Question

The following cost data relate to the manufacturing activities of Chang Company during the just completed year:

Manufacturing overhead costs incurred:
Indirect materials	$	16,000
Indirect labor		140,000
Property taxes, factory		9,000
Utilities, factory		80,000
Depreciation, factory		251,500
Insurance, factory		11,000
Total actual manufacturing overhead costs incurred	$	507,500
Other costs incurred:
Purchases of raw materials (both direct and indirect)	$	410,000
Direct labor cost	$	70,000
Inventories:
Raw materials, beginning	$	21,000
Raw materials, ending	$	31,000
Work in process, beginning	$	41,000
Work in process, ending	$	71,000

The company uses a predetermined overhead rate of $25 per machine-hour to apply overhead cost to jobs. A total of 20,700 machine-hours were used during the year.

Required:

1. Compute the amount of underapplied or overapplied overhead cost for the year.

2. Prepare a schedule of cost of goods manufactured for the year.

Answer 1

Solution:

First of all we need to know what is overhead and what is Manufacturing Overheads.

Overheads are the indirect cost which are not directly traceable with the units.

Manufacturing Overheads are the indirect costs incurred in production department during making the product. It includes all indirect costs related to the factory which are related to the production.

Part 1 --- the amount of underapplied or overapplied overhead cost for the year

Generally, the manufacturing overhead costs are applied on predetermined basis by calculating a predetermined overhead rate of the company in order to find out the total cost of a product.

Manufacturing Overhead Costs are applied on some allocation basis. Allocation base may be direct labor hour, direct labor cost or machine hour etc as per the companies policy.

Since Manufacturing overheads are applied on estimation basis the actual manufacturing overheads may differ from applied overheads.

If Factory Overhead applied is less than the actual manufacturing overheads, the overheads are called under applied.

If Factory Overhead applied is greater than the actual manufacturing overheads, the overheads are called over applied.

Calculation of Actual Manufacturing Overhead Costs

Manufacturing overhead costs incurred:
Indirect materials	16,000
Indirect labor	140,000
Property taxes, factory	9,000
Utilities, factory	80,000
Depreciation, factory	251,500
Insurance, factory	11,000
Total actual manufacturing overhead costs incurred	507,500

Applied Manufacturing Overhead Costs = Total Machine Hours Used x Predetermined Overhead Rate

= 20,700 MHs x $25 per MH

= $517,500

Here, Applied Overheads are higher than Actual Overheads, it means Overheads are OVER APPLIED by $10,000 (517,500 – 507,500)

Over Applied Manufacturing Overhead = Applied Overheads $517,500 – Actual Overheads $507,500 = $10,000

Part 2 --- Schedule of cost of goods manufactured for the year

First of all we need to calculate the cost of direct material used in production

Cost of Direct Material Used in Production = Beginning raw material + total purchases during the year – Indirect material – Ending Inventory

= 21,000 + 410,000 – 16,000 – 31,000

= $384,000

Schedule of Cost of Goods manufactured
	$$
Cost of Direct material used in production (Refer above calculation)	$384,000
Plus: Direct Labors Costs	$70,000
Plus: Applied Manufacturing Overhead (Refer Part 1)	$517,500
Total Manufacturing Cost	$971,500
Add: Work In Process, Beginning Inventory	$41,000
Less: Work IN Process, Ending Inventory	-$71,000
Cost of Goods Manufactured	$941,500

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you