Question

Juarez, Inc. uses a job-order costing system for its products, which pass from the Machining Department, to the Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The company applies manufacturing overhead using machine hours in the Machining Department and direct-labor cost in the Assembly Department. The following information relates to the year just ended:

	Machining Department	Assembly Department
Budgeted manufacturing overhead	$4,000,000	$3,136,000
Actual manufacturing overhead	4,270,000	3,030,000
Budgeted direct-labor cost (based on practical capacity)	1,500,000	5,600,000
Actual direct-labor cost	1,450,000	5,780,000
Budgeted machine hours (based on practical capacity)	400,000	100,000
Actual machine hours	425,000	110,000

The data that follow pertain to job no. DC66, the only job in production at year-end.

	Machining Department	Assembly Department
Direct material	$24,500	$ 6,700
Direct labor	$27,800	$58,700
Machine hours	360	150

Selling and administrative expense amounted to $2,500,000.

1.	Assuming the use of normal costing, determine the predetermined overhead rates used in the Machining Department and the Assembly Department.

2.	Compute the cost of the company’s year-end work-in-process inventory.

3.	Determine whether overhead was under- or overapplied during the year in the Machining Department.

4.	Determine whether overhead was under- or overapplied during the year in the Assembly Department.

5.	If Juarez disposes of under- or overapplied overhead as an adjustment to Cost of Goods Sold, would the company’s Cost of Goods Sold account increase or decrease?
6.	How much overhead would have been charged to the company’s Work-in-Process account during the year?

7.	Comment on the appropriateness of the company’s cost drivers (i.e., the use of machine hours in Machining and direct-labor cost in Assembly).
	- The company’s cost drivers are not appropriate. OR - The company’s cost drivers are appropriate.

Answer 1

Answer:

1) Predetermined overhead rates :
Machining department = (40,00,000/4,00,000)	10 per Machine hour
Assembly department = (31,36,000/56,00,000)*100	56% of direct labour cost

2) Compute the cost of the company’s year-end work-in-process inventory. Machining department Assembly department Total Direct material                                 24,500                 6,700                31,200 Direct labour                                 27,800               58,700                86,500 Overhead applied(360*10)&($58,700*56%)                                   3,600               32,872                36,472 Total                                 55,900               98,272             1,54,172 Therefore the company's year end work in process $1,54,172

3&4.Determine whether overhead was under- or overapplied during the year Machining department Assembly Department Actual Overhead                            42,70,000          30,30,000 Applied Overhead (425,000*10)& (57,80,000*56% )                            42,50,000          32,36,800 Under applied overhead                                 20,000                       -   Over applied overhead                                         -             -2,06,800

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