A Job Costing System Accumulates Economics Essay

Chapter 14

A job-costing system accumulates and analyzes costs separately for each product or small batches of products. Examples of firms that use job-costing systems include law firms and firms that build custom houses.

A process-costing system accumulates and analyzes costs by each process (or a department) rather than by each job. Examples of firms that use process-costing systems include steel mills and paper companies.

Direct materials and direct labor are traced, and overhead is allocated.

Work in process inventory is the inventory of unfinished products at the start of a period. Cost of goods manufactured is the cost of items finished and transferred from work in process inventory to finished goods inventory. Cost of goods sold is the cost of products sold in a period. It is the cost of items transferred from finished goods inventory to the income statement.

A predetermined overhead rate equals expected overhead costs for the period divided by the expected activity level.

Firms use predetermined overhead rates because actual overhead costs and activity volumes frequently fluctuate.

A normal-costing system is a job-costing system that uses a predetermined overhead rate.

Underapplied overhead means that the overhead applied to jobs is smaller than the amount actually spent on overhead. Overapplied overhead means that the overhead applied to jobs exceeds the amount spent on overhead.

False – if a firm has underapplied overhead, the actual rate must have exceeded the predetermined rate.

(1) correct rates are year end, (2) write off to cost of goods sold, and (3) prorate among inventory accounts and cost of goods sold.

The adjustment will increase cost of goods sold and, in turn, decrease net income.

The proration method allocates the under- or overapplied overhead to WIP inventory, FG inventory, and cost of goods sold in proportion to their unadjusted ending balances.

Three accounts will be affected: (1) WIP, (2) FG, and (3) COGS.

Income will be higher under the proration method because some of the adjustment will be to the inventory account.

Discussion Questions

Job shops and process shops differ considerably in the extent to which we can trace costs to individual units and jobs. A pure job shop makes custom products. Each unit is a separate job and is unique. It is therefore possible to trace many costs directly to each job. However, in process shops, it is not possible to trace most costs to individual units. Rather, we can trace the costs, even for direct materials and direct labor, only at the process or departmental level.

Get Help With Your Essay

If you need assistance with writing your essay, our professional essay writing service is here to help!
Find out more about our Essay Writing Service

Yes. Each patient’s care may be viewed as a job. Many of the costs, including the costs of nurse care, attending physician’s time, medicines and drugs, room occupancy can be directly traced to the patient. Some indirect costs may still have to be allocated. However, such a system also has elements of process costing in that we might use pre-determined rates (e.g., $40 per hour of nursing or $100 per visit by a doctor) to determine costs rather than use actual costs.

Business consulting firms are likely to have job-costing like systems. Fast food restaurants like McDonald’s have more of process costing-type environment.

True. Batch size is one of the main differences that distinguish job shops from process shops. Job shops can be viewed as having a production batch size of one with each batch being unique, while the batch size in process shops is typically large, with each batch consisting of a large number of identical units.

A firm’s actual overhead cost and actual activity volume likely change from month to month. Firms compute a predetermined overhead rate using expected overhead costs and expected activity levels at the start of a plan period (usually a year), which provides a basis for computing overhead variances as the difference between actual overhead and applied overhead. These overhead variances can be potentially used for control purposes.

Using a higher predetermined overhead (for instance, using a smaller denominator volume to calculate the rate) tends to result in the overhead being overapplied. In this case, the year-end adjustment would be income-increasing.

Assume that the budgeted overhead is $100,000 and the normal volume is 10,000 units. Then the predetermined overhead rate is $10 per unit. Let us say that the actual volume is 9,500 units, and the actual overhead is also $100,000. Overhead would be underapplied by $5,000 (9,500 Ã- 10 – $100,000). The actual overhead rate is $100,000/9,500. The error in the predetermined rate is $10 – ($100,000/9,500). Multiplying this by the actual production units we get 9,500 Ã- [$10 – ($100,000/9,500)] = -$5,000, or $5,000 underapplied.

