Commerce Mentor Program
294 Midterm Review Session
(20 marks, suggested time 20 minutes)
Looney Tunes Inc. (“LTI”) is a large firm with numerous departments.
experience suggests that the cost function used to estimate overhead in the
Cartoons Department is no longer appropriate.
The current cost function was
developed three years ago.
Since then, a number of changes occurred in the
facilities and processes used in the Cartoons Department.
happened one at a time.
Each time a change was made, the cost accountant felt
the change was not major enough to justify calculating a new overhead cost
LTI is in a very competitive industry and ,due to high demand for its
products, the factory/plant is open 7 days a week.
You have been assigned the task of developing a new cost function for overhead
in the Cartoons Department.
Initial analysis suggests that the number of direct
labor hours is an appropriate cost driver.
Departmental records are available for
The records reveal the following information.
Direct Labor Hours
Your assistant has analyzed the data for March through July and made the
appropriate adjustments except for the following items (for which the assistant
was unsure of the proper treatment).
1. The semiannual property tax bill for the Animation Department’s factory/plant
was paid on June 30.
The entire amount, $6,000 was charged to overhead
2. The costs to install a new piece of equipment with a life of 5 years in the
department was charged to overhead in March instead of being capitalized
(cost of asset).
The installation costs were $12,000.
3. Cartoons’ factory/plant/equipment depreciation/amortization of $8,000 per
month is included in overhead.
The $8,000 includes amortization relating to
the new equipment but not the installation costs.