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Dakota Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Dakota allocates manufacturing overhead costs using direct manufacturing labor costs. Dakota provides the following information: $$\begin{array}{lcc} & \text { Budget for 2017 } & \text { Actual Results for 2017 } \\ \hline \text { Direct material costs } & \$ 2,250,000 & \$ 2,150,000 \\ \text { Direct manufacturing labor costs } & 1,700,000 & 1,650,000 \\ \text { Manufacturing overhead costs } & 3,060,000 & 3,217,500 \end{array}$$ 1\. Compute the actual and budgeted manufacturing overhead rates for 2017 . 2\. During March, the job-cost record for Job 626 contained the following information: Direct materials used Direct manufacturing labor costs \(\$ 55,000\) \(\$ 45,000\) Compute the cost of Job 626 using (a) actual costing and (b) normal costing. 3\. At the end of 2017 , compute the under-or overallocated manufacturing overhead under normal costing. Why is there no under- or overallocated manufacturing overhead under actual costing? 4\. Why might managers at Dakota Products prefer to use normal costing?

Step by step solution

01

Compute the actual and budgeted manufacturing overhead rates for 2017.

To calculate the actual manufacturing overhead rate, we will divide the actual manufacturing overhead costs by actual direct manufacturing labor costs. And to determine the budgeted manufacturing overhead rate, we'll divide the budgeted manufacturing overhead costs by budgeted direct manufacturing labor costs. Actual Manufacturing Overhead Rate = \(\frac{Actual Manufacturing Overhead Costs}{Actual Direct Manufacturing Labor Costs}\) Actual Manufacturing Overhead Rate = \(\frac{3,217,500}{1,650,000}\) = 1.95 Budgeted Manufacturing Overhead Rate = \(\frac{Budgeted Manufacturing Overhead Costs}{Budgeted Direct Manufacturing Labor Costs}\) Budgeted Manufacturing Overhead Rate = \(\frac{3,060,000}{1,700,000}\) = 1.8

02

Compute the cost of Job 626 using (a) actual costing and (b) normal costing.

(a) For actual costing, we will multiply the actual manufacturing overhead rate by the direct manufacturing labor costs for Job 626. Actual Cost of Job 626 = Direct Materials Used + Direct Manufacturing Labor Costs + (Actual Manufacturing Overhead Rate × Direct Manufacturing Labor Costs) Actual Cost of Job 626 = 55,000 + 45,000 + (1.95 × 45,000) = 142,750 (b) For normal costing, we will multiply the budgeted manufacturing overhead rate by direct manufacturing labor costs for Job 626. Normal Cost of Job 626 = Direct Materials Used + Direct Manufacturing Labor Costs + (Budgeted Manufacturing Overhead Rate × Direct Manufacturing Labor Costs) Normal Cost of Job 626 = 55,000 + 45,000 + (1.8 × 45,000) = 137,000

03

Compute the under- or overallocated manufacturing overhead under normal costing.

To determine the under- or overallocated manufacturing overhead under normal costing, we need to compare the actual manufacturing overhead costs to the allocated manufacturing overhead costs. Allocated Manufacturing Overhead Costs = Budgeted Manufacturing Overhead Rate × Actual Direct Manufacturing Labor Costs Allocated Manufacturing Overhead Costs = 1.8 × 1,650,000 = 2,970,000 Under- or Overallocated Manufacturing Overhead = Actual Manufacturing Overhead Costs - Allocated Manufacturing Overhead Costs Under- or Overallocated Manufacturing Overhead = 3,217,500 - 2,970,000 = 247,500 (overallocated)

04

Why might managers at Dakota Products prefer to use normal costing?

Managers at Dakota Products may prefer to use normal costing because it evens out the overhead allocation throughout the year, based on their budgeted figures. This provides a more stable and predictable cost structure which is easier to plan around. It also eliminates fluctuations in overhead costs due to changes in actual labor costs or manufacturing overhead costs, therefore, offering more consistent costing information for managerial decision-making and product pricing.

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Key Concepts

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

Direct Materials

Direct materials are the raw inputs that are consumed in the manufacturing process and can be directly traced to the final product. They play a crucial role in job-costing systems as one of the primary direct-cost categories. For Dakota Products, understanding and accurately reporting direct material costs is important for sound financial decision-making.

In the given exercise, Dakota's actual direct material costs were reported as \(2,150,000, less than the budgeted amount of \)2,250,000. This could indicate better-than-expected procurement pricing or efficiency in usage. Students should note that direct materials are a variable cost, changing with the level of production output, and are recorded as part of the inventory until the product is sold, at which point they are expensed as the cost of goods sold.

Direct Manufacturing Labor Costs

Direct manufacturing labor costs include the wages and related expenses for employees who are directly involved in the production of goods. These costs are directly traceable to the specific jobs and thus, are one of the two direct-cost categories tracked in job-costing systems.

The exercise reveals that Dakota's actual direct manufacturing labor costs amounted to \(1,650,000 as opposed to the budgeted \)1,700,000, signaling potential labor efficiency or reduced wage rates. In job-costing systems, these costs are directly attributed to a job and serve as the allocation base for manufacturing overhead. Hence, accurate tracking and management of direct labor costs are paramount for the allocation of indirect costs and for assessing the overall cost of jobs.

Manufacturing Overhead Allocation

The manufacturing overhead allocation involves the distribution of indirect costs to individual jobs based on a predetermined rate. Indirect costs cannot be directly traced to products and include expenses like utilities, depreciation, and supervisory salaries.

Dakota Products uses direct manufacturing labor costs as the basis for overhead allocation, which implies that the overhead is proportional to the labor input. Overhead allocation helps in determining the full cost of a job. The exercise required calculation of the actual and budgeted overhead rates, which are critical for assessing company performance and costing accuracy. Furthermore, understanding why Dakota might prefer normal costing over actual costing gives students insights into the benefits of stable cost measures that support budgeting, planning, and pricing strategies.