Quiz 4: Process Costing

Process Costing Journal Entries Arizona Brick Corporation produces bricks in two processing departments-Molding and Firing. Information relating to the company's operations in March follows: a. Raw materials were issued for use in production: Molding Department, $28,000: and Firing Department, $5,000. b. Direct labor costs were incurred: Molding Department. $18,000; and Firing Department, $5,000. c. Manufacturing overhead was applied: Molding Department, $24,000; and Firing Department, $37,000. d. Unfired, molded bricks were transferred from the Molding Department to the Firing Department. According to the company's process costing system, the cost of the unfired, molded bricks was $67,000. e. Finished bricks were transferred from the Firing Department to the finished goods warehouse. According to the company's process costing system, the cost of the finished bricks was $108,000. f. Finished bricks were sold to customers. According to the company's process costing system, the cost of the finished bricks sold was $106,000. Required: Prepare journal entries to record items (a) through (f) above.

Under what conditions would it be appropriate to use a process costing system

Computation of Equivalent Units-Weighted-Average Method Lindex Company uses a process costing system. The following data are available for one department for October: The department started 390,000 units into production during the month and transferred 410.000 completed units to the next department. Required: Compute the equivalent units of production for October, assuming that the company uses the weighted-average method of accounting for units and costs.

In what ways are job-order and process costing similar

Cost Per Equivalent Unit-Weighted-Average Method Billinstaff Industries uses the weighted-average method in its process costing system. Data for the Assembly Department for May appear below: Required: 1. Compute the cost per equivalent unit for materials, for labor, and for overhead. 2. Compute the total cost per equivalent whole unit.

Why is cost accumulation simpler in a process costing system than it is in a job-order costing system

Applying Costs to Units-Weighted-Average Method Data concerning a recent period's activity in the Prep Department, the first processing department in a company that uses process costing, appear below: A total of 1,300 units were completed and transferred to the next processing department during the period. Required: Compute the cost of the units transferred to the next department during the period and the cost of ending work in process inventory.

How many Work in Process accounts are maintained in a company that uses process costing

Cost Reconciliation Report-Weighted-Average Method Lech-Zurs Bakerie Corporation uses a process costing system. The Baking Department is one of the processing departments in its apple strudel manufacturing facility. In July in the Baking Department, the cost of beginning work in process inventory was $4,830, the cost of ending work in process inventory was $1,120, and the cost added to production was $25,650. Required: Prepare a cost reconciliation report for the Baking Department for July.

Assume that a company has two processing departments-Mixing and Firing. Prepare a journal entry to show a transfer of work in process from the Mixing Department to the Firing Department.

Equivalent Units and Cost per Equivalent Unit-Weighted-Average Method Kalox, Inc., manufactures an antacid product that passes through two departments. Data for May for the first department follow: The beginning work in process inventory was 80% complete with respect to materials and 75% complete with respect to labor and overhead. The ending work in process inventory was 60% complete with respect to materials and 20% complete with respect to labor and overhead. Required: Assume that the company uses the weighted-average method of accounting for units and costs. 1. Compute the equivalent units for May's activity for the first department. 2. Determine the costs per equivalent unit for May.

Assume that a company has two processing departments-Mixing followed by Firing. Explain what costs might be added to the Firing Department's Work in Process account during a period.

Comprehensive Exercise; Second Production Department-Weighted-Average Method Papyrutech Corporation produces fine papers in three production departments-Pulping, Drying, and Finishing. In the Pulping Department, raw materials such as wood fiber and rag cotton are mechanically and chemically treated to separate their fibers. The result is a thick slurry of fibers. In the Drying Department, the wet fibers transferred from the Pulping Department are laid down on porous webs, pressed to remove excess liquid, and dried in ovens. In the Finishing Department, the dried paper is coated, cut, and spooled onto reels. The company uses the weighted-average method in its process costing system. Data for October for the Drying Department follow: No materials are added in the Drying Department. Pulping cost represents the costs of the wet fibers transferred in from the Pulping Department. Wet fiber is processed in the Drying Department in batches; each unit in the above table is a batch, and one batch of wet fibers produces a set amount of dried paper that is passed on to the Finishing Department. Required: 1. Determine the equivalent units for October for pulping and conversion. 2. Compute the costs per equivalent unit for October for pulping and conversion. 3. Determine the total cost of ending work in process inventory and the total cost of units transferred to the Finishing Department in October. 4. Prepare a cost reconciliation report for the Drying Department for October.

