Fastraq Inc. is in the business of design and manufacture of bike chains for both professional and amateur cyclists. Two new titanium chain sets were introduced during the year – the Smooth and Extreme. They are currently selling for $110 and $155 respectively. The following data summarise the cost structure for the two chain sets:
Number of sets budgeted and produced
Number of sets sold
Direct labour hours per set
Direct labour cost per hour
Direct materials per set
The company adopts an absorption costing system. Overhead is applied to the two products based on direct labour hours using a flexible budget to calculate the overhead rate prior the commencement of the financial year.
Fastraq budgeted (and produced) 43,000 Smooth and 55,000 Extreme chain sets. Fixed manufacturing overhead was budgeted at $1,650,000 and variable manufacturing overhead was estimated to be $1.75 per direct labour hour. Actual overhead incurred for the year amounted to $2,100,000. Any over- or under-absorbed overhead is written off to cost of goods sold. Compute the overhead rate used by Fastraq to absorb overheads to the chain sets. Provide your answers to four (4) decimal places. Using the overhead absorption rate from part (a), calculate the operating income of Fastraq by product lines and for the company. Calculate the operating income if Fastraq had used variable costing instead. Present your income statement by product lines and for the company. The over- or under-absorbed overhead is to be treated as a fixed cost and charged to cost of goods sold. Reconcile the income computed in parts (b) and (c) above, and provide an explanation of the difference Calculate how much of manufacturing overhead will be charged to the income statement if in the following year, Fastraq incurs total manufacturing overhead of $2,300,000 and sells off all of the brought forward inventory from the current year, under (i) absorption costing and (ii) variable costing.
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Fastraq Inc. is in the business of design and manufacture of bike chains for both professional and a was first posted on July 1, 2020 at 7:54 am.
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