Question

Scanlon Company has a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The following estimates were used in preparing the predetermined overhead rate for the most recent year:

Machine-hours----95,000
Manufacturing overhead cost----$1,710,000

During the most recent year, a severe recession in the company’s industry caused a buildup of inventory in the company’s warehouses. The company’ $ cost records revealed the following actual cost and operating data for the year:
Machine-hours----75,000
Manufacturing overhead cost------$1,687,500
Amount of applied overhead in inventories at year-end:
Workinprocess-----$337,500
Finished goods-----$253,125
Amount of applied overhead in cost of goods sold $759,375

Required:
a. Compute the company’s predetermined overhead rate for the year and the amount of underapplied or overapplied overhead for the year.
b. Determine the difference between net operating income for the year if the underapplied or overapplied overhead is allocated to the appropriate accounts rather than closed directly to Cost of Goods Sold.

Answer 1

a) Predetermine overhead rate = 1710000/95000 = 18 per machine hour

Applied overhead = 18*75000 = 1350000

Under applied overhead = 1687500-1350000 = 337500

b) Cost of godos sold allocated amount of under applied overhead if fully allocated on cost of goods sold = 337500

Cost of goods sold allocated amount of under applied overhead if allocated on appropriate accounts = 337500*759375/1350000 = 189843.75

Difference in net income = 337500-189843.75 = 147656.25