The overhead allocation rate in Franz Company\'s job order cost accounting syste
ID: 2385883 • Letter: T
Question
The overhead allocation rate in Franz Company's job order cost accounting system applies overhead based on direct labor costs. The manufacturing costs for the current year were: direct materials, $108,000; direct labor, $144,000; and factory overhead, $18,000. At year end, the total cost of goods in process is 36,000 which includes 12,000 of direct labor cost.What amount of direct material cost is included in the ending goods in process inventory?
Please show calculations so I can help to better understand the problem. thanks
Explanation / Answer
To solve for the direct material cost, the first step would be to solve for the factory overhead included in the ending goods in process inventory. Since direct labor is already given, finding the overhead will automatically give us the direct materials overhead by simple subtraction.
Since the job order cost accounting system of the company applies overhead based on direct labor, we must first find out how much overhead is applied per dollar of direct labor (the ratio).
It is given that for the $144,000 worth of direct labor, there is $18,000 worth of factory overhead. Which means, getting the ratio:
18,000 / 144,000 = $.125 per direct labor dollar.
This means that for every dollar spent on direct labor, there is an equivalent $.125 cost on factory overhead.
Now back to the problem at hand:
Since it is indicted that the company spent $12,000 of direct labor, we can compute the factory overhead by multiplying it by the rate:
$12,000 * $.125 = $1,500 factory overhead.
Now that we have both the direct labor and factory overhead, it is easy to solve for the direct materials because the manufacturing costs compose only of 3 components.
Direct Material Cost = $36,000 - 12,000 - 1,500
= $22,500.
Hope that helps.
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