Hi guys, please help. When can we tell if the question asks for variable cost only, fixed cost only or total overhead cost? Why don't we take into account the variable cost for the question below?
Black and Company manufacture concrete lawn products. Black has invested a substantial amount in concrete mixing, casting, and curing equipment and has allocated fixed costs of $2.00 per unit produced based on normal capacity. During a period of slack demand, a salesman has proposed accepting an order for ten thousand ornamental concrete statues to be delivered to the customer at a price of $2.79 each. The cost of each unit is projected to be:
Materials $0.62
Labor $0.47
Shipping $0.07
Overhead $2.00
If Black’s normal capacity was 20,000 units per month, and this 10,000 unit contract was the only one worked on during the month, which of the following adjustments to the factory overhead control account should be made at the end of the month?
A. A debit of $3,700
B. A credit of $3,700
C. A debit of $20,000
D. A credit of $20,000
Answer
Choice “D” is correct. Black's actual overhead costs are 20,000 times $2.00, or $40,000. The
reduced quantity of products produced would have resulted in only 10,000 times $2.00, or
$20,000, being credited to this account for application to the job. A credit adjustment of
$20,000 would be required to close the unapplied amounts at the end of the month.
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