Question

PROBLEM 2 Use the following information to answer questions a. and ). Suppose a company expects $15,000,000 in overhead during the year and expects to use 100,000 machine hours. Product X Lises 4,000 machine hours, Product Y uses 2.000 machine hours, and Product Z uses 3,000 machine hours during the month of January, which is the company's first month in business. a. How much overhead will be applied to each product during January assuming that the company uses machine hours as the cost driver? b. Now, assume that all units that were started in January were finished in January. 60% of the units of Product X were sold during January, 40% of the units of Y were sold during January, and 25% of the units of Product Z were sold during January. How much of the overhead applied will be in inventory and how much will be in cost of goods sold?

Answer 1

Given Information:

Expected overheads: $ 15,000,000

Expected machine hours: 100,000 machine hours

Solution:

(a) Expected overhead per machine hour = Total Expected overhead

                                                                                   Total machine hours

                                                                              

                                                                            =            $ 15,000,000

                                                                                   100,000 machine hours

                                                                            =        $ 150 per machine hours

Overhead to be applied to each product for the month of January assuming machine hour as the cost driver is as follows:

Particulars	Product X	Product Y	Product Z
Machine hours used by each product during the month of January (Machine hours)	4000	2000	3000
Expected Overhead rate per machine hour (as calculated above) ($)	150	150	150
Total overheads applied for each product during the month of January ($)	600,000 (4000*150)	300,000 (2000*150)	450,000 (3000*150)

(b) Calculation for identifying how much of the overheads applied will be in the inventory and how much will be in the cost of goods sold. Is as follows

Overhead’s applied which will be in the Inventory-

Particulars	Product X	Product Y	Product Z
Total overheads applied for each product during the month of January [Refer above] ($)	600,000	300,000	450,000
Percentage of units of each product not sold during the month of January (%)	40	60	75
Applied overheads which will be in the cost of goods sold ($)	240,000 (600,000 * 40%)	180,000 (300,000*60%)	337,500 (450,000*75%)

Overhead’s applied which will be in the cost of goods sold

Particulars	Product X	Product Y	Product Z
Total overheads applied for each product during the month of January [Refer above] ($)	600,000	300,000	450,000
Percentage of units of each product sold during the month of January (%)	60	40	25
Applied overheads which will be in the cost of goods sold ($)	360,000 (600,000 * 60%)	120,000 (300,000*40%)	112,500 (450,000*25%)