Question

PROBLEM 2-21B   Predetermined Overhead Rate; Disposition of Underapplied or Overapplied Overhead (LO1, LO7)

CHECK FIGURE

(2) Underapplied: $68,600

Adriana Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

Computer-hours	82,000
Fixed manufacturing overhead cost	$1,278,000
Variable manufacturing overhead per computer-hour	$3.40

During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Computer-hours	60,000
Manufacturing overhead cost	$1,208,000
Inventories at year-end:
Raw materials	$420,000
Work in process	$120,000
Finished goods	$1,030,000
Cost of goods sold	$2,770,000

Required:

1.       Compute the company’s predetermined overhead rate for the year.

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

3. Assume the company closes any underapplied or overapplied overhead directly to cost of goods sold. Prepare the appropriate entry. Will this entry increase or decrease net operating income?

Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income Statement (LO6)

CHECK FIGURE

Direct labor: $57,000

Alexsandar Company provided the following account balances for the year ended December 31 (all raw materials are used in production as direct materials):

Selling expenses	$217,000
Purchases of raw materials	$263,000
Direct labor	?
Administrative expenses	$151,000
Manufacturing overhead applied to work in process	$336,000
Total actual manufacturing overhead costs	$359,000

Inventory balances at the beginning and end of the year were as follows:

	Beginning of Year	End of Year
Raw materials	$59,000	$30,000
Work in process	?	$29,000
Finished goods	$37,000	?

The total manufacturing costs for the year were $685,000; the cost of goods available for sale totaled $725,000; the unadjusted cost of goods sold totaled $663,000; and the net operating income was $39,000. The company’s overapplied or underapplied overhead is closed entirely to cost of goods sold.

Required:

Prepare schedules of cost of goods manufactured and cost of goods sold and an income statement. (Hint: Prepare the income statement and schedule of cost of goods sold first followed by the schedule of cost of goods manufactured.)

Answer 1

1

Fixed Overhead rate = Estimated overhead / computer hours = 1,278,000 / 82,000 = 15.59 per hour

Total overhead pre-determined rate = variable overhead rate + fixed overhead rate = 15.59 + 3.4 = 18.99

2

Overhead applied = 60,000 hours X 18.99 per hour = 1,139,400

As actual overhead is more than applied overhead, overhead is under applied

Under applied overhead = 1,208,000 – 1,139,400 = 68,600

3

Account                              Debit     Credit

Cost of goods sold           68,600

Manufacturing overhead              68,600

Second question:

Schedule of cost of goods manufactured and cost of goods sold
Particulars	Amount		Amount
Beginning work In progress inventory			32,000.00
Materials used		292,000.00
Direct labor		57,000.00
Manufacturing overhead applied		336,000.00
Total manufacturing costs for the period		685,000.00	685,000.00
Total manufacturing costs to account for			717,000.00
Less: closing work In progress inventory			29,000.00
Cost of goods manufactured			688,000.00
Add: Opening finshed goods			37,000.00
Cost of goods available for sale			725,000.00
Less: closing finished goods			62,000.00
Cost of goods sold - unadjusted			663,000.00
Add: under applied overhead			23,000.00
Cost of goods sold			686,000.00

Income statement
Particulars	Amount
Sales	-
Cost of goods sold - unadjusted	686,000
Gross profit	-686,000
Expenses
Selling expenses	217,000
Administrative expenses	151,000
Total expenses	368,000
Net operating income	-1,054,000