Case #1

UOT Corp provides Just in Time printing and kitting services to many different clients. The kitting operations consisted of building COVID kits, containing personal protective equipment, to be sent out to hospitals and doctor's offices throughout the country. All kit components were supplied by customers directly. UOT facility is located in two buildings: Building A houses the printing and kitting departments (manufacturing) and while Building B belonged to administration, sales, warehousing for finished goods, and shipping. Building A also contains a warehouse however it is only used to store raw materials.

At the beginning of 2020, the plant controller left the company to pursue a new position, as a result, the company hired a bookkeeper to maintain the company's books for the year. The problem was the bookkeeper came from a retail sales background and did not know how to keep the books for a manufacturing firm. At the end of the year upon providing the income statement to the manufacturing manager, the manager was shocked as the statements varied vastly from the prior year. Upon confronting the book keeper, who disagreed with the manager, the book keeper felt wronged and quit without notice. Furthermore in 2019 all Kitting department employees were required to obtain fork lift licenses and as a result of the new certification, all kitting employees received a $5 per hour pay raise at the beginning of 2020. Luckily given that UOT applies overhead based on direct labour dollars the controller did update the predetermined overhead rate based on the expected increase in wages for 2020.

Throughout 2020 UOT won very few new kitting contracts and seems to be winning 70% more print contracts than 2019. The manufacturing manager is convinced that the pay raise given to the kitting employees has caused UOT to be unsuccessful at winning new bids for kitting but cannot understand why they were winning more print contracts when labour costs remained the same. UOT bids on jobs using cost-plus therefore a Job cost of $5.00 at cost-plus 40%, the selling price would be $7.00 with $2.00 as profits to UOT. This has been the standard method of job pricing for all new jobs. It is normal for the industry to award bids to those companies with the lower selling price. UOT costing on labour and materials have typically been spot on.

Alyssa Shah, CPA was brought in as the new controller and has been asked to correct the books after the book keeper left. After reviewing through everything Alyssa figured out where the problems were and while there were no errors in recording amounts she did notice that some of the accounts were incorrect. She noted that while direct labour and direct materials were all recorded correctly, manufacturing overhead had no debits recorded in the account and resulted in a very large credit balance at year end.

Since UOT operates in a Just In Time environment and the plant shuts down during the last two weeks of December, there is usually no work in process and no finished goods inventory at the start and end the year. Raw materials inventory accounted for $300,000 of ending inventory in 2020.

Using the information in Exhibit #1 - 4 answer the following question.

1) Prepare the journal entries to correct the manufacturing overhead account for 2020. You do not need to create journal entries for direct labour, direct material or manufacturing overhead applied to the jobs throughout the year, as they were all performed correctly. (Hint: your entry should start with a debit to manufacturing overhead)

2) What was the Predetermined Overhead Rate used by UOT? Calculate the over/under applied overhead for the year and prepare a journal entry to allocate the difference directly to costs of goods sold. Be sure to show all calculations. Exhibit #3 shows a sample job cost sheet for a job performed in the year.

3) Prepare a new income statement for the period ending December 31, 2020 for UOT with all the corrections made above. The statement should be based on information found in Exhibit #2 (Hint: Net Income should significantly increase)

4) Nona Cellar, the sales manager, pulled Alyssa and the manufacturing manager aside to address her concern with the latest Kitting bid. She has been told that the bid for ABC Medical (Exhibit #4) will be higher due to the results for 2020. She understands that the 40% mark-up and the labour costs cannot be changed but was hoping something can be done about keeping the additional overhead as low as possible. The manufacturing manager has asked Alyssa to see if selecting different activity bases would help with the matter, keeping in mind it will also affect bids on future print jobs. The manufacturing manager would like to update the overhead applied based on 2020's actual results. Nona really wants to win this bid as kitting has been struggling getting new business in 2020.

Prepare a report to Nona and the manufacturing manager with your proposed changes to additional overhead applied to the ABC Medical kit bid along with the final bid price. Be sure to justify your proposed changes and explain how it will affect future print and kitting bids. (Hint: Your calculations should include the current activity base used and your proposed activity bid)

Exhibit #1

Actual results for the year ended December 31, 2020 by department.

Average

Total Annual

Printing Department

Cost rate

Activity

Printing Staff

$20

per hour

45,000

hours

Print Materials

$10

per lb

100,000

lbs

Machine Hours

8,320

hours

Kitting Department

Kitting Staff

$25

per hour

44,000

hours

Building B Shipping Department

Shipping Staff

$18

per hour

10,000

hours

Exhibit #2

Income Statement for UOT for the combined performance of Buildings A and B prepared by the book keeper.

UOT Printing

Income Statement

For the year ended December 31, 2020

Sales

$ 4,900,000

COGS

3,500,000

Gross Profit

1,400,000

Expenses

Notes

Executive Sales and Admin Salaries

400,000

Landscaping and Snow Removal

1

10,000

Insurance Costs

1

18,000

Property Tax

1

50,000

Other Expenses

2

90,000

Depreciation

2

30,000

Utilities

2

50,000

Maintenance Staff

2

300,000

Manufacturing Manager Salary

200,000

Shipping Department

3

250,000

Total Expenses

1,398,000

Net Income

$ 2,000

Notes

1

50% of costs belongs to building A and 50% of Building B

2

80% of costs belongs to building A and 20% of Building B

3

Costs includes labour and supplies for shipping in Building B

Exhibit #3

Sample Job Costs Sheet for a print job.

UOT Corp

Job Cost Sheet

Job#

P1589

Quantity

50,000

Item

Menus

Date Required

20-Jun-20

For

ZZZ Food

Date Completed

15-Jun-20

Direct

Direct

Direct

MOH

Date

Materials

Labour hours

Labour

Applied

5-Jun

$ 2,000.00

65

$ 1,300.00

$ 325.00

10-Jun

65

$ 1,300.00

$ 325.00

15-Jun

50

$ 1,000.00

$ 250.00

Total

$ 2,000.00

180

$ 3,600.00

$ 900.00

Total Job Costs

$ 6,500.00

Cost Per Unit

$ 0.13

Exhibit #4

Request for bid from ABC Medical

ABC Medical will provide all materials required for kit components. The contract is for 100,000 medical kits. Each Kit contains 25 components of varying weights and sizes weighting 24 lbs per kit. A sample kit has been provided for your review. Upon completion ABC Medical will pick up all the from the successful company.

Per the manufacturing manager : (Additional Overhead to be updated based on 2020 results)

It would take approximately 0.05 hours or 3 minutes to build each kit.

Labour costs

$ 125,000

Additional Overhead

$ 31,250

Total Cost

$ 156,250

40% mark up

$ 62,500

Total bid

$ 218,750