Question

Chelsea Household Renovations (CHR) is a rapidly growing company that has not been profitable despite increases in sales. It has hired you as a consultant to find ways to improve profitability. You believe that the problem results from poor cost control and inaccurate cost estimation on jobs. The company has essentially no accounting system from which to collect data. You are able, however, to piece together the following information for June:

Production

Completed Job 61.

Started and completed Job 62.

Started Job 63.

Inventory values

Work-in-process inventory (excluding applied overhead):

May 31: Job 61
Direct materials	$	10,000
Labor (1,160 hours × $35)		40,600

June 30: Job 63
Direct materials	$	8,400
Labor (1,240 hours × $35)		43,400

Each job in work-in-process inventory was exactly 50 percent completed as to labor-hours; however, all direct materials necessary to do the entire job were charged to each job as soon as it was started.

There were no direct materials inventories or finished goods inventories at either May 31 or June 30.

Actual overhead was $100,000.

Cost of goods sold (before adjustment for over- or underapplied overhead):

Job 61
Material	$	10,000
Labor		?
Overhead		?
Total	$	131,800

Job 62
Materials	?
Labor	?
Overhead	?
Total	?

Overhead was applied to jobs using a predetermined rate per labor dollar that has been used since the company began operations.

All direct materials were purchased for cash and charged directly to Work-in-Process Inventory when purchased. Direct materials purchased in June amounted to $22,400.

Direct labor costs charged to jobs in June were $148,000. All labor costs were the same per hour for all laborers for June.

Required:

Write a report to management to show:

a. The cost elements (material, labor, and overhead) of cost of goods sold before adjustment for over- or underapplied overhead for each job sold.

b. The value of each cost element (Material(M), Labor(L), and Overhead(O)) for each job in Work-in-process inventory at June 30.

c. Over- or underapplied overhead for June.

Answer 1

a. The cost elements of cost of goods sold before adjustment for over- or underapplied overhead for each job sold is as follows:

Overhead rate is calculated with the help of data provided for Job 61.

It is deduced that the overhead recovery rate is $17.50 per direct labor hour.

Since work-in-process inventory indicates 50% completion as per labor hours, it is assumed that Job 61 has consumed 1,160 hours in June. Likewise, Overhead for Job 61 in the month of June would be $20,300 (1,160 x $17.5)

It is given that work-in-process inventory also indicates that entire material required for the job is consumed.

That is, the material purchased in the month of June belongs to Job 62 and Job 63.

Materials of Job 63 is provided in the question, the balance amount is the materials amount of Job 62.

Total direct labor cost of June is given, if labor cost of Job 63, and labor cost of Job 61($40,600) is deducted from the total, labor cost for the Job 62 would be known.

b. Value of each cost element for Work-in-process inventory at June 30 is as follows:

Only overhead is additionally calculated at the overhead recovery rate of $17.50 per direct labor hour.

c. Over- or underapplied overhead for June is as follows:

Job 61 overhead applied in the month of June = 1,160 x $17.50 = $20,300.

There is under application of overhead.

Hope this is helpful!!