Lock Tite Company Accounting

Lock Tite Company Accounting

Title: Lock Tite Company Accounting

Overview: The connect question requires creation of posted transactions common to manufacturing companies to inventory T-accounts. This assignment builds on these transactions with additional detail relating to the application and incurrence of overhead. Students will complete journal entries and common reports relating to the activity through the cost accounts, including clearing any over- or under-applied overhead. Budgeted/estimated, applied and actual overhead will be examined using multiple application methods including traditional predetermined rates and activity-based costing. Various methods of overhead application will be compared in totality as well as more specifically at a job level basis. Students also will explore the impact of overhead costing in the bidding process typical of companies using job costing.

Use “given” and your “results” from HW 2.1 Question 15 on CONNECT relating to Lock-Tite Company to complete the Project requirements below. Make sure you are using CORRECT answers from connect.

1) Write journal entries in good format for Lock-Tite Company for the following transactions for the period as calculated/given in the problem on CONNECT.

Ref.

Account

Debit

Credit

a) Raw Material purchased on account

a

b) Raw Material used as direct and indirect material

b

c) Recognition of direct and indirect labor owed to employees

c

d) Application of factory overhead to work-in-process

d

e) Recognition of Cost of Goods Manufactured

e

f) Recognition of Sales Revenue

f

g) Recognition of Cost of Goods Sold

g

h) Incurrence of other overhead costs (use “various” to represent multiple accounts.

h

2) Adjusting Factory Overhead: Use these T-accounts to complete the requirements below:

COGS

Unadjusted Balance from connect

AJE

Adjusted COGS balances

Factory Overhead

Unadjusted Balance

AJE

Adjusted COGS balances

a) Include the unadjusted balances in the T accounts above. The COGS unadjusted balance can be found in the partial income statement underneath the T accounts on Question 11 of connect HW2.1 assignment. The unadjusted Factory Overhead balance is the last row of the Factory Overhead T account again in Question 15 of connect HW2.1 assignment.

b) Assume Lock-Tite clears all its under- or over-applied overhead to cost of goods sold. Write the “adjusting” journal entry to zero the Factory Overhead account.

c) Post the journal entry to the COGS and FOH T accounts above 2a and calculate the “adjusted balances for COGS. Show the ending Factory Overhead account as zero.

3) Use the information from connect T-accounts along with the journal entries in 1 and the T-accounts in 2 of the Project to complete the following:

a) Prepare a Schedule of Cost of Goods Manufactured using the following (include amounts in each pale blue cell):

LOCK-TITE COMPANY

Schedule of Cost of Goods Manufactured

For Month Ended May 31, Year X

Direct materials

Raw materials inventory, beginning

Add: Raw materials purchases

Raw materials available for use

Less: Raw materials inventory, ending

Raw materials used

Less: Indirect material used

Direct Material used

Direct labor

Factory overhead applied

Total manufacturing costs

Add: Work in process inventory, beginning

Total cost of work in process

Less: Work in process inventory, ending

Cost of Goods Manufactured

b) Complete the partial income statement for the table below (include amounts in all pale blue cells):

Lock-Tite Company

Income Statement

For Month Ended May 31, Year 1

Sales

Cost of goods sold

Finished goods inventory, beginning

Cost of goods manufactured

Cost of goods available for sale

Less: Finished goods inventory, ending

Unadjusted Cost of goods sold

Add/Subtract over/under applied overhead

Adjusted Cost of Goods Sold

Gross Margin

c) Calculate Lock-Tite Company’s overall Gross Margin percent. Hint: Gross Margin percent = Gross Margin/Sales Revenue. (Lock Tite Company Accounting)

d) Many job costing companies, use cost-plus pricing, where they “markup” their total costs to set the prices quoted to customers. Prices are sometimes adjusted for job complexity and customers are occasionally charged for cost over-run (when they are identified). We can determine the average “markup” rate from Lock-Tite’s income statement as: MARKUP equals sales revenue divided by unadjusted Cost of Goods Sold. Calculate Lock-Tite Company’s Cost-Plus Mark-Up rate. Show 2 decimal places. You will use this later in the project.

