Question: O’Leary Corporation manufactures special purpose
O’Leary Corporation manufactures special purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O’Leary uses a normal job costing system. Direct labor at O’Leary is paid $17 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows:
At the beginning of year 3, O’Leary has two jobs, which have not yet been delivered to customers. Job MC-270 was completed on December 27, year 2. It is scheduled to ship on January 7, year 3. Job MC-275 is still in progress. The predetermined rate in year 2 was $130 per direct labor-hour. Data on direct material costs and direct labor-hours for these jobs in year 2 follow:
During year 3, O’Leary incurred the following direct material costs and direct labor-hours for all jobs worked in year 3, including the completion of Job MC-275:
Direct material costs . . . . . . . . . . . . . . . . . . . $11,840,000
Direct labor-hours . . . . . . . . . . . . . . . . . . . . . . . . . 74,000
Actual manufacturing overhead . . . . . . . . . . $9,120,000
For the purpose of computing the predetermined overhead rate, O’Leary uses the previous year’s actual overhead rate. At the end of year 3, there were four jobs that had not yet shipped. Data on these jobs follow:
Required
a. What was the amount in the beginning Finished Goods and beginning Work-in-Process accounts for year 3?
b. O’Leary incurred direct materials cost of $57,000 and used an additional 300 hours in year 3 to complete job MC-275. What was the final (total) cost charged to job MC-275?
c. What was over- or underapplied overhead for year 3?
d. O’Leary prorates any over- or underapplied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-in-Process Inventory. Prepare the journal entry to prorate the Over- or Underapplied Overhead computed in requirement (c).
e. A customer has asked O’Leary to bid on a job to be completed in year 4. O’Leary estimates that the job will require about $92,500 in direct materials and 5,000 direct labor-hours. Because of the economy, O’Leary expects demand for their services to be low in year 4, and the CEO wants to bid aggressively, but does not want to lose any money on the project. O’Leary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount O’Leary can bid on the job and still not incur a loss?
Transcribed Image Text:
Year 1 Year 2 Direct labor-hours worked 69,000 54,000 Manufacturing overhead costs incurred Indirect labor .... Employee benefits Supplies.. Power.... Heat and light... Supervision Depreciation..... Property taxes and insurance Total manufacturing overhead costs.. $2,760,000 1,035,000 690,000 552,000 $2,160,000 810,000 540,000 522,000 138,000 656,250 1,982,500 751,250 138,000 716,250 1,982,500 751,250 $8,625,000 $7,560,000 Job MC-270 Job MC-275 Direct material costs $270,000 2,500 hours 3,200 hours $495,000 Direct labor-hours.. MC-389 MС-390 MC-397 MС-399 Direct materials. $67,000 1,740 hours 2,700 hours 6,100 hours Finished $43,200 $103,500 $28,900 1,300 hours In progress Direct labor-hours Job status Finished In progress
> Partially completed T-accounts and additional information for Cardinals, Inc., for the month of November appear on the following page: Additional information for November follows: • Labor wage rate was $30 per hour. •
> The following transactions occurred in January at Tarnsdale Fabricators, a manufacturer of custom tools: 1. Purchased $17,000 of materials. 2. Issued $16,800 in direct materials to the production department. 3. Issued $1,200 of supplies from the material
> Prepare a scattergraph based on the overhead and machine-hour data in Exercise 5-30. In Exercise 5-30 Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overh
> Apple, Inc. is developing a new product (the iWhatever). Managers at Apple are interested in estimating the impact of learning on the cost of producing the iWhatever. They plan to use data from previous products, such as the iPod and the iPad, to estimat
> Brighton Services repairs locomotive engines. It employs 100 full-time workers at $20 per hour. Despite operating at capacity, last year’s performance was a great disappointment to the managers. In total, 10 jobs were accepted and compl
> The following data are from the accounting records of Fremont Products for year 2: Units produced and sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,500 Total revenues and costs Sales revenue . . . . . . . . . . . . . . . . . . . . . .
