Question 3 ESG Limited (ESG) manufactures electric motors for various brands of machines. The motors are...

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Question 3 ESG Limited ("ESG") manufactures electric motors for various brands of machines. The motors are designed and assembled according to customers' specifications. ESG uses normal costing to cost its job orders and applies plant-wide manufacturing overhead (MOH) based on direct labour hours (DLH). Over or under-applied overhead is closed to Cost of Goods Sold (COGS) annually on 31st March. ESG sells its products at normal cost plus a 15% mark up. Motors are designed in Design Department using computer-aided design software on a mega machine. Once designs are approved, material is sourced from extemal manufacturers and motors are manually assembled in Assembly Department. Assembly workers are paid an hourly rate of $12 per DLH. Designers are paid a fixed salary regardless of complexity or volume of job order. Designers are also responsible to oversee the completion of jobs they designed - they also function as project managers. In consideration of additional project management responsibilities, designers are paid an incentive payment equal to 15% of gross profit (computed based on normal product cost) for each job order completed within specified deadlines. For product costing purposes, ESG treats all bonuses and incentive payments as period expenses, and all spoilage costs as normal spoilage specific to each job. As such, designers have incentive to complete the jobs in a cost effective and timely manner. The following data relates to the current job completed in March 2021 for SkillsM Ltd, a first time customer. Direct materials Number of units completed Direct labour hours per unit $200,000 (excluding spoilage) 5,000 0.5 ACC203e Copyright 2021 Singapore University of Social Sciences (SUSS) Timed Online Assignment - January Semester 2021 Page 4 of 6 Spoilage material amounted to $5,000 resulting from a worker's error during the manufacturing process for SkillsM job. When the error was discovered, the material had to be replaced and spoilage discarded. ESG's budgeted direct labour hours for the year ended 31 March 2021 is 500,000 DLH. ESG also manufactures other components in its factory. ESG's budgeted MOH, DLH and Machine Hours (MH) for the year ended 31 March 2021 were estimated as follows. Design Department MOH $240,000 DLH 100,000 MH 10,000 Assembly Department Variable | $120,000 400,000 2,000 Assembly Department Fixed $240,000 For the year ended 31 March 2021, actual total MOH was $580,000 and actual total DLH was 470,000. Required: (a) Apply job-ordering and normal costing to compute the price that ESG should bill SkillsM Ltd for the current job (rounded to nearest dollar). (b) (c) (6 marks) Calculate the over/under applied MOH for the year ended 31 March 2021 and write a journal entry to close this MOH variance. (4 marks) Mirosh, a designer and project manager for SkillsM job complained that ESG's current policy on overhead allocation cost him to earn less incentive payment for the SkillsM job. He suggested that MOH should be allocated by departmental rates using appropriate cost drivers. Based on estimation, the SkillsM job used 50 machine hours. Explain if there is basis for Mirosh's complaint by showing clear supporting computations (rounded to nearest cent). (d) (6 marks) Discuss whether the incentive payment to designers is aligned with ESG's organisational architecture (OA). (7 marks) Question 3 ESG Limited ("ESG") manufactures electric motors for various brands of machines. The motors are designed and assembled according to customers' specifications. ESG uses normal costing to cost its job orders and applies plant-wide manufacturing overhead (MOH) based on direct labour hours (DLH). Over or under-applied overhead is closed to Cost of Goods Sold (COGS) annually on 31st March. ESG sells its products at normal cost plus a 15% mark up. Motors are designed in Design Department using computer-aided design software on a mega machine. Once designs are approved, material is sourced from extemal manufacturers and motors are manually assembled in Assembly Department. Assembly workers are paid an hourly rate of $12 per DLH. Designers are paid a fixed salary regardless of complexity or volume of job order. Designers are also responsible to oversee the completion of jobs they designed - they also function as project managers. In consideration of additional project management responsibilities, designers are paid an incentive payment equal to 15% of gross profit (computed based on normal product cost) for each job order completed within specified deadlines. For product costing purposes, ESG treats all bonuses and incentive payments as period expenses, and all spoilage costs as normal spoilage specific to each job. As such, designers have incentive to complete the jobs in a cost effective and timely manner. The following data relates to the current job completed in March 2021 for SkillsM Ltd, a first time customer. Direct materials Number of units completed Direct labour hours per unit $200,000 (excluding spoilage) 5,000 0.5 ACC203e Copyright 2021 Singapore University of Social Sciences (SUSS) Timed Online Assignment - January Semester 2021 Page 4 of 6 Spoilage material amounted to $5,000 resulting from a worker's error during the manufacturing process for SkillsM job. When the error was discovered, the material had to be replaced and spoilage discarded. ESG's budgeted direct labour hours for the year ended 31 March 2021 is 500,000 DLH. ESG also manufactures other components in its factory. ESG's budgeted MOH, DLH and Machine Hours (MH) for the year ended 31 March 2021 were estimated as follows. Design Department MOH $240,000 DLH 100,000 MH 10,000 Assembly Department Variable | $120,000 400,000 2,000 Assembly Department Fixed $240,000 For the year ended 31 March 2021, actual total MOH was $580,000 and actual total DLH was 470,000. Required: (a) Apply job-ordering and normal costing to compute the price that ESG should bill SkillsM Ltd for the current job (rounded to nearest dollar). (b) (c) (6 marks) Calculate the over/under applied MOH for the year ended 31 March 2021 and write a journal entry to close this MOH variance. (4 marks) Mirosh, a designer and project manager for SkillsM job complained that ESG's current policy on overhead allocation cost him to earn less incentive payment for the SkillsM job. He suggested that MOH should be allocated by departmental rates using appropriate cost drivers. Based on estimation, the SkillsM job used 50 machine hours. Explain if there is basis for Mirosh's complaint by showing clear supporting computations (rounded to nearest cent). (d) (6 marks) Discuss whether the incentive payment to designers is aligned with ESG's organisational architecture (OA). (7 marks)

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a To compute the price that ESG should bill SkillsM Ltd for the current job using normal costing we need to calculate the total manufacturing cost and ... View the full answer