Requirements
Solution
Data:
| Voltus Communications | |
| Financial Year | 1 July 2018 to 30 June 2019 |
| MOH is applied based on Machine hours | |
| Budgeted Overhead | $ 3,600,000 |
| Machine Hours | $ 80,000 |
| Job in Process on 31 May 2019 | |
| Job No | Bal at 31 May 2019 |
| B12-008 | $ 263,000 |
| K12-009 | $ 163,000 |
| K12-011 | $ – |
| L15-005 | $ – |
| L15-006 | $ – |
| Total | $ 426,000 |
| Work Carried Out in June 2019 | |||
| Job No | DM | DL | Machine hours |
| B12-008 | $ 2,500 | $ 13,500 | 300 |
| K12-009 | $ 14,000 | $ 36,000 | 1,000 |
| K12-011 | $ 71,800 | $ 85,100 | 1,400 |
| L15-005 | $ 118,700 | $ 55,000 | 2,500 |
| L15-006 | $ 78,000 | $ 50,400 | 800 |
| Total | $ 285,000 | $ 240,000 | 6,000 |
| Actual MOH Incurred | 1 Jul 2018-31 May 2019 | Jun-19 |
| Indirect Material | $ 375,000 | $ 27,000 |
| Indirect Labor | $ 1,035,000 | $ 90,000 |
| Utilities | $ 735,000 | $ 66,000 |
| Depreciation | $ 1,155,000 | $ 105,000 |
| Total Overhead | $ 3,300,000 | $ 288,000 |
| Other Info | 1 Jul 2018-31 May 2019 | Jun-19 |
| Purchases | $ 2,895,000 | $ 294,000 |
| DL Cost | $ 2,535,000 | $ 240,000 |
| Machine hours | 73000 | 6000 |
| Account Balances for 1 July | |
| RM Inventory | $ 315,000 |
| WIP Inventory | $ 180,000 |
| finished Goods Inventory | $ 375,000 |
| Acc Bal 30 Jun 2019 | |
| RM Inventory | $ 255,000 |
Requirement 1
For the calculation of the Rate of application for the MOH, the following formula has been used.
Application rate=Budgeted Overhead x Machine hours
| For the calculation of the Application Rate for the manufacturing overhead. | |
| Budgeted Overhead | 3,600,000 |
| Machine Hours | 80000 |
| Resultant Application Rate | $ 45 |
Similarly, for the computation of the applied factory overhead for the financial year of the company from July 2018 to May 2019, the formula that has been used is.
Applied MOH=Machine hours x MOH Application Rate
The computations using the above formula are.
| For the calculation of the Application of the Factory Overhead for the Period of 1 Jul 18 – 31 May 19 | |
| Machine hours | 73000 |
| Resultant Application Rate | $ 45 |
| Applied Manufacturing Overhead | $ 3,285,000 |
Requirement 2
For the computation of the amount of the factory overhead that Voltus Communications applied for the month of June in the year 2019, the following formula has been utilized.
Applied MOH-June 2019=Machine hours x MOH Application Rate
The resulting calculations are.
| Computation for Applied MOH for the Month of June 2019 | |
| Machine hours | 6000 |
| Resultant Application Rate | $ 45 |
| Applied MOH for June 19 | $ 270,000 |
Requirement 3
For the calculation purpose of the analysis of the over or under application of factory overhead during the financial year of the Voltus Communications, the formula that has been used is.
Over or Under MOH=Applied MOH- Actual MOH incurred
First, the calculation of the over or under application of factory overhead for the period of 1 Jul 18 to 31 May 19 is done. The calculations conducted show an application under 15,000.
| Computation for the analysis of Over or Under Application of Manufacturing Overhead | ||
| Actual MOH Incurred | 1 Jul 2018-31 May 2019 | $ 3,300,000 |
| Applied MOH | 1 Jul 2018-31 May 2019 | 3285000 |
| Under Applied MOH for | 1 Jul 2018-31 May 2019 | $ (15,000) |
Secondly, the calculation of the over or under application of factory overhead for the period of June 2019 is done. The calculations conducted show an under application by 18,000.
| Computation for the analysis of Over or Under Application of Manufacturing Overhead | ||
| Actual MOH Incurred | Jun-19 | $ 288,000 |
| Applied MOH | Jun-19 | 270000 |
| Under Applied MOH for | Jun-19 | $ (18,000) |
Lastly, the calculation of the over or under application of factory overhead for the period of 1 Jul 18 to 30 June 2019 is done. The calculations conducted show an under application by 33,000.
For this purpose, the formula used is.
Total Over or Under MOH=Under Applied MOH 1 Jul 1831 May 19+ Under Applied MOH Jun 19
| Computation for the analysis of Total Over or Under Application of Manufacturing Overhead | ||
| Under Applied MOH for | 1 Jul 2018-31 May 2019 | $ (15,000) |
| Under Applied MOH for | Jun-19 | $ (18,000) |
| Total Under Applied MOH for | 1 Jul 18- 31 May 19 & Jun 19 | $ (33,000) |
Requirement 4
The under applied MOH by the Voltus Communications show that the company needs to adjust its Cost of Goods Sold with the same amount which it has under applied. Therefore, an entry in the general journal needs to be recorded. The entry will report the disposition of the under application of the MOH to the Cost of Goods Sold of the company. For this purpose, there are two methods by which this under applied MOH can be disposed. Firstly, the simple method of disposing the MOH directly to the Cost of Goods Sold can be used. This is a simpler way of reporting the application of the MOH by which the MOH will automatically increase by the specific amount. This is depicted in the entry recorded below for Voltus Communications.