> On September 1, two jobs were in process at Pete’s Patios. Details of the jobs follow: Materials Inventory on September 1 totaled $11,040, and $1,392 worth of materials was purchased during the month. Indirect materials of $192 were w
> For the month of January, Bay Accountants worked 2,000 hours for Lake Lumber, 600 hours for Marty’s Marina, and 1,000 hours for the State Prison System. Bay bills clients at $160 an hour; its labor costs are $60 an hour. A total of 4,000 hours were worke
> What are some important assumptions commonly made in CVP analysis. Do these assumptions impose serious limitations on the analysis? Why or why not?
> Youth Athletic Services (YAS) provides adult supervision for organized youth athletics. It has a president, William Mayes, and five employees. He and one of the other five employees manage all marketing and administrative duties. The remaining four emplo
> A new computer virus (AcctBGone) destroyed most of the company records at Backups RntUs. The computer experts at the company could recover only a few fragments of the company’s factory ledger for February as follows: Further investiga
> UCD Company uses a job costing accounting system for its production costs. A predetermined overhead rate based on direct labor-hours is used to apply overhead to individual jobs. An estimate of overhead costs at different volumes was prepared for the cur
> The following transactions occurred in June at Fast Wheels, Inc., a custom bicycle manufacturer: 1. Purchased $20,000 of materials. 2. Issued $1,000 of supplies from the materials inventory. 3. Purchased $25,000 of materials. 4. Paid for the materials pu
> Kansas Company uses a job costing accounting system for its production costs. The company uses a predetermined overhead rate based on direct labor-hours to apply overhead to individual jobs. The company prepared an estimate of overhead costs at different
> The following T-accounts represent November activity: Additional Data • Materials of $113,600 were purchased during the month, and the balance in the Materials Inventory account increased by $11,000. • Overhead is ap
> What is each component of the basic cost flow model? Describe each component.
> Simple regression results from the data of Adriana Corporation (Exercise 5-30) are as follows: Equation: Overhead = $217,610 + ($88.61 × Labor-hours) Statistical data Correlation coefficient . . . . . . . . . . . . . . . . . . . . . . . . . . .610 R2 .
> Terracotta, Inc., provides you with the following data for their single product: Sales price per unit ......................................................................................... $ 25 Fixed costs (per month): Selling, general, and administra
> The following T-accounts represent September activity: Required Compute the missing amounts indicated by the letters (a) through (i). Materials Inventory Work-in-Process Inventory BB (9/1) BB (9/1) 22,300 180,500 121,000 94,000 8,000 (a) 4,300 (b)
> The accounting records for Frankie’s Fixtures report the following production costs for the past year: Direct materials . . . . . . . . . . . . . . . . . . . . . $420,000 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . 350,000 Variable o
> Valley Corporation estimated that direct labor for the year would be 58,500 hours. Valley’s overhead (all fixed) is applied on the basis of direct labor-hours. The company estimates its overhead costs at $234,000. During the year, all overhead costs were
> Write out the profit equation and describe each term.
> Sydney Corporation estimated that machine-hours for the year would be 20,000 hours and overhead (all fixed) would be $80,000. Sydney applies its overhead on the basis of machine-hours. During the year, all overhead costs were exactly as planned ($80,000)
> Describe the predetermined overhead rate. What is the role of the predetermined overhead rate in product costing?
> What are the three criteria for the design of cost management systems?
> Is it possible for a company to have a two-stage allocation system but use, for example, direct labor-hours to allocate costs from all pools in the second stage? Will the resulting product costs be the same as if it used a single-stage system?
> The following transactions occurred in October at Pawnee Workshops, a custom manufacturer of furniture: 1. Purchased $16,000 of materials. 2. Issued $800 of supplies from the materials inventory. 3. Purchased $11,200 of materials. 4. Paid for the materia
> Refer to Exercise 2-44. In Exercise 2-44 Larcker Manufacturing’s cost accountant has provided you with the following information for January operations: Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21 per unit Fixed
> Place the number of the appropriate definition in the blank next to each concept. Concept ____ Period cost ____ Indirect cost ____ Fixed cost ____ Opportunity cost ____ Outlay cost ____ Direct cost ____ Expense ____ Cost ____ Variable cost ____ Full abs
> Identify a particular support function in a business school (the library, for example). Discuss possible allocation bases that might be used to allocate costs in the function to programs (degrees) or students.