What is meant by the term equivalent units of production when the weighted-average method is used

Process Costing Journal Entries Schneider Brot is a bread-baking company located in Aachen, Germany, near the Dutch border. The company uses a process costing system for its single product-a popular pumpernickel bread. Schneider Brot has two processing departments-Mixing and Baking. The T-accounts below show the flow of costs through the two departments in April (all amounts are in the currency euros): Required: Prepare journal entries showing the flow of costs through the two processing departments during April.

Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and gold. The medallions are identical except for the materials used in their manufacture. What costing system would you advise the company to use

Cost Assignment; Cost Reconciliation-Weighted-Average Method Kenton Industrial Corporation uses the weighted-average method in its process costing system. During April, the Baker Assembly Department completed its processing of 18.000 units and transferred them to the next department. The cost of beginning inventory and the costs added during April amounted to $855,000 in total. The ending inventory in April consisted of 1.500 units, which were 909c complete with respect to materials and 40% complete with respect to labor and overhead. The costs per equivalent unit for the month were as follows: Required: 1. Compute the equivalent units of materials, labor, and overhead in the ending inventory for the month. 2. Compute the cost of ending inventory and of the units transferred to the next department for April. 3. Prepare a cost reconciliation for April. (Note: You will not be able to break the cost to be accounted for into the cost of beginning inventory and costs added during the month. )

Equivalent Units-Weighted-Average Method Societe Clemeau. a company located in Lyons. France, manufactures cement for the construction industry. Data relating to the kilograms of cement processed through the Mixing Department, the first department in the production process, are provided below for May: Required: 1. Compute the number of kilograms of cement completed and transferred out of the Mixing Department during May. 2. Compute the equivalent units of production for materials and for conversion for May.

Equivalent Units and Cost per Equivalent Unit-Weighted-Average Method Solex Company produces a high-quality insulation material that passes through two production processes. Data for June for the first process follow: Required: 1. Assume that the company uses the weighted-average method of accounting for units and costs. Determine the equivalent units for June for the first process. 2. Compute the costs per equivalent unit for June for the first process. 3. Determine the total cost of ending work in process inventory and the total cost of units transferred to the next process in June.

Equivalent Units-Weighted-Average Method Gulf Fisheries, Inc.. processes tuna for various distributors. Two departments are involved-Cleaning and Packing. Data relating to pounds of tuna processed in the Cleaning Department during May are given below: *Labor and overhead only. A total of 480.000 pounds of tuna were started into processing during Mav. All materials are added at the beginning of processing in the Cleaning Department. Required: Compute the equivalent units for May for both materials and labor and overhead assuming that the company uses the weighted-average method of accounting for units. Problems Connect

Comprehensive Problem Weighted-Average Method The PVC Company manufactures a high-quality plastic pipe that goes through three processing stages prior to completion. Information on work in the first department, Cooking, is given below for May: The company uses the weighted-average method. Required: 1. Compute the equivalent units of production. 2. Compute the costs per equivalent unit for the month. 3. Determine the cost of ending work in process inventory and of the units transferred out to the next department. 4. Prepare a cost reconciliation report for the month.

Comprehensive Problem-Weighted-Average Method Honeybutter. Inc.. manufactures a product that goes through two departments prior to completion-the Mixing Department followed by the Packaging Department. The follow ing information js available about work in the first department, the Mixing Department, during June. Required: Assume that the company uses the weighted-average method. 1. Determine the equivalent units for June for the Mixing Department. 2. Compute the costs per equivalent unit for June for the Mixing Department. 3. Determine the total cost of ending work in process inventory and the total cost of units transferred to the Packaging Department. 4. Prepare a cost reconciliation report for the mixing department for June.

Analysis of Work in Process T-account-Weighted-Average Method Brady Products manufactures a silicone paste wax that goes through three processing departments Cracking. Blending, and Packing. All raw materials are introduced at the start of work in the Cracking Department. The Work in Process T-account for the Cracking Department for a recent month is given below: The May 1 work in process inventory consisted of 35,000 pounds with $43,400 in materials cost and $20,300 in conversion cost. The May 1 work in process inventory was 100% complete with respect to materials and 80% complete with respect to conversion. During May, 280.000 pounds were started into production. The May 31 inventory consisted of 45.000 pounds that were 100% complete with respect to materials and 60% complete with respect to conversion. The company uses the weighted-average method to account for units and costs. Required: 1. Determine the equivalent units of production for May. 2. Determine the costs per equivalent unit for May. 3. Determine the cost of the units completed and transferred to the Blending Department during May.

