Accounting Management: Cost Classification and Ethics

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TASK 1: Cost Classification and Ethics
The Sorrel Pharmaceuticals Corporation manufactures a variety of drugs that are marketed internationally. Inventories on May 31 and June 30 were as follows:
May 31June 30
Materials Inventory$354,100$327,400
Work in Process Inventory112,600116,400
Finished Goods Inventory138,500142,800
Purchases of materials for June were $142,600. Direct labor costs were incurred and computed on the basis of 27,000 hours at $8 per hour. Actual overhead costs incurred in June were as follows: operating supplies used, $5,700; janitorial and materials handling labor, $38,100; employee benefits $110,800; heat, light, and power, $50,000; factory depreciation, $8,400; property taxes, $8,000; and expired portion of insurance premiums, $12,000. Net sales for June were $992,700. Selling and administrative expenses were $165,000. Prepare a statement of cost of goods manufactured for month ended June 30. ANSWER:

A statement of cost of goods manufactured for month ended June 30 follows: •Direct materials = Beginning raw materials inventory + raw materials in purchased – ending raw materials inventory
= 354,100 + 142,600 – 327,400
 Direct materials: $169,300
Direct labor:27,000 x 8 = $216,000
Manufacturing overhead:
Operating supplies used= $ 5,700
Janitorial and materials handing labor= $38,100
Employee benefits=$11,800
Heat, light and power=$50,000
Factory depreciation=$8,400
Property Taxes= $8,000
Expired portion of insurance premiums=$12,000
 Manufacturing overhead:$233,000
Total manufacturing costs = Direct materials + Direct labor + Manufacturing overhead = $169,300 + $216,000 + $ 233,000
= $ 618,300
Cost of goods manufactured = Beginning work in process inventory + Total manufacturing costs – Ending work in process inventory
= $ 112,600 + $ 618,300 + $ 116,400
= $ 614,500
TASK 2: Comparing Traditional and ABC Production Costs
The controller for Drisau Company is trying to decide whether or not the company should switch from the traditional approach of overhead cost allocation to the activity-based costing approach. She has gathered the following overhead data on the company’s two products: estimated total overhead, $180,000 (consisting of the $70,000 for setups and $110,000 for assembly); estimated direct labor hours (Product A, 6,000; Product B, 3,000); estimated number of setups (Product A, 750; Product B, 1,250); estimated number of machine hours used in assembly (Product A, 3,000; Product B, 5,000); estimated number of units produced (Product A, 500; Product B, 200). ANSWER:

1.Using the traditional approach:
a.Calculate the predetermined overhead rate using direct labor hours as the cost driver Total Direct labor-hour = 6,000 + 3,000 = 9,000 direct labor hour Predetermined overhead cost rate = Total cost overhead / Total direct labor hour = $180,000/9000 = $20 per direct labor hour Predetermined overhead cost rate is $20 per direct labor hour b.Computer the amount of overhead costs applied to each product in total and per unit. Total overhead costs applied to A product = $20 x 6000 = $ 120,000 Overhead costs applied per A unit = $ 120,000/50= $ 240 per unit Total overhead costs applied to B product = $20 x 3000= $ 60,000 Overhead costs applied per B unit = $ 60,000 /200 = $ 300 per unit 2 Using the activity-based approach:

a. Calculated the overhead cost pool rates for each pool.
Total Direct labor-hour = 6,000 + 3,000 = 9,000 direct labor hour Predetermined overhead cost rate = Total cost overhead / Total direct labor hour = $180,000/9000 = $20 per direct labor hour

b. Compute the amount of overhead costs applied to each product by cost pool, in total, and per unit. Overhead...
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