> What is continuous flow processing? Give at least three examples of products that might use continuous flow processing.
> Ideally, what does an allocation base reflect between the overhead cost and the activity (production of a product, for example)?
> Old Tyme Soda produces one flavor of a popular local soft drink. It had no work in process on October 31 in its only inventory account. During November, Old Tyme started 10,000 barrels. Work in process on November 30 is 1,200 barrels. The production supe
> The following data apply to the provision of psychological testing services: Sales price per unit (1 unit = 1 test plus feedback to client) ...................... $ 600 Fixed costs (per month): Selling and administration .................................
> What is the purpose of having two manufacturing overhead accounts, the Manufacturing Overhead Control and Applied Manufacturing Overhead?
> Cray-Z Consultants provides management accounting advice to not-for-profit firms. It employs three levels of consultants, based on experience and education: partner, senior, and associate. When Cray-Z considers bidding on jobs, it estimates the costs usi
> Kim & Smith Refiners starts business on March 1. The following operations data are available for March for the one lubricant it produces: _________________________________Gallons Beginning inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Big City Bank processes the checks its customers write at Riverdale Operations Center (ROC). ROC processed 2,800,000 checks in September. It takes only seconds to process a check, so none are left unprocessed at the end of the day. ROC cost data from Sep
> The typical cost-volume-profit graph assumes that profi ts increase continually as volume increases. What are some of the factors that might prevent the increasing profits that are indicated when linear CVP analysis is employed?
> Pogue’s Pops produces a popular beverage. Operating data for October follow: Materials . . . . . . . . . . . . . . . . . . . $ 650,000 Labor . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 Manufacturing overhead . . . . . . 2,940,000 Pogue pro
> Why is control of materials important from a managerial planning perspective?
> Enviro Corporation manufactures a special liquid cleaner at its Green plant. Operating data for June follow: Materials . . . . . . . . . . . . . . . . . . . . $714,000 Labor . . . . . . . . . . . . . . . . . . . . . . . . . . 61,200 Manufacturing overhea
> ABC Consultants works for only two clients: a large, for-profit corporation and a small environmental not-for-profit agency. The fee charged for work is based on cost. In deciding how to allocate overhead, the CFO of ABC decides to use the base that allo
> Fill in the missing items for the following inventories: A. B Beginning balance.... Ending balance . $ 30,000 $ 260,000 $21,000 31,000 110,000 120,000 Transferred in. 18,000 Transferred out. 27,000 920,000
> Fill in the missing items for the following inventories: A B Beginning balance... $ 7,100 $156,000 $250,000 260,000 Ending balance 6,200 22,000 128,000 Transferred in Transferred out 270,000 280,000
> Fill in the missing items for the following inventories: A B. Beginning balance Ending balance . Transferred in... $51,000 48,000 $28,400 24,800 88,000 $ 67,000 56,000 . Transferred out. 57,000 170,000
> Assume that the following events occurred at a division of Generic Electric for March of the current year: 1. Purchased $45 million in direct materials. 2. Incurred direct labor costs of $24 million. 3. Determined that manufacturing overhead was $40.5 mi
> Why are cost flow diagrams useful in describing product costing systems?
> How are product costing and cost allocation related?
> Brunswick Parts is a small manufacturing firm located in eastern Canada. The company, founded in 1947, produces metal parts for many of the larger manufacturing firms located in both Canada and the United States. It prides itself on high quality and cust
> I don’t understand this. Last year [year 1], we decided to drop our highest-end Red model and only produce the Yellow and Green models, because the cost system indicated we were losing money on Red. Now, looking at the preliminary numbe
> Owl-Eye Radiologists (OR) does various types of diagnostic imaging. Radiologists perform tests using sophisticated equipment. OR’s management wants to compute the costs of performing tests for two different types of patients: those who
> What are the three categories of product cost in a manufacturing operation? Describe each element briefly.
