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Ronsin: Here are my calculations for next year’s predetermined
overhead rate. If you approve, we can enter the rate into the computer on
January 1 and be up and running in the job-order costing system right
away this year.
Irving: Thanks for coming up with the calculations so quickly, and they
look just fine. There is, how- ever, one slight modification I would like
to see. Your estimate of the total direct labor-hours for the year is
440,000 hours. How about cutting that to about 420,000 hours?
Ronsin: I don’t know if I can do that. The production manager says she
will need about 440,000 direct labor-hours to meet the sales projections
for the year. Besides, there are going to be over 430,000 direct labor-
hours during the current year and sales are projected to be higher next
year.
Irving: Teri, I know all of that. I would still like to reduce the direct
labor-hours in the base to some- thing like 420,000 hours. You probably
don’t know that I had an agreement with your predecessor as divisional
controller to shave 5% or so off the estimated direct labor-hours every
year. That way, we kept a reserve that usually resulted in a big boost to
net operating income at the end of the fiscal year in December. We
called it our Christmas bonus. Corporate headquarters always seemed as
pleased as punch that we could pull off such a miracle at the end of the
year. This system has worked well for many years, and I don’t want to
change it now.
Required:
Assume the following information:
per
Direct Materials
$40
unit
per
Direct Labor
$20
unit
Total Estimated
Manufacturing Overhead
Manufacturing overhead is
allocated based on estimated
direct-labor hours.
$8,400,000