Question

ARKANSAS CORPORATION is a company that produces machinery to customer order. Its job costing system, using normal costing, has two direct cost categories, direct materials and direct labor, and one indirect cost pool, manufacturing overhead, allocated using a budgeted rate based on direct labor costs. Budgeted and actual information for 2019 are as follows:

    

			Budget	Actual
Direct Labor			$210,000	$200,000
Manufacturing overhead			$126,000	$ 93,420

At the end of 2019, the ending work in process consisted of:

Ending Work In Process:
Direct Materials			$32,000
Direct Labor			25,000
Overhead			15,000
			$ 72,000

There were no beginning work-in-process or finished-goods inventories. Ending Finished Goods showed a balance of $78,000, which included overhead costs of $12,600.

Cost of goods sold was $800,000, of which $92,400 consisted of applied overhead.

Required:

1. What is the predetermined overhead rate (per direct labor dollar)?
2. How much overhead was applied to production during 2019? What was the journal entry to record this?
3. What were the journal entries to record actual overhead in 2019?
4. Calculate the under/overapplied overhead for 2019.
5. ASSUME that the company decides to write off the entire over/underapplied overhead to cost of goods sold. Prepare the adjusting entry to close the misapplied overhead.
6. Is this method really right? Why or why not?
7. Assume that the under/overapplied overhead is considered material in nature. Round final answers to nearest dollar. Prorate the amount computed in requirement two above on the basis of:
8. Ending balances of the appropriate accounts (before any adjustment).
9. The amount of applied overhead in the ending balances of the appropriate accounts (before any adjustment).
10. Prepare the adjusting journal entries for 7a and 7b. Which approach is theoretically preferred? WHY?

Answer 1

Arkansas Corporation Requirement 1 Predetermined Overhead Rate = Manufacturing overhead / Direct Labor = 126000 / 210000 = 0.6 Requirement 2 Applied OH = 6 * 200,000 = 120,000 Work in process a/c Dr. Finished Goods a/c Dr. Cost of Goods Sold a/c Dr. To Manufacturing Overhead 15000 12600 92400 120000 Requirement 3 93420 Work in process a/c Dr. To Manufacturing Overhead 93420 Requirement 4 Applied Overhead - Actual Overhead = 120000 - 93420 = 26580 overapplied Requirement 5 Dr. 26580 Overhead Control a/c To Cost of Goods Sold 26580

Requirement 6 No this method is not right because the overhead is material so the overhead should be broken up into WIP, FG, and COGS. Requirement 7a. a. Ending balances of the appropriate accounts (before any adjustment). Work in Process 72,000/ 950,000 = .0757 * 26,580 = 2,014.48 Finished Goods 78,000/ 950,000 = .0821 * 26,580 = 2,182.36 Costs of Goods Sold 800,000 / 950,000 = .8421 * 26,580 = 22,383.16 26580 Overhead Control a/c Dr. To Work in Process To Finished Goods To Costs of Goods Sold 2014 2182 22384 Requirement 7b. b. The amount of applied overhead in the ending balances of the appropriate accounts (before any adjustment). Work in Process 15,000 / 120,000 = .125 * 26,580 = 3,322.5 Finished Goods 12,600/120,000 = .105 * 26,580 = 2,790.9 Costs of Goods Sold 92,400 / 120,000 = .77 * 26,580 = 20,466.6 26580 Overhead Control a/c Dr. To Work in Process To Finished Goods To Costs of Goods Sold 3323 2791 20466