Question

Crimson Tide Company uses a job-order costing system. At Crimson Tide, overhead costs are applied to jobs on the basis of machine-hours.

For the current year, Crimson Tide estimated that its machines would work for a total of 26,000 machine-hours. Tide also estimated for the current year that it would incur $124,800 in manufacturing overhead cost.

The following transactions occurred during the year:

a. Raw materials requisitioned for use in production, $300,000 (80% direct and 20% indirect).

b. The following costs were incurred for employee services:

Direct labor	$	171,000
Indirect labor	$	29,000
Sales commissions	$	21,000
Administrative salaries	$	36,000

c. Total insurance costs were $21,000 Note: Of the total insurance cost, 90% relates to factory operations, and 10% relates to selling and administrative activities.

d. In the factory only, heat, power, and water costs incurred in the factory totalled $60,000.

e. Total depreciation recorded for the year was  $71,000 Note: Of the total depreciation recorded 85% relates to factory operations, and 15% relates to selling and administrative activities.

f. Advertising costs incurred was $61,000.

g. According to their job cost sheets, goods that cost $491,000 to manufacture were transferred to the finished goods warehouse.

h. Sales for the year totaled $722,000. The total cost to manufacture these goods according to their job cost sheets was $486,000.

i. The company actually used 51,000 machine-hours during the year.

Required:

1. Determine the underapplied or overapplied overhead for the year. (Round predetermined overhead rate to 2 decimal places.).

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.) (Round predetermined overhead rate to 2 decimal places.)

Answer 1

Solution

1.

Manufacturing overhead is overapplied by $16,550.

Manufacturing Overhead
(b)	60,000			244,800	(h)
(c)	29,000
(d)	60,000
(e)	18,900
(g)	60,350
				16,550	Bal.

2.

CRIMSON TIDE COMPANY Income Statement For the Year Ended December 31
Sales................................................................		$722,000
Less cost of goods sold ($486,000 – $16,550)........		469,450
Gross margin.....................................................		252,550
Less selling and administrative expenses:
Sales commissions...........................................	$21,000
Administrative salaries......................................	36,000
Insurance.......................................................	2,100
Advertising......................................................	61,000
Depreciation....................................................	18,900	139,000
Net operating income.........................................		$ 113,550