Final Exam Question #1 – Problem 3-25 (pp. 131–132) Multiple Departments; Overhead Rates; Underapplied or Overapplied Overhead [LO3, LO5, LO8] Hobart, Evans, and Nix is a small law firm that employs 10 partners and 12 support persons. The firm uses a job-order costing system to accumulate costs changeable to each client, and it is organized into two departments-the Research and Documents Department and the Litigation Department. The firm uses predetermined overhead rates to change the costs of these departments to its clients. At the beginning of the year, the firm's management made the following estimates for the year: Department Research and Development Litigation Research-hour 24,000 Direct attorney-hour 9,000 18,000 Legal forms and supplies $16,000 $5,000 Direct attorney cost $450,000 $900,000 Departmental overhead cost $840,000 $360,000 The predetermined overhead rate in the Research and Documents Department is based on research-hours, and the rate in the Litigation Department is based on direct attorney cost. The costs charged to each client are made up of three elements: legal forms and supplies used, direct attorney cost incurred, and an applied amount of overhead from each department in which work is performed on the case. Case 418-3 was initiated on February 23 and completed on May 16. during this period, the following costs and time were recorded on the case: Department Research and Development Litigation Research-hour 26 Direct attorney-hour 7 114 Legal forms and supplies $80 $40 Direct attorney cost $350 $5,700 Required: 1. Compute the predetermined overhead rate used during the year in the Research and Documents Department. Compute the rate used in the Litigation Department. 2. Using the rates you computed in (1) above, compute the total overhead cost applied to Case
Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below: Product Additional Processing Costs Selling Price A $63,000 $20 per pound B $80,000 $13 per pound C $36,000 $32 per gallon Required: 1) Which product or products should be sold at the split-off point and which product or products should be processed further? Show computations. Answer: 1. A B C Selling price after further processing $20 $13 $32 Selling price at the split-off point 16 8 25 Incremental revenue per pound or gallon $ 4 $ 5 $ 7 Total quarterly output in pounds or gallons ×15,000 ×20,000 ×4,000 Total incremental revenue $60,000 $100,000 $28,000 Total incremental processing costs 63,000 80,000 36,000 Total incremental profit or loss $(3,000 ) $ 20,000 $(8,000 ) Therefore, only product B should be processed further. Chapter 14 Exercise 14-10 Net Present Value Analysis of Two Alternatives [L01] Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B Cost of equipment required $100,000 $0 Working capital investment requires $0 $100,000 Annual cash flow $21,000 $16,000 Salvage value of equipment in six years $8,000 $0 Life of the project 6 years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%.