Question

GOALS AND OBJECTIVES

• Review WHY we have mis-applied overhead and the need to dispose of it
• Review advantages and disadvantages of closing mis-applied overhead to CGS
• Understand how to deal with this when the amount is materially large

ARKANSAS CORPORATION

…… is a company that produces machinery to customer order. Its job costing system, using normal costing, has two direct cost categories, direct materials and direct labor, and one indirect cost pool, manufacturing overhead, allocated using a budgeted rate based on direct labor costs. Budgeted and actual information for 2019 are as follows:

     

			Budget	Actual
Direct Labor			$210,000	$200,000
Manufacturing overhead			$126,000	$ 93,420

At the end of 2019, the ending work in process consisted of:

Ending Work In Process:
Direct Materials			$32,000
Direct Labor			25,000
Overhead			15,000
			$ 72,000

There were no beginning work-in-process or finished-goods inventories. Ending Finished Goods showed a balance of $78,000, which included overhead costs of $12,600.

Cost of goods sold was $800,000, of which $92,400 consisted of applied overhead.

Required:

1. What is the predetermined overhead rate (per direct labor dollar)?

2. How much overhead was applied to production during 2019? What was the journal entry to record this?

3. What were the journal entries to record actual overhead in 2019?

4. Calculate the under/overapplied overhead for 2019.

5. ASSUME that the company decides to write off the entire over/underapplied overhead to cost of goods sold. Prepare the adjusting entry to close the misapplied overhead.

6. Is this method really right? Why or why not?

7. Assume that the under/overapplied overhead is considered material in nature. Round final answers to nearest dollar. Prorate the amount computed in requirement two above on the basis of:

1. Ending balances of the appropriate accounts (before any adjustment).
2. The amount of applied overhead in the ending balances of the appropriate accounts (before any adjustment).

8. Prepare the adjusting journal entries for 7a and 7b. Which approach is theoretically preferred? WHY?

Answer all the questions please

Answer 1

1. Predetermined overhead rate = Budgeted manufacturing overhead/Budgeted direct labor cost = $126000/$210000 = $0.60 per direct labor dollar

2. Overhead applied to production during 2019 = $200000 x $0.60 = $120000

3.

Accounts and Explanation	Debit	Credit
Manufacturing overhead	93420
Cash/Accounts payable		93420
(To record actual overheads)

4.

Actual overhead	93420
Overhead applied	120000
Overapplied overhead $	26580

5.

Accounts and Explanation	Debit	Credit
Manufacturing overhead	26580
Cost of goods sold		26580
(To close overapplied overheads)

6. The method of closing the entire overapplied overhead to the cost of goods sold is not right since it decreases the cost of goods sold thereby increasing the net income.

7a.

	Ending Balance	Percent of total	Allocation of Overapplied Overhead
Work in process	72000	7.5789%	2015
Finished goods	78000	8.2105%	2182
Cost of goods sold	800000	84.2105%	22383
Total	950000	100.0000%	26580

7b.

	Applied Overhead	Percent of total	Allocation of Overapplied Overhead
Work in process	15000	12.50%	3323
Finished goods	12600	10.50%	2791
Cost of goods sold	92400	77.00%	20466
Total	120000	100.00%	26580

8.

No.	Accounts and Explanation	Debit	Credit
7a.	Manufacturing overhead	26580
	Work in process inventory		2015
	Finished goods inventory		2182
	Cost of goods sold		22383
	(To close overapplied overheads)
7b.	Manufacturing overhead	26580
	Work in process inventory		3323
	Finished goods inventory		2791
	Cost of goods sold		20466
	(To close overapplied overheads)