Question

Wabash Products uses a job costing system and applies overhead based on direct labor cost. Last year, manufacturing overhead was expected to be $2,684,000 and direct labor cost was estimated to be $1,100,000 (40,400 direct-labor hours). Actual manufacturing overhead amounted to $2,796,000 and direct labor cost was $1,200,000 (42,700 direct-labor hours).

Wabash allocates an over- or underapplied overhead to the three accounts—Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold—based on those account balances. At the end of the year, the total amount in the three accounts (Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold) was $5.80 million before any allocation. As a part of the process, you learn that Wabash allocated $114,840 to Cost of Goods Sold.

Required:

What will Wabash report as Cost of Goods Sold for the year?

Answer 1

Answer
Cost of goods sold	$      4,931,160
Workings:
Estimated Overhead cost	$      2,684,000
Divide by Estimated Direct labor cost	$      1,100,000
Predetermined overhead rate	244%
Actual manufacturing overhead	$      2,796,000
Less: Applied Overhead	$      2,928,000	1200000*244%
Overapplied Overhead	$         132,000
Percentage allocated to Cost of Goods sold	87%	114840/132000
Cost of Goods sold before allocation	$      5,046,000	5800000*87%
Less: Over-applied overhead allocated	$         114,840
Cost of goods sold	$      4,931,160
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