Question

Baab Corporation is a manufacturing firm that uses job-order costing. The company's inventory balances were as follows at the beginning and end of the year:

	Beginning Balance		Ending Balance
Raw materials	$	14,600	$	22,600
Work in process	$	27,600	$	9,600
Finished Goods	$	62,600	$	77,600

The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 33,600 machine-hours and incur $275,520 in manufacturing overhead cost. The following transactions were recorded for the year:

Raw materials were purchased, $315,600.

Raw materials were requisitioned for use in production, $307,600 ($280,400 direct and $27,200 indirect).

The following employee costs were incurred: direct labor, $377,600; indirect labor, $96,600; and administrative salaries, $172,600.

Selling costs, $147,600.

Factory utility costs, $10,600.

Depreciation for the year was $163,000 of which $148,000 is related to factory operations and $15,000 is related to selling, general, and administrative activities.

Manufacturing overhead was applied to jobs. The actual level of activity for the year was 34,120 machine-hours.

Sales for the year totaled $1,290,000.

Required:

a. Prepare a schedule of cost of goods manufactured.

b. Was the overhead underapplied or overapplied? By how much?

c. Prepare an income statement for the year. The company closes any underapplied or overapplied overhead to Cost of Goods Sold

Answer 1

Solution:

Part 1 –

Cost of Goods manufactured
	$$	$$
Beginning Raw Materials	$14,600
Plus: Purchases	$315,600
Less: Ending Raw Materials	-$22,600
Raw Materials used in production		$307,600
Plus: Direct Labor		$377,600
Plus: Applied Manufacturing Overhead (Refer Note 1)		$279,784
Total Manufacturing Costs		$964,984
Plus: Beginning Work in Process		$27,600
		$992,584
Less: Ending work in process		-$9,600
Cost of Goods Manufactured		$982,984

Note 1 --- Manufacturing Overheads are applied on predetermine basis.

So, a predetermined overhead rate is calculated by using estimated manufacturing overhead cost and estimated allocation base.

Predetermined overhead rate = Estimated Total Manufacturing Overhead Cost / Estimated Machine Hours

= $275,520 / 33,600

= $8.20 per machine hour

Actual machine hours = 34,120 MHs

Applied Manufacturing Overhead Costs = Actual MH 34,120 * Overhead Rate 8.20 = $279,784

Part 2 -- Was the overhead underapplied or overapplied? By how much?

Applied manufacturing Overhead (refer note 1) = $279,784

Actual manufacturing overhead incurred:

	$$
Indirect materials	$27,200
Indirect labor	$96,600
Factory Utility costs	$10,600
Depreciation factory operation	$148,000
Total Actual Manufacturing OH	$282,400

Applied Manufacturing Overhead is less than actual manufacturing overhead incurred. It means Overheads are UNDER APPLIED.

Under Applied Overhead = $282,400 - $279,784 = $2,616

Part 3 –Income Statement

Income Statement
	$$
Sales Revenue	$1,290,000
Less: Cost of Goods Sold (Refer Note 3)	$970,600
Gross Margin	$319,400
Selling and Administrative Expenses:
Administrative salaries	$172,600
Selling Costs	$147,600
Depreciation selling, general, and administrative activities	$15,000
Total Selling and Admn Expenses	$335,200
Income/(loss) from Operation	-$15,800

Note 3 --- Adjusted Cost of Goods Sold

Adjusted Cost of Goods Sold	$$
Cost of Goods Manufactured	$982,984
Plus: Beginning Finished Goods	$62,600
Cost of Goods Available for Sale	$1,045,584
Less: Ending Finished Goods	-$77,600
Cost of Goods Sold (unadjusted)	$967,984
Add: Under Applied Overhead	$2,616
Adjusted Cost of Goods Sold	$970,600

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