Q41CP - Horngren'S Financial And Managerial Accounting

Question

This problem continues the Piedmont Computer Company situation from Chapter 16. Piedmont Computer Company uses a job order costing system in which each batch manufactured is a different job. Piedmont Computer Company assigns direct materials and direct labor to each job. The company assigns labor costs at \(25 per hour. It allocates manufacturing overhead to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs. 

At the beginning of 2020, the controller prepared the following budget:

Manufacturing overhead	\)290,000
Direct labor costs	\(1,160,000

In November 2020, Piedmont Computer Company worked on several jobs.

Records for two jobs appear here:

	Job 721	Job 722
Direct labor hours	780 hours	60 hours
Direct material	\)23,400	$2,500

Requirements

1. Compute Piedmont Computer Company’s predetermined overhead allocation rate for 2020.

2. Compute the total cost of each job.

3. Why does Piedmont assign costs to jobs?

Step-by-Step Solution

Answer

1. The predetermined overhead allocation rate for 2020 is 25%. 

 

2. The total cost of Job no. 721 is $47,775, and Job no. 722 is $4,375. 

 

3. The cost is assigned to the job because the cost incurred while manufacturing the product is required to be recovered by selling the product. Hence, Piedmont design assigns costs to the job to identify its price.

Meaning of Manufacturing Overhead Cost

Manufacturing overhead cost refers to the cost of business that includes all the indirect expenses incurred while manufacturing the products. It is included in the total cost of the final product manufactured by the company

Predetermined overhead allocation rate for 2018

$$\begin{gathered} \text{Predtermined overhead allocation rate} = \frac{\text{Total estimated manufacturing overhead costs}}{\text{Budgeted direct labor costs}} \\ =\frac{\$290,000}{\$1,160,000} \end{gathered}$$

                                                                         = 25%

Total cost of Job 721 and Job 722

Particulars	Tasty co-op	Maynard Chocolates
Direct labor cost	$19,500 (780 hr x $25)	$1,500 (60 hr x $25)
Direct material cost	23,400	2,500
Manufacturing overhead  (25% of direct labor cost)	4,875	375
Total cost	47,775	4,375

Assignment of cost to the jobs

The cost incurred while manufacturing the products should be assigned to the job to determine the product’s sales price. It is so because the company wants to earn above the manufacturing costs.