Question

TB Problem Qu. 3-252 Baab Corporation is a ...

Baab Corporation 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	$	14,650	$	22,650
Work in process	$	27,650	$	9,650
Finished Goods	$	62,650	$	77,650

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 33,650 machine-hours and incur $279,295 in manufacturing overhead cost. The following transactions were recorded for the year:

Raw materials were purchased, $315,650.

Raw materials were requisitioned for use in production, $307,650 ($280,350 direct and $27,300 indirect).

The following employee costs were incurred: direct labor, $377,650; indirect labor, $96,650; and administrative salaries, $172,650.

Selling costs, $147,650.

Factory utility costs, $10,650.

Depreciation for the year was $166,000 of which $151,000 is related to factory operations and $15,000 is related to selling, general, and administrative activities.

Manufacturing overhead was applied to jobs. The actual level of activity for the year was 34,130 machine-hours.

Sales for the year totaled $1,295,000.

Required:

a. Prepare a schedule of cost of goods manufactured.

b. Was the overhead underapplied or overapplied? By how much?

c. Prepare an income statement for the year. The company closes any underapplied or overapplied overhead to Cost of Goods Sold.

Answer 1

Solution a:

Predetermined overhead rate = Estimated overhead / Estimated machine hours

= $279,295/ 33650 = $8.30 per machine hour

Baab Corporation
Schedule of cost of goods manufactured
Particulars	Details	Amount
Direct Material:
Beginning material inventory	$14,650.00
Cost of material purchased	$315,650.00
Cost of material available	$330,300.00
Less: Ending material inventory	$22,650.00
Total material used	$307,650.00
Less: Indirect material used	$27,300.00
Direct material used		$280,350.00
Direct labor		$377,650.00
Manufacturing overhead applied (34130 * $8.30)		$283,279.00
Total manufacturing cost for the year		$941,279.00
Add: Beginning WIP		$27,650.00
Total cost of work in process during the year		$968,929.00
Less: Ending WIP		$9,650.00
Cost of goods manufactured		$959,279.00

Solution b:

Total manufacturing overhead incurred = Indirect material + Indirect labor + Factory utility cost + Depreciation related to factory operations

= $27,300 + $96,650 + $10,650 + $151,000 = $285,600

Overhead applied = 34130*$8.30 = $283,279

As actual overhead is higher than overhead applied, it means overhead is underapplied.

Underapplied overhead = $285,600 - $283,279 = $2,321

Solution c:

Computation of Adjusted Cost of goods sold
Particulars	Amount
Cost of goods manufactured	$959,279.00
Add: Beginning finished goods inventory	$62,650.00
Less: Ending finished goods inventory	$77,650.00
Unadjusted cost of goods sold	$944,279.00
Add: Underapplied overhead	$2,321.00
Adjusted cost of goods sold	$946,600.00

Baab Corporation
Income Statement
Particulars	Details	Amount
Sales		$1,295,000.00
Cost of goods sold		$946,600.00
Gross Profit		$348,400.00
Operating Expenses:
Administrative salaries	$172,650.00
Selling Costs	$147,650.00
Depreciation Expense	$15,000.00
Total operating expenses		$335,300.00
Net Income		$13,100.00