Yes, it will.. Adjusting the income for the entire amount of the underapplied or overapplied, means that the entire amount is charged to COGS. With actual rates, the adjustment will differ because some of the amount will go toward WIP and FG inventories. Indeed, the amounts will not agree even with proration because we use unadjusted balances as the allocation basis.

Yes it would. If the overhead is underapplied, the income would be higher when it is prorated among work-in-process inventory, finished goods inventory, and cost of goods sold rather than written off. If overhead is overapplied, the income would be lower when it is prorated among work-in-process inventory, finished goods inventory, and cost of goods sold.

We would generally agree with this statement. We view the method for disposing of overhead as an accounting exercise to balance the books and to zero out control accounts. The specific method used does not affect the estimate of future capacity costs and thus is not likely to be very useful from a decision making perspective.

Exercises

We can use the inventory equation for the WIP account to answer the question.

Beginning WIP + (materials + labor + applied overhead) = COGM + Ending WIP.

We know the items on the left hand side. But, we need to calculate Ending WIP, which will be the costs charged to job 232.

Direct materials $4,250

Direct labor $2,500

Mfg. overhead $3,750 $2,500 Ã- $1.50 per labor $

Ending WIP $10,500

(We use the total amounts charged to WIP to calculate the overhead rate as $36,000 applied overhead /$24,000 labor $ = $1.50 per labor dollar.)

Thus, we have:

COGM = $22,500 + (25,000+24,000 + 36,000) – $10,500 = $97,000.

The expected fixed overhead is $500,000 out of a total overhead amount of $1,200,000. Thus, the remaining $700,000 constitutes variable overhead. Given the expected activity of 10,000 machine hours, we have:

Variable overhead rate =

Fixed overhead rate =

Total overhead rate =

We compute the inventoriable cost of the job as:

Job cost = Cost of direct materials + cost of direct labor + allocated overhead.

Referring to the solution from part [a], we calculated the total overhead rate to be $120 per machine hour. Therefore, the cost of this job under the job-costing system is:

Job cost = $5,000 + $8,000 + ($120 per hour Ã- 40 hours) = $17,800.

Price = $22,250 = $17,800 Ã- 1.25 (for the 25% mark up).

Overhead application rate = Budgeted overhead / Budgeted DL costs.

Thus, the pre-determined rate is $525,000 / $150,000 = $3.50 per labor dollar.

Applied overhead = predetermined overhead rate Ã- Actual DL costs.

Thus, Applied overhead = $140,000 labor $ Ã- $3.50 per labor $ = $490,000.

Under/Overapplied overhead = Actual overhead – Applied overhead.

Thus, $530,000 – $490,000 = $40,000 underapplied.

Since overhead was overapplied, then the products’ cost for the period should decrease.

Because Ace uses the proration method, we should allocate the overapplied overhead among the WIP, FG and COGS accounts.

The WIP account will decrease by

$10,000 Ã- [$25,000 / ($25,000 + $75,000 + $100,000)]

= $10,000 Ã- 0.125 = $1,250.

Thus, the adjusted balance is $25,000 – $1,250 = $23,750.

Alternatively, you could construct a table as follows:

Item

Amount

Percent

Allocated

Amount of $10,000

Adjusted

Amount

Cost of Goods Sold

$100,000

50.0%

$5,000

$95,000

Finished Goods Inventory

$75,000

37.5%

$3,750

$71,250

Work-in-process inventory

$25,000

12.5%

$1,250

$23,750

Total

200,000

100.0%

10,000

190,000

We know that

Overhead rate = budgeted overhead / budgeted activity volume

$5 per machine hour = $25,000 / budgeted hours

Budgeted hours = 5,000.

Next, we know that

Applied overhead – actual overhead = under/(overapplied overhead)

In this case, applied overhead is smaller than actual overhead because overhead is under applied. Thus,

Applied overhead = $26,000 -$6,000 = $20,000.

