Question

The Night Ranger Company uses normal job-order costing with a predetermined overhead rate. The company had $7,000 in Materials Control at the beginning of 2019. The company includes BOTH direct and indirect materials in the Materials Control account. At the beginning of 2019, the company had two jobs in Work in Process. These were Job 20, which had $12,000 of product costs charged to the job last year (2018), and Job 30, which had $4,000 of product cost charged to the job last year. The company also had one job in Finished Goods at the beginning of 2019. This was Job 5, which consisted of 400 units with a production cost of $80 for each unit. For 2019, the company will charge overhead to jobs using direct labor COST. The estimated direct labor cost for 2019 was $80,000, and the estimated overhead cost for 2019 was $192,000. The following information shows the direct costs charged to the only 4 jobs that the company worked on during 2019: Job 20 Direct materials cost $10,000 Direct labor cost $20,000 Units on completed job 1,000 units Job 30 $14,800 $18,000 500 units Job 40 $ 16,760 $23,600 2,000 units Job 50 $ 5,000 $ 8,400 Unfinished The company purchased $60,000 of total materials during 2019. During 2019, the company finished Jobs 20, 30, and 40. Job 50 was NOT completed during 2019. The actual overhead incurred during 2019 was $175,000. Of the total overhead amount of $175,000, $9,440 was for indirect materials used. During 2019, the company sold 300 units from Job 5, 530 units from Job 20, 275 units from Job 30, and all 2,000 units from Job 40. The total sales revenue for 2019 was $400,000, and the total period expenses for 2019 were $150,000 1. Compute the underallocated or overallocated overhead for 2019, and tell whether it is underallocated or overallocated.

Answer 1

1	Allocated overhead=(Total direct labor charged to all jobs)*Predetermined overhead rate
	Predetermined overhead rate=Estimated overhead cost/Estimated direct labor cost=192000/80000=$ 2.4 per direct labor cost
	Allocated overhead=(20000+18000+23600+8400)*2.4=70000*2.4=$ 168000
	Actual overhead=$ 175000
	Allocated overhead < Actual overhead
	Hence,Overhead is underallocated
	Underallocated overhead=175000-168000=$ 7000
2	Appropriate accounts are Finished goods,Work in process and cost of goods sold
	Cost per unit of each jobs:
					Job 20	Job 30	Job 40	Job 50
	Beginning balance				12000	4000	0	0
	Direct materials			a	10000	14800	16760	5000
	Direct labor cost			b	20000	18000	23600	8400
	Overhead allocated			c=b*2.4	48000	43200	56640	20160
	Total			d=a+b+c	90000	80000	97000	33560
	Units completed on jobs			e	1000	500	2000
	Cost per unit			f=d/e	90	160	48.5
	Ending balance of finished goods;
					Job 5	Job 20	Job 30	Job 40	Total
	Units completed on jobs				400	1000	500	2000
	Less: Units sold				300	530	275	2000
	Units remaining as FG inventory			a	100	470	225	0
	Cost per unit			b	80	90	160	48.5
	Cost of inventory			a*b	8000	42300	36000	0	86300
	Ending balance of cost of goods sold
					Job 5	Job 20	Job 30	Job 40	Total
	Units sold				300	530	275	2000
	Cost per unit				80	90	160	48.5
	Cost of goods sold				24000	47700	44000	97000	212700
	Ending balance of work in process=cost of incomplete job=cost of Job 50=$ 33560
	Percentage of allocation to finished goods=86300/(86300+212700+33560)=86300/332560=0.2595=25.95%=26%
3	Underallocated overhead=$ 7000
	Percentage of allocation to finished goods=26%
	Percentage of allocation to cost of goods sold=212700/(86300+212700+33560)=212700/332560=0.6396=63.96%=64%
	Percentage of allocation to WIP=33560/(86300+212700+33560)=33560/332560=0.1009=10.09%=10%
	Allocation of underallocated overhead;
	To FG	7000*26%=$ 1820
	To COGS	7000*64%=$ 4480
	To WIP	7000*10%=$ 700
	Adjusted amount of overhead in WIP=overhead allocated+under-allocated overhead prorated=168000+700=$ 168700
4	Actual overhead rate=Actual overhead/Actual direct labor cost=175000/70000=$ 2.5 per direct labor cost
	Actual overhead charged to Job 50=Direct labor cost of Job 50*Actual overhead rate=8400*2.5=$ 21000