Chapter 13 – Exercise 7
Product Costing -
Various Issues
Problem Definition
• Gale Co. produces ceramic coffee mugs and
pencil holders. Manufacturing overhead is
assigned to production using an application
rate based on direct labor hours.
Problem Requirements
a. For 2002, the company’s cost accountant estimated that
total overhead costs incurred would be $408,750 and that a
total of 54,500 direct labor hours would be worked.
Calculate the amount of overhead to be applied for each
direct labor hour worked on a production run.
b. A production run of 750 coffee mugs used raw materials that
cost $810 and used 90 direct labor hours at a cost of $9.50 per
hour. Calculate the cost of each coffee mug produced.
c. At the end of April 2002, 530 coffee mugs made in the above
production run had been sold and the rest were in ending
inventory. Calculate (1) the cost of coffee mugs sold that would
have been reported in the income statement and (2) the cost
included in the April 30, 2002, finished goods inventory.
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =
$408,750
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =
$408,750
=
54,500 DLH
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =
$408,750
= $7.50 per direct labor hour
54,500 DLH
Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =
$408,750
= $7.50 per direct labor hour
54,500 DLH
For every direct labor hour incurred, $7.50 of
overhead will be applied to the production run.
Problem Requirements
a. For 2002, the company’s cost accountant estimated that
total overhead costs incurred would be $408,750 and that a
total of 54,500 direct labor hours would be worked.
Calculate the amount of overhead to be applied for each
direct labor hour worked on a production run.
b. A production run of 750 coffee mugs used raw materials that
cost $810 and used 90 direct labor hours at a cost of $9.50 per
hour. Calculate the cost of each coffee mug produced.
c. At the end of April 2002, 530 coffee mugs made in the above
production run had been sold and the rest were in ending
inventory. Calculate (1) the cost of coffee mugs sold that would
have been reported in the income statement and (2) the cost
included in the April 30, 2002, finished goods inventory.
Problem Solution
• Step 1: Calculate the total cost of
producing 750 mugs:
Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:
Raw materials
Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:
$2,340
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
$2,340
750 mugs
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
$2,340
= $3.12 per coffee mug
750 mugs
Problem Solution
• Step 2: Calculate the cost of producing
each mug: