Complete the following exercise.
In December 20X2, the Cardoso Company established its predetermined overhead rate for jobs produced during the year 20X3 by using the following cost predictions:
Overhead costs: $750,000
Direct labor costs: $625,000.
At year-end 20X3, the company's records show that actual overhead costs for the year were $830,000. Actual direct labor cost had been assigned to jobs as follows:
Jobs completed and sold……................. $513,750
Jobs in goods in progress inventory……… $ 68,500
Jobs in finished goods inventory………… $102,750
Total actual direct labor costs…………… $685,000
Required:
Using the information above, determine the pre-determined overhead rate for the year 20X3.
Determine when the overhead is over applied or under applied, the amount during the year, and prepare the adjusting entry to allocate any over or under applied overhead the cost of goods sold.
Create a report between 200 and 300 words in length for leadership. The topic is the state of this company. Where do you see a problem regarding the company? Make some suggestions if there are areas you feel need to be further investigated.
To determine the predetermined overhead rate for the year 20X3, we need to divide the estimated overhead costs by the estimated direct labor costs. In this case, the estimated overhead costs are given as $750,000, and the estimated direct labor costs are $625,000.
The predetermined overhead rate can be calculated as follows:
Predetermined overhead rate = Estimated overhead costs / Estimated direct labor costs
Predetermined overhead rate = $750,000 / $625,000
Predetermined overhead rate = 1.2
So, the predetermined overhead rate for the year 20X3 is 1.2.
To determine if the overhead is over applied or under applied, we need to compare the actual overhead costs to the applied overhead costs. In this case, the actual overhead costs are given as $830,000 and the applied overhead costs can be calculated by multiplying the predetermined overhead rate by the actual direct labor costs.
Applied overhead costs = Predetermined overhead rate * Actual direct labor costs
Applied overhead costs = 1.2 * $685,000
Applied overhead costs = $822,000
Now, we can calculate the over applied or under applied overhead by subtracting the applied overhead costs from the actual overhead costs.
Over applied or under applied overhead = Actual overhead costs - Applied overhead costs
Over applied or under applied overhead = $830,000 - $822,000
Over applied or under applied overhead = $8,000 over applied
Since the overhead is over applied by $8,000, we need to make an adjusting entry to allocate this amount to the cost of goods sold. The adjusting entry will debit the cost of goods sold account by $8,000 and credit the overhead account by the same amount.
Now, to create a report on the state of the company, we need to analyze the information provided. From the given data, it appears that the company's actual overhead costs exceeded the estimated overhead costs for the year. This indicates that the company may not have accurately estimated its overhead costs, resulting in over application of overhead.
To address this problem, the company should conduct a thorough review of its cost predictions and revise them accordingly. It is important to accurately estimate overhead costs to ensure proper allocation and avoid over or under application. The company may also need to evaluate its cost control measures and identify any areas where unnecessary expenses are being incurred.
Furthermore, the company should closely monitor its actual overhead costs throughout the year and compare them with the estimated overhead costs on a regular basis. Regular reviews and adjustments will help in improving cost accuracy and ensuring that the company's financial records correctly reflect the actual expenses incurred.
Additionally, the company should consider conducting a comprehensive analysis of its production processes and identify any inefficiencies that may be contributing to higher overhead costs. By streamlining operations and optimizing resource utilization, the company can potentially reduce its overhead expenses and improve overall profitability.
In conclusion, the problem regarding the company lies in the inaccurately estimated overhead costs, leading to over application of overhead. The company should focus on improving its cost prediction methods, regularly monitoring actual overhead costs, identifying inefficiencies in production processes, and implementing measures to control expenses. These steps will help enhance the company's financial performance and ensure a more accurate representation of its state.