Mary E. Jones
Case 1: Greetings Inc.: Job Order Costing
1. Define and explain the meaning of a predetermined manufacturing overhead rate that is applied in a job-order costing system? A predetermined overhead rate is the rate used to apply manufacturing overhead to work-in-process inventory. The predetermined overhead rate is calculated before the period begins. The first step is to estimate the amount of the activity base that will be required to support operations in the upcoming period. The second step is to estimate the total manufacturing cost at that level of activity. The third step is to compute the predetermined overhead rate by dividing the estimated total manufacturing overhead costs by the estimated total amount of cost driver or activity base. Common activity bases used in the calculation include direct labor costs, direct labor hours, or machine hours.
2. What are the advantages and disadvantages of using the cost of each print as a manufacturing overhead cost driver? The advantage to this approach is that each Greetings store, through the Wall Décor website, can offer a wide variety of prints, yet the individual Greetings stores do not have to hold any inventory of prints or framing materials. About the only cost to the individual store is the computer and high-speed line connection to Wall Décor. The advantage to the customer is the wide variety of unframed and framed print items that can be conveniently purchased and delivered to the home or business, or to a third party as a gift. The disadvantages to this approach are that Wall Décor would be required to have multiple matting colors and frame styles, which also requires considerable warehouse space. It also requires skilled employees to assemble the products and more expensive packaging procedures.
3. Using the information on page CA-5, compute and interpret the predetermined manufacturing overhead rate for Wall Décor....
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