Question

Income Statement

Predetermined Overhead Rate, Application of Overhead to Jobs, Job Cost, Unit Cost

On August 1, Cairle Company’s work-in-process inventory consisted of three jobs with the following costs:

	Job 70	Job 71	Job 72
Direct materials	$1,500	$2,000	$850
Direct labor	1,900	1,300	900
Applied overhead	1,520	1,040	720

During August, four more jobs were started. Information on costs added to the seven jobs during the month is as follows:

	Job 70	Job 71	Job 72	Job 73	Job 74	Job 75	Job 76
Direct materials	$800	$1,235	$3,600	$5,000	$300	$560	$80
Direct labor	1,000	1,400	2,200	1,800	600	850	180

Before the end of August, Jobs 70, 72, 73, and 75 were completed. On August 31, Jobs 72 and 75 were sold.

Cairle’s selling and administrative expenses for August were $1,300. Assume that Cairle prices its jobs at cost plus 25 percent.

Required:

Prepare an income statement for Cairle Company for August.

Cairle Company
Income Statement
For the Month of August
Sales	$
Cost of goods sold
Gross margin	$
Selling and administrative expenses
Operating income	$

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Answer 1

Direct material and direct labour cost for each job has been given. However applied overhead have not been given.

When you calculate the overhead are applied at 80% of direct labour.

For Job 70 - 80% of 1900 = 1520 and so on for other jobs as well.

Total overhead cost for each job is as follows :-

Job 70 - 80% of 1000 = 800

Job 71 - 80% of 1400 = 1120

Job 72 - 80% of 2200 = 1760

Job 73 - 80% of 1800 = 1440

Job 74 - 80% of 600 = 480

Job 75 - 80% of 850 = 680

Job 76 - 80% of 180 = 144

Total cost for each job would be as follows :-

Job 70 - 1500 + 1900 + 1520 + 800 + 1000 + 800 = 7520

Job 71 - 2000 + 1300 + 1040 + 1235 + 1400 + 1120 = 8095

Job 72 - 850 + 900 + 720 + 3600 + 2200 + 1760 = 10060

Job 73 - 5000 + 1800 + 1440 = 8240

Job 74 - 300 + 600 + 480 = 1380

Job 75 - 560 + 850 + 680 = 2090

Job 76 - 80 + 180 + 144 = 404

While making income statement only jobs from which income has earned will be used for computing and rest will go to WIP.

This is used to calculated the gross margin while preparing Profit and Loss statement.

Profit margin is calculated at 25% on cost which is as follows for the jobs which have been completed and sold.

Job 72 = 10060 * 1.25 = 12575/-

Job 75 = 2090 * 1.25 = 2612.5/-

Income statement is as follows :-

Sales 15,187.5 ( 12,575 + 2,612.5)

COGS 12,150 ( 10,060 + 2,090)

Gross margin 3,037.5 ( 15,187.5 - 12,150)

Selling & admin exp 1,300 given

Operating income 1,737.5 ( 3,037.5 - 1,300)

The income statement and income for the business is as calculated above.