Under a costing system that uses direct labor hours as a driver for the allocation, how much of the inspection costs would be allocated to softball machine?

You have just been hired by Gracie Faye International (GFI) as a cost accountant. The company was named for the internationally popular Toka player, Gracie Faye. The company was started by John Smith who, in his basement, crafted a toka ball and beautifully strong toka stick for his daughter, Tresha, who played on a local team.

Tresha’s team saw the benefit of Tresha’s well-crafted equipment, and soon after, John was asked to equip the whole team. After the team won the championship, he was taking orders for the whole league and soon the whole toka world was knocking on John Smith’s door.

From simple beginnings, GFI has branched out to other sports, taking their brand of solid construction to new heights. Their ping pong table is known as the elephant’s dancing table, since ping-pong star Kevin “The Elephant” Pelinsky leapt onto a GFI table to dance across the net after he won a championship.

Founder Smith was quoted soon after saying, “all of our products have elephant dancing quality.” Their bleachers sales skyrocketed after the collapse of a competitor in the early ‘90s, and a Department of Parks and Recreation remodeled all their baseball fields with GFI electronic scoreboards and their batting cages with GFI automatic pitching machines.

The CFO (your new department head) has asked you to prepare a report to submit to the top management of the company. It would seem that the CFO did not do a very good job justifying your position and what you can do for the company.

The CFO would like for you to explain cost accounting, as well as present information to the management team on product costs for the production of toka balls, specific job order costs for special order products and provide costing information for two models of pitching machines currently offered.

You will present all of this information in a management report divided up into four separate sections as described below.

PART 1: In this section of the report, your job is to explain cost accounting and what skills you can bring to the company. The CFO feels you should include an overview of what cost management is and some of its applications. Be sure to discuss the opportunities available in the cost accounting and how it relates to corporate strategy. This section of your report should be approximately two pages in length.

PART 2: In this section of the report, you are asked to classify the product costs for the production of toka balls. Classify each cost as:

  • fixed or variable
  • direct or indirect

Complete the table and include it in your report. The management team will require justification for each cost (i.e. why you classified the costs as you did).

Product Cost Variable Fixed Direct Indirect
        Electricity        
        Real Estate Taxes        
        Wood for toka sticks        
        Leather to tie wood together        
        Manufacturing Labor        
        Water        
        Lubricants for Machinery        
        Equipment depreciation        

PART 3: The third section of the report should contain your computations for the month of July based on the information given below. The following information is available for a GFI division that produces electronic scoreboards. These are special order products that use a job order cost accounting system. The management team wants to see your calculations in your responses.

 
June 30
July 31
Inventories
        Raw materials
62,000
75,000
        Goods in process
85,000
95,000
        Finished goods
103,000
58,000
Activities and information for July
        Raw materials purchases by cash
510,000
        Factory payroll by cash
745,000
        Factory overhead
                Indirect materials
24,000
                Indirect labor
132,000
                Other overhead costs
220,000
Sales in cash
3,500,000
Predetermined overhead rate based on direct labor cost
52%

Compute the following amounts for the month of July.

  1. Cost of direct materials used.
  2. Cost of direct labor used
  3. Cost of goods manufactured.
  4. Cost of goods sold. (Do not consider any underapplied or overapplied overhead.)
  5. Gross profit.
  6. Overapplied or underapplied overhead.

PART 4: In the last section of the report, the management team would like to know the profits they can expect from the two models of pitching machines they currently manufacture. The softball pitching machine and the hardball machine make up the entire product line. To help determine the profit of each individual product, the CFO wants overheads to be allocated back to the products. Total inspection costs are $40,000.

The estimated production budget is as follows.

Softball pitching machine
Units
20 units
Direct labor hours per unit
200 hours per unit
Number of inspections
5 per unit

Hardball pitching machine
Units
20 units
Direct labor hours per unit
200 hours per unit
Number of inspections
15 per unit
  1. Under a costing system that uses direct labor hours as a driver for the allocation, how much of the inspection costs would be allocated to softball machine?
  2. Repeat the same question for hardball machine.
  3. Using ABC and the number of inspections as a driver for allocation, recalculate the allocation for the softball machine.
  4. Repeat the activity mentioned in question 3 for hardball machine

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