Simon Construction Company uses a job costing system.

| February 25, 2017

Question

Question 1.

Simon Construction Company uses a job costing system. It applies overhead to jobs at a rate of 60 percent of direct labor cost. On August 1, the balance in the Work-in-Process Inventory account was $34,000. It had the following jobs in process on August 1:
Job No.
478 (irrigation project)……………………………………………….. $19,600
479 (parking lot construction)………………………………………. 9,400
480 (street repair) ………………………………………………………. 5,000
Total …………………………………………………………………………. $34,000
Selected transactions for the month of August follow:
(1) Materials issued: Job 480, $600; Job 481, $4,200; Job 482, $2,600; indirect materials, $400.
(2) Paul assigned labor costs as follows: Job 478, $300; Job 479, $2,600; Job 480, $7,800; Job 481, $5,900; Job 482, $1,700; indirect labor, $800.
(3) It applies overhead for August to jobs using an overhead rate of 60 percent of direct labor costs. Actual overhead for the month was $12,000 including the indirect materials and indirect labor noted in (1) and (2) above.
(4) Paul completed Jobs 478 and 479 in August.
Paul’s Construction Company’s management is concerned that costs are higher than anticipated. Management had expected the cost of completed jobs to be as follows:
Job 478: $20,000, when complete
Job 479: $13,000, when complete
Job 480: $15,000, as of August 31
Job 481: $10,000, as of August 31
Job 482: $4,000, as of August 31
Compare the actual job costs to management’s expected costs, and report your results.

Question 2.

Jake Miille has just joined the Ciudad Juarez factory (text example) as the new production manager. He was pleased to see the company uses activity-based costing. Miille believes he can reduce production costs if he reduces the number of machine setups. He has spent the past month working with purchasing and sales to better coordinate raw material arrivals and the anticipated demand for the company’s products. In March, he plans to produce 1,000 mountain bikes and 200 racing bikes. Miille believes that with his efficient production scheduling he can reduce the number of setups for both mountain and racing bikes by about 50 percent.
a. Refer to Exhibit 3.5. Compute the amount of overhead allocated to each product line— mountain bikes and racing bikes—assuming annual setups are reduced by approximately 50 percent. Assume the number of machine setups in March is seven setups for mountain bikes and 15 setups for racing bikes. Assume the overhead costs of setting up machines decrease proportionately with the reduction in the number of setups; thus, the setup rate remains at $2,000 per setup. All other overhead costs will remain the same.
b. What information did activity-based costing provide that enabled Jake Miille to pursue reducing overhead costs? In general, what are the advantages of activity-based costing over the traditional volume-based allocation methods? What are the disadvantages?

Question 3.

DuraDisc Corporation produces two types of compact discs: standard and high-grade. The standard CDs are used primarily in computer drives and are designed for data storage rather than accurate sound reproduction. The company only recently began producing the higher-quality, high-grade model to enter the lucrative musicrecording market. Since the new product was introduced, profits have seen only a modest increase. Management expected a significant profit increase related to rapidly growing sales of the high-grade discs. Management believes the accounting system may not be accurately allocating costs to products. Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on the direct labor costs in the products. Last year%u2019s manufacturing overhead was $880,000, based on production of 320,000 standard CDs and 120,000 high-grade CDs. Selling prices last year averaged $3.60 per standard disc and $5.80 per high-grade disc. Direct labor and direct materials costs for last year were as follows:

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Management believes the following three activities cause overhead costs. The cost drivers and related costs are as follows:
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a. How much of the overhead will be assigned to each product if the three cost drivers are used to allocate overhead? What would be the cost per unit produced for each product?
b. How much of the overhead would have been assigned to each product if direct labor cost had been used to allocate overhead? What would have been the total cost per unit produced for each product?
c. How might the results explain why profits did not increase as much as management expected?

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