Question

O’Leary Corporation manufactures special purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O’Leary uses a normal job costing system. Direct labor at O’Leary is paid $37 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows.

		Year 1			Year 2
Direct labor-hours worked		71,000			58,000
Manufacturing overhead costs incurred
Indirect labor	$	2,920,000		$	2,320,000
Employee benefits		1,065,000			870,000
Supplies		710,000			580,000
Power		667,000			562,000
Heat and light		146,000			146,000
Supervision		787,850			668,250
Depreciation		2,102,500			2,102,500
Property taxes and insurance		831,650			871,250
Total manufacturing overhead costs	$	9,230,000		$	8,120,000

At the beginning of year 3, O’Leary has two jobs, which have not yet been delivered to customers. Job MC-270 was completed on December 27, year 2. It is scheduled to ship on January 7, year 3. Job MC-275 is still in progress. For the purpose of computing the predetermined overhead rate, O’Leary uses the previous year’s actual overhead rate. Data on direct material costs and direct labor-hours for these jobs in year 2 follow.

	Job MC-270			Job MC-275
Direct material costs	$	274,000		$	499,000
Direct labor-hours		2,700	hours		3,400	hours

During year 3, O’Leary incurred the following direct material costs and direct labor-hours for all jobs worked in year 3, including the completion of Job MC-275.

Direct material costs	$	11,844,000
Direct labor-hours		78,000
Actual manufacturing overhead	$	10,080,000

At the end of year 3, there were four jobs that had not yet shipped. Data on these jobs follow.

	MC-389	MC-390	MC-397	MC-399
Direct materials	$47,200	$71,000	$107,500	$32,900
Direct labor-hours	1,780 hours	2,900 hours	6,300 hours	1,500 hours
Job status	Finished	Finished	In progress	In progress

Required:

a. What was the amount in the beginning Finished Goods and beginning Work-in-Process accounts for year 3?

b. O’Leary incurred direct materials costs of $61,000 and used an additional 700 hours in year 3 to complete job MC-275. What was the final (total) cost charged to job MC-275?

c. What was over- or underapplied overhead for year 3?

d. O’Leary prorates any over- or underapplied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-in-Process Inventory. Prepare the journal entry to prorate the over- or underapplied overhead.

e. A customer has asked O’Leary to bid on a job to be completed in year 4. O’Leary estimates that the job will require about $94,500 in direct materials and 5,200 direct labor-hours. Because of the economy, O’Leary expects demand for its services to be low in year 4, and the CEO wants to bid aggressively, but does not want to lose any money on the project. O’Leary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount O’Leary can bid on the job and still not incur a loss?

Answer 1

a. Beginning of Year 3 balances in	Finished goods	WIP
Job No.	MC 270	MC 275
1.Direct materials	274000	499000
2.Direct labor hrs.	2700	3400
3. DL cost at $ 37/hr.(2 *$37)	99900	125800
4.Predetermined MOH rate= $ 130
9230000/71000= 130/ hr.*2700 hrs.	351000
130/hr.*3400 hrs.=		442000
Total cost	724900	1066800

b. Additional costs incurred		MC 275
B/f from above		1066800
Direct materials		61000
Direct labor (700 hrs. *$37)		25900
MOH rate=8120000/58000= $   140/hr.
MOH applied= $ 140/hr.*700 hrs.		98000
Total cost of the job		1251700

c. Over- or underapplied overhead for year 3
Total DL hrs. worked in Yr.3=	78000
So, Total MOH applied to jobs
78000*140=	10920000
MOH actually incurred	10080000
MOH over-applied(diff.)	840000

d..Workings for Pro-Rata allocation of Over-applied MOH

	Year 2	Year 3
	Finished goods	WIP Inventory
	MC 270	MC 275	Other FG	MC389	MC390	MC 397	MC 399	Yr. 3 Tot.
	724900
DM		61000	11524400	47200	71000	107500	32900	11844000
DL hrs.		700	64820	1780	2900	6300	1500	78000
DL $		25900	2398340	65860	107300	233100	55500	2886000
MOH app.		98000	9074800	249200	406000	882000	210000	10920000
Total	724900	184900	22997540	362260	584300	1222600	298400	25650000
	Cost of Goods sold	Finished goods inv.	WIP Inventory

From the above Table
COGS=
MC 270	724900
MC 275	184900
Others	22997540
Total	23907340
Finished Goods inventory
MC389	362260
MC 390	584300
Total	946560
WIP inventory
MC 397	1222600
MC 399	298400
Total	1521000

d..Pro-Rata allocation of Over-applied MOH
	Value before allocation		Less: over applied MOH	Adjusted COGS
COGS	23907340	23907340/26374900*840000=	761412	23145928
Fin. Gds.	946560	946560/26374900*840000=	30146	916414
WIP.Inv.	1521000	1521000/26374900*840000=	48442	1472558
	26374900		840000	25534900

e.The minimum amount O’Leary can bid on the job and still not incur a loss

is cost of direct materials +Direct labor +MOH

ie.
Direct materials	94500
Direct labor(5200*37)	192400
MOH--Yr. 3 OH actual OH rate
ie.10080000/78000=129.23
5200*129.2308=	672000
Total bid price=	958900