Question

Durham Company uses a job-ordering cost system. The following transaction took place last year: a. Raw materials requisitioned for use in production , $53,000( 75% direct and 25% indirect) b. Factory utility costs incurred, $15,900 c. Depreciation recorded on plant and equipment, $30,600. Three-fourths of the depreciation relates to factor equipment, and remainder relates to selling and administrative equipment d. Costs for salaries and wages were incurred as follows: Direct labor...........$53,000 Indirect Labor.......$19,300 Sales commissions.....$11,300 Administrative salaries.....$38,000 e. Insurance costs incurred, $5,600 (75% relates to factory operations, and 25% relates to selling and administrative activities f. Miscellaneous selling and administrative expenses incurred, $19,300 g. Manufacturing overhead was applied to production. The company applies overhead on the basis of 130% of direct labor cost. h. Goods that cost $143,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse i. Goods that had cost $133,000 to manufacture according to their job cost sheets were sold for $226,000 Required: 1. Determine the underapplied or overapplied overhead for the year 2. Prepare an income statement for the year. (HInt: No calculations are required to determine the cost of goods sold before any adjustment for underapplied or overapplied overhead). Durham Company Income Statement For the Year Ended December 31

Answer 1

(1).

Applied manufacturing overhead are 130% of direct labor cost

Direct labor cost is given = $53000

Hence, Applied manufacturing overhead ($53000 * 1.30) = $68900

Now let’s calculate actual manufacturing overhead;

Indirect raw material ($53000 * 0.25)	$13250
Indirect labor	$19300
Factory Utility cost	$15900
Depreciation ($30600 * 3 / 4)	$22950
Insurance cost ($5600 * 0.75)	$4200
Total actual manufacturing overhead	$75600
Applied manufacturing overhead (Calculated above)	$68900
Thus under-applied manufacturing overhead ($75600 – $68900)	$6700

(2).

Durham Company
Income Statement
Sales	$226000
Add: Finished goods inventory	$143000
Total revenue	$369000
Less: Expenses;
Underapplied Manufacturing Overhead	$6700
Administrative salary	$38000
Sales Commission	$11300
Depreciation of selling equipment ($30600 / 4)	$7650
Insurance ($5600 * 0.25)	$1400
Mise selling & administrative exp.	$19300
Total expenses	($84350)
Net income	$284650