Question

Job Order Costing: Wadadli Products uses a job-order costing system Overhead costs are applied to jobs on the basis of machine-hours. At the beginning of the year, management estimated that 170,000 machine-hours would be required for the periods estimated level of production. The company also estimated $212,500 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $1.50 per machine hour. Required: 1. Compute the company’s predetermined overhead rate. 2. Assume that during the year of the company actually works only 160,000 machine-hours and incurs the following costs in the Manufacturing overhead and Work in Process accounts: Manufacturing Overhead Utilities 28,000 ? Insurance 18,000 Maintenance 66,000 Indirect Materials 14,000 Indirect Labor 130,000 Depreciation 80,000 Work in Process Direct Materials 1,060,000 Direct Labor 170,000 Overhead ? Copy the data in the T-accounts above onto your answer sheet. Compute the amount of overhead cost that would be applied to Work in Process for the year, and the make the entry in your T-accounts. 3. Compute the amount of underapplied or overapplied overhead for the year and the show the balance in your manufacturing overhead T- account. Prepare a journal entry to close out the balance this account to Cost of Goods Sold. 4. Explain why Manufacturing Overhead was underapplied or overapplied for the year.

Answer 1

Solution

1.)

Predetermined Overhead rate

= Total overheads/ Machine hours       

= ($212,500 + ($1.50*170,000))/ 170,000

= $2.75

2.)

Overheads = 160,000 machine hours*$2.75

= $440,000

Work in Process
(Utilities)	28,000	440000
(insurance)	18,000
Maintenance)	66,000
Indirect materials)	14,000
Indirect labor)	130,000
Depreciation)	80,000

Work in Process
(Direct material)	1,060,000
(Direct labor)	170,000
(Overhead)	440,000

3.)

The overhead cost is over applied as actual overheads are $136,000 while applied overheads on the basis of predetermined rate is $ 440,000. Thus overheads are under applied by $104,000.

Manufacturing overhead
Utilities	28000	440000
Insurance	18000
Maintenance	66000
Indirect Materials	14000
Indirect Labor	130000
Depreciation	80000
Over applied Overhead	104,000
	$440,000	$440,000
Particulars	Debit	Credit
Manufacturing Overhead	104,000
Cost of Goods Sold		104,000

4.)

The overheads are applied on the basis of predetermined overhead rate based on some fixed output; in the case given it is based on machine hours. So it is assumed that overheads are proportionate to the machine hours. However as per actual level of activity, the overheads incurred are $336,000 while the applied overheads are $440,000. Thus cost of goods sold is decreased by $104,000.