Firm XYZ has 3 production departments. The fim uses a plant-wide rate to allocat
ID: 2336549 • Letter: F
Question
Firm XYZ has 3 production departments. The fim uses a plant-wide rate to allocate overhead costs; it uses direct wages cost as the activity base (or cost driver). You are given production information for 2014: Production Dept Direct wages Direct labour Machine hours Production rs overhead costs 25,000 100,000 25,000 50,000 10,000 50,000 25,000 85,000 40,000 10,000 120,000 30,000 75,000 225,000 50,000 During 2014, the firm incurred the following costs and consumed the following resources to complete a particular contract for client G Production Dept Direct material Direct wages Direct labour Machine hours hours 120 60 100 40 10 40 10 10 After adding production overhead to prime cost, gross profit is ascertained by increasing production cost by one-third Required:Explanation / Answer
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Production Dept Direct wages Direct labour hours Machine hours Production overhead costs ($) A $ 25,000 10,000 40,000 $ 120,000 B $ 100,000 50,000 10,000 $ 30,000 C $ 25,000 25,000 $ 75,000 Total $ 150,000 85,000 50,000 $ 225,000 A Overhead plantwide rate = Total overhead÷ Direct wages 225000 ÷ 150000 $ 1.50 per direct wage $ B $1.50 x Direct wages Production Dept Direct material Direct wages Overhead Total cost A 120 100 150 370 B 60 60 90 210 C 10 10 15 35 Total 615 Add: 1/3 205 Total prod cost 820 C Production Dept Production overhead costs ($) ÷ Activity driver = Activity rate A $ 120,000 40000 Machine hour 3 per MH B $ 30,000 50000 Direct labor hours 0.6 per DLH C $ 75,000 25000 Direct labor hours 3 per DLH D For department A machine hour is selected since 80%(40000/50000) machine hours utilised only in Dept A For department B Direct labor hours is selected since 59%(50000/85000) labor hours is utilzed in this department For department C also Direct labor hours is selected since there is only labor based work If we look closely then it is clear that only department A is machine intensive and department B and C is labor intensive and company most of the capacity is used by these departments respectively. E Production Dept Direct material Direct wages Overhead Total cost A 120 100 40 x 3 = 120 340 B 60 60 40 x 0.60 = 24 144 C 10 10 10 x 3 = 30 50 Total 534 Add: 1/3 178 Total prod cost 712 Total cost F Plantwide 820 Departmental 712 Departmental overhead better represents the cost structure since only that part is responsible for occurrence of cost and is its activity driver.Related Questions
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