Central Redi-Mix Concrete, Inc. applies manufacturing overhead based on number o
ID: 2473024 • Letter: C
Question
Central Redi-Mix Concrete, Inc. applies manufacturing overhead based on number of yards of concrete produced. At the beginning of 2014 management estimated the plant would produce 100,000 yards of concrete during the coming year. At the same time manufacturing overhead was budgeted to be $500,000. At the end of the year the firm had produced 110,000 yards of concrete and incurred $550,000 of manufacturing overhead. Required: 1. Compute the overhead application rate for 2014. 2. Calculate the amount of overhead applied to work-in-process during the year. 3. Compute the overhead variance. Was it favorable or unfavorable and why? 4. Explain why we use a predetermined rate to apply manufacturing overhead to work-in-process versus the way a company accounts for direct labor and direct material.
Explanation / Answer
Answer 1.
Compute the overhead application rate for 2014.
Overhead application rate = Budgeted manufacturing overhead / estimated yards of concrete
= $500,000 / 100,000
= $ 5 per yards of concrete
Answer 2.
Calculate the amount of overhead applied to work-in-process during the year.
Overhead applied to work-in-process = Actual production * Overhead application rate
= 110,000 yards of concrete * $ 5 per yards of concrete
=$ 550,000
Answer 3.
Compute the overhead variance. Was it favorable or unfavorable and why?
Variance = Overhead applied to work-in-process - Actual manufacturing overhead incurred
=$ 550,000 - $550,000
= 0
Answer 4.
Explain why we use a predetermined rate to apply manufacturing overhead to work-in-process versus the way a company accounts for direct labor and direct material.
Companies use predetermined overhead rates for a variety of following reasons
Job Order Costing Accounting Requirements: Job order costing is often used in companies that manufacture a variety of products. It is a way for companies to calculate an average cost per unit when costs differ because the products manufactured are different. Generally accepted accounting principles require to assign direct and overhead costs to work in progress so inventory and cost of goods sold are reported accurately. Using predetermined overhead rates allows to fulfill the GAAP matching principal by assigning overhead costs while products are still in production.
Easier Cost Tracking Method: The indirect nature of overhead costs makes it difficult to accurately track and trace these costs to individual products. By using a predetermined overhead rate, managers can assign overhead costs as a group, saving time and tedious work.
Facilitates Decision Making: Cost information is critical for making important business decisions, such as evaluating pricing strategies and making budgeting decisions. While it’s easy for managers to quickly identify and allocate direct production costs, the same can’t be done for indirect overhead costs. Most actual overhead costs aren’t known until after manufacturing ends. Predetermined overhead rates allow managers to estimate and allocate overhead costs while products are still in production, which facilitates cost-based business decisions.
Due to above reasons, we use a predetermined rate to apply manufacturing overhead to work-in-process versus the way a company accounts for direct labor and direct material.