Furthermore,

Applied overhead = actual # of machine hours Ã- rate per machine hour

Plugging in the relevant values, we have:

Actual number of machine hours = $20,000 / $5 per machine hour = 4,000 hours.

We need to use the inventory equation in the WIP account for this item.

Beginning WIP + (materials + labor + applied overhead) = COGM + Ending WIP.

Plugging in relevant data, we have:

Beginning WIP + ($90,000 +$107,000 + $113,000) = $313,000 + 0.4 Ã- Beginning WIP.

Solving, we calculate Beginning WIP as $5,000.

We then calculate Ending WIP = 40% Ã- Beginning WIP = 0.4 Ã- $5,000 = $2,000.

We know that

Applied overhead – actual overhead = under/(overapplied) overhead.

In this case, overhead is overapplied, meaning that applied overhead is larger than actual overhead. Thus,

Applied overhead = $500,000 + $50,000 = $550,000.

Furthermore,

Applied overhead = actual # of labor hours Ã- rate per labor hour

Plugging in the relevant values, we have:

Actual number of labor hours = $550,000 / $50 per labor hour = 11,000 hours.

We have to calculate this number indirectly as an input into the WIP account.

Beginning balance + (materials+ labor +applied overhead) – COGM =Ending balance.

We know the beginning and ending balances in this account. The inflows into this account are materials, labor (the answer), and applied overhead. We calculate the cost of materials by applying the inventory equation to the raw materials inventory account.

Materials added to WIP account = $30,000 + $200,000 – $40,000= $190,000

We know applied overhead to be $150,000. The final item to calculate is COGM, which we can do by applying the inventory equation to the finished goods account.

Beginning FG balance + COGM – COGS = Ending FG balance

$65,000 + COGM – $530,000 = $50,000, or COGM = $515,000.

Thus, $10,000 + ($190,000 + labor cost + $150,000) – $515,000 = $20,000

Labor cost = $185,000

We know that adjusted COGS is larger than the unadjusted amount. Hence, overhead is underapplied. Further, the adjustment is $757,500 – $720,000 = $37,500.

However, this is not the entire amount of the underapplied overhead. This is only the portion allocated to COGS. Under proration, COGS would have received $720,000 / ($720,000 + $54,000 + $90,000) = 83.33% of the total underapplied overhead.

Thus, the total underapplied overhead is $37,500/0.83333 = $45,000 underapplied.

a.

We have

Actual overhead $260,000

Applied overhead $280,000

Overapplied overhead ($20,000)

Closing the amount to the COGS give us an adjusted COGS of $200,000 – $20,000 = $180,000.

Notice that we reduce the COGS because overhead is overapplied.

b.

The percentage of overapplied OH that should be prorated to COGS is

$200,000 / ($50,000 + $150,000 + $200,000) = 50%.

Thus, the adjustment amount that should be applied to COGS is $10,000.

The adjusted COGS is therefore $200,000 – $10,000 = $190,000

Alternatively, you could construct a table as follows:

Item

Amount

Percent

Allocated

amount

Adjusted

Amount

Cost of Goods Sold

$200,000

50.0%

$10,000

$190,000

Finished Goods Inventory

$150,000

37.5%

$7,500

$142,500

Work-in-process inventory

$50,000

12.5%

$2,500

$47,500

Total

$400,000

100.0%

20,000

380,000

a.

We can do this problem in two ways. The first way is to calculate the flow through the WIP account. However, this method is tedious.

A shorter way, however, is to recognize that neither jobs J5-59 nor X9-60 are in the WIP account. Only job T10-61 is left in WIP. This job has costs of:

Direct materials $37,000

Direct labor 35,000

Mfg. overhead 43,200 1,200 hours Ã- $36 per machine hour

Total $115,200

b.

