Question

Smith Company manufactures lawn mowers.  The firm had the following inventories.

          Jan 1, 2017     Dec 3, 2017

                        Finished goods                        $142,000         $  92,000

                        Work in process                      $262,000         $426,000

                        Materials                                 $114,000         $ 90,000

            The following additional manufacturing data pertains to operations.

            Material purchased                  $150,000         Property Taxes Factory           $ 7,500

            Direct labor                             $400,000         Utilities-Factory                      $15,000

            Depreciation-Factory Equip    $  25,000         Insurance-Factory                   $  4,500

            Factory Supervisor Salaries    $227,500         Selling and Admin Expense    $200,000

Alex Company applies manufacturing overhead at the rate of 60 percent of direct-labor cost.  

            Required:

            Compute the following amounts for the year of 2017.

A. Alex Company’s direct materials cost.

B. Alex Company’s total manufacturing costs for 2017.

C. Alex Company’s cost of goods manufactured.

D. Alex Company’s cost of goods sold (before disposing of under/over-applied overhead).

E. Assume Alex Company wants to achieve a Gross Profit of 30% of Sales -- Compute the total dollar amount of Sales needed.

F. Show Alex Company's Income Statement

G. Was overhead under or over applied and by how much?

H. What effect, if any, will the amount in G have on net income. Explain and show the computation.

I. Why does overhead need to be applied?  Explain.

J. If Alex estimated overhead for the year to be $252,000, what amount was the original estimate for direct labor cost?

I understand A,B,C and D now I just need the rest if possible. E, F, G, H, I, J

A= 174,000 B= 814,000 C= $650,000 D. 700,000

Answer 1

Part E –

Required Gross Profit = 30% of Sales

Gross Profit is the difference of Sales and Cost of Goods Sold. In other words,

Gross Profit = Total Sales – Cost of Goods Sold

So, here we have given the required percentage of gross profit on sales is 30%.

Gross Profit = Total Sales – Cost of Goods Sold

30%*Sales = Sales – Cost of Goods Sold

Cost of Goods sold from Part d is $700,000

30%*Sales = Sales – Cost of Goods Sold 700,000

Cost of Goods Sold 700,000 = Sales – 30% or 0.30 of Sales

Cost of Goods Sold 700,000 = 0.70 Sales

Sales = Cost of Goods Sold 700,000 / 0.70 = $1,000,000

The total dollar amount of Sales needed to achieve 30% Gross Profit of sales = $1,000,000

Part F --- Income Statement

Income Statement
	$$
Sales (From part E)	$1,000,000
Less: Cost of Goods sold (before under or over applied overhead)	$700,000
Gross Profit	$300,000
Selling and Admin Expense	$200,000
Operating Profit	$100,000

Part G – Under or Over Applied Overhead

Generally, overheads are charged on predetermined basis and the overhead rate is calculated at the beginning of period.

Since at beginning the company do not know how much will be the overhead cost, they estimates the total manufacturing overhead for the whole year and a allocation base by using which they can allocate the overhead to each unit or production department in order to findout the correct total cost of production.

So, the allocation base here given is Direct Labor Cost.

Applies manufacturing overhead at the rate of 60 percent of direct-labor cost

Applied Manufacturing Overhead = 60% of Direct Labor Cost = 60%*400,000 = $240,000

Actual Manufacturing Overhead Incurred

	$$
Property Taxes Factory	$7,500
Utilities-Factory	$15,000
Depreciation-Factory Equip	$25,000
Factory Supervisor Salaries	$227,500
Insurance-Factory	$4,500
Total Actual Manufacturing Overhead	$279,500

Here applied manufacturing overheads are lesser than actual manufacturing overhead. It means the overheads are UNDER APPLIED.

Under applied manufacturing overhead = 279,500 Actual - $240,000 Applied = $39,500

The Overhead was UNDER APPLIED by $39,500

Part H – Since the overheads are under applied, to find out the correct total cost the company is required to charge these UNDER APPLIED overhead to Cost of Goods sold or income statement.

The profit of $100,000 showing at present is decreased by $39,500 due to under applied ovehread.

Operating profit after under applied overhead = $100,000 – Under Applied Overhead 39,500 = $60,500

I --- Refer the explanation of part G --- To find out the correct costing of product.

J ---

If estimated overhead for the year to be = $252,000

The amount of original estimate of Direct Labor Cost = Estimated Overhead / 60% = $252,000 / 0.60 = $420,000

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you