Reference no: EM131874693

QUESTION - Galvin Corporation produces customized machine parts which are produced in small batch sizes (job lots). The engineering department designs the parts; once the design specifications are established, the equipment can be set up for batch production. After the completion of each batch, a sample is inspected for quality defects. In addition to engineering, set up, machining and inspection, there are two additional activities: providing utilities and providing space throughout the plant. Galvin uses a joborder costing system and allocates overhead using machine hours as a base. Total overhead costs and machine hours for 2012 were estimated to be $1,282,000 and 50,000 respectively.

Required

1. Compute Galvin's predetermined overhead allocation rate for 2012.

2. Galvin's two main jobs, 2012-901 and 2012-1126, consumed 15,000 and 10,000 machine hours respectively. What is the overhead amount that should be assigned to the two jobs? Assume that Job 2012-901 consisted of 300 units and Job 2012-1126 consisted of 100 units. Compute the overhead cost per unit for each job.

3. At the end of 2012, the company recorded the following actual data:

Overhead costs: $1,300,280

Machine hours: 52,000 hours

Compute the under-/over-applied overhead for 2012. Assume that Galvin Corporation closes the under-/over-applied overhead to Cost of Goods Sold. Prepare the appropriate journal entry to record this transaction.

4. Glenda Klein, Galvin's controller, recently returned from a conference on activity-based costing and decided to try it out using 2012 data. She collected the following information:

Details of overhead costs estimated at the beginning of 2012

Activity	Activity measure	Activity cost	Activity volume
Engineering	Engineering hours	$250,000	10,000 hours
Setups	Number of setups	224,500	400 setups
Machining	Machine hours	500,000	50,000 hours
Inspection	Inspection hours	200,000	5,000 hours
Providing space	Machine hours	62,500	50,000 hours
Providing utilities	Machine hours	45,000	50,000 hours
Total		$1,282,000

Resource consumption for Galvin Corporation's two main jobs, 2012-901 and 2012-1126

Activity measure	Resource consumption
	Job 2012-901	Job 2012-1126
Engineering	2,000 engineering hours	3,000 engineering hours
Setups	80 setups	120 setups
Matching	15,000 machine hours	10,000 machine hours
Inspection	1,000 inspection hours	1,500 inspection hours
Units produced	300	100

Compute the predetermined overhead allocation rates for the individual activities using activity based costing.

5. How much overhead amount should Glenda assign to jobs 2012-901 and 2012-1126 (both in total and per unit)?

6. Explain why there is a difference in the overhead costs under the two different methods.

7. Glenda wondered whether the use of activity-based costing will result in ZERO under- or overapplied overhead amounts. What would your response be to Glenda?