Time period used to compute indirect cost rates.

Splash Manufacturing produces outdoor wading and slide pools. The company uses a normal costing system and
direct manufacturing labour hours. Most of the company’s production and sales occur in the first and second qua
one of its larger customers, Sotco Wholesale, due to large fluctuations in price. The owner of Splash has requeste
the second and third quarters. You have been provided the following budgeted information for the coming year:

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Pools manufactured and sold 565 490 245 100 1400

It takes 1 direct manufacturing labour-hour to make each pool. The actual direct material cost is Rs.140 per pool.
Rs.200 per hour. The budgeted variable manufacturing overhead rate is Rs.150 per direct manufacturing labour-h
are Rs. 122,500 each quarter:
Q1. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company alloc
budgeted manufacturing overhead rate determined for each quarter.
Q2. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company alloc
annual budgeted manufacturing overhead rate.
Q3. Splash Manufacturing prices its pools at manufacturing cost plus 30%. Why might Sotco Wholesale be seei
of the methods described in Question 1 and Question 2 would you recommend Splash use? Explain.

Solution Question 1 and Question 2

DML hours to make each pool = 1
Actual DML hour rate = 200 Pools manufactured and sold
Budgeted variable MOH per DML hour = 150 DML hours consumed (hours)
Fixed MOH cost (Rs.) = 122,500 Fixed MOH costs
Budgeted Fixed MOH cost per pool
Variable cost per unit
Actual direct material cost per pool = 140 Manufacturing cost per pool
Actual DML cost per pool = 200 Alternatively,
Budgeted variable MOH per pool = 150 Direct material costs
Variable cost per pool = 490 Direct manufacturing labour cos
Variable MOH costs
Budgeted fixed MOH costs
Total manufacturing costs
Manufacturing cost per pool

Q3. Sale price based on quarterly MOH

Sale price based on annual MOH cost

Sotco might be seeing large fluctuations in the prices of its pools because Splash is determining the budgeted MO
Splash should use the budgeted annual MOH rate because capacity decisions are based on longer annual periods
Prices should not vary based on quarterly fluctuations in production.
Splash could vary selling prices based on market conditions and demand for its pools. Hence, Splash should char
Pricing based on quarterly budgets would cause plunge to do the opposite -- to decrease rather than increase pric
 normal costing system and allocates manufacturing overhead on the basis of
r in the first and second quarters of the year. The company is in danger of losing
wner of Splash has requested an analysis of the manufacturing cost per unit in
mation for the coming year:

rial cost is Rs.140 per pool. The actual direct manufacturing labour rate is
rect manufacturing labour-hour. Budgeted fixed manufacturing overhead costs

ssuming the company allocates manufacturing overhead costs based on the

ssuming the company allocates manufacturing overhead costs based on an

ht Sotco Wholesale be seeing large fluctuations in the prices of pools? Which

plash use? Explain.

per unit Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total

565 490 245 100 1400
565 490 245 100 1,400
122,500 122,500 122,500 122,500 490,000
H cost per pool 216.81 250.00 500.00 1,225.00 350.00
490.00 490.00 490.00 490.00 490.00
706.81 740.00 990.00 1,715.00 840.00

140 79,100 68,600 34,300 14,000 196,000

200 113,000 98,000 49,000 20,000 280,000
150 84,750 73,500 36,750 15,000 210,000
122,500 122,500 122,500 122,500 490,000
399,350 362,600 242,550 171,500 1,176,000
706.81 740.00 990.00 1,715.00 840.00

quarterly MOH 918.86 962.00 1,287.00 2,229.50 1,092.00

annual MOH cost 1,092.00 1,092.00 1,092.00 1,092.00

etermining the budgeted MOH rates on the quarterly basis rather using annual fixed MOH cost.
ed on longer annual periods rather quarterly periods.

. Hence, Splash should charge higher prices in Q2 when demand for its pools is high.
se rather than increase prices!
 Direct manufacturing labour ₹ 840,000
Manufacturing overhead ₹ 504,000
Proportion 0.6
DML costs of all jobs = ₹ 800,000
Total DML hours of all jobs = 20,000 ==> DML cost per hr ₹ 40
Total charges to the Mfg OH control account for the year = ₹ 373,680
Usha prices on a cost-plus basis. It currently uses a guideline of cost plus 40% of cost.
(1) Prepare a detailed schedule showing the ending balances in inventories and the COGS (before considering
Show also the MOH allocated in these ending balances.
Solution:
The Work-in-Process inventory break down at the end of 2001 for Jobs 1768B and 1819C is:
Particulars Job 1768B Job 1819C
Direct materials (given) ₹ 44,000 ₹ 84,000
Direct manufacturing labor (given) 22,000 78,000
Manufacturing OH allocated 13,200 46,800
Total manufacturing costs were ₹ 79,200 ₹ 208,800

