Question

Review Problem #2 * $624,000 $75,000 $200,000 $150,000 $65,000 $100,000 $80,000 Sales Direct labor cost Raw materials purchases Selling expenses Administrative expenses Manufacturing overhead applied to work in process Actual manufacturing overhead costs Inventories Beginning raw materials Ending raw materials Beginning work in process Ending work in process Beginning finished goods Ending finished goods $5,000 $10,000 $10,000 $5,000 $20,000 $35,000 * * 1. Prepare a schedule of cost of goods manufactured. 2. Prepare a schedule for cost of goods sold. X 3. Prepare a traditional income statement.

all 3 parts and how was calculated

Answer 1

In the given question there is favorable variance for factory overhead. There are various option to deal with favorable variance. One of the option is that if the variance amount is very small compared to company's net income, simply put the entire amount on the income statement.

Another suggested treatment is If the variance amount is favorable and significant in amount, allocate the variance to the company's inventories and its cost of goods sold.

I have adopted second approach of allocation since first approach is very simple.

In the given circumstance we should have been provided that how much opening and closing WIP is complete in respect of overhead, however such information is not provided hence we have to assume that it might be used equally for opening WIP, Closing WIP & manufactured goods & accordingly impact of under allocation is provided. While in respect of finished goods it is evident that overhead variance would not have impact on opening stock and it is assumed that goods would be sold on FIFO basis hence it will be bifurcated between cost of goods sold and finished goods only :

Raw Material Consumed :

	Opening Balance	5,000.00
Add	Purchase	200,000.00
Less	Closing Balance	10,000.00
	Raw Material Consumed	195,000.00

Cost transferred to WIP :

Direct Labor Cost	75,000.00
Add : Raw material consumed	195,000.00
Add: Manufacturing overhead applied to WIP at standard rate	100,000.00
Cost transferred to WIP	370,000.00

Cost of Good Manufactured :

Factory Overhead Allocation --> Under allocation value *Total cost of goods manufactured/(Total cost of goods manufactured+closing WIP)

	Opening WIP	10,000.00
Add	Cost transferred to WIP	370,000.00
Less :	Closing WIP	5,000.00
	Total Cost of goods manufactured before overhead variance allocation	375,000.00
Less :	Factory overhead variance allocation	(19,736.84)	-20000*375,000/(375,000+5,000)
	Cost of Good Manufactured after factory overhead variance allocation	355,263.16

Closing WIP Calculation :

	Closing WIP before factory overhead allocation	5,000.00
Less :	Factory overhead variance allocation	(263.16)	(-20000+19736.8)
	Closing WIP after factory overhead variance allocation	4,736.84

Cost of Goods Sold :

Opening Balance	20,000.00
Cost of goods Manufactured before overhead allocation	375,000.00
Closing Balance	35,000.00
Cost of Goods Sold	360,000.00
Factory overhead variance allocation	(17,894.74)	-19736.8*(375000-35000)/375000
Cost of Goods Sold after factory overhead variance allocation	342,105.26

Closing Finished goods Calculation :

Finished Goods	35,000.00
Factory overhead variance allocation	(1,842.11)	-(19736.8-17894.7)
Finished Goods after allocation of factory overhead variance	33,157.89

Traditional Income Statement
Sales		624,000.00
Direct Labor cost	75,000.00
Raw Material Consumed	195,000.00
Factory Overhead	80,000.00
Decrease in WIP	5,263.16
Increase in Finished goods	(13,157.89)
Cost of Good Sold		342,105.26
Gross Profit		281,894.74
Administrative Expenses		65,000.00
Selling Expenses		150,000.00
Operating Income		66,894.74