Question

Krazy Kayaks manufactures kayaks. The company has automated production, so it allocates manufacturing overhead based on machine hours. Krazy expects to incur $240,000 of manufacturing overhead costs and to use 4,000 machine hours during 2015. At the end of 2014, Krazy reported the following inventories: Raw Materials Inventory $20,000 Work-in-Process Inventory $17,000 Finished Goods Inventory $11,000 During January 2015, Krazy used 300 machine hours and recorded the following transactions: Purchased materials on account, $31,000 Used direct materials, $39,000 Manufacturing wages incurred totaled $40,000, of which 90% was direct labor and 10% was indirect labor. Used indirect materials, $3,000 Incurred other manufacturing overhead for January 2015, $13,000 Allocated manufacturing overhead for January 2015 Cost of completed motor scooters, $100,000 Sold scooters on account, $175,000; cost of scooters sold, $95,000 Requirements: Compute Krazy Kayak’s predetermined overhead allocation rate for 2015 Journalize the transactions in the general journal. Adjust the Manufacturing overhead.

Answer 1

Predetermined overhead rate= Estimated manufacturing overhead costs/Estimated machine hours

= $240000/4000

= $60 per machine hour

No.	Account titles and explanation	Debit	Credit
a)	Materials inventory	$31000
	Accounts payable		$31000
	(To record materials purchased on account)
b)	Work in process inventory	$39000
	Materials inventory		$39000
	(To record direct materials used in production)
c)	Work in process inventory (40000*90%)	$36000
	Manufacturing overhead (40000*10%)	$4000
	Wages payable		$40000
	(To record wages incurred)
d)	Manufacturing overhead	$3000
	Materials inventory		$3000
	(To record indirect materials)
e)	Manufacturing overhead	$13000
	Accounts payable		$13000
	(To record manufacturing overhead incurred)
f)	Work in process inventory ($60*300)	$18000
	Manufacturing overhead		$18000
	(To record manufacturing overhead applied)
g)	Finished goods inventory	$100000
	Work in process inventory		$100000
	(To record cost of completed transferred from work in process to finished goods)
h)	Accounts receivable	$175000
	Sales		$175000
	(To record sales on account)
	Cost of goods sold	$95000
	Finished goods		$95000
	(To record cost of goods sold)

Actual manufacturing overhead= $4000+3000+13000= $20000

Overapplied or underapplied overhead= Actual manufacturing overhead-Applied manufacturing overhead

= $20000-18000= $2000 underapplied

No.	Account titles and explanation	Debit	Credit
	Cost of goods sold	$2000
	Manufacturing overhead		$2000
	(To record underapplied overhead)