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 $2,553,000 of factory overhead costs and use 69,000 machine hours.

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

1. Purchased 200,000 pounds of materials on account; the cost was $6.00 per pound.

2. Issued 130,000 pounds of materials to production, of which 20,000 pounds were used as indirect materials.

3. Incurred direct labor costs of $290,000 and $50,000 of indirect labor costs.

4. Recorded depreciation on equipment for the month, $77,700.

5. Recorded expired insurance costs for the manufacturing property, $4,500.

6. Paid $9,500 cash for utilities and other miscellaneous items for the manufacturing plant.

7. Completed Job H11 costing $8,500 and Job G28 costing $82,000 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 9,700 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

1)Predetermined overhead rate =Estimated overhead /Estimated mahcine hours

                          = 2553000 /69000

                         = $37 per machine hour

2)

Date	Account title	Debit	credit
a	Raw material inventory (200000*6)	1200000
	Accounts payable		1200000
b	Work in process inventory	660000
	Manufacturing overhead (20000*6)	120000
	Raw material inventory (130000*6)		780000
c	Work in process inventory	290000
	Manufacturing overhead	50000
	Factory labor		340000
d	Manufacturing overhead	77700
	Accumulated depreciation -equipment		77700
e	Manufacturing overhead	4500
	prepaid insurance		4500
f	Manufacturing overhead	9500
	cash		9500
g	Finished goods inventory	90500
	work in process inventory (8500+82000)		90500
h	Accounts receivable	106600
	sales revenue [82000(1+.30)]		106600
h-2	cost of goods sold	82000
	Finished goods inventory		82000
i	Work in process inventory	358900
	manufacturing overhead (9700*37)		358900

3a)Actual overhead : Indirect material +Indirect labor + depreciation +prepaid insurance +others

            = 120000+50000+77700+4500+9500

            = 252200

Applied overhead = 358900

Under-applied /(over-applied ) overhead = Actual overhead -Applied overhead

                        = 252200 - 358900

                        = -97200 overapplied (enter as 97200 as positive value)

3b)

Date	Account title	Debit	credit
April 30	Manufacturing overhead	97200
	cost of goods sold		97200