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Product Costing

In: Business and Management

Submitted By nschlagk9909
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44. Problems with Overhead Application: Decision Focus – Bergan Brewery uses the latest in modern brewing technology to produce a prizewinning beer. In both 2011 and 2012, Bergan produced and sold 100,000 cases of beer and had no raw materials, work in process, or finished goods inventory at the beginning or end of either year. At the end of 2011, the company installed machines to perform some of the repetitive tasks previously performed with direct labor. At the beginning of 2012, Bergan’s bookkeeper estimated that net income would increase from $ 530,000 in 2011 to $ 706,000 in 2012: | 2011 Actual | 2012 Estimated | Beer sales (100,000 cases) | $1,000,000 | $1,000,000 | Less: Cost of goods sold | | | Direct material | 150,000 | 150,000 | Direct labor | 125,000 | 25,000 | Applied overhead* | 95,000 | 19,000 | Gross profit | $630,000 | $806,000 | Less: Selling and administrative costs | 100,000 | 100,000 | Net income | $530,000 | $706,000 |
* For 2012, overhead was applied at the 2011 rate of $ 9.50 per direct labor hour for an estimated 2,000 hours of direct labor. A total of 10,000 direct labor hours were worked in 2011. Bergan’s bookkeeper estimates that 5,000 machine hours will be worked in 2012.

However, when actual overhead was used to calculate net income at the end of the year, net income decreased from $ 530,000 in 2011 to $ 435,000 in 2012: | 2011 Actual | 2012 Actual | Beer sales (100,000 cases) | $1,000,000 | $1,000,000 | Less: Cost of goods sold | | | Direct material | 150,000 | 150,000 | Direct labor | 125,000 | 25,000 | Actual overhead: | | | Lease expense | 25,000 | 25,000 | Utilities expense | 15,000 | 30,000 | Depreciation (equipment) | 50,000 | 200,000 | Equipment maintenance | 5,000 | 35,000 | Gross profit | $630,000 | $535,000 | Less: Selling and

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