Question

Paladin Parabolics Company produces high-quality microscopes for education and health care uses. The company uses a job order costing system. Because the microscopes’ optics require significant manual labor to ensure adherence to strict manufacturing specifications, the company applies overhead on the basis of direct labor hours. At the beginning of 2017, the company estimated its manufacturing overhead would be $1,960,000 and that employees would work a total of 98,000 direct labor hours. During March, the company worked on the following five jobs.

b		Beginning Balance		Direct Materials added during March		Direct Labor added during March		Direct Labor Hours added during March
134		$118,600		$4,000		$8,400		150
158		121,450		2,500		12,160		300
212		21,800		86,400		36,650		3,450
287		34,350		71,800		31,850		2,700
301				18,990		21,845		1,400
Total		$296,200		$183,690		$110,905		8,000

Jobs 134 and 158 were started in January, Jobs 212 and 287 were started in February, and Job 301 was started in March. During March, workers completed Jobs 134, 158, and 212. Jobs 134 and 212 were delivered to customers during March.

Paladin Parabolics Company incurred $176,300 manufacturing overhead in the month of March. Given that expenditure for overhead, was manufacturing overhead under- or overapplied in March? By how much?

Assume that Paladin Parabolics Company closes under- or overapplied overhead to the Cost of Goods Sold account. Calculate the Cost of Goods Sold amount after that adjustment.

Answer 1

Solution 1:

Predetermined overhead rate = Estimated manufacturing overhead / Estimated direct labor hours

= $1,960,000 / 98000 = $20 per direct labor hour

Total manufacturing overhead applied during march = Direct labor hours * Predetermined overhead rate = 8000*$20 = $160,000

Actual manufacturing overhead = $176,300

Under-applied overhead = Actual manufacturing overhead - Overhead applied = $176,300 - $160,000 = $16,300

Solution 2:

Unadjusted cost of goods sold = Cost of Job 134 and 212

Computation of Cost of Job sold
Particulars	Job 134	Job 212
Beginning WIP	$118,600.00	$21,800.00
Direct material	$4,000.00	$86,400.00
Direct labor	$8,400.00	$36,650.00
Manufacturing overhead applied	$3,000.00	$69,000.00
Total Job Cost	$134,000.00	$213,850.00

Unadjusted cost of goods sold = $134,000 + $213,850 = $347,850

Cost of goods sold after overhead adjustment = $347,850 + $16,300 = $364,150