The only job remaining in Finished Goods is X9-60. Using the same logic as in part (a), the cost in the FG inventory is:

Beginning value $39,500

Direct materials 0 none were added

Direct labor $20,000

Mfg. overhead $ 7,200 200 hours Ã- $36 per machine hour

Total $66,700

The budgeted overhead rates for the most recent year are:

Variable overhead rate = $62 per rug,

Fixed overhead rate = $25 per rug,

Total overhead rate = $87 per rug.

Calculating applied overhead using the actual number of rugs produced, we find:

Variable overhead applied = $62 Ã- 9,750 = $604,500

Fixed overhead applied = $25 Ã- 9,750 = $243,750

Total overhead applied = $87 Ã- 9,750 = $848,250

Total overhead under- or overapplied

= Actual total overhead – Applied total overhead

= $848,250 – $848,250 = $0.

Thus, total overhead was neither under- nor overapplied.

Fixed overhead under- or overapplied

= Actual fixed overhead – Applied fixed overhead

= $603,250 – $604,500 = ($1,250) or $1,250 overapplied.

Fixed overhead under- or overapplied

= Actual variable overhead – Applied variable overhead

= $245,000 – $243,750 = $1,250 or $1,250 underapplied.

Notice that the amounts by which fixed and variable overhead are under- or overapplied exactly offset each other. Such an exact offset is generally unlikely.

The total overhead rate at the beginning of the year is:

Total overhead rate = Fixed overhead rate + Variable overhead rate

= = $152 per labor hour.

The applied overhead for the year = Actual direct labor hours Ã- overhead rate.

= 120,000 hours Ã- $152/hour = $18,240,000.

The actual overhead incurred was $18,000,000.

Thus, under- or overapplied overhead

= Actual overhead incurred – Applied overhead

= $18,000,000 – $18,240,000

= ($240,000), or $240,000 overapplied.

Because the overhead is overapplied by $240,000, cost of goods sold is overstated. Therefore, writing off the amount of cost of goods sold will decrease cost of good sold and, in turn, increase income by $240,000.

a.

Manufacturing overhead rate = Budgeted overhead / Budgeted activity volume

= $275,000 / 20,000 Machine hours

= $13.75 per machine hour

b.

The ending balance of Finished Goods is Job no. 401:

Prior period’s production costs

$211,250

Current period’s production costs:

Direct materials

$33,000

Direct labor

$15,200

Applied overhead

$34,375

Total

$293,825

Applied overhead = 2,500 machine hours Ã- $13.75 per machine hour

c.

Actual overhead

= $50,000 + $53,000 + $26,250 + $168,000

= $297,250.

Applied overhead = Total machine hours Ã- $13.75 per machine hour

= (2,500 + 6,800 + 6,500 + 12,000) Ã- $13.75 per machine hour

= $382,250.

Thus, overhead is under- or overapplied by

= 297,250 – $382,250 = ($85,000) or $85,000 overapplied.

Lone Star Glassworks would apply factory overhead as:

Factory overhead applied =

Overhead rate per direct labor hour Ã- actual direct labor hours.

Thus,

Factory overhead applied = $8 Ã- 50,000 = $400,000.

We calculate underapplied (overapplied) overhead as:

Underapplied (overapplied) overhead = Actual overhead incurred – Applied overhead

From part (a), we know factory overhead applied = $400,000.

Actual factory overhead for the year = $415,000

= $160,000 indirect labor + $75,000 depreciation on manufacturing equipment + $60,000 factory fuel + $120,000 factory rent.

Note: We do not include sales commissions because, under GAAP, sales commissions are a period cost and not an inventoriable product cost.

For Lone Star, overhead was underapplied by $15,000 = $415,000 – $400,000 for the year.

a.

Dept A overhead rate =Dept Budgeted OH / materials cost in department

= $ 9,000,000 / [($6,000 per unit Ã- 4,000 units) + ($6,000 per unit Ã- 2,000 units)]

=$9,000,000 / $36,000,000

= $ 0.25 per materials dollar

Dept B overhead rate = Dept Budgeted OH / (Machine hours in Dept)

= $3,000,000 / [(4,000 units Ã- 40 hours per unit) + )2,000 units Ã- 20 hours per unit)]

= $3,000,000 / 200,000 hours

= $15 per machine hour

b.

