A company has a factory that produces Book shelf. It has multiple product lines.
ID: 2391474 • Letter: A
Question
A company has a factory that produces Book shelf. It has multiple product lines.
Materials and labor for the Book shelf are determined by each job. To simplify the assignment, it assumes the following average costs. The materials include $1,000 for the wood and other direct materials of $200. Both items listed are on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 65%. This company estimates that it will have 16,000 direct labor hours in total for all product lines. It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the book shelf follows:
Salaries- office & administrative $ 520,000
Salaries for factory personal: $ 220,000
Office Rent $ 125,000
Factory Rent $ 20,000
Office Utilities and office expenses (based on units sold) $ 20,000
Sales Travel (based on units sold) $ 24,000
Insurance - office $ 12,000
Depreciation - office equipment $ 40,000
Depreciation for factory equipment $ 70,000
Advertising $ 20,000
Sales commissions (based on units sold) $ 45,000
Factory Property taxes: $ 10,000
Maintenance for factory equipment: $ 80,000
Questions:
a. Discuss MOH costs using the activity-based costing (at least 2 options), if necessary, put assumptions.
b. Do multiple product lines impact the MOH allocation? What happans if MOH is not allocated correctly?
c. How does a company identify each type of cost, for example, what the variable costs for this product line are.
d. Prepare a schdule for each area on a yearly basis.
Explanation / Answer
We discussed methods to record manufacturing expenses and nonmanufacturing expenses following U.S. Commonly accredited Accounting principles (U.S. GAAP). Below U.S. GAAP, all nonmanufacturing costs (selling and administrative expenditures) are dealt with as interval costs seeing that they are expensed on the revenue assertion in the interval where they are incurred. All expenses associated with creation are handled as product fees, together with direct substances, direct labor, and constant and variable manufacturing overhead. These expenses are hooked up to stock as an asset on the balance sheet unless the goods are bought, at which point the expenditures are transferred to price of items bought on the earnings assertion as an cost. This system of accounting is called absorption costing on the grounds that all manufacturing overhead expenses (constant and variable) are absorbed into inventory except the items are sold. (The term full costing is also used to explain absorption costing.)
question: although absorption costing is used for external reporting, managers commonly pick to use an replacement costing strategy for inside reporting purposes known as variable costing. What's variable costing, and the way does it compare to absorption costing?
Reply: Variable costing requires that all variable construction expenses be included in inventory, and all constant construction costs (fixed manufacturing overhead) be said as period expenditures. As a result all constant construction fees are expensed as incurred.
The only difference between absorption costing and variable costing is in the remedy of fixed manufacturing overhead. Making use of absorption costing, fixed manufacturing overhead is suggested as a product price. Utilizing variable costing, constant manufacturing overhead is stated as a period rate.
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