Cost Flows Nature's Way. Inc., keeps one of its production facilities busy making a perfume called Essence de la Vache. The perfume goes through two processing departments: Blending and Bottling. The following incomplete Work in Process account is provided for the Blending Department for March: The $32,800 beginning inventory in the Blending Department consisted of the following elements: materials, $8,000; direct labor. $4,000: and overhead applied, $20,800. Costs incurred during March in the Bottling Department were: materials used. $45,000: direct labor. SI7.000: and overhead cost applied to production, $108,000. Required: 1. Prepare journal entries to record the costs incurred in both the Blending Department and Bottling Department during March. Key your entries to items (a) through (g) below: a. Raw materials were issued for use in production. b. Direct labor costs were incurred. c. Manufacturing overhead costs for the entire factory were incurred. $596,000. (Credit Accounts Payable and use a single Manufacturing Overhead control account for the entire factory.)d. Manufacturing overhead was applied to production using a predetermined overhead rate. e. Units that were complete with respect to processing in the Blending Department were transferred to the Bottling Department, $722,000. f. Units that were complete with respect to processing in the Bottling Department were transferred to Finished Goods, $920,000. g. Completed units were sold on account for $1,400,000. The cost of goods sold was $890,000. 2. Post the journal entries from (1) above to T-accounts. The following account balances existed at the beginning of March. (The beginning balance in the Blending Department's Work in Process account is given above.) After posting the entries to the T-accounts, find the ending balances in the inventory accounts and the manufacturing overhead account.

Comprehensive Problem; Second Production Department-Weighted-Average Method Bohemian Links Inc. produces sausages in three production departments-Mixing, Casing and Curing, and Packaging. In the Mixing Department, meats are prepared and ground and then mixed with spices. The spiced meat mixture is then transferred to the Casing and Curing Department, where the mixture is force-fed into casings and then hung and cured in climate-controlled smoking chambers. In the Packaging Department, the cured sausages are sorted, packed, and labeled. The -0mpany uses the weighted-average method in its process costing system. Data for April for the (j ,sin2 and Curing Department follow: Mixing cost represents the costs of the spiced meat mixture transferred in from the Mixing Department. The spiced meat mixture is processed in the Casing and Curing Department in batches; each unit in the above table is a batch, and one batch of spiced meat mixture produces a set amount of..abases that are passed on to the Packaging Department. During April. 60 batches (i.e.. units) were completed and transferred to the Packaging Department. Required: 1. Determine the equivalent units for April for mixing, materials, and conversion. Do not round off your computations. 2. Compute the costs per equivalent unit for April for mixing, materials, and conversion. 3. Determine the total cost of ending work in process inventory and the total cost of units transferred to the Packaging Department in April. 4. Prepare a cost reconciliation report for the Casing and Curing Department for April.

Interpreting a Report-Weighted-Average Method Bell Computers. Ltd.. located in Liverpool, England, assembles a standardized personal computer from parts it purchases from various suppliers. The production process consists of several steps, starting with assembly of the "mother" circuit board, which contains the central processing unit. This assembly takes place in the CPU Assembly Department. The company recently hired a new accountant who prepared the following report for the department for May using the weighted- average method: The company's management would like some additional information about May's operation in the CPU Assembly Department. (The currency in England is the pound, which is denoted by the symbol £.)Required: 1. How many units were started and completed during May 2. What were the equivalent units for May for materials and conversion costs 3. What were the costs per equivalent unit for May The following additional data are available concerning the department's costs: 4. Verify the accountant's ending work in process inventory figure (£8,200) given in the report. 5. The new manager of the CPU Assembly Department was asked to estimate the incremental cost of processing an additional 1,000 units through the department. He took the unit cost for an equivalent whole unit you computed in (3) above and multiplied this figure by 1,000. Will this method yield a valid estimate of incremental cost Explain.