> Mets Products produces baseball caps and T-shirts. Most of the production is done by machine. Data on operations and costs for October follow: Management asks the firm’s cost accountant to compute product costs. The accountant first a
> Refer to the data in Exercise 6-34. The president of Tiger Furnishings is confused about the differences in costs that result from using direct labor costs and machine-hours. In Exercise 6-34 Tiger Furnishings produces two models of cabinets for home th
> Are learning curves likely to affect materials costs per unit?
> Refer to the data in Exercise 6-34. Compute the individual product costs per unit assuming that Tiger Furnishings uses machine-hours to allocate overhead to the products. In Exercise 6-34 Tiger Furnishings produces two models of cabinets for home theate
> Star Buck, a coffee shop manager, has two major product lines—drinks and pastries. If Star allocates common costs on any objective basis discussed in this chapter, the drinks are profitable, but the pastries are not. Star is concerned that her boss will
> Assume that Limitless Labs, Inc., offers three basic drug-testing services for professional athletes. Here are its prices and costs: Variable costs include the labor costs of the medical technicians at the lab. Fixed costs of $390,000 per year include
> Larcker Manufacturing’s cost accountant has provided you with the following information for January operations: Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21 per unit Fixed manufacturing overhead costs . . . . . . .
> Refer to the data in Exercise 6-34. Compute the individual product costs per unit assuming that Tiger Furnishings uses direct labor costs to allocate overhead to the products. In Exercise 6-34 Tiger Furnishings produces two models of cabinets for home t
> For each of the following costs incurred in a manufacturing operation, indicate whether they are included in prime costs (P), conversion costs (C), or both (B): a. Property taxes on the factory. b. Direct materials used in the production process. c. Tran
> Organic Grounds produces two brands of coffee: Star and Bucks. The two coffees are produced in one factory using the same production process. The only difference between the two coffees is the cost of the unroasted coffee beans. The following data are av
> S. Lee Enterprises produces two models of lawn tractor: SL1 and SL2. The models are both produced in the company’s Louisville factory and go through identical assembly operations. The difference is in the quality (hence, cost) of the pa
> The Office Mart store in South Beach experienced the following events during the current year: 1. Incurred $400,000 in marketing costs. 2. Purchased $1,200,000 of merchandise. 3. Paid $40,000 for transportation-in costs. 4. Incurred $400,000 of administr
> Howrley-David, Inc., manufactures two models of motorcycles: the Fatboy and the Screamer. Both models are assembled in the same plant and require the same assembling operations. The difference between the models is the cost of materials. The following da
> Refer to the data in Exercise 6-34. Draw the cost flow diagram assuming that Tiger Furnishings uses direct labor costs to allocate overhead costs. In Exercise 6-34 Tiger Furnishings produces two models of cabinets for home theater components, the Basic
> Refer to the data in Exercise 6-34. Compute the predetermined overhead rate assuming that Tiger Furnishings uses machine-hours to allocate overhead costs. In Exercise 6-34 Tiger Furnishings produces two models of cabinets for home theater components, th
> Refer to the data in Exercise 6-34. Compute the predetermined overhead rate assuming that Tiger Furnishings uses direct labor costs to allocate overhead costs. In Exercise 6-34 Tiger Furnishings produces two models of cabinets for home theater component
> Tiger Furnishings produces two models of cabinets for home theater components, the Basic and the Dominator. Data on operations and costs for March follow: Required Compute the predetermined overhead rate assuming that Tiger Furnishings uses direct labo
> Rex Santos, a cost accountant, prepares a product profitability report for Jane Gates, the production manager. Much to Rex’s surprise, almost one-third of the company’s products are not profitable. He says, “Jane, it looks like we will have to drop one-t
> Give at least three applications of the learning phenomenon that were not mentioned in the text.
> Clovis Supply sells two models of saddles to retail outfitters—basic and custom. Basic saddles sell for $1,000 each and custom saddles sell for $1,500. The variable cost of a basic saddle is $600 and that of a custom saddle is $750. Annual fixed costs at
> What is the difference between outlay cost and opportunity cost?
