Question

Smith Company manufactures lawn mowers. The firm had the following inventories.

          Jan 1, 2018     Dec 3, 2018

                        Finished goods                        $142,000         $ 92,000

                        Work in process                      $262,000         $426,000

                        Materials                                 $114,000         $ 90,000

            The following additional manufacturing data pertains to operations.

            Material purchased                 $150,000         Property Taxes Factory           $ 7,500

            Direct labor                             $400,000         Utilities-Factory                      $15,000

            Depreciation-Factory Equip   $ 25,000         Insurance-Factory                   $ 4,500

            Factory Supervisor Salaries    $227,500         Selling and Admin Expense   $200,000

Alex Company applies manufacturing overhead at the rate of 60 percent of direct-labor cost.

            Required:

            Compute the following amounts for the year of 2018.

-Was overhead under or over applied and by how much?
-What effect, if any, will the amount in h have on net income. Explain and show the computation.

Answer 1

Overhead applied
$400000*60%	$240,000
Actual overhead
Depreciation-Factory Equip	25000
Factory Supervisor Salaries	227500
Property taxes-Factory	7500
Utilities-factory	15000
Insurance Factory	4500
Actual overhead	279500
Underapplied (279500-240000)	$39,500
The net income will be decreased by $39500. As the
underapplied manufacturing overhead will be charged
to Cost of good sold thereby increasing the expenses
and which decreases the income