Question

CW 1 Actual costing, normal costing, manufacturing overhead. Destin Products uses a -job-costing system with two direct-cost categories (direct materials and direct man- ufacturing labour) and one manufacturing overhead cost poll. Destin allocates man- ufacturing overhead costs using direct manufacturing labour costs. Destin provides the following information: Budget for Actuals for Year 2021 Year 2021 Direct manufacturing labour costs Direct manufacturing overhead costs Direct materials costs $1,000,000 $1,750,000 $1,500,000 $980,000 $1,862,000 $1,450,000 REQUIRED 1. Compute the actual and budgeted manufacturing overhead rates for 2021 2. During March, the cost record for Job 626 contained the following: Direct materials used $40,000 Direct manufacturing labour costs $30,000 Compute the cost of Job 626 using (a) an actual-costing system and (b) a normal- costing system. 3. At the end of 2021 compute the under-or overallocated manufacturing overhead under Destin's normal costing system. Why is there no under- or overallocated overhead under Destin's actual-costing system? 4. Comment briefly on the advantages and disadvantages of actual-costing and normal-costing systems. Preview

Answer 1

1 Actual overhead rate for 2021 Actual manufacturing overheads Actual Direct labor costs Actual overhead absorption rate $1,862,000 $980,000 190% of DL cost Budgeted overhead rate for 2021 Budgeted manufacturing overheads Budgeted Direct labor costs Budgeted overhead rate $1,750,000 $1,000,000 175% of DL cost 2 Cost of Job 626 Actual costing System Direct material $40,000 Direct labor $30,000 Manufacturing overhead applied $57,000 Cost of Job 626 $127,000 Normal Costing system $40,000 $30,000 $52,500 see working below $122,500 Working notes Manufacturing overhead applied Direct labor Overhead absorption rate Cost of Job 626 Actual costing System $30,000 190% $57,000 Normal Costing system $30,000) 175% $52,500 3 Actual Direct labor costs Overhead absorption rate Manufacturing overhead applied $980,000 175% $1,715,000 Actual manufacturing overhead Under-applied manufacturing overheads $1,862,000 $147,000 Actual costing system uses overhead absorption rate based on actual overheads and actual direct labor cost Hence there is no over or under-absorption at the end of the year since not estimates involved 4 Actual-costing system Advantages: No over or under absorption of overheads helps in allocating actual incurred cost Disadvantages: It leads to fluctuation of product costing Setting product prices is an issue Normal-costing system Advantages: Helps in setting product cost with consistency and uniformity Helps in decision making like submitting bids, quotations, etc Disadvantages: Need to calculate over-under absorption of overheads Allocation of over or under-absorbed overheads is an issue