Question: Custom Granite Inc. uses an absorption cost
Custom Granite Inc. uses an absorption cost system for accumulating product cost. The following data are available for the past year:
- Raw materials purchases totaled $240,000.
- Direct labor costs incurred for the year totaled $480,000.
- Variable manufacturing overhead is applied on the basis of $6 per direct labor hour.
- Fixed manufacturing overhead is applied on the basis of machine hours used.
- When plans for the year were being made, it was estimated that total fixed overhead costs would be $312,000 and that 96,000 machine hours would be used during the year.
- The direct labor rate is $16 per hour.
- Actual machine hours used during the year totaled 88,000 hours.
- Actual general and administrative expenses for the year totaled $320,000.
Inventory balances at the beginning and end of the year were as follows:
Required:
a. Calculate the predetermined fixed manufacturing overhead rate and explain how it will be used during the year.
b. Draw a graph for fixed manufacturing overhead showing two lines. The first line should illustrate cost behavior and how Custom Granite’s management expects total fixed costs to be incurred for the year. The second line should illustrate product costing and how fixed costs are to be assigned to Custom Granite’s production. Comment on your graph.
c. Repeat requirement b for variable manufacturing overhead.
d. Prepare a T-account for Raw Materials to calculate the cost of raw materials used. Explain the relationship between raw material purchased and raw material used.
e. Calculate the variable manufacturing overhead applied to work in process. Could the applied amount of variable overhead differ from the actual amount of variable overhead incurred by Custom Granite for the year? If so, why might this occur?
f. Calculate the fixed manufacturing overhead applied to work in process. Could the applied amount of fixed overhead differ from the actual amount of fixed overhead incurred by Custom Granite for the year? Why or why not?
g. Prepare a T-account for Work in Process to calculate the cost of goods manufactured.
h. Prepare a T-account for Finished Goods to calculate the cost of goods sold. Identify the cost of goods manufactured and not sold.
i. Custom Granite estimated that it would use 96,000 machine hours during the year, but actual machine hours used totaled 88,000. Refer to the graph you prepared in requirement b and explain the implications for the product costing system of the 8,000 machine hours that Custom Granite failed to generate during the year. What are the implications for Custom Granite’s balance sheet and income statement?
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