Sales

divided by

Unadj. COGS

=

Cost-Plus Markup Rate

÷

=

4) Understanding application of Overhead: Many of the terms relating to overhead can become confusing as there are 3 different amounts that need to be considered; BUDGETED (also referred to as estimated), APPLIED and ACTUAL. Budgeted overhead (and its driver) is estimated BEFORE an accounting period and is used to set the predetermined overhead rate. APPLIED overhead is calculated DURING the accounting period as production jobs are completed and the actual driver units are incurred. ACTUAL overhead is known AFTER or at the end of an accounting period once all costs have been incurred and recorded in the accounting system. The CONNECT problem gives the APPLIED and ACTUAL amounts of overhead for Lock-Tite Company for the accounting period. Because overhead is applied based on direct labor dollars, the actual driver amounts are also known. (Direct Labor costs in dollars). But the BUDGETED overhead amount, nor the budgeted driver amount that was used to set the 55% predetermined rate were provided in the connect question. Let’s generate a few numbers to use.

a) Use the Direct Labor costs used in the journal entry in 1c. (Direct Labor only!!!) Multiply this number by 1.4 and again by 77% (0.77). We will assume these numbers are total budgeted/estimated overhead costs and budgeted/estimated direct labor costs.

DL from 1c

Budgeted Amounts

x 1.4 =

Budgeted DL costs in dollars

x 0.77 =

Budgeted Overhead in dollars

Note: The calculations in 3d and 4a above are your CHECK POINT. Email or text a photo or PDF to Teri (instructor) and she will verify your accuracy of your work up to this point before you continue with the project.

b) The table examines the impact of using 3 different predetermined overhead rates using 3 different drivers: direct labor dollars, direct labor hours and machine hours. Complete table below using the directions underneath. Green and yellow highlighted cells should include amounts used in a) above. Complete all other pale blue cells in the table.

Factory Overhead method comparisons

Using DL $s

Using DL hours

Using Machine Hours

i) Budgeted Overhead in dollars

ii) Budgeted or Estimated driver amount

10,000

DL hours

14,000

Machine hours

iii) Predetermined overhead rate

0.55

iv) Actual driver values

7,800 DL hours

13,800 hours

v) Applied factory overhead

vi) Actual Overhead Costs

vii) over/(under) applied factory overhead amount

viii) Over or Under-applied?

i) Include the Budgeted Overhead in dollars (calculated in 5a table) in ALL three columns. Calculate the over- or under-applied overhead and include it in the table (include label) for all 3 columns.

ii) Include the Budgeted Direct Labor costs in dollars (calculated in 5a table). Direct Labor is the driver represented in the first column. Direct Labor hours and Machine Hours are the drivers represented in the next two columns. Both the budgeted/estimated drivers and the actual driver amounts are provided for you in the last two columns.

iii) Calculate the predetermined overhead rate for each column by dividing the budgeted overhead dollars (top row) by the budgeted driver amount (2nd row). The rate in the first column should be expressed as a percent. The rate in the next two columns should be expressed in dollars and cents (2 decimals).

iv) Include the actual direct labor dollars from your journal entry in 1c. (Also used in the calculations for 5a) in the first column.

v) Calculate the applied overhead by multiplying the rate (iii) times the actual driver values (iv) for each column.

vi) Include the actual overhead costs. This amount will be the same for all three columns and represents the sum of the debit postings to the overhead T-account on your connect Q11 of HW2.1.

vii) Determine the amount of over- or under-applied overhead by subtracting the actual overhead costs (vi) from the applied overhead (v).

viii) Indicate whether the amount in (vii) represents under- or over-applied overhead.

c) The table represents the amount of overhead applied by Lock-Tite in the first column as well as two alternatives. Lock-Tite could have used a predetermined overhead using direct labor hours or machine hours rather than its chosen direct labor dollars. However overhead is applied, the Factory Overhead account is “cleared” or written to zero. This is the entry written in 2 above. Write the journal entry that would have been required to clear the Factory overhead account (AJE as in 2) assuming the company applied overhead using the methods in the 2nd and 3rd columns.

i) AJE if Direct labor hours used:

ii) AJE if Machine hours used:

d) Would using a different driver significantly affect the amount of Cost of Goods Sold recorded on the income statement for May? Why or why not? Explain using 10 to 30 words.

5) Activity Based Costing, ABC is another method to apply overhead. Lock-Tite Company has identified the several cost pools and estimate of the drivers for May.

a) Use the given percentages to allocate the total budgeted overhead across the pools. Hint: Use the budgeted overhead from 5) as your total. (100%) Round allocated costs to nearest whole number.

b) Calculate the activity rate for each cost pool by dividing the “driver units” into the “allocated costs”. Show decimal places for activity rates. Show 2 decimal places for activity rates.

