Question

Redmar, Inc. manufactures custom campers. They use a costing system with one rate of manufacturing overhead. In this system, they apply manufacturing overhead based on the direct labor hours. Below are the estimated costs (both period and product), estimated number of campers to be produced this year, and estimated direct labor hours per camper for the year-ended 2018.

                        Cost                                        Amount

                        Indirect Production Labor      $   75,000

                        Factory Insurance                   $   15,400

                        Factory Utilities                      $   30,800

                        Marketing expense                  $   57,700

                        Production Supervisor            $   62,300

                        Salaries of salespeople $ 122,500

                        Direct Labor                            $ 262,000

Depreciation on sales office $ 25,000

                        Direct materials                       $ 225,000

                        Factory Rent                           $   69,800                                            

                        Depreciation of factory           $ 124,300

                                                                                                                        

            Estimated campers to be manufactured in 2018 =          400                  

            Estimated direct labor hours per camper                    =          25

Assume Redmar began the year with zero balances in raw materials, work in process, and finished goods inventory. Throughout the course of the year they had the following transactions:

1. They purchased $250,000 in raw materials.  

2. They requisitioned $ 190,000 of direct materials and $30,000 of indirect materials for the production of 500 campers.

3. Throughout the year, they started 500 campers and completed 480 campers. The 500 campers required 12,110 hours of direct labor paid at $20 / hour. Manufacturing overhead was applied to 500 campers. The completed campers were transferred into Finished Goods.

4. They incurred actual manufacturing overhead costs of $ 460,000.  

5. Of the 480 campers completed, they sold 460 for $3,000 / camper.

6. They incurred actual selling and administrative costs of $75,000.

Please answer the following question in order:

A. What is the predetermined manufacturing overhead rate for 2018?

B. What is the actual cost per camper being transferred from work in process to finished goods?

C. Was manufacturing overhead underapplied or overapplied? By how much?

D. What is the net income for 2018 assuming under/overapplied manufacturing overhead was closed into Cost of Goods Sold?

E. What is the ending balance (12/31/18) for all three inventory accounts?

Answer 1

Solution A:

predetermined manufacturing overhead rate for 2018 = Estimated manufacturing overhead / Estimated direct labor hours

Estimated manufacturing overhead = Indirect production labor + Factory insurance + Factory utilities + Prodcution supervisor + Factory rent + Depreciation on factory

= $75,000 + $15,400 + $30,800 + $62,300 + $69,800 + $124,300 = $377,600

Estimated direct labor hours = 400 * 25 = 10000 hours

Predetermined overhead rate = $377,600 / 10000 = $37.76 per labor hours

Solution B:

Direct material cost = $190,000

Actual direct labor cost = 12110 * $20 = $242,200

Manufacturing overhead applied = 12110 * $37.76 = $457,274

Total production cost of 500 camper = $190,000 + $242,200 + $457,274 = $889,474

Cost per camper transferred from WIP to finished goods = $889,474 / 500 = $1,778.95

Solution C:

Manufacturing overhead applied = $457,274

Actual manufacturing overhead = $460,000

Underapplied overhead = $460,000 - $457,274 = $2,726

Solution D:

Computation of net income
Particulars	Amount
Sales revenue (460*$3000)	$1,380,000.00
Cost of goods sold (460*$1,778.95 + $2,726)	$821,043.00
Gross Profit	$558,957.00
selling and administrative cost	$75,000.00
Net Income	$483,957.00

Solution E:

Ending balance of raw material inventroy = $250,000 - $190,000 - $30,000 = $30,000

Work In process = Cost incurred - Cost of goods completed

= $889,474 - (480 * $1778.95) = $35578

Finished goods = Cost of goods manufactured - Cost of goods sold = (480 * $1,778.95) - (460*1778.95) = $35,579