# Opticom Inc Case Solution

Solution Id Length Case Author Case Publisher
1496 715 Words (5 Pages)
This solution includes: A Word File and An Excel File

To find the finished good inventory at the end of December 31, all the direct costs are required. The direct costs are direct material, direct labor and direct overheads. All these three costs are added in the November balance of finished goods for Job no. N11-013. Only this Job’s balance is used to calculate the finished goods inventory as it was mentioned in the case that this job was turned over to customers by the close of business on December 31. All other jobs were completed in December. The finished good inventory at the end of December comes out to be \$646.000. This is shown in Exhibit 3.

## Following questions are answered in this case study solution:

1. Explain why manufacturers use a predetermined overhead rate to apply manufacturing overhead to their jobs

2. How much manufacturing overhead would opticom have applied to jobs through November 30 of the year just completed?

3. How much manufacturing overhead would have been applied to jobs during December of the year just completed?

4. Determine the amount by which manufacturing overhead is overapplied or underapplied as of December 31 of of the year just completed.

5. Determined the balance in the Finished-Goods inventory account on December 31 of the year just completed.

6. Prepare a schedule of cost of goods manufactured for opticom,Inc. for the year just completed. (Hint: In computing the cost of direct material used, remember that opticom includes both direct and indirect materials in the raw material inventory account.)

#### 1. Explain why manufacturers use a predetermined overhead rate to apply manufacturing overhead to their jobs

There are multiple reasons for which the manufacturers use predetermined overhead rates. This ranges from the requirement by the cost accounting and for convenience preference. Primarily, the reason is to allocate the cost of production to the activities that cannot be directly traced for a particular product or a job. The decision makers can save a lot of time, effort and work while assigning the cost as a group to the overhead activities. Using the rates, managers can identify the indirect overhead costs while the products are still in manufacturing. By doing this, mangers are enabled to make a cost-based decision on a timely basis. Moreover, the end overhead reconciliation is simplified using the predetermined overhead rates.

#### 2. How much manufacturing overhead would opticom have applied to jobs through November 30 of the year just completed

Since the company is using a job order costing system to allocate overheads to the activities. Using this system, the company has identified a predetermined overhead rate for the indirect overhead activities. The rate is 30\$ per machine hour. By using the information in the case, it can be seen that the total machine hours used through November 30 of the year just completed are 73,000. The total overhead through November 30 of the year just completed can be calculated by multiplying the total machine hours with the rate per machine hour. Exhibit 1, shows that the total overhead comes out to be \$2,190,000.

#### 3. How much manufacturing overhead would have been applied to jobs during December of the year just completed?

The same method can be used to calculate the total manufacturing overhead in the month of December of the year just completed. The total machine hours used during the month of December are 6,000. By multiplying the machine hours with the rate per machine hour, the total manufacturing overhead is obtained. Exhibit 2 shows that the total manufacturing overhead for December comes out to be \$180,000.

#### 4. Determine the amount by which manufacturing overhead is overapplied or underapplied as of December 31 of of the year just completed

To calculate the over or under applied overhead, first of all, the actual overhead incurred is required. Using the information given in the case, the actual overhead incurred is calculated by adding the indirect material, indirect labor, utilities and depreciation of all the activities through November 30. The actual overhead comes out to be \$2,200,000 which is less than the overhead applied \$2,190,000. This means that the overhead is under applied by \$10,000 (\$2,200,000 - \$2,190,000). Similarly, the actual overhead in the month of December comes out to be \$12,000. The overhead is under applied in December as well by the amount \$12,000.

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