Case 3- 62 FiberCom, Inc., a manufacturer of fiber optic communications equiptme
ID: 2372719 • Letter: C
Question
Case 3- 62
FiberCom, Inc., a manufacturer of fiber optic communications equiptment, uses a job-order costing system. Since the production process is heavily automated, manufacturing voverhead is applied on the basis of machine hours using a predetermined overhead rate. The current annual rate of $15 per machine hour is based on budget manufacturing overhead costs of $1,200,000 and a budgeted activity level of 80,000 machine hours (the company's estimated practical capacity). Operations for the year have been completed, and all accounting entries have been made for the year except the application of manufacturing overhead to the jobs worked on during December, and transfer of costs from work-in-Precess to Finished Goods for the jobs completed in December, and the transfer of costs from Finished Goods to Cost of Goods Sold for the jobs that have been sold during December. Summarized data as of November 30 and the month of December are Presented in the following table. Jobs T11-007, N11-013, and N11-015 were completed during December. All Completed jobs except job N11-013 had been turned over to customers by the close of business on December 31.
Work-in-Process December Activity
Job No. Balance November 30 Direct Material Direct Labor Machine Hours
T11-007 $ 87,000 $ 1,500 $ 4,500 300
N11-013 $ 55,000 4,000 $ 12,000 1,000
N11-015 $ 0 25,600 26,700 1,400
D12-002 0 37,900 20,000 2,500
D12-003 0 26,000 16,800 800
Total $142,000 $95,000 $80,000 600
Operating Activity: Activity through November 30 December Activity
Actual Manufacturing Overhed Occured:
Indirect Material $ 125,000 $ 9,000
Indirect Labor $ 345,000 30,000
Utilities $ 245,000 22,000
Depreciation $ 385,000 35,000
Total Overhead $ 1,100,000 96,000
Other Data:
Raw Material Purchases $ 965,000 $ 98,000
Direct Labor costs $ 845,000 $ 80,000
Machine hours 73,000 6,000
Accounts Balances at Beginning of Year January 1
Raw-Material Inventory $105,000
Work-in-Process 60,000
Finished Goods Inventory 125,000
Note: Raw material purchases and raw material inventory consist of both direct and indirect materials. The balance of the Raw Material Inventory account as of December 31, of the year just completed is $85,000.
Required:
1. Expalin why manufacturers use a perdetermined overhead rate to applied manufacturing overhead to their jobs.
2. How much manafacturing overhead would FiberCom have applied to jobs through November 30 of the year just completed?
3. How much manufacturing overhead would have been applied to jobs during December of the year just completed?
4. Determined the amount by which manafacturing overhead is overapplied or underapplied as of December 31 of the year
completed.
5. Determined the balance in the Finish Goods Inventory account on December 31, of the year just completed.
6. Prepare a Schedule of Cost of Goods Manufactured for FiberCom, Inc., for the year just completed. (Hint: In computing the cost of direct material used, remember that Fibercom includes both direct and indirect material in its Raw-Material Inventory Account).
Explanation / Answer
ANSWER A predetermined overhead rate is the rate used to apply manufacturing overhead to work-in-process inventory. The predetermined overhead rate is calculated before the period begins. The first step is to estimate the amount of the activity base that will be required to support operations in the upcoming period. The second step is to estimate the total manufacturing cost at that level of activity. The third step is to compute the predetermined overhead rate by dividing the estimated total manufacturing overhead costs by the estimated total amount of cost driver or activity base. Common activity bases used in the calculation include direct labor costs, direct labor hours, or machine hours.
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