Question

Y Company reported the following actual costs data for the year: Purchase of raw materials (all direct) $200,000 Direct labour (average hourly rate of $20) $320,000 Manufacturing overhead costs $100,000 The following changes in inventory accounts occurred during the year Increase in raw materials $20,000 Increase in work in progress $16,000 Increase in finished goods $32,000 Y Company used a predetermined overhead rate based on direct labour hours. Estimated annual manufacturing overhead cost and direct labour hours were $150,000 and 20,000, respectively. Required: a. What was the pre-determined manufacturing overhead rate? b. Calculate the cost of goods manufactured. c. What was the cost of goods sold before adjusting for any under or overapplied overhead? d. By how much was manufacturing overhead cost under or overapplied? e. Prepare a summary journal entry to close any under or overapplied manufacturing overhead cost to cost of goods sold. f. Explain possible causes for the over/under applied overhead

Answer 1

a. Predetermined overhead rate = $150000/20000 = $7.50 per direct labor hour

b. Cost of goods manufactured: $604000

Direct materials:
Purchase of raw materials	200000
Less: Increase in raw materials	20000
Direct materials used		180000
Direct labor		320000
Manufacturing overhead ($320000/$20 x $7.50)		120000
Total manufacturing costs incurred		620000
Less: Increase in work in progress		16000
Cost of goods manufactured $		604000

c. Cost of goods sold: $572000

Cost of goods manufactured	604000
Less: Increase in finished goods	32000
Cost of goods sold $	572000

d. Over-applied overheads: $20000

Overheads incurred - Overheads applied = $100000 - $120000 = $20000 overheads over-applied

e.

General Journal	Debit	Credit
Manufacturing overhead	20000
Cost of goods sold		20000
(To close over-applied overheads)

f. The possible causes for the over-applied overhead is the difference in the total estimated manufacturing overheads and the actual overheads incurred or the difference in the budgeted level of the cost driver activity which in this case is the direct labor hours and the actual number of direct labor hours.