Part One (cost driver and pre-determined overhead) Memories, Inc. (MI) produces
ID: 2474498 • Letter: P
Question
Part One (cost driver and pre-determined overhead) Memories, Inc. (MI) produces souvenir figurines that are sold wholesale to gift shops. They have created a new line of dolls representing historical figures. The company's goal is to produce and sell 350,000 dolls each year. MI plans to keep approximately a one-month supply of dolls in finished goods inventory. MI will have 10 production lines. Each of the five workers on each line will be responsible for one of the five stages of production: molding, cleaning, painting, finishing, and packaging. Each of the 10 production lines can produce 20 dolls per hour. MI deals exclusively with Quality Materials, Inc. to purchase raw materials and equipment. All materials (plastic, molds, paint, etc.) are delivered within two days of ordering and MI generally holds only a one- or two- day supply in raw materials inventory. The projected materials costs are: Material cost per doll Plastic $.12 Doll molds .20 Varnish .08 Paint .30 Packaging .04 Direct labor employees are paid on an hourly basis according to hours worked. Once production-line workers finish a day's scheduled production, they are sent home. They can work a maximum of 8 hours each day without earning overtime. The overtime premium is an additional 50% of the base hourly rate of $7.50 per hour. Supervisors and other indirect labor employees are salaried. Labor Costs (estimated) Rate for direct labor $7.50 per hour (plus $2.50 per hour in fringe benefits) During the first year of operations, Memories, Inc. estimated that they would produce 346,125 dolls but actually produced 336,033. Actual direct materials costs were $248,664 and actual direct labor costs were $840,082 for 84,008 hours worked. Estimated overhead costs for the year were $191,700 while actual overhead was $193,000. Required: What is an appropriate cost driver for allocating overhead to dolls in Year 1? (Explain your reasoning for choosing the driver.) Calculate the predetermined overhead rate using the cost driver of units produced. HINT: POHR = Estimated OH / Estimated units produced Using normal costing, compute the cost of one of the 336,033 dolls produced in Year 1. (Round to the nearest dollar.) HINT: DM+DL+applied OH (applied OH = POHR x actual units produced. Was overhead over- or under-applied during the year? By how much? Why do you think this happened?
Explanation / Answer
A) Appropriate cost dirver for allocating overheads to dolls is direct labor hours. It is the most appropriate in this situation as the production is labor oriented.
B) No of units produced is 20 units per hour of operation in each production line.
No of labor hours per hour of operation in each production line = 5 hrs (5 workers*1 hr)
no of units produced in 1 labor hour = 20/5 = 4 units.
no of labor hours required for producing the estimated production of 346125 units = 346125/4 = 86531.25 hrs
Pre-determined OH rate = 191700/86531.25 = $2.22 per direct labor hour.
C) Cost per unit under normal costing = $3.79
Calculations:
D) Overhead incurred = $193,000
Overhead applied = $186498
Hence, overhead is underapplied to the extent of 193000 - 186498 = $6,502
Reasons for under application of overhead:
Spending variance = 193,000 (actual overhead) - 191700 (estimated) = $1300 (adverse) OH spending is more than budgeted.
Volume variance = 191700 - 84008 (actual labor hours) * 2.22 = $5202 (adverse); cost of productive hours not utilised as estimated.
Normal cost of dolls produced- 336033 units total cost unit cost direct material cost 248664 0.74 direct labor cost 840082 2.50 overhead applied 186498 0.55 (84008 hrs * 2.22) 1275244 3.79