Question

Erkens Company uses a job costing system with normal costing and applies factory overhead on the basis of machine hours. At the beginning of the year, management estimated that the company would incur $1,680,000 of factory overhead costs and use 60,000 machine hours.

Erkens Company recorded the following events during the month of April:

1. Purchased 182,000 pounds of materials on account; the cost was $5.10 per pound.

2. Issued 121,000 pounds of materials to production, of which 15,500 pounds were used as indirect materials.

3. Incurred direct labor costs of $245,000 and $41,000 of indirect labor costs.

4. Recorded depreciation on equipment for the month, $75,900.

5. Recorded expired insurance costs for the manufacturing property, $3,600.

6. Paid $8,600 cash for utilities and other miscellaneous items for the manufacturing plant.

7. Completed Job H11 costing $7,600 and Job G28 costing $77,500 during the month and transferred them to the Finished goods inventory account.

8. Shipped Job G28 to the customer during the month. The job was invoiced at 30% above cost.

9. Used 7,900 machine hours during April.

Required:

1. Compute Erkens Company’s predetermined overhead rate for the year.

2. Prepare journal entries to record the events that occurred during April.

3-a. Compute the amount of overapplied or underapplied overhead.

3-b. Prepare a journal entry to close overapplied or underapplied overhead into cost of goods sold on April 30.

Answer 1

Question 1

Predetermined Overhead Rate = Total Estimated Manufacturing Overhead / Total Estimated Machine Hours

Total Estimated Manufacturing Overhead = $ 16,80,000

Total Estimated Machine Hours = 60,000 Hours

Predetermined Overhead Rate = 16,80,000 / 60,000

Predetermined Overhead Rate = $ 28 per Machine Hour

Question 2

S.No.	Particulars	Debit	Credit
A	Raw Materials Inventory A/C..Dr	928,200
	To Accounts Payables		928,100
	(Being Raw Materials Purchased on Credit)
B	Work in Process Inventory A/C..Dr (105,500 Pounds * $ 5.10)	538,050
	Manufacturing Overhead A/C..Dr (15,500 Pounds * $ 5.10)	79,050
	To Raw Materials Inventory		617,100
	(Being Raw Materials Issued)
C	Work in Process Inventory A/C..Dr	245,000
	Manufacturing Overhead A/C..Dr	41,000
	To Factory Labour Cost		286,000
	(Being Factory Labour Cost Incurred)
D	Manufacturing Overhead A/C..Dr	75,900
	To Accumulated Depreciation		75,900
	(Being Depreciation Recorded)
E	Manufacturing Overhead A/C..Dr	3,600
	To Prepaid Insurance		3,600
	(Being Utilisation of Insurance Recorded)
F	Manufacturing Overhead A/C..Dr	8,600
	To Cash		8,600
	(Being Utilities Cost Recorded)
G	Finished Goods Inventory H11 A/C..Dr	7,600
	Finished Goods Inventory G28 A/C..Dr	77,500
	To Work in Process Inventory		85,100
	(Being Goods Completed and Transferred)
H	Accounts Receivables A/C..Dr	100,750
	To Sales Revenue		100,750
	(Being Finished Goods of G28 sold)
H	Cost of Goods Sold A/C..Dr	77,500
	To Finished Goods Inventory G28		77,500
	(Being Cost of Goods Sold Recorded)

Sales Revenue of Finished Goods = 77,500 + 30% Increase = $ 100,750

Question 3

Part 3A

Amount of Overhead Applied = Actual Hours * Predetermined Overhead Rate

Actual Machine Hours = 7,900 Hours

Predetermined Overhead Rate = $ 28

Amount of Overhead Applied = 7,900 * 28

Amount of Overhead Applied = $ 221,200

Actual Overhead = $ 208,150 (Sum of Overhead Recorded in Journal Entries)

Overhead Underapplied / (Overapplied) = Actual Overhead Cost - Amount of Overhead Applied

= 208,150 - 221,700

= ($ 13,050) Overapplied Overhead

Part 3 B

S.No.	Particulars	Debit	Credit
1	Manufacturing Overhead A/C..Dr	13,050
	To Cost of Goods Sold		13,050
	(Being Overapplied Overhead Adjusted for the Month of April)