Newcastle Company's Beginning and Ending Inventories for the Month of January

question 36

Multiple Choice

Newcastle Company's beginning and ending inventories for the month of January were as follows: $\begin{array}{lrr}&\text { January } 1&\text { January } 31\\ \text {Direct Materials } &£ 80,000 & £ 78,000\\ \text { Work in Process } &£ 155,000 &£ 166,000\\ \text { Finished Goods} &£ 90,000& £ 88,000\\\end{array}$

Production data for month follow: $\begin{array}{lrr} \text { Direct labour cost incurred.} &£ 215,000\\ \text { Actual manufacturing overhead cost incurred } &£ 145,000\\ \text {Direct materials purchases} &£ 160,000\end{array}$

Newcastle applies manufacturing overhead cost to jobs at the rate of 75% of direct labour cost incurred. This rate has been used for many years. The company does not close under- or overapplied manufacturing overhead to Cost of Goods Sold until the end of the year.
-The management accountant wants to apply manufacturing overhead at a rate of 75% of direct labour. The managing director wants to know how this change will affect reported profit. (Assuming Newcastle applies manufacturing overhead cost to jobs at the rate of 75% of direct labour cost incurred) . Newcastle Company's total manufacturing cost for January was:

• A)£522,250.
• B)£538,250.
• C)£463,000.
• D)£465,250.

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Definitions:

Fixedness

A cognitive bias that limits a person to using an object only in the way it is traditionally used.

Heuristics

Mental shortcuts or rules of thumb that simplify decision making and problem solving, although not always perfectly accurate.

Creativity

The ability to produce original and unusual ideas, or to make something new or imaginative.

Sunk-Cost Fallacy

A cognitive error where past investments of time, effort, or money are taken into account when making a decision, even though they cannot be recovered.