% of Total

Allocated costs

Estimated

Driver units

Driver

Calculated

Activity Rate

Design

14%

22

# of Jobs

Batch setup

10%

50

# of set ups

Material Handling

62%

240

# of materials

Inspection

5%

1,200

# of units

General Factory

9%

14,000 machine hours

Total Budgeted OH

100%

Start here with 4a amount

c) During May, the company tracked the necessary drivers for each cost pool. These driver units are listed in the table below. Multiply these units by the appropriate “activity rate” from the table above in 5b. Add the total together. This represents applied overhead for Lock-Tite had used ABC costing. Round to the nearest whole dollar.

Actual

Driver units

Driver

Applied Factory Overhead

Design

30

# of Jobs

Batch setup

70

# of set ups

Material Handling

330

# of materials

Inspection

1,600

# of units

General Factory

13,800 machine hours

Total Applied Overhead

d) Using ABC, would overhead be over- or under-applied? By how much? (Lock Tite Company Accounting)

e) Overhead is becoming a bigger and bigger cost component of Lock-Tite’s products. The vice president has indicated the company has had a difficult time applying overhead because of the complexity of their products. Products tend to have a higher number of components that require more costly material handling and designing. Which method do you think would be best for Lock-Tite to use to apply overhead? Traditional plant-wide overhead rate using direct labor dollars, hours, machine hours, or ABC method? Support your answer by incorporating observations from the calculations in 5) and 6). Answer with complete sentences using between 30 and 50 words.

6) To better understand the impact of the applying overhead for their job costing facility, Lock-Tite wants to analyze a few of its larger jobs using both their traditional (percent of direct labor dollars) versus the ABC method. Lock-Tite’s three largest jobs during the year were, JV28, BY92 and ZF14. Use the calculations in a) through g) below to complete the Jobs Report here. Use whole dollar amounts except for Gross Margin %

Lock-Tite Company

Jobs Report – Traditional OH allocation (DL dollars)

Year Ending December 31

JV28

BY92

ZF14

Sales Revenue

From 6e)

Job Costs:

Direct Material

Start here in 6a)

Direct Labor

From 6b)

Overhead

From 6c)

Total Job Costs/COGS

DM+DL+OH

Gross Margin

Sales – COGS

Gross Margin %

GM/Sales

a) Direct Material: Job JV28 used 8% of the company’s Direct Material (amount from JE 1b), Job BY92 used 6% and Job ZF14 used 4% the company’s Direct Material. Use these percentages and calculate the Direct Material for each job. The combined total for the three jobs WILL NOT agree to the total costs because Lock-Tite has other jobs they sold as well as jobs that are still in inventory. Include these amounts in the Jobs Report above.

Job JV28

Job BY92

Job ZF14

Total DM

From JE 1b (Direct only)

% used by job

8%

6%

4%

Given above

DM per job

Calculate (multiply)

b) Direct Labor: 8% of the company’s actual Direct Labor costs were spent on Job JV28. Job BY92 and ZF14 each used 3% and 2%, respectively. Use these percentages and calculate the Direct Material for each job. Include these amounts in the table above.

Job JV28

Job BY92

Job ZF14

Total DL

From JE 1c (Direct only)

% used by job

4%

3%

2%

Given above

DL per job

Calculate (multiply)

c) Factory Overhead; Use the 55% of direct labor dollars and calculate the overhead as it would be applied using a plantwide predetermined rate. Include the amounts in the Jobs Report above for Overhead Cost.

Job JV28

Job BY92

Job ZF14

DL per job

Calculated in 6b bottom

Predetermined rate

0.55

0.55

0.55

given in connect

FOH per job

Calculate (multiply)

d) Determine the total job costs by adding DM, DL and OH for each job in the Jobs Report above. (Add DM, DL and OH together).

e) Sales Revenue: Using Lock-Tite’s average markup rate (showing 2 decimal places) (calculated in 3d) in the table below (yellow cells). Use this markup rate to estimate the sales revenue for each of the 3 jobs.

