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Calculation of Sami Design Company Budget for Given Year Assessment Answer

    Question 

    Sami Design Ltd manufacturers Sami musical instruments for use by high school students. The company uses a job costing system in which manufacturing overheard is applied on the basis of direct labour hours. The company’s budget for the current year included the following predictions: 

    Budget Total Manufacturing Overhead$4,50,600
    Budgeted Total Direct labour Hours $22530

    During March, the firm began two production jobs:

    Job number T81, consisting of 70 trombones

    Job number C40, consisting of 125 cornets. 

    The event of March are described below:

    1. 1000 squares metre of rolled Sami sheet metal were purchased on credit for $8000.

    2. 400 kilograms of Sami tubing were purchased on credit for $5300.

    3. The following requisitions were filed on 5 March:

    Requisition number 112: 250 square metre of Sami sheet metal @$5 per square metre (For job T81)

    Requisition number 113: 1000 kilogram of Sami tubing @ $10 per kilogram (for job number C40)

    Requisition number 114: 10 litre of valve lubricant @ $1 per liter. 

    4. An analysis of Labour time sheets reveal the following labour usage for March:

    Direct labour: Job number T81, 800hrs @ $18 per hour

    Direct labour: job number C40, 900hrs @ $18 per hour

    Indirect labour: general factory clean-up $3650

    Indirect labour: factory supervisory salaries $8300

    5. Depreciation of the factory building and equipment during March amounted to $11300

    6. Rent paid in cash for warehouse space used during March was $1130

    7. Electricity costs incurred during March amounted to $1995 The invoices for these costs were received, but the bill were not paid in March.

    8. March council rates and property taxes on the factory were paid in cash $2260

    9. Insurance cost covering factory operation for March was $2960. The insurance policy has been prepaid in february. 

    10. Costs of salaries and on-costs for sales and administrative personnel paid in cash during March amounted to $7300.

    11. Depreciation on administrative office equipment and space amounted to $3650

    12. Other selling and administrative expenses paid in cash during March amounted to $1000.

    13. Job number T81 was completed in March.

    14. Half the Trombones in job number T81 were sold on credit during March for $800 each. 

    The first March balances in selected accounts are as follows:

    Account Name 1 March Balance
    Cash $9000
    Account Receivable $19000
    Prepaid insurance$6920
    Raw Material Inventory$149000
    Manufacturing supplies inventory$500
    Work in progress inventory$82000
    Finished goods Inventory$246000
    Accumulated Depreciation: building and equipment$102000
    Accounts Payable $13000
    Wages payable$8000

    Required:

    1. Calculate the company’s predetermined overhead rate for the year current year.
    2. Complete job cost sheet for job number T81.
    3. Prepare journal entries to record the events of march.
    4. Set up ledger accounts, and post the journal entires made in requirement 3.
    5. Calculate the overapplied or underapplied overhead of March. Prepare the journal entries to close this balance into cost of goods sold.
    6. Prepare a schedule of cost of goods manufactured for March.
    7. Prepare a schedule of cost of goods sold for March.
    8. Prepare an income statement for March.
    9. Provide a management team of Sami design Ltd with the issues could occur applying the current traditional manufacturing overhead costing system. 
    10. Analyse and describe the benefits for replacing activity based costing. 

    Answer

    Accounting

    1. Calculation of the company’s predetermined overhead rate for the current year.

    Budgeted manufacturing overhead
    $4,50,600
    Budgeted total direct labour hours 
    22530

    Predetermined Overhead Rate=  Budgeted manufacturing overhead/ Budgeted total direct labour hours

    Predetermined Overhead Rate= $4,50,600/ 22530

    Predetermined Overhead Rate= $ 20.00 

    2. Job cost sheet for job number T81




    		Amount
    (A)Direct Material
    		 
    		 
    250 Sq. Metre Sami Sheet Metal (250*$5)
    		 
    		 $                                                  1,250.00 
    (B)Direct Labour
    		 
    		 
    800 Hours @ $18 per hour
    		 
    		 $                                                14,400.00 
    Prime Cost (A)+(B)

    		 $                                                15,650.00 
    Overheads (800 Hours * $20)
    		 
    		 $                                                16,000.00 
    Total Cost
    		 
    		 $                                                31,650.00 

    3. Journal entries to record the events of Marc

    Particulars
    		Debit
    		Credit
    Raw Material Inventory A/c Dr
    		$8,000

    To Accounts Payable A/c

    		$8,000
    (To purchase Sami Sheet Metal)


