Question

Dimanche Company had the following estimates available at the beginning of the year:

Indirect Cost Pool #1 $60,000

Indirect Cost Pool #2 $180,000

Labor hours 40,000

Machine hours 80,000

Dimanche uses labor hours to allocate costs from Cost Pool #1, and machine hours to allocate costs from Cost Pool #2.

The following jobs were started during the year:

Job A1 Prime costs             $20,000 Labor hours                 5,000 Machine hours         12,000	Job A2 Prime costs            $32,000 Labor hours                8,000 Machine hours        20,000
Job A3 Prime costs             $26,000 Labor hours                6,500 Machine hours         13,000	Job A4 Prime costs            $29,000 Labor hours                6,000 Machine hours          9,000
Job A5 Prime costs            $18,000 Labor hours               2,400 Machine hours             540	Job A6 Prime costs           $38,000 Labor hours            10,000 Machine hours      30,000

Jobs A3 and A5 were still in process at the end of the year. Job A4 was completed, but had not been sold at the end of the year.

Actual indirect cost information for the year:

Indirect Cost Pool #1 $ 65,000

Indirect Cost Pool #2 $178,000

Assume any over or underapplied overhead amounts are material.

A. Calculate the pre-determined overhead rates for the year.

B. Calculate the total overhead applied to each job. Calculate the total amount of overhead applied during the year.

C. Calculate the amount of over or under applied overhead for the year for each cost pool and for the firm as a whole.

D. Use the Account Balance pro-ration method to dispose of the over or under applied overhead. Make the necessary journal entries, in good form.

E. Use the Allocated (Applied) Overhead pro-ration method to dispose of the over or under applied overhead. Make the necessary journal entries, in good form. (Note: when allocating over or underapplied overhead using the Allocated Overhead method each cost pool must be allocated separately.)

F. Use the Adjusted Allocation Rate (Actual Allocation) method to determine the net adjustment to each job. Do not prepare the journal entries. What is the benefit of using this method?

G. Calculate the total manufacturing cost that will appear as cost of goods sold on Dimanche’s income statement using 1) the allocations from D and 2) the allocations from E.

Answer 1

A. Calculation of predetermined overhead rates for the year:

Indirect cost pool # 1	Indirect cost pool # 2
Predetermined overhead rates = Indirect cost / Labour hours	Predetermined overhead rates = Indirect cost / Machine hours
= $60,000/40,000 = $ 1.5 / labour hr	= $ 180,000/ 80,000 = $ 2.25 / machine hr

B. Calculation of overhead applied to each job during the year :

Particulars	A1	A2	A3	A4	A5	A6	Total
Indirect cost pool # 1
Labour hours	5,000	8,000	6,500	6,000	2,400	10,000	37,900
Predetermined overhead rates	1.5	1.5	1.5	1.5	1.5	1.5
Applied Overead = (Labour hrs * predetermined overhead rates )	$ 7,500	$ 12,000	$ 9,750	$ 9,000	$ 3,600	$ 15,000	$ 56,850
Indirect cost pool # 2
Machine hrs	12,000	20,000	13,000	9,000	540	30,000	84,540
Predetermined overhead rates	2.25	2.25	2.25	2.25	2.25	2.25
Applied Overead = (MAchine hrs * predetermined overhead rates )	$ 27,000	$ 45,000	$ 29,250	$ 20,250	$ 1,215	$ 67,500	$ 190,215
Total applied overhead= (Indirect cost Pool # 1 + Indirect Cost Pool # 2)	$ 34,500	$ 57,000	$ 39,000	$ 29,250	$ 4,815	$ 82,500	$ 247,065

C. Calculation of  over or under applied overhead for the year for each cost pool and for the firm as a whole.

Particulars	Indirect cost pool # 1	Indirect cost pool # 2	Total (For the firm as a whole )
Applied Overhead	$ 56,850	$ 190,215
Actula overhead	$ 65,000	$ 1,78,000
Underapplied overhead	= $ 65,000- $ 56,850 = $ 8150
Overapplied Overhead		= $ 190,215 - 1,78,000 = 12,215	=$ 12,215 - $ 8,150 = $ 4065

D.

Particulars	A1	A2	A3	A4	A5	A6
Prime Cost	20,000	32,000	26,000	29,000	18,000	38,000
Overhead applied	34,500	57,000	39,000	29,250	4,815	82,500
Total cost	54,500	89,000	65,000	58,250	22,815	120,500

Cost of Jobs still in progress = WIP = Job A3 + Job A5 = $65,000+$22,815 =$ 87,815

Cost of jobs completed but not sold = finished goods = Job A4 = $ 58,250

Cost of jobs completed and sold = COGS = Job A1 + Job A2 + Job A6 = $ 54,500+$89,000+$120,500 = $ 264,000

Overapplied applied = $ 4,065

Allocation of Overapplied overhead to WIP, FG and COGS

WIP + FG + COGS = 87,815 + 58,250 + 264,000 =$ 410,065

WIP = (4,065 * 87,815) /410,065 = $ 871

FG = (4,065 * 58,250) /410,065 = $ 577

COGS = (4,065 * 264,000) /410,065 = $ 2,617

Journal Entry:

Manufacturing overhed A/c Dr.   $ 4,065

To WIP   $ 871

To FG   $ 577

$ COGS $ 2,617

( Being manufacturing overhead allocated)