Question

Using the following accounts and a predetermined overhead rate of 50% of direct labor cost, determine the amount of applied overhead.

Work in Process Inventory
Beginning WIP 23,000
Direct materials 69,000
Direct labor ?
Applied overhead ?
To finished goods ?
Ending WIP 47,220
Finished Goods Inventory
Beginning FG 6,400
169,280
Ending FG

Answer 1

The best production method is determined by evaluating the costs of labor and capital for each method. Method 1 is the most cost-effective initially and remains so even if labor costs increase or if the cost of capital decreases.

Step-by-step explanation:

When evaluating the best production method, we must consider the costs of labor and capital for each method. With labor costing $100/unit and capital costing $400/unit:

• Method 1 incurs a cost of (50 units of labor × $100/unit) + (10 units of capital × $400/unit) = $5,000 + $4,000 = $9,000.
• Method 2 incurs a cost of (20 units of labor × $100/unit) + (40 units of capital × $400/unit) = $2,000 + $16,000 = $18,000.
• Method 3 incurs a cost of (10 units of labor × $100/unit) + (70 units of capital × $400/unit) = $1,000 + $28,000 = $29,000.

Thus, Method 1 is the most cost-effective initially. If the cost of labor rises to $200/unit, the costs change:

• Method 1: ($200 × 50) + ($400 × 10) = $14,000.
• Method 2: ($200 × 20) + ($400 × 40) = $18,000.
• Method 3: ($200 × 10) + ($400 × 70) = $30,000.

Even with increased labor costs, Method 1 remains the least expensive. Finally, if the cost of labor remains at $40/unit, but the cost of capital decreases to $50/unit, the total cost for each method would be:

• Method 1: ($40 × 50) + ($50 × 10) = $2,000 + $500 = $2,500.
• Method 2: ($40 × 20) + ($50 × 40) = $800 + $2,000 = $2,800.
• Method 3: ($40 × 10) + ($50 × 70) = $400 + $3,500 = $3,900.

In this last scenario, Method 1 should be used as it is still the most cost-effective.