Question

This is a question from Managerial Accounting.

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Jerry Corp applies overhead based on Direct labor Dollars. At the beginning of 2018, they estimated $100,000 of manufacturing overhead and $50,000 in direct labor. Actual Manufacturing Overhead for 2018 was $115,000 and actual Direct Labor was $55,000. The following account balances are taken from Jerry's General Ledger. Raw Materials Inventory 1/1/18 Work in Process Inventory 1/1/18 Finished Goods Inventory 1/1/18 Purchases Direct Labor Selling Expenses Administrative Expenses $10,000 20,000 30,000 90,000 55,000 15,000 25,000 $15,000 25,000 40,000 500,000 Raw Materials Inventory 12/31/18 Work in Process Inventory 12/31/18 Finished Goods Inventory 12/31/18 Sales Required 1. 2. 3. 4. Compute the Predetermined Overhead rate and use it to compute under or over applied overhead for 2018. Prepare a statement of Cost of Goods Manufactured. Prepare a statement of Cost of Goods Sold. Prepare an income statement for 2018. Ignore income taxes.

Answer 1

1) Predetermine overhead rate = 100000/50000 = 200% of direct labor cost

Overhead applied = 55000*200% = 110000

Actual overhead = 115000

Under applied overhead = 5000

2) Statement of cost of goods manufactured

Beginning work in process			20000
Direct material
Beginning raw material	10000
Purchase	90000
Raw material available for use	100000
Less: Ending raw material	-15000
Direct material used		85000
Direct labor		55000
Overhead applied		110000
Total manufacturing cost			250000
Total Cost of work in process			270000
Less: Ending work in process			-25000
Cost of goods manufactured			245000

3) Statement of cost of goods sold

Beginning finished goods	30000
Cost of goods manufactured	245000
Cost of goods available for sale	275000
Less: Ending finished goods	-40000
Unadjusted cost of goods sold	235000
Under applied overhead	5000
Adjusted cost of goods sold	240000

Income statement

Sales		500000
Cost of goods sold		240000
Gross profit		260000
Less: Selling and administrative expense
Selling expense	15000
Administrative expense	25000
Total selling and administrative expense		40000
Net operating income		220000