Question

Gitano Products operates a job-order costing system and applies overhead cost to jobs on the basis of direct materials used in production (not on the basis of raw materials purchased). Its predetermined overhead rate was based on a cost formula that estimated $121,800 of manufacturing overhead for an estimated allocation base of $87,000 direct material dollars to be used in production. The company has provided the following data for the just completed year:

Purchase of raw materials $ 134,000
Direct labor cost $ 83,000
Manufacturing overhead costs:
Indirect labor $ 119,900
Property taxes $ 8,600
Depreciation of equipment $ 17,000
Maintenance $ 13,000
Insurance $ 7,600
Rent, building $ 39,000
Beginning Ending
Raw Materials $ 22,000 $ 13,000
Work in Process $ 44,000 $ 36,000
Finished Goods $ 68,000 $ 58,000
Required:
1-a. Compute the predetermined overhead rate for the year.
1-b. Compute the amount of underapplied or overapplied overhead for the year.
2. Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in production as direct materials.
3-a.Compute the unadjusted cost of goods sold for the year. (Do not include any underapplied or overapplied overhead in your cost of goods sold figure.)
3-b. Identify the options available for disposing of underapplied or overapplied overhead? (Select all that apply.)
4. Job 215 was started and completed during the year. What price would have been charged to the customer if the job required $3,600 in direct materials and $4,600 in direct labor cost and the company priced its jobs at 55% above the job’s cost according to the accounting system?
5. Direct materials made up $8,800 of the $36,000 ending Work in Process inventory balance. Supply the information missing below:

Answer 1

1a. Predetermined Overhead Rate = Estimated Manufacturing Overhead/Estimated Allocation Base*100

Predetermined Overhead Rate = 121,800/87,000*100

Predetermined Overhead Rate = 140%

1b. Overhead Applied = (Opening Value of Direct Material + Purchase of Direct Material - Closing Value of Direct Material)*Predetermined Overhead Rate = (22,000 + 134,000 - 13,000)*140% = $200,200

Overhead Incurred = $119,900 + $8,600 + $17,000 + $13,000 + $7,600 + $39,000

Overhead Incurred = $205,100

Since, overhead incurred is more than the overhead applied, there is underapplied overhead to the extent of $4,900 (200,200 - 205,100)

2. Cost of Goods Manufactured Schedule

Direct Material Used:

Opening Stock of Raw Material 22,000

Add Purchases of Raw Material 134,000

Less Closing Stock of Raw Material 13,000

Direct Material Used in Production 143,000

Direct Labor 83,000

Manufacturing Overhead Applied to Work in Progress 200,200

Total Manufacturing Costs 426,200

Add Opening WIP 44,000

Less Closing WIP 36,000 8,000

Cost of Goods Manufactured $434,200

3. Cost of Goods Manufactured $434,200

Add Opening Stock of Finished Goods $68,000

Goods Available for Sale $502,200

Less Closing Stock of Finished Goods $58,000

Cost of Goods Sold $444,200

3b. Underapplied or Overapplied overhead may be allocated between Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the overhead applied or may be closed directly to Cost of Goods Sold.

4. Direct Material $3,600

Direct Labor $4,600

Overhead Applied (3,600*140%) $5,040

Total Manufacturing Costs $13,240

Price to the Customer = $13,240 * (1+55%)

Price to the Customer = $13,240 * 1.55

Price to the Customer = $20,522