Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 59

Product costing — manufacturing overhead Deckhand Accessories, Inc., manufactures women’s boating shoes. Manufacturing overhead is assigned to production on a machine-hour basis. For 2010, it was estimated that manufacturing overhead would total $974,400 and that 67,200 machine hours would be used.

Required:

a.Calculate the predetermined overhead application rate that will be used for absorption costing purposes during 2010.

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b. During May, 11,720 pairs of shoes were made. Raw materials costing $56,936 were used, and direct labor costs totaled $57,600. A total of 5,680 machine hours were worked during the month of May. Calculate the cost per pair of shoes made during May.

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c. At the end of May, 3,156 pairs of shoes were in ending inventory. Calculate the cost of the ending inventory and the cost of the shoes sold during May.

Step 1 of 2

a.

The cost for manufacturing a product includes raw material, direct labor and overhead costs. Determining the raw materials and direct labor costs is normally easy. The amount of raw material and direct labor used can be determined from the raw material inventory usage records and time records for direct labor workers. But the overheads cost cannot determined very easily. Normally the overheads are assigned to products based on a measure of activity such as machine hours, direct labor hours.

In the present case, the overhead cost is assigned to product based on machine hours. The predetermined overhead application rate is $18.50 per machine hour. The machine hours expected to be used for 2013 are 12,000 hours.

Calculate the overhead cost to be incurred

The overhead cost to be incurred for 12,000 units is determined by multiplying the number of machine hours used with the overhead application rate.

The overhead cost to be incurred for 12,000 machine hours is $222,000.