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:

     Dr                                      WIP Inventory A/C                                              Cr.

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) Compute Monticello’s predetermined manufacturing overhead rate for 2017.

ii) State the journal entries necessary to record the above transactions in the general

journal:

a) For direct materials used in June

b) For indirect material issued to production in June

c) For total manufacturing labour incurred in June

d) To assign manufacturing labour to the appropriate accounts

e) For other manufacturing overhead incurred

f) For manufacturing overhead applied for June

g) To move the completed jobs into finished goods inventory

h) To sell the two completed jobs on account

iii) Calculate the manufacturing overhead variance for Monticello and state the journal

entries necessary to dispose of the variance.

iv) What is balance on the Cost of Goods Sold account after the adjustment

v) Determine the balance in work in process inventory on June 30.

Answer 1

i. Predetermined manufacturing overhead rate = $ 1,232,500 / $ 850,000 = 1.45 or 145 %

ii. In the books of Monticello Company:

Transaction	Account Titles	Debit	Credit
		$	$
a.	Work in Process Inventory	127,400
	Materials Inventory		127,400
b.	Manufacturing Overhead	19,000
	Materials Inventory		19,000
c.	Manufacturing Labor	172,500
	Wages Payable		172,500
d.	Work in Process Inventory	138,000
	Manufacturing Overhead	34,500
	Manufacturing Labor		172,500
e.	Manufacturing Overhead	170,375
	Accounts Payable		170,375
f.	Work in Process Inventory	200,100
	Manufacturing Overhead		200,100
g.	Finished Goods Inventory	265,000
	Work in Process Inventory		265,000
h.	Accounts Receivable	463,750
	Sales Revenue		463,750
h.	Cost of Goods Sold	265,000
	Finished Goods Inventory		265,000

iii. Manufacturing overhead variance = Manufacturing Overhead Incurred - Manufacturing Overhead Applied = $ ( 19,000 + 34,500 + 170,375 ) - $ 200,100 = $ 23,775 U ( underapplied )

Journal entry required: Debit Cost of Goods Sold; Credit Manufacturing Overhead

iv. Balance in Cost of Goods Sold after the adjustment = $ 265,000 + $ 23,775 = $ 288,775.

v. Balance in Work in Process Inventory on June 30 : $ 226,125

Beginning balance	25,625	Completed and Transferred Out	265,000
Direct Materials Used	127,400
Direct Labor	138,000
Manufacturing Overhead Applied	200,100
Ending balance	226,125