    Raw Material Inventory A/c Dr
    		$5,300

    To Accounts Payable A/c

    		$5,300
    (To purchase Sami Tubing)


    Work in Process Inventory A/c Dr
    		$2,250

    To Raw Material Inventory A/c

    		$2,250
    (To transfer raw material into WIP)


    Manufacturing Overheads A/c Dr
    		$10

    To Raw Material Inventory A/c

    		$10
    (To use indirect material)


    Factory Payroll A/c Dr
    		$30,600

    To Wages Payable A/c

    		$30,600
    (To record wages payable)



    Work in Process Inventory A/c Dr
    		$30,600

    To Factory Payroll A/c

    		$30,600
    (To use direct labour)


    Manufacturing Overheads A/c Dr
    		$11,950

    To Factory Payroll A/c

    		$11,950
    (To record indirect Labour)


    Manufacturing Overheads A/c Dr
    		$14,950

    To Accumulated Depreciation A/c

    		$14,950
    (To record depreciation)


    Manufacturing Overheads A/c Dr
    		$1,130

    To Cash A/c

    		$1,130
    (To pay rent)


    Manufacturing Overheads A/c Dr
    		$1,995

    To Accounts Payable A/c

    		$1,995
    (To pay electricity cost)


    Manufacturing Overheads A/c Dr
    		$2,960

    To Prepaid Insurance A/c

    		$2,960
    (To use prepaid insurance)


    Manufacturing Overheads A/c Dr
    		$2,260

    To Cash A/c

    		$2,260
    (To pay property tax)


    Sales & Administrative Overhead A/c Dr
    		$8,300

    To Cash A/c

    		$8,300
    (To pay sales and Administrative expenses)


    Work in Process Inventory A/c Dr
    		$35,255

    To Manufacturing Overhead A/c

    		$35,225
    (To transfer Manufacturing Overhead)


    Finished Goods Inventory A/c Dr
    		$31,650

    To Work in process Inventory A/c

    		$31,650
    (To record complete job T81)


    Cost of Goods Sold A/c Dr.
    		$24,125

    To Finished Goods Inventory A/c

    		$15,825
    To Selling & Administrative Overhead A/c

    		$8,300
    (To record cost of Goods sold)


    Finished Goods Inventory A/c Dr
    		$28,000

    To Sales A/c

    		$28,000
    (To record Sales)



    Calculation of Closing Inventory

    Raw Material
    		Amount
    Opening Balance
    		 $                   1,49,000 
    Purchased Sami Metal Sheets
    		 $                         8,000 
    Purchased Sami Tubing
    		 $                         5,300 
    Less: Transferred to WIP
    		 $                     -11,250 
    Less: Indirect Material
    		 $                              -10 

    Closing Raw Material Inventory
    		 $                   1,51,040 


    Work in Process 
    		Amount
    Opening Balance
    		 $                       82,000 
    Raw Material Inventory
    		 $                       11,250 
    Direct Labour
    		 $                       30,600 
    Manufacturing Overheads
    		 $                       35,255 
    Less: Transferred to Finished Goods
    		 $                     -31,650 
    Closing WIP Inventory
    		 $                   1,27,455 


    Finished Goods
    		Amount
    Opening Balance
    		 $                   2,46,000 
    WIP Inventory
    		 $                       31,650 
    Cost of Goods Sold
    		 $                     -15,825 
    Closing Finished Goods Inventory
    		 $                   2,61,825 


    4. Ledgers
    Raw Materials Inventory
    Opening Balance
    		 $                   1,49,000 
    		WIP Inventory
    		 $          11,250 
    Purchased Sami Metal Sheets
    		 $                         8,000 
    		Manufacturing Overhead
    		 $                  10 
    Purchased Sami Tubing
    		 $                         5,300 
    		Closing Balance
    		 $       1,51,040 




    Work in Process
    Opening Balance
    		 $                       82,000 
    		Transferred to Finished Goods
    		 ₹          31,650 
    Raw Material Inventory
    		 $                       11,250 
    		 
    		 
    Direct Labour
    		 $                       30,600 
    		 
    		 
    Manufacturing Overheads
    		 $                       35,255 
    		Closing Balance
    		 $       1,27,455 




    Finished Goods Inventory
    Opening Balance
    		 $                   2,46,000 
    		Cost of Goods Sold
    		 $          15,825 
    WIP Inventory
    		 $                       31,650 
    		Closing Balance
    		 $       2,61,825 




    Manufacturing Overheads
    Raw Material Inventory
    		 $                               10 
    		Work in Proceed Inventory
    		 $          35,255 
    Factory Payroll
    		 $                       11,950 
    		 
