The Foremost Company predicted factory overhead for 2018 and 2019 would be $120,000 for each year. The predicted activity for 2018 and 2019 were 30,000 and 20,000 direct labor hours, respectively. Additional data are as follows: $\begin{array}{lcc}&2018&2019\
\text { Sales in units } & 25,000 & 25,000 \
\text { Selling price per unit } & \$ 20 & \$ 20 \
\text { Direct materials and direct labor per unit } & \$ 10 & \$ 10
\end{array}$ The company assumes that the long-run normal production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of 2018 and 2019 was $120,000. Assume that it takes one direct labor hour to make one finished unit.
When the annual estimated factory overhead rate is used, the gross profits for 2018 and 2019, respectively, are
A)$150,000 and $150,000.
B)$150,000 and $100,000.
C)$250,000 and $250,000.

Question

Quizplus · Accepted Answer

The gross profit is calculated by subtracting the cost of goods sold (COGS) from the sales revenue. For both years, the sales revenue is the same: 25,000 units * $20/unit = $500,000. The COGS includes direct materials, direct labor, and factory overhead. The factory overhead rate per direct labor hour is $120,000 / 20,000 hours = $6/hour (based on the normal production level). For 2018, the COGS is 25,000 units * ($10 direct materials and labor + $6 overhead) = $400,000, leading to a gross profit of $500,000 - $400,000 = $100,000. For 2019, since the actual hours worked match the normal production level, the overhead applied is accurate, and the COGS calculation remains the same, leading to the same gross profit of $100,000.

The Foremost Company Predicted Factory Overhead for 2018 and 2019