Question

Gitano Products operates a job-order costing system and applies overhead cost to jobs on the basis of direct materials used in production (not on the basis of raw materials purchased). Its predetermined overhead rate was based on a cost formula that estimated $800,000 of manufacturing overhead for an estimated allocation base of $500,000 direct material dollars to be used in production. The company has provided the following data for the just completed year:

  

Purchase of raw materials	$	510,000
Direct labor cost	$	90,000
Manufacturing overhead costs:
Indirect labor	$	170,000
Property taxes	$	48,000
Depreciation of equipment	$	260,000
Maintenance	$	95,000
Insurance	$	7,000
Rent, building	$	180,000

	Beginning		Ending
Raw Materials	$	20,000	$	80,000
Work in Process	$	150,000	$	70,000
Finished Goods	$	260,000	$	400,000

Required:

1. Compute the predetermined overhead rate for the year.

2. Compute the amount of underapplied or overapplied overhead for the year.

3. Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials.

4. Compute the unadjusted cost of goods sold for the year. Do not include any underapplied or overapplied overhead in your answer.

5. Assume that the $70,000 ending balance in Work in Process includes $24,000 of direct materials. Given this assumption, supply the information missing below:

Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials.
	Gitano Products Schedule of Cost of Goods Manufactured Direct materials: Total raw materials available Raw materials used in production 0000000000000 000000000000 Total manufacturing cost Cost of goods manufactured

·      

Answer 1

1) Overhead rate = 800000*100/500000 = 160% of direct material used

2) Direct material used = 20000+510000-80000 = 450000

Overhead applied = 450000*1.6 = 720000

Actual overhead = 760000

Under applied overhead = 720000-760000 = 40000

3) Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials.

Direct material
Beginning raw material	20000
Raw material purchase	510000
Total material available for use	530000
Less: Ending raw material	-80000
Direct material used		450000
Direct labour		90000
Overhead applied		720000
Total manufacturing cost		1260000
Beginning work in process		150000
Total cost of work in process		1410000
Less: Ending work in process		-70000
Cost of goods manufactured		1340000

4. Compute the unadjusted cost of goods sold for the year. Do not include any underapplied or overapplied overhead in your answer.

Unadjusted cost of goods sold = 1340000+260000-400000 = 1200000

5. Assume that the $70,000 ending balance in Work in Process includes $24,000 of direct materials. Given this assumption, supply the information missing below:

Ending work in process	70000
Direct material	24000
Direct labour (24000*160%)	38400
Direct labour	7600