Inventoriable cost consists of materials, labor, and applied overhead.

Materials $6,000

Labor in department A 1,000

Labor in department B 750

Overhead in department A 1,500 $6,000Ã- 0.25/material $

Overhead in department B 300 20 machine hours Ã- $15 per machine hour

Total cost $9,550

For the previous year, Serene has total overhead of ($500,000 + $600,000) = $1,100,000, and 10,000 budgeted machine hours. Thus, its total overhead rate is $110 per machine hour.

Repeating the exercise for the current year, we calculate the total overhead rate as $100 per machine hour.

The manufacturing cost for a product comprises the cost of materials, labor, and overhead. Using the overhead rates from part (a), we calculate the allocated overhead per unit as ($110 Ã- .25 per unit) = $27.50, and ($100 Ã- .25 per unit) = $25.00 for the previous and current years, respectively. Adding these costs to the cost of materials and labor yields:

Previous Year Current Year

Materials + DL cost per unit $45.00 $45.00

Allocated overhead per unit $27.50 $25.00

Cost per unit $72.50 $70.00

The unit cost has come down by $2.50 per unit from the previous year to the current year. However, this fact does not necessarily mean that the firm has reduced costs or increased efficiency. In particular, each unit actually consumed 0.25 machine hours both last year and this year. Thus, there is no gain in efficiency.

The decline in reported cost arises because the fixed overhead rate and, in turn, the total overhead rate has changed.

The variable overhead rate has stayed the same because the total variable overhead has increased in direct proportion to machine hours. In the prior year, Serene budgeted 10,000 machine hours and, in the current year, Serene budgeted 12,500 machine hours. At a variable overhead rate of $60 per machine hour (=$750,000/12,500 hours), this increase of 2,500 machine hours corresponds exactly to an increase in variable overhead of $150,000.

On the other hand, the budgeted fixed overhead has stayed the same at $500,000. However, because budgeted machine hours have increased from 10,000 to 12,500, the fixed overhead rate has declined from $50 per machine hour to $40 per machine hour.

This decline in fixed overhead rates is the only reason for the apparent decline in costs. Stated differently, the firm was able to utilize its capacity better, resulting in less money lost to idle capacity. We are not comfortable, however, terming this higher utilization as reducing costs.

Note: In general, as the volume of activity increases but the fixed overhead stays the same, the fixed overhead rate declines. However, the variable overhead rate stays the same as long as the variable overhead increases in the same proportion. Thus, one way of distinguishing fixed and variable overhead items is to look at the trend in the respective rates over time as the volume of the allocation base fluctuates. Variable overhead rates would remain relative stable, whereas fixed overhead rates would vary inversely with volume.

Let us begin by first calculating the amount of under- or overapplied overhead.

Underapplied (overapplied) overhead = Actual overhead incurred – Applied overhead.

For the labor-related pool, we have:

Underapplied overhead = $1,445,400 – ($0.80 Ã- 1,800,000) = $5,400.

For the machine-related pool, we have:

Overapplied overhead = $1,816,550 – ($22 Ã- 84,000) = ($31,450).

Thus, the total under- or overapplied overhead is ($31,450) + $5,400 = $26,050 overapplied.

When we write off under- or overapplied overhead to COGS, net income decreases or increases by a like amount. Overapplied overhead reduces COGS and increases net income. Thus, the year-end adjustment increases Malcolm’s net income to $471,330 = $445,280 + $26,050.

In part (a), the adjustment resulted in net income increasing by the entire amount of the overapplied overhead. However, by definition, when we prorate (or allocate) overapplied overhead among COGS and the inventory accounts, we allocate less than $26,050 to COGS. Thus, the amount of decrease in COGS, and the corresponding increase in net income, would be lower than that in Part (a). Thus, Malcolm’s income would be lower than the answer computed in part [a].

