Question

ollowing information has been extracted from the books of Ali & Usman Co. to make adjustment of Under or Over applied factory overhead cost in Cost of Goods Sold Statement at normal.

Extracted information of the company as follows:

Particulars	Rs.
Direct material cost	100,000
Direct labor cost	40,000
Actual factory overhead cost	50,000
*Cost of good to sold at normal	290,000

Applied factory overhead rate is 150% of direct labor cost.

*The cost of goods sold in which factory overhead cost is included on the basis of predetermined rate is termed as “Cost of Goods Sold at Normal”.

Required:

(1) Compute Under or Over applied Factory Overhead (FOH) Cost with the help of given information.

(2) Compute cost of goods sold at actual after making adjustment of Under or Over applied Factory Overhead (FOH) to Cost of good to sold at normal.

(3) How the net income of Ali & Usman Company will be affected (increased or decreased) if Under/Over applied FOH cost is not adjusted appropriately in cost of goods sold statement.

Answer 1

Ques 1
Applied Factory overhead	150%*40000 (direct labor cost)	60000
Actual factory overhead cost	given	50000
Overapplied overhead		10000
Ques 2
Cost of goods sold at Normal	given	290000
Less:Overapplied overheads	Ques 1	10000
Cost of goods sold at Actual		280000
Ques 3
Decrease in net income
if cost of goods sold is not adjusted
cost of goods sold will be
presented at	290000
in the income statement
decreasing the net income
for example
let us say sales are 500000
so
	Normal	Actual
Sales	500000	500000
Less:
Cost of goods sold	290000	280000
Net income	210000	220000