Question

In: Accounting

Ravsten Company uses a job-order costing system. The company applies overhead cost to jobs on...

Ravsten Company uses a job-order costing system.

The company applies overhead cost to jobs on the basis of machine-hours. For the current year, the company estimated that it would work 25,000 machine-hours and incur $118,750 in manufacturing overhead cost. The following transactions occurred during the year:

a. Raw materials requisitioned for use in production, $244,000 (70% direct and 30% indirect).

b. The following costs were incurred for employee services:

Direct Labor $170,000

Indirect Labor $28,000

Sales commisions $20,000

Administrative salaries $35,000

c. Heat, power, and water costs incurred in the factory, $51,000.

d. Insurance costs, $20,000 (80% relates to factory operations, and 20% relates to selling and administrative activities).

e. Advertising costs incurred, $60,000.

f. Depreciation recorded for the year, $70,000 (75% relates to factory operations, and 25% relates to selling and administrative activities).

g. The company used 50,000 machine-hours during the year.

h. Goods that cost $490,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse.

i. Sales for the year totaled $720,000. The total cost to manufacture these goods according to their job cost sheets was $485,000.

1. Determine the underapplied or overapplied overhead for the year. (Round predetermined overhead rate to 2 decimal places.).

2. Prepare an income statement for the year. (Hint: No calculations are required to determine the cost of goods sold before any adjustment for underapplied or overapplied overhead.) (Round predetermined overhead rate to 2 decimal places.)

Expert Solution

CLASSIFICATION OF COST
		TOTAL	MATERIAL	LABOUR	MFG. OH	OTHER PERIOD COST
Material issued		244000	170800		73200
labour cost		253000		170000	28000	55000
Heat Power andn lighting		51000			51000
Insurance		20000			16000	4000
Advertising		60000				60000
Dpreciation		70000			52500	17500
Total		698000	170800	170000	220700	136500

Pre-determined OH rate: Estimated Overheads/ Machine hours
	($118750 / 25000 MH) = $4.75 per MH

Req 1.
Overheads incurred (as computed above)			220700
Less: Overheads applied			237500
(50,000 MH @ $4.75 per MH)
Over-applied overheads			16800

Req 2:
INCOME STATEMENT
Sales revenue			720000
Less: COGS			485000
Gross margin			235000
Less: Period cost
Sales commission			20000
Admin salaries			35000
Insurance			4000
Advertising			60000
Depreciation			17500
Net Operating Income			98500

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