> Oholics, Ltd., produces chocolate that it sells to candy makers. On April 1, it had no work-in-process inventory. It started production of 20,000 pounds of chocolate in April and completed production of 19,000 pounds. The costs of the resources used by O
> Opech, Inc., produces oil and ships it in a pipeline. On May 1, it had no work-in-process inventory. It started production of 300 million barrels of oil in May and shipped 270 million barrels in the pipeline. The costs of the resources used by Opech in M
> Why might two companies in the same industry have different cost systems?
> Van Goe produces paints. On January 1, it had no work-in-process inventory. It starts production of 300,000 gallons of paint in January and completes 240,000 gallons. The costs of the resources used by Van Goe in January consist of the following: Materia
> For each of the following costs incurred in a manufacturing firm, indicate whether the costs are most likely fixed (F) or variable (V) and whether they are most likely period costs (P) or product costs (M) under full absorption costing: a. Depreciation o
> What is the difference between R2 and adjusted R2?
> What is the difference between simple and multiple regression?
> Refer to Exercise 2-42. In Exercise 2-42 Karen Corporation has compiled the following information from the accounting system for the one product it sells: Sales price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $900 per unit Fixed
> Which method of cost estimation is not usually based primarily on company accounting records?
> What are the common methods of cost estimation?
> McDonald’s, the fast-food restaurant, is known for high employee turnover, high quality, and low costs. Using your knowledge of the learning phenomenon, how does McDonald’s get high quality and low costs when it has so much employee turnover?
> Sundial, Inc., produces two models of sunglasses: AU and NZ. The sunglasses have the following characteristics: The total fixed costs per year for the company are $2,208,000. Required a. What is the anticipated level of profits for the expected sales
> In doing cost analysis, you realize that there could be errors in the accounting records. For example, maintenance costs were recorded as zero in December. However, you know that maintenance was performed in December. You fi nd that maintenance costs wer
> Why do most companies use normal or standard costing? After all, actual costing gives the actual cost, so the firm could just wait until it knows what the cost will be.
> Custom Homebuilders (CH) designs and constructs high-end homes on large lots owned by customers. CH has developed several formulas, which it uses to quote jobs. These include costs for materials, labor, and other costs. These estimates are also dependent
> What are the characteristics of the following three costing systems: (a) Job costing, (b) Process costing, and (c) Operation costing?
> The dean of the Midstate University Business School is trying to understand the costs of the school’s two degree programs: Bachelors (BBA) and Masters (MBA). She has asked you for recommendations on how to allocate the costs of the following services, wh
> A friend comes to you with the following problem. “I provided my boss a cost equation using regression analysis. He was unhappy with the results. He told me to do more work and not return until I had a lower cost estimate for one of the variables—the num
> Alameda Tile sells products to many people remodeling their homes and thinks that they could profitably offer courses on tile installation, which might also increase the demand for their products. The basic installation course has the following (tentativ
> Consider the Business Application item “Using Statistical Analysis to Improve Profitability.” Pick a favorite sports team or recurring cultural event (musical concert, opera, play, rock concert, etc). What factors do you think are important in determinin
> A decision maker is interested in obtaining a cost estimate based on a regression equation. There are no problems with changes in prices, costs, technology, or relationships between activity and cost. Only one variable is to be used. What are some questi
> Some people claim that the scattergraph and the regression methods go hand in hand. Why?
> For each of the following statements, indicate whether it is true, false, or uncertain. Explain why. Give examples in your answer. a. A cost is something used up to produce revenues in a particular accounting period. b. The cost of direct materials is fi
> Why might an experienced executive prefer account analysis to statistical cost estimation methods?
> After doing an account analysis and giving the results to your boss, you discover an error in the data for 3 of the 24 months covered by your analysis. In 6 of the 24 months, your assistant had dropped 000 from the costs. Therefore, you thought $10,000,0
> Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales for the past five years. However, Ms. Luray, Eagle’s CEO, believes that to maintain the company’s present growth will require an aggressi
