Accounting Exercises 5: Costing

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by Clemens Werkmeister

Information about Salesdesign's Departments and Job Orders

Salesdesign Ltd. designs, produces and sells salespoints for retailers. Due to its large inventory it has quick reaction times and is able to build a broad variety of salespoints to order. Apart from the Warehouse, the manufacturing departments are Design and Assembly. The Sales department is responsible for selling and customer service. The following departmental accounting data are available:

Department Warehouse Design Assembly Sales
Budgeted overhead $100,000 $800,000 $900,000 $500,000
Actual overhead 120,000 810,000 870,000 550,000
Cost driver Direct
Cost driver units $2,000,000 50,000 hrs 30,000 hrs t.b.d.

Average direct labor cost is $15 per hour. During the year, several jobs were completed. Data pertaining to three such jobs, Job 623, 624 and 625, follow:

Job 623 624 625
Direct materials $2,000 $10,000 $1,000
Direct labor Design 100 hrs 200 hrs 200 hrs
Direct labor Assembly 60 hrs 200 hrs 40 hrs
Units produced 5 20 1

Job-order costing with plant-wide overhead rates

Salesdesign Ltd. calculates job-order cost using a plant-wide budgeted manufacturing overhead rate based on direct labor costs. There are no changes in inventory of raw materials, work in process or finished goods.
1. Compute the budgeted plant-wide manufacturing overhead rate.
2. Compute the per-unit manufacturing cost and the cost of goods sold for Jobs 623, 624 and 625, based on the plant-wide rate.
3. Compute the sales overhead rate and allocate sales overhead to Jobs 623, 624 and 625.

Job-order costing based on departmental overhead rates

Salesdesign Ltd. wants to analyze the effect of job-order costing with departmental rates based on the above departmental cost drivers. Departmental direct labor costs are $20 per design hour and $10 per assembly hour.
4. Compute the budgeted departmental overhead rates.
5. Recalculate the unit manufacturing costs for both jobs based on departmental overhead rates and direct labor cost rates.
6. Compute the difference in unit costs for the three jobs.
7. At the end of the year, Salesdesign reported 48,000 direct labor hours in Design and 32,000 in Assembly. Total material costs were $1,950,000. Determine the under- or over-applied overhead (based on departmental overhead rates). What happens with the overhead variance?
8. Discuss advantages and disadvantages of the departmental approach compared to the plant-wide rates. Which one is more complex? Is it appropriate for the current situation?

Activity-based costing

An activity analysis prepared by Salesdesign's controller, comes to a surprising conclusion: There are only two activities, Order-setup and Processing, which are the main overhead drivers in the three manufacturing departments. The analysis assigns percentages of departmental overhead to the two activities using the following work distribution matrix:

Department Overhead Setup Processing
Warehouse $100,000 70 % 30 %
Design 800,000 80 % 20 %
Assembly 900,000 20 % 80 %
Cost drivers Orders Units
Cost-driver units 250 3,000

9. Assign the departmental cost to activities.
10. Compute the activity rates (per order and per unit).
11. Calculate the total and unit manufacturing costs for the three jobs.
12. Compute the difference in unit cost for the three jobs and compare them to the plant-wide job-order costing. Is this activity-based costing approach appropriate for Salesdesign's manufacturing process?

Sales Cost as Activity-based Costs

The Sales department is strongly involved in the design of salespoints and the customers appreciate its after-sales service activities as a key part of the product. Thus, Salesdesign considers including the corresponding costs in the cost of goods manufactured (or cost of goods sold, respectively). Following estimates, about 50 % of Sales activities are order-setup related, the rest is selling.
13. Calculate the cost of goods manufactured including this information.
14. Analyze possible effects of this change on the financial statements and order-related decisions.

Accounting Exercises