Problem 3313 IAA Acrophobia Company summarized manufacturing

Problem 33-13 (IAA) Acrophobia Company summarized manufacturing and construction activities for 2017 as follows: Finished goods 3,000,000 4,000,000 Machinery 500,000 1,000,000 Materials Direct labor Overhead for the prior year was 75% of the direct labor cost. Overhead in 2017 related to both product manufacture and construction activities amounted to P3,600,000. Required: a. Calculate the cost of the machinery, assuming that manufacturing activities are to be charged with overhead at the rate experienced in the prior year b. Calculate the cost of the machinery if manufacturing and construction activities are to be charged with overhead at the same rate.

Solution

a. Cost of the machinery, assuming that manufacturing activities are to be charged with overhead at the rate experienced in the prior year:

Cost of Machine = $500,000 + $1,000,000 + ($1,000,000x75%)

                              = $2,250,000

Since overhead is based on prior year, it is calculated at 75% of the Direct Labour, hence the cost of Machineru is $2,250,000.

B. Cost of Machinery if manufacturing and construction activities are to be charged with overhead at the same rate:

It is clear that, overhead is related to direct labour hour but we don\'t know what is the percentage of direct labour assigned to overhead. We are given with the actual overhead amount incurred. We need to find the overhead for machinery in order to know its cost. This can be done, by allocating the actual overhead in the proportion of the Direct Labour expense for Fixed Products and Machinery.

In this case, actual overhead $3,600,000 is to be allocated in 4:1 proportion and $720,000 is allocated to the Machinery ($3,600,000/5).

Cost of Machinery = $500,000 + $1,000,000 + $720,000

                                 = $2,220,000