Question

Gitano Products operates a job-order costing system and applies overhead cost to jobs on the basis of direct materials used in production (not on the basis of raw materials purchased). Its predetermined overhead rate was based on a cost formula that estimated $105,600 of manufacturing overhead for an estimated allocation base of $88,000 direct material dollars to be used in production. The company has provided the following data for the just completed year: Purchase of raw materials $ 133,000 Direct labor cost $ 84,000 Manufacturing overhead costs: Indirect labor $ 95,200 Property taxes $ 8,600 Depreciation of equipment $ 19,000 Maintenance $ 14,000 Insurance $ 9,700 Rent, building $ 35,000 Beginning Ending Raw Materials $ 27,000 $ 12,000 Work in Process $ 48,000 $ 38,000 Finished Goods $ 73,000 $ 58,000 Required: 1. Compute the predetermined overhead rate for the year. 2. Compute the amount of underapplied or overapplied overhead for the year. 3. Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials. 4. Compute the unadjusted cost of goods sold for the year. Do not include any underapplied or overapplied overhead in your answer. 5. Assume that the $38,000 ending balance in Work in Process includes $9,000 of direct materials. Given this assumption, supply the information missing below:

Answer 1

1	Predeterined Overhead rate =	Estimated total manufacturing overhead cost
		Estimated total amount of the allocation base
	=	$105,600
		$88,000 direct materials cost
	=	120%
2	Before the underapplied or overapplied overhead can be computed, we must determine the amount of direct materials used in production for the year.
	Raw materials inventory, beginning	$      27,000
	Add, Purchases of raw materials	133,000
	Raw materials available	160,000
	Deduct: Raw materials inventory, ending	12,000
	Raw materials used in production	$    148,000
	Actual manufacturing overhead costs:
	Indirect labor	$      95,200
	Property taxes	8,600
	Depreciation of equipment	19,000
	Maintenance	14,000
	Insurance	9,700
	Rent, building	35,000
	Total actual costs	181,500
	Applied manufacturing overhead costs:
	$148,000 X 120%	177,600
	Underapplied overhead	$        3,900
3	Gitano Products
	Schedule of Cost of Goods Manufactured
	Direct materials:
	Raw materials inventory, beginning	$      27,000
	Add purchases of raw materials	133,000
	Total raw materials available	160,000
	Deduct raw materials inventory, ending	12,000
	Raw materials used in production		$    148,000
	Direct labor		84,000
	Manufacturing overhead applied to work in process		177,600
	Total manufacturing costs		409,600
	Add: Work in process, beginning		48,000
			457,600
	Deduct: Work in process, ending		38,000
	Cost of goods manufactured		$    419,600
4	Cost of goods sold:
	Finished goods inventory, beginning	$      73,000
	Add: Cost of goods manufactured	419,600
	Goods available for sale	492,600
	Deduct: Finished goods inventory, ending	58,000
	Cost of goods sold	$    434,600
	The underapplied overhead can either be closed out to Cost of Goods Sold or allocated between Work in Process, Finished Goods, and Cost of Goods Sold based on the overhead applied during the year in the ending balance in each of these accounts.
5	The amount of overhead cost in Work in Process was:
	$9,000 direct materials cost X 120% = $10,800
	The amount of direct labor cost in Work in Process is:
	Total ending work in process		$      38,000
	Deduct: Direct materials	$        9,000
	Manufacturing overhead	10,800	19,800
	Direct labor cost		$      18,200
	The completed schedule of costs in Work in Process was:
	Direct materials	$        9,000
	Direct labor	18,200
	Manufacturing overhead	10,800
	Work in process inventory	$      38,000