Ethics and the Manager; Understanding the impact of Percentage Completion on Profit Thad Kostowski and Carol Lee are production managers in the Appliances Division of Mesger Corporation, which has several dozen plants scattered in locations throughout the world. Carol manages the plant located in Kansas City, Missouri, while Thad manages the plant in Roseville. Oregon. Production managers are paid a salary and get an additional bonus equal to 10% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company's annual report has been prepared and issued to stockholders. Late in February. Carol received a phone call from Thad that went like this: Thad: How's it going. Carol Carol : Fine, Thad. How's it going with you Thad: Great! I just got the preliminary profit figures for the division for last year and we are within $62,500 of making the year's target profits. All we have to do is to pull a few strings, and we'll be over the top! Carol: What do you mean Thad: Well, one thing that would be easy to change is your estimate of the percentage completion of your ending work in process inventories. Carol: I don't know if I should do that. Thad. Those percentage completion numbers are supplied by Jean Jackson, my lead supervisor. 1 have always trusted her to provide us with good estimates. Besides. I have already sent the percentage completion figures to the corporate headquarters. Thad: You can always tell them there was a mistake. Think about it. Carol. All of us managers are doing as much as we can to pull this bonus out of the hat. You may not want the bonus check, but the rest of us sure could use it. The final processing department in Carol's production facility began the year with no work in process inventories. During the year. 270,000 units were transferred in front the prior processing department and 250,000 units were completed and sold. Costs transferred in from the prior department totaled $49,221,000. No materials are added in the final processing department. A total of $ 16,320,000 of conversion cost was incurred in the final processing department during the year. Required: 1. Jean Jackson estimated that the units in ending inventory in the final processing department were 25% complete with respect to the conversion costs of the final processing department. If this estimate of the percentage completion is used, what would be the cost of goods sold for the year 2. Does Thad Kostowski want the estimated percentage completion to be increased or decreased Explain why. 3. What percentage completion figure would result in increasing the reported net operating income by $62,500 over the net operating income that would be reported if the 25% figure were used'.' 4. Do you think Carol Lee should go along with the request to alter estimates of the percentage completion Why or why not

Second Department-Weighted-Average Method Durall Company manufactures a plastic gasket that is used in automobile engines. The gaskets go through three processing departments: Mixing, Forming, and Stamping. The company's accountant (who is very inexperienced) has prepared a summary of production and costs for the Forming Department for October as follows: After mulling over the data above, Durall's president commented, "I can't understand what's happening here. Despite a concentrated effort at cost reduction, our unit cost actually went up in the Forming Department last month. With that kind of performance, year-end bonuses are out of the question for the people in that department." The company uses the weighted-average method in its process costing. Required: 1. Prepare a report for the Forming Department for October showing how much cost should have been assigned to the units completed and transferred to the Stamping Department and to the ending work in process inventory. 2. Explain to the president why the unit cost appearing on the report prepared by the accountant is so high.

Computation of Equivalent Units-FIFO Method Refer to the data for Lindex Company in Exercise 4-2. Required: Compute the equivalent units of production for October assuming that the company uses the FIFO method for accounting for units and costs.

Cost per Equivalent Unit-FIFO Method Resprin Company uses the FIFO method in its process costing system. Data for the Assembly Department for May appear below: 1 Required: Compute the cost per equivalent unit for materials, for labor, for overhead, and in total.

Applying Costs to Units-FIFO Method Data concerning a recent period's activity in the Mixing Department, the first processing department in a company that uses process costing, appear below: A total of 8,000 units were completed and transferred to the next processing department during the period. Beginning work in process inventory consisted of 1,000 units and ending work in process inventory consisted of 2.000 units. Required: Using the FIFO method, compute the cost of the units transferred to the next department during the period and the cost of ending work in process inventory.

Cost Reconciliation Report-FIFO Method Kippinger Baking Corporation uses a process costing system in its large-scale baking operations. The Mixing Department is one of the company's processing departments. In the Mixing Department in August, the cost of beginning work in process inventory was S4.230. the cost of ending work in process inventory was 53,870, and the cost added to production was $46,320. Required: Prepare a cost reconciliation report for the Mixing Department for August.

Equivalent Units-FIFO Method Refer to the data for Gulf Fisheries. Inc.. in Exercise 4-12. Required: Compute the equivalent units for May for the Cleaning Department, assuming that the company- uses the FIFO method of accounting for units.

Equivalent Units-FIFO Method Refer to the data for Societe Clemeau in Exercise 4-10. Required: 1. Compute the number of kilograms of cement completed and transferred out of the Mixing Department during May. 2. Compute the equivalent units of production for materials and for conversion for May.

Equivalent Units and Cost per Equivalent Unit-FIFO Method Refer to the data for Kalox, Inc., in Exercise 4-6. Required: Assume that the company uses the FIFO method of accounting for units and costs. 1. Compute the equivalent units for May's activity for the first processing department. 2. Determine the costs per equivalent unit for May.

Computation of Equivalent Units-FIFO Method QualCon. inc.. produces wine bottles for vintners in a process that starts in the Melt and Mold Department. Data concerning that department's operations in the most recent period appear below: Required: QualCon uses the FIFO method in its process costing system. Compute the equivalent units of production for the period for the Melt and Mold Department.

