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.

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

	Machining Department	Assembly Department
Budgeted manufacturing overhead	4000000	3136000
Divide by Cost driver	400000	5600000
Predetermined overhead rate	10	56%
Overhead applied:
Machining Department	4250000	=425000*10
Assembly Department	3236800	=5780000*56%
Overhead applied	7486800
Actual manufacturing overhead	7300000	=4270000+3030000
5
Cost of Goods Sold account will decrease as Overhead is over-applied
6
Overhead charged to Work-in-Process account = $7486800
7
The company’s cost drivers are appropriate.