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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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