Question

Arnold Company is a manufacturing firm that uses job-order costing. The company's inventory balances were as follows at the beginning and end of the year:

	Beginning Balance	Ending Balance
Raw materials	$21,000	$24,000
Work-in-process	$40,000	$22,000
Finished goods	$26,000	$41,000

The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 38,000 machine-hours and incur $266,000 in manufacturing overhead cost. The following transactions were recorded for the year: Raw materials were purchased, $300,000.

• Raw materials were requisitioned for use in production, $297,000 $(281,000 direct and $16,000 indirect).
• The following employee costs were incurred: direct labor, $389,000; indirect labor, $62,000; and administrative salaries, $176,000.
• Selling costs, $160,000.
• Factory utility costs, $19,000.
• Depreciation for the year was $143,000 of which $137,000 is related to factory operations and $6,000 is related to selling, general, and administrative activities.
• Manufacturing overhead was applied to jobs. The actual level of activity for the year was 34,000 machine-hours.
• Sales for the year totaled $1,283,000

  On the basis of the above data, you are required to do the following:

  i) Prepare a schedule of cost of goods manufactured in good form.

  ii) Was the overhead underapplied or overapplied? By how much?

  iii) Prepare an income statement for the year in good form. The company closes any underapplied or overapplied overhead to Cost of Goods Sold.

Answer 1

Predetermined overhead rate = Estimated manufacturing overhead / Estimated machine hours

Predetermined overhead rate = $266,000 / 38,000 = $7 per machine hour

1.

Schedule of Cost of Goods Manufactured
Beginning raw material	$21,000
Raw material purchases	300,000
Ending raw material	-24,000
Raw material used	297,000
Indirect material	-16,000
Direct material used		281,000
Direct labor		389,000
Manufacturing overhead applied (34,000*$7)		238,000
Total manufacturing cost		908,000
Beginning work in process		40,000
Ending work in process		-22,000
Cost of goods manufactured		$926,000

2.

Actual manufacturing overhead
Indirect material	$16,000
Indirect labor	62,000
Factory utility cost	19,000
Depreciation - Factory	137,000
Total actual manufacturing overhead	$234,000

Overhead is over applied by $4,000 ($238,000-234,000)

3.

Cost of Goods Sold
Cost of goods manufactured	$926,000
Beginning finished goods	26,000
Cost of goods available for sale	952,000
Ending finished goods	-41,000
Unadjusted cost of goods sold	911,000
Over applied overhead	-4,000
Adjusted cost of goods sold	$907,000

ARNOLD COMPANY Income Statement
Sales		$1,283,000
Cost of goods sold		907,000
Gross margin		376,000
Selling and administrative expenses:
Administrative salaries	$176,000
Selling cost	160,000
Depreciation	6,000
Total selling and administrative expenses		342,000
Net income		$34,000