Sonia Company manufactures custom-made fire trucks and had the following estimat

Question

Sonia Company manufactures custom-made fire trucks and had the following estimates and actual costs for 2014:

                                                                                                                Estimate                               Actual

Direct materials used                                                        $1,400,000                                $1,500,000

Direct Labor                                                                           1,000,000                                   1,050,000

Indirect Labor                                                                            400,000                                      375,000

Factory Insurance                                                                      25,000                                         25,000

Factory maintenance                                                              100,000                                         50,000

Factory rent                                                                               575,000                                       550,000

Factory equipment depreciation                                          100,000                                       100,000

Work-in-process inventory is $0 at 1/1/14 and $70,000 at 12/31/14.  Finished goods inventory is $80,000 at 1/1/14 and $65,000 at 12/31/14.

Step 1:  Would Sonia use job order costing or process costing?  Why

Step 2:  Sonia uses a predetermined overhead rate based on direct labor costs.  What is the predetermined rate for the current

               year?

Step 3:  Compute the amount of under - or over-applied overhead for the year.

Step 4:  Determine the cost of goods manufactured for the year.

Explanation / Answer

Would Sonia use job order costing or process costing? Why

-> Sonia should use job order csting because fire trucks are machines which take long period for construction and is mainly based on the order received.Further,Process costing is used only when by processing the raw materials into a totally different finished good in terms of nature. eg: sugar from sugar cane.

Sonia uses a predetermined overhead rate based on direct labor costs. What is the predetermined rate for the current

--> Overheads = (400000 + 25000 + 100000 + 575000 + 100000) = $1200000

Predetermined overhead rate = Estimated Overhead / direct labor = $1200000 / $1000000 = 120%

Predetermined overhead rate = 120%

Step 3: Compute the amount of under - or over-applied overhead for the year

Actual Overhead = (375000 + 25000 + 50000 + 550000 + 100000) = $11 00 000

Over head over applied = $1200000 - $1100000 = $100000

Determine the cost of goods manufactured for the year

COGM = Direct Materials + Direct Labor + Overhead + WIP = 1500000 + 1050000 + $1100000 + (0 - 70000) = $3580000

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