Managerial Cost Accouting Homework

In cost accounting, costs can be classified as being direct or indirect. In practice, some costs can fall into either category.

Required:

Identify three costs that can be either a direct or an indirect cost. For each cost identified, explain what factors are relevant in the decision to treat the cost as direct or indirect. BA 421 – 2014-15 Term V Mid Term Exam Page 3

Oskar Meyer Plastics is a manufacturer of custom plastic toys. Production is capital-intensive, and as of late some potential new customers have avoided using Oskar Meyer Plastics because there aren’t enough machines to keep up with the demand. For the fiscal year July 2015-June 2016, they are budgeting sales of $30,000,000 and purchases as follows:

Oskar Meyer Plastics is starting a new project to reduce its inventory costs. The budgeted inventory figures for Oskar Meyer Plastics are as follows:

Oskar Meyer Plastics accounts for overhead using a job cost system. The raw materials (plastic pellets) are measured by the pound and are traceable to the job used. Overhead is currently allocated based on the number of direct labor hours used on a job. Currently, the average rate of pay for production floor workers is $29/hour, including payroll taxes and benefits.

Some members of management believe that it would be better to allocate overhead costs based on the amount of machine-hours used in each job instead of direct labor hours. In an average year, machines will be available for 20,000 machine-hours.

Other members of management would like to use activity-based costing to allocate the overhead. An initial cost study shows that each customer order incurs $1,100 in costs and each production run costs $750 in setup costs. There are 1,200 orders and 2,640 production runs in BA 421 – 2014-15 Term V Mid Term Exam Page 4

the average year. In the proposed activity-based costing system, all remaining overhead costs would be allocated by the amount of machine-hours used.

Oskar Meyer Plastics excludes income taxes in its overhead calculation. It also excludes all selling, general, and administrative expenses from overhead calculations.

Actual information from four jobs produced in August 2015 are as follows:

Required:

1. Prepare an income statement and statement of goods manufactured using the budgeted revenues and costs. Assume an corporate income tax rate of 40%.

2. Determine the following:

a. The total amount of overhead to apply to jobs, assuming the use of a normal costing system

b. The overhead rate, under the current method of direct-labor hours

c. The overhead rate, assuming that Oskar Meyer Plastics switches to using machine-hours as its allocation base

d. The overhead rate per machine hour under activity-based costing

3. Using the rate calculated in requirement #2(d), determine the following:

a. Overhead costs for Jobs 80, 81, 82, and 83

b. Profit for Jobs 80, 81, 82, and 83

4. What advantages and disadvantages exist for each of the three allocation methods that Oskar Meyer Plastics is using? Which method would you recommend, and why?