Question

Nicole Limited is a company that produces machinery to customer orders, using a normal job-order cost system. It applies manufacturing overhead to production using a predetermined rate. This overhead rate is set at the beginning of each fiscal year by forecasting the year’s overhead and relating it to direct labour costs. The budget for 2020 was as follows:

Direct labour

$1,807,000

  

Manufacturing overhead

903,500

As at the end of the year, two jobs were incomplete. These were 1768B, with total direct labour charges of $114,100, and 1819C, with total direct labour charges of $390,800. On these jobs, machine hours were 287 hours for 1768B and 647 hours for 1819C. Direct materials issued for 1768B amounted to $227,000, and for 1819C they amounted to $420,800.

Total charges to the Manufacturing Overhead Control account for the year were $902,000, and direct labour charges made to all jobs amounted to $1,573,600, representing 247,300 direct labour hours.

There were no beginning inventories. In addition to the ending work in process just described, the ending finished goods inventory account showed a balance of $562,060.

Sales for the year amounted to $6,207,300; cost of goods sold totalled $3,653,390; and sales, general, and administrative expenses were $1,850,100.

The above amounts for inventories and the cost of goods sold have not been adjusted for any over- or under-application of manufacturing overhead to production. It is the company’s practice to allocate any over- or under-applied overhead to inventories and the cost of goods sold.

  

  

  

  

  

Calculate the under- or over-applied manufacturing overhead for 2020. (Round answer to the nearest whole dollar, e.g. 5,275.)

Manufacturing overhead

$ Under-appliedOver-applied   

  

  

  

  

  

Prorate the amount calculated in part (a) based on the ending balances (before prorating) of Work in Process, Finished Goods, and Cost of Goods Sold. (Round allocation percentage to 2 decimal places, e.g. 15.25% and final answers to the nearest whole dollar, e.g. 5,275.)

Allocation

Cost of goods sold $

Finished goods inventory

WIP inventory

Total $

  

  

  

  

  

Prepare an income statement for the company for the year. The income tax rate is 40%. (Round answers to the nearest whole dollar, e.g. 5,275.)

  

  

Answer 1

a) We will have to calculate the predetermined overhead rate to calculate the applied manufacturing overhead and compare it with actual manufacturing overhead to calculate over or under applied overhead
Formula to calculate predetermined overhead rate
Predetermined overhead rate = Estimated manufacturing overhead/Allocation base
Calculation of predetermined overhead rate
Predetermined overhead rate = 903,500/1,807,000
Predetermined overhead rate			0.50
Therefore the applied manufacturing overhead is 1,573,600*0.50						$786,800
Actual manufacturing overhead is						$902,000
Underapplied manufacturing overhead (902,000-786,800)						$115,200
Since actual manufacturing overhead is higher than the applied manufacturing overhead the manufacturing overhead are underapplied by $115,200
b) The allocation of underapplied manufacturing overhead is based on the outstanding balances of Cost of goods sold, finished goods inventory and WIP inventory
	Amount	Pro rata % [Value/Total]	Underapplied overhead assigned (115200*pro rata%)
Cost of goods sold	$3,653,390	65.00%	$74,880
Finished goods Inventory	$562,060	10.00%	$11,520
WIP Inventory	$1,405,150	25.00%	$28,800
Total	$5,620,600
Calculation of WIP inventory would based on incomplete jobs
Direct Labour charges of incomplete jobs			114100+390800	504900
Direct material issued of incomplete jobs			227000+420800	647800
Applied manufacturing overhead of incomplete jobs			(114100+390800)*0.50	252450
Total WIP				1405150
The allocation would be as follows				505400
Cost of goods sold	$74,880			202160
Finished goods Inventory	$11,520
WIP Inventory	$28,800
Total	$115,200
The income statement of the company is as follows
NICOLE LIMITED
Income statement for the year 2020
Sales	$6,207,300
Less: Adjusted cost of goods sold	$3,728,270	(3653390+74880)
Gross Profit	$2,479,030
Less : Operating Expenses	$1,850,100
Net Income before taxes	$628,930
Tax @ 40%	$251,572
Net Income	$377,358