The summary account information is: at 60% of DML

Accounts Direct material DML MOH allocated
Work in progress ₹ 128,000 ₹ 100,000 ₹ 60,000
Finished goods (closing) 184,000 80,000 48,000
Cost of goods sold 2,208,000 620,000 372,000
Total 2,520,000 800,000 480,000

(2) Compute the under- or over-allocated MOH for the current year.
MOH allocated ₹ 480,000
MOH incurred 373,680
MOH overallocated = ₹ 106,320

(3) Prorate the amount computed in requirement 2 on the basis of:

(i) The ending balances (before proration) of WIP control, Finished Good control and the COGS.
Account Account balance Proration of 106,320
(before proration) overallocated to MOH
Work in progress
Job 1768B ₹ 79,200 2.08% 2,216
Job 1819C ₹ 208,800 5.49% 5,842
Finished goods (closing) 312,000 8.21% 8,729
Cost of goods sold 3,200,000 84.21% 89,533
Total 3,800,000 100.00% 106,320

(ii) The allocated OH amount (before proration) in the ending balances of WIP control, Finished Goods co
Account Account balance Allocated MOH in a/c balance
(before proration) (before proration)
Work in progress
Job 1768B ₹ 79,200 ₹ 13,200 2.75%
Job 1819C ₹ 208,800 ₹ 46,800 9.75%
Finished goods (closing) 312,000 48,000 10.00%
Cost of goods sold 3,200,000 372,000 77.50%
Total 3,800,000 480,000 90.25%
(4) Assume Usha decides to write off to Cost of Goods Sold any under- or overallocated manufacturing OH. W
operating income that would have resulted from the proration in requirement 3(a) and 3(b)?
The Cost of Goods Sold amount when the overallocated overhead is immediately written off to cost of goods sol
and `31,17,602 in 3(b). Thus with a lower cost of goods sold, there is a higher operating income.
Account Account balance Write-off to COGS of
(before proration) Rs.106,320 overallocated
Work in progress ₹ 288,000 ₹0
Finished goods (closing) 312,000 0
Cost of goods sold 3,200,000 106,320
Total 3,800,000 106,320

(5) Calculate the cost of job NO. 1819C if Usha Limited had used the adjusted allocation-rate approach to dis
The adjusted allocation rate approach would adjust the cost of job 1819C for the amount of manufacturing overh
For current year, MOH is overallocated to each job by 22.15% (Rs.1,06,320/Rs.4,80,000).
Hence, the cost of job 1819C would be decreased by 22.15% x MOH allocated to job 1819C = 22.15% x 46,800
Cost of Job 1819C would then appear as follows:
Direct material ₹ 84,000
DML 78,000
MOH allocated 46,800
Adjustment for MOH overallocated -10,366
Cost of job after adjustment for overallocation ₹ 198,434
 Job 1768B Job 1819C
Beginning inventories 0 0
Machine time (hours) 287 647
Direct materials (given) ₹ 44,000 ₹ 84,000
Direct manufacturing labor (given) 22,000 78,000

he COGS (before considering any under- or over-allocated MOH).

Revenue for current year = 5,401,360
Cost of goods sold for the year 3,200,000
Marketing costs for the year 1,715,740
Total
₹ 128,000 The ending FG inventory 312,000
100,000 of which, DML cost is 80,000
60,000
₹ 288,000
Direct Based on Based on
IS effect Planeed write-off total cost MOH cost
Total Sales 5,401,360 5,401,360 5,401,360 5,401,360
₹ 288,000 COGS 3,200,000 3,093,680 3,110,467 3,117,602
312,000 Gross profit 2,201,360 2,307,680 2,290,893 2,283,758
3,200,000 Mktg cost 1,715,740 1,715,740 1,715,740 1,715,740
3,800,000 EBIT 485,620 591,940 575,153 568,018
BS effect
WIP
Job 1768B ₹ 79,200 ₹ 79,200 ₹ 76,984 ₹ 76,276
Job 1819C 208,800 208,800 202,958 198,434
288,000 288,000 279,942 274,710
FG 312,000 312,000 303,271 301,368
WIP + FG 600,000 600,000 583,213 576,078
trol and the COGS.
year-end balance
(after proration)

76,984
202,958
303,271
3,110,467
3,693,680

P control, Finished Goods control and the Cost of Goods Sold.

H in a/c balance Proration of Rs.106,320 Account balance
overallocated MOH (after proration)

₹ 2,924 ₹ 76,276
₹ 10,366 ₹ 198,434
10,632 301,368
82,398 3,117,602
106,320 3,693,680
ocated manufacturing OH. Will the operating income be higher or lower than the
3(a) and 3(b)?
written off to cost of goods sold is `30,93,680 (see below) compared to `31,10,468 in 3(a)
rating income.
Account balance
(after proration)
₹ 288,000
312,000
3,093,680
3,693,680

ocation-rate approach to dispose off the under- or overallocated MOH in the current year.
mount of manufacturing overhead overallocated to it.

ob 1819C = 22.15% x 46,800 = Rs.10,366.20