Reference no: EM13492529

Short Answer

1.       What are the primary reasons for using a predetermined overhead rate?

2.       Why is variable costing not used extensively in external reporting?

3.       How can a company product both variable and absorption costing information from a single accounting system?

4.       Why is absorption costing not used for CVP analysis?

5.       What are three significant cost drivers that have been disregarded by traditional product costing system?

Problem

1.       Dynamic Designs, Inc. has developed a new design to produce track shoes tht are used in cross-country races. The company's shoe design is innovative in that the insole is made of a product that provides a greater cushion and adapts more easily to a runner's foot. Management estimates expected annual capacity to be 80,000 units; overhead is applied using expected annual capacity. The company's cost accountant predicts the following current year activities and related costs:

Standard unit variable manufacturing costs                                                      $140

Variable unit selling expense                                                                            $6

Fixed manufacturing overhead                                                                      $2,400,000

Fixed selling and administrative expenses                                                          $164,000

Selling price per unit                                                                                       $225

Units of sales                                                                                               70,000

Units of production                                                                                        81,000

Units in beginning inventory                                                                            15,000

Other than any possible under- or overapplied fixed overhead, management expects no variances from the previous manufacturing costs. Under- or overapplied fixed overhead is to be written off to Cost of Goods Sold.

Required:

1.       Determine the amount of under- or overapplied fixed overhead using (a) variable costing and (b) absorption costing:

2.       Prepare projected income statements using (a) variable costing and (b) absorption costing.

3.       Reconcile the incomes derived in part 2

2.       Falcon Crest Corporation manufactures two brands of wine: Regular and Extra Rich. Below is the current year's production date for the company

                                                                                    Regular                                          Extra Rich

Direct material in pounds                                                      225,000                               110,000

Direct labor hours                                                               45,000                                  65,000

Machine hours                                                                    36,000                                   24,000

Number of setups                                                                1,450                                     2,375

Number of gallons produced                                                  450,000                                  90,000

The 335,000 pounds of matrial had a total cost of $753,750. Direct labor is $21 per hour. The company has total overhead production costs of $2,212,125.

a.       If Falcon Crest Corporation applies factory overhead using direct labor hours, compute the total production cost and the unit cost for each brand.

b.       If Falcon Crest Corporation applies factory overhead using machine hours, compute the total production cost and the unit cost for each brand.

c.       Assume that Falcon Crest Corporation has established the following activity centers, cost drivers, and costs to apply factory overhead.

Cost Pool                                             Cost Driver                                     Cost                                      Volume

Equipment Maintenance               # of machine hours                        $450,000                           60,000

Production Setup                            # of setups                                $248,625                          3,825

Material Handling                           Pounds of Materials                       $703,500                          335,000

Storage Costs                                    # of gallons produced               $810,000                          540,000

Compute the total cost and the unit cost for each brand.

d.   Explain why the unit cost for each model is different across the three methods of overhead application. How can this information benefit the organization?