Question

O’Leary Corporation manufactures special purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O’Leary uses a normal job costing system. Direct labor at O’Leary is paid $34 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows.

		Year 1			Year 2
Direct labor-hours worked		70,400			57,400
Manufacturing overhead costs incurred
Indirect labor	$	2,896,000		$	2,296,000
Employee benefits		1,056,000			861,000
Supplies		704,000			574,000
Power		661,000			556,000
Heat and light		144,800			144,800
Supervision		786,110			666,450
Depreciation		2,084,500			2,084,500
Property taxes and insurance		819,590			853,250
Total manufacturing overhead costs	$	9,152,000		$	8,036,000

At the beginning of year 3, O’Leary has two jobs, which have not yet been delivered to customers. Job MC-270 was completed on December 27, year 2. It is scheduled to ship on January 7, year 3. Job MC-275 is still in progress. For the purpose of computing the predetermined overhead rate, O’Leary uses the previous year’s actual overhead rate. Data on direct material costs and direct labor-hours for these jobs in year 2 follow.

	Job MC-270			Job MC-275
Direct material costs	$	273,400		$	498,400
Direct labor-hours		2,670	hours		3,370	hours

During year 3, O’Leary incurred the following direct material costs and direct labor-hours for all jobs worked in year 3, including the completion of Job MC-275.

Direct material costs	$	11,843,400
Direct labor-hours		77,400
Actual manufacturing overhead	$	9,936,000

At the end of year 3, there were four jobs that had not yet shipped. Data on these jobs follow.

	MC-389			MC-390			MC-397			MC-399
Direct materials	$46,600			$70,400			$106,900			$32,300
Direct labor-hours	1,774 hours			2,870 hours			6,270 hours			1,470 hours
Job status	Finished			Finished			In progress			In progress

Required:

a. What was the amount in the beginning Finished Goods and beginning Work-in-Process accounts for year 3?

b. O’Leary incurred direct materials costs of $60,400 and used an additional 640 hours in year 3 to complete job MC-275. What was the final (total) cost charged to job MC-275?

c. What was over- or underapplied overhead for year 3?

d. O’Leary prorates any over- or underapplied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-in-Process Inventory. Prepare the journal entry to prorate the over- or underapplied overhead.

e. A customer has asked O’Leary to bid on a job to be completed in year 4. O’Leary estimates that the job will require about $94,200 in direct materials and 5,170 direct labor-hours. Because of the economy, O’Leary expects demand for its services to be low in year 4, and the CEO wants to bid aggressively, but does not want to lose any money on the project. O’Leary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount O’Leary can bid on the job and still not incur a loss?

Answer 1

A

Cost Sheet for Job at END of Year 2
	Job MC-270	Job MC-275
Direct labour Hours used	2,670	3,370
Manufacturing overhead absorption rate used	$             130.00	$                     130.00
Material Cost Used	$     273,400.00	$            498,400.00
Labour Cost Paid@ $ 34 per hour	$       90,780.00	$            114,580.00
Manufacturing Overhead Cost	$     347,100.00	$            438,100.00
Total Cost of the job at beigning of the year 3	$     711,280.00	$         1,051,080.00
Job Status	Finsished	Work in Progress

B

Total Cost of JOB MC-275 in Year 3 after complition
		JOB MC-275
Cost of WIP		$         1,051,080.00
ADD; Addition Material Cost		$               60,400.00
Additional labour Cost(640 hours@$34)		$               21,760.00
Overhead Cost Absorbed @ year 1 rate	$     438,100.00
Overhead Cost @year 2 rate for 4010 hours x $140	$     561,400.00
Under Absorb Overhead Cost Charged to job		$            123,300.00
Total cost of the job after complition		$         1,256,540.00

C

Over or under applied overhead cost for year 3
	Labor hrs	Amount
Actual Overhead cost incurred	77,400	$9,936,000.00
Overhead cost Absorbed to Various Job @ Year2 rate	$             140.00	$      10,836,000.00
Over Absorption of Cost to various jobs		$            900,000.00

D

OVER ABSORPTION AND UNDER ABSORPTION

Generally production overhead cost are charged to the product or job on the basis of predetermine rate which calculated on estimated basis i.e. on the basis of budgeted cost.

At the end of the year when Actual Overhead cost are known then overhead cost are required to be adjusted and actual overhead cost are charged to the product or job.

The difference between the two rate are known as over absorption or under absorption of overhead cost.

If the rate at which cast was charged is lower then the actual rate then it is called as under absorption of cost and the difference will be further charged to product or vice a versa.

	Journal Entry For Overhead Cost
		Debit	Credit
Under Absorption case	At Year 2 Closing
	At end of Year 2, We have Job MC-270 as finished goods which is sold but not Delivered yet And JOB MC-275 as WIP
	FINISHED GOODS A/C(2670 hours@$10)	$       26,700.00
	WIP A/C(3370 hours@$10)	$       33,700.00
	To Manufacturing Overhead a/c		$               60,400.00
	(Overhead Cost Under Absorbed now Charged @$10 More)
Over Absorption case	At Year 3 Closing
	Manufacturing Overhead Cost(640 hours@$11.63)	$          7,443.20
	To Cost of Goods Sold		$                 7,443.20
	Job MC-275 Completed & 670 Hours more work on job in year 3, but sold by charging overhead cost @previous year rate
	Manufacturing Overhead Cost	$     143,677.02
	To Cost of Goods Sold(4614 hours@$11.63)		$               53,660.82
	To WIP A/c(7740 hours @$11.63)		$               90,016.20
	(Assume Job MC 389 & 390 was sold out and job MC-397 & 399 on hold, Account adjusted with actual overhead rate for the year)

E

Cost for the NEW Job in year 4
Material Cost	$       94,200.00
Labour Cost(5100 hours Used0	$     175,780.00
Production Overhead($ 128.37 per hours)	$     663,672.90
Add Selling & Administartion Cost	$                       -
Total Cost required to recovered from job.	$     933,652.90

Thanks