Answer all parts of this question. Thank you! 1) Overhead allocation Jackson ind
ID: 2462608 • Letter: A
Question
Answer all parts of this question. Thank you!
1) Overhead allocation Jackson industries uses job order costing. It has two (2) production departments, Fabrication and Assembly You are provided with the budgeted data for 2017 Assembly 600000 Total budgeted direct labour hours MrJackson has asked you to explain to him how the overhead allocated to jobs would be different between using a plant-wide approach as compared to using departmental overhead rates. He provides data from a recently completed job in 2016. All direct labour was paid $10 per DLH 2016. All direct labour was paid $10 per DLH Job 2785 Matenal cExplanation / Answer
1.1) Predetermined overhead rate = estimated total production overhead cost / estimetaed total labour hours
here, estimated total production overhead cost = $600.000 in fabrication + $300,000 in assembly = $900,000
and estimetaed total labour hours = 40,000 hours in fabrication + 50,000hours in assembly = 90,000 labour hours
Predetermined overhead rate = estimated total production overhead cost / estimetaed total labour hours
= $900,000 / 90,000 = $10 per labour hour is the Predetermined overhead rate.
1.2) calculating the deparmental overhead rate:
For depatment Fabrication = Over head cost / labour hours = $600,000 / 40,000 hours = $15per labour hour
For depatment Assembly = Over head cost / labour hours = $300,000 / 50,000 hours = $6per labour hour
1.3) The rate calculated as predetermined overhead rate is called as Traditional costing Method.
This method is simple and easier to implement than ABC systems ( Activity based costing system).
However, traditional costing systems are not as accurate as ABC systems.Traditional costing systems can also result in significant under-costing and over-costing because, Traditional costing systems apply indirect costs to products based on a predetermined overhead rate. Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing is optimal when indirect costs are low compared to direct costs.
here, as per the given information we calculated 2 models .
1st as per traditional method the predetermined rate = $10per labour hour and where as as per ABC analysis,
for depatment fabrication its $15per labour hour and For depatment Assembly its $6 per labour hour.
Total cost comparition , under predetermined its $41,400 and under ABC system its $44,440.
As per the above comparision, we can assume that predetermined rate id more acurate than ABC, here under ABC cost is more, with this more cost sales would be more as a consequence assuming that Compitators supply more cheaply.
1.4) As per the above discusssion at this stage of production plant Jackson can follow Predetermined rate because under ABC system the Cost of the Job would be overpriced on adoption of ABC System.
Note:
ABC provides a way to allocate costs more accurately when overhead costs are not incurred at the same rate as direct labor dollars. The more activities identified, the more complex the costing system becomes and using ABC does provide a more accurate estimate of costs for use in making management decisions.
For the Cost figures , the activity based costing results may be taken as the more accurate results—more closely reflecting the "true" production costs —than the Cost figures from the traditional costing approach. Whether or not the improved accuracy justifies the higher cost of applying this costing method, however, is a question management will have to investigate and answer before committing to a comprehensive new approach to costing.
Details Job 2785 Material cost $22,000 Direct labour cost ( no change because they are calculated @ $10per hour, already given) Fabrication $12,000 Assembly $7,400 Total cost $41,400Related Questions
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