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Topics: Costs, Cost, Resource allocation Pages: 7 (1084 words) Published: June 10, 2015
1. Predetermined overhead is a method of applying overhead to the products under job order costing system. In this method we estimate the overhead and estimate a base and calculate the predetermined rate as Estimated overhead/estimated base. Based on the usage of base, the overhead is applied to products. 2. The advantage is simplicity, the cost of each print is know and so overhead can easily be applied. The disadvantage is that the cost of print may not be a correct cost driver. As we have seen, unframed prints do not need much overhead while framed prints need more work to done and so using the print cost as cost driver may not allocated overhead costs correctly. 3. Predetermined overhead rate = Estimated Overhead/Estimated total cost of prints The estimated overhead is $375,200

The total cost of print = Number of units to be sold X cost of print The cost of prints is 80,000X12 + 15,000X16 + 7,000X20 = $1,340,000 Predetermined overhead rate is 375,200/1,340,000 = $0.28/$ of print cost This means that for each $ of print cost, $0.28 of overhead would be applied to the product. 4.

(a) Lance Armstrong unframed print (base cost of print $12). Print Cost12
Direct Labor ($0.2X10 minutes)2
Overhead (0.28X12)3.36
Total cost$17.36
(b) John Elway print in steel frame, no mat (base cost of print $16). Print Cost16
Frame and Glass 4
Direct Labor ($0.2X10+0.35X20) 9
Overhead (0.28 X 16)4.48
Total cost $33.48 (c) Lambeau Field print in wood frame with mat (base cost of print $20). Print Cost20
Frame and Glass6
Matting4
Direct Labor ($0.2X10+$0.35X30)12.50
Overhead ($0.28X20)5.60
Total cost$48.10
5. (a) Overhead allocated to unframed prints = 0.28 X 80,000 X12 = 268,800 (b) Overhead allocated to steel framed prints = 0.28 X 15,000 X 16 = 67,200 (c) Overhead allocated to wood framed prints = 0.28 X 7,000 X 20 = 39,200 (d) Percentage of overhead allocated to unframed prints = 268,800/375,200 = 71.6% 6. The amount is not reasonable. The percentage of overhead allocated to unframed print is much higher but the actual work on unframed prints is much less. 7. The problem would that since the cost is not correctly calculated, the price would not be correct and so selling products would have a problem in terms of margins. A unframed prints would be overpriced while framed prints would be under priced.

1. Activity costing would be appropriate
a. The company has three different products and each uses different resources and so ABC would given a better allocation b. ABC would relate costs to the activities and so would make cost control better.

2. The activity based rates are
Activity
Overhead
Driver
Total Activity
Activity Rate
Picking Prints
30,600
Number of Prints
102,000
0.30
per print
Inventory Selection and Management
91,700
Number of components per print item
131,000
0.70
per component
Website Optimization- Unframed
25,800
Number of prints at capacity
100,000
0.26
per print
Website Optimization- framed
103,200
Number of prints at capacity
25,000
4.13
per print
Framing and Matting costs
123,900
Number of components at capacity
59,000
2.10
per component

375,200

3. The cost using ABC is
In the first stage we allocate the overhead cost to products a. Lance Armstrong (unframed)
Activity
Rate
Usage
Overhead Allocated
Picking Prints
0.30
80,000
24,000
Inventory Selection and Management
0.70
80,000
56,000
Website Optimization- Unframed
0.26
80,000
20,640
Website Optimization- framed
4.13
-
-
Framing and Matting costs...
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