Job JV28

Job BY92

Job ZF14

Total Job Costs

Calculated in 6d

Cost-Plus Markup Rate

Calculated in 3d

Sales Revenue per Job

Calculate (multiply)

f) Calculate gross margin for each job in the Jobs Report below. Note: Gross Margin equals Sales Revenue minus total job costs.

g) Calculate Gross Margin percent as gross margin divided by sales revenue in the Jobs Report below.

h) Compare the Gross Margin percentages for these three jobs with the company’s overall gross margin percent calculated in 3c above. Why are the percentages in this table different from the percent in 3c? Should Lock-Tite be concerned with the accuracy of the overhead applied to each job? How does this effect the Jobs Report created above? Explain why in 30 to 50 words.

7) In an Activity Based Costing System, overhead is allocated to each job from each cost pool and totaled. Driver units’ statistics are accumulated for each job and they are listed in the table below. Complete the table below for the following requirements. For each job, determine the total overhead applied by adding the costs allocated from each pool. (Support, Batch Setups, Product Sustaining and General Factory). Note: Use the activity rates calculated in 5b). Round costs to the nearest whole dollar.

ABC Application of Overhead

JV28

BY92

ZF14

drivers

OH Costs

drivers

OH Costs

drivers

OH Costs

Design

1

1

1

Batch Setups

4

3

8

Material Handling

15

20

55

Inspection

100

90

220

General Factory

1,100

800

400

Total OH Applied

8) ABC Job Costing: Complete the Jobs Report here using the directions below.

Lock-Tite Company

Job Report – ABC

JV28

BY92

ZF14

Sales Revenue

Job Costs:

Direct Material

Direct Labor

`

Overhead – from 8

Total Job Costs

Gross Margin

Gross Margin %

a) Sales Revenue, Direct Material and Direct Labor costs will be the same regardless of how overhead is applied. Include these amounts from the Jobs Report prepared in 6) above. Presumably, the customers of these jobs have already been billed and paid these revenue amounts so we cannot change them. The Direct Material and the Direct Labor information would also remain the same as it indicates the amounts requisitioned from raw materials and employee time- card information.

b) Include the applied overhead calculated under ABC as calculated in 7) above. Because this is a managerial evaluation, the company is free to presume alternate methods of cost allocations.

c) Complete the Jobs Report and calculate Gross Margin percent for each job.

d) Comparing the Gross Margin percentages of the jobs under the Activity Based Costing system, which job is more attractive for Lock-Tite to sell? How does the Job Report above, compare with the Job Report in 6? Identify and discuss at least two assumptions that could be made by comparing the two reports. Explain using complete sentences and 30 to 50 words.

9) Assume Lock-Tite has been asked to bid a job, Job VP07, for a customer. Lock-Tite’s engineers estimate this job will be one of the most complex jobs they have ever manufactured. It is estimated to require 48 different materials costing $8,500, about 1,500 machine hours and 10 different batch set ups. Direct labor is expected to cost $12,200 for the entire job.

a) Calculate the overhead costs that would be applied to Job VP07 assuming the predetermined overhead rate of 55% of direct labor costs was used.

b) Use your activity rates calculated in 6 above with the given estimated drivers for Job VP07 to calculate the overhead to be applied using ABC.

Job VP07

Cost Pool

Estimated driver Units

Activity Rate

(from 6 above)

OH Costs

(units x rate)

unit description

Design

1

# of Jobs

Batch Setups

10

# of set ups

Material Handling

48

# of materials

Inspection

1250

# of units

General Factory

1,500

Total OH Applied

c) Determine the estimated total job costs under both overhead methods in the table below.

Lock-Tite

Bid Proposal for Job VP07

Costs using 55% OH rate

Costs using ABC

Direct Material

8,500

8,500

Direct Labor

12,200

12,200

Overhead

Total Costs

MARKUP rate from 3d

Proposed bid Price

d) Assume the same price MARKUP rate as determined in 3d, calculate the “proposed bid price” under each method by multiplying the “total costs” for each column by the markup rate from.

e) Which bid price should they propose to the customer? Why? Explain your answer using full sentences and 30 to 50 words.

f) What is the risk (downside) to Lock-Tite proposing the price determined using the 55% overhead rate? Answer with 30 to 50 words.

g) What is the risk (downside) to Lock-Tite proposing the price determined using ABC overhead? Answer with 30 to 50 words.

h) Should Lock-Tite Company switch to ABC method? Explain how it may or may not help manage their company. Use complete sentences and 30 to 50 words.

5

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