    		 
    Accumulated Depreciation
    		 $                       14,950 
    		 
    		 
    Rent
    		 $                         1,130 
    		 
    		 
    Insurance
    		 $                         2,960 
    		 
    		 
    Property Tax
    		 $                         2,260 
    		 
    		 
    Accounts Payable
    		 $                         1,995 
    		 
    		 
    Total
    		 $                       35,255 
    		Total
    		 $          35,255 

    5. Calculation of the over applied or under applied overhead for March. 

    Total Overheads = Manufacturing Overheads + Selling and Administrative Overhead

    Total Overhead = $35,255+$8,300=$43,555

    Actual Overhead Rate = Total Overheads/Number of Hours

    Number of Hours = 800+900= 1700 Hours

    Actual Overhead Rate = $43,555/1600 = $25.62

    Over applied Overhead rate = $25.62-$20.00 = $5.62 per hour

    6. Schedule of cost of goods manufactured for March. 

    Direct Material
    		Amount
    Opening Balance
    		 $                   1,49,000 
    Purchases
    		 $                       13,300 
    Less: Closing Balance
    		 $                  -1,51,040 
    Cost of Raw Material (A)
    		 $                       11,260 
    Direct Labour
    		 
    800*18
    		 $                       14,400 
    900*18
    		 $                       16,200 
    Cost of Direct Labour (B)
    		 $                       30,600 
    Prime Cost (A)+(B)
    		 $                       41,860 
    Indirect Material
    		 $                               10 
    Indirect Labour
    		 $                       11,950 
    Depreciation- Building
    		 $                       11,300 
    Electricity
    		 $                         1,995 
    Insurance
    		 $                         2,960 
    Property Tax
    		 $                         2,260 
    Add: Opening WIP Balance
    		 $                       82,000 
    Less: Closing WIP Balance
    		 $                  -1,27,455 
    Works Cost
    		 $                       26,880 
    Depreciation- Fire Equipment
    		 $                         3,650 
    Cost of Production
    		 $                       30,530 
    Add: Opening Finished Goods Balance
    		 $                   2,46,000 
    Less: Closing Finished Goods Balance
    		 $                  -2,61,825 
    Cost of Goods Manufactured
    		 $                       14,705 

    7. Schedule of cost of goods sold for March. 

    Cost of Goods Manufactured
    		 $                       14,705 
    Warehouse Rent
    		 $                         1,130 
    Salaries to Sales and Administrative staff
    		 $                         7,300 
    Other Selling Expenses
    		 $                         1,000 
    Cost of Goods Sold
    		 $                       24,135 

    8. Income Statement

    Revenue (35*$800)
    		 
    		$  28,000.00
     
    		 

    Less: Expenses
    		 

    Cost of Raw Material
    		 $                       11,260 

    Cost of Labour
    		 $                       30,600 

    Indirect Material
    		 $                               10 

    Indirect Labour
    		 $                       11,950 

    Depreciation- Building
    		 $                       11,300 

    Electricity
    		 $                         1,995 

    Insurance
    		 $                         2,960 

    Property Tax
    		 $                         2,260 

    Change in WIP
    		 $                     -45,455 

    Depreciation- Fire Equipment
    		 $                         3,650 

    Change in Finished Goods
    		 $                     -15,825 

    Warehouse Rent
    		 $                         1,130 

    Salaries to Sales and Administrative staff
    		 $                         7,300 

    Other Selling Expenses
    		 $                         1,000 
    		$  24,135
    Profit
    		 
    		$ 3,865

    9. Management team of Sami Design with the issue could occur apply the current traditional manufacturing overhead costing system

    After assessing the given case study, it could be inferred that the Sami Design Company has been bifurcating or distributing its overhead on the hourly basis (ODO, 2018).  There has not been set any program or cost drivers for the proper bifurcation of the total overhead of the company which may lead to misleading of the overall process costing of the organization. Therefore, the main issue which Sami Design might face would be recording of the wrongful costing of the units in the particular process system while adopting the traditional manufacturing costing system (Hanif, & Mukherjee, 2018).

    10 analysing and describing the benefits of deploying the ABC costing method 

    The main problem which Sami Design Company has been facing in its business process is related to its wrong allocation of the cost overhead in the different process department. With the implication of the ABC costing method, the proper allocation of the overhead is done with the use of the cost drivers set for the particular cost. The cost drivers decides the basis of the cost allocation or absorption of the cost in the process department which helps in determining the process costing in effective manner. It helps in deciding the effective strategic planning and determine the rightful pricing policy in the business process. 

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