Question
In: Accounting
Nicole Limited is a company that produces machinery to customer orders, using a normal job-order cost...
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.)
Solutions
Expert Solution
| 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 | ||||||||||
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