Question

Monticello Company uses a perpetual inventory system and has a highly labour intensive production process, so it assigns manufacturing overhead based on direct labour cost. Monticello’s predetermined overhead application rate for 2017 was computed from the following data: Total estimated factory overhead $1,232,500 Total estimated direct labour cost $850,000 The following activities took place in the work in process inventory during June: WIP Inventory A/C June 1 Bal. 25,625 Direct Materials Used 127,400 Other transactions incurred:  Indirect material issued to production was $19,000  Total manufacturing labour incurred in June was $172,500, 80% of this amount represented direct labour.  Other manufacturing overhead costs incurred for June amounted to $170,375.  Two jobs were completed with total costs of $160,000 & $105,000 respectively. They were sold on account at a mark-up of 75% on cost. Required: i) ii) Compute Monticello’s predetermined manufacturing overhead rate for 2017. State the journal entries necessary to record the above transactions in the general journal: For direct materials used in June For indirect material issued to production in June For total manufacturing labour incurred in June To assign manufacturing labour to the appropriate accounts For other manufacturing overhead incurred For manufacturing overhead applied for June To move the completed jobs into finished goods inventory To sell the two completed jobs on account Calculate the manufacturing overhead variance for Monticello and state the journal entries necessary to dispose of the variance. What is balance on the Cost of Goods Sold account after the adjustment Determine the balance in work in process inventory on June 30.

Answer 1

Solution (i):

Predetermined Overhead rate = Estimated Overhead / Estimated Direct labor cost = $1232500 / 850000 = 145%

Solution (ii):

Journal Entries
S.no.	Particulars	Debit	Credit
(a)	Work In process Inventory Dr	$1,27,400
	To Raw Material Inventory		$1,27,400
(b)	Manufacturing Overhead Dr	$19,000
	To Raw Material Inventory		$19,000
(c )	Wages Expense Dr	$1,72,500
	To Wages payable		$1,72,500
(d)	Work In process Inventory Dr ($172500*80%)	$1,38,000
	Manufacturing Overhead Dr	$34,500
	To Wages Expense		$1,72,500
(e )	Manufacturing Overhead Dr	$1,70,375
	To Accounts Payable		$1,70,375
(f)	Work In process Inventory Dr ($138000*145%)	$2,00,100
	To Manufacturing Overhead		$2,00,100
(g)	Finished Goods Inventory Dr ($160000+$105000)	$2,65,000
	To Work in process Inventory		$2,65,000
(h) - 1	Accounts Receivable Dr ($265000*175%)	$4,63,750
	To Sales Revenue		$4,63,750
(h) - 2	Cost of Goods sold Dr	$2,65,000
	To Finished Goods Inventory		$2,65,000

Solution (iii)

Actual Manufacturing overhead incurred = $19000+ $34500 + $170375 = $223,875

Applied manufacturing overhead = $200,100

Under applied Overhead = $223,875 - $200,100 = $23,775

Journal Entry- To dispose of the Variance
Particulars	Debit	Credit
Cost of Goods Sold Dr	$23,775
To Manufacturing Overhead		$23,775

Solution (iv)

Balance on Cost of goods sold account after adjustment = $265000 + $23775 = $288,775

Solution (v):

Balance in Work in Process inventory = Beginning work in process + Direct material + Direct labor + applied Overhead - Transferred to Finished Goods inventory

= $25625 + $127400+ $138000+ $200100 - $265000

= $226,125