Question

Auto Renovators2 is a leading classic car restoration company in Australia. The company has been well-known for renovating thousands of classic cars in Australia according to customers’ orders. In February, the company has worked on five jobs, numbered 301 to 305. Direct materials used, direct labour incurred in February were as shown in the following table.

Order number	Direct material ($)	Direct labour ($)
301	1090	1610
302	770	1410
303	920	1010
304	1070	1910
305	230	610

Manufacturing overheads during February included indirect material ($ 1100), indirect labour ($ 2750), rent ($ 2000), depreciation ($ 1300), insurance ($ 250), utilities ($ 800), and other manufacturing costs ($ 400).

At the beginning of the month, management anticipated that overhead cost would be $ 9100 and total direct labour would amount to $ 6500. Overhead is allocated on the basis of direct labour dollars.

Jobs 301 to 303 were finished during the month; Jobs 304 and 305 is still in process. Jobs 301 to 303 were picked up and paid by customers for $ 6100, $ 4800, $ 3700.

Required

1.       Determine the company’s predetermined overhead rate.

2.       Prepare the journal entries to reflect the following: the incurrence of materials, labour, and actual overhead costs; the allocation of overhead; and the transfer of job costs to finished goods inventory and cost of goods sold (Note: Use summary entries where appropriate by combining individual job data).

3.       In your own words, describe the two different approaches to closing overapplied or underapplied overhead at the end of the month. How do you choose an appropriate method? Calculate the amount of overapplied or underapplied overhead to be closed and prepare an appropriate journal entry.

Answer 1

1. Pre determined overhead rate = 9100/6500 = 1.4

2. Journal Entries

For incurrance

a. Dr. Direct Material 4080

Dr. Direct Labour 6550

Cr. Bank 10630

b.

Dr. Indirect Material 1100

Dr. Indirect Labour 2750

Dr. Rent 2000

Dr. Insurance     250

Dr. utilities 800

Dr. other exp 400

Cr. Bank 7300

c)

Dr. Depreciation 1300

   Cr. Plant 1300

for transfer to jobs (Here Jobs collectively called WIP)

D) Dr WORK IN PROCESS 10630

Cr Direct Material 4080

Cr Direct Labour 6550

Transfer of indirect expenses to overhead

Factory Overhead		8600
	indirect material		1100
	indirect labour		2750
	rent		2000
	depreciation		1300
	insurance		250
	utilities		800
	other exp		400

Allocation of overhead to jobs (WIP)

Factory Overhead
	DR	CR
Allocated overhead to 301		2254
Allocated overhead to 302		1974
Allocated overhead to 303		1414
Allocated overhead to 304		2674
Allocated overhead to 305		854
Recorded actual overhead	8600

Total 9170 transfered to WIP

Transfer completed jobs to finished goods

Dr. Finished Goods 12452

Cr Work in progress 12452

Transfer of sold inventory

Dr. Cost of goods sold 12452

Cr. Finished goods 12452

Offsetting overapplied factory overhead

Dr Factory overhead 570

Cr Cost of goods sold 570

Recording sales

Dr. Bank 14600

Cr Sales 14600

P&L account

Dr Sales     14600

Cr P&L account 14600

P&L account

Dr P&L account 11882

Cr Cost of goods sold 11882

3.

There are two different approaches in closing overapplied or underapplied overhad.

a. Closing it out to cost of goods sold

b. Allocating it among work in process, finished goods and cost of goods sold.

Dr Factory overhead 570

Cr Cost of goods sold 570