Question

_{Exercise 4-31 Cost Flows; Applying Overhead [LO 4-3, 4-4, 4-5) *** Erkens Company uses a job costing system with normal costing and applies factory overhead on the basis of machine hours. At the beginning of the year, management estimated that the company would incur $1,750,000 of factory overhead costs and use 70,000 machine hours. Erkens Company recorded the following events during the month of April: a. Purchased 202,000 pounds of materials on account; the cost was $4.50 per pound. b. Issued 131,000 pounds of materials to production, of which 20,500 pounds were used as indirect materials. c. Incurred direct labor costs of $295,000 and $51,000 of indirect labor costs. d. Recorded depreciation on equipment for the month, $77,900. e. Recorded expired insurance costs for the manufacturing property, $4,600. f. Paid $9,600 cash for utilities and other miscellaneous items for the manufacturing plant. g. Completed Job H11 costing $8,600 and Job G28 costing $82,500 during the month and transferred them to the Finished goods inventory account. h. Shipped Job G28 to the customer during the month. The job was invoiced at 35% above cost. i. Used 9,900 machine hours during April. Required: 1. Compute Erkens Company's predetermined overhead rate for the year. 2. Prepare journal entries to record the events that occurred during April. 3-a. Compute the amount of overapplied or underapplied overhead. 3-b. Prepare a journal entry to close overapplied or underapplied overhead into cost of goods sold on April 30. Complete this question by entering your answers in the tabs below.}

Answer 1

1. Predetermined overhead rate= $1,1750,000/70,000 =$25 per machine hour

2. Journal entries

Transaction	General journal	Debit	Credit
1.	Purchased materials on account
	Material inventory	$909,000
	Accounts payable		$909,000
2.	Issued materials to production
	Work in progress inventory	$589,500
	Factory overhead	$92,250
	Materials Inventory		$681,750
3.	Incurred labour cost
	Work in progress Inventory	$295,000
	Factory overhead	$51,000
	Accounts payable		$346,000
4.	Depreciation of equipment
	Factory overhead	$77,900
	Accumulated depreciation		$77,900
5.	Insurance for the manufacturing property
	Factory overhead	$4,600
	Prepaid insurance		4,600
6.	Utilities & other misc. Items for the manufacturing plant
	Factory overhead	$9,600
	Cash		$9,600
7.	Completed jobs and transferred to finished goods inventory account
	Finished goods inventory - job H11	$8,600
	Finished goods inventory - job G28	$82,500
	Work in progress inventory		$91,100
8.	Shipped job G28 & invoiced at 35%above cost
	Accounts receivable	$111,375
	Cost of goods sold	$82,500
	Sales		$111,375
	Finished goods inventory- job G28		$82,500
9.	overhead allocation for April - 9,900 Machine hours
	Work in progress inventory	$247,500
	Factory overhead		$247,500

3 A.  

Actual factory overhead = $92,250+$51,000+$77,900+$4,600+$9,600

=$235,350

Overapplied overhead = $247,500-$235,350

=$12,150

3 B. Journal entry for Overapplied overhead

Adjustment of Overapplied overhead for the month April

Transaction	General journal	Debit	Credit
1.	Factory overhead	$12,150
	Cost of goods sold		$12,150

____×____

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