Question

Dakota Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Dakota allocates manufacturing overhead costs using direct manufacturing labor costs. Dakota provides the following information:Budget for 2017 Actual Results for 2017Direct material costs $2,250,000 $2,150,000Direct manufacturing labor costs 1,700,000 1,650,000Manufacturing overhead costs 3,060,000 3,217,500Required1. Compute the actual and budgeted manufacturing overhead rates for 2017.2. During March, the job-cost record for Job 626 contained the following information:Direct materials used $55,000Direct manufacturing labor costs $45,000Compute the cost of Job 626 using (a) actual costing and (b) normal costing.3. At the end of 2017, compute the under- or overallocated overhead under normal costing. Why is there no under- or overallocated overhead under actual costing?4. Why might managers at Dakota Products prefer to use normal costing?

Answer 1

Answer:

1.Overhead Rate = Overhead Costs/ Direct Labor Costs

Budget Overhead Rate = 3060,000/ 1700,000= 1.8

Actual Overhead Rate = 3217,500/ 1650,000= 1.895

Dakota Products

                                Budget for 2017                  Actual Results for 2017

Direct material costs $2,250,000                          $2,150,000

Direct manufacturing labor costs 1,700,000          1,650,000

Manufacturing overhead costs 3,060,000            3,217,500

2.During March, the job-cost record for Job 626

Direct materials used $55,000

Direct manufacturing labor costs $45,000

Actual Overhead  = 1.895 * $45,000= $ 85295.45

Normal Overhead = 1.8 * 45,000= $ 81,000

2.The  actual cost of Job 626 =$ 55,000+ $ 45,000+ $ 85295.45= $ 185,295.45

2.The  normal cost of Job 626 =$ 55,000+ $ 45,000+ $ 81,000= $181,000

3. Under- or Overallocated Overhead under normal costing=

     Budgeted Overhead - Actual Overhead= 3,060,000 -  3,217,500=

157,500 underapplied

There is no under- or overallocated overhead under actual costing because  overhead costs actually are at their actual costs. There is no difference between calculated and actual.

4. Normal Costing would give an idea before 2017 and it is easier to make decision prior to changes. Actual results can only be obtained after the process. Managers find it easier to pre plan . So normal costing is adoptable.