Country Products manufactures quilt racks. Pine is introduced in Department 1, w

Question

Country Products manufactures quilt racks. Pine is introduced in Department 1, where the raw material is cut and assembled. In Department 2, completed racks are stained and packaged for shipment. Department 1 applies overhead on the basis of machines hours; Department 2 applies overhead on the basis of direct labor hours. The company's predetermined overhead rates were computed using the following information:

                              Department 1       Department 2
Expected overhead    $465,000             $380,600
Expected DLHs                4,000                22,000
Expected MHs                30,000                  2,500

Sue Power contacted Country Products to produce 500 quilt racks as a special order. Power and watned the racks made from teak and to be made larger than the company's normal racks. Country Products designated Poiwer's order as Job #462.

During July, Country Products purchased $346,000 of raw material on account, of which $19,000 was teak. Requisitions were issued for $340,000 of raw material, including all of the teak. There were 285 direct labor hours worked (at a rate of $11 per DLH) and 2,400 machine hours recorded in Department 1; of these hours, 25 DLHs and 320 MHs were on Job #462. Department 2 had 1,430 DLHs (at a rate of $18 per DLH) and 180 MHs; of these, 158 DLHs and 20 MHs were worked on Job #462. Assume that all wages are paid in cash.

Job #462 was complete on July 28 and shipped to Power. She was billed cost plus 20 percent.

a. What are the predetermined overhead rates for Departments 1 and 2?
b. Prepare journal entries for the July transactions.
c. What were the cost and selling price per unit of Job #462? What was the cost per unit for the raw material?
d. Assume that enough pine had been issued in July for 20,000 quilt racks. The RM inventory manager is a friend of Power and he conveniently "forgot" to trace the cost of the teak specifically to Job #462. What would have been th effect of this error on the raw material cost, total cost, and selling price for each unit in Job #462?

Explanation / Answer

Given : Department 1 Department 2 Expected Overhead 465000 380600 Expected DLHs 4000 22000 Expected MHs 30000 2500 Basis of Overhead Application Machine Hours Labor Hours PreDetermined OH rate 465,000 / 30,000 380,600 / 22,000 a. PreDetermined OH rate 15.5/Machine Hour 17.3 / Labor Hour b Journal Entries: Raw Material Inventory 346000       Accounts Payable 346000 Work In Progress 340000 Raw Material Inventory 340000 Wages 28875 Cash 28875 Over head 61939 Cash 61939 (Dept 1 - 15.5 * 2400 Dept 2 - 17.3 *1430 ) c. Cost of of Job #462 Raw Material 19,000.00 Direct Labor : Dept 1-25*11 275.00 Dept 2- 158 *12 1,896.00 Over Heads : Dept 1- 320 * 15.5 4,960.00 Dept 2 - 158 * 17.3 2,733.40 Total Cost 28,864.40 Selling Price 34,637.28 d. d. The Raw Material Cost and consequently total cost would be understated consequently, the profit for job 462 would be over stated. Given : Department 1 Department 2 Expected Overhead 465000 380600 Expected DLHs 4000 22000 Expected MHs 30000 2500 Basis of Overhead Application Machine Hours Labor Hours PreDetermined OH rate 465,000 / 30,000 380,600 / 22,000 a. PreDetermined OH rate 15.5/Machine Hour 17.3 / Labor Hour

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