Central States Manufacturing produces a single product: Product 1222. The company has estimated that annual overhead expenses wll be $180,000 and production volume will be 20,000 units using 20,000 hours of labor. Overhead is applied to production based on assembly labor hours. The company has recorded the following transactions in February in its accounting records:
Paid assembly workers for 7,000 hours of work 70,000
Paid for factory supplies used 12,000
Raw materials used in production 24,000
Recorded machine depreciation expense of 12,000
Paid for electricity used 17,000
3,000 units of product were started and completed during February.
Required:
A. Calculate unit cost for Product 1222 using actual costing.
B. Calculate unit cost for Product 1222 using normal costing.
C. Why might the company decide to use normal costing rather than actual costing?
A. To calculate the unit cost for Product 1222 using actual costing, we need to consider the actual overhead expenses incurred and the actual assembly labor hours worked.
1. Actual overhead expenses: In this case, the company's estimated annual overhead expenses are $180,000. Since February is just one month, we need to allocate a portion of this estimated overhead to the units produced in February. To do this, we divide the estimated annual overhead by the estimated annual labor hours:
$180,000 / 20,000 hours = $9 per labor hour
2. Actual assembly labor hours: The company paid assembly workers for 7,000 hours of work in February.
Now, we can calculate the actual overhead cost applied to the units produced in February by multiplying the actual assembly labor hours by the predetermined overhead rate:
$9 per labor hour * 7,000 labor hours = $63,000
To calculate the unit cost:
Unit Cost = (Direct Materials Cost + Direct Labor Cost + Applied Overhead) / Total Units Produced
Total Units Produced = 3,000 units
Given:
Direct Materials Cost = $24,000
Direct Labor Cost = $70,000
Unit Cost = ($24,000 + $70,000 + $63,000) / 3,000
Unit Cost = $157,000 / 3,000
Unit Cost = $52.33 per unit
Therefore, the unit cost for Product 1222 using actual costing is $52.33.
B. To calculate the unit cost for Product 1222 using normal costing, we use the predetermined overhead rate based on the estimated annual overhead and labor hours.
Predetermined Overhead Rate = Estimated Overhead / Estimated Labor Hours
Estimated Overhead = $180,000
Estimated Labor Hours = 20,000
Predetermined Overhead Rate = $180,000 / 20,000 hours
Predetermined Overhead Rate = $9 per labor hour
Now, to calculate the unit cost using normal costing:
Unit Cost = (Direct Materials Cost + Direct Labor Cost + Applied Overhead) / Total Units Produced
Total Units Produced = 3,000 units
Given:
Direct Materials Cost = $24,000
Direct Labor Cost = $70,000
Unit Cost = ($24,000 + $70,000 + ($9 per labor hour * 3,000 labor hours)) / 3,000
Unit Cost = ($24,000 + $70,000 + $27,000) / 3,000
Unit Cost = $121,000 / 3,000
Unit Cost = $40.33 per unit
Therefore, the unit cost for Product 1222 using normal costing is $40.33.
C. The company might decide to use normal costing rather than actual costing for several reasons:
1. Simplicity: Normal costing uses predetermined overhead rates based on estimates. It eliminates the need to track actual overhead expenses on a transaction-by-transaction basis, making the cost calculation process simpler.
2. Budgeting and planning: Normal costing provides a more predictable overhead cost calculation, which helps with budgeting and planning. Since it uses predetermined rates, the company can estimate and plan for costs in advance.
3. Cost control: With normal costing, the company can have better control over costs by analyzing and reviewing the predetermined overhead rate on a regular basis. Any significant deviations from the estimated rates can be investigated and corrective actions can be taken.
4. Consistency: Normal costing provides consistency in comparing costs across different periods. Since actual costs can vary due to fluctuations in overhead expenses or labor hours, normal costing allows for a more consistent comparison of unit costs over time.
However, it is important to note that normal costing relies on estimates, and there can be discrepancies between the estimated costs and the actual costs incurred. Therefore, it is essential for the company to regularly review and adjust the predetermined overhead rates to ensure accuracy.
A. To calculate the unit cost for Product 1222 using actual costing, we need to consider the actual overhead expenses incurred and the actual labor hours used in production.
1. Actual overhead expenses: $180,000
2. Actual labor hours used: 20,000 hours
Unit Cost = (Actual Overhead Expenses / Actual Labor Hours) + (Direct Materials + Direct Labor)
Direct Materials = $24,000
Direct Labor = $70,000
Unit Cost = ($180,000 / 20,000) + ($24,000 + $70,000) = $9 + $94 = $103
Therefore, the unit cost for Product 1222 using actual costing is $103.
B. To calculate the unit cost for Product 1222 using normal costing, we need to use predetermined overhead rates based on estimated overhead expenses and estimated labor hours.
1. Estimated overhead expenses: $180,000
2. Estimated labor hours: 20,000 hours
Predetermined Overhead Rate = Estimated Overhead Expenses / Estimated Labor Hours
Predetermined Overhead Rate = $180,000 / 20,000 = $9 per labor hour
Unit Cost = (Predetermined Overhead Rate * Actual Labor Hours) + (Direct Materials + Direct Labor)
Unit Cost = ($9 * 20,000) + ($24,000 + $70,000) = $180,000 + $94,000 = $274,000
3,000 units were completed, so the unit cost for Product 1222 using normal costing is:
Unit Cost = Total Cost / Number of Units
Unit Cost = $274,000 / 3,000 = $91.33
Therefore, the unit cost for Product 1222 using normal costing is $91.33.
C. The company might decide to use normal costing rather than actual costing for several reasons:
1. Simplicity: Normal costing uses predetermined overhead rates based on estimated figures, making it easier to calculate and apply overhead costs.
2. Stability: Normal costing provides a more stable and predictable unit cost, as it is based on estimated overhead expenses and labor hours.
3. Planning and budgeting: Normal costing allows for better planning and budgeting, as it uses estimated figures that are known in advance.
4. Cost control: Normal costing allows the company to identify cost variances by comparing estimated and actual costs, which can help in controlling expenses.
5. Timeliness: Normal costing can be applied throughout the year, even before actual costs are known, allowing for timely cost calculations and decision-making.
Overall, the decision to use normal costing instead of actual costing is often driven by the desire for simplicity, stability, and better planning and budgeting.