Allison\'s Engines, which builds high performance auto engines for race cars, st

Question

Allison's Engines, which builds high performance auto engines for race cars, started operations on January 1, 2012. During the month, the following events occurred: Materials costing dollar 6,500 were purchased on account. Direct materials costing dollar 3, 000 were placed in process. A total of 380 direct labor hours charged to individual jobs at a rate of dollar 15 per hour. Overhead costs for the month of January were as follows: Depreciation on building and equipment dollar 500 Indirect labor 1,500 Utilities 600 Property taxes on building 650 Insurance on building 550 On January 31. only one job (A06) was in process with materials costs of dollar 600. direct labor charges of dollar 450 for 30 direct labor hours, and applied overhead. The building and equipment were purchased before operations began and the insurance was prepaid. All other costs will be paid during the following month. Assuming Allison's Engines assigned actual monthly overhead costs to jobs on the basis of actual monthly direct labor hours, prepare an analysis of Work-in-Process for the month of January. Assuming Allison's Engines uses a predetermined overhead rate of dollar 10.50 per direct labor hour, prepare an analysis of work-in-Process for the month of January. Describe the appropriate treatment of any overapplied or underapplied overhead for the month of January. Review the overhead items and classify each as fixed or variable in relation to direct labor hours. Next, predict the actual overhead rates lor months when 200 and 1,000 direct labor hours are used. Assuming jobs similar to A06 were in process at the end of each month, determine the costs assigned to these jobs. Why do you suppose predetermined overhead rates are preferred to actual overhead rates.

Explanation / Answer

a. Computation of work in process for January:

Overhead application rate = Total Overhead cost / Direct labor hours = $ 3,800 / 380 = $ 10 per direct labor hour

Job A06: Direct material cost + Direct labor cost + Manufacturing overheads applied = $ 600 + $ 450 + 30 x $ 10 = $ 1,350

b. If predetermined overhead rate is $ 10.50 per direct labor hour, then overheads applied to Job A06 = 30 x $ 10.50 = $ 315.

Therefore overapplied manufacturing overhead = $ 315 - $ 300 = $ 15

This overapplied overhead should be balanced by creating a credit to cost of goods sold, as it is a favorable variance resulting in a reduction in cost.

c.

* $ 1,500 / 380 direct labor hours x 200 direct labor hours = $ 789

** $ 1,500 / 380 direct labor hours x 1,000 direct labor hours = $ 3,947

*** $ 600 / 380 direct labor hours x 200 direct labor hours = $ 316

**** $ 600 / 380 direct labor hours x 1,000 direct labor hours = $ 1,579

Component of overhead cost Cost behavior in relation to direct labor hours 200 direct labor hours 1000 direct labor hours Depreciation on building and equipment Fixed $ 500 $ 500 Indirect labor Variable $ 789* $ 3,947** Utilities Variable $ 316*** $ 1,579**** Property taxes on building Fixed $ 650 $ 650 Insurance on building Fixed $ 550 $ 550

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