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Chapter 18: Problem 15

The AutoDoctor Body Shop uses a job order cost system to determine the cost of performing automotive body and repair work. Estimated costs and expenses for the coming period are as follows: \begin{tabular}{lr} Auto parts & \(\$ 675,500\) \\ Shop direct labor & 490,000 \\ Shop and repair equipment depreciation & 16,900 \\ Shop supervisor salaries & 95,200 \\ Shop property tax & 19,200 \\ Shop supplies & 12,200 \\ Advertising expense & 17,300 \\ Administrative office salaries & 63,400 \\ Administrative office depreciation expense & 10,300 \\ Total costs and expenses & \(\$ 1,400,000\) \\ \hline \hline \end{tabular} The average shop direct labor rate is \(\$ 14\) per hour. Determine the predetermined shop overhead rate per direct labor hour.

Short Answer

Expert verified
The predetermined overhead rate is $4.10 per direct labor hour.

Step by step solution

01

Identify Total Overhead Costs

The total overhead costs include shop and repair equipment depreciation, shop supervisor salaries, shop property tax, and shop supplies. We exclude costs like auto parts and shop direct labor, as these don't fall under overhead costs. Therefore, total overhead costs amount to: \( 16,900 + 95,200 + 19,200 + 12,200 = 143,500 \).
02

Calculate Total Direct Labor Hours

Given the shop direct labor cost \( \\( 490,000 \) and the rate per hour \( \\) 14 \), we can find the total direct labor hours using the formula: \( \text{Total direct labor cost} \div \text{Direct labor rate per hour} \). This gives us \( 490,000 \div 14 \approx 35,000 \) labor hours.
03

Compute Predetermined Overhead Rate

The predetermined overhead rate is calculated using the formula: \( \text{Total overhead costs} \div \text{Total direct labor hours} \). Here, it will be \( 143,500 \div 35,000 \approx 4.10 \). Therefore, the predetermined overhead rate is \( \$ 4.10 \) per direct labor hour.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Predetermined Overhead Rate
In cost accounting, calculating the predetermined overhead rate is essential for a business utilizing a job order cost system. This rate represents how much overhead is allocated to each unit of direct labor hours before production actually begins. It's a tool to help estimate costs in advance, allowing businesses, like AutoDoctor Body Shop, to price their services appropriately.
This is achieved by dividing the estimated total overhead costs by the estimated total direct labor hours. For example, the overhead costs at AutoDoctor include expenses such as depreciation, supervisor salaries, property tax, and supplies, totaling $143,500. Dividing that by the direct labor hours which is 35,000 hours (calculated from labor cost and rate), the overhead rate comes to approximately $4.10 per hour. This means for every hour of direct labor worked at AutoDoctor, $4.10 is added to cover overhead.
Direct Labor Hours
Direct labor hours refer to the actual time workforce spends on specific tasks within a production or service process. It's a key metric in cost accounting, helping businesses keep an eye on labor efficiency. For AutoDoctor Body Shop, the direct labor cost is \(490,000, with a labor rate of \)14 per hour.By dividing the total direct labor cost by the hourly rate, we can calculate these hours: \[ \frac{490,000}{14} = 35,000 \text{ hours} \]This figure is crucial. It not only defines total manpower used but also serves to allocate overhead rates to each job order. Efficiency in direct labor can directly influence the company's profitability and service pricing structures.
Cost Accounting
Cost accounting is a branch of accounting focused on assessing, monitoring, and analyzing a company's costs. Here, it helps in precise pricing of products or services while managing profitability. At AutoDoctor Body Shop, cost accounting plays a pivotal role by utilizing a job order cost system. This system assesses all costs associated with a particular job and uses predetermined overhead rates. Understanding such rates is vital, as they impact invoicing and financial management. The fundamental tasks in cost accounting include:
  • Identifying all cost elements鈥攄irect materials, direct labor, and overheads.
  • Calculating each element correctly, ensuring accurate job costing.
  • Regularly assessing the efficiency and effectiveness of cost strategies to maintain financial health.
By mastering cost accounting, businesses like AutoDoctor can ensure they are competitive and sustainable in the market.

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Most popular questions from this chapter

The following events took place for Mercury Shoe Company during May 2006, the first month of operations as a producer of athletic shoes: \- Purchased \(\$ 155,300\) of materials. \- Used \(\$ 145,800\) of direct materials in production. \- Incurred \(\$ 94,500\) of direct labor wages. \- Applied factory overhead at a rate of \(75 \%\) of direct labor cost. \- Transferred \(\$ 304,300\) of work in process to finished goods. \- Sold goods with a cost of \(\$ 300,100\). \- Sold goods for \(\$ 510,000\). \- Incurred \$116,000 of selling expenses. \- Incurred \(\$ 48,400\) of administrative expenses. a. Prepare the May income statement for Mercury Shoe Company. Assume that Mercury Shoe uses the perpetual inventory method. b. Determine the inventory balances at the end of the first month of operations.

Good Samaritan Medical Center has a single operating room that is used by local physicians to perform surgical procedures. The cost of using the operating room is accumulated by each patient procedure and includes the direct materials costs (drugs and medical devices), physician surgical time, and operating room overhead. On January 1 of the current year, the annual operating room overhead is estimated to be: \begin{tabular}{lr} Disposable supplies & \(\$ 124,500\) \\ Depreciation expense & 24,000 \\ Utilities & 15,300 \\ Nurse salaries & 188,000 \\ Technician wages & 47,200 \\ \(\quad\) Total operating room overhead & \(\$ 399,000\) \\ \hline \hline \end{tabular} The overhead costs will be assigned to procedures based on the number of surgical room hours. The Medical Center expects to use the operating room an average of seven hours per day, six days per week. In addition, the operating room will be shut down two weeks per year for general repairs. a. Determine the predetermined operating room overhead rate for the year. b. LeVar Wilson had a \(2.5\)-hour procedure on January 10 . How much operating room overhead would be charged to his procedure, using the rate determined in (a)? c. During January, the operating room was used 170 hours. The actual overhead costs incurred for January were \(\$ 31,800\). Determine the overhead under- or overapplied for the period.

Indicate whether each of the following costs of the Procter \& Gamble Company would be classified as direct materials cost, direct labor cost, or factory overhead cost: a. Depreciation on the St. Bernard (Cincinnati) soap plant b. Wages paid to Packing Department employees c. Maintenance supplies d. Packaging materials e. Plant manager salary of the Lima, Ohio, liquid soap plant f. Pulp for towel and tissue products g. Wages of Making Department employees h. Scents and fragrances i. Depreciation on disposable diaper converting machines j. Salary of process engineers

Indicate whether each of the following costs of a furniture manufacturer would be classified as direct materials cost, direct labor cost, or factory overhead cost: a. Inspector salaries b. Depreciation on woodworking machinery c. Assembly wages d. Wood e. Wages of wood cutters f. Furniture hardware g. Saw blades h. Supervisor salaries

The following information is available for the first month of operations of Native Arts Inc., a manufacturer of art and craft items: \(\begin{array}{lr}\text { Sales } & \$ 850,000 \\ \text { Gross profit } & 235,000 \\ \text { Indirect labor } & 65,000 \\ \text { Indirect materials } & 27,000 \\ \text { Other factory overhead } & 13,500 \\ \text { Materials purchased } & 305,000 \\ \text { Total manufacturing costs for the period } & 640,000 \\ \text { Materials inventory, end of period } & 20,000\end{array}\) Using the above information, determine the following missing amounts: a. Cost of goods sold b. Direct materials cost c. Direct labor cost
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