Question

When a job is finished, the company makes an entry to transfer its total cost to finished goods inventory. This response is incorrect because it assumes total costs represents the sum of the actual manufacturing overhead costs, expected overhead costs, and expected materials costs. The correct total costs = direct materials ($750,000) + direct labor ($300,000) + overhead applied [($600,000/ $400,000) or 1.50 x $300,000] = $1,500,000 (“Assigning Costs to Finished Goods”). In the current year, Mitchell Manufacturing expected Job No. 13 to cost $600,000 of overhead, $650,000 of materials, and $400,000 of labor. Mitchell applied overhead based on direct labor cost. Actual production required an overhead cost of $420,000, $750,000 of materials used, and $300,000 of labor. All of the goods were completed. What amount was transferred from Work in Process to Finished Goods?

Answer 1

first let us know the overhead rate = expected overhead cost / expected value of the base i.e direct labor

=>$600,000 / $400,000

=>$1.5 per direct labor dollar.

so the amount transferred from work in process to finished goods:

direct material	750,000
direct labor	300,000
overhead (300,000*1.5 per direct labor) (as per rate calculated above)	450,000
total	1,500,000