Problems

Underapplied (Overapplied) overhead = Actual overhead – Applied overhead.

We know that actual overhead is $692,415. Further, applied overhead = $679,815, the sum of the applied overhead amounts in WIP, FG, and COGS (=$61,183.35+$95,174.10+$523,457.55, respectively). Thus,

$692,415 – $679,815 = $12,600 underapplied overhead.

Closing out the underapplied overhead to COGS would increase COGS, thereby reducing income. Thus, the adjustment for underapplied overhead would reduce Skoll’s net income by $12,600, from $122,342 to $109,742.

Under pro-ration, the underapplied overhead would be allocated among the WIP, FG, and COGS accounts. No adjustment would be made to the Raw Materials account because no overhead has been charged to this account in the first place. The adjustment in each account is proportional to the ending balances as shown below:

Work in process

Finished Goods

Cost of Goods Sold

Total

Unadjusted year-end value

$143,516.50

$215,274.75

$1,076,373.75

$1,435,165

% of value in account

10%

15%

75%

100%

Allocation for underapplied overhead

$1,260.00

$1,890.00

$9,450.00

12,600

Adjusted balance

$144,776.50

$217,164.75

$1,085,823.75

$1,447,765

We find that COGS increases by $9,450, meaning that net income decreases by a like amount. We compute adjusted net income as $122,342 – $9,450 = $112,892.

This requirement is similar to requirement [c] except that the allocation basis is different. We now allocate based on the current period overhead, rather than the end of year balances, as shown below.

Work in process

Finished Goods

Cost of Goods Sold

Total

Current period overhead

61,183.35

95,174.10

523,457.55

679,815

% of value in account

9%

14%

77%

100%

Unadjusted value at year end

$143,516.50

$215,274.75

$1,076,373.75

$1,435,165

Allocation for underapplied overhead

$1,134.00

$1,764.00

$9,702.00

12,600

Adjusted balance

$144,650.50

$217,038.75

$1,086,075.75

$1,447,765

Thus, we find that COGS increases by $9,702, meaning that net income decreases by a like amount. We have the adjusted net income as: $122,342 – $9,702 = $112,640.

The results differ because of the different allocations of the underapplied overhead of $12,600. The methods in (b) – (d) use differing allocation basis: all to COGS, proportional to ending balances, proportional to overhead applied during the year.

Intuitively, we might expect the answers for parts (c) and (d) to be the same as we are prorating overhead in both instances to the same accounts. However, the amounts allocated differ the ratio of overhead to the ending balance would vary across the accounts. For instance, for Skoll, WIP comprises 10% of the total value but only 9% of the overhead. Such a discrepancy might arise because we still have to perform some work on the units in WIP (meaning that we would allocate more overhead to these units).

a.

Manufacturing OH rate = $1,728,000 / (24 persons * 2,000 artisan hours per person)

= $36 per artisan hour

b.

The unadjusted balance of Cost of Goods Sold is the cost of Job no. 101:

Prior period’s production costs

$200,000

Current period’s production costs:

Direct materials

$160,000

Direct labor (1,000 DLHs Ã- $50)

$ 50,000

Overhead (1,000 DLHs Ã- $36)

$36,000

Total

$446,000

c.

First, let us calculate the under- or overapplied overhead. We have:

Actual overhead = $187,500 + $50,000 + $30,000 + $108,500 = $376,000.

Applied overhead = $36 per artisan hour * (1,000 + 6,500 + 3,000) hours = $378,000.

Overapplied overhead = $378,000 – $376,000 = $2,000.

The adjusted cost of goods sold is therefore $446,000 – $2,000 = $444,000.

a.

Let us begin by calculating the overhead rate as

Total overhead / total machine hour

= $4,000,000 / 200,000 = $20 per machine hour.

