Business

Problemswith overhead application: Decision focus

  1. What potential problems do you see in the book keepers income estimate for 2012

Theincome statements of 2012 has a couple of potential problems such asthe fact that the applied overhead for the estimated overhead costwas greatly under applied. Applied overhead that was quoted was lessby 271000. Such an error would affect the future plans made by thecompany. The income statement also assumes that the overhead costsfor the year 2012 would be proportional to those in 2011 despite thefact that the production method was completely changed (Bragg, 2013).

  1. On the basis of the information given would you change the cost driver or predetermined overhead rate for 2012? What cost driver would you suggest? What would be the new predetermined overhead rate?

Yes,I would change both the predetermined overhead rate and would add acost driver. I would include manufacturing overhead costs in thepredetermined income statement to take into account the equipmentdepreciation since more machines were installed which would alsoincrease equipment maintenance and utility costs. I would suggest a$290000 overhead cost to take into considerations these cost drivers.This would change the predetermined overhead rate to $58.00 permachine hour

  1. Using the cost driver and predetermined overhead rate for 2012 you suggested in B and assuming that 5000 machine hours will be incurred recalculate Bergan’s estimated net income.

(Thecosts mentioned below are in dollars.)

2012(estimated)

Beer sales

1000000

Less cost of goods sold

Direct material

150000

Direct labour

25000

Applied overhead

290000

Gross profit

535000

Less selling and administrative costs

100000

Net income

435000

  1. Bergan has set a goal of increasing net income to $550000 in 2013 however sales are expected to be flat how might the company reach its goal of increasing income to 550000? What qualitative factors should be considered in its decision?

Toincrease the profit margin of the company the company should aim atreducing the overhead costs of the organization this may be donethrough improving the quality of the machines used to reduceoperation costs of the machines. Using machines that have a longerlife spun to reduce depreciation rates of the machinery.Alternatively the institution may change to labor intensiveproduction methods.

References

Bragg,S. M. (2013). Accounting Best Practices. Hoboken, New Jersey: JohnWiley &amp Sons.