Question

Vandelay Industries makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:

Machine-hours		92,000
Fixed manufacturing overhead cost	$	1,443,000
Variable manufacturing overhead per machine-hour	$	3.10

During the year, a glut of furniture on the market resulted in cutting back production and a buildup of furniture in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Machine-hours		55,000
Manufacturing overhead cost	$	975,000
Inventories at year-end:
Raw materials	$	420,000
Work in process (includes overhead applied of 47,160)	$	110,000
Finished goods (includes overhead applied of 366,400)	$	1,050,000
Cost of goods sold (includes overhead applied of 619,340)	$	2,710,000
A Compute the Company’s predetermined overhead rate for the year. (round to 2 decimal points)

B Compute the underapplied or overapplied overhead for the year. (answer format: number then overapplied or underapplied)

C Record the journal entry to close out the overapplied or underapplied manufacturing overhead.

D What is the impact of your journal entry on the Company's net income? (Net Income increased or decreased)

Answer 1

Rreq A:
Pre-determined OH rate:
Fixed MFg Oh rate (1443000/92000):				15.68
Variable Mfg Oh rate				3.1
Pre-determined OH rate:				18.78
Req B:
Actual manufacturing OH incurred				975000
Actual machine hours		55000
Overheads applied (55000 Mh @ 18.78)				1032900
Over-applied OH				57900
Req c:
Allocation of Over-appied OH to following:
	OH applied	% of Total	Over-applied Oh	Allocated
WIP	47160	4.57%	57900	2643
FG	366400	35.47%	57900	20539
COGS	619340	59.96%	57900	34718
TOTAL	1032900	100.00%	57900	57900
Journal entry:
manufacturing Overheads Ddr.			57900
Work in process inventory				2643
Finished Goods inventory				20539
Cost of goods sold				34718
Req d:
Net income increase by decrease in COGS					34718
Net income decrease by decrease in inventory
	WIP		2643
	FG		20539		23182
Net Increase in income due to over-applied OH					11536