Question

Garrison, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies manufacturing overhead on the basis of direct-labor cost. The following information relates to 20x3:

• Budgeted direct labor and manufacturing overhead were anticipated to be $370,000 and $555,000, respectively.

• Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct labor:

Job No.	Direct Materials				Direct Labor
1	$	162,000			$	52,000
2		337,000				82,000
3		72,000				97,000

• Job nos. 1 and 2 were completed and sold on account to customers at a profit of 65% of cost. Job no. 3 remained in production.

• Actual manufacturing overhead by year-end totaled $355,000. Garrison adjusts all under- and overapplied overhead to cost of goods sold.

Required:

1. Compute the company's predetermined overhead application rate.

2. Compute Garrison’s ending work-in-process inventory.

3. Determine Garrison’s sales revenue.

4. Was manufacturing overhead under- or overapplied during 20x3? By how much?

5. Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-end.

Answer 1

	Job No. 1	Job No. 2	Job No. 3
Direct Material	$         162,000	$         337,000	$          72,000
Direct Labor	$           52,000	$           82,000	$          97,000
Overhead	$           78,000	$         123,000	$       145,500
Total Costs	$        292,000	$         542,000	$       314,500

1. Overhead rate = $555000 / 370000 = 150% of Direct Labor Cost

2. Ending Work in Process = $314,500 i.e. for Job No. 3

3. Sales Revenue = ($292000+542000) x 165% = $1,376,100

4.
Total Overhead applied = $346,500
Since overhead applied is lower, overhead is under-applied.

Under-applied overhead = $355000-346500 = $8500

5.

Account Titles	Debit	Credit
Cost of Goods Sold	$             8,500
Manufacturing Overhead		$              8,500