QUESTION no 3:
Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $800,000 and 25,000 hours, respectively. Information about the company's products follows.
Estimated production volume, 3,000 units
Direct-material cost, $25 per unit
Direct labor per unit, 3 hours at $12 per hour
Estimated production volume, 4,000 units
Direct-material cost, $40 per unit
Direct labor per unit, 4 hours at $12 per hour
Ontario's overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.
Machine Hours Worked
Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed—machinery that was expected to produce significant operating efficiencies.
You are to construct a spreadsheet to solve all of the below requirements:
Ontario’s selling price is based heavily on cost.
Calculate which product is over cost and which is under cost by using direct labor hours as an application base.
Explain if it is possible that this over costing and under costing is responsible for the profit issues the company is facing.
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