Rocky Mountain Outfitters manufactures cowboy boots. Information related to a recent production period is as follows:
Estimated manufacturing overhead, 2004 $240,000
Estimated machine hours, 2004 12,000
Direct labor cost, September $ 8,000
Direct materials cost, September $5,000
Supervisors salary, September $3,000
Factory rent, September $1,800
Factory utilities, September $800
Indirect materials cost, September $2,000
Machine hours worked, September 400
During September, 500 pairs of boots were produced.
a. Using actual costing, what is the unit cost of one pair of boots produced during September?
b. Using normal costing, with machine hours as the activity base, what is the unit cost of one pair of boots produced during sept?
c. If normal costing is used was manufacturing overhead over- or underapplied during September.? by how much?
d. What might have caused the amount of overhead applied to be different from the actual amount?
e. Why would managers at rocky mountain choose to use normal costing rather than actual costing.
a. To calculate the unit cost of one pair of boots produced during September using actual costing, we need to consider the direct materials cost, direct labor cost, and the actual manufacturing overhead.
Unit Cost = (Direct Materials Cost + Direct Labor Cost + Manufacturing Overhead) / Number of Units Produced
Since the question mentions that 500 pairs of boots were produced, we can calculate it as follows:
Unit Cost = ($5,000 + $8,000 + $240,000) / 500
= $253
Therefore, the unit cost of one pair of boots produced during September using actual costing is $253.
b. To calculate the unit cost of one pair of boots produced during September using normal costing and machine hours as the activity base, we need to allocate the manufacturing overhead based on the machine hours worked.
Allocation Rate = Estimated Manufacturing Overhead / Estimated Machine Hours
= $240,000 / 12,000
= $20 per machine hour
Unit Cost = (Direct Materials Cost + Direct Labor Cost + (Machine Hours Worked x Allocation Rate)) / Number of Units Produced
Unit Cost = ($5,000 + $8,000 + (400 x $20)) / 500
= $21.60
Therefore, the unit cost of one pair of boots produced during September using normal costing and machine hours as the activity base is $21.60.
c. To determine if manufacturing overhead was over- or underapplied during September using normal costing, we compare the actual manufacturing overhead incurred with the manufacturing overhead applied using the allocation rate.
Manufacturing Overhead Applied = Machine Hours Worked x Allocation Rate
= 400 x $20
= $8,000
Actual Manufacturing Overhead = Supervisors Salary + Factory Rent + Factory Utilities + Indirect Materials Cost
= $3,000 + $1,800 + $800 + $2,000
= $7,600
Manufacturing Overhead Overapplied/Underapplied = Manufacturing Overhead Applied - Actual Manufacturing Overhead
= $8,000 - $7,600
= $400
Therefore, manufacturing overhead was overapplied during September by $400.
d. The amount of overhead applied can be different from the actual amount due to various reasons. In this case, some potential causes for the difference could be:
1. Variations in machine efficiency or downtime during production.
2. Differences between estimated and actual costs for the supervisors' salary, factory rent, factory utilities, and indirect materials.
3. Changes in production volume or mix that affect the allocation of overhead.
4. Inaccurate estimation of the allocation rate.
e. Managers at Rocky Mountain might choose to use normal costing rather than actual costing due to several reasons:
1. Normal costing provides a more accurate reflection of the actual production costs by allocating overhead based on an activity base, such as machine hours or labor hours.
2. It helps in determining the true cost of production for each unit, considering the indirect costs that are not directly traceable to the product.
3. Normal costing allows for better planning, budgeting, and cost control as it incorporates estimated costs based on historical data.
4. It helps in comparing actual costs with anticipated costs, assisting in identifying and managing cost variations.
5. Normal costing provides a standardized method of cost allocation, enabling consistent cost comparisons across different products or production periods.