Question

Sigma Corporation applies overhead cost to jobs on the basis of direct labor cost Job V, which was started and completed during the current period, shows charges of $6,200 for direct materials, $8,300 for direct labor, and $5,727 for overhead on Its Job cost sheet. Job W, which is still in process at year-end, shows charges of $2,500 for direct materials and $4,600 for direct labor.

1a. Should any overhead cost be applied to Job Wat year-end?
1b. How much overhead cost should be applied to Job W?
2. How will the costs included in Job W's job cost sheet be reported within Sigma Corporation's financial statements at the end of the year?

Answer 1

Job W should have $3,174 of overhead applied at year-end using the overhead rate from Job V's costs. These costs will be reported under Work-in-Process inventory on the balance sheet.

Step-by-step explanation:

The overhead cost applied to a job is typically based on a predetermined overhead rate, which Sigma Corporation sets based on direct labor cost. Since Job V shows an overhead cost proportional to its direct labor, we can deduce the rate of overhead applied. Job W, still in process, will also have overhead applied based on its direct labor cost.

To find the amount of overhead to apply to Job W, we first look at Job V's costs. Job V has $8,300 in direct labor and $5,727 in overhead, so the overhead rate is:

Overhead rate = $5,727 ÷ $8,300 = 0.69 (or 69%).

Applying this rate to Job W's direct labor cost:

Overhead for Job W = 0.69 × $4,600 = $3,174.

Thus, $3,174 of overhead should be applied to Job W at year-end.

Regarding the treatment of Job W's costs in the financial statements of Sigma Corporation at year-end: Job W, not yet completed, will be reported under Work-in-Process (WIP) inventory on the balance sheet. This includes direct materials, direct labor, and applied overhead costs.