Question

The following scenario will be used for the next four questions. Operating data for the Abraham Company for fiscal 2017 are presented below. Abraham has one building, and the space in the building is divided about equally between manufacturing and retailing. Approximately 20% of the labor costs incurred in manufacturing are for supervisory labor, and the remaining 80% of the salaries are paid to employees directly engaged in manufacturing jobs for clients.

Purchases of raw material in 2017 $220,000

Manufacturing labor cost incurred $500,000

Salaries of sales force $112,000

Operating expenses for the building $90,000

Vacation pay and employee benefits for factory workers $74,000

Retail selling and administrative expenses $282,000

Depreciation expense for delivery trucks $25,000

Safety training for production workers $16,000

Depreciation of factory equipment $110,000

Raw materials inventory, 12/31/16 $42,000

Raw materials inventory, 12/31/17 $36,000

Work in progress inventory, 12/31/16 $18,000

Work in progress inventory, 12/31/17 $20,000

Finished goods inventory, 12/31/16 $44,000

Finished goods inventory, 12/31/17 $50,000

Applied manufacturing overhead in 2017 $300,000

Sales revenue $1,600,000

1.Based on the data provided above for the Abraham Company, prepare a schedule listing the items to be included in the computation of the actual cost of manufacturing overhead incurred by Abraham in 2017. You will receive partial credit for each overhead cost that is correctly listed and credit will be deducted for each item incorrectly listed.

2.Based on the data provided above for the Abraham Company, compute the amount of raw materials issued to production in 2017. Show your work and/or explain your answer in order to receive full credit.

3.This question is based on the data provided above for the Abraham Company. Overhead is applied using direct labor hours. The budget overhead for 2017 was $320,000 and the budget for direct labor hours for 2017 was 16,000 hours. How many direct labor hours were worked during 2017?

4.Setting aside your answer to the question on Abraham's manufacturing overhead, assume that the actual cost of overhead is $280,000, the applied manufacturing overhead in 2017 is $300,000 (as originally stated in the problem), and the cost of goods sold before considering the amount of overapplied or underapplied overhead is $900,000. Compute the cost of goods sold for 2017 after adjusting for the overapplied/underapplied overhead (do not prorate). Show your work and/or explain your answer in order to receive full credit.

Answer 1

1.

Actual manufacturing overhead incurred:
Manufacturing labor cost ($500,000*20%)	$100,000
Operating expense for building	90,000
Vacation pay and employee benefits for factory workers	74,000
Safety training for production workers	16,000
Depreciation of factory equipment	110,000
Total	$390,000

2.

Raw material issued to production
Raw material inventory, 12/31/16	$42,000
Add: Purchases of raw material	220,000
Raw material available	262,000
Less: Raw material inventory, 12/31/17	36,000
Total	$226,000

3.

Applied overhead rate = Budgeted overhead / Budgeted direct labor hours

Applied overhead rate = $320,000 / 16,000 = $20 per direct labor hour

Direct labor hours worked during 2017 = Applied manufacturing overhead / Direct labor hour rate

Direct labor hours worked during 2017 = $300,000 / $20 = 15,000 hours

4.

Over/under applied manufacturing overhead = Actual manufacturing overhead - Applied manufacturing overhead

Over applied manufacturing overhead = $280,000 - 300,000 = $20,000

Cost of goods sold (Adjusted) = Cost of goods sold (Unadjusted) - Over applied manufacturing overhead

Cost of goods sold (Adjusted) = $900,000 - 20,000 = $880,000