Equivalent Units; Applying Costs-FIFO Method Krollon Company uses the FIFO method in its process costing system. The following data are for the most recent month of operations in one of the company's processing departments: According to the company's costing system, the cost of beginning inventory was $7,886. of which $4,897 was for materials and the remainder was for conversion cost. The costs added during the month amounted to $181,652. The costs per equivalent unit for the month were: Required: 1. Compute the total cost per equivalent unit for the month. 2. Compute the equivalent units of material and of conversion costs in the ending inventory. , 3. Compute the equivalent units of material and of conversion costs that were required to complete the beginning inventory. 4. Determine the number of units started and completed during the month. 5. Determine the costs of ending inventory and units transferred out.

E q u iva l e nt U nits; App lying C osts- F IFO Met hod Reutter Company manufactures a single product and uses process costing. The company's product goes through two processing departments. Etching and Wiring. The following activity was recorded in the Etching Department during July: Materials are added at several stages during the etching process. The company uses the FIFO method. Required: 1. Determine the equivalent units for July for the Etching Department. 2. Compute the costs per equivalent unit for July for the Etching Department. 3. Determine the total cost of ending work in process inventory and the total cost of units transferred to the next process for the Etching Department in July. 4. Prepare a cost reconciliation report for the Etching Department for July.

Equivalent Units, Cost per Equivalent Unit, Applying Costs-FIFO Method Refer to the data for the Mixing Department in Honeybutter, Inc., in Problem 4-14. Assume that the company uses the FIFO method rather than the weighted-average method in its process costing system. Required: 1. Determine the equivalent units for June for the Mixing Department. 2. Compute the costs per equivalent unit for June for the Mixing Department. 3. Determine the total cost of ending work in process inventory and the total cost of units transferred to the next process for the Mixing Department in June. 4. Prepare a cost reconciliation report for the Mixing Department for June.

Second Department-FIFO Method Refer to the data for Durall Company in Case 4-20. Assume that the company uses the FIFO method in its process costing system. Required: 1. Prepare a report for the Forming Department for October showing how much cost should have been assigned to the units completed and transferred to the Stamping Department and to the ending work in process inventory. 2. Assume that in order to remain competitive, the company undertook a major cost-cutting program during October. Would the effects of this cost-cutting program tend to show up more under the weighted-average method or under the FIFO method Explain your answer. Most large organizations have both operating departments-and senice departments. The central purposes of the organization are carried out in the operating departments. In contrast, service departments do not directly engage in operating activities. Instead, they provide services or assistance to the operating departments. Examples of operating departments include the Surgery Department at Mt. Sinai Hospital, the Geography Department at the University of Washington, the Marketing Department at Allstate Insurance Company, and production departments at manufacturers such as Mitsubishi, Hewlett-Packard, and Michelin. In process costing, the processing departments are all operating departments. Examples of service departments include Cafeteria, Internal Auditing, Human Resources, Cost Accounting, and Purchasing. The overhead costs of operating departments commonly include allocations of costs from the service departments. To the extent that service department costs are classified as production costs, they should he included in unit product costs and thus, must be allocated to operating departments in a process costing system. Three approaches are used to allocate the costs of serv ice departments to other departments: the direct method, the step-down method, and the reciprocal method. These three methods are discussed in the following sections. However, before getting into the details of these methods, we will discuss interdepartmental senices.

Direct Method Ignatius College has provided the following data to be used in its service department cost allocations: Required: Using the direct method, allocate the costs of the service departments to the two operating departments. Allocate the costs of the Administration Department on the basis of student credit-hours and the costs of the Physical Plant Services Department on the basis of space occupied.

Step-Down Method University District Co-op, a whole foods grocery and coffee shop, has provided the following data to be used in its service department cost allocations: Required: Using the step-down method, allocate the costs of the service departments to the two operating departments. Allocate the costs of the Administration Department first on the basis of employee- hours and then the costs of the Building Services Department on the basis of space occupied.

Step-Down Method Arbon Company has three service departments and two operating departments. Selected data concerning the five departments are presented below: The company allocates service department costs by the step-down method in the following order: Administrative (number of employees), Janitorial (space occupied), and Equipment Maintenance (machine-hours). Required: Using the step-down method, allocate the service department costs to the operating departments.

