The predetermined overhead rate is used for estimating the manufacturing overhead cost because companies cannot assign the actual overhead cost to specific job. From the case, Wall Décor uses a traditional job-order costing system. The actual costs of direct materials and direct labor are charged to its specific jobs which are unframed prints, steel-framed with no matting prints, and wood-framed with matting prints.
As mentioned, predetermined overhead rate is based on estimates rather than actual results. This is because the predetermined overhead rate is computed before the period begins and is used to apply overhead cost throughout the period. Wall Décor calculates this rate as total estimated manufacturing overhead cost divided by total estimated cost of prints. Then, companies use predetermined overhead rates to allocate manufacturing overhead costs to each unframed or framed print, based on the costs of the prints. In conclusion, Wall Décor can assign this rate to a specific job to determine total cost of each specific job when it is completed.
2. What are the advantages and disadvantages of using the cost of each print as a manufacturing overhead cost driver?
From the case, Wall Décor calculates predeterminated overhead rate as total estimated manufacturing overhead cost divided by total estimated cost of prints. The advantage of using the cost of each print as a manufacturing overhead cost driver is that the base is easily to determined because we can calculate the cost of the prints.
There are some disadvantages of using the cost of each print as a manufacturing overhead cost driver. Manufacturing overhead is an indirect cost. This means that it is either impossible or difficult to trace these costs to a particular product. The actual overhead incurred may not relate to the cost of print for example, an unframed print would get a higher share of overhead cost due to its higher volume comparing to the framed print that require much effort but still get a lower share of overhead because its lower volume.
3.Using information next page. Compute and interpret the predetermined manufacturing overhead rate for Wall Décor.
Wall Décor allocates its overhead on the basis of cost of print. The predetermined overhead rate is 28%, computed as follows.
The predetermined overhead rate = Total expected manufacturing overhead
Total expected cost of prints
The expected manufacturing overhead is $375,200
The total expected cost of print = number of expected units sold × cost of print
The cost of prints is equal to (80,000×12) + (15,000×16) + (7,000×20) = $1,340,000
Thus, the predetermined overhead rate is 375,200/1,340,000 = 28% or $0.28 per cost of print.
4. Compute the product cost for the following three items.
(a) Lance Armstrong unframed print (base cost of print $12)
Print Cost $12.00
Direct Labor ($12×10/60 minutes) 2.00
Manufacturing Overhead (12×28%) 3.36
Total product cost = $17.36
(b) John Elway print in steel frame, no mat (base cost of print $16)
Print Cost $16.00
Frame and Glass 4.00
Direct Labor ($12×10/60 minutes+$21×20/60 minutes) 9.00
Manufacturing Overhead (16×28%) 4.48
Total product cost = $33.48
(c) Lambeau Field print in wood frame with mat (base cost of print $20)
Print Cost $20.00
Frame and Glass 6.00
Direct Labor ($12×10/60 minutes+$21×30/60 minutes) 12.50
Manufacturing Overhead (20×28%) 5.60
Total product cost = $48.10
5. (a) How much of the total of overhead cost is expected to allocated to (a) unframed prints?
Total overhead cost allocated to unframed prints = 0.28 × 80,000 × 12 = 268,800
(b) How much of the total of overhead cost is expected to allocated to (b) steel framed prints?
Total overhead cost...