varying amounts of work in the three departments. The RR2 job, for
example, would have required manufacturing costs in the three departments as
follows:

Department
Cutting Machining Assembly Total Plant
Direct materials RM12,000 RM900 RM5,600 RM18,500
Direct labor RM6,500 RM1,700 RM13,000 RM21,200
Manufacturing overhead ? ? ? ?

The company uses a plantwide overhead rate to apply manufacturing overhead

cost to jobs.

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REQUIRED:

(a) Assuming use of a plantwide overhead rate:

(i) Compute the rate for the current year.
(ii) Determine the amount of manufacturing overhead cost that would
have been applied to the RR2 job.

(b) Suppose that instead of using a plantwide overhead rate, the company
had used a separate predetermined overhead rate in each department.
Under these conditions:
(i) Compute the rate for each department for the current year.
(ii) Determine the amount of manufacturing overhead cost that would
have been applied to the RR2 job.

(c) Explain the difference between the manufacturing overhead that would
have been applied to RR2 job using the plantwide rate in part (a) (ii) above
and using the departmental rates in part (b) (ii).

(d) Assume that it is necessary in the industry to bid jobs at 150% of total
manufacturing cost. What was the company’s bid price on the RR2 job if a
plantwide overhead rate is used? What would the bid price have been if
departmental overhead rates had been used to apply overhead cost?

(e) At the end of the year, the company assembled the following actual cost
data relating to all jobs worked on during the year:

Department
Cutting Machining Assembly Total Plant
Direct materials RM760,000 RM90,000 RM410,000 RM1,260,00
0
Direct labor RM320,000 RM210,00 RM340,000 RM870,000
0
Manufacturing overhead RM560,000 RM830,00 RM92,000 RM1,482,00
0 0

Compute the underapplied or overapplied overhead for the year:

(i) Assuming that a plantwide overhead rate is used.
(ii) Assuming that departmental overhead rates are used.

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Exercise 4

Ezy Furnish Sdn Bhd makes furniture using latest automated technology. The
company uses a job-order costing system and applies manufacturing overhead
cost to products on the basis of machine hours. The following estimates were
used in preparing the predetermined overhead rate at the beginning of the year:

Machine hours............................ 75,000

Manufacturing overhead cost...... RM900,000

During the year, a glut of furniture on the market resulted in cutting back
production and a buildup of furniture in the company’s warehouse. The
company’s cost records revealed the following actual cost and operating data for
the year:

Machine hours................................................................................... 60,000

Manufacturing overhead cost............................................................. RM850,000
Inventories at year end:
Raw materials.................................................................................... RM30,000
Work in process (includes overhead applied of RM36,000)............ RM100,000
Finished goods (includes overhead applied of RM180,000)........... RM500,000
Cost of goods sold (includes overhead applied of RM504,000)...... RM1,400,000

REQUIRED:

(a) Compute the company’s predetermined overhead rate.

(b) Compute the underapplied or overapplied overhead.

(c) Assume that the company closes any underapplied or overapplied

overhead directly to Cost of Goods Sold. Prepare the appropriate journal
entry.

(d) Assume that the company allocates any underapplied or overapplied

overhead to Work in Process, Finished Goods, and Cost of Goods Sold on
the basis of the amount of overhead applied that remains in each account
at the end of the year. Prepare the journal entry to show the allocation for
the year.

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(e) How much higher or lower will net operating income be if the underapplied
or overapplied overhead is allocated rather than closed directly to Cost of
Goods Sold?