Thus, the job’s total cost is:

Materials given $5,000

Labor 250 hours Ã- $16 $4,000

Overhead 1,000 hours Ã-$20 $20,000

Total $29,000

Notice that we apply overhead based on the total machine hours, across both departments. Thus, 250 hours = 100 + 150 hours; 1,000 hours = 400 + 600 hours.

b.

Let us begin by calculating the overhead rates

Materials handling $1,500,000 / 150,000 = $10 per labor hour

Assembly $2,500,000 / 100,000 = $25 per machine hour

Thus, the job’s total cost is:

Materials given $5,000

Labor 250 hours Ã- $16 $4,000

Overhead 100 labor hours Ã-$10 $1,000

Overhead 600 machine hrs Ã- $25 /hr 15,000

` Total $25,000

Notice that we apply materials handling overhead only on the labor hours in that department (100 hours), and the assembly department overhead only on the machining costs in that department.

The accounting equation for the raw materials account is:

Ending balance = Beginning balance + raw materials purchased – raw materials issued to production. Thus,

$80,000 = $60,000 + raw materials purchased – $225,000.

Therefore, raw materials purchased = $245,000.

Total costs charged to production = raw materials issued to production consumed + direct labor cost + (120% Ã- direct labor cost) = $885,000.

$225,000 + direct labor cost + (1.2 Ã- direct labor cost) = $885,000.

2.2 Ã- direct labor cost = $885,000 – $225,000 = $660,000.

Therefore,

Direct labor cost charged to production = $300,000.

The accounting equation for the work-in-process account is:

Ending balance = Beginning balance + costs charged to operations – cost of goods manufactured.

$105,000 = $80,000 + $885,000 – Cost of goods manufactured.

Cost of goods manufactured = $860,000.

Overhead applied during the period = 120% Ã- direct labor cost

= 1.2 Ã- $300,000 = $360,000.

Actual overhead incurred is $400,000.

Underapplied (overapplied) overhead = Actual overhead incurred – Applied overhead

= $400,000 – $360,000 = $40,000,

= $40,000 underapplied.

We can express cost flows through the finished goods account using the following accounting equation:

Ending balance = Beginning balance + Cost of goods manufactured – Cost of goods sold.

$320,000 = $300,000 + $860,000 – Cost of goods sold.

Cost of goods sold = $840,000

[Alternatively, we can calculate cost of goods sold as cost of goods available for sale less ending balance in finished goods, or $1,160,000 less $320,000, to get $840,000.]

Therefore, the balance in cost of goods sold after writing off the underapplied amount of $40,000 is $840,000 + $40,000 = $880,000.

Given the unit data, we know total overhead = (4,800 Ã- $48) + (3,200 Ã- $72) = $460,800.

Variable overhead = 40% of direct labor $ = .40 Ã- [(4,800 Ã- $24) + (3,200 Ã- $36)] = $92,160.

Thus, fixed overhead = $460,800 – $92,160 = $368,640.

We can calculate the total assembly hours required to make 4,800 units of Cavalier and 3,200 units of Classic as (4,800 Ã- 0.80) + (3,200 Ã- 2.40) = 11,520 assembly hours.

Total budgeted overhead = Budgeted fixed overhead + Budgeted variable overhead

= $368,640 + (0.40 Ã- 230,400) = $460,800.

Therefore, the new overhead rate = per assembly hour.

With this rate, each unit of Cavalier will be charged ($40 Ã- 0.80) = $32 of overhead, and each unit of Classic will be charged ($40 per assembly hours Ã- 2.40 assembly hours) = $96 per unit. Therefore,

Unit manufacturing cost of Cavalier = $20 + $24 + $32 = $76.

Unit manufacturing cost of Classic = $30 + $36 + $96 = $162.

Note: With this new allocation scheme, the Classic appears even more expensive. It takes 3 times as long to assemble each Classic compared to each Cavalier. In contrast, with labor dollars as the allocation basis, the Classic attracted only 1.5 times the overhead as the Cavalier because the labor content of the Classic was 1.5 times that of the Cavalier. The question of which of these two allocation bases is more appropriate