Question

Finlon Upholstery Inc. uses a job-order costing system to accumulate manufacturing costs. The company's work-in-process on December 31, 2001, consisted of one job (no. 2077), which was carried on the year-end balance sheet at $156,800. There was no finished-goods inventory on this date.

Finlon applies manufacturing overhead to production on the basis of direct-labor cost. (The budgeted direct-labor cost is the company's practical capacity, in terms of direct-labor hours multiplied by the budgeted direct-labor rate.) Budgeted totals for 2002 for direct labor and manufacturing overhead are $4,200,000 and $5,460,000, respectively. Actual results for the year are as follows:

Actual Results
Direct Materials Used	$5,600,000.00
Direct Labor	$4,350,000.00
Indirect Material Used	$65,000.00
Indirect Labor	$2,860,000.00
Factory Depreciation	$1,740,000.00
Factory Insurance	$59,000.00
Factory Utilities	$830,000.00
Selling and Administrative Expenses	$2,160,000.00
Total	$17,664,000.00

Job no. 2077 was completed in January 2002, and there was no work in process at year-end. All jobs produced during 2002 were sold with the exception of Job no. 2143, which contained direct-material costs of $156,000 and direct-labor charges of $85,000. The company charges any under- or over-applied overhead to the cost of goods sold category.

Using the above information, do the following:

Calculate the company’s predetermined overhead application rate.

Calculate the additions to the work-in-process inventory account for the direct material used, direct labor, and manufacturing overhead.

Calculate the finished-goods inventory for the 12/31/02 balance sheet.

Calculate the over-applied or under-applied overhead at year-end.

Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category.

Answer 1

Calculate the company’s predetermined overhead application rate.

Solution-

Company predetermined overhead application rate = Budgeted Manufacturing overhead / Budgeted Direct labor cost

Company’s predetermined overhead application rate = $5,460,000 / 4,200,000

Company’s predetermined overhead application rate = 130%

Calculate the additions to the work-in-process inventory account for the direct material used, direct labor, and manufacturing overhead.

Solution-

Addition to work-in process during the period
Costs Addition during the period:
Direct Material	$5,600,000
Direct Labor	$4,350,000
Manufacturing Overhead	$5,655,000
Total cost added		$15,605,000

Calculate the finished-goods inventory for the 12/31/02 balance sheet.

Solution-

Finished goods - Ending Inventory
Direct Material	$156,000
Direct Labor	$85,000
Manufacturing Overhead	$110,500
Total cost of Ending Inventory		$351,500

Calculate the over-applied or under-applied overhead at year-end

Solution-

Finlon Upholstery Inc
Manufacturing Overhead incurred
Indirect Material	$65,000
Indirect Labor	$2,860,000
Factory Depreciation	$1,740,000
Factory Insurance	$59,000
Factory Utilities	$830,000
Total Cost incurred		$5,554,000
Less: Manufacturing Overhead Applied		$5,655,000
Overhead Over Applied		$101,000

Explain if it is appropriate to include selling and administrative expenses in the cost of goods sold category.

Solution-

Cost of goods sold means the cost of goods manufactured, i.e cost incurred for bringing it to finished goods inventory. Selling and administrative expenses are incurred to sell the product, after it is ready to sell. Hence Selling and administrative expenses are not included in cost of goods sold.