Springsteen Company manufactures two different customized acoustic guitars: beginner model and professional model. The company has two support departments: the maintenance department and the power department, and two producing departments: the construction department and the finishing department. Springsteen allocates support department costs only to the producing departments. It uses job-order normal cost-accounting system in two producing departments. In the Construction Department, the wooden guitars are built by highly skilled craftsmen and coated with several layers of lacquer. Then the units are transferred to the Finishing Department, where the bridge of the guitar is attached and the strings are installed. The guitars also are tuned and inspected in the Finishing Department . Springsteen estimates to have an annual practical capacity of 6000 guitars (1500 professional model and 4500 beginner model). The diagram below depicts the production process.
Recently, Springsteen has faced intense competition from oversea guitars manufacturers. Springsteen considers implementing the standard costing to improve cost control. After conducting task analysis in the production departments, Springsteen establishes the following standards:
1) Each finished guitar contains seven pounds of veneered wood. In addition, one pound of wood is typically wasted in the production process.
2) The veneered wood used in the beginner model has a standard price of $12 per pound and the professional model has a standard price of $18. The other parts needed to complete each beginner guitar (professional guitar), such as the bridge and strings, cost $15 ($18) per guitar.
3) The labor standards for Springsteen’s two production departments are as follows:
Construction Department Finishing Department
Beginner model (B) 3 hours of direct labor at $20 per hour 2 hours of direct labor at $18 per hour
Professional model (P) 5 hours of direct labor at $20 per hour 5 hours of direct labor at $18 per hour
The following historical information has been collected from Springsteen’s accounting information systems:
2009 2010 2011 2012
Annual sales 4146(B) & 1611(P) 4456(B) & 1256(P) 4668(B) & 1322(P) 4125(B) & 1369(P)
July sales 343(B) & 133(P) 368(B) & 103(P) 385(B) & 108(P) 332(B) & 112(P)
Based on the budgeted production, Springsteen estimated direct costs for the two support and two production departments in July as follows:
Power Department Maintenance Department Construction Department Finishing
Variable $18,500 $10,000 $25,500 $26,000
Fixed $4,000 $4,000 $10,000 $15,000
Kilowatt-hours 10,000 60,000 30,000
Maintenance hours 80 160 160
Springsteen also expected to allocate the budgeted general indirect manufacturing costs $18,000 evenly to the construction and finishing department in July.
At the end of June, the balance in Springsteen’s Materials Inventory account, which included 150 pounds of grade A veneered wood, was $2,640; the balance in the finished-goods inventory, which was valuated using the last-in, first-out (LIFO) method, consisted of 2 models, was $19,000.
Quantity and Unit Cost
Beginner model 30 units @ $440 each
Professional model 10 units @ $580 each
The following pertains to the month of July.
1. There were no beginning inventories in both production departments.
2. Springsteen’s work-in-process inventory on July 31 consisted of two jobs: B0642 and P0642.
3. Additions to and requisitions from the materials inventory during the month of July included the following.
Raw Materials Purchased Parts
Additions 550 pounds of grade A veneered wood for $9,625
3300 pounds of grade B veneered wood for $41,250 100 set of premium bridges and strings for $1,850
400 set of regular bridges and strings for $6,600
Job B0639 (120 beginner units) 936 pounds of grade B wood 125 regular sets
Job B0640 (100 beginner units) 790 pounds of grade B wood 103 regular sets
Job B0641 (150 beginner units) 1170 pounds of grade B wood 153 regular sets
Job B0642 (15 beginner units) 118 pounds of grade B wood 9 regular sets
Job P0640 (30 professional units) 24 pounds of grade A wood 31 premium sets
Job P0641 (35 professional units) 273 pounds of grade A wood 32 premium sets
Job P0642 (10 professional units) 82 pounds of grade A wood 4 premium sets
4. The average hourly rate for the construction and finishing departments in July was $15 and $14 respectively. The total payroll taxes and fringe benefits rate for Springsteen was 40% of wages paid. The July labor hours consisted of the following:
Account Construction Department Finishing Department
Job B0639 (120 beginner units) 350 264
Job B0640 (100 beginner units) 302 200
Job B0641 (150 beginner units) 448 285
Job B0642 (15 beginner units) 32 17
Job P0640 (30 professional units) 150 144
Job P0641 (35 professional units) 173 176
Job P0642 (10 professional units) 52 22
5. 372 beginner models & 70 professional models were sold on account for $600 (beginner model) & $800 (professional model) each. The finished-goods inventory is valuated using LIFO method.
6. The actual direct fixed costs for power department and maintenance department were $4,050 and $4,000 respectively. The actual direct variable costs for power department and maintenance department were $17,084 and $9,280 respectively.
7. The actual direct fixed costs for construction department and finishing department were $10,800 and $14,800 respectively. The actual direct variable for construction department and finishing department were $23,084.60 and $24,038.40 respectively.
8. Depreciation of the general facility and equipment shared by both production departments during July amounted to $12,000.
9. Rent paid in cash for warehouse space used by the production departments during July was $1,200. Utility costs incurred for the warehouse during July amounted to $2,100. The invoices for these costs were received, but the bills were not paid in July.
10. July property taxes on the general facility were paid in cash, $2,400.
11. The insurance cost covering factory operations for the month of July was $3,100. The insurance policy had been prepaid.
12. The costs of salaries and fringe benefits for sales and administrative personnel paid in cash during July amounted to $8,000.
13. Depreciation on administrative office equipment and space amounted to $4,000.
14. Other selling and administrative expenses paid in cash during July amounted to $35,000.
15. The July 1 balances in selected accounts are as follows:
Accounts Receivable 21,000
Prepaid Insurance 5,000
Accumulated Depreciation: Facility & Equipment 102,000
Accounts Payable 13,000
Submit a hard copy of your work and email an Excel workbook to support your calculations on or before the due date for questions 1 – 9.
1. Assuming Springsteen uses job-order normal costing, and calculate the followings:
– budgeted total manufacturing overhead for the year for each production departments.
– departmental predetermined overhead rate for the year for each production departments
2. Prepare the journal entries to record the transactions in July using normal costing.
3. Calculate the overapplied or underapplied overhead for July. Use the proration method to prepare a journal entry to close this balance.
4. Prepare a schedule of cost of goods manufactured for July.
5. Prepare a schedule of cost of goods sold for July.
6. Prepare an income statement for July.
7. Assuming Springsteen implements the standard costing, and calculate the followings:
– Direct material and direct labor variances
– variable manufacturing overhead rate for both production departments in July.
– fixed manufacturing overhead rate for both production departments in July.
– standard cost for the beginner model and the professional model.
8. Prepare the journal entries to record the transactions in July using the standard costing.
9. Prepare entries to close all the variances using the proration method.