Case+7-Requirements+and+Guidelines - UNDER/OVER ALLOCATED...

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UNDER/OVER ALLOCATED OVERHEAD Mini-Case 7 Prepared By: Dr. Linda Bamber Martin Lockheed produces aircraft for both commercial and military use. This year they delivered on a major sale to the Air Force. This single job constituted 75% of Martin Lockheed’s Cost of Goods Sold this year. At the end of the year, Martin Lockheed has no other jobs for the military in progress or under contract. Martin Lockheed prices non-military business using fixed price contracts (the customer agrees to pay a set amount for an aircraft). In contrast, Martin Lockheed had a cost-plus contract with the Air Force. That is, the Air Force paid Martin Lockheed for the cost of producing the aircraft, plus a flat profit. Martin Lockheed uses normal costing, and allocates manufacturing overhead to jobs based on direct labor costs. Martin Lockheed uses a predetermined manufacturing overhead rate that is a percentage of direct labor cost. Martin Lockheed had no beginning inventories. At the end of the year, its records show the following details supporting the (unadjusted) ending balances (in millions): Work in Process Finished Goods Cost of Goods Sold Direct materials $425 $25 $250 Direct labor 45 5 50 Manufacturing overhead 90_ 10__ 100_ Total ending balance $560
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Case+7-Requirements+and+Guidelines - UNDER/OVER ALLOCATED...

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