| General Journal Entry for the recording of the Under Applied MOH to COGS | |||
| Particulars | Debit | Credit | |
| COGS | $ 33,000 | ||
| Manufacturing Overhead | $ 33,000 | ||
| To record the under applied MOH to COGS for the year | |||
This is a comparatively simpler method of reporting the under applied or over applied MOH. For instance, if the MOH had been over applied, the company would simply need to report the MOH in the debit account against the COGS in the credit account so that the MOH would be declined with the same amount it had been over applied. However, there is another method which can also be used for the reporting of the MOH over or under application which is a bit complex than this method (Weygandt et al., 2009). The other method uses the accounts of WIP, COGS and finished Goods individually for the reporting of the under or over application of the MOH to their specific accounts with the amount which is equal to their comparable balances. For example, Voltus Communications can use the following entry for the disposition of the under applied MOH as well.
| General Journal Entry for the recording of the Under Applied MOH to COGS | |||
| Particulars | Debit | Credit | |
| WIP | $ 11,948 | ||
| FG | $ 6,828 | ||
| COGS | $ 14,224 | ||
| Manufacturing Overhead | $ 33,000 | ||
| To record the under applied MOH to COGS for the year | |||
The calculations for the specific accounts are done using the following formulas.
Under Applied MOH to WIP= ((RM Inventory Bal of 1 July)/ (Total Bal of 1 July for RM+WIP+FG)) x total Under Applied MOH
Under Applied MOH to FG= ((WIP Inventory Bal of 1 July)/ (Total Bal of 1 July for RM+WIP+FG)) x total Under Applied MOH
Under Applied MOH to COGS= ((FG Inventory Bal of 1 July)/ (Total Bal of 1 July for RM+WIP+FG)) x total Under Applied MOH
This method is more complex than the first one. However, as it shows, it depicts more accuracy than the first one as well. Companies can opt for any of the methods depending on various factors. These factors could be the use of a process which allows the use of the complex entry. Furthermore, another factor is the amount of the under or over application of the MOH. For instance, if the amount is big enough to have impact; then it is better to use the method which is more accurate and more complex. Voltus Communications is using a complex and good enough accounting system; therefore, it should record the entry using the second method.
Requirement 5
Activity-based costing is a pertinent technique to reduce the cost of the business and enhance the visibility of business outcomes. In this contemporary era, corporations intend to adopt this costing technique to reduce overhead cost. Assigning risk to several elements and related management is a right approach to make the difference. ABC has demonstrated the bookkeeping strategy, which contains various types of cost techniques. It is also linked with the product development process. The most important thing for the management is to calculate the cost for each item and process in the internal business environment. Allocation of cost at low discretion seems worthy to reduce the overall cost of the business (Vanderbeck, 2012). However, the big challenge for the company exists, as it cannot execute this costing technique to all parties. For Instance, compensation and rewards are to be sustained with the old technique. On the other hand, ABC identified or developed a different cost method. It can help the company to derive pertinent cost information, especially for assembly lines.
For different overhead expenses, the company must break these expenses. The company will allocate the cost which is required for a particular item or process. Similarly, in the management or administration process, this costing method can be applied successfully. The management of the company has to streamline overhead and several cost drivers only in prominent activities. It can facilitate accountants in the company to reduce the cost. Benefits for clients are also in the limelight, as business outputs are to be distributed at low prices. ABC aims to contain broad strategies and traits to make some changes or improve the process. It is a fact that the cost method is associated with the administration as well. For Instance, all activities or cost exercises are to be controlled and monitored by the administration (Warren et al., 2008). The example from the assembly line seems relevant. In the assembling prices, movement X is baseless, and it is not necessary for completion. Thus, to reduce the cost, the management can eliminate this activity.
The application regarding the case of Voltus Company is quite visible. Activity-based costing is one of the most prominent industry trends. This application is triggered by some key steps, which are enlisted below.
Step 1
- In phase one, it seems imperative to know progress or procedures to come up with the new product
- Knowledge of procurement process
- To make communication equipment, the assembly line can be shaped.
- Components will also be processed for communication equipment. The employment of different machines is also essential for communication equipment.
- Polishing of components is mandatory for communication equipment
- Outputs are associated with different improvements
Step 2
| Cost Pool | Overhead cost |
| Purchase | $ 375,000 |
| Assembly | $ 735,000 |
| Processing | $ 345,000 |
| Machining | $ 1,155,000 |
| Polishing | $ 345,000 |
| Touching | $ 345,000 |
The formulas that have been used for the computation of the above figures are.
Purchase=The Cost of Indirect Material
Assembly=The Cost of utilities
Processing= (The Cost of Indirect Labor)/3
Machining=The Cost of Depreciation
Polishing= (The Cost of Indirect Labor)/3
Touching= (The Cost of Indirect Labor)/3
Step 3
The allocation of the cost drivers to the separate pools of costs.
| Cost Driver | notes | |
| Cost- Purchasing | No. of units Bought | Direct Relation of Purchasing of the Raw Materials with Costs incurred on units purchased |
| Cost – Assembly | No. of Machine hours Used | Heavy use of capital |
| Cost – Processing%3 |
