Question

On page 135 of the book there is a discussion about the use of predetermined overhead rates for allocating manufacturing overhead costs to individual jobs. A two part question:

1. explain as the shop operations manager responsible for the actual production of products, what factors from your specific floor manager position can or did you influence through the month that may have affected actual costs versus planned/budgeted costs to be different.

2. What is one example of cost that you could not control?

lasing Manufacturing Overhead old 40 for its tread- -tory As a final step. Life count. Since manufacturing ove Life Fitness must deal with the balance in the manufacturing overhead the company uses a predetermined manufacturing overhead rate to allocate overhead to individual jobs, the total amount allocated to jobs will most the amount of manufacturing overhead actually incurred. how this plays out in the Manufacturing Overhead Taccount: cords likely differ from the Let's see how this plas 1. All manufac the Manufacturing anufacturing overhead costs incurred by Life Fitness nufacturing Overhead account. These debits total $25,000 of actual manufac- Te Fitness were recorded as debits to ruring overhead incurred. other hand, all manufacturing overhead allocated to specific jobs ($8,000 + l was recorded as credits to the Manufacturing Overhead account: 2. On the other $16,000) was recor and her 00 Indirect material Manufacturing Overhead (ACTUAL) ALLOCATED to Jobs ► 2,000 24,000 13,000 10,000 1,000 $8,000 allocated to Job 603 Indirect labor $16,000 allocated to Job 604 Other indirect manufacturing costs which means that man More manufacturing Manufacturing Overhea financial statements, it mus of the inventory pr leaves a debit balance of $1,000 in the Manufacturing Overhead account, ans that manufacturing overhead has been underallocated during the month. anufacturing overhead costs were incurred than were allocated to jobs. Since facturing Overhead is a temporary account not shown on any of the company's statements, it must be closed out (zeroed out) at the end of the period. Since most he inventory produced during the period has been sold, Life Fitness will close the bal- in Manufacturing Overhead to Cost of Goods Sold as follows: 1,000 Cost of Goods Sold Manufacturing Overhead (to close the manufacturing overhead account) 1,000 As a result of this entry, 1) the Manufacturing Overhead account now has a zero bal- ance, and 2) the balance in Cost of Goods Sold has increased to correct for the fact that the jobs had been undercosted during the period. Manufacturing Overhead 2,000 24,000 13,000 10,000 1,000 Cost of Goods Sold 154,400 Adjustment for Underallocation 1,000 155,400 01

Answer 1

1. It is a case of Under-allocation of Manufacturing overhead thus reflecting an excess of Actual cost incurred vis-a-vis the Standard output produced. This is primarily due to less than optimal use of resources generating the output units.

To avoid the under-allocation a more efficient mechanism should be adopted. This can mean increase in productivity for Indirect Materials, Indirect Labour and Machine hours. The higher Production/Output rate can absorb a higher amount of overheads, thus eliminating the Under-allocation.

2. There are several factors that cannot be influenced by the Operation Manager on the floor. One such example is the Depreciation of Machinery included in the Manufacturing overhead. This being a period cost is fixed per period.