Question

Data about Annabelle Company’s production and inventories for the month of June are as follows:

Purchases		143,440
Freight In		5,000
Purchase returns and allowances		2,440
Direct labor		175,000
Actual factory overhead		120,000
Inventories:	June 1	June 30
Finished goods	68,000	56,000
Work in process	110,000	135,000
Direct Materials	52,000	44,000

Annabelle Company applies factory overhead at 80% of direct labor cost. Over or under applied overhead is closed to cost of goods sold at year end. The company’s accounting period is on the calendar year basis/

Purchases		143,440
Freight In		5,000
Purchase returns and allowances		2,440
Direct labor		175,000
Actual factory overhead		120,000
Inventories:	June 1	June 30
Finished goods	68,000	56,000
Work in process	110,000	135,000
Direct Materials	52,000	44,000

Annabelle Company applies factory overhead at 80% of direct labor cost. Over or under applied overhead is closed to cost of goods sold at year end. The company’s accounting period is on the calendar year basis/

Provide the following:

1.Prime cost

2. Conversion Cost

3. Total Manufacturing Cost

4. Cost of Good Transferred to Finished Goods Inventory Account

5. Cost of Goods Sold

6. The amount of over/under applied overhead.

7. Cost of goods sold - after closing the over/under applied overhead

Answer 1

THIS QUESTION CAN BE SOLVED BY PREPARING COST SHEET

COST SHEET

PARTICULARS	TOTAL
DIRECT MATERIAL RAW MATERIAL WORK IN PROGRESS FINISHED STOCK	149000 (25000) 12000
DIRECT LABOUR	175000
DIRECT EXPENSES	5000
PRIME COST	316000
FACTORY OVERHEAD	140000
FACTORY COST	456000

WORKING NOTES :

WORKING NOTE 1 - CALCULATION OF DIRECT MATERIAL

(1) RAW MATERIAL CONSUMED = OPENING STOCK+ PURCHASE - PURCHASE RETURN- CLOSING STOCK

= 52000+143440-2440-44000 = 149000

(2) WORK-IN-PROGRESS = OPENING STOCK - CLOSING STOCK

  = 110000-135000 = (25000)

(3) FINISHED STOCK = OPENING STOCK - CLOSING STOCK

= 68000-56000 = 12000

WORKING NOTE 2 - FREIGHT INWARD IS A DIRECT EXPENSE SO TO BE INCLUDED IN PRIME COST.

WORKING NOTE 3 - FACTORY OVERHEAD ARE TO BE ABSORBED AS 80% OF DIRECT LABOUR

SO, FACTORY OVERHEAD = 80% OF 175000 = 140000

NOTE : FACTORY OVERHEAD ARE CHARGED AS % OF PRIME COST, MATERIAL COST, LABOUR COST, PER UNIT, AS TIMES OF LABOUR OR MACHINE HOUR WORKED.

ANSWERS OF QUESTIONS ASKED IN QUESTION

1. PRIME COST = 316000 (AS CALCULATED ABOVE IN COST SHEET)

2. CONVERSION COST = DIRECT LABOUR + FACTORY OVERHEAD = 175000+140000

3. TOTAL MANUFACTURING COST i.e. FACTORY COST WHICH IS 456000 (REFER COST SHEET)

4.COST OF GOODS TRANSFERRED TO FINISHED GOODS INVENTORY ACCOUNT = 25000 WHICH IS TRANSFERED FROM WORK IN PROGRESS

5.COST OF GOODS SOLD = ASSUME THAT ALL GOODS MANUFACTURED ARE SOLD BECAUSE THE QUESTION IS SILENT ABOUT VOLUME OF SALES. SO, COST OF GOODS SOLD IS FACTORY COST i.e. 456000

6. OVER ABSORPTION OF OVERHEAD =ABSORBED OVERHEAD - ACTUAL OVERHEAD = 140000-120000 = 20000

7.Cost of goods sold - after closing the over/under applied overhead = 456000 - 20000 = 436000