Question

Baab Corporation is a manufacturing firm that uses job-order costing. The company's inventory balances were as follows at the beginning and end of the year: Beginning Balance Ending Balance Raw materials $ 14,750 $ 22,750 Work in process $ 27,750 $ 9,750 Finished Goods $ 62,750 $ 77,750 The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 33,750 machine-hours and incur $286,875 in manufacturing overhead cost. The following transactions were recorded for the year: Raw materials were purchased, $315,750. Raw materials were requisitioned for use in production, $307,750 ($280,250 direct and $27,500 indirect). The following employee costs were incurred: direct labor, $377,750; indirect labor, $96,750; and administrative salaries, $172,750. Selling costs, $147,750. Factory utility costs, $10,750. Depreciation for the year was $172,000 of which $158,000 is related to factory operations and $14,000 is related to selling, general, and administrative activities. Manufacturing overhead was applied to jobs. The actual level of activity for the year was 34,150 machine-hours. Sales for the year totaled $1,305,000. Required: a. Prepare a schedule of cost of goods manufactured. b. Was the overhead underapplied or overapplied? By how much? c. Prepare an income statement for the year. The company closes any underapplied or overapplied overhead to Cost of Goods Sold.

Answer 1

Schedule of cost of goods manufactured

Direct materials
Beginning raw materials	$14,750
Add: Raw materials Purchased($315,750-$27,500)	$288,250
Raw materials available for use	$303,000
Less: Ending raw materials	$22,750
Direct materials used	$280,250
Direct labor	$377,750
Manufacturing overhead($286,875/33,750 ×34,150)	$290,275
Total manufacturing cost	$948,275
Add: Beginning Work-in-process	$27,750
Total cost in process	$976,025
Less: Ending Work-in-process	($9,750)
Cost of goods manufactured	$966,275

Schedule of cost of goods sold

Beginning finished goods	$62,750
Add: Cost of goods manufactured	$966,275
Cost of goods available for sale	$1,029,025
Less: Ending finished goods	($77,750)
Unadjusted cost of goods sold	$951,275
Underapplied manufacturing overhead	$2,725
Adjusted cost of goods sold	$954,000

2. Underapplied or overapplied overhead

Actual manufacturing overhead =$27,500+$96,750+$10,750+$158,000

=$293,000

Underapplied Overhead= Actual manufacturing overhead- Manufacturing overhead incurred

=$293,000-$290,275

=$2,725

3.

Income statement

Sales		$1,305,000
(-) Cost of goods sold		($954,000)
Gross margin		$351,000
Selling and administrative expenses
Selling expenses	$147,750
Administrative expenses	$172,750
Depreciation	$14,000
Total selling and administrative expenses		($334,500)
Net operating income		$16,500