Direct Method Refer to the data for Arbon Company in Exercise 4B-3. Required: Assuming that the company uses the direct method rather than the step-down method to allocate service department costs, how much cost would be assigned to each operating department

Step-Down Method Pleasant View Hospital has three service departments-Food Services, Administrative Services, and X-ray Services. The costs of these departments are allocated by the step-down method, using the allocation bases and in the order shown below: Estimated cost and operating data for all departments in the hospital for the forthcoming month are presented in the following table: All billing in the hospital is done through the Outpatient Clinic, OB Care, or General Hospital. The hospital's administrator wants the costs of the three service departments allocated to these three billing centers. Required: Prepare the cost allocation desired by the hospital administrator. Include under each billing center the direct costs of the center as well as the costs allocated from the service departments.

Step-Down Method versus Direct Method; Predetermined Overhead Rates Petah, Ltd., of Tel Aviv, Israel, has budgeted costs in its various departments as follows for the coming year: The Israeli currency is the shekel, denoted by . The company allocates service department costs to other departments, in the order listed below: Stamping and Assembly are operating departments: the other departments are service departments. Factor)' Administration is allocated on the basis of labor-hours; Custodial Services 011 the basis of square meters occupied: Personnel on the basis of number of employees; and Maintenance on the basis of machine-hours. Required: 1. Allocate service department costs to consuming departments by the step-down method. Then compute predetermined overhead rates in the operating departments, using a machine-hours basis in Stamping and a direct labor-hours basis in Assembly. 2. Repeat (1) above, this time using the direct method. Again, compute predetermined overhead rates in Stamping and Assembly. 3. Assume that the company doesn't bother with allocating service department costs but simply computes a single plant wide overhead rate based on total overhead costs (both service department and operating department costs) divided by total direct labor-hours. Compute the plant- wide overhead rate. 4. Suppose a job requires machine and labor time as follows: Using the overhead rates computed in (1), (2), and (3) above, compute the amount of overhead cost that would be assigned to the job if the overhead rates were developed using the step- down method, the direct method, and the plantwide method. (Round allocations to the nearest whole shekel.)

Step-Down Method versus Direct Method "I can't understand what's happening here," said Mike Holt, president of Severson Products, Inc. "We always seem to bid too high on jobs that require a lot of labor time in the Finishing Department, and we always seem to get every job we bid on that requires a lot of machine time in the Milling Department. Yet we don't seem to be making much money on those Milling Department jobs. I wonder if the problem is in our overhead rates." Severson Products manufactures high-quality wood products to customers' specifications. Some jobs take a large amount of machine work in the Milling Department, and other jobs take a large amount of hand finishing work in the Finishing Department. In addition to the Milling and Finishing departments, the company has three service departments. The costs of these service departments are allocated to other departments in the order listed on the following page. (For each service department, use the most appropriate allocation base.) Budgeted overhead costs in each department for the current year are as follows: "This represents the amount of cost subsidized by the company. Because of its simplicity, the company has always used the direct method to allocate service department costs to the two operating departments. Required: 1. Using the step-down method, allocate service department costs to the consuming departments. Then compute predetermined overhead rates in the operating departments for the current year using machine-hours as the allocation base in the Milling Department and direct labor-hours as the allocation base in the Finishing Department. 2. Repeat (1) above, this time using the direct method. Again compute predetermined overhead rates in the Milling and Finishing Departments. 3. Assume that during the current year the company bids on a job that requires machine and labor time as follows: a. Determine the amount of overhead that would be assigned to the job if the company used the overhead rates developed in (1) above. Then determine the amount of overhead that would be assigned to the job if the company used the overhead rates developed in (2) above. b. Explain to the president why the step-down method provides a better basis for computing predetermined overhead rates than the direct method. Although sales have remained unchanged at Si00.000. the sales mix is exactly the reverse of what it was in Exhibit 5-4. with the bulk of the sales now coming from the less profitable Le Louvre DVD. Notice that this shift in the sales mix has caused both the overall CM ratio and total profits to drop sharply from the prior month even though total sales are the same. The overall CM ratio has dropped from 45% in September to only 30% in October, and net operating income has dropped from $18,000 to only S3.000. In addition, with the drop in the overall CM ratio, the company's break-even point is no longer $60,000 in sales. Because the company is now realizing less average contribution margin per dollar of sales, it takes more sales to cover the same amount of fixed costs. Thus, the break-even point has increased from $60,000 to $90,000 in sales per year. In preparing a break-even analysis, an assumption must be made concerning the sales mix. Usually the assumption is that it will not change. However, if the sales mix is expected to change, then this must be explicitly considered in any CVP computations.