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Financial & Managerial Accounting

Found in: Page 694

Book edition 7th

Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta

Pages 1096 pages

ISBN 9781259726705

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Short Answer

Question: Why must a company estimate the amount of factory overhead assigned to individual jobs or job lots?

Answer

Estimating the relation between factory overhead cost and job or job lot is necessary to assign costs.

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Step by Step Solution

TABLE OF CONTENTS :

TABLE OF CONTENTS

Step 1: Meaning of Factory Overhead

Factory overhead is the portion of a business' operating expenses that aren't directly related to a particular product or service. Overhead is typically connected to manufacturing or production.

Step 2: Explaining why must a company estimate the amount of factory overhead assigned to individual jobs or job lots

Manufacturing overhead isn't connected to specific units (jobs) or bunches (job lots). Estimates of the relationship between manufacturing overhead cost and work or job lot are required to relegate expenses. Also, since work order cost accounting can be a perpetual framework, we must calculate (permanent) stock costs by estimating a predetermined overhead rate. Also, utilizing this anticipated completeness facilitates quick estimation of work arrangement companies.

Most popular questions for Business-studies Textbooks

In December 2016, Shire Computer’s management establishes the 2017 predetermined overhead rate based on direct labor cost. The information used in setting this rate includes estimates that the company will incur $747,500 of overhead costs and $575,000 of direct labor cost in year 2017. During March 2017, Shire began and completed Job 13-56.

1. What is the predetermined overhead rate for 2017?

2. Use the information on the following job cost sheet to determine the total cost of the job.

JOB COST SHEET

Customer’s Name Keiser Co Job No 13-56

Job Description 5 plasma monitors—61 inch

Overhead

Direct Materials Direct Labor Costs Applied

Date Requisition No. Amount Time-Ticket No Amount Rate Amount

Mar. 8 4-129 $5,000 T-306 $ 700

Mar. 11 4-142 7,020 T-432 1,250

Mar. 18 4-167 3,330 T-456 1,250

Totals

Refer to the chapter opener regarding Neha Assar and her company, Neha Assar. All successful businesses track their costs, and it is especially important for start-up businesses to monitor and control costs.

Required

1. Assume that Neha Assar uses a job order costing system. For the basic cost category of direct materials, explain how Neha’s job cost sheet would differ from a job cost sheet for a manufacturing company.

2. For the basic cost categories of direct labor and overhead, provide examples of the types of costs that would fall into each category for Neha Assar.

Moonrise Bakery applies factory overhead based on direct labor costs. The company incurred the following costs during 2017: direct materials costs, $650,000; direct labor costs, $3,000,000; and factory overhead costs applied, $1,800,000.

1. Determine the company’s predetermined overhead rate for 2017.

2. Assuming that the company’s $71,000 ending Work in Process Inventory account for 2017 had $20,000 of direct labor costs, determine the inventory’s direct materials costs.

3. Assuming that the company’s $490,000 ending Finished Goods Inventory account for 2017 had $250,000 of direct materials costs, determine the inventory’s direct labor costs and its overhead costs.

Why must a company use predetermined overhead rates when using job order costing?

Custom Cabinetry has one job in process (Job 120) as of June 30; at that time, its job cost sheet reports direct materials of $6,000, direct labor of $2,800, and applied overhead of $2,240. Custom Cabinetry applies overhead at the rate of 80% of direct labor cost. During July, Job 120 is sold (on account) for $22,000, Job 121 is started and completed, and Job 122 is started and still in process at the end of the month. Custom Cabinetry incurs the following costs during July.

July Product Costs	Job 120	Job 121	Job 122	Total
Direct materials	$1,000	$6,000	$2,500	$9,500
Direct labor	2,200	3,700	2,100	8,000
Overhead applied	?	?	?	?

1. Prepare journal entries for the following transactions and events a through e in July.

Direct materials used in production.
Direct labor used in production.
Overhead applied.
The sale of Job 120
Cost of goods sold for Job 120.

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