CASE 1: CASES FOR MANAGEMENT DECISION MAKING

1. Define and explain the meaning of a predetermined manufacturing overhead rate that is applied in a job-order costing system.

This is the estimate of how much overhead will be needed based on estimate of production.

2. What are the advantages and disadvantages of using the cost of each print as a manufacturing overhead cost driver?

Advantage Disadvantage Costs will be more accurate, costs are Relies too heavily on prediction of how many tailored more too specific products. of each particular product will be sold.

3. Using the information on the next page, compute and interpret the predetermined manufacturing overhead rate for Wall Dcor. Total cost = number of prints x cost per print

Unframed Print Steel Framed Print, No Matting Wood Framed Print, with Matting

80,000 x $12 = $960,000 15,000 x $16 = $240,000 7,000 x $20 = $140,000

Total Cost of Prints = $960,000 + $240,000 + $140,000 = $1,340,000

Predetermined Manufacturing Overhead Rate = Manufacturing Overhead 100% Total Cost of Prints)

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375, 200 100% 1, 340, 000

= 28%

4. Compute the product cost for the following three items. a) Lance Armstrong unframed print (base of print $12) b) John Elway print in steel frame, no mat (base cost of print $16) c) Lambeau Field print in wood frame with mat (base cost of print $20)

Direct Materials = print + frame & glass + matting Direct Labor = picking labor + framing & matting labor Manufacturing Overhead = direct materials x predetermined rate Cost of Prints = direct materials + direct labor + manufacturing overhead

Picking labor =

Rate x minutes worker hour

Rate $12 10 = $2 / unit x minutes worked = 60 min 60 Rate $21 20 = $7 x minutes worked = 60 min 60 Rate $21 30 = $10.50 x minutes worked = 60 min 60

For Steel Framed, Matting & Framing Time =

For Wood Framed, Matting & Framing Time =

Direct Materials ($)

Direct Labor ($)

Manufacturing Overhead ($)

Total Product Cost ($) 2|Page

Unframed Prints Steel Framed, No Matting Wood Framed, with Matting

12 (16 + 4) = 20

2 (2 + 7) = 9

(12 x 0.28) = 3.36 (16 x 0.28) = 4.48

17.36 33.48

(20 + 6 + 4) = 30

(2 x 10.50) = 12.50

(20 x 0.28) = 5.60

48.10

5. a) How much of the total overhead cost is expected to be allocated to unframed prints? b) How much of the total overhead cost is expected to be allocated to steel framed prints? c) How much of the total overhead cost is expected to be allocated to wood framed prints? d) What percentage of the total overhead cost is expected to be allocated to unframed prints?

Total Overhead Cost = Manufacturing Overhead x number of units expected

Total Overhead Cost Unframed Prints Steel Framed, No Matting Wood Framed, with Matting $3.36 x 80,000 = $268,800 $4.48 x 15,000 = $67,200 $5.60 x 7,000 = $39,200

Percentage of manufacturing Overhead of Unframed prints to Allocated manufacturing Overhead = Manufacturing for Unframed Prints 100% Allocated Manufacturing Overhead 3|Page

268,800 100% = 71.6% 375, 200

6. Do you think the amount of overhead allocated to the three product categories is reasonable? Relate your response to this question to your findings in previous questions.

No. There is more overhead allocated to the unframed prints than for the other prints that require more labor and materials. They will have under applied manufacturing overhead if they sell more framed and / or matted prints than expected.

7. Anticipate business problems that may result from allocating manufacturing overhead based on the cost of the prints. Problems with the way manufacturing is being allocated:
o

Each print would have to generate enough sales revenue to cover not only manufacturing costs but also selling, general and administrative, interest expense, and some profit. If an inaccurate allocation results in too much cost assigned to the prints, management might want to increase the price on the prints when in reality price increases are not necessary. If customers react to the unnecessary price increase by looking for lower prices from other manufacturers, the company may end up losing sales, profits, and customers. If inaccurate allocations result in too few costs assigned to the prints, a company may not realize that the prints selling price is too low to cover the true costs needed to produce and sell that product. If the company does not realize this and raise the price the company might be selling that product at a